# 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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2023-27860

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 16, 2024
- **Citation:** 89 FR 2714

## Text

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) 551-5525; Thomas K. McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202) 551-5522; Raymond Lombardo, Assistant Director, at 202-551-5755; 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 20549-7010.

SUPPLEMENTARY INFORMATION:

First, the Commission is amending 17 CFR 240.17ad-22(e)(18) (“Rule 17ad-22(e)(18)”) to require covered clearing agencies that provide central counterparty (“CCP”) services for U.S. Treasury securities to establish, implement, maintain and enforce written policies and procedures reasonably designed, as applicable, to establish objective, risk-based and publicly disclosed criteria for participation, which require that any direct participant of such a covered clearing agency submit for clearance and settlement all the eligible secondary market transactions in U.S. Treasury securities to which such direct participant is a counterparty. In addition, these policies and procedures must be reasonably designed, as applicable, to identify and monitor the covered clearing agency's direct participants' submission of transactions for clearing as required above, including how the covered clearing agency would address a failure to submit transactions. These policies and procedures must also be reasonably designed, as applicable, to ensure that the covered clearing agency has appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities, including those of indirect participants, which policies and procedures the board of directors of such U.S. Treasury securities covered clearing agency (“CCA”) must review annually. The Commission is defining an eligible secondary market transaction as a secondary market transaction in U.S. Treasury securities of a type accepted for clearing by a registered covered clearing agency that is either a repurchase or reverse repurchase agreement collateralized by U.S. Treasury securities, in which one of the counterparties is a direct participant, or certain specified categories of cash purchase or sale transactions, including certain exclusions for transactions with sovereign entities, international financial institutions, natural persons, inter-affiliate repo transactions, state/local governments, and other clearing organizations. Second, the Commission is amending 17 CFR 240.17ad-22(e)(6)(i) (“Rule 17ad-22(e)(6)(i)”) to require that a covered clearing agency providing central counterparty services for U.S. Treasury securities establish, implement, maintain and enforce written policies and procedures reasonably designed to, as applicable, calculate, collect, and hold margin for transactions in U.S. Treasury securities submitted on behalf of an indirect participant separately from those submitted on behalf of the direct participant. Third, the Commission is amending Rule 17ad-22(e)(18) to require that a covered clearing agency providing central counterparty services for U.S. Treasury securities establish, implement, maintain and enforce written policies and procedures reasonably designed to, as applicable, ensure that it has appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities, including those of indirect participants, which policies and procedures the board of directors of such covered clearing agency reviews annually. In connection with these proposed amendments, the Commission is including as part of 17 CFR 240.17ad-22(a) (“Rule 17ad-22(a)”) definitions of “U.S. Treasury security,” “central bank,” “eligible secondary market transaction,” “international financial institution,” “sovereign entity,” “state and local government,” and “affiliated counterparty.” As part of this rulemaking, the Commission is also amending the CFR designation of Rule 17Ad-22 to Rule 17ad-22.
1

Fourth, the Commission is amending 17 CFR 240.15c3-3a (“Rule 15c3-3a”) to permit margin required and on deposit at covered clearing agencies providing central counterparty services for U.S. Treasury securities to be included by broker-dealers as a debit in the customer and PAB reserve formulas, subject to certain conditions.

1

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

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

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

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

c. Interdealer Brokers

d. 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

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 Non-Members 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).

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

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”).

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 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.

6

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

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.

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 self-regulatory organizations (“SROs”) under Section 19(b) of the Exchange Act that address how the proposed rule changes are consistent with the Exchange Act and the Covered Clearing Agency Standards thereunder.

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.

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 Group
12

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.

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-securities-market-318/report-joint-treasury-federal-reserve-study-us-government-securities-market-6282.

The Commission received many comments on the proposal.
15

Having considered the comments received, the Commission is adopting the proposed new rules and rule amendments with modifications, as discussed further below.

15
Copies of all comment letters received by the Commission are available at
https://www.sec.gov/comments/s7-23-22/s72322.htm.

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 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

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 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.”

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

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.

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 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.

21

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

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.

22

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

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.

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.

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).

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 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

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.”)).

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

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/wp-content/uploads/2020/12/WP72_Liang-Parkinson.pdf
(“Liang & Parkinson”); Duffie,
supra
note 27, at 16-17.

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 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.

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.

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 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.

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”).

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

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.

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 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.

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”).

36
Additional Information about Reference Rates Administered by the New York Fed,
available at https://www.newyorkfed.org/markets/reference-rates/additional-information-about-reference-rates#tgcr_bgcr_sofr_calculation_methodology.

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 among market participants (which may increase systemic risk) if such participants leave the market.
38

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”).

38
SIFMA/IIB Letter,
supra
note 37, at 8.

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 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.

39
SIFMA/IIB Letter,
supra
note 37, at 8.

40
Dodd-Frank Act section 723; 15 U.S.C. 3C(a).

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.

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 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

43
SIFMA/IIB Letter,
supra
note 37, at 9.

44
SIFMA/IIB Letter,
supra
note 37, at 9.

45
SIFMA/IIB Letter,
supra
note 37, at 9.

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 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

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).

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).

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, 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

51
SIFMA/IIB Letter,
supra
note 37, at 10.

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.

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

53
SIFMA/AMG Letter,
supra
note 37, at 3, 9.

54
SIFMA/AMG Letter,
supra
note 37, at 9.

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 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.

55
For example, there is only one CCA in the U.S. equities market and in the U.S. listed derivatives market.

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 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

56
17 CFR 240.17ad-22(e)(4)(vi) and (vii) and (e)(7)(vi) and (vii).

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 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

57
17 CFR 240.17ad-22(e)(6).

58
17 CFR 240.17ad-22(e)(18) and (19).

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, 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.

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.

63
12 U.S.C. 5465(e); 17 CFR 240.19b-4.

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 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.

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.

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.

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

66
Letter from the Independent Dealer & Trader Association, at 9 (Dec. 27, 2022) (“IDTA Letter”).

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 to their customers, and at what price, thereby providing the ability for the direct participants to differentiate themselves from their competitors.

67
15 U.S.C. 78q-1(b)(3)(E).

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

68
15 U.S.C. 78s(b); Dodd-Frank Act Section 806(e); 17 CFR 240.19b-4.

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 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

69
ICE Letter,
supra
note 33, at 2-3.

70
15 U.S.C. 78q-1(b)(3)(I).

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.

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).

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 securities
72

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 transaction
73

would include:

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 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.

• 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 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

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/wp-content/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.

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

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.

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-us-treasury-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-into-primary-dealer-securities-financing-and-mbs-activity-20220805.htm
(recent research with respect to 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)).

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

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
.

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 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.

78
TMPG Repo White Paper,
supra
note 75, at 1.

79
G-30 Report,
supra
note 5, at 13.

80
17 CFR 240.17ad-22(e)(6).

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 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

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
.

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.

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.

84

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

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 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

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 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.

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 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

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.

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.

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.

95
ICI Letter,
supra
note 85, at 33.

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 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 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 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

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
.

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).

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-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf
.

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

104

See
MFA Letter,
supra
note 81, at 17.

105

See id.

106

See
ICI Letter,
supra
note 85, at 12, 22.

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 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.

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-White-Paper.pdf
.

108

Id.

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 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

109

See
MFA Letter,
supra
note 81, at 12, 14.

110

See id.

111
Securities Exchange Act Release No. 92799 (Aug. 27, 2021), 86 FR 49387 (Sept. 2, 2021) (SR-FICC-2021-801); Securities Exchange Act Release No. 92014 (May 25, 2021), 86 FR 29334 (June 1, 2021) (SR-FICC-2021-003).

112
Securities Exchange Act Release No. 40623 (Oct. 30, 1998), 63 FR 59831 (Nov. 5, 1998) (SR-GSCC-98-02).

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-and-statistics/data-visualization/tri-party-repo#interactive/tripartygcf
.

114

See
DTCC 2023 White Paper,
supra
note 107.

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. 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

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).

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 Treasury securities.
117

Collateral management practices may evolve to better delineate collateral types in light of the definition of an eligible secondary market transaction.

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.

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.

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

118
Of this amount, approximately $1.5 trillion was invested in the Federal Reserve's overnight reverse repo facility.
See
U.S. Securities and Exchange Commission, Money Market Fund Statistics (Sept. 2023),
available at https://www.sec.gov/divisions/investment/mmf-statistics
. Repo transactions with the central bank are excluded from the scope of Eligible Secondary Market Transactions.

119
Federal Reserve, Financial Accounts of the United States, Table L.207 Federal Funds and Security Repurchase Agreements (2023 Q2).

120
ICI Letter,
supra
note 85, at 13; Federated Letter,
supra
note 85, at 2; DTCC/FICC Letter,
supra
note 33, at 17.

121

See
DTCC, Sponsored DVP and Sponsored GC Activity,
available at https://www.dtcc.com/charts/membership,
which also shows data over a longer timeframe for reference.

Several commenters stated that they did not support including repo transactions with registered funds as a counterparty in the definition of an eligible secondary market transaction, which, as proposed, would include repo transactions with all counterparties.
122

One commenter stated that the Commission should not, at this time, require that repos between a fund and a direct participant of a U.S. Treasury securities CCA be subject to a clearing requirement because the current clearing framework is not sufficiently developed to support such a mandate.
123

The commenter identified several issues to be addressed prior to adopting such a requirement, which are discussed in the following paragraphs.

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.

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, agreed-upon terms for rejection of trades by a sponsoring member, and centralized storage of delegation.
124

124
ICI Letter,
supra
note 85, at 13-14.

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 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

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.

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.”).

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.

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.

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.

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 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 margin
137

to satisfy a U.S. Treasury securities CCA's margin deposit requirements.

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.

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

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.

• FICC withdraws the margin provided by a sponsored member registered fund only upon that registered fund's default;
139

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.

• The margin provided by a registered fund is not commingled with, and is kept separate from, FICC's assets;
140

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 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”).

• 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

141

See
Section 17(f) of the 1940 Act and the rules thereunder.

• The margin provided by a registered fund is not subject to loss mutualization
142

or allocation;
143

142

See
FICC 2003 Letter at n. 18.

143

See e.g.,
FICC Rule 4,
supra
note 19.

• 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

144
For purposes of this Commission position, FICC is not permitted to use registered fund margin for default liquidity purposes.

• 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 arrangement consistent with this Commission position, (together, the “FICC registered fund margin framework”).
145

145
The Commission notes that this position only applies with respect to the custody of

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2023-27860. Public record. Not legal advice.