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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240

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

RIN 3235-AN09

Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of

the Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting rules

under the Securities Exchange Act of 1934 (“Exchange Act”) to amend the standards applicable

to covered clearing agencies for U.S. Treasury securities to require that such covered clearing

agencies have written policies and procedures reasonably designed to require that every direct

participant of the covered clearing agency submit for clearance and settlement all eligible

secondary market transactions in U.S. Treasury securities to which it is a counterparty. In

addition, the Commission is adopting additional amendments to the Covered Clearing Agency

Standards with respect to risk management. These requirements are designed to protect investors,

reduce risk, and increase operational efficiency. Finally, the Commission is amending the

broker-dealer customer protection rule to permit margin required and on deposit with covered

clearing agencies for U.S. Treasury securities to be included as a debit in the reserve formulas for

accounts of customers and proprietary accounts of broker-dealers (“PAB”), subject to certain

conditions.

DATES: Effective date: March, 18, 2024.

Compliance date: The applicable compliance dates are discussed in Part III of this release.

FOR FURTHER INFORMATION CONTACT: Elizabeth L. Fitzgerald, Assistant Director,

and Robert Zak, Special Counsel, Office of Clearance and Settlement at (202) 551-5710,

Division of Trading and Markets; Michael A. Macchiaroli, Associate Director, at (202) 5515525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy

Associate Director, at (202) 551-5522; Raymond Lombardo, Assistant Director, at 202-5515755; Sheila Dombal Swartz, Senior Special Counsel, at (202) 551-5545; or Nina Kostyukovsky,

Special Counsel, at (202) 551-8833, Office of Broker-Dealer Finances, Division of Trading and

Markets; U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 205497010.

SUPPLEMENTARY INFORMATION: First, the Commission is amending 17 CFR 240.17ad22(e)(18) (“Rule 17ad-22(e)(18)”) to require covered clearing agencies that provide central

counterparty (“CCP”) services for U.S. Treasury securities to establish, implement, maintain and

enforce written policies and procedures reasonably designed, as applicable, to establish

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

direct participant of such a covered clearing agency submit for clearance and settlement all the

eligible secondary market transactions in U.S. Treasury securities to which such direct

participant is a counterparty. In addition, these policies and procedures must be reasonably

designed, as applicable, to identify and monitor the covered clearing agency’s direct participants’

submission of transactions for clearing as required above, including how the covered clearing

agency would address a failure to submit transactions. These policies and procedures must also

be reasonably designed, as applicable, to ensure that the covered clearing agency has appropriate

means to facilitate access to clearance and settlement services of all eligible secondary market

transactions in U.S. Treasury securities, including those of indirect participants, which policies

and procedures the board of directors of such U.S. Treasury securities covered clearing agency

(“CCA”) must review annually. The Commission is defining an eligible secondary market

transaction as a secondary market transaction in U.S. Treasury securities of a type accepted for

clearing by a registered covered clearing agency that is either a repurchase or reverse repurchase

agreement collateralized by U.S. Treasury securities, in which one of the counterparties is a

direct participant, or certain specified categories of cash purchase or sale transactions, including

certain exclusions for transactions with sovereign entities, international financial institutions,

natural persons, inter-affiliate repo transactions, state/local governments, and other clearing

organizations. Second, the Commission is amending 17 CFR 240.17ad-22(e)(6)(i) (“Rule 17ad22(e)(6)(i)”) to require that a covered clearing agency providing central counterparty services for

U.S. Treasury securities establish, implement, maintain and enforce written policies and

procedures reasonably designed to, as applicable, calculate, collect, and hold margin for

transactions in U.S. Treasury securities submitted on behalf of an indirect participant separately

from those submitted on behalf of the direct participant. Third, the Commission is amending

Rule 17ad-22(e)(18) to require that a covered clearing agency providing central counterparty

services for U.S. Treasury securities establish, implement, maintain and enforce written policies

and procedures reasonably designed to, as applicable, ensure that it has appropriate means to

facilitate access to clearance and settlement services of all eligible secondary market transactions

in U.S. Treasury securities, including those of indirect participants, which policies and

procedures the board of directors of such covered clearing agency reviews annually. In

connection with these proposed amendments, the Commission is including as part of 17 CFR

240.17ad-22(a) (“Rule 17ad-22(a)”) definitions of “U.S. Treasury security,” “central bank,”

“eligible secondary market transaction,” “international financial institution,” “sovereign entity,”

“state and local government,” and “affiliated counterparty.” As part of this rulemaking, the

Commission is also amending the CFR designation of Rule 17Ad-22 to Rule 17ad-22.1 Fourth,

the Commission is amending 17 CFR 240.15c3-3a (“Rule 15c3-3a”) to permit margin required

and on deposit at covered clearing agencies providing central counterparty services for U.S.

Treasury securities to be included by broker-dealers as a debit in the customer and PAB reserve

formulas, subject to certain conditions.

Table of Contents

I. Introduction

II. Discussion of Comments Received and Final Rules

A. U.S. Treasury Securities CCA Membership Requirements

1. Requirement to Clear Eligible Secondary Market Transactions

Comments Regarding the Requirement to Clear Eligible Secondary Market

Transactions

Comments Regarding the Concentration of Risk in One Covered Clearing Agency

Final Rule

2. Definition of Eligible Secondary Market Transactions

Repo Transactions

i. Triparty Repo

ii.

Repos by Registered Funds

iii. Repos by Other Clearing Organizations

iv. Repos by FCMs

Repos involving “End Users”

vi. Interaffiliate Repos

vii. Repos by State and Local Governments

viii.

Other Repo Comments

ix. Final Rule

Purchases and Sales of U.S. Treasury Securities

i. Comments Regarding Cash Clearing Generally

ii.

IDB Transactions

iii. Other Cash Transactions

iv. Comments Regarding Cash Transactions for Registered Funds

Final Rule

3. Other Exclusions from the Definition of an Eligible Secondary Market Transaction

See note 71 infra for further discussion of this amendment. The Commission refers to the redesignated

Rule 17ad-22 throughout this release.

4. Policies and Procedures Regarding U.S. Treasury Securities CCA’s Monitoring of its

Direct Participants’ Transactions

5. Alternative Approaches Proposed by Commenters

B. Additional Changes to Covered Clearing Agency Standards

1. Netting and Margin Practices for House and Customer Accounts

2. Facilitating Access to U.S. Treasury Securities CCAs

Comments Supporting the Commission’s Proposed Rule

Comments Regarding the Commission’s Authority to Require a CCA to Accept

Done Away Transactions

Other Comments Regarding Access

Final Rule

C. Amendments to Rule 15c3-3a

1. Introduction

2. Credit Items

3. New Debit Item

4. Note to New Debit Item

First Condition – Permitted Collateral

Second Condition – Customer Position Margin

Third Condition – Rules of U.S. Treasury Securities CCA

Fourth Condition – Commission Approval of Rules of U.S. Treasury Securities

CCA

5. PAB Reserve Computation

III. Compliance Dates

IV. Economic Analysis

A. Broad Economic Considerations

B. Baseline

1. U.S. Treasury Securities

2. U.S. Treasury Repurchase Transactions

3. Clearance and Settlement of U.S. Treasury Security Transactions

Cash Market

i. Interdealer

ii.

Dealer-to-Customer

U.S. Treasury Repo Market

i. Non-Centrally Cleared Bilateral Repo

ii.

Centrally Cleared Bilateral Repo

iii. Non-Centrally Cleared Repo Settled on a Triparty Platform

iv. Centrally Cleared Repo Settled on a Triparty Platform

Inter-Affiliate Repo

4. Central Clearing in the U.S. Treasury Securities Market

5. Margin Practices in U.S. Treasury Secondary Markets

6. Disruptions in the U.S. Treasury Securities Market

COVID-19 shock of March 2020

September 2019 repo market disruptions

October 2014 flash rally

7. Affected Parties

Covered Clearing Agencies for U.S. Treasury Securities: FICC

Direct Participants at U.S. Treasury Securities CCAs: FICC Netting Members

Interdealer Brokers

Other Market Participants

i. Broker-Dealers That Are Not Direct Participants/FICC Netting Members

ii.

Hedge Funds, Family Offices, and Separately Managed Accounts

iii. Registered Investment Companies (RICs) Including Money Market Funds, Other

Mutual Funds, and ETFs

iv. Principal Trading Firms (PTFs)

State and Local Governments

vi. Private Pensions Funds and Insurance Companies.

Triparty Agent: Bank of New York Mellon

f. Custodian Banks / Fedwire Securities Service (FSS)

C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, and Capital Formation

1. Benefits

U.S. Treasury Securities CCA Membership Requirements

i. Scope of the Requirement to Clear Eligible Secondary Market Transactions

ii.

Application of the Requirement to Clear Eligible Repo Transactions

iii. Application of the Requirement to Clear Eligible Secondary Market Transactions

to Purchases and Sales of U.S. Treasury Securities

iv. Exclusions from the Requirement to Clear Eligible Secondary Market

Transactions

Other Changes to Covered Clearing Agency Standards

i. Policies and Procedures Regarding Direct Participants’ Transactions

ii.

Netting and Margin Practices for House and Customer Accounts

iii. Facilitating Access to U.S. Treasury Securities CCAs

Amendments to Rules 15c3-3 and 15c3-3a

2. Costs

Costs to FICC and its Members of the Requirement to Clear Eligible Secondary

Market Transactions

i. Costs attendant to an increase in CCLF

ii.

Costs of the Requirement to Clear Eligible Secondary Market Transactions in

terms of increased margining for existing FICC members

iii. Other Costs

Costs to non-members of a U.S Treasury securities CCA as a result of the

Requirement to Clear Eligible Secondary Market Transactions

Other Changes to Covered Clearing Agency Standards

i. Netting and Margin Practices for House and Customer Accounts

ii.

Facilitating Access to U.S. Treasury Securities CCAs

Amendments to Rules 15c3-3 and 15c3-3a

Other Costs

3. Effect on Efficiency, Competition, and Capital Formation

Efficiency

i. Price Transparency

ii.

Operational and Balance Sheet Efficiency

Competition

Capital Formation

D. Reasonable Alternatives

1. Require U.S. Treasury Securities CCAs to Have Policies and Procedures Requiring

Only IDB Clearing Members to Submit U.S. Treasury Securities Cash Trades with Nonmembers for Central Clearing

2. Require U.S. Treasury Securities CCAs to Have Policies and Procedures Requiring the

Submission of All Repurchase Agreements without Requirements for the Submission of

Cash Transactions

3. Include All Cash Transactions within the Scope of Eligible Secondary Market

Transactions with Exceptions for Central Banks, Sovereign Entities, International Financial

Institutions, and Natural Persons

4. Require U.S. Treasury Securities CCAs to Change CCA Access Provisions and

Netting and Margin Practices for House and Customer Accounts and Rule 15c3-3

V. Paperwork Reduction Act

A. Proposed Changes to Covered Clearing Agency Standards

1. Amendment to Rule 17ad-22(e)(6)

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

B. Broker-Dealers

VI. Regulatory Flexibility Act

A. Clearing Agencies

B. Broker-Dealers

C. Certification

VII. Other Matters

Statutory Authority

I. Introduction

The Commission is responsible for facilitating the establishment of a national system for

the prompt and accurate clearance and settlement of securities transactions.2 This responsibility

includes the authority to regulate clearing agencies engaged in the clearance and settlement of

government securities transactions, including U.S. Treasury securities.3 This inclusion of

government securities, including U.S. Treasury securities, within the Commission’s authority for

the national system of clearance and settlement underscores the importance of, among other

things, the U.S. Treasury market.

See 15 U.S.C. 78q-1.

Government Securities Act of 1986, section 102(a); 15 U.S.C. 78c(a)(12)(B)(i).

U.S. Treasury securities play a critical and unique role in the U.S. and global economy,

serving as a significant investment instrument and hedging vehicle for investors, a risk-free

benchmark for other financial instruments, and an important mechanism for the Federal

Reserve’s implementation of monetary policy.4 Consequently, confidence in the U.S. Treasury

market, and in its ability to function efficiently, even in times of stress, is critical to the stability

of the global financial system.5

CCPs provide an important role for securities markets, interposing themselves between

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

the seller to every buyer. The Commission regulates CCPs as covered clearing agencies

(“CCA”).6 The Commission historically has acknowledged the benefits that a CCP brings to the

markets it serves. By novating transactions (that is, becoming the counterparty to both sides of a

transaction), a CCP addresses concerns about counterparty risk by substituting its own

See, e.g., Staffs of the U.S. Department of the Treasury, Board of Governors of the Federal Reserve

System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S.

Commodity Futures Trading Commission, Recent Disruptions and Potential Reforms in the U.S. Treasury

Market: A Staff Progress Report, at 1 (Nov. 2021), available at

https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf (“Inter-Agency Working Group for

Treasury Market Surveillance (“2021 IAWG Report”); Staffs of the U.S. Department of the Treasury,

Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities

and Exchange Commission, and U.S. Commodity Futures Trading Commission, Joint Staff Report: The

U.S. Treasury Market on October 15, 2014, at 1, 8 (2015), available at

https://home.treasury.gov/system/files/276/joint-staff-report-the-us-treasury-market-on-10-15-2014.pdf

(“Joint Staff Report”). These reports represent the views of Commission and other Federal regulatory staff.

The reports are not a rule, regulation, or statement of the Commission. The Commission has neither

approved nor disapproved the content in the reports. These reports, like all staff reports, have no legal

force or effect: they do not alter or amend applicable law, and they create no new or additional obligations

for any person.

Group of Thirty Working Group on Treasury Market Liquidity, U.S. Treasury Markets: Steps Toward

Increased Resilience, at 1 (2021), available at https://group30.org/publications/detail/4950 (“G-30

Report”).

See Rule 17ad-22(a) (defining covered clearing agency and central counterparty) and Exchange Act Section

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

creditworthiness and liquidity for the creditworthiness and liquidity of the counterparties.7

Further, the Commission has recognized that “the centralization of clearance and settlement

activities at covered clearing agencies allows market participants to reduce costs, increase

operational efficiency, and manage risks more effectively.”8 A CCP also provides a centralized

system of default management that can mitigate the potential for a single market participant’s

failure to destabilize other market participants or the financial system more broadly.9 However,

the Commission has also recognized that this centralization of activity at clearing agencies

makes risk management at such entities a critical function.

Because of the importance of risk management at CCPs and to further the establishment

of linked and coordinated facilities for clearance and settlement of securities transactions, in

2016, the Commission adopted the Covered Clearing Agency Standards.10 These standards

address all aspects of a CCP’s operations, including financial risk management, operational risk,

default management, governance, and participation requirements.11 The Commission has had the

opportunity to administer this new regulatory framework, considering many rule filings with

respect to proposed rule changes filed by CCAs pursuant to their rule filing obligations as selfregulatory organizations (“SROs”) under Section 19(b) of the Exchange Act that address how the

See, e.g., Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in

Connection with Request of Liffe Administration and Management and Lch.Clearnet Ltd. Related to

Central Clearing of Credit Default Swaps, and Request for Comments, Exchange Act Release No. 59164

(Dec. 24, 2008), 74 FR 139, 140 (Jan. 2, 2009) (“Liffe Order”).

Covered Clearing Agency Standards Proposing Release, Exchange Act Release No. 71699 (Mar. 12, 2014),

79 FR 29507, 29587 (May 27, 2014) (“CCA Standards Proposing Release”).

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

See Covered Clearing Agency Standards Adopting Release, Exchange Act Release No. 78961 (Sept. 28,

2016), 81 FR 70786 (Oct. 13, 2016) (“CCA Standards Adopting Release”).

See generally id.

proposed rule changes are consistent with the Exchange Act and the Covered Clearing Agency

Standards thereunder.

The Commission also has had the opportunity to observe the U.S. Treasury market,

including with respect to the clearance and settlement of U.S. Treasury security transactions in

both the cash and repo market. In particular, the Commission understands that the proportion of

transactions that are centrally cleared has declined over the past years. One recent analysis by

the Treasury Market Practice Group12 estimates that only 13 percent of the overall volume in

U.S. dollars of U.S. Treasury cash transactions were centrally cleared as of the first half of 2017,

and that an additional 19 percent were what the TMPG refers to as “hybrid” clearing, that is,

executed on an interdealer broker platform (as discussed in parts II.A.1 and II.A.2.b.ii infra) in

which one counterparty is a member of a CCA and submits its transaction with the interdealer

broker for central clearing, while the other counterparty is not a member of a CCA and

bilaterally clears its transaction with the interdealer broker.13 This use of both centrally cleared

and not centrally cleared transactions introduces risk into the market, because bilateral clearing

involves varying risk management practices that are less uniform and less transparent to the

broader market and may be less efficient with regard to netting exposures and use of collateral as

compared to central clearing.

The Treasury Market Practices Group (“TMPG”) is a group of “market professionals committed to

supporting the integrity and efficiency of the Treasury, agency debt, and agency mortgage-backed

securities markets.” See Treasury Mark Practice Group, About the TMPG, available at

https://www.newyorkfed.org/TMPG/index.html. The TMPG is sponsored by the Federal Reserve Bank of

New York. Id.

TMPG, White Paper on Clearing and Settlement in the Secondary Market for U.S. Treasury Securities, at

12 (July 2019), available at

https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf (“TMPG

White Paper”). These estimates use FR2004 data, which are reports provided to the Federal Reserve Bank

of New York regarding primary dealer market activity in U.S. Government securities, covering the first

half of 2017 and are based on various assumptions specified in the TMPG White Paper. See also FR2004,

Government Securities Dealer Reports, available at

https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZq2f74T6b1cw.

Therefore, the Commission proposed amendments to Rule 17ad-22(e)(18) to help reduce

contagion risk to the CCA and bring the benefits of central clearing to more transactions

involving U.S. Treasury securities, thereby lowering overall systemic risk in the market.14

Specifically, the Commission proposed amendments that would require CCAs for the U.S.

Treasury market to establish, implement, maintain and enforce written policies and procedures

reasonably designed to require that their direct participants submit for clearance and settlement

certain eligible secondary market transactions, both for repos and certain categories of cash

transactions. In addition, the Commission proposed amendments to address certain other issues

that could help facilitate increased central clearing in the U.S. These proposed changes included

amending Rule 17ad-22(e)(6)(i) to require that a CCA establish, implement, maintain and

enforce written policies and procedures reasonably designed to calculate, collect, and hold

proprietary margin separate from customer margin, amending Rule 17ad-22(e)(18) to require that

CCAs establish, implement, maintain and enforce written policies and procedures reasonably

designed to ensure that they have appropriate means to facilitate access to clearance and

settlement services of all eligible secondary market transactions in U.S. Treasury securities,

including those of indirect participants, and amending Rule 15c3-3 to permit margin required and

on deposit at covered clearing agencies providing central counterparty services for U.S. Treasury

securities to be included by broker-dealers as a debit in the customer and PAB reserve formulas.

Proposing Release, Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application

of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities, Exchange Act

Release No. 95763 (Sept. 14, 2022), 87 FR 64610 (Oct. 25, 2022) (“Proposing Release”). See also Report

of the Joint Treasury-Federal Reserve Study of the U.S. Government Securities Market (Apr. 1969),

available at https://fraser.stlouisfed.org/title/joint-treasury-federal-reserve-study-us-government-securitiesmarket-318/report-joint-treasury-federal-reserve-study-us-government-securities-market-6282.

The Commission received many comments on the proposal.15 Having considered the

comments received, the Commission is adopting the proposed new rules and rule amendments

with modifications, as discussed further below.

II. Discussion of Comments Received and Final Rules

A. U.S. Treasury Securities CCA Membership Requirements

1. Requirement to Clear Eligible Secondary Market Transactions

Proposed Rule 17ad-22(e)(18)(iv)(A) would require that U.S. Treasury securities CCAs

establish, implement, maintain and enforce written policies and procedures reasonably designed

to, as applicable, establish objective, risk-based, and publicly disclosed criteria for participation,

which require that the direct participants of such covered clearing agency submit for clearance

and settlement all of the eligible secondary market transactions to which they are a counterparty.

The proposed amendment would apply to “direct participants” in a U.S. Treasury securities

CCA, which distinguishes entities that access a CCA directly (i.e., members of the CCA) from

indirect participants who “rely on the services provided by direct participants to access the

covered clearing agency’s payment, clearing or settlement facilities.”16 For purposes of the

Covered Clearing Agency Standards, “participants” of a CCA are referred to as “members” or

“direct participants” to differentiate these entities from “direct participants’ customers” or

“indirect participants.”17 Consequently, for purposes of this amendment and consistent with the

Copies of all comment letters received by the Commission are available at

https://www.sec.gov/comments/s7-23-22/s72322.htm.

17 CFR 240.17ad-22(e)(19). See also CCA Standards Proposing Release, supra note 8, at 29553 (noting

that some market participants would not meet a covered clearing agency’s direct participation requirements

and proposing risk management requirements for indirect and tiered participants).

See, e.g., 17 CFR 240.17ad-22(e)(6) (referring to participants) and (e)(2)(vi) (referring to direct

participants’ customers). In addition, the Exchange Act defines a participant of a clearing agency as “any

person who uses a clearing agency to clear or settle securities transactions or to transfer, pledge, lend, or

terminology already used in the Covered Clearing Agency Standards,18 the term “direct

participants” refers to the entities that directly access a U.S. Treasury securities CCA (generally

banks and broker-dealers), and the term “indirect participants” would refer to those entities

which rely on a direct participant to clear and settle their U.S. Treasury securities transactions

with the U.S. Treasury securities CCA (generally their customers or clients, which typically

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

smaller banks or broker-dealers).19

Moreover, persons who provide services in connection with clearance and settlement,

such as settlement agent, settlement bank, or clearing bank services, and do not submit trades for

clearing to a U.S. Treasury securities CCA would not be “direct participants” or “indirect

participants” within the meaning of this amendment and the terminology used in the Covered

Clearing Agency Standards.20

In the Proposing Release, the Commission stated that it believes that the requirement to

clear eligible secondary market transactions would promote the prompt and accurate clearance

hypothecate securities.” 15 U.S.C. 78c(a)(24). Indirect participants are expressly excluded from the

Exchange Act definition of a “participant” of a clearing agency because the Exchange Act provides that a

person whose only use of a clearing agency is through another person who is a participant or as a pledgee

of securities is not a “participant” of the clearing agency. Id.

See 17 CFR 240.17ad-22(e)(19) (referring to firms that are indirect participants in a covered clearing

agency as those that “rely on the services provided by direct participants to access the covered clearing

agency’s payment, clearing, or settlement facilities”).

For example, FICC maintains the Sponsored Service. See Fixed Income Clearing Corporation, Government

Securities Division Rulebook, Rule 3A, available at

https://www.dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf (“FICC Rule”). Because

sponsored members cannot clear or settle government securities transactions without a sponsoring member,

the Commission believes that these sponsored members are not “direct participants.” As noted above, such

persons are referred to in this release as “indirect participants” or “customers.”

The Commission recognizes that some entities may access more limited services of a U.S. Treasury

securities CCA without use of its CCP services. For example, FICC provides “comparison only” services

for a certain membership type. See FICC Rule 8, supra note 19. Consistent with the definition of a

“participant” under the Exchange Act, such entities would not be considered participants of a CCA and

therefore would not be subject to any rules with respect to the clearing of eligible secondary market

transactions that a CCA may adopt for its direct participants.

and settlement of U.S. Treasury securities transactions, providing several benefits to the market

for U.S. Treasury securities as a whole,21 which are summarized briefly here.

First, the Commission stated that it believes that the requirement to clear eligible

secondary market transactions would decrease the overall amount of counterparty credit risk in

the secondary market for U.S. Treasury securities. Because a U.S. Treasury securities CCA

would novate and guarantee each transaction submitted for central clearing, it would become a

counterparty to each transaction, as the buyer to every seller and the seller to every buyer. The

U.S. Treasury securities CCA would be able to risk manage these transactions centrally, pursuant

to risk management procedures that the Commission has reviewed and approved,22 and would

guarantee settlement of the trade in the event of a direct participant default.

In particular, the requirement to clear eligible secondary market transactions is designed

to reduce the amount of “contagion risk” to a U.S. Treasury securities CCA arising from what

has been described as “hybrid clearing,” as discussed in more detail in part II.A.2.b.iii. With this

type of clearing, a direct participant’s transactions that are not submitted for central clearing pose

an indirect risk to the covered clearing agency, as any default on a bilaterally settled transaction

could impact the direct participant’s financial resources and ability to meet its obligations to the

covered clearing agency. The Commission stated that it believes that requiring U.S. Treasury

securities CCAs to impose, as a condition of membership, an obligation on their direct

participants to submit all eligible secondary market transactions for central clearing should

address the transactions most likely to cause contagion risk to the CCA.

See generally Proposing Release, supra note 14, 87 FR 64626-29; see also part IV.C.1 infra.

See Section 19(b) of the Exchange Act and Rule 19b-4 thereunder.

Second, the Commission stated that it believes that the requirement to clear eligible

secondary market transactions would also help any U.S. Treasury securities CCA to avoid a

potential disorderly member default. Defaults in bilaterally settled transactions are likely to be

less orderly and subject to variable default management techniques because bilaterally settled

transactions are not subject to the default management processes that are required to be in place

and publicly disclosed at a CCP.23 Centralized default management is a key feature of central

clearing.24 Because the CCP has novated and guaranteed the transactions, it is uniquely

positioned to coordinate the default of a member for trades that it has centrally cleared, and the

non-defaulting members can rely on the CCP to complete the transactions of the defaulting

member and cover any resulting losses using the defaulting member’s resources and/or its

default management tools. Even in a situation where two CCPs have to coordinate the default of

a joint member, that coordination should result in more efficiency and market confidence than

multiple bilateral settlements.

Third, the Commission stated that it believes that the requirement to clear eligible

secondary market transactions will further the prompt and accurate clearance and settlement of

U.S. Treasury securities by increasing the multilateral netting of transactions in these

instruments, thereby reducing operational and liquidity risks, among others. Central clearing of

transactions nets down gross exposures across participants, which reduces firms’ exposures

A covered clearing agency, including a U.S. Treasury securities CCA, is required to establish, implement,

maintain and enforce written policies and procedures reasonably designed to, as applicable, ensure the

CCA has the authority and operational capacity to contain losses and liquidity demands and continue to

meet its obligations, which must be tested annually, and publicly disclose all relevant rules and material

procedures, including key aspects of its default rules and procedures. See Rule 17ad-22(e)(13) and

(e)(23)(i).

CCA Standards Proposing Release, supra note 8, 79 FR 29545 (a CCP’s default management procedures

would provide certainty and predictability about the measures available to a covered clearing agency in the

event of a default which would, in turn facilitate the orderly handling of member defaults and would enable

members to understand their obligations to the covered clearing agency in extreme circumstances).

while positions are open and reduces the magnitude of cash and securities flows required at

settlement.25 As the Commission stated in the Proposing Release, FICC’s failure to receive all

eligible trading activity of an active market participant reduces the value of its vital multilateral

netting process and causes FICC to be less well-situated to prevent future market crises.26

The benefits of multilateral netting flowing from central clearing can improve market

safety by lowering exposure to settlement failures, which would also tend to promote the prompt

and accurate clearance and settlement of U.S. Treasury securities transactions.27 Multilateral

netting can also reduce the amount of balance sheet required for intermediation and could also

enhance dealer capacity to make markets during normal times and stress events because existing

bank capital and leverage requirements recognize the risk-reducing effects of multilateral netting

of trades that CCP clearing accomplishes.28

Fourth, the Commission stated that the potential benefits associated with the multilateral

netting of transactions at a CCP that the requirement to clear eligible secondary market

transactions is designed to bring about could, in turn, help to unlock further improvements in

U.S. Treasury market structure. For example, the increase in clearing and consequent reduction

in counterparty credit risk could “enhance the ability of smaller bank and independent dealers to

2021 IAWG Report, supra note 4, at 30.

Proposing Release, supra note 14, 87 FR 64628 & n. 182 (citing Self-Regulatory Organizations; Fixed

Income Clearing Corporation; Order Granting Approval of a Proposed Rule Change Relating to Trade

Submission Requirements and Pre-Netting, Exchange Act Release No. 51908 (June 22, 2005), 70 FR

37450 (June 29, 2005) (describing a rule designed to bring additional transactions into FICC’s netting

system as “clearly designed to promote the prompt and accurate clearance and settlement of those

transactions and to preserve the safety and soundness of the national clearance and settlement system.”)).

Darrell Duffie, Still the World’s Safe Haven Redesigning the U.S. Treasury Market After the COVID-19

Crisis, Hutchins Center Working Paper # 62 (Brookings Inst.) at 15 (June 2020), available at

https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf (“Duffie”).

2021 IAWG Report, supra note 4, at 30; Nellie Liang & Patrick Parkinson, Enhancing Liquidity of the U.S.

Treasury Market Under Stress, at 9 (Dec. 16, 2020), available at https://www.brookings.edu/wpcontent/uploads/2020/12/WP72_Liang-Parkinson.pdf (“Liang & Parkinson”); Duffie, supra note 27, at 1617.

compete with the incumbent bank dealers.”29 Similarly, decreased counterparty credit risk – and

potentially lower costs for intermediation – could result in narrower spreads, thereby enhancing

market quality.30 The Commission also stated that increased accessibility of central clearing in

U.S. Treasury markets could support movement toward all-to-all trading, even potentially in the

repo market, which would further improve market structure and resiliency, although a movement

in that direction is not assured.31 This potential movement would stem from the fact that

increased central clearing of U.S. Treasury securities transactions would, in turn, result in

decreased counterparty risk, making all-to-all trading more attractive, that is, a market participant

would be more willing to trade with any counterparty if a CCP were to serve as its ultimate

counterparty.

Finally, the Commission stated that increased central clearing should enhance regulatory

visibility in the critically important U.S. Treasury market. Specifically, central clearing increases

the transparency of settlement risk to regulators and market participants, and in particular allows

a CCP to identify concentrated positions and crowded trades, adjusting margin requirements

accordingly, which should help reduce significant risk to the CCP and to the system as a whole.32

In light of the role of U.S. Treasury securities in financing the Federal Government, it is

Liang & Parkinson, supra note 28, at 9.

G-30 Report, supra note 5, at 13.

2021 IAWG Report, supra note 4, at 30; Duffie, supra note 27, at 16; G-30 Report, supra note 5, at 13.

All-to-all trading would be characterized by the ability for a bid or offer submitted by one market

participant to be accepted by any other market participant, with trades executed at the best bid or offer.

See, e.g., Liang & Parkinson, supra note 28, at 9. All-to-all trading could improve the quality of trade

execution in normal market conditions and broaden and stabilize the supply of market liquidity under

stress. See, e.g., G-30 Report, supra note 5, at 10.

Duffie, supra note 27, at 15;2021 IAWG Report, supra note 4, at 30 (centralization of transactions at a

CCP “can simplify data collection and improve visibility into market conditions for the authorities and, to

some degree, for market participants”).

important that regulators improve their visibility into this market. Increased central clearing

would also allow for a more aggregated view of market activity in one place.

a. Comments Regarding the Requirement to Clear Eligible

Secondary Market Transactions

Some commenters generally supported the proposal and its approach to requiring

additional central clearing of transactions in U.S. Treasury securities.33 However, other

commenters generally opposed the proposed requirement to clear eligible secondary market

transactions, arguing that there was not sufficient information on the costs and benefits of such a

requirement, that the Commission should do further study, and/or that the Commission should

incentivize additional clearing instead of requiring it.34

One commenter also referenced the need to assess the potential impact of an increased

volume of cleared repo transactions on the Secured Overnight Financing Rate (“SOFR”), given

its importance as a reference rate replacing LIBOR and because SOFR is calculated largely

based on implied financing rates of repo transactions cleared at FICC.35 SOFR is calculated as a

volume-weighted median, which is the rate associated with transactions at the 50th percentile of

See generally Letter from Americans for Financial Reform Education Fund (Dec. 27, 2022) (“AFREF

Letter”); Letter from Stephen W. Hall, Legal Director and Securities Specialist, and Scott Farnin, Legal

Counsel, Better Markets, Inc. (Dec. 23, 2022) (“Better Markets Letter”); Letter from Murray Pozmanter,

Managing Director, President of DTCC Clearing Agency Services, Head of Global Business Operations,

and Laura Klimpel, General Manager of FICC, Head of SIFMU Business Development, Depository Trust

and Clearing Corporation and Fixed Income Clearing Corporation (Dec. 27, 2022) (“DTCC/FICC Letter”);

Letter from Robin Vince, President and Chief Executive Officer, The Bank of New York Mellon

Corporation (Dec. 22, 2022) (“BNY Mellon Letter”); Letter from Rachel Goldberg, Head of Government

Relations and Regulatory Strategy, Americas, London Stock Exchange Group (Dec. 27, 2022) (“LSEG

Letter”); Letter from Chris Edmonds, Chief Development Officer, Intercontinental Exchange, Inc. (Jan. 12,

2023) (“ICE Letter”).

The Commission discusses the comments on incentives in its discussion of alternative approaches to a

clearing requirement in part II.A.5 infra.

Letter from William C. Thum, Managing Director and Assistant General Counsel, Securities Industry and

Financial Markets Association (“SIFMA”) Asset Management Group, at 7 (Dec. 23, 2022) (“SIFMA AMG

Letter”).

transaction volume.36 Specifically, the volume-weighted median rate is calculated by ordering

the transactions from lowest to highest rate, taking the cumulative sum of volumes of these

transactions, and identifying the rate associated with the trades at the 50th percentile of dollar

volume. Such volume weighting should allow preparation of the rate to take into account any

increased transaction volume arising from additional central clearing in response to a

requirement to clear eligible secondary market transactions, thereby making further study

unnecessary.

With respect to costs and benefits, one commenter stated that the increased costs of

centrally clearing U.S. Treasury security transactions may reduce liquidity and diversity in the

Treasury market if firms reduce activity, leave the market, or if barriers to entry are too high,

given the significant costs of clearing for market participants.37 The commenter identified

several types of costs, including initial margin requirements, clearing fees, obligations with

respect to FICC’s Capped Contingent Liquidity Facility (“CCLF”), the operational build

necessary to access central clearing either as a direct or indirect participant, and legal costs and

time associated with onboarding customers for indirect central clearing, including, e.g., the need

for Sponsoring Members to file UCC financing statements with respect to Sponsored Members

under the Sponsored Member program. The commenter stated that the impact of these costs

would be disproportionately felt by small and mid-sized participants in the U.S. Treasury market,

and that these costs would reduce diversity in the market and further increase concentration

Additional Information about Reference Rates Administered by the New York Fed, available at

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

Letter from Robert Toomey, Managing Director and Associate General Counsel, Securities Industry and

Financial Markets Association, and Michelle Meertens, Deputy General Counsel, Institute of International

Bankers, at 8 (Dec. 22, 2022) (“SIFMA/IIB Letter”).

among market participants (which may increase systemic risk) if such participants leave the

market.38

As discussed in more detail in part IV.C.2, increased transaction costs will generally

reduce the expected return of a particular investment. If the amendments regarding eligible

secondary market transactions resulted only in such increased costs, then the potential risk/return

tradeoff would worsen, resulting in decreased transaction volumes and decreased liquidity.

However, central clearing provides other benefits, including those described in part IV.C.1,

many of which could accrue to small and mid-sized market participants. Moreover, increased

cost does not necessarily mean that firms will reduce activity or leave the market.

The commenter also stated that these costs may incentivize non-direct participants of a

U.S. Treasury securities CCA to look for ways to trade away from direct participants in order to

not have to centrally clear U.S. Treasury transactions, undermining the policy goals of the

proposal.39 The Commission acknowledges that the proposed requirement for U.S. Treasury

securities CCAs to require their members to submit eligible secondary market transactions for

clearing and settlement does not limit the ability of market participants to transact in U.S.

Treasury securities transactions away from CCAs. This requirement is not a mandate to clear all

transactions in U.S. Treasury securities, regardless of who executes the transaction, and differs

from the swaps mandate imposed by Congress in the Dodd-Frank Act in 2010.40 However,

given current market structure and requirements applicable to certain market participants, it

would be challenging for market participants to simply shift all their activity to transact away

from CCAs. For example, primary dealers, which serve as trading counterparties of the New

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

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

York Fed in its implementation of monetary policy, are required to maintain a substantial

presence as a market maker that provides two-way liquidity in U.S. government securities,

particularly Treasury cash and repo operations.41 These primary dealers must be participants in

FICC, as the CCP for the government securities market, to support clearing of primary market

transactions.42 Therefore, if a market participant wants to transact with a primary dealer which is

required to be a direct participant of FICC, it would have to determine an appropriate way to

submit such transactions for clearing and settlement. Primary dealers are responsible for a

significant portion of market activity in the U.S. Treasury market (see part IV.B infra), and

therefore, market participants likely would continue to transact with such primary dealers.

In addition, the commenter stated that central clearing can have procyclical effects in

times of market stress due to the margin requirements of clearing agencies, further reducing

liquidity when it is most needed.43 The commenter stated that, depending on the applicable

margin models, clearing can be procyclical in times of market turmoil, as increased margin

requirements (including intraday and ad hoc calls) drive demand for liquid assets, which, in turn,

increases the scarcity of those assets and further drives market stress. The commenter described

FICC’s rules as allowing FICC to demand, at any time in its discretion, additional margin from

its members in times of market volatility, including through intraday calls, to safeguard the

clearing infrastructure.44 The commenter suggested that the Commission should engage in

additional study on the procyclical effects of central clearing before implementing a central

See Primary Dealers, available at https://www.newyorkfed.org/markets/primarydealers (“In order to be

eligible as a primary dealer, a firm must . . . Be a participant in the central counterparty service for the

government securities market—DTCC’s FICC-GSD—to support clearing of primary market

transactions.”).

Id.

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

clearing requirement, focusing on the appropriate balance from a systemic risk perspective of

rigorously managing the risk of positions cleared through a CCP as compared to minimizing

liquidity strains on the U.S. Treasury market.45

The Commission acknowledges that, in times of market stress, margin calls may increase

to address the ongoing market volatility. This is by design, as margin models are built to be

responsive to current market conditions. The Commission has specifically required that CCAs

have the authority and operational capacity to make intraday margin calls in defined

circumstances.46 This ability is important to the CCA’s ability to manage the risk and cover the

credit exposures that its participants may bring to the CCA. When considering a CCA’s

authority with respect to intraday margin, the Commission may consider its potential

procyclicality.47 In addition, the Commission may consider the transparency of the margin

model, such that market participants can understand when the CCA may make margin calls.48 In

addition to the FICC rules cited by the commenter, FICC has provided additional transparency

regarding how it determines the need for intraday margin calls, including the specific criteria that

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

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

See, e.g., Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed

Rule Change to Modify the Calculation of the MBSD VaR Floor to Incorporate a Minimum Margin

Amount, Exchange Act Release No. 92303, at 32 (June 30, 2021) (discussing commenter’s concern

regarding potential procyclical nature of a margin methodology change); Self-Regulatory Organizations;

The Options Clearing Corporation; Order Granting Approval of Proposed Rule Change Concerning The

Options Clearing Corporation’s Margin Methodology for Incorporating Variations in Implied Volatility,

Exchange Act Release No. 95319, at 3 (July 19, 2022) (referencing the impact of a change to margin

methodology on procyclicality of margin).

See, e.g., Self-Regulatory Organizations; National Securities Clearing Corporation; Order Approving a

Proposed Rule Change to Enhance National Securities Clearing Corporation’s Haircut-Based Volatility

Charge Applicable to Illiquid Securities and UITs and Make Certain Other Changes to Procedure XV,

Exchange Act Release No. 34-90502, at 56-59 (Nov. 24, 2020) (discussing commenter’s concerns

regarding transparency of change to margin methodology).

it uses to assess the need.49 FICC is also subject to Rule 17ad-22(e)(23), which requires certain

levels of public disclosure regarding FICC’s margin methodology and the costs of participating

in FICC, as discussed further in part II.B.2 infra. The Commission’s ongoing consideration of

the role and function of intraday margin calls, as well as market participants’ ability to

understand such calls, obviates the need for separate study in connection with this proposal.50

b. Comments Regarding the Concentration of Risk in One Covered

Clearing Agency

Commenters also mentioned the potential concentration risk that would arise as a result

of the requirement to clear eligible secondary market transactions, specifically because only one

covered clearing agency currently provides such services. One commenter stated that

concentrating such significant levels of settlement, operational, liquidity and credit risk in one

institution means that were there operational or liquidity stress at FICC, widespread dysfunction

in the Treasury markets could result.51 Another commenter which analyzed market views of the

proposal identified increased concentration risk as a primary concern for market participants,

See Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule

Changes to the Required Fund Deposit Calculation in the Government Securities Division Rulebook,

Exchange Act Release No. 82588 (Jan. 26, 2018) (identifying the following specific parameter breaks: (i) a

dollar threshold that evaluates whether a Netting Member’s Intraday VaR Charge equals or exceeds a set

dollar amount (then set at $1,000,000) when compared to the VaR Charge that was included in the most

recently collected Required Fund Deposit including, any subsequently collected Intraday Supplemental

Fund Deposit; (ii) a percentage threshold, that evaluates whether the Intraday VaR Charge equals or

exceeds a percentage increase (then set at 100%) of the VaR Charge that was included in the most recently

collected Required Fund Deposit including, if applicable, any subsequently collected Intraday

Supplemental Fund Deposit; (iii) the coverage target, that evaluates whether a Netting Member is

experiencing backtesting results below the 99% confidence level). FICC has updated this information via

Important Notices to its participants. See, e.g., Important Notice GOV1244-22, GSD Intraday

Supplemental Fund Deposit Parameter Change (Apr. 11, 2022), available at https://www.dtcc.com//media/Files/pdf/2022/4/11/GOV1244-22.pdf (raising the coverage target).

See also Proposed Rule, Covered Clearing Agency Resilience and Recovery and Wind-Down Plans,

Exchange Act Release No. 97516 (May 17, 2023), 88 FR 34708 (May 30, 2023) (proposing additional

requirements with respect to intraday margin that CCAs require intraday monitoring of their exposures and

specifying particular circumstances in which the CCA should make intraday margin calls).

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

who cited potential technical issues at FICC that would result in a “pause [of] counterparty trade

transactions and lead to substantial losses for market participants.” However, the commenter

also acknowledged that a smaller group of market participants explained that they were not

opposed to a single clearinghouse model through FICC, stating that FICC has adequate risk

models and that the concentration in one CCP is not of concern in the futures or derivatives

markets, which, like FICC, also only have one CCP to serve their respective markets.52

In addition, one commenter stated that the Commission should only impose a clearing

mandate once FICC and at least a second covered clearing agency are able to offer access to

clearing solutions that will fulfill the enhanced rule requirements and meet the needs of market

participants.53 The commenter noted that the existence of one covered clearing agency serving

the U.S. Treasury market is highly problematic as it creates enormous concentration risk for

market participants, and highlighted that, given the importance of the U.S. Treasury market to

the overall global economy, there needs to be a compelling reason for increasing the

concentration of cleared trading activity in a single clearing house that is member owned and

operated on a for-profit basis, particularly when there is no alternative or fallback venue should

the clearing house experience a disruption to its operations or more significantly were it to fail.54

The Commission acknowledges that, currently, there is only one U.S. Treasury securities

CCA, FICC, and that this does create concentration risk for the clearing of U.S. Treasury

securities transactions. However, this concentration risk is mitigated by the existence of a

supervisory framework for the existing U.S. Treasury securities CCA, and it is not uncommon

Comment Submission from SIA Partners, entitled CENTRAL CLEARING OF U.S. TREASURIES &

REPO, A Study on the Impact to the Market and Market Participants, at 79-80 (Mar. 2023) (“SIA Partners

Comment”); see also id. at 8.

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

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

for one CCA to serve a particular market.55 The Commission therefore disagrees with the

commenter that the existence of two CCAs is necessary for this requirement to be implemented.

Moreover, the Commission is not requiring that the additional central clearing of U.S. Treasury

securities transactions be concentrated in one clearing house. But, if that remains the case going

forward, the benefits expected to arise from this additional clearing, as discussed further in part

IV.C.1 infra, constitute a sufficient compelling reason to adopt the final rule, even if such

concentration is present, which, as discussed, is subject to the appropriate mitigation of risk

arising from the regulatory framework applicable to CCAs as discussed in this section.

FICC has been designated by the Financial Stability Oversight Council as systemically

important under Title VIII of the Dodd-Frank Act. This designation means that FICC is subject

to heightened supervision and examination by the Commission, in consultation with the Board of

Governors of the Federal Reserve System (“Board of Governors”. FICC is subject to the

Covered Clearing Agency Standards, which address the various types of risk that FICC faces as a

CCP, including settlement, operational, liquidity, and credit risk.

A CCA must be able to meet the requirements of the Covered Clearing Agency Standards

regardless of the presence or absence of other CCAs. The Covered Clearing Agency Standards

specifically address a CCA’s obligations in 23 specific areas, many of which directly relate to the

CCA’s ability to manage the risks presented to it as a CCA. For example, a CCA must have

policies and procedures in place to effectively identify, measure, monitor, and manage its credit

exposures to participants and those arising from its payment, clearing, and settlement processes,

including by, among other things, maintaining sufficient financial resources to cover its credit

exposure to each participant fully with a high degree of confidence and maintain additional

For example, there is only one CCA in the U.S. equities market and in the U.S. listed derivatives market.

financial resources to enable it to cover a wide range of foreseeable stress scenarios, including

the default of the largest or two largest participant families (depending on the nature of the

CCA’s activities). A CCA also must have policies and procedures in place to effectively

measure, monitor, and manage the liquidity risk that arises in or is borne by the CCA, including

measuring, monitoring, and managing its settlement and funding flows on an ongoing and timely

basis, and its use of intraday liquidity, by, among other things, holding qualifying liquid

resources in an amount sufficient to effect same-day and, where appropriate, intraday and

multiday settlement of payment obligations with a high degree of confidence under a wide range

of foreseeable stress scenarios that includes, but is not limited to, the default of the largest

participant family in extreme but plausible market conditions. With respect to both its credit and

liquidity resources, the CCA is required to, among other things, test the sufficiency of such

resources at least once each day using standard and predetermined parameters and assumptions,

conduct a comprehensive analysis on at least a monthly basis of the existing scenarios, models,

and underlying parameters and assumptions used to ensure that they are appropriate for

determining the CCA’s needs and resources in light of current and evolving market conditions,

and to perform a model validation of the models used for such testing at least annually.56

In addition, a CCA is required to establish, implement, maintain and enforce written

policies and procedures reasonably designed to cover its credit exposures to its participants by

establishing a risk-based margin system that, at a minimum and among other things, calculates

margin sufficient to cover its potential future exposure to participants in the interval between the

last margin collection and the close out of positions following a participant default, and is

monitored by management on an ongoing basis and is regularly reviewed, tested, and verified by

17 CFR 240.17ad-22(e)(4)(vi) and (vii) and (e)(7)(vi) and (vii).

conducting backtests of its margin model at least once each day using standard predetermined

parameters and assumptions and conducting a sensitivity analysis of its margin model and a

review of its parameters and assumptions for backtesting on at least a monthly basis, among

other things.57 A CCA also is required to have policies and procedures reasonably designed to

establish objective, risk-based, and publicly disclosed criteria for participation, which permit fair

and open access by direct and, where relevant, indirect participants and other financial market

utilities, require participants to have sufficient financial resources and robust operational capacity

to meet obligations arising from participation in the clearing agency, and monitor compliance

with such participation requirements on an ongoing basis; and identify, monitor, and manage the

material risks to the CCA arising from arrangements in which firms that are indirect participants

in the CCA rely on the services provided by direct participants to access the CCA’s payment,

clearing, or settlement facilities.58

These requirements should ensure that a CCA is able to accommodate the market needs

for its clearance and settlement activity and that a CCA can appropriately risk manage the

activity that its participants submit for clearing and settlement, which should, in turn, mitigate

the potential concentration risk arising from the existence of only one CCA for a particular asset

class.

Further, regarding the comments raising concerns about potential operational or technical

issues at a single CCA, the Covered Clearing Agency Standards include Rule 17ad-22(e)(17),

which requires written policies and procedures reasonably designed to manage the covered

clearing agency’s operational risks by (i) identifying the plausible sources of operational risk,

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

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

both internal and external, and mitigating their impact through the use of appropriate systems,

policies, procedures, and controls; (ii) ensuring that systems have a high degree of security,

resiliency, operational reliability, and adequate, scalable capacity; and (iii) establishing and

maintaining a business continuity plan that addresses events posing a significant risk of

disrupting operations.59 In addition, CCAs, as registered clearing agencies, are subject to the

requirements of Regulation Systems Compliance Integrity (“Regulation SCI”). Regulation SCI

is designed to strengthen the infrastructure of the U.S. securities markets, reduce the occurrence

of systems issues in those markets, improve their resiliency when technological issues arise, and

implement an updated and formalized regulatory framework, thereby helping to ensure more

effective Commission oversight of such systems.60 As entities subject to Regulation SCI, CCAs

are required to have written policies and procedures reasonably designed to ensure that their key

automated systems have levels of capacity, integrity, resiliency, availability, and security

adequate to maintain their operational capability and promote the maintenance of fair and orderly

markets, and that such systems operate in accordance with the Exchange Act and the rules and

regulations thereunder and the entities’ rules and governing documents, as applicable.61 These

requirements should work to mitigate the possibility that a CCA would experience an

interruption to its operations. In the event that a CCA were to fail, it is required to have policies

and procedures to establish a recovery and wind-down plan to address that situation.62

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

Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252, 72253, 72256 (Dec. 5, 2014).

See 17 CFR 242.1001.

17 CFR 240.17ad-22(e)(3)(ii). In the event of a wind-down in which the result is that the U.S. Treasury

securities CCA no longer exists, Rule 17ad-22(e)(18)(iv) would not apply, as there would be no CCA to

impose such membership requirements. The requirement to clear eligible secondary market transactions

arises under the CCA’s rules and is not a mandate to clear based on the nature of the security.

FICC also must meet its obligations under both Section 19(b) of the Exchange Act, as a

self-regulatory organization, and Title VIII of the Dodd-Frank Act. This means that the

Commission has the opportunity to review any proposed rule changes and imposes specific

additional filing obligations for an entity designated as systemically important under Title VIII of

the Dodd-Frank Act to provide advance notice to the Commission, which must consult with the

Board of Governors, of any change to the entity’s procedures that may materially alter the nature

or level of risk presented.63 This overall supervisory framework, including the Covered Clearing

Agency Standards, should help ensure that FICC continues to be subject to robust supervision

and oversight and to be able to manage the risks presented to it, even those arising from

increased Treasury clearing. In light of the robust regulatory framework applicable to CCAs, the

fact that only one CCA serves the market should not preclude the imposition of a requirement to

clear eligible secondary market transactions.

Further, the Commission is not persuaded that the ownership or organizational structure

of the present U.S. Treasury securities CCA has an effect on its ability to serve the market. The

Commission has not imposed particular requirements for the ownership or corporate structure of

CCAs, and CCAs currently exhibit a variety of ownership and corporate structures. For

example, FICC is wholly owned by the Depository Trust & Clearing Corporation (“DTCC”),

which is, in turn, owned by the members of the clearing agencies owned by the DTCC.64 FICC

operates on a cost plus low-margin model, meaning that its fees are cost-based plus a markup as

approved by the Board or management and that this markup or “low margin” is applied to

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

The members of such clearing agencies are required to purchase common shares under DTCC’s

Shareholders Agreement as a condition to use the clearing agencies’ services and facilities. See, e.g., FICC

Rule 49, section 2, supra note 19. This differs from other clearing agencies or clearing organizations in

which the shareholders are not limited to the participants of the clearing agency and the clearing agency

may be owned by a publicly traded company.

recover development costs and operating expenses and to accumulate capital sufficient to meet

regulatory and economic requirements.65 Nevertheless, a CCA’s status as a for-profit

organization does not preclude its ability to meet its requirements under the Covered Clearing

Agency Standards.

An additional commenter stated its belief that relinquishing control of credit approval to a

single entity poses a significant problem, particularly, with all transactions going through FICC

and where margin requirements can be changed at any time. The commenter stated that every

firm has a different risk appetite and quantitative and qualitative perspectives as it relates to

credit analysis, which are part of the professional services and expertise that well-run firms offer,

and that by inserting FICC into the center of the credit approval process, firms lose their ability

to apply their deeply informed market views and differentiate themselves from competitors.66

The Commission disagrees that the requirement to clear eligible secondary market

transactions, which currently can be done only at FICC, will remove firms’ ability to

differentiate themselves from their competitors. FICC has no role in the relationship between a

direct participant and the direct participant’s customers, and, indeed, the Exchange Act provides

that its rules cannot impose any schedule of prices, or fix rates or other fees, for its participants’

services.67 FICC’s direct participants will remain free to determine what services they will offer

See, e.g., Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and

Immediate Effectiveness of Proposed Rule Change to Amend Certain MBSD Fees, Exchange Act Release

No. 96575 (Dec. 22, 2022). In addition, because FICC is member-owned, members may receive rebates

when FICC collects excess net income, which is defined as either income of FICC or one business line of

FICC after application of expenses, capitalization costs, and applicable regulatory requirements. See FICC

Rules, Fee Structure, Section XII, supra note 19.

Letter from the Independent Dealer & Trader Association, at 9 (Dec. 27, 2022) (“IDTA Letter”).

15 U.S.C. 78q-1(b)(3)(E).

to their customers, and at what price, thereby providing the ability for the direct participants to

differentiate themselves from their competitors.

The Commission also disagrees that margin requirements at FICC can change at any

time. FICC’s margin methodology is part of its rules that have been approved by the

Commission, and changes to that methodology must be filed with and reviewed by the

Commission because of FICC’s status as a self-regulatory organization. The margin

methodology, which is part of FICC’s approved rules, does provide some flexibility to FICC to

manage risk, and potentially increase margin requirements, in times of market volatility and to

guard against exposure to the CCP, but this flexibility is not equivalent to FICC being able to

alter its margin requirements at any time. Pursuant to the Commission’s rules, FICC would be

obligated to file for Commission review any proposed change to its margin methodology and to

file an advance notice of any proposed change to its rules in the event that the change would

materially alter the nature or level of risk presented by the CCA, with both of these processes

involving notice and the opportunity for public comment.68

Finally, one commenter also stated that any final rule should expressly acknowledge the

potential for multiple U.S. Treasury securities CCAs and prohibit a clearing agency’s rules from

restricting or impeding in any way their members’ ability to clear U.S. Treasury securities cash

or repo transactions at another CCA.69 Such clarification is unnecessary. The requirements

being adopted apply to any U.S. Treasury securities CCA and do not rely on the existence of

only one U.S. Treasury securities CCA. The Commission acknowledges that there is the

potential for multiple clearing agencies serving the U.S. Treasury market under its regulatory

15 U.S.C. 78s(b); Dodd-Frank Act Section 806(e); 17 CFR 240.19b-4.

ICE Letter, supra note 33, at 2-3.

framework, and that the existence of additional U.S. Treasury securities CCAs would lower the

concentration risk that currently exists due to having a single CCA for that market. Moreover, a

rule prohibiting a clearing agency from restricting or impeding in any way its member’s ability

to clear at another CCA is also unnecessary because to be registered under Section 17A of the

Exchange Act, a clearing agency’s rules must not impose any burden on competition not

necessary or appropriate in furtherance of the purposes of Section 17A.70

c. Final Rule

For the reasons discussed in parts II.A.1.a and b supra, the Commission is adopting Rule

17ad-22(e)(18)(iv) as proposed.71 This requirement applies to all types of transactions that are of

a type currently accepted for clearing at a U.S. Treasury securities CCA; it does not impose a

requirement on a U.S. Treasury securities CCA to offer additional products for clearing.

Definition of Eligible Secondary Market Transactions

As part of Rule 17ad-22(a), the Proposing Release set forth a definition of an eligible

secondary market transaction in U.S. Treasury securities72 subject to the requirement to submit

for clearance and settlement discussed in part II.A.1 above. Specifically, the definition of an

eligible secondary market transaction73 would include:

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

The Commission also amends the CFR designation of Rule 17Ad-22 in order to ensure the regulatory text

conforms more consistently with section 2.13 of the Document Drafting Handbook. See Office of the

Federal Register, Document Drafting Handbook (Aug. 2018 Edition, Revision 2.1, dated Oct. 2023),

available at https://www.archives.gov/files/federal-register/write/handbook/ddh.pdf. In particular, the

Commission amends the CFR section designation for 17 CFR 240.17Ad-22 (Rule 17Ad-22) to replace the

uppercase letter with the corresponding lowercase letter, such that the rule is redesignated as 17 CFR

240.17ad-22 (Rule 17ad-22).

The Commission did not receive any comments on its proposed definition of “U.S. Treasury security” and

is adopting that definition as proposed.

As the Commission stated in the Proposing Release, the amendment does not apply to the primary market,

i.e., the issuance and sale of a U.S. Treasury security to a primary dealer or other bidder in a U.S. Treasury

auction. Proposing Release, supra note 14, 87 FR 64621. Further, as the Commission also stated in the

•

Repurchase agreements and reverse repurchase agreements in which one of the

counterparties is a direct participant;

•

Any purchases and sales entered into by a direct participant if the direct participant (A)

brings together multiple buyers and sellers using a trading facility (such as a limit order

book) and (B) is a counterparty to both the buyer and seller in two separate transactions;

and

•

Any purchases and sales of U.S. Treasury securities between a direct participant and a

counterparty that is a registered broker-dealer, government securities dealer, or

government securities broker, a hedge fund, or an account at a registered broker-dealer,

government securities dealer, or government securities broker where such account may

borrow an amount in excess of one-half of the value of the account or may have gross

notional exposure of the transactions in the account that is more than twice the value of

the account.

The Commission is adopting this rule, with modifications related to repos by other

clearing organizations (see part II.A.2.a.iii), inter-affiliate repo transactions (see part II.A.2.a.vi),

and state and local government repo transactions (see part II.A.2.a.vii) and related to cash

transactions by hedge funds and leveraged accounts (see part II.A.2.b.iii). The Commission

Proposing Release, because trading in when-issued securities occurring the day after the auction shares

similar characteristics to secondary market transactions and because such trading is already reported as a

secondary market transaction, the definition of an eligible secondary market transaction would apply to

when-issued trades that occur the day after the auction and are considered on-the-run on some IDBs, to the

extent that such when-issued trades otherwise meet the definition of an eligible secondary market

transaction, as discussed further in part II.A.2.ii infra. Id. However, because when-issued trading

occurring before and on the day of the auction does not share these characteristics and is primarily used as a

tool for price discovery leading to the auction, such transactions would not be encompassed by the

definition. Id.

discusses the proposed definitions and the comments received thereupon in the following

sections.

a. Repo Transactions

The proposed definition of an eligible secondary market transaction would include,

among other things, all U.S. Treasury repurchase and reverse repurchase agreements entered into

by a direct participant of a U.S. Treasury securities CCA, subject to the exclusions discussed in

part XX infra. As explained in the Proposing Release, in a U.S. Treasury repo transaction, one

party sells a U.S. Treasury security to another party (often referred to as the “start leg”) and

commits to repurchase the security at a specified price on a specified later date (often referred to

as the “end leg”), and a reverse repo transaction is the same transaction from the buyer’s

perspective.74

In the Proposing Release, the Commission stated that the available data indicates that the

volume of repo transactions that are bilaterally cleared and settled remains substantial.75

Proposing Release, supra note 14, 87 FR 64616. The effect of a repo transaction is similar to a cash loan,

using U.S. Treasury securities as collateral. Id. However, standard industry documentation classifies the

start and end legs of the repo transaction as purchases and sales of securities. See, e.g., SIFMA, Master

Repurchase Agreement (September 1996 Version), available at https://www.sifma.org/wpcontent/uploads/2017/08/MRA_Agreement.pdf. In this release, the term “seller” refers to the party selling

U.S. Treasury securities on the start leg of the transaction and repurchasing them on the end leg of the

transaction. The term “buyer” refers to the party purchasing the U.S. Treasury securities on the start leg of

the transaction and selling them on the end leg of the transaction.

Proposing Release, supra note 14, 87 FR 64616 (citing 2021 IAWG Report, supra note 4, at 29 (stating that

non-centrally cleared bilateral repo represents a significant portion of the market, roughly equal in size to

centrally cleared repo) (citing a 2015 pilot program by the Treasury Department); TMPG, Clearing and

Settlement Practices for Treasury Secured Financing Transactions Working Group Update (“TMPG Repo

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

https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CSP_SFT_Note.pdf; Katy Burne, “Future

Proofing the Treasury Market,” BNY Mellon Aerial View, at 7 (Nov. 2021), available at

https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/future-proofing-the-ustreasury-market.pdf.coredownload.pdf (noting that 63% of repo transactions remain non-centrally cleared

according to Office of Financial Research data as of Sept. 10, 2021); Sebastian Infante et al., Insights from

revised Form FR2004 into primary dealer securities financing and MBS activity (Aug. 5, 2022), available

at https://www.federalreserve.gov/econres/notes/feds-notes/insights-from-revised-form-fr2004-intoprimary-dealer-securities-financing-and-mbs-activity-20220805.htm (recent research with respect to

Because of this, FICC lacks visibility into its members’ non-centrally cleared repo trades, and the

default of one counterparty can have cascading effects on multiple other market participants,

including members of FICC, thereby risking contagion to the CCP.

The Commission also stated its belief that, particularly with respect to banks and dealers,

an important potential benefit of repo central clearing stems from mitigating the constraints on

intermediaries’ balance sheets under the existing accounting and regulatory capital rules.76 The

Commission further stated that it believes that the benefit of this resulting additional balance

sheet capacity could be shared by all market participants through improved market liquidity and

smooth market functioning.77

The Commission also referenced that, as with cash markets, risk management practices in

the bilateral clearance and settlement of repos are not uniform across market participants and are

not transparent.78 Indeed, a recent publication stated that competitive pressures in the bilaterally

settled market for repo transactions have exerted downward pressure on haircuts, sometimes to

zero.79 The reduction of haircuts, which serve as a counterparty credit risk mitigant in bilateral

repos, could result in greater exposure to potential counterparty default risk in non-centrally

primary dealers indicates that 38% of their repo and 60% of their reverse repo activity is not centrally

cleared, and, overall, that 20% of all their repo and 30% of their reverse repo activity is centrally cleared

through FICC)).

In effect, accounting rules allow purchases and sales of the same security to be netted but do not allow

repos of the same security to be netted, unless the repos are with the same counterparty and the trades have

been documented under a master netting agreement. See, e.g., Proposing Release, supra note 14, 87 FR

64621 (citing G-30 Report, supra note 5, at 13; Program on International Financial Systems, Mandatory

Central Clearing for U.S. Treasuries and U.S. Treasury Repos, at 25-27 (Nov. 2021), available at

https://www.pifsinternational.org/wp-content/uploads/2021/11/PIFS-Mandatory-Central-Clearing-for-U.S.Treasury-Markets-11.11.2021.pdf (“PIFS Paper”)). Thus, if a dealer’s repos are all with a U.S. Treasury

securities CCA, greater netting is allowed.

See Committee on the Global Financial System, Repo Market Functioning, at 24 (Apr. 2017), available at

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

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

G-30 Report, supra note 5, at 13.

cleared repos. The Commission stated that by contrast, a U.S. Treasury securities CCA is

subject to the Commission’s risk management requirements addressing financial, operational,

and legal risk management, which include, among other things, margin requirements

commensurate with the risks and particular attributes of each relevant product, portfolio, and

market.80 Therefore, repos cleared at a U.S. Treasury securities CCA would be subject to

transparent risk management standards that are publicly available and applied uniformly and

objectively to all participants in the CCA.

Many commenters supported the definition of an eligible secondary market transaction as

it relates to repo and reverse repo transactions.81 These commenters encouraged a broad and

comprehensive definition to limit market fragmentation and avoidance of central clearing.

Several other commenters that did not support a requirement to clear eligible secondary market

transactions still acknowledged that repos were the most appropriate scope for such a

requirement if one were to be adopted. For example, one commenter agreed that a clearing

mandate applied to bilateral repo transactions would be beneficial, pointing to the balance sheet

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

See Letter from Jirí Król, Deputy CEO, Global Head of Government Affairs, Alternative Investment

Management Association, at 6-7 (Dec. 22, 2022) (“AIMA Letter”); AFREF Letter, supra note 33, at 3; see

generally Better Markets Letter, supra note 33; DTCC/FICC Letter, note 33; Letter from Ryan Sheftel,

Global Head of Fixed Income, GTS Securities, LLC (Jan. 6, 2023) (“GTS Securities Letter”); LSEG Letter,

supra note 33; Letter from ARB Trading Group LP, Citadel Securities, DRW Holdings, LLC, Eagle Seven

LLC, Geneva Trading USA, LLC, Hard Eight Futures, LLC, Hudson River Trading LLC, IMC Trading,

Jump Trading Group, Kore Trading LLC, Optiver, Quantlab Financial, LLC, WH Trading LLC, and XR

Trading LLC, at 4 (Dec. 27, 2022) (“ARB et al. Letter”); Letter from Manfred E. Will, Founder & CEO,

MEW Consul (Oct. 24, 2022); Letter from Shiv Rao, Chairman, Sunthay Holdings LLC, at 2 (Dec. 27,

2022); and Letter from Elisabeth Kirby, Head of U.S. Market Structure, Tradeweb Markets Inc. (Dec. 27,

2022). One commenter, while broadly supporting the definition of an eligible secondary market repo and

reverse repo transaction, recommended excluding Derivatives Clearing Organizations (“DCO”) registered

with the CFTC. See Letter from Jonathan Marcus, Senior Managing Director and General Counsel, CME

Group Inc., at 6-7 (Dec. 27, 2022) (“CME Letter”) and part II.A.2.iii infra. Other commenters, while

broadly supporting the definition, recommended excluding transactions executed on the triparty repo

platform. See Letter from Stephen John Berger, Managing Director, Global Head of Government &

Regulatory Policy, Citadel and Citadel Securities (Dec. 27, 2022) (“Citadel Letter”), Letter from Jennifer

W. Han, Executive Vice President, Chief Counsel & Head of Global Regulatory Affairs, Managed Funds

Association at 6, 14 (Dec. 21, 2022) (“MFA Letter”), and part II.A.2.i infra.

efficiency resulting from repo clearing, but stressing that this requirement be put in place only

after the Commission has strengthened the ability for market participants to access central

clearing.82 Another commenter stated that while the case for clearing repos is “marginally

stronger” than the case for clearing cash transactions, it is “far from convincing.”83

Other commenters questioned the need for a requirement with respect to repo, noting that

the balance sheet netting efficiencies already exist, providing a natural incentive to centrally

clear such transactions.84 The Commission agrees that centrally cleared repo already benefits

from favorable treatment on balance sheet, but also recognizes that, by definition, a requirement

to clear repo transactions should result in more transactions being centrally cleared. Thus, there

would still be benefits from the requirement, despite the currently existing balance sheet

treatment, as discussed further in part IV.C.1.a.ii.

In addition, some commenters supported excluding particular types of repos from the

definition, and other commenters supported excluding particular types of market participants

engaging in repos from the definition. The Commission discusses these comments in the

following parts.

i. Triparty Repo

Several commenters supported excluding triparty repos from the definition of an eligible

secondary market transaction.85 One commenter suggested that the cost of including triparty

MFA Letter, supra note 81, at 13 (supporting inclusion of bilateral repo and reverse repo).

SIFMA AMG Letter, supra note 35, at 11.

See, e.g., SIFMA AMG Letter, supra note 35, at 4; SIFMA-IIB Letter, supra note 37, at 4.

See MFA Letter, supra note 81, at 6, 14; SIFMA-IIB Letter, supra note 37, at 20-21; SIFMA AMG Letter,

supra note 35, at 6, 11; Letter from Sarah A. Bessin, Deputy General Counsel, and Nhan Nguyen, Assistant

General Counsel, Investment Company Institute at 22-23 (Dec. 23, 2022) (“ICI Letter”); Citadel Letter,

supra note 81, at 6; Letter from Deborah A. Cunningham, Executive Vice President, Chief Investment

repos would outweigh the benefits, and other commenters raised similar concerns.86 The

discussion of additional costs and benefits arising from the inclusion of triparty repos within the

definition of an eligible secondary market transaction is provided in part IV.C.2 infra. Several

commenters argued that including triparty repos would not significantly reduce the risks that the

proposal seeks to address because the current triparty market infrastructure inherently mitigates

the associated risks.87 Specifically, these commenters argue that credit risk in the triparty market

is mitigated by the triparty agent’s provision of custodial, collateral management, and settlement

services.88

Moreover, one commenter stated that the infrastructure underlying the triparty repo

market is robust and provides credit protections, operational safeguards, and strict internal

controls akin to central clearing.89 One commenter stated that the triparty agent’s ability to

handle the settlement of triparty repos through its collateral allocation system has resulted in a

well-functioning process that operates under severe time constraints.90 One commenter added

that the triparty market is relatively safe from credit risk because the triparty agent is subject to

prudential regulation.91 One commenter added that settlement risk in the triparty market is

nearly eliminated because collateral posted to the triparty platform cannot generally be repledged

Officer of Global Liquidity Markets, and Senior Portfolio Manager, Susan R. Hill, Senior Vice President,

Senior Portfolio Manager and Head of Government Liquidity, and David R. McCandless, Corporate

Counsel, Federated Hermes at 5 (Dec. 28, 2022) (“Federated Letter”); Letter from Sebastian Crapanzano,

Managing Director, Morgan Stanley, at 2 (Nov. 15, 2023) (“Morgan Stanley Letter”).

See MFA Letter, supra note 81, at 6, 14; see also SIFMA/IIB Letter, supra note 37, at 20; ICI Letter, supra

note 85, at 11; Federated Letter, supra note 85, at 5.

See MFA Letter, supra note 81, at 14; SIFMA/AMG Letter, supra note 35, at 11; ICI Letter, supra note 85,

at 12, 22; Citadel Letter, supra note 81, at 6; Federated Letter, supra note 85, at 5.

See id.

See ICI Letter, supra note 85, at 22.

See Federated Letter, supra note 85, at 3.

See MFA Letter, supra note 81, at 14.

outside the platform.92 The commenter stated, therefore, that the only significant source of

settlement risk is the rare occurrence of a counterparty’s nonpayment of the repurchase price,

which is generally attributable to operational risk as opposed to credit risk.93 Another

commenter stated that these types of triparty repos, described as secured funding transactions

where the funding counterparty has no rehypothecation rights, do not appear to raise concerns

discussed in the proposal regarding the use of transactions to generate leverage that would

warrant imposition of the requirement to clear eligible secondary market transactions.94

Despite supporting the exclusion of triparty repos from the definition of an eligible

secondary market transaction, one commenter acknowledged that the triparty agent “does not

fulfill a CCP role—it does not guarantee either counterparty’s performance through novation or

otherwise and does not assume counterparty risk.”95 For this reason, triparty repos will not be

excluded from the definition of an eligible secondary market transaction.

The Commission recognizes that the current triparty market infrastructure incorporates

credit protections, operational safeguards, and strict internal controls. The Commission also

recognizes that the triparty agent’s current processes for handling the settlement of triparty repos

generally function well. However, the triparty agent does not serve as a central counterparty,

meaning that it does not guarantee either counterparty’s performance through novation or assume

counterparty risk, and therefore, the Commission disagrees with the contention that the current

market infrastructure incorporates controls equivalent to those available through central clearing.

The Commission recognizes that the triparty agent is subject to heightened prudential

See Federated Letter, supra note 85, at 5.

Morgan Stanley Letter, supra note 85, at 2.

ICI Letter, supra note 85, at 33.

regulation.96 However, the triparty agent is not subject to regulatory supervision as a CCP,

which entails additional protections against the risk of many market participants acting to

liquidate similar collateral in the event of a default in a non-centrally cleared environment. A

U.S. Treasury securities CCA is subject to the Commission’s risk management requirements

addressing financial, operational, and legal risk management, which include, among other things,

margin requirements commensurate with the risks and particular attributes of each relevant

product, portfolio, and market and also include certain requirements applicable only to covered

clearing agencies that are serving as central counterparties.97 In contrast, a triparty agent is not

equipped with a mechanism to manage the risk of collateral fire-sale in the aftermath of a

counterparty default.98 As a result, a U.S. Treasury securities CCA is better positioned to handle

a large, unexpected default than a triparty agent. The possibility that a direct participant in a

U.S. Treasury securities CCA with large, unsettled trading volumes (bilateral or triparty) could

fail creates contagion risk to the CCA, as well as to the market as a whole. This rulemaking is

designed to ameliorate that contagion risk, at least in part. Accordingly, the Commission does

not believe that the current triparty market infrastructure alone mitigates the aforementioned

contagion risk sufficiently to warrant excluding triparty repos from the definition of an eligible

secondary market transaction. In response to the commenter who stated that most risks are

eliminated because collateral cannot be posted outside the triparty platform, the Commission

The triparty agent is supervised and/or regulated by, among others, New York State Department of

Financial Services, and the Federal Reserve Bank of New York. See

https://www.bnymellon.com/us/en/disclaimers/business-disclaimers. Additionally, the triparty agent is

designated as a Global Systemically Important Bank by the Financial Stability Board. See

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

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

See, e.g, Brian Begalle et al., The Risk of Fire Sales in the Tri-Party Repo Market, N.Y. Fed Staff Report

No. 616 (“Begalle et al.”), at 9-14, available at,

https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr616.pdf.

disagrees. Significant risks exist if concerns emerge regarding the financial condition of sellers

in the triparty market.99 In such scenarios, even though collateral stays within the triparty

platform, the buyer could still experience distress following a sudden default of a triparty repo

counterparty.100 For example, a triparty repo default may leave a money market fund holding

long-dated Treasury securities collateral, which may cause the money market fund to no longer

meet requirements under rule 2a-7 relating to the weighted average life to maturity of the fund’s

portfolio.101 A spike in market volatility accompanying an event of default and potential

collateral liquidation activity by buyers could cause liquidity stress for the financial system

leading to decline in collateral value even for the most creditworthy assets such as U.S. Treasury

securities. A U.S. Treasury securities CCA is better positioned to manage a repo counterparty

default by employing a range of available pre-funded resources without reliance on repo

collateral liquidation.102 In contrast, the triparty platform is not designed to manage risks

associated with a repo counterparty default and a potential collateral liquidation following the

default. In a triparty repo transaction, the triparty custodian bank holds the collateral on behalf

See 2013 Annual Report of the Financial Stability Oversight Council, at 4, 12-13, 133-134, available at

https://home.treasury.gov/system/files/261/FSOC-2013-Annual-Report.pdf (“FSOC 2013 Annual Report”);

Begalle et al., supra note 98 (discussing concern that stress caused by a potential default of a triparty repo

counterparty can lead to either pre-default fire sales of assets by the counterparty or post-default fire sales

of collateral by the triparty repo investor and the related financial stability concerns). See also 2019

Annual Report of the Financial Stability Oversight Council, at 11, available at

https://home.treasury.gov/system/files/261/FSOC2019AnnualReport.pdf (highlighting that the possibility

of fire sales of collateral by creditors of a defaulted counterparty in the triparty repo market remains a

financial system vulnerability despite the triparty repo infrastructure reform).

100

See FSOC 2013 Annual Report, supra note 99, at 12-13 (recognizing that a major broker-dealer’s default

could threaten financial stability as the broker-dealers’ creditors liquidate the collateral pledged against

their tri-party repo lending, with the fire sales of this collateral potentially destabilizing financial markets

and amplifying the negative consequences of such a default).

101

See 17 CFR 270.2a-7(d)(1). In addition, the money market fund holding the collateral may cause liquidity

concerns under rule 2a-7. See 17 CFR 270.2a-7(d)(4).

102

17 CFR 240.17ad-22(e)(13).

of the buyer. However, the buyer is responsible for initiating and managing the collateral

liquidation process, including Treasury securities, if the liquidation is necessary.103

One commenter argued that including triparty repos in the definition of an eligible

secondary market transaction would likely impair the cash and collateral management processes

of hedge funds and alternative asset managers.104 Specifically, the commenter suggested that

such firms currently conduct same-day bilateral transactions that they would not be able to

conduct with a direct participant of a U.S. Treasury securities CCA required to centrally clear its

repo transactions.105 Similarly, another commenter argued that including triparty repos would

prevent participants, such as money market funds, from conducting transactions on a short term

(i.e., overnight) basis when U.S. Treasury securities CCAs are at full capacity.106

The Commission disagrees with these commenters. In its supervisory capacity, the

Commission is aware that registered funds, hedge funds, and alternative asset managers currently

conduct centrally cleared triparty repo transactions. For example, the Commission is aware that

numerous hedge funds conduct such same-day transactions as sponsored members of FICC.

Therefore, the existing operational infrastructure supports centrally cleared triparty repo

transactions. The FICC novation window for all delivery-versus-payment trades, including the

sponsored repo service, remains open until 8 p.m. (ET) and therefore is available for a later-day

103

Baklanova, et al., Reference Guide to U.S. Repo and Securities Lending Markets, OFR Working Paper

No15-17 (Sept. 2015), available at: https://www.financialresearch.gov/working-papers/files/OFRwp-201517_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.

104

See MFA Letter, supra note 81, at 17.

105

See id.

106

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

trading.107 Additionally, the Commission disagrees that there is a finite “full capacity” at a U.S.

Treasury securities CCA. The Commission understands that increased demand for a CCA

service may lead to a higher volume of trading activity by existing members and, in certain

circumstances, reduce members’ ability or willingness to facilitate their clients’ access to central

clearing, if such members do not wish to grow this line of business. However, higher demand

for access to central clearing could also present an opportunity for dealers that do not currently

offer such services to enter the market, resulting in growing CCA capacity, more competition

among its members, and a wider range of available repo counterparties. The Commission also

understands that the existing U.S. Treasury securities CCA may consider, as appropriate,

additional changes to their operational infrastructure and trading capacity, including revisions to

the eligibility criteria for sponsored membership and an extension of the trade submission and

novation windows later in the day,108 to enhance their ability to accommodate any increase in the

volume of centrally cleared triparty repo transactions resulting from this rulemaking.

One commenter expressed concern that the centrally cleared triparty repo market has only

been available since 2021 and is therefore, relatively untested.109 Therefore, the commenter

suggested that the Commission should delay its decision whether to include triparty repos in the

definition of an eligible secondary market transaction until after the Commission has had an

opportunity to evaluate the effectiveness of the centrally cleared triparty repo infrastructure.110

The Commission disagrees. While FICC expanded its Sponsored Service in 2021 to enable

107

See DTCC, Looking to the Horizon: Assessing a Potential Expansion of U.S. Treasury Central Clearing,

Sept. 2023 (“DTCC 2023 White Paper”), available at https://www.dtcc.com//media/Files/Downloads/WhitePapers/Accessing-Potential-Expansion-US-Treasury-Clearing-WhitePaper.pdf.

108

Id.

109

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

110

See id.

sponsored members (e.g., registered funds) to conduct centrally cleared triparty repo

transactions,111 FICC has been facilitating such transactions for its direct participants via the

General Collateral Finance (“GCF”) Repo Service since 1998.112 Additionally, although the

expanded Sponsored Service is relatively new, the infrastructure is operational, and its usage

appears to be increasing. Data provided by the Federal Reserve show a significant increase in

the gross value of Treasury securities traded in GCF Repo since March 2020.113 Additionally, as

stated above, the Commission understands that the U.S. Treasury securities CCA is consulting

with market participants and is considering steps to further enhance its operational infrastructure

to support any increase in the volume of centrally cleared triparty repo transactions resulting

from this rulemaking.114

Finally, commenters argued for the exclusion from the definition of an eligible secondary

market transaction of triparty repos involving purchased securities that include both Treasury

CUSIPs and securities with other CUSIPs or where permitted substitution may be made in

CUSIPs other than Treasury CUSIPs. According to the commenters, the fact that some CUSIPs

in a mixed triparty repo are U.S. Treasury security CUSIPs should not bring that transaction into

the definition of an eligible secondary market transaction if it were of a type that is entered into

in the ordinary course of business or otherwise in connection with a legitimate business purpose.

111

Securities Exchange Act Release No. 92799 (Aug. 27, 2021), 86 FR 49387 (Sept. 2, 2021) (SR-FICC2021-801); Securities Exchange Act Release No. 92014 (May 25, 2021), 86 FR 29334 (June 1, 2021) (SRFICC-2021-003).

112

Securities Exchange Act Release No. 40623 (Oct. 30, 1998), 63 FR 59831 (Nov. 5, 1998) (SR-GSCC-9802).

113

Federal Reserve, GCF Repo (showing that the daily snapshot of the Treasury securities value traded in the

GCF repo segment was under $120 billion on Mar. 10, 2020. The value reported on June 9, 2023 was over

$320 billion, which includes sponsored activity), available at https://www.newyorkfed.org/data-andstatistics/data-visualization/tri-party-repo#interactive/tripartygcf.

114

See DTCC 2023 White Paper, supra note 107.

The commenters stated that without such an exemption, the definition of an eligible secondary

market transaction could scope in transactions of which U.S. Treasury securities only represent a

small component, which would exceed the regulatory objective behind the proposal, and stated

that such transactions do have margin collected.115

The Commission understands that market participants may use U.S. Treasury securities

as permissible substitutions for other types of collateral and generally should not consider mixed

CUSIP triparty repos resulting from such a permissible substitution as within the scope of part (i)

of the definition of an eligible secondary market transaction. Collateral substitution allows a

repo seller to complete trade settlement even if the type of collateral securities agreed upon at the

time of trade initiation is no longer available. Typically, Treasury securities or cash can be

permissible substitution.116 However, to the extent that a mixed CUSIP triparty repo contains

U.S. Treasury CUSIPs from the outset of the transaction, such a transaction would be included in

the scope of part (i) of the definition of an eligible secondary market transaction. An exclusion

for such transactions is not necessary because the counterparties specifically structured the

transaction to include U.S. Treasury securities; therefore, such a transaction is within the scope

of the definition. Data submitted by money market funds on Form N-MFP shows that the

holdings reported as U.S. Government Agency Repurchase Agreements are typically

collateralized by U.S. government agency securities and are also partially collateralized by

115

See SIFMA/IIB Letter, supra note 37, at 20-21; Letter from Jiri Krol, Deputy CEO, Global Head of

Government Affairs, Alternative Investment Management Association (Oct. 20, 2023) at 3 (“AIMA Letter

II”); see also Citadel Letter, supra note 81, at 6 (supporting that the Commission exclude triparty repos at

this stage, noting that they may include both Treasury and non-Treasury securities as collateral).

116

For example, money market fund filings of portfolio data show that, on average, Treasury securities

account for around 3% of collateral backing investments in non-government repos.

Treasury securities.117 Collateral management practices may evolve to better delineate collateral

types in light of the definition of an eligible secondary market transaction.

ii. Repos by Registered Funds

Registered investment companies, or registered funds, that is, those entities that are

registered under the Investment Company Act of 1940 (“1940 Act”), including money market

funds and exchange-traded funds, are important participants in the U.S. Treasury repo market.

Filings of Form N-MFP by money market funds show that, as of September 30, 2023, these

funds invested approximately $2.2 trillion in Treasury repos.118 In addition, mutual funds

invested $37 billion in repurchase agreements, including those backed by Treasury securities.119

Generally, commenters acknowledged that central clearing of Treasury repos and reverse repos

through the FICC Sponsored Service, which has been available to registered funds since 2005,

provides additional collateral supply.120 FICC data shows that at the end of November 2023, the

daily volume of sponsored “delivery-versus-payment” Treasury repo activity was approximately

$820 billion, while the daily volume of sponsored activity in the triparty GCF repo was close to

$130 billion.121

117

Money market fund filings of portfolio data show that, on average, Treasury securities account for around

20% of collateral backing investments in U.S. government agency repos.

118

Of this amount, approximately $1.5 trillion was invested in the Federal Reserve’s overnight reverse repo

facility. See U.S. Securities and Exchange Commission, Money Market Fund Statistics (Sept. 2023),

available at https://www.sec.gov/divisions/investment/mmf-statistics. Repo transactions with the central

bank are excluded from the scope of Eligible Secondary Market Transactions.

119

Federal Reserve, Financial Accounts of the United States, Table L.207 Federal Funds and Security

Repurchase Agreements (2023 Q2).

120

ICI Letter, supra note 85, at 13; Federated Letter, supra note 85, at 2; DTCC/FICC Letter, supra note 33, at

17.

121

See DTCC, Sponsored DVP and Sponsored GC Activity, available at

https://www.dtcc.com/charts/membership, which also shows data over a longer timeframe for reference.

Several commenters stated that they did not support including repo transactions with

registered funds as a counterparty in the definition of an eligible secondary market transaction,

which, as proposed, would include repo transactions with all counterparties.122 One commenter

stated that the Commission should not, at this time, require that repos between a fund and a

direct participant of a U.S. Treasury securities CCA be subject to a clearing requirement because

the current clearing framework is not sufficiently developed to support such a mandate.123 The

commenter identified several issues to be addressed prior to adopting such a requirement, which

are discussed in the following paragraphs.

First, the commenter stated that the Commission should encourage FICC to enhance its

Sponsored Service in several ways, to address regulatory, structural, and operational issues

raised by the proposal. The commenter stated that the Commission should encourage FICC to

further develop a “give up” structure to facilitate best execution. The commenter described this

as a “critically important step” to incentivize voluntary clearing, because it would generate

increased competition among market participants, which may result in more efficient pricing.

The commenter also stated that a “give up” structure would be essential under a requirement to

centrally clear eligible secondary market transactions because the Sponsored Service may not be

able to meet the increased capacity requirements due to the limited number of sponsoring

members and the increased demand for sponsored clearing under such a requirement. The

commenter suggested that the infrastructure currently used by FICC for prime brokerage clearing

could be leveraged to develop a give up model, stating that any such model will need to provide

for standardized documentation that facilitates additions and deletions of approved brokers,

122

ICI Letter, supra note 85, at 12-28; Federated Letter, supra note 85, at 2-6.

123

ICI Letter, supra note 85, at 12.

agreed-upon terms for rejection of trades by a sponsoring member, and centralized storage of

delegation.124

The commenter requested that the SEC encourage FICC to establish a feature allowing

(but not requiring) registered fund sponsored members to support their obligations by having

margin posted with FICC (“FICC registered fund margin arrangement”) rather than by paying

fees to the sponsoring member.125 FICC’s rules currently provide that each sponsoring member

must make a deposit to FICC's Clearing Fund based on the activity of its sponsored members.126

The contributions of all Netting Members, including those that are sponsoring members, are

commingled in the Clearing Fund and are available to FICC for, among other things, securing

members’ obligations and providing liquidity to meet its settlement obligations.127 While the

commenter stated that the Sponsored Service under current FICC rules does not raise custody

issues for registered funds under the 1940 Act because registered funds are not required to post

margin to FICC, if a fund’s margin were permitted to be posted with FICC, that could raise

custody issues for funds unless such funds receive relief from certain provisions of the 1940

124

ICI Letter, supra note 85, at 13-14.

125

ICI Letter, supra note 85, at 14; Letter from Jennifer W. Han, Executive Vice President, Chief Counsel &

Head of Global Regulatory Affairs, Managed Funds Association (Dec. 4, 2023), at 4 (“MFA Letter II”).

See also MFA Letter, supra note 81, at 7 (noting that “an indirect participant should have the ability

(although not the obligation) to fund the margin obligations of the direct participant clearing on its behalf

which are attributable to the indirect participant. In such case, the margin posted by the indirect participant

should be segregated from the direct participant’s house margin, and it should not be subject to loss

mutualization vis-à-vis other direct participants. Given that many indirect participants have fiduciary

obligations to their own clients, it is crucial that indirect participants are able to post margin on a segregated

basis such that their clients are not subject to the credit risk of others (and, likewise, that their funds are not

subject to loss mutualization).”); SIFMA/IIB Letter, supra note 37, at 12-13 (noting that “it will be difficult

to support expanding cleared trading in U.S. Treasury securities until we have a framework which ensures

customers can access clearing solutions where their margin and collateral will be adequately protected,

including from loss mutualization by the clearing agency”).

126

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

127

FICC Rule 4, supra note 19.

Act.128 The commenter stated that permitting registered funds’ margin to be posted with FICC

could reduce costs for registered funds and facilitate their use of cleared reverse repos and term

repos.129 The commenter also stated that the final rule should require FICC to establish margin

rules that ensure that margin is held in a segregated manner, not commingled with any direct

participant’s house margin, and not be subject to loss mutualization associated with other direct

participants.130 Finally, the commenter stated that in order to address concerns regarding the

security of registered fund assets under a Treasury repo clearing mandate, FICC rules addressing

margin posting would need to be amended to provide for enhanced recordkeeping, internal

controls, and transparency around the positions and related margin.131

In order to support a clearing requirement for eligible secondary market transactions, the

Commission is taking the position that, for a period of five years, registered funds utilizing such

an arrangement in a manner consistent with the circumstances described below would not

provide a basis for enforcement action under Section 17(f) of the 1940 Act. The Commission

takes this position to recognize the unique circumstances facing registered funds in the context of

entering into eligible secondary market transactions using FICC’s Sponsored Program.

128

Section 17(f) of the 1940 Act (providing that “[e]very registered management company shall place and

maintain its securities and similar investments in the custody of (A) a bank or banks having the

qualifications prescribed in paragraph (1) of section 26(a) of this title for the trustees of unit investment

trusts; or (B) a company which is a member of a national securities exchange as defined in the Securities

Exchange Act of 1934, subject to such rules and regulations as the Commission may from time to time

prescribe for the protection of investors; or (C) such registered company, but only in accordance with such

rules and regulations or orders as the Commission may from time to time prescribe for the protection of

investors.”). See also rule 17f-1 under the 1940 Act (permitting registered funds to custody assets with a

member of a national securities exchange as defined in the 1934 Act pursuant to certain conditions).

129

ICI Letter, supra note 85, at 14.

130

Id.

131

See id. (“Enhanced recordkeeping and related controls are critical to appropriately identifying ownership of

assets during a Treasury repo or reverse repo transaction particularly since, unlike a typical derivates or

cash transaction, ownership of the Treasury securities underlying a repo or reverse repo change owners

during the transaction.”).

Our staff has previously stated that it would not recommend enforcement action under the

custody provisions of the 1940 Act in the context of certain registered fund trading activities.132

For example, the staff issued the Delta Letter in connection with Delta’s options clearing service,

which provided assurances that the staff would not recommend enforcement action under Section

17(f) of the 1940 Act if registered investment companies deposited margin with Delta.133 One

representation in the Delta Letter was that Delta was permitted to withdraw the margin provided

“only upon the investment company’s default on the option contract.”134 Other previous staff

no-action positions have been provided in different contexts. In one such no-action position,

FICC represented that a registered fund’s margin would not be used to cover another client’s

default and segregating fund assets from the custodian’s proprietary assets and other customers’

assets.135 These types of features would help protect fund client assets consistent with the 1940

Act under the FICC registered fund margin arrangement, and we have included similar types of

features for purposes of our position that follows below.

While the final rules do not require registered funds’ margin to be posted with FICC, and

no current U.S. Treasury securities CCA has rules imposing such a requirement, as discussed

above, a commenter requested that the Commission encourage FICC to establish a FICC

132

See e.g., Delta Government Options Corp. No-Action Letter (pub. avail. Sept. 27, 1990) (“Delta Letter”);

cf. CME Group, Inc. No-Action Letter (pub. avail. Dec. 19, 2017); FICC No-Action Letter (pub. avail.

Mar. 13, 2003) (“FICC 2003 Letter”). In the FICC Letter, the staff observed certain operational features of

FICC’s Mortgage-Backed Securities Division (“MBSD”), which differ from the current circumstances of

FICC’s Government Securities Division, such as registered funds being direct participants in MBSD’s

clearing scheme and participant trades not being novated to MBSD. Any staff statements cited represent

the views of the staff. They are not a rule, regulation, or statement of the Commission. Furthermore, the

Commission has neither approved nor disapproved their content. These staff statements, like all staff

statements, have no legal force or effect: they do not alter or amend applicable law; and they create no new

or additional obligations for any person.

133

Delta Letter.

134

Id.

135

See FICC 2003 Letter.

registered fund margin arrangement.136 The Commission agrees that facilitating the ability for a

registered fund’s margin to be posted at FICC as an alternative to the sponsoring member posting

the margin and passing the cost of doing so through to the registered fund may lower the cost of

trading for the fund, and the Commission position below will help facilitate the posting of

registered fund margin137 to satisfy a U.S. Treasury securities CCA’s margin deposit

requirements.

Specifically, the Commission takes the position that, for a period of five years beginning

on the effective date of this adopting release, if a registered investment fund’s cash and/or

securities are placed and maintained in the custody of FICC for purposes of meeting FICC’s

margin deposit requirements that may be imposed for eligible secondary market transactions in

connection with the fund’s participation in the Sponsored Program, it would not provide a basis

for enforcement action under Section 17(f) of the 1940 Act so long as:138

•

FICC withdraws the margin provided by a sponsored member registered fund only upon

that registered fund’s default;139

•

The margin provided by a registered fund is not commingled with, and is kept separate

from, FICC’s assets;140

136

See ICI Letter, supra note 85, at 14.

137

The Commission position is intended to address certain considerations under the 1940 Act specific to

registered funds. Other types of buy-side participants may have different considerations to address in

connection with their participation in the Sponsored Program beyond the scope of the 1940 Act.

138

To the extent a registered fund becomes aware that its custodial arrangement is no longer consistent with

the FICC registered fund margin framework, the registered fund may not utilize the FICC registered fund

margin framework to enter into eligible secondary market transactions.

139

For the avoidance of doubt, FICC may only withdraw margin provided by a registered fund in the event

that the registered fund defaults on a transaction that has been novated to FICC.

140

See FICC Letter; see also Institutional Equity Fund No-Action Letter (pub. avail. Feb. 27, 1984) (stating

that the staff would not recommend enforcement action under Section 17(f) of the 1940 Act if, among other

•

FICC segregates on its books and records the margin provided by a registered fund (or

series thereof, as applicable), and identifies a value of margin in its books and records as

being attributable to the registered fund;

•

The entity that FICC uses to custody such margin is an eligible fund custodian under the

1940 Act and the applicable rules thereunder;141

•

The margin provided by a registered fund is not subject to loss mutualization142 or

allocation;143

•

The margin provided by a registered fund is not used by FICC for any purpose other than

in connection with that registered fund’s default as a sponsored member;144

•

Registered funds receive quarterly statements of accounts concerning the margin

provided in connection with eligible secondary market transactions showing, at a

minimum, the name of the account, asset movements during the quarter, and quarter-end

positions; and

•

The account into which a registered fund’s margin is deposited is governed by a contract

by and among the registered fund, its sponsoring member, and FICC providing for an

things, the assets of a registered fund participating in the Options Clearing Corporation’s program were

held in a “non-proprietary account at OCC which does not include any assets held by the Clearing Member

agent other than as a fiduciary, custodian or otherwise for customers”).

141

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

142

See FICC 2003 Letter at n. 18.

143

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

144

For purposes of this Commission position, FICC is not permitted to use registered fund margin for default

liquidity purposes.

arrangement consistent with this Commission position, (together, the “FICC registered

fund margin framework”).145

In general, Section 17(f) of the 1940 Act and the rules thereunder govern the safekeeping

of investment company assets.146 The FICC registered fund margin framework is designed to

protect fund investor assets, consistent with the principles of the 1940 Act.147 The framework

would seek to adequately protect registered fund assets by isolating them from FICC’s

proprietary assets and segregating them on FICC’s books and records from the sponsoring

member’s other customers, preventing registered fund assets from being used to cover any

obligation other than an obligation of that registered fund, limiting FICC’s ability to use

registered fund margin for any purpose other than an obligation of the registered fund as a

sponsored member, and prohibiting registered fund assets from being subject to loss

mutualization or allocation.148 Five years is intended to provide sufficient time for FICC to

develop and file any proposed rule changes under Section 19(b) of the Exchange Act that may be

relevant to facilitate a registered fund’s ability to have its margin posted at FICC consistent with

the FICC registered fund margin framework. The Commission will consider any proposed rule

changes consistent with its obligations under Section 19(b) of the Exchange Act in the event that

FICC submits any proposal to facilitate a registered fund’s ability to have its margin posted at

145

The Commission notes that this position only applies with respect to the custody of registered fund margin,

and does not apply to cash or collateral received under a sponsored repo or reverse repo trade. Further, this

position does not impact any other obligation that a registered fund has in connection with its participation

in the Sponsored Program or under the 1940 Act and rules thereunder.

146

The legislative history of section 17(f) indicates that Congress intended the assets of investment companies

to be kept by a financially secure entity that has sufficient safeguards against misappropriation. See

Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate

Comm. on Banking and Currency, 76th Cong., 3d Sess. 264 (1940).

147

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

148

Cf. infra part II.C.2.

FICC consistent with the FICC registered fund margin framework in the future, and providing

this position for five years will also provide sufficient time for the Commission to determine if

extending or revising this position is appropriate. Five years is intended to provide sufficient

time for market participants to consider other potential frameworks for the posting of registered

fund margin to satisfy FICC’s margin deposit requirements and to gain insight into the merits of

such frameworks.149

A registered fund may wish to use a member of a national securities exchange as a

sponsoring member. Such a sponsoring member that receives and posts margin to a U.S.

Treasury securities CCA on behalf of registered funds may be deemed to have custody of fund

assets and implicate Rule 17f-1 under the 1940 Act. Therefore, the Commission takes the

position, for a period of five years from the effective date of this adopting release, that if a

registered fund’s cash and/or securities are placed and maintained with a sponsoring member that

is a member of a national securities exchange, solely in connection with facilitating the posting

of margin to FICC on behalf of a registered fund in connection with the registered fund’s

participation in the Sponsored Program, it would not provide the basis for an enforcement action

against a registered fund under Section 17(f) of the 1940 Act so long as: (i) the fund complies

with Rule 17f-1(a), (b)(5), and (d), and (ii) the contract between the registered fund and the

member of the national securities exchange provides for the following:

149

We note that a U.S. Treasury securities CCA could develop a different mechanism for a registered fund to

post margin. For example, the Options Clearing Corporation has a “deposits in lieu of margin” framework

whereby a customer of a clearing member makes a deposit in lieu of margin through OCC's escrow deposit

program, and the relevant positions are excluded from the clearing member's margin requirement to OCC.

See OCC Rules 610, 610A, 610B, and 610C; see also Self-Regulatory Organization: The Options Clearing

Corporation: Notice of Filing of Advance Notice Concerning the Options Clearing Corporation’s Escrow

Deposit Program, Securities Exchange Act Rel. No. 34-78334 (Sept. 14, 2016), 81 FR 64537-38 (Sept. 20,

2016). Although there are fundamental differences in the purpose and use of margin in the OCC’s deposit

in lieu of margin framework, a U.S. Treasury securities CCA could use the principles underlying the

OCC’s program by analogy in developing its own margin posting framework.

•

The margin provided by a registered fund is not commingled with, and is kept separate

from, the sponsoring member’s assets; 150

•

The sponsoring member segregates on its books and records the margin provided by a

registered fund (or series thereof, as applicable), and identifies a value of margin in its

books and records as being attributable to the registered fund;

•

The registered fund’s provision of margin is consistent with the FICC registered fund

margin framework; and

•

The sponsoring member does not hold registered fund assets that exceed the amount that

is required to be deposited as margin to FICC with respect to the registered fund’s

outstanding eligible secondary market transactions.151

As above, such an approach is intended to accomplish a similar purpose as the FICC

registered fund margin framework and additionally limit the amount of assets held in custody at

a sponsoring member that is a member of a national securities exchange to an amount of margin

that is required by FICC.

More generally, the Commission understands that the commenter which raised issues

regarding the ability of registered funds to post margin to the CCA is referring to clearing models

whereby an indirect participant in a U.S. Treasury securities CCA executes a transaction with a

counterparty and then “gives up” the transaction to another party to submit for clearance and

settlement. The Commission agrees with the commenter that the use of a “give up” model could

150

See note 140 supra.

151

This Commission position would not apply to the extent that the sponsoring member holds an amount of

registered fund assets that exceeds the registered fund’s margin obligations. If a sponsoring member were

to hold registered fund assets in an amount that exceeds the registered fund’s margin obligations, then the

sponsoring member would need to return such excess to the registered fund as promptly as possible or

promptly comply with all requirements of Rule 17f-1 under the 1940 Act.

be helpful in further facilitating the increased demand for central clearing under a potential

clearing requirement. The Commission understands that FICC currently has certain models that

facilitate “give up” style clearing, and, consistent with the requirement discussed in part II.B.2

infra, encourages U.S. Treasury securities CCAs to consider how best to facilitate “give up”

clearing.

The Commission’s ability to “encourage” FICC, a covered clearing agency, must be

considered in context of the relevant regulatory framework. Covered clearing agencies are SROs

for purposes of the Exchange Act,152 meaning that, as an SRO, a covered clearing agency is

required to file with the Commission any proposed rule or proposed change in its rules, including

additions or deletions from its rules.153 The Commission publishes all proposed rule changes for

comment.154 When considering whether to approve or disapprove a proposed rule change, the

Commission shall approve the proposed rule change if it finds that such proposed rule change is

consistent with the requirements of the Exchange Act and the rules and regulations thereunder

applicable to the particular type of SRO.155

152

17 CFR 240.17ad-22(a)(5) (defining a covered clearing agency); 15 U.S.C. 78c(a)(26) (defining an SRO to

include a registered clearing agency).

153

An SRO must submit proposed rule changes to the Commission for review and approval pursuant to Rule

19b-4 under the Exchange Act. A stated policy, practice, or interpretation of an SRO, such as its written

policies and procedures, would generally be deemed to be a proposed rule change. See 15 U.S.C.

78s(b)(1); 17 CFR 240.19b-4. See 15 U.S.C. 78s(b)(3)(A) (setting forth the types of proposed rule changes

that take effect upon filing with the Commission). The Commission may temporarily suspend those rule

changes within 60 days of filing and institute proceedings to determine whether to approve or disapprove

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

154

See 15 U.S.C. 78s(b)(1). Proposed rule changes are generally required to be approved by the Commission

prior to going into effect; however, certain types of proposed rule changes take effect upon filing with the

Commission.

155

15 U.S.C. 78s(b)(1)(C)(i). On the other hand, the Commission shall disapprove a proposed rule change if it

cannot make such a finding. 15 U.S.C. 78s(b)(1)(C)(ii).

In addition, clearing agencies registered with the Commission are financial market

utilities, as defined in section 803(6) of the Dodd-Frank Act.156 A clearing agency that has been

designated by the Financial Stability Oversight Council as systemically important or likely to

become systemically important, and for which the Commission is the Supervisory Authority

(“designated clearing agency”), is required to file 60-days advance notice with the Commission

of changes to rules, procedures, and operations that could materially affect the nature or level of

risk presented by the designated clearing agency (“advance notice”).157 Such an advance notice

also requires consultation with the Board of Governors.158 The Clearing Supervision Act

authorizes the Commission to object to changes proposed in such an advance notice, which

would prevent the clearing agency from implementing its proposed change(s).159

These statutory requirements applicable to covered clearing agencies mean that the

Commission must consider proposed rule changes as they are filed. The Commission does not

dictate particular proposed rule changes that a CCA should adopt, although a CCA may

determine that it should propose certain rule changes in response to a new or amended

Commission rule. In response to this commenter, and as discussed in part II.B.2 infra, the

Commission will consider any proposed rule changes filed by FICC, or any other U.S. Treasury

156

See 12 U.S.C. 5462(6).

157

The Dodd-Frank Act defines a “designated clearing entity” as a designated financial market utility that is

either a derivatives clearing organization registered under section 5b of the Commodity Exchange Act (7

U.S.C. 7a–1) or a clearing agency registered with the Securities and Exchange Commission under section

17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q–1). See 12 U.S.C. 5462(3). The Commission

is the Supervisory Agency, as defined in 12 U.S.C. 5462(8), for four designated clearing agencies (the

Depository Trust Company, the National Securities Clearing Corporation, the Fixed Income Clearing

Corporation, and the Options Clearing Corporation). See 12 U.S.C. 5465(e)(1)(A). The Commission

published a final rule concerning the filing of advance notices for designated clearing agencies in 2012.

See 17 CFR 240.19b-4(n); Exchange Act Release No. 34-67286 (June 28, 2012), 77 FR 41602 (July 13,

2012).

158

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

159

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

securities CCA, in due course, consistent with its obligations under Section 19(b) of the

Exchange Act. The Commission does not have the ability to revise particular aspects of the rules

of an SRO that is a registered clearing agency, like a CCA.160

Second, the commenter discussed potential custody issues for registered funds under

Section 17(f) of the 1940 Act and Rule 17f-4 thereunder. Section 17(f) requires that a registered

fund maintain its securities and similar investments in a bank, a company which is a member of a

national securities exchange, or its own custody.161 The commenter stated that substantially all

funds use a bank custodian, and that a bank custodian is particularly beneficial to funds in the

context of repo and reverse repo transactions with respect to custodying both securities and

cash.162

The Commission has adopted rules that specify required qualifications for entities other

than those named in Section 17(f) to act as custodians of fund assets, including Rule 17f-4 which

permits a registered fund to deposit the securities it owns in a securities depository, under certain

conditions.163 A “securities depository” is defined to include a clearing corporation that is

registered with the Commission under Section 17A of the Exchange Act.164 The commenter

observed that FICC is registered as a clearing agency, but that FICC has stated that it is not a

securities depository and does not provide securities depository services.165 The commenter

asserted that, because FICC is not deemed to be a securities depository eligible to custody fund

160

15 U.S.C. 78s(c) (establishing the Commission’s authority to, by rule, abrogate, add to, and delete from the

rules of an SRO other than a registered clearing agency).

161

15 U.S.C. 80a-17(f)(1).

162

ICI Letter, supra note 85, at 15.

163

17 CFR 270.17f-4.

164

17 CFR 270.17f-4.

165

ICI Letter, supra note 85, at 15.

assets, expanding the Sponsored Service for funds would require addressing Section 17(f) “if the

offering would require margin posting by funds,” and stated that one way to do this would be for

FICC to obtain Commission relief to hold fund margin as an eligible securities depository within

the meaning of Rule 17f-4.166

The Commission is not opining on whether FICC’s Government Securities Division

could currently be considered a “securities depository” for purposes of Rule 17f-4.167 However,

the amendments to Rule 17ad-22(e) do not require that registered funds post margin directly to a

U.S. Treasury securities CCA, meaning that this issue is not implicated at this time. Therefore,

the Commission does not believe that such concerns are ripe for consideration, as no U.S.

Treasury securities CCA has proposed particular rules that would require the posting of

registered funds’ securities at the CCA and such an arrangement is not specifically required by

the requirement to clear eligible secondary market transactions. Moreover, as discussed in this

part above, the Commission has taken the position regarding the FICC registered fund margin

framework in light of the commenter’s concern.

The Commission’s definition of an eligible secondary market transaction and the

requirement to clear such transactions does not, on its own, mandate particular changes to

166

ICI Letter, supra note 85, at 15-16.

167

The commenter’s assertion that FICC has stated that it is not a securities depository and does not provide

securities depository services comes from a statement in FICC’s Disclosure Framework concerning a

different regulatory regime. Specifically, the statement concerns whether FICC is a “central securities

depository” or provides “central securities depository” services, for purposes of discussing FICC’s

obligation to comply with Rule 17ad-22(e)(10), which applies to CCAs that provide central securities

depository services. “Central securities depository” is a defined term in the Covered Clearing Agency

Standards, meaning a clearing agency that is a securities depository as described in Section 3(a)(23)(A) of

the Act (15 U.S.C. 78c(a)(23)(A). Section 3(a)(23)(A) defines a securities depository, in turn, as who (i)

acts as a custodian of securities in connection with a system for the central handling of securities whereby

all securities of a particular class or series of any issuer deposited within the system are treated as fungible

and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities

certificates, or (ii) otherwise permits or facilitates the settlement of securities transactions or the

hypothecation or lending of securities without physical delivery of securities certificates.

FICC’s membership models, including the Sponsored Service. FICC has not proposed any rule

changes with respect to the Sponsored Service in this regard at this time. The Commission will

consider any proposed rule changes consistent with its obligations under Section 19(b) of the

Exchange Act in the event that FICC submits any such proposal in the future.

Third, the commenter stated that FICC’s rules addressing margin posting will need to be

amended to provide for enhanced recordkeeping, internal controls, and transparency around the

positions and related margin, to address fund concerns regarding the security of fund assets

under a requirement to clear certain transactions. The commenter stated that enhanced

recordkeeping and related controls are critical to appropriately identifying ownership of assets

during a repo transaction particularly since, unlike a typical derivatives or cash transaction,

ownership of the U.S. Treasury securities underlying a repo transaction changes during the

transaction. The commenter asserted that FICC currently relies on its broker-dealer members

and, in certain cases, designated agency banks to maintain records regarding margin positions,

and that FICC has indicated that it is not able to identify positions or possess the assets of its

members’ customers. The commenter states that notwithstanding FICC’s current lack of

infrastructure, “the Proposal relies heavily on FICC to intermediate transactions under a clearing

mandate and contemplates that this approach will provide a higher level of safety to the market

than the current bilateral market, which relies on a well-diversified group of credit-worthy banks

to hold collateral, including through robust tri-party arrangements, and utilizes an industry

standard agreement that is well understood by market participants.”168

However, no U.S. Treasury securities CCA has proposed particular rules that would

require the posting of registered funds’ securities at the CCA. The Commission’s definition of

168

ICI Letter, supra note 85, at 16-17.

an eligible secondary market transaction and the requirement to clear such transactions does not,

on its own, mandate particular changes to FICC’s membership models, including the Sponsored

Service. The Commission will consider any proposed rule changes consistent with its

obligations under Section 19(b) of the Exchange Act in the event that FICC submits any such

proposal in the future.

The Commission disagrees with the commenter’s assertion that FICC has indicated that it

is not able to identify positions or possess the assets of its members’ customers. FICC currently

is able to maintain position data for customer positions in all its indirect access models.169 In

addition, under the amendments being adopted in this release, FICC will, as discussed in section

II.B.1 infra, be required to separately calculate and hold customer margin (which it currently

does for the Sponsored Service), which addresses the commenter’s concern that FICC calculate

and hold customer margin separately.

Fourth, the commenter highlighted its support for strong protections for fund assets,

including “legally segregated, operationally commingled” (“LSOC”) protections. In addition,

another commenter asserted that, without an exclusion from the definition of an eligible

secondary market transaction for repos with registered funds, such funds could be subject to

greater counterparty credit risk because the existing Sponsored Member clearing model at FICC

has no requirement to segregate customer assets, while at present most registered funds use thirdparty custodians to hold securities and cash.170 The Commission addresses these comments in

more detail in part II.B.1 below.

169

FICC Buyside FAQ at 4, available at https://www.dtcc.com/ustclearing//media/Files/Downloads/Microsites/Treasury-Clearing/FICC-GSD-FAQ.pdf (“FICC records positions of

Sponsored Members and positions of Executing Firms of a Prime Broker as long as the Prime Broker

submits the trades to FICC using a unique client identifier called the “Executing Firm symbol.”) (“FICC

Buyside FAQ”).

170

SIFMA AMG Letter, supra note 35, at 5.

Fifth, the commenter stated that the Commission and FICC must address the bankruptcy

treatment of certain fund assets. Specifically, the commenter stated that FICC’s rules should

confirm that agreements entered into by repo counterparties will be enforceable against both

parties, notwithstanding that the transactions are cleared, and provide a clear process for closeout

of transactions by FICC, including both the start and end legs of the transaction. The commenter

also stated that FICC’s rules need to address what happens upon the insolvency of a sponsoring

member in a variety of factual circumstances, including providing for prompt replacement of the

sponsoring member by its sponsored members and handling of other functions typically

performed by the sponsoring member to ensure that transactions by the sponsored member are

maintained and allowing the sponsored member the authority to receive certain reports directly

and to post to the clearing fund to preserve pending trades. The commenter also stated that

FICC’s rules should provide clarity regarding how non-defaulting parties, such as funds, can

exercise closeout rights, including those available under Sections 555, 559, 561, and similar

sections of the U.S. Bankruptcy Code. The commenter stated that if, in the future, FICC decides

to expand the Sponsored Service to permit (but not require) sponsored members to post margin,

then the Commission and FICC should clarify that the margin posted by a sponsored member

with its sponsoring member for on-posting with FICC would be eligible for customer treatment

under the Securities Investor Protection Act (“SIPA”). The commenter also argues that

clarification of FICC’s rules regarding closeout rights – particularly in respect to “done away”

trades – is important to clarify a repo counterparty’s rights under different insolvency regimes

applicable to cleared transactions.171

171

ICI Letter, supra note 85, at 20-21.

Regarding these bankruptcy-related comments, FICC’s rules already address the issues

raised by the commenter. For example, with respect to the enforceability of the agreements

entered into by repo counterparties, FICC requires applicants for membership to execute a

Membership Agreement, in which the applicant agrees to be bound by FICC’s Rules, and FICC

further requires applicants for membership to provide a legal opinion regarding the membership

agreement, which incorporates FICC’s Rules.172 Novation consists of the termination of the

deliver, receive, and related payment obligations between the parties to a trade, and their

replacement with identical obligations to and from FICC in accordance with the Rules. Once it

novates a transaction, FICC contractually replaces the original counterparties’ obligations to each

other with two sets of obligations, both of which include FICC and one of the original

counterparties.173 FICC is not a party to the pre-novation bilateral agreements between a

Sponsoring Member and its Sponsored Members, and therefore, it cannot guarantee performance

of those contracts.

In addition, with respect to FICC’s need to establish a process for closeout, FICC’s Rules

contain these processes. Upon ceasing to act for an insolvent member, FICC may promptly close

out and manage the member’s positions, including with respect to the member’s pending

transactions with non-defaulting members.174 Specifically, FICC would terminate and net all of

the insolvent member’s positions, after which FICC would liquidate the net positions through

market action and determine a single net amount owed to or from the insolvent member from or

172

FICC Rule 2A, Section 7, supra note 19; FICC Disclosure Framework, Principle 1, available at

https://www.dtcc.com/-/media/Files/Downloads/legal/policy-andcompliance/FICC_Disclosure_Framework.pdf.

173

FICC Rule 5, section 8 (regarding novation generally) and Rule 3A, section 7(a) (regarding novation in the