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- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Conformed to Federal Register version
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

2

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

3

240.17ad-22(a) (“Rule 17ad-22(a)”) definitions of “U.S. Treasury security,” “central bank,”
“eligible secondary market transaction,” “international financial institution,” “sovereign entity,”
“state and local government,” and “affiliated counterparty.” As part of this rulemaking, the
Commission is also amending the CFR designation of Rule 17Ad-22 to Rule 17ad-22.1 Fourth,
the Commission is amending 17 CFR 240.15c3-3a (“Rule 15c3-3a”) to permit margin required
and on deposit at covered clearing agencies providing central counterparty services for U.S.
Treasury securities to be included by broker-dealers as a debit in the customer and PAB reserve
formulas, subject to certain conditions.
Table of Contents
I. Introduction
II. Discussion of Comments Received and Final Rules
A. U.S. Treasury Securities CCA Membership Requirements
1. Requirement to Clear Eligible Secondary Market Transactions
a.
Comments Regarding the Requirement to Clear Eligible Secondary Market
Transactions
b.
Comments Regarding the Concentration of Risk in One Covered Clearing Agency
c.
Final Rule
2. Definition of Eligible Secondary Market Transactions
a.
Repo Transactions
i. Triparty Repo
ii.
Repos by Registered Funds
iii. Repos by Other Clearing Organizations
iv. Repos by FCMs
v.
Repos involving “End Users”
vi. Interaffiliate Repos
vii. Repos by State and Local Governments
viii.
Other Repo Comments
ix. Final Rule
b.
Purchases and Sales of U.S. Treasury Securities
i. Comments Regarding Cash Clearing Generally
ii.
IDB Transactions
iii. Other Cash Transactions
iv. Comments Regarding Cash Transactions for Registered Funds
v.
Final Rule
3. Other Exclusions from the Definition of an Eligible Secondary Market Transaction
1

See note 71 infra for further discussion of this amendment. The Commission refers to the redesignated
Rule 17ad-22 throughout this release.

4

4. Policies and Procedures Regarding U.S. Treasury Securities CCA’s Monitoring of its
Direct Participants’ Transactions
5. Alternative Approaches Proposed by Commenters
B. Additional Changes to Covered Clearing Agency Standards
1. Netting and Margin Practices for House and Customer Accounts
2. Facilitating Access to U.S. Treasury Securities CCAs
a.
Comments Supporting the Commission’s Proposed Rule
b.
Comments Regarding the Commission’s Authority to Require a CCA to Accept
Done Away Transactions
c.
Other Comments Regarding Access
d.
Final Rule
C. Amendments to Rule 15c3-3a
1. Introduction
2. Credit Items
3. New Debit Item
4. Note to New Debit Item
a.
First Condition – Permitted Collateral
b.
Second Condition – Customer Position Margin
c.
Third Condition – Rules of U.S. Treasury Securities CCA
d.
Fourth Condition – Commission Approval of Rules of U.S. Treasury Securities
CCA
5. PAB Reserve Computation
III. Compliance Dates
IV. Economic Analysis
A. Broad Economic Considerations
B. Baseline
1. U.S. Treasury Securities
2. U.S. Treasury Repurchase Transactions
3. Clearance and Settlement of U.S. Treasury Security Transactions
a.
Cash Market
i. Interdealer
ii.
Dealer-to-Customer
b.
U.S. Treasury Repo Market
i. Non-Centrally Cleared Bilateral Repo
ii.
Centrally Cleared Bilateral Repo
iii. Non-Centrally Cleared Repo Settled on a Triparty Platform
iv. Centrally Cleared Repo Settled on a Triparty Platform
v.
Inter-Affiliate Repo
4. Central Clearing in the U.S. Treasury Securities Market
5. Margin Practices in U.S. Treasury Secondary Markets
6. Disruptions in the U.S. Treasury Securities Market
a.
COVID-19 shock of March 2020
b.
September 2019 repo market disruptions
c.
October 2014 flash rally
7. Affected Parties
a.
Covered Clearing Agencies for U.S. Treasury Securities: FICC

5

b.
c.
d.

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)
v.
State and Local Governments
vi. Private Pensions Funds and Insurance Companies.
e.
Triparty Agent: Bank of New York Mellon
f. Custodian Banks / Fedwire Securities Service (FSS)
C. Analysis of Benefits, Costs, and Impact on Efficiency, Competition, and Capital Formation
1. Benefits
a.
U.S. Treasury Securities CCA Membership Requirements
i. Scope of the Requirement to Clear Eligible Secondary Market Transactions
ii.
Application of the Requirement to Clear Eligible Repo Transactions
iii. Application of the Requirement to Clear Eligible Secondary Market Transactions
to Purchases and Sales of U.S. Treasury Securities
iv. Exclusions from the Requirement to Clear Eligible Secondary Market
Transactions
b.
Other Changes to Covered Clearing Agency Standards
i. Policies and Procedures Regarding Direct Participants’ Transactions
ii.
Netting and Margin Practices for House and Customer Accounts
iii. Facilitating Access to U.S. Treasury Securities CCAs
c.
Amendments to Rules 15c3-3 and 15c3-3a
2. Costs
a.
Costs to FICC and its Members of the Requirement to Clear Eligible Secondary
Market Transactions
i. Costs attendant to an increase in CCLF
ii.
Costs of the Requirement to Clear Eligible Secondary Market Transactions in
terms of increased margining for existing FICC members
iii. Other Costs
b.
Costs to non-members of a U.S Treasury securities CCA as a result of the
Requirement to Clear Eligible Secondary Market Transactions
c.
Other Changes to Covered Clearing Agency Standards
i. Netting and Margin Practices for House and Customer Accounts
ii.
Facilitating Access to U.S. Treasury Securities CCAs
d.
Amendments to Rules 15c3-3 and 15c3-3a
e.
Other Costs
3. Effect on Efficiency, Competition, and Capital Formation
a.
Efficiency
i. Price Transparency
ii.
Operational and Balance Sheet Efficiency
b.
Competition
c.
Capital Formation

6

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.

2

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

3

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

7

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

4

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.

5

Group of Thirty Working Group on Treasury Market Liquidity, U.S. Treasury Markets: Steps Toward
Increased Resilience, at 1 (2021), available at https://group30.org/publications/detail/4950 (“G-30
Report”).

6

See Rule 17ad-22(a) (defining covered clearing agency and central counterparty) and Exchange Act Section
3(a)(23) (defining clearing agency).

8

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

7

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”).

8

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”).

9

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

10

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”).

11

See generally id.

9

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.

12

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.

13

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.

10

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.

14

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.

11

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

15

Copies of all comment letters received by the Commission are available at
https://www.sec.gov/comments/s7-23-22/s72322.htm.

16

17 CFR 240.17ad-22(e)(19). See also CCA Standards Proposing Release, supra note 8, at 29553 (noting
that some market participants would not meet a covered clearing agency’s direct participation requirements
and proposing risk management requirements for indirect and tiered participants).

17

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

12

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.
18

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”).

19

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.”

20

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.

13

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.

21

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

22

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

14

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

23

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).

24

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).

15

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

25

2021 IAWG Report, supra note 4, at 30.

26

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.”)).

27

Darrell Duffie, Still the World’s Safe Haven Redesigning the U.S. Treasury Market After the COVID-19
Crisis, Hutchins Center Working Paper # 62 (Brookings Inst.) at 15 (June 2020), available at
https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf (“Duffie”).

28

2021 IAWG Report, supra note 4, at 30; Nellie Liang & Patrick Parkinson, Enhancing Liquidity of the U.S.
Treasury Market Under Stress, at 9 (Dec. 16, 2020), available at https://www.brookings.edu/wpcontent/uploads/2020/12/WP72_Liang-Parkinson.pdf (“Liang & Parkinson”); Duffie, supra note 27, at 1617.

16

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

29

Liang & Parkinson, supra note 28, at 9.

30

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

31

2021 IAWG Report, supra note 4, at 30; Duffie, supra note 27, at 16; G-30 Report, supra note 5, at 13.
All-to-all trading would be characterized by the ability for a bid or offer submitted by one market
participant to be accepted by any other market participant, with trades executed at the best bid or offer.
See, e.g., Liang & Parkinson, supra note 28, at 9. All-to-all trading could improve the quality of trade
execution in normal market conditions and broaden and stabilize the supply of market liquidity under
stress. See, e.g., G-30 Report, supra note 5, at 10.

32

Duffie, supra note 27, at 15;2021 IAWG Report, supra note 4, at 30 (centralization of transactions at a
CCP “can simplify data collection and improve visibility into market conditions for the authorities and, to
some degree, for market participants”).

17

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

33

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”).

34

The Commission discusses the comments on incentives in its discussion of alternative approaches to a
clearing requirement in part II.A.5 infra.

35

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”).

18

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

36

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.

37

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”).

19

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

38

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

39

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

40

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

20

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

41

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.”).

42

Id.

43

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

44

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

21

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

45

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

46

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

47

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).

48

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).

22

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,

49

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).

50

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).

51

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

23

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

52

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.

53

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

54

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

24

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

55

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

25

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

56

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

26

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,

57

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

58

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

27

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

59

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

60

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

61

See 17 CFR 242.1001.

62

17 CFR 240.17ad-22(e)(3)(ii). In the event of a wind-down in which the result is that the U.S. Treasury
securities CCA no longer exists, Rule 17ad-22(e)(18)(iv) would not apply, as there would be no CCA to
impose such membership requirements. The requirement to clear eligible secondary market transactions
arises under the CCA’s rules and is not a mandate to clear based on the nature of the security.

28

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

63

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

64

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.

29

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

65

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.

66

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

67

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

30

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

68

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

69

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

31

framework, and that the existence of additional U.S. Treasury securities CCAs would lower the
concentration risk that currently exists due to having a single CCA for that market. Moreover, a
rule prohibiting a clearing agency from restricting or impeding in any way its member’s ability
to clear at another CCA is also unnecessary because to be registered under Section 17A of the
Exchange Act, a clearing agency’s rules must not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of Section 17A.70
c. Final Rule
For the reasons discussed in parts II.A.1.a and b supra, the Commission is adopting Rule
17ad-22(e)(18)(iv) as proposed.71 This requirement applies to all types of transactions that are of
a type currently accepted for clearing at a U.S. Treasury securities CCA; it does not impose a
requirement on a U.S. Treasury securities CCA to offer additional products for clearing.
2.

Definition of Eligible Secondary Market Transactions

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

70

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

71

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).

72

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

73

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

32

•

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.

33

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

74

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.

75

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

34

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)).
76

In effect, accounting rules allow purchases and sales of the same security to be netted but do not allow
repos of the same security to be netted, unless the repos are with the same counterparty and the trades have
been documented under a master netting agreement. See, e.g., Proposing Release, supra note 14, 87 FR
64621 (citing G-30 Report, supra note 5, at 13; Program on International Financial Systems, Mandatory
Central Clearing for U.S. Treasuries and U.S. Treasury Repos, at 25-27 (Nov. 2021), available at
https://www.pifsinternational.org/wp-content/uploads/2021/11/PIFS-Mandatory-Central-Clearing-for-U.S.Treasury-Markets-11.11.2021.pdf (“PIFS Paper”)). Thus, if a dealer’s repos are all with a U.S. Treasury
securities CCA, greater netting is allowed.

77

See Committee on the Global Financial System, Repo Market Functioning, at 24 (Apr. 2017), available at
https://www.bis.org/publ/cgfs59.pdf.

78

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

79

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

35

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

80

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

81

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.

36

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

82

MFA Letter, supra note 81, at 13 (supporting inclusion of bilateral repo and reverse repo).

83

SIFMA AMG Letter, supra note 35, at 11.

84

See, e.g., SIFMA AMG Letter, supra note 35, at 4; SIFMA-IIB Letter, supra note 37, at 4.

85

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

37

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”).
86

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.

87

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.

88

See id.

89

See ICI Letter, supra note 85, at 22.

90

See Federated Letter, supra note 85, at 3.

91

See MFA Letter, supra note 81, at 14.

38

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

92

See Federated Letter, supra note 85, at 5.

93

See Federated Letter, supra note 85, at 5.

94

Morgan Stanley Letter, supra note 85, at 2.

95

ICI Letter, supra note 85, at 33.

39

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

96

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.

97

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

98

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.

40

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

99

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).

41

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.

42

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.

43

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.

44

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.

45

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.

46

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.

47

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.

48

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.”).

49

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.

50

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

51

•

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.

52

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, consi

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Aba5a5cb94608e255. Public record. Not legal advice.