Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Expand the One-Pot Cross-Margining Program With New York Portfolio Clearing, LLC to Certain “Market Professionals”, 30032-30038 [2012-12181]
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Federal Register / Vol. 77, No. 98 / Monday, May 21, 2012 / Notices
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May 15, 2012.
[FR Doc. 2012–12182 Filed 5–18–12; 8:45 am]
BILLING CODE 8011–01–P
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Dated: May 16, 2012.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–12356 Filed 5–17–12; 4:15 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66989; File No. SR–FICC–
2012–03]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Change To
Expand the One-Pot Cross-Margining
Program With New York Portfolio
Clearing, LLC to Certain ‘‘Market
Professionals’’
I. Introduction
On March 20, 2012, the Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
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Commission (‘‘Commission’’) the
proposed rule change SR–FICC–2012–
03 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 2 thereunder.
The proposed rule change was
published for comment in the Federal
Register on April 4, 2012.3 The
Commission received one comment
letter on the proposed rule change.4
This order approves the proposed rule
change.
II. Description
This rule change consists of
modifications to certain rules of the
Government Securities Division
(‘‘GSD’’) of FICC in order to expand
FICC’s existing one-pot cross-margining
program with New York Portfolio
Clearing, LLC (‘‘NYPC’’) 5 (‘‘Proprietary
Cross-Margining Program’’) to include
eligible positions held by GSD Netting
Members and NYPC Clearing Members
for certain ‘‘market professionals.’’ 6
Overview
In its present form, the Proprietary
Cross-Margining Program is limited to
cross-margining of proprietary accounts.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 66679
(March 29, 2012), 77 FR 20445 (April 4, 2012).
4 Letter from Adam Cooper, Senior Managing
Director and Chief Legal Officer, Citadel LLC (April
23, 2012).
5 See Securities Exchange Act Release No. 34–
63986 (February 28, 2011), 76 FR 12144 (March 4,
2011).
6 The NYPC–FICC ‘‘market professional’’ crossmargining program aims to closely replicate the
Options Clearing Corporation (‘‘OCC’’)—Chicago
Mercantile Exchange (‘‘CME’’) cross-margining
program, which was first approved in 1989
(Securities Exchange Act Release No. 34–27296
(September 26, 1989), 54 FR 41195 (October 5,
1989)) and was expanded in 1991 to include market
professionals (Securities Exchange Act Release No.
34–29991 (November 26, 1991), 56 FR 61458
(December 3, 1991)). Since that time, the
Commission has approved several similar ‘‘market
professional’’ cross-margining programs, including
most recently in 2008. They include: OCC—
Intermarket Clearing Corporation (‘‘ICC’’) Securities
Exchange Act Release No. 34–30041 (December 5,
1991), 56 FR 68424 (December 12, 1991); OCC–ICC–
CME Securities Exchange Act Release No. 34–32534
(June 28,1993), 58 FR 36234 (July 6, 1993); OCCBoard of Trade Clearing Corporation Securities
Exchange Act Release No. 34–32681 (July 27, 1993),
58 FR 41302 (August 3, 1993); OCC–Kansas City
Board of Trade Clearing Corporation (‘‘KCBOT’’)
Securities Exchange Act Release No. 34–32708
(August 2, 1993), 58 FR 42586 (August 10, 1993);
OCC–ICC—Commodity Clearing Corporation
(‘‘CCC’’) Securities Exchange Act Release No. 34–
33272 (December 2, 1993), 58 FR 64997 (December
10, 1993); OCC–ICC, OCC–ICC–CME, OCC–KCBOT
Securities Exchange Act Release No. 34–36819
(February 7, 1996), 61 FR 5594 (February 13, 1996);
OCC–CME—Securities Exchange Act Release No.
34–38584 (May 8, 1997), 62 FR 26602 (May 14,
1997); and OCC–ICE Clear Securities Exchange Act
Release No. 34–57118 (January 9, 2008), 73 FR 2970
(January 16, 2008).
2 17
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Specifically, from NYPC’s perspective,
only a member’s proprietary or ‘‘house’’
account is eligible for cross-margining;
from GSD’s perspective, all accounts
maintained by GSD for its Netting
Members are deemed proprietary.7 The
proposed rule change expands the
Proprietary Cross-Margining Program to
non-proprietary accounts carried by
participating GSD Netting Members on
behalf of ‘‘Market Professionals’’
(‘‘Market Professional Cross-Margining
Program’’). The proposed rule change
defines ‘‘Market Professional’’ as an
entity, other than a ‘‘non-customer,’’ 8
that is a member of a designated
contract market and that actively trades
for its own account products that are
eligible under the cross-margining
agreement between FICC and NYPC
(‘‘FICC–NYPC Cross-Margining
Agreement’’) 9 for cross-margining
(‘‘Eligible Products’’).10 Positions and
collateral held for Market Professionals
will be maintained in accounts that are
distinct from both proprietary crossmargining accounts and non-crossmargining accounts.11
7 The GSD does not have segregated accounts for
Netting Members’ customers. In contrast, NYPC
currently maintains both proprietary and segregated
customer accounts for its Clearing Members in
compliance with applicable Commodity Futures
Trading Commission (‘‘CFTC’’) regulations. Only
NYPC Clearing Members’ proprietary accounts at
NYPC are eligible for participation in the
Proprietary Cross-Margining Program. The present
proposal would introduce a third type of account
at NYPC that NYPC Clearing Members may
maintain, i.e., the Market Professional account. The
present proposal also introduces a second type of
account at GSD, i.e., the Market Professional
account.
8 Consistent with previously approved market
professional cross-margining programs, FICC’s rules
define ‘‘Non-Customer’’ as GSD Netting Members
and other persons whose accounts with GSD
Netting Members would not be the accounts of
‘‘customers’’ within the meaning of SEC Rules 8c–
1 and 15c2–1.
9 The FICC–NYPC Cross-Margining Agreement
was approved by the Commission as part of FICC’s
Rule Filing No. SR–FICC–2010–09. See note 5,
supra.
10 As defined in the FICC–NYPC Cross-Margining
Agreement, the term ‘‘Eligible Products’’ includes
U.S. Government securities, securities of U.S.
federal agencies and U.S. Government-sponsored
enterprises, financing products and certain
mortgage-backed securities cleared by FICC, and
futures contracts and options on futures contracts,
including U.S. dollar-denominated interest rate and
fixed income futures contracts and options on
futures contracts, cleared by NYPC. Formal
inclusion of options on futures in the program will
be the subject of a separate rule filing with the
Commission.
11 As described above, GSD Netting Members who
wish to participate in the Market Professional
Cross-Margining Program will need to open an
additional account for their Market Professionals.
Likewise, NYPC Clearing Members wishing to
participate in the program will need to open an
additional account for their Market Professionals,
which will be required to be separate and distinct
from both their proprietary and segregated customer
accounts.
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As with the current Proprietary CrossMargining Program, the proposed
Market Professional Cross-Margining
Program would be available to GSD
Netting Members that carry accounts of
Market Professionals and that are also
clearing members of NYPC (‘‘Joint
Member’’) or that have an affiliate that
is a clearing member of NYPC
(‘‘Affiliated Member’’). Members do not
have to be participating in the
Proprietary Cross-Margining Program in
order to participate in the proposed
Market Professional Cross-Margining
Program (or vice versa).
The proposed rule change necessitates
revisions to the FICC–NYPC CrossMargining Agreement, which are
described in detail below. Additional
participant agreements have been added
as appendices to the FICC–NYPC CrossMargining Agreement for this purpose.
Segregation and Liquidation
Considerations
The proposed Market Professional
Cross-Margining Program addresses
concerns regarding segregation and
liquidation procedures under the
Commodity Exchange Act (‘‘CEA’’),12
Title 11 of the United States Code
(‘‘Bankruptcy Code’’) 13 and the
Securities Investor Protection Act
(‘‘SIPA’’).14 The CEA requires that the
property of customers must be
segregated from the proprietary property
of a futures commission merchant.
Because Market Professionals are
considered ‘‘customers’’ under CFTC
regulations, the cross-margined
positions of the Market Professionals
and all property related thereto must be
segregated from the cross-margined
positions and property of the GSD
Netting Member that carries their
accounts.
Under the proposed rule change, each
GSD Netting Member electing to
participate in the Market Professional
Cross-Margining Program must execute
a Cross-Margining Participant
Agreement for Market Professional
Accounts and must establish a separate
cross-margining account for the benefit
of Market Professionals for whom it
carries cross-margined positions
(‘‘Market Professional Cross-Margining
Account’’). GSD Netting Members and
NYPC Clearing Members who establish
Market Professional Cross-Margining
Accounts must also obtain the consent
of each Market Professional whose
cross-margined positions are carried in
such account to the commingling of the
Market Professional’s assets with those
12 7
U.S.C. 1–27f as amended.
U.S.C. 101–1532 as amended.
14 15 U.S.C. 78aaa–78lll as amended.
13 11
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of other electing Market Professionals of
the same GSD Netting Member and
NYPC Clearing Member (or permitted
margin affiliate at NYPC); provided,
however, that consistent with the
requirements of CFTC Regulation
39.13(g)(8)(i) (gross margin for customer
accounts), the positions of a Market
Professional cleared by FICC will only
be cross-margined with the derivatives
positions of the same Market
Professional cleared by NYPC.
Moreover, because Section 4d(a)(2) of
the CEA prohibits commingling futures
and securities in the absence of a CFTC
rule, regulation or order to the contrary,
it will be necessary for NYPC to obtain
from the CFTC an order stating that
Eligible Products that are cleared by
FICC and property received by a
participating GSD Netting Member to
margin, guarantee, or secure trades or
positions in or accruing as a result of
such Eligible Products may be
commingled in a Market Professional
Cross-Margining Account with Eligible
Products cleared by NYPC and with
property received by a participating
NYPC Clearing Member to margin,
guarantee, or secure trades or positions
in or accruing as a result of such Eligible
Products that would otherwise be
required by the CFTC to be segregated
under the CEA.
FICC has established procedures to
facilitate the segregation of the funds
and securities deposited or received by
GSD Netting Members regarding their
Market Professional cross-margining
activity. For example, each GSD Netting
Member must establish separate bank
accounts for the purpose of making
daily funds-only settlement of its
proprietary cross-margining activity and
for the purpose of making daily fundsonly settlement of its Market
Professional cross-margining activity. In
addition, FICC and NYPC will establish
and use separate bank accounts for
paying and collecting cash margin and
funds-only settlement amounts resulting
from members’ proprietary crossmargining activities and for paying and
collecting such amounts resulting from
members’ market professional crossmargining activity. FICC will not permit
the netting of obligations arising out of
a GSD Netting Member’s proprietary
cross-margining activity with those
arising out of its Market Professional
cross-margining activity.
FICC has also taken steps to assure the
segregation of securities that are
deposited with FICC or its agents to
satisfy Clearing Fund requirements in
Market Professional Cross-Margining
Accounts and proprietary crossmargining accounts. For example, FICC
and NYPC will establish and use
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separate custody accounts to hold
securities deposited as margin by
members for proprietary crossmargining activity and to hold securities
deposited as margin by members for
Market Professional cross-margining
activity.
FICC’s proposal also addresses the
potential for conflict between SIPA,
Subchapter IV of chapter 7 of the
Bankruptcy Code,15 and corresponding
CFTC bankruptcy regulations,16 in the
event of the liquidation and distribution
of the property and funds of a GSD
Netting Member that is a registered
broker-dealer.17 To establish uniform
results in the event of the bankruptcy or
liquidation of a broker-dealer GSD
Netting Member under SIPA, FICC will
require each Netting Member that
chooses to participate in the Market
Professional Cross-Margining Program
to require that the GSD Netting
Member’s participating Market
Professionals agree that in the event of
the bankruptcy or liquidation of the
GSD Netting Member carrying its crossmargined positions, the Market
Professional will subordinate its crossmargining related claims to the claims
of the firm’s non-cross-margining
customers.18 Similarly, each
participating Market Professional must
acknowledge that all of the assets
carried in a GSD Netting Member’s
Market Professional Cross-Margining
Account on the Market Professional’s
behalf will not be deemed ‘‘customer
property’’ for purposes of SIPA or give
rise to any claim thereunder. This
means that in the event of a GSD Netting
Member bankruptcy, all claims to assets
in cross-margining accounts will be
determined under Subchapter IV of
chapter 7 of the Bankruptcy Code and
15 11
U.S.C. 761–767.
CFR Part 190.
17 Some Market Professionals could be deemed to
be ‘‘customers’’ under SIPA and Exchange Act Rule
15c3–3. Consistent with previously approved crossmargining programs, however, Market Professionals
will be required to agree to subordinate their
claims, in the event of the bankruptcy of a GSD
Netting Member or an NYPC member, to the claims
of other customers. See Securities Exchange Act
Release No. 34–29991 (November 26, 1991), 56 FR
61458 (December 3, 1991) n.23.
18 Under SIPA, SIPC satisfies the claims of
‘‘customers’’ against insolvent broker-dealers up to
predetermined limits. 15 U.S.C. 78fff–3. Under
SIPA, however, the term ‘‘customer’’ does not
include any person to the extent that such person
has a claim for cash or securities which, by
agreement, is subordinated to the claims of any or
all creditors of the debtor. 15 U.S.C. 78lll(2)(C)(ii).
Because a Market Professional will be required to
subordinate its cross-margin related claims against
a GSD Netting Member to those of the GSD Netting
Member’s non-cross-margining customers, it will
not fall within the protections afforded by SIPA.
See Securities Exchange Act Release No. 34–29991
(November 26, 1991), 56 FR 61458 (December 3,
1991) n.24.
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applicable CFTC regulations. FICC
believes these measures reduce the
possibility that assets in a GSD Netting
Member’s Market Professional CrossMargining Account will be subject to
two conflicting schemes of distribution.
In the event of a default of a member
that chooses to participate in the Market
Professional Cross-Margining Program,
FICC and NYPC will follow the
remedies outlined in the FICC–NYPC
Cross-Margining Agreement to liquidate
or transfer the proprietary and Market
Professional Cross-Margining Accounts.
Any deficit in the Market Professional
Cross-Margining Account would, absent
a deficit in any NYPC segregated
customer account of the defaulting
member, be offset against any credit in
any proprietary cross-margining account
of the defaulting member. Non-crossmargining accounts at NYPC would be
liquidated or transferred pursuant to
NYPC procedures as they exist today.
FICC and NYPC will not offset a credit
in a Market Professional CrossMargining Account with a deficit in a
proprietary cross-margin account or
with any other account FICC or NYPC
maintains for the defaulting member.
Thus, any surplus in the Market
Professional Cross-Margining Account
will be returned to the member or its
representative.
In the event of a member bankruptcy,
the Bankruptcy Code exempts FICC and
NYPC from the automatic stay and
permits FICC and NYPC to liquidate any
assets held for the insolvent member 19
and offset those assets against the
member’s liabilities.20 Assets of the
member held in the Market Professional
Cross-Margining Account will only be
set-off against related Market
Professional cross-margining liabilities.
Any assets remaining after such a set-off
will be transferred to the bankruptcy
trustee for administration and
distribution.21
If a member becomes insolvent, the
Securities Investor Protection
Corporation (‘‘SIPC’’) may and probably
will file for a protective decree under
SIPA.22 SIPC will then appoint a trustee
charged with liquidating the bankrupt
estate, consistent with SIPA. Under
SIPA, the trustee must, to the extent not
inconsistent with SIPA, administer the
assets of the member held as a
commodity broker in accordance with
19 11
20 11
U.S.C. 555, 556, 560, and 561.
U.S.C. 362(b)(6), 362(b)(17), 362(b)(27), and
561.
21 In the situation where an Affiliated Member
becomes insolvent, assets in the Market
Professional Cross-Margin Accounts of FICC and
NYPC will be set-off by FICC and NYPC against
related liabilities in such accounts.
22 11 U.S.C. 742.
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Sfmt 4703
the Bankruptcy Code’s commodity
broker liquidation requirements and
applicable CFTC regulations.23 Even if
SIPC does not exercise its power to seek
appointment of a trustee and SIPA does
not apply to the liquidation, a Market
Professional’s claims to assets in the
Market Professional Cross-Margining
Account will be determined in
accordance with the Bankruptcy Code’s
commodity broker liquidation scheme
contained in Subchapter IV of chapter 7
and applicable CFTC regulations.
Generally, applicable sections of the
Bankruptcy Code and CFTC regulations
provide for the trustee to distribute
‘‘customer property’’ 24 pro rata among
‘‘customers’’ 25 according to account
class and generally give priority to
customer claims over all others, except
those dealing with the administration of
the bankrupt estate.26 Also, assuming
the trustee does not transfer customer
accounts to another firm and determines
to liquidate customer accounts, the
trustee will distribute customer property
to the claimants.27 If there is a shortfall
in the Market Professional CrossMargining Account and there is no
shortfall or a lesser shortfall in the noncross-margining customer account,
Market Professionals will have a claim
against the Market Professional CrossMargining Account and will be able to
claim against the non-cross-margining
customer account only after all noncross-margining customer claims have
been satisfied. If the shortfall in the noncross-margining customer account is
equal to or greater than the shortfall in
the Market Professional Cross-Margining
Account, the two accounts will be
combined and Market Professionals and
non-cross-margining customers will
share on a pro rata basis.28
Proposed Changes to the FICC–NYPC
Cross-Margining Agreement
In addition to certain technical
corrections and conforming changes, the
FICC–NYPC Cross-Margining
Agreement would be substantively
amended as described below in order to
incorporate the proposed Market
Professional Cross-Margining Program.
23 15 U.S.C. 78fff–1(b) states in part: ‘‘To the
extent consistent with the provisions of this chapter
or as otherwise ordered by the court, a trustee shall
be subject to the same duties as a trustee in a case
under chapter 7 of Title 11, including, if the debtor
is a commodity broker, as defined under section
101 of such title, the duties specified in subchapter
IV of such chapter 7.’’
24 As defined in 11 U.S.C. 761(10) and 17 CFR
190.01(n).
25 As defined in 11 U.S.C. 761(9).
26 11 U.S.C. 766(h); see 17 CFR 190.08.
27 See generally 11 U.S.C. 766 and 17 CFR 190.08.
28 See 17 CFR part 190, appendix B (Framework
1).
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Capitalized terms used in this section
have the meanings given to them in the
FICC–NYPC Cross-Margining
Agreement.
subsection (b) of Section 7 of the FICC–
NYPC Cross-Margining Agreement
(Suspension and Liquidation of CrossMargining Participant).
Recitals
Section 1(y) (Customer Funds Account)
The term ‘‘Segregated Funds
Account’’ in the existing FICC–NYPC
Cross-Margining Agreement would be
replaced by the term ‘‘Customer Funds
Account’’ and modified in order to
clearly distinguish non-cross-margining
‘‘customer’’ accounts established by
NYPC from both Market Professional
Cross-Margining Accounts and
Proprietary Cross-Margining Accounts.
The Recitals to the FICC–NYPC CrossMargining Agreement would be
amended to describe the proposed
expansion of the existing FICC–NYPC
Cross-Margining Agreement to provide
for the cross-margining of the accounts
of Market Professionals, and also to
reflect the fact that the current FICC–
NYPC Cross-Margining Agreement was
executed on March 4, 2011, after receipt
of the necessary regulatory approvals by
FICC and NYPC.
Section 1. Definitions
Section 1(f) (Available Assets) and
Section 1(tt) (Margin)
The ‘‘Available Assets’’ definition
would be amended to include as assets
available in the event of a default any
margin posted to the Defaulting
Member’s Proprietary Cross-Margining
Account, as well as any margin posted
to the Defaulting Member’s Market
Professional Cross-Margining Account.
The ‘‘Margin’’ definition would be
similarly amended to include original
margin, option premiums and other
margin collateral held by or for the
account of FICC or NYPC to secure the
obligations of a Cross-Margining
Participant’s Proprietary CrossMargining Account and/or its Market
Professional Cross-Margining Account.
The ‘‘Available Assets’’ definition
would be further amended to clarify
that, consistent with the distributional
convention established in Appendix B
to Part 190 of the CFTC’s Regulations,
the NYPC Guaranty Fund deposits of a
Defaulting Member would first be
applied to any deficit in the Customer
Funds Account of the Defaulting
Member carried by NYPC, and then,
after any such deficit has been
completely satisfied, to any CrossMargin Loss in the Defaulting Member’s
Market Professional Cross-Margining
Account carried by NYPC, and then
finally to any Cross-Margin Loss in the
Defaulting Member’s Proprietary CrossMargining Account carried by NYPC.
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Section 1(t) (Cross-Margin Gain) and
Section 1(u) (Cross-Margin Loss)
For ease of reference and to facilitate
understanding of the loss allocation
mechanism in the event of the
liquidation of the cross-margined
positions carried for a Defaulting
Member by FICC and NYPC, the
definitions of Cross-Margin Gain and
Cross-Margin Loss would become a new
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Section 1(ww) (Market Professional)
As described above, consistent with
previously approved cross-margining
programs, the term ‘‘Market
Professional’’ would be defined as an
entity, other than a ‘‘Non-Customer’’
(described below), that is a member of
a designated contract market and that
actively trades for its own account
Eligible Products that are eligible for
cross-margining under the FICC–NYPC
Cross-Margining Agreement.
Section 1(bbb) (Non-Customer)
As described above, ‘‘Non-Customers’’
would be excluded from the definition
of a Market Professional. With respect to
a GSD Netting Member, the term ‘‘NonCustomer’’ would be defined as such
GSD Netting Member or other person
whose account with such GSD Netting
Member would not be the account of a
‘‘customer’’ within the meaning of SEC
Rules 8c–1 and 15c2–1.
Section 1(sss) (Securities Custody
Account) and 1(uuu) (Settlement
Account)
For ease of reference, the term ‘‘CrossMargining Securities Account’’ would
be replaced with the term ‘‘Securities
Custody Account’’ and would be
expanded to include a custody account
to hold Margin in the form of securities
deposited by a Cross-Margining
Participant in respect of a Proprietary
Cross-Margining Account or a Market
Professional Cross-Margining Account.
Similarly, the definition of
‘‘Settlement Account’’ would be
expanded to include a bank account
established to hold cash Margin
deposited by a Cross-Margining
Participant in respect of a Proprietary
Cross-Margining Account or a Market
Professional Cross-Margining Account.
Section 2. Participation
Section 2(a) would be amended and
Section 2(b) and 2(c) would be added in
order to accommodate the additional
documentation required to establish a
PO 00000
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Sfmt 4703
30035
Set of Market Professional CrossMargining Accounts by either a Joint
Clearing Member or by a Clearing
Member and its Cross-Margining
Affiliate.
Section 5. Forms of Margin; Holding
Margin
Section 5(b) would be amended to
reflect the fact that separate Settlement
Accounts and Securities Custody
Accounts would be maintained for
proprietary and Market Professional
cross-margining activity.
Section 5(c) would be amended to
allow FICC and NYPC to hold cash and
securities posted with respect to crossmargining activity in either separate
accounts or, consistent with previously
approved cross-margining programs,
joint accounts titled in the names of
FICC and NYPC.
Section 7. Suspension and Liquidation
of Cross-Margining Participant
Section 7(a) would be amended to
clarify that the positions and Margin of
a Defaulting Member may be liquidated
or transferred to one or more nondefaulting Clearing Members.
A new Section 7(b) would be added
to define ‘‘Cross-Margin Gain’’ and
‘‘Cross-Margin Loss,’’ as described
above. New Section 7(b) would also
make clear that in calculating its CrossMargin Gain (or Cross-Margin Loss) or
Net Gain (or Net Loss) FICC and NYPC
would be required to make separate
calculations with respect to the
Defaulting Member’s Proprietary CrossMargining Account and its Market
Professional Cross-Margining Account.
Section 7(g) would be amended to
provide that to the extent that pursuant
to the loss allocation prescribed in
Section 7, both FICC and NYPC owe
payments to each other, i.e., one
clearing organization owes a payment
with respect to the Proprietary CrossMargining Account of a Defaulting
Member and the other owes a payment
with respect to the Defaulting Member’s
Market Professional Cross-Margining
Account, those two payments may be
netted and setoff against each other.
Proposed Changes to Clearing Member
Agreements
The FICC–NYPC Cross-Margining
Agreement is solely between FICC and
NYPC. Members of FICC and of NYPC
that wish to participate in the CrossMargining Program must become party
to a Clearing Member Cross-Margining
Agreement which, among other things,
reflects the Clearing Member’s
agreement to be bound by the Rules
applicable to cross-margining and to the
provisions of the FICC–NYPC Cross-
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Margining Agreement (‘‘Clearing
Member Agreements’’). Capitalized
terms used in this section have the
meanings given to them in the proposed
Clearing Member Agreements.
The current FICC–NYPC CrossMargining Agreement includes two
forms of Clearing Member Agreement—
one for joint Clearing Members (i.e.,
entities that are members of both FICC
and NYPC), the other for Clearing
Members that are Affiliates of each other
(i.e., a Clearing Member of either FICC
or NYPC that directly or indirectly
controls, is controlled by, or under
common control with a Clearing
Member of the other Clearing
Organization). Those agreements, which
are set forth as Appendix A and
Appendix B to the FICC–NYPC CrossMargining Agreement, would be
renamed as Clearing Member CrossMargining Agreement (Joint Clearing
Member—Proprietary Accounts) and
Clearing Member Cross-Margining
Agreement (Affiliated Clearing
Members—Proprietary Accounts), and
references in those agreements to a
‘‘Member’’ would be replaced with
references to a ‘‘Clearing Member’’ for
consistency with the terminology used
in the FICC–NYPC Cross-Margining
Agreement.
The Clearing Member Agreements for
Proprietary Accounts are proposed to be
further modified to make clear that a Set
of Proprietary Cross-Margining
Accounts would be combined and
treated as a single account for purposes
of calculating Margin. This change is
reflective of the current practice of the
Clearing Organizations pursuant to the
Cross-Margining Agreement and is
proposed to be set out solely for
purposes of clarity.
The Clearing Member Agreements
would additionally be modified to
reflect the practice of the Clearing
Organizations regarding the use of
Clearing Data (as that term is defined in
the Clearing Member Cross-Margining
Agreements). Specifically, the Clearing
Member Agreements would be modified
to provide that Clearing Data may only
be disclosed (i) To an Affiliated Clearing
Member, where applicable, (ii) in
accordance with the provisions of
Section 10 of the Cross-Margining
Agreement, and (iii) in aggregated form,
provided that such aggregated Clearing
Data does not identify of the Clearing
Member or Affiliated Clearing Members,
as applicable, as the source thereof.
The termination provisions of the
Clearing Member Agreements for
Proprietary Accounts would also be
modified to make clear that the required
acknowledgment of a Clearing Member’s
termination of the Agreement will be
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given by the Clearing Organizations
promptly after the two Business Day
notice period required by the Clearing
Member Agreements. The termination
provisions would additionally be
modified to make explicit that a
Clearing Member’s continuing
obligations under the Clearing Member
Agreements and the Cross-Margining
Agreement survive the termination of
the Clearing Member Agreement only to
the extent those obligations arose prior
to such termination.
Finally, the Clearing Member CrossMargining Agreement (Affiliated
Clearing Members—Proprietary
Accounts) is proposed to be amended to
include a waiver of the Clearing
Members’ and the Clearing
Organizations’ right to jury trial in any
dispute arising in connection with that
agreement. A comparable provision
already is included in the Clearing
Member Cross-Margining Agreement
(Joint Clearing Member—Proprietary
Accounts). The remaining revisions to
the Clearing Member Agreements for
Proprietary Accounts are nonsubstantive or conforming.
While it is anticipated that some
Clearing Members will elect to
participate in cross-margining for their
Proprietary Accounts and also act as
Clearing Member for Market
Professionals, a Clearing Member could
elect to act in only one of those
capacities. The Clearing Member
Agreements in Appendices A and B to
the FICC–NYPC Cross-Margining
Agreement, therefore, would be
complemented by a Clearing Member
Cross-Margining Agreement (Joint
Clearing Member—Market Professional
Accounts) and Clearing Member CrossMargining Agreement (Affiliated
Clearing Members—Market Professional
Accounts), respectively, and a Clearing
Member that elected to maintain a Set
of Proprietary Cross-Margining
Accounts and a Set of Market
Professional Cross-Margining Accounts
would be required to enter into Clearing
Member Cross-Margining Agreements
for both its Proprietary Accounts and for
its Market Professional Accounts.
The proposed Clearing Member
Agreements for Market Professional
Accounts (Appendices C and D to the
FICC–NYPC Cross-Margining
Agreement) are based upon the Clearing
Member Agreements for Proprietary
Accounts, but have been modified as
appropriate. For example, the Clearing
Member Agreements for Market
Professional Accounts would make
explicit that the Set of Market
Professional Cross-Margining Accounts
that would be established by the
Clearing Organizations for a Clearing
PO 00000
Frm 00074
Fmt 4703
Sfmt 4703
Member are to be limited to transactions
and positions established by Market
Professionals who have signed a Market
Professional Agreement for CrossMargining in the form set forth as
Exhibit A to Appendices C and D,
respectively.29
The Market Professional Agreements
are derived from the form of Market
Professional’s Agreement for CrossMargining that has previously been
approved by the Commission.30 The
FICC–NYPC Market Professional
Agreements differ from the forms of
agreement that have previously been
approved in that they would be
modified to reference the Eligible
Products that are available for crossmargining under the FICC–NYPC CrossMargining Agreement. The FICC–NYPC
Market Professional Agreements
additionally would be modified to
reference the definitions of the term
‘‘Market Professional’’ that would be set
forth in the Rules of FICC and NYPC,
and to require a Market Professional to
represent and warrant that it does, in
fact, qualify as such. Moreover, the
FICC–NYPC Market Professional
Agreements would be amended to
provide that, consistent with the
requirements of CFTC Regulation
39.13(g)(8)(i) (gross margin for customer
accounts), the positions of a Market
Professional cleared by FICC will only
be cross-margined with the derivatives
positions of the same Market
Professional cleared by NYPC. The only
other substantive change from the form
of agreement previously approved by
the Commission would be the
elimination of a provision that would
have conditioned the effectiveness of
the Market Professional Agreements on
the receipt of all necessary approvals by
the Commission and the CFTC. FICC
believes that a provision of this nature
29 Similar to the Clearing Member Agreements for
Proprietary Accounts, the Clearing Member
Agreements for Market Professional Accounts
would require the Clearing Member to pledge, for
itself and for each Market Professional on whose
behalf positions are carried in a Set of Market
Professional Cross-Margining Accounts, the
positions and Margin in the Set of Market
Professional Cross-Margining Accounts. Consistent
therewith and with the Clearing Member
Agreements for Proprietary Accounts, the Clearing
Member Agreements for Market Professional
Accounts would include representations and
warranties by the Clearing Member to the effect that
it has the power to grant the foregoing security
interest and that it is the sole owner of or otherwise
has the right to transfer collateral to the Clearing
Organizations.
30 See Exhibits 5F and 5G to Release No. 34–
57118 (January 9, 2008) (Options Clearing
Corporation—ICE Clear U.S. market professional
cross-margining); see also Securities Exchange Act
Release No. 34–29991 (November 26, 1991), 56 FR
61458 (December 3, 1991) (Options Clearing
Corporation—Chicago Mercantile Exchange market
professional cross-margining).
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is unnecessary, given that FICC and
NYPC will not permit Clearing Members
to enter into Market Professional
Agreements until all necessary
regulatory approvals have been
obtained.
Proposed FICC Rule Changes
In addition to the proposed changes to
the FICC–NYPC Cross-Margining
Agreement, FICC is proposing the
following GSD rule changes to effectuate
the Market Professional Cross-Margining
Program. Capitalized terms used in this
section have the meanings given to them
in the GSD Rules.
Rule 1 (Definitions)
New definitions are being added for
the following terms: ‘‘Market
Professional,’’ ‘‘Market Professional
Agreement for Cross-Margining,’’
‘‘Market Professional Cross-Margining
Account,’’ ‘‘Non-Customer,’’ ‘‘NYPC
Market Professional Account,’’ and
‘‘NYPC Proprietary Account’’ (which
retains the current definition of ‘‘NYPC
Account’’). ‘‘NYPC Account,’’ an
existing term, is now proposed to be
amended to encompass the two new
terms of ‘‘NYPC Market Professional
Account’’ and ‘‘NYPC Proprietary
Account.’’ In addition, changes are
proposed to the following definitions to
reference the concepts associated with
the Market Professional Cross-Margining
Program: ‘‘Account,’’ ‘‘Cross-Margining
Affiliate,’’ ‘‘Cross-Margining
Agreement’’ and ‘‘Margin Portfolio.’’ A
technical change is being proposed to
the definition of ‘‘Cross-Margining
Payment.’’
Rule 3 (On-Going Membership
Requirements)
FICC is proposing to amend Section
11 of Rule 3, which covers additional
accounts requested by Members, to
provide for the opening of market
professional accounts and to make clear
that such accounts must meet the
requirements of the Cross-Margining
Agreement and the GSD Rules (as with
all other accounts carried by FICC for its
Members).
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Rule 4 (Clearing Fund and Loss
Allocation)
FICC is proposing to amend Section
1b and Section 2 of Rule 4 to provide
that the market professional account
will have its own Clearing Fund
calculations separate from the main
account of the Netting Member, and that
the rules applicable to the Clearing
Fund calculations and the requirements
of the Required Fund Deposit also apply
Clearing Fund calculations and
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18:18 May 18, 2012
Jkt 226001
Required Fund Deposits associated with
the market professional accounts.
Rule 13 (Funds-Only Settlement)
FICC is proposing to amend Section 1
and Section 5a to provide that fundsonly settlement amounts will be
calculated separately for the member’s
market professional account and that
net-net funds only credits/debits will
also apply to the market professional
accounts of a Member (or its permitted
margin affiliate) across FICC and NYPC,
as is the case currently with the
proprietary accounts.
Rule 22A (Procedures for When the
Corporation Ceases to Act)
FICC is proposing to amend Section 2
of Rule 22A to provide that a liquidation
gain in a Netting Member’s proprietary
account will be used to offset any
resulting liquidation loss in such
Member’s Market Professional CrossMargining Account.
Rule 29 (Release of Clearing Data)
FICC is proposing to amend Rule 29
to make clear that a Member’s Clearing
Data will be released to a futures
clearing organization (‘‘FCO’’) with
which FICC has a Cross-Margining
Arrangement and that such data will
include data regarding the Member’s
market professional customers.
Rule 43 (Cross-Margining
Arrangements)
FICC is proposing to amend Rule 43
to provide for the requirement for
Netting Members who wish to
participate in the Market Professional
Cross-Margining Program to execute the
appropriate participation agreements
which are appended to the FICC–NYPC
Cross-Margining Agreement as
discussed above.
III. Comments
The Commission received one
comment to the proposed rule change
from Citadel, LLC.31 The commenter
supports the proposed rule change,
stating that the proposed rule change
would allow market professionals to
more effectively manage risk by
recognizing the value of offsetting
positions cleared by NYPC and FICC.
The commenter believes that the
proposed rule change will allow market
professionals to use their capital more
efficiently and will reduce systemic risk
by removing excess interconnectedness
from the marketplace and optimizing
collateral balances. Furthermore the
commenter believes that the proposed
rule change will further encourage
31 See
PO 00000
supra note 4.
Frm 00075
Fmt 4703
Sfmt 4703
30037
competition in the US futures markets
and provides for consumer protection in
the event of the bankruptcy of a clearing
member in accordance with the CFTC’s
rules.
IV. Discussion
Section 19(b)(2)(B) of the Act 32
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
the proposed rule change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to such organization. In
Section 17A(a)(2)(A)(ii) of the Act,33
Congress directs the Commission to use
its authority to facilitate the
establishment of linked or coordinated
facilities for clearance and settlement of
transactions in securities, securities
options, contracts of sale for future
delivery and options thereon, and
commodity options. Sections
17A(b)(3)(A) and (F) of the Act 34 require
that a clearing agency be organized and
its rules designed to facilitate the
prompt and accurate clearance and
settlement of securities transactions and
derivative agreements, contracts, and
transactions for which it is responsible
and to safeguard securities and funds in
its custody or control or for which it is
responsible. The Commission has
carefully considered the proposed rule
change and the comment thereto and
the Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder.35
As the Commission noted in
approving the FICC–NYPC Proprietary
Cross-Margining Program, the
Commission has encouraged crossmargining arrangements as a way to
promote more efficient risk management
across product classes.36 Furthermore,
cross-margining arrangements are
consistent with Section 17A(b)(3)(F) in
that they may strengthen the
safeguarding of assets through effective
risk controls that more broadly take into
account offsetting positions of
participants in both the cash and futures
markets, and promote prompt and
32 15
U.S.C. 78s(b)(2)(B).
U.S.C. 78a–1 (a)(2)(A)(ii).
34 15 U.S.C. 78q–1(b)(3)(A), (F)
35 In approving this proposed rule change, the
Commission notes and FICC agrees that FICC will
adhere to the conditions to provide information and
reports on an ongoing basis that are set forth in the
Commission’s Order Granting Approval of a
Proposed Rule Change to Introduce CrossMargining of Certain Positions Cleared at the Fixed
Income Clearing Corporation and Certain Positions
Cleared at New York Portfolio Clearing, LLC, to the
extent applicable to ‘‘Market Professionals.’’ See
note 5, supra.
36 See note 5, supra.
33 15
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Federal Register / Vol. 77, No. 98 / Monday, May 21, 2012 / Notices
accurate clearance and settlement of
securities through increased
efficiencies. The Commission agrees
with the commenter that the proposed
rule change will help promote effective
risk management and provides for
increased efficiencies by taking into
account offsetting positions. Moreover,
the Commission has repeatedly found
that similar cross-margining programs
for ‘‘Market Professionals’’ are
consistent with clearing agency
requirements under Section 17A of the
Act.37 Because the Market Professional
Cross-Margining Program being
approved by this Order helps further
linked or coordinated facilities for
clearance and settlement of transactions
while facilitating their prompt and
accurate clearance and settlement and
safeguards securities and funds in
FICC’s custody or control or for which
it is responsible, the Commission
believes that the proposed rule change
is consistent with Section 17A of the
Act and, therefore, is approving FICC’s
proposed rule change.
V. Conclusion
On the basis of the foregoing, the
Commission finds that the proposal is
consistent with the requirements of the
Act and in particular with the
requirements of Section 17A of the
Act 38 and the rules and regulations
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) 39 of the Act, that the
proposed rule change (File No. SR–
FICC–2012–03) be, and hereby is,
approved.40
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.41
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–12181 Filed 5–18–12; 8:45 am]
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BILLING CODE 8011–01–P
37 See
note 6, supra.
U.S.C. 78q–1.
39 15 U.S.C. 78s(b)(2).
40 In approving this proposed rule change the
Commission has considered the proposed rule’s
impact of efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
41 17 CFR 200.30–3(a)(12).
38 15
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66992; File No. SR–Phlx–
2012–62]
Self-Regulatory Organizations;
NASDAQ OMX PHLX LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change to PSX Rule
3301(f)(8) Concerning the Processing
of the Price To Comply Order
May 15, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 4,
2012, NASDAQ OMX PHLX LLC
(‘‘Phlx’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to clarify how
the processing of a Price to Comply
Order under PSX Rule 3301(f)(8)
operates based on the method of entry.
The Exchange will implement the
change effective May 14, 2012.
The text of the proposed rule change
is below. Proposed new language is in
italics; proposed deletions are in
brackets.
*
*
*
*
*
3301. Definitions
The following definitions apply to the
Rule 3200 and 3300 Series for the
trading of securities on PSX.
(a)–(e)
(f) The term ‘‘Order Type’’ shall mean
the unique processing prescribed for
designated orders that are eligible for
entry into the System, and shall include:
(1)–(6) No change.
(7) Reserved.
(8) ‘‘Price to Comply Order’’ are
orders that, if, at the time of entry, a
Price to Comply Order would lock or
cross the quotation of an external
market, the order will be priced to the
current low offer (for bids) or to the
current best bid (for offers) and
displayed at a price one minimum price
increment lower than the offer (for bids)
or higher than the bid (for offers). The
displayed and undisplayed prices of a
Price to Comply order entered through
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00076
Fmt 4703
Sfmt 4703
an OUCH port may be adjusted once or
multiple times depending upon [the
method of order entry and] the election
of the member firm and changes to the
prevailing NBBO. The displayed and
undisplayed prices of a Price to Comply
order entered through a RASH port may
be adjusted multiple times, depending
upon changes to the prevailing NBBO.
(9)–(11) No change.
(g)–(i) No change.
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Phlx is proposing to clarify the effect
that the methods of order entry have on
the processing of Price to Comply
Orders, as described in PSX Rule
3301(f)(8).3 Price to Comply Orders
allow members to quote aggressively
and still comply with the locked and
crossed markets provisions of
Regulation NMS.4
As part of the launch of its PSX
equities market in October 2010, Phlx
adopted many substantially similar
equities rules to that of its sister
exchange The NASDAQ Stock Market
LLC (‘‘NASDAQ’’), including the Price
to Comply Order type under PSX Rule
3301(f)(8).5 NASDAQ amended its
definition of the Price to Comply Order
type under NASDAQ Rule 4751(f)(7) in
June 2008.6 Prior to June 2008, if at the
time of entry on NASDAQ a Price to
3 ‘‘Price to Comply Order’’ is an order such that,
if, at the time of entry, it would lock or cross the
quotation of an external market, the order will be
priced to the current low offer (for bids) or to the
current best bid (for offers) and displayed at a price
one minimum price increment lower than the offer
(for bids) or higher than the bid (for offers).
4 17 CFR 242.610.
5 Securities Exchange Act Release No. 62877
(September 9, 2010), 75 FR 56633 (September 16,
2010) (SR–Phlx–2010–79).
6 Securities Exchange Act Release No. 57910
(June 3, 2008), 73 FR 32776 (June 10, 2008) (SR–
NASDAQ–2008–049).
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]]>Agencies
[Federal Register Volume 77, Number 98 (Monday, May 21, 2012)]
[Notices]
[Pages 30032-30038]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-12181]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66989; File No. SR-FICC-2012-03]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Expand the One-Pot Cross-
Margining Program With New York Portfolio Clearing, LLC to Certain
``Market Professionals''
May 15, 2012.
I. Introduction
On March 20, 2012, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2012-03 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\
thereunder. The proposed rule change was published for comment in the
Federal Register on April 4, 2012.\3\ The Commission received one
comment letter on the proposed rule change.\4\ This order approves the
proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 66679 (March 29, 2012),
77 FR 20445 (April 4, 2012).
\4\ Letter from Adam Cooper, Senior Managing Director and Chief
Legal Officer, Citadel LLC (April 23, 2012).
---------------------------------------------------------------------------
II. Description
This rule change consists of modifications to certain rules of the
Government Securities Division (``GSD'') of FICC in order to expand
FICC's existing one-pot cross-margining program with New York Portfolio
Clearing, LLC (``NYPC'') \5\ (``Proprietary Cross-Margining Program'')
to include eligible positions held by GSD Netting Members and NYPC
Clearing Members for certain ``market professionals.'' \6\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 34-63986 (February
28, 2011), 76 FR 12144 (March 4, 2011).
\6\ The NYPC-FICC ``market professional'' cross-margining
program aims to closely replicate the Options Clearing Corporation
(``OCC'')--Chicago Mercantile Exchange (``CME'') cross-margining
program, which was first approved in 1989 (Securities Exchange Act
Release No. 34-27296 (September 26, 1989), 54 FR 41195 (October 5,
1989)) and was expanded in 1991 to include market professionals
(Securities Exchange Act Release No. 34-29991 (November 26, 1991),
56 FR 61458 (December 3, 1991)). Since that time, the Commission has
approved several similar ``market professional'' cross-margining
programs, including most recently in 2008. They include: OCC--
Intermarket Clearing Corporation (``ICC'') Securities Exchange Act
Release No. 34-30041 (December 5, 1991), 56 FR 68424 (December 12,
1991); OCC-ICC-CME Securities Exchange Act Release No. 34-32534
(June 28,1993), 58 FR 36234 (July 6, 1993); OCC-Board of Trade
Clearing Corporation Securities Exchange Act Release No. 34-32681
(July 27, 1993), 58 FR 41302 (August 3, 1993); OCC-Kansas City Board
of Trade Clearing Corporation (``KCBOT'') Securities Exchange Act
Release No. 34-32708 (August 2, 1993), 58 FR 42586 (August 10,
1993); OCC-ICC--Commodity Clearing Corporation (``CCC'') Securities
Exchange Act Release No. 34-33272 (December 2, 1993), 58 FR 64997
(December 10, 1993); OCC-ICC, OCC-ICC-CME, OCC-KCBOT Securities
Exchange Act Release No. 34-36819 (February 7, 1996), 61 FR 5594
(February 13, 1996); OCC-CME--Securities Exchange Act Release No.
34-38584 (May 8, 1997), 62 FR 26602 (May 14, 1997); and OCC-ICE
Clear Securities Exchange Act Release No. 34-57118 (January 9,
2008), 73 FR 2970 (January 16, 2008).
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Overview
In its present form, the Proprietary Cross-Margining Program is
limited to cross-margining of proprietary accounts.
[[Page 30033]]
Specifically, from NYPC's perspective, only a member's proprietary or
``house'' account is eligible for cross-margining; from GSD's
perspective, all accounts maintained by GSD for its Netting Members are
deemed proprietary.\7\ The proposed rule change expands the Proprietary
Cross-Margining Program to non-proprietary accounts carried by
participating GSD Netting Members on behalf of ``Market Professionals''
(``Market Professional Cross-Margining Program''). The proposed rule
change defines ``Market Professional'' as an entity, other than a
``non-customer,'' \8\ that is a member of a designated contract market
and that actively trades for its own account products that are eligible
under the cross-margining agreement between FICC and NYPC (``FICC-NYPC
Cross-Margining Agreement'') \9\ for cross-margining (``Eligible
Products'').\10\ Positions and collateral held for Market Professionals
will be maintained in accounts that are distinct from both proprietary
cross-margining accounts and non-cross-margining accounts.\11\
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\7\ The GSD does not have segregated accounts for Netting
Members' customers. In contrast, NYPC currently maintains both
proprietary and segregated customer accounts for its Clearing
Members in compliance with applicable Commodity Futures Trading
Commission (``CFTC'') regulations. Only NYPC Clearing Members'
proprietary accounts at NYPC are eligible for participation in the
Proprietary Cross-Margining Program. The present proposal would
introduce a third type of account at NYPC that NYPC Clearing Members
may maintain, i.e., the Market Professional account. The present
proposal also introduces a second type of account at GSD, i.e., the
Market Professional account.
\8\ Consistent with previously approved market professional
cross-margining programs, FICC's rules define ``Non-Customer'' as
GSD Netting Members and other persons whose accounts with GSD
Netting Members would not be the accounts of ``customers'' within
the meaning of SEC Rules 8c-1 and 15c2-1.
\9\ The FICC-NYPC Cross-Margining Agreement was approved by the
Commission as part of FICC's Rule Filing No. SR-FICC-2010-09. See
note 5, supra.
\10\ As defined in the FICC-NYPC Cross-Margining Agreement, the
term ``Eligible Products'' includes U.S. Government securities,
securities of U.S. federal agencies and U.S. Government-sponsored
enterprises, financing products and certain mortgage-backed
securities cleared by FICC, and futures contracts and options on
futures contracts, including U.S. dollar-denominated interest rate
and fixed income futures contracts and options on futures contracts,
cleared by NYPC. Formal inclusion of options on futures in the
program will be the subject of a separate rule filing with the
Commission.
\11\ As described above, GSD Netting Members who wish to
participate in the Market Professional Cross-Margining Program will
need to open an additional account for their Market Professionals.
Likewise, NYPC Clearing Members wishing to participate in the
program will need to open an additional account for their Market
Professionals, which will be required to be separate and distinct
from both their proprietary and segregated customer accounts.
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As with the current Proprietary Cross-Margining Program, the
proposed Market Professional Cross-Margining Program would be available
to GSD Netting Members that carry accounts of Market Professionals and
that are also clearing members of NYPC (``Joint Member'') or that have
an affiliate that is a clearing member of NYPC (``Affiliated Member'').
Members do not have to be participating in the Proprietary Cross-
Margining Program in order to participate in the proposed Market
Professional Cross-Margining Program (or vice versa).
The proposed rule change necessitates revisions to the FICC-NYPC
Cross-Margining Agreement, which are described in detail below.
Additional participant agreements have been added as appendices to the
FICC-NYPC Cross-Margining Agreement for this purpose.
Segregation and Liquidation Considerations
The proposed Market Professional Cross-Margining Program addresses
concerns regarding segregation and liquidation procedures under the
Commodity Exchange Act (``CEA''),\12\ Title 11 of the United States
Code (``Bankruptcy Code'') \13\ and the Securities Investor Protection
Act (``SIPA'').\14\ The CEA requires that the property of customers
must be segregated from the proprietary property of a futures
commission merchant. Because Market Professionals are considered
``customers'' under CFTC regulations, the cross-margined positions of
the Market Professionals and all property related thereto must be
segregated from the cross-margined positions and property of the GSD
Netting Member that carries their accounts.
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\12\ 7 U.S.C. 1-27f as amended.
\13\ 11 U.S.C. 101-1532 as amended.
\14\ 15 U.S.C. 78aaa-78lll as amended.
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Under the proposed rule change, each GSD Netting Member electing to
participate in the Market Professional Cross-Margining Program must
execute a Cross-Margining Participant Agreement for Market Professional
Accounts and must establish a separate cross-margining account for the
benefit of Market Professionals for whom it carries cross-margined
positions (``Market Professional Cross-Margining Account''). GSD
Netting Members and NYPC Clearing Members who establish Market
Professional Cross-Margining Accounts must also obtain the consent of
each Market Professional whose cross-margined positions are carried in
such account to the commingling of the Market Professional's assets
with those of other electing Market Professionals of the same GSD
Netting Member and NYPC Clearing Member (or permitted margin affiliate
at NYPC); provided, however, that consistent with the requirements of
CFTC Regulation 39.13(g)(8)(i) (gross margin for customer accounts),
the positions of a Market Professional cleared by FICC will only be
cross-margined with the derivatives positions of the same Market
Professional cleared by NYPC. Moreover, because Section 4d(a)(2) of the
CEA prohibits commingling futures and securities in the absence of a
CFTC rule, regulation or order to the contrary, it will be necessary
for NYPC to obtain from the CFTC an order stating that Eligible
Products that are cleared by FICC and property received by a
participating GSD Netting Member to margin, guarantee, or secure trades
or positions in or accruing as a result of such Eligible Products may
be commingled in a Market Professional Cross-Margining Account with
Eligible Products cleared by NYPC and with property received by a
participating NYPC Clearing Member to margin, guarantee, or secure
trades or positions in or accruing as a result of such Eligible
Products that would otherwise be required by the CFTC to be segregated
under the CEA.
FICC has established procedures to facilitate the segregation of
the funds and securities deposited or received by GSD Netting Members
regarding their Market Professional cross-margining activity. For
example, each GSD Netting Member must establish separate bank accounts
for the purpose of making daily funds-only settlement of its
proprietary cross-margining activity and for the purpose of making
daily funds-only settlement of its Market Professional cross-margining
activity. In addition, FICC and NYPC will establish and use separate
bank accounts for paying and collecting cash margin and funds-only
settlement amounts resulting from members' proprietary cross-margining
activities and for paying and collecting such amounts resulting from
members' market professional cross-margining activity. FICC will not
permit the netting of obligations arising out of a GSD Netting Member's
proprietary cross-margining activity with those arising out of its
Market Professional cross-margining activity.
FICC has also taken steps to assure the segregation of securities
that are deposited with FICC or its agents to satisfy Clearing Fund
requirements in Market Professional Cross-Margining Accounts and
proprietary cross-margining accounts. For example, FICC and NYPC will
establish and use
[[Page 30034]]
separate custody accounts to hold securities deposited as margin by
members for proprietary cross-margining activity and to hold securities
deposited as margin by members for Market Professional cross-margining
activity.
FICC's proposal also addresses the potential for conflict between
SIPA, Subchapter IV of chapter 7 of the Bankruptcy Code,\15\ and
corresponding CFTC bankruptcy regulations,\16\ in the event of the
liquidation and distribution of the property and funds of a GSD Netting
Member that is a registered broker-dealer.\17\ To establish uniform
results in the event of the bankruptcy or liquidation of a broker-
dealer GSD Netting Member under SIPA, FICC will require each Netting
Member that chooses to participate in the Market Professional Cross-
Margining Program to require that the GSD Netting Member's
participating Market Professionals agree that in the event of the
bankruptcy or liquidation of the GSD Netting Member carrying its cross-
margined positions, the Market Professional will subordinate its cross-
margining related claims to the claims of the firm's non-cross-
margining customers.\18\ Similarly, each participating Market
Professional must acknowledge that all of the assets carried in a GSD
Netting Member's Market Professional Cross-Margining Account on the
Market Professional's behalf will not be deemed ``customer property''
for purposes of SIPA or give rise to any claim thereunder. This means
that in the event of a GSD Netting Member bankruptcy, all claims to
assets in cross-margining accounts will be determined under Subchapter
IV of chapter 7 of the Bankruptcy Code and applicable CFTC regulations.
FICC believes these measures reduce the possibility that assets in a
GSD Netting Member's Market Professional Cross-Margining Account will
be subject to two conflicting schemes of distribution.
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\15\ 11 U.S.C. 761-767.
\16\ 17 CFR Part 190.
\17\ Some Market Professionals could be deemed to be
``customers'' under SIPA and Exchange Act Rule 15c3-3. Consistent
with previously approved cross-margining programs, however, Market
Professionals will be required to agree to subordinate their claims,
in the event of the bankruptcy of a GSD Netting Member or an NYPC
member, to the claims of other customers. See Securities Exchange
Act Release No. 34-29991 (November 26, 1991), 56 FR 61458 (December
3, 1991) n.23.
\18\ Under SIPA, SIPC satisfies the claims of ``customers''
against insolvent broker-dealers up to predetermined limits. 15
U.S.C. 78fff-3. Under SIPA, however, the term ``customer'' does not
include any person to the extent that such person has a claim for
cash or securities which, by agreement, is subordinated to the
claims of any or all creditors of the debtor. 15 U.S.C.
78lll(2)(C)(ii). Because a Market Professional will be required to
subordinate its cross-margin related claims against a GSD Netting
Member to those of the GSD Netting Member's non-cross-margining
customers, it will not fall within the protections afforded by SIPA.
See Securities Exchange Act Release No. 34-29991 (November 26,
1991), 56 FR 61458 (December 3, 1991) n.24.
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In the event of a default of a member that chooses to participate
in the Market Professional Cross-Margining Program, FICC and NYPC will
follow the remedies outlined in the FICC-NYPC Cross-Margining Agreement
to liquidate or transfer the proprietary and Market Professional Cross-
Margining Accounts. Any deficit in the Market Professional Cross-
Margining Account would, absent a deficit in any NYPC segregated
customer account of the defaulting member, be offset against any credit
in any proprietary cross-margining account of the defaulting member.
Non-cross-margining accounts at NYPC would be liquidated or transferred
pursuant to NYPC procedures as they exist today. FICC and NYPC will not
offset a credit in a Market Professional Cross-Margining Account with a
deficit in a proprietary cross-margin account or with any other account
FICC or NYPC maintains for the defaulting member. Thus, any surplus in
the Market Professional Cross-Margining Account will be returned to the
member or its representative.
In the event of a member bankruptcy, the Bankruptcy Code exempts
FICC and NYPC from the automatic stay and permits FICC and NYPC to
liquidate any assets held for the insolvent member \19\ and offset
those assets against the member's liabilities.\20\ Assets of the member
held in the Market Professional Cross-Margining Account will only be
set-off against related Market Professional cross-margining
liabilities. Any assets remaining after such a set-off will be
transferred to the bankruptcy trustee for administration and
distribution.\21\
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\19\ 11 U.S.C. 555, 556, 560, and 561.
\20\ 11 U.S.C. 362(b)(6), 362(b)(17), 362(b)(27), and 561.
\21\ In the situation where an Affiliated Member becomes
insolvent, assets in the Market Professional Cross-Margin Accounts
of FICC and NYPC will be set-off by FICC and NYPC against related
liabilities in such accounts.
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If a member becomes insolvent, the Securities Investor Protection
Corporation (``SIPC'') may and probably will file for a protective
decree under SIPA.\22\ SIPC will then appoint a trustee charged with
liquidating the bankrupt estate, consistent with SIPA. Under SIPA, the
trustee must, to the extent not inconsistent with SIPA, administer the
assets of the member held as a commodity broker in accordance with the
Bankruptcy Code's commodity broker liquidation requirements and
applicable CFTC regulations.\23\ Even if SIPC does not exercise its
power to seek appointment of a trustee and SIPA does not apply to the
liquidation, a Market Professional's claims to assets in the Market
Professional Cross-Margining Account will be determined in accordance
with the Bankruptcy Code's commodity broker liquidation scheme
contained in Subchapter IV of chapter 7 and applicable CFTC
regulations.
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\22\ 11 U.S.C. 742.
\23\ 15 U.S.C. 78fff-1(b) states in part: ``To the extent
consistent with the provisions of this chapter or as otherwise
ordered by the court, a trustee shall be subject to the same duties
as a trustee in a case under chapter 7 of Title 11, including, if
the debtor is a commodity broker, as defined under section 101 of
such title, the duties specified in subchapter IV of such chapter
7.''
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Generally, applicable sections of the Bankruptcy Code and CFTC
regulations provide for the trustee to distribute ``customer property''
\24\ pro rata among ``customers'' \25\ according to account class and
generally give priority to customer claims over all others, except
those dealing with the administration of the bankrupt estate.\26\ Also,
assuming the trustee does not transfer customer accounts to another
firm and determines to liquidate customer accounts, the trustee will
distribute customer property to the claimants.\27\ If there is a
shortfall in the Market Professional Cross-Margining Account and there
is no shortfall or a lesser shortfall in the non-cross-margining
customer account, Market Professionals will have a claim against the
Market Professional Cross-Margining Account and will be able to claim
against the non-cross-margining customer account only after all non-
cross-margining customer claims have been satisfied. If the shortfall
in the non-cross-margining customer account is equal to or greater than
the shortfall in the Market Professional Cross-Margining Account, the
two accounts will be combined and Market Professionals and non-cross-
margining customers will share on a pro rata basis.\28\
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\24\ As defined in 11 U.S.C. 761(10) and 17 CFR 190.01(n).
\25\ As defined in 11 U.S.C. 761(9).
\26\ 11 U.S.C. 766(h); see 17 CFR 190.08.
\27\ See generally 11 U.S.C. 766 and 17 CFR 190.08.
\28\ See 17 CFR part 190, appendix B (Framework 1).
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Proposed Changes to the FICC-NYPC Cross-Margining Agreement
In addition to certain technical corrections and conforming
changes, the FICC-NYPC Cross-Margining Agreement would be substantively
amended as described below in order to incorporate the proposed Market
Professional Cross-Margining Program.
[[Page 30035]]
Capitalized terms used in this section have the meanings given to them
in the FICC-NYPC Cross-Margining Agreement.
Recitals
The Recitals to the FICC-NYPC Cross-Margining Agreement would be
amended to describe the proposed expansion of the existing FICC-NYPC
Cross-Margining Agreement to provide for the cross-margining of the
accounts of Market Professionals, and also to reflect the fact that the
current FICC-NYPC Cross-Margining Agreement was executed on March 4,
2011, after receipt of the necessary regulatory approvals by FICC and
NYPC.
Section 1. Definitions
Section 1(f) (Available Assets) and Section 1(tt) (Margin)
The ``Available Assets'' definition would be amended to include as
assets available in the event of a default any margin posted to the
Defaulting Member's Proprietary Cross-Margining Account, as well as any
margin posted to the Defaulting Member's Market Professional Cross-
Margining Account. The ``Margin'' definition would be similarly amended
to include original margin, option premiums and other margin collateral
held by or for the account of FICC or NYPC to secure the obligations of
a Cross-Margining Participant's Proprietary Cross-Margining Account
and/or its Market Professional Cross-Margining Account.
The ``Available Assets'' definition would be further amended to
clarify that, consistent with the distributional convention established
in Appendix B to Part 190 of the CFTC's Regulations, the NYPC Guaranty
Fund deposits of a Defaulting Member would first be applied to any
deficit in the Customer Funds Account of the Defaulting Member carried
by NYPC, and then, after any such deficit has been completely
satisfied, to any Cross-Margin Loss in the Defaulting Member's Market
Professional Cross-Margining Account carried by NYPC, and then finally
to any Cross-Margin Loss in the Defaulting Member's Proprietary Cross-
Margining Account carried by NYPC.
Section 1(t) (Cross-Margin Gain) and Section 1(u) (Cross-Margin Loss)
For ease of reference and to facilitate understanding of the loss
allocation mechanism in the event of the liquidation of the cross-
margined positions carried for a Defaulting Member by FICC and NYPC,
the definitions of Cross-Margin Gain and Cross-Margin Loss would become
a new subsection (b) of Section 7 of the FICC-NYPC Cross-Margining
Agreement (Suspension and Liquidation of Cross-Margining Participant).
Section 1(y) (Customer Funds Account)
The term ``Segregated Funds Account'' in the existing FICC-NYPC
Cross-Margining Agreement would be replaced by the term ``Customer
Funds Account'' and modified in order to clearly distinguish non-cross-
margining ``customer'' accounts established by NYPC from both Market
Professional Cross-Margining Accounts and Proprietary Cross-Margining
Accounts.
Section 1(ww) (Market Professional)
As described above, consistent with previously approved cross-
margining programs, the term ``Market Professional'' would be defined
as an entity, other than a ``Non-Customer'' (described below), that is
a member of a designated contract market and that actively trades for
its own account Eligible Products that are eligible for cross-margining
under the FICC-NYPC Cross-Margining Agreement.
Section 1(bbb) (Non-Customer)
As described above, ``Non-Customers'' would be excluded from the
definition of a Market Professional. With respect to a GSD Netting
Member, the term ``Non-Customer'' would be defined as such GSD Netting
Member or other person whose account with such GSD Netting Member would
not be the account of a ``customer'' within the meaning of SEC Rules
8c-1 and 15c2-1.
Section 1(sss) (Securities Custody Account) and 1(uuu) (Settlement
Account)
For ease of reference, the term ``Cross-Margining Securities
Account'' would be replaced with the term ``Securities Custody
Account'' and would be expanded to include a custody account to hold
Margin in the form of securities deposited by a Cross-Margining
Participant in respect of a Proprietary Cross-Margining Account or a
Market Professional Cross-Margining Account.
Similarly, the definition of ``Settlement Account'' would be
expanded to include a bank account established to hold cash Margin
deposited by a Cross-Margining Participant in respect of a Proprietary
Cross-Margining Account or a Market Professional Cross-Margining
Account.
Section 2. Participation
Section 2(a) would be amended and Section 2(b) and 2(c) would be
added in order to accommodate the additional documentation required to
establish a Set of Market Professional Cross-Margining Accounts by
either a Joint Clearing Member or by a Clearing Member and its Cross-
Margining Affiliate.
Section 5. Forms of Margin; Holding Margin
Section 5(b) would be amended to reflect the fact that separate
Settlement Accounts and Securities Custody Accounts would be maintained
for proprietary and Market Professional cross-margining activity.
Section 5(c) would be amended to allow FICC and NYPC to hold cash
and securities posted with respect to cross-margining activity in
either separate accounts or, consistent with previously approved cross-
margining programs, joint accounts titled in the names of FICC and
NYPC.
Section 7. Suspension and Liquidation of Cross-Margining Participant
Section 7(a) would be amended to clarify that the positions and
Margin of a Defaulting Member may be liquidated or transferred to one
or more non-defaulting Clearing Members.
A new Section 7(b) would be added to define ``Cross-Margin Gain''
and ``Cross-Margin Loss,'' as described above. New Section 7(b) would
also make clear that in calculating its Cross-Margin Gain (or Cross-
Margin Loss) or Net Gain (or Net Loss) FICC and NYPC would be required
to make separate calculations with respect to the Defaulting Member's
Proprietary Cross-Margining Account and its Market Professional Cross-
Margining Account.
Section 7(g) would be amended to provide that to the extent that
pursuant to the loss allocation prescribed in Section 7, both FICC and
NYPC owe payments to each other, i.e., one clearing organization owes a
payment with respect to the Proprietary Cross-Margining Account of a
Defaulting Member and the other owes a payment with respect to the
Defaulting Member's Market Professional Cross-Margining Account, those
two payments may be netted and setoff against each other.
Proposed Changes to Clearing Member Agreements
The FICC-NYPC Cross-Margining Agreement is solely between FICC and
NYPC. Members of FICC and of NYPC that wish to participate in the
Cross-Margining Program must become party to a Clearing Member Cross-
Margining Agreement which, among other things, reflects the Clearing
Member's agreement to be bound by the Rules applicable to cross-
margining and to the provisions of the FICC-NYPC Cross-
[[Page 30036]]
Margining Agreement (``Clearing Member Agreements''). Capitalized terms
used in this section have the meanings given to them in the proposed
Clearing Member Agreements.
The current FICC-NYPC Cross-Margining Agreement includes two forms
of Clearing Member Agreement--one for joint Clearing Members (i.e.,
entities that are members of both FICC and NYPC), the other for
Clearing Members that are Affiliates of each other (i.e., a Clearing
Member of either FICC or NYPC that directly or indirectly controls, is
controlled by, or under common control with a Clearing Member of the
other Clearing Organization). Those agreements, which are set forth as
Appendix A and Appendix B to the FICC-NYPC Cross-Margining Agreement,
would be renamed as Clearing Member Cross-Margining Agreement (Joint
Clearing Member--Proprietary Accounts) and Clearing Member Cross-
Margining Agreement (Affiliated Clearing Members--Proprietary
Accounts), and references in those agreements to a ``Member'' would be
replaced with references to a ``Clearing Member'' for consistency with
the terminology used in the FICC-NYPC Cross-Margining Agreement.
The Clearing Member Agreements for Proprietary Accounts are
proposed to be further modified to make clear that a Set of Proprietary
Cross-Margining Accounts would be combined and treated as a single
account for purposes of calculating Margin. This change is reflective
of the current practice of the Clearing Organizations pursuant to the
Cross-Margining Agreement and is proposed to be set out solely for
purposes of clarity.
The Clearing Member Agreements would additionally be modified to
reflect the practice of the Clearing Organizations regarding the use of
Clearing Data (as that term is defined in the Clearing Member Cross-
Margining Agreements). Specifically, the Clearing Member Agreements
would be modified to provide that Clearing Data may only be disclosed
(i) To an Affiliated Clearing Member, where applicable, (ii) in
accordance with the provisions of Section 10 of the Cross-Margining
Agreement, and (iii) in aggregated form, provided that such aggregated
Clearing Data does not identify of the Clearing Member or Affiliated
Clearing Members, as applicable, as the source thereof.
The termination provisions of the Clearing Member Agreements for
Proprietary Accounts would also be modified to make clear that the
required acknowledgment of a Clearing Member's termination of the
Agreement will be given by the Clearing Organizations promptly after
the two Business Day notice period required by the Clearing Member
Agreements. The termination provisions would additionally be modified
to make explicit that a Clearing Member's continuing obligations under
the Clearing Member Agreements and the Cross-Margining Agreement
survive the termination of the Clearing Member Agreement only to the
extent those obligations arose prior to such termination.
Finally, the Clearing Member Cross-Margining Agreement (Affiliated
Clearing Members--Proprietary Accounts) is proposed to be amended to
include a waiver of the Clearing Members' and the Clearing
Organizations' right to jury trial in any dispute arising in connection
with that agreement. A comparable provision already is included in the
Clearing Member Cross-Margining Agreement (Joint Clearing Member--
Proprietary Accounts). The remaining revisions to the Clearing Member
Agreements for Proprietary Accounts are non-substantive or conforming.
While it is anticipated that some Clearing Members will elect to
participate in cross-margining for their Proprietary Accounts and also
act as Clearing Member for Market Professionals, a Clearing Member
could elect to act in only one of those capacities. The Clearing Member
Agreements in Appendices A and B to the FICC-NYPC Cross-Margining
Agreement, therefore, would be complemented by a Clearing Member Cross-
Margining Agreement (Joint Clearing Member--Market Professional
Accounts) and Clearing Member Cross-Margining Agreement (Affiliated
Clearing Members--Market Professional Accounts), respectively, and a
Clearing Member that elected to maintain a Set of Proprietary Cross-
Margining Accounts and a Set of Market Professional Cross-Margining
Accounts would be required to enter into Clearing Member Cross-
Margining Agreements for both its Proprietary Accounts and for its
Market Professional Accounts.
The proposed Clearing Member Agreements for Market Professional
Accounts (Appendices C and D to the FICC-NYPC Cross-Margining
Agreement) are based upon the Clearing Member Agreements for
Proprietary Accounts, but have been modified as appropriate. For
example, the Clearing Member Agreements for Market Professional
Accounts would make explicit that the Set of Market Professional Cross-
Margining Accounts that would be established by the Clearing
Organizations for a Clearing Member are to be limited to transactions
and positions established by Market Professionals who have signed a
Market Professional Agreement for Cross-Margining in the form set forth
as Exhibit A to Appendices C and D, respectively.\29\
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\29\ Similar to the Clearing Member Agreements for Proprietary
Accounts, the Clearing Member Agreements for Market Professional
Accounts would require the Clearing Member to pledge, for itself and
for each Market Professional on whose behalf positions are carried
in a Set of Market Professional Cross-Margining Accounts, the
positions and Margin in the Set of Market Professional Cross-
Margining Accounts. Consistent therewith and with the Clearing
Member Agreements for Proprietary Accounts, the Clearing Member
Agreements for Market Professional Accounts would include
representations and warranties by the Clearing Member to the effect
that it has the power to grant the foregoing security interest and
that it is the sole owner of or otherwise has the right to transfer
collateral to the Clearing Organizations.
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The Market Professional Agreements are derived from the form of
Market Professional's Agreement for Cross-Margining that has previously
been approved by the Commission.\30\ The FICC-NYPC Market Professional
Agreements differ from the forms of agreement that have previously been
approved in that they would be modified to reference the Eligible
Products that are available for cross-margining under the FICC-NYPC
Cross-Margining Agreement. The FICC-NYPC Market Professional Agreements
additionally would be modified to reference the definitions of the term
``Market Professional'' that would be set forth in the Rules of FICC
and NYPC, and to require a Market Professional to represent and warrant
that it does, in fact, qualify as such. Moreover, the FICC-NYPC Market
Professional Agreements would be amended to provide that, consistent
with the requirements of CFTC Regulation 39.13(g)(8)(i) (gross margin
for customer accounts), the positions of a Market Professional cleared
by FICC will only be cross-margined with the derivatives positions of
the same Market Professional cleared by NYPC. The only other
substantive change from the form of agreement previously approved by
the Commission would be the elimination of a provision that would have
conditioned the effectiveness of the Market Professional Agreements on
the receipt of all necessary approvals by the Commission and the CFTC.
FICC believes that a provision of this nature
[[Page 30037]]
is unnecessary, given that FICC and NYPC will not permit Clearing
Members to enter into Market Professional Agreements until all
necessary regulatory approvals have been obtained.
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\30\ See Exhibits 5F and 5G to Release No. 34-57118 (January 9,
2008) (Options Clearing Corporation--ICE Clear U.S. market
professional cross-margining); see also Securities Exchange Act
Release No. 34-29991 (November 26, 1991), 56 FR 61458 (December 3,
1991) (Options Clearing Corporation--Chicago Mercantile Exchange
market professional cross-margining).
---------------------------------------------------------------------------
Proposed FICC Rule Changes
In addition to the proposed changes to the FICC-NYPC Cross-
Margining Agreement, FICC is proposing the following GSD rule changes
to effectuate the Market Professional Cross-Margining Program.
Capitalized terms used in this section have the meanings given to them
in the GSD Rules.
Rule 1 (Definitions)
New definitions are being added for the following terms: ``Market
Professional,'' ``Market Professional Agreement for Cross-Margining,''
``Market Professional Cross-Margining Account,'' ``Non-Customer,''
``NYPC Market Professional Account,'' and ``NYPC Proprietary Account''
(which retains the current definition of ``NYPC Account''). ``NYPC
Account,'' an existing term, is now proposed to be amended to encompass
the two new terms of ``NYPC Market Professional Account'' and ``NYPC
Proprietary Account.'' In addition, changes are proposed to the
following definitions to reference the concepts associated with the
Market Professional Cross-Margining Program: ``Account,'' ``Cross-
Margining Affiliate,'' ``Cross-Margining Agreement'' and ``Margin
Portfolio.'' A technical change is being proposed to the definition of
``Cross-Margining Payment.''
Rule 3 (On-Going Membership Requirements)
FICC is proposing to amend Section 11 of Rule 3, which covers
additional accounts requested by Members, to provide for the opening of
market professional accounts and to make clear that such accounts must
meet the requirements of the Cross-Margining Agreement and the GSD
Rules (as with all other accounts carried by FICC for its Members).
Rule 4 (Clearing Fund and Loss Allocation)
FICC is proposing to amend Section 1b and Section 2 of Rule 4 to
provide that the market professional account will have its own Clearing
Fund calculations separate from the main account of the Netting Member,
and that the rules applicable to the Clearing Fund calculations and the
requirements of the Required Fund Deposit also apply Clearing Fund
calculations and Required Fund Deposits associated with the market
professional accounts.
Rule 13 (Funds-Only Settlement)
FICC is proposing to amend Section 1 and Section 5a to provide that
funds-only settlement amounts will be calculated separately for the
member's market professional account and that net-net funds only
credits/debits will also apply to the market professional accounts of a
Member (or its permitted margin affiliate) across FICC and NYPC, as is
the case currently with the proprietary accounts.
Rule 22A (Procedures for When the Corporation Ceases to Act)
FICC is proposing to amend Section 2 of Rule 22A to provide that a
liquidation gain in a Netting Member's proprietary account will be used
to offset any resulting liquidation loss in such Member's Market
Professional Cross-Margining Account.
Rule 29 (Release of Clearing Data)
FICC is proposing to amend Rule 29 to make clear that a Member's
Clearing Data will be released to a futures clearing organization
(``FCO'') with which FICC has a Cross-Margining Arrangement and that
such data will include data regarding the Member's market professional
customers.
Rule 43 (Cross-Margining Arrangements)
FICC is proposing to amend Rule 43 to provide for the requirement
for Netting Members who wish to participate in the Market Professional
Cross-Margining Program to execute the appropriate participation
agreements which are appended to the FICC-NYPC Cross-Margining
Agreement as discussed above.
III. Comments
The Commission received one comment to the proposed rule change
from Citadel, LLC.\31\ The commenter supports the proposed rule change,
stating that the proposed rule change would allow market professionals
to more effectively manage risk by recognizing the value of offsetting
positions cleared by NYPC and FICC. The commenter believes that the
proposed rule change will allow market professionals to use their
capital more efficiently and will reduce systemic risk by removing
excess interconnectedness from the marketplace and optimizing
collateral balances. Furthermore the commenter believes that the
proposed rule change will further encourage competition in the US
futures markets and provides for consumer protection in the event of
the bankruptcy of a clearing member in accordance with the CFTC's
rules.
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\31\ See supra note 4.
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IV. Discussion
Section 19(b)(2)(B) of the Act \32\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that the proposed rule change is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to such
organization. In Section 17A(a)(2)(A)(ii) of the Act,\33\ Congress
directs the Commission to use its authority to facilitate the
establishment of linked or coordinated facilities for clearance and
settlement of transactions in securities, securities options, contracts
of sale for future delivery and options thereon, and commodity options.
Sections 17A(b)(3)(A) and (F) of the Act \34\ require that a clearing
agency be organized and its rules designed to facilitate the prompt and
accurate clearance and settlement of securities transactions and
derivative agreements, contracts, and transactions for which it is
responsible and to safeguard securities and funds in its custody or
control or for which it is responsible. The Commission has carefully
considered the proposed rule change and the comment thereto and the
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder.\35\
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\32\ 15 U.S.C. 78s(b)(2)(B).
\33\ 15 U.S.C. 78a-1 (a)(2)(A)(ii).
\34\ 15 U.S.C. 78q-1(b)(3)(A), (F)
\35\ In approving this proposed rule change, the Commission
notes and FICC agrees that FICC will adhere to the conditions to
provide information and reports on an ongoing basis that are set
forth in the Commission's Order Granting Approval of a Proposed Rule
Change to Introduce Cross-Margining of Certain Positions Cleared at
the Fixed Income Clearing Corporation and Certain Positions Cleared
at New York Portfolio Clearing, LLC, to the extent applicable to
``Market Professionals.'' See note 5, supra.
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As the Commission noted in approving the FICC-NYPC Proprietary
Cross-Margining Program, the Commission has encouraged cross-margining
arrangements as a way to promote more efficient risk management across
product classes.\36\ Furthermore, cross-margining arrangements are
consistent with Section 17A(b)(3)(F) in that they may strengthen the
safeguarding of assets through effective risk controls that more
broadly take into account offsetting positions of participants in both
the cash and futures markets, and promote prompt and
[[Page 30038]]
accurate clearance and settlement of securities through increased
efficiencies. The Commission agrees with the commenter that the
proposed rule change will help promote effective risk management and
provides for increased efficiencies by taking into account offsetting
positions. Moreover, the Commission has repeatedly found that similar
cross-margining programs for ``Market Professionals'' are consistent
with clearing agency requirements under Section 17A of the Act.\37\
Because the Market Professional Cross-Margining Program being approved
by this Order helps further linked or coordinated facilities for
clearance and settlement of transactions while facilitating their
prompt and accurate clearance and settlement and safeguards securities
and funds in FICC's custody or control or for which it is responsible,
the Commission believes that the proposed rule change is consistent
with Section 17A of the Act and, therefore, is approving FICC's
proposed rule change.
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\36\ See note 5, supra.
\37\ See note 6, supra.
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \38\ and the
rules and regulations thereunder.
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\38\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) \39\ of the
Act, that the proposed rule change (File No. SR-FICC-2012-03) be, and
hereby is, approved.\40\
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\39\ 15 U.S.C. 78s(b)(2).
\40\ In approving this proposed rule change the Commission has
considered the proposed rule's impact of efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-12181 Filed 5-18-12; 8:45 am]
BILLING CODE 8011-01-P
