Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Amend and Restate the Cross-Margining Agreement between FICC and CM, 48926-48937 [2023-15981]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Notices]
[Pages 48926-48937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-15981]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97969; File No. SR-FICC-2023-010]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend and Restate the 
Cross-Margining Agreement between FICC and CM

July 24, 2023.
    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 July 17, 2023, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared primarily by FICC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of a proposed Amended and 
Restated Cross-Margining Agreement (the ``Restated Agreement'') between 
FICC and the Chicago Mercantile Exchange

[[Page 48927]]

Inc. (``CME,'' collectively FICC and CME are referred to herein as the 
``Clearing Organizations'' or ``Parties''). The proposed Restated 
Agreement would replace the current Cross-Margining Agreement between 
the Parties (the ``Existing Agreement'') \3\ in its entirety and would 
be incorporated into the FICC Government Securities Division (``GSD'') 
Rulebook (``GSD Rules''). The proposed rule change does not require any 
changes to the text of the GSD Rules.\4\ The proposed Restated 
Agreement was attached to this filing as Exhibit 5[sic].\5\
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    \3\ See Securities Exchange Act Release No. 49003 (Dec. 29, 
2003), 69 FR 712 (Jan. 6, 2004) (SR-FICC-2003-10). For subsequent 
amendments to the Existing Agreement, see Securities Exchange Act 
Release Nos. 50790 (Dec. 3, 2004), 69 FR 71456 (Dec. 9, 2004) (SR-
FICC-2004-16); 51178 (Feb. 9, 2005), 70 FR 7982 (Feb. 16, 2005) (SR-
FICC-2005-03); 55217 (Jan. 31, 2007), 72 FR 5774 (Feb. 7, 2007) (SR-
FICC-2006-16); 59498 (Mar. 4, 2009), 74 FR 10321 (Mar. 10, 2009) 
(SR-FICC-2009-01); 63986 (Feb. 28, 2011), 76 FR 12144 (Mar. 4, 2011) 
(SR-FICC-2010-09); and 72396 (June 16, 2014), 79 FR 35400 (June 20, 
2014) (SR-FICC-2014-04).
    \4\ The Existing Agreement is incorporated in the GSD Rules 
available at www.dtcc.com/legal/rules-and-procedures.aspx. Unless 
otherwise specified, capitalized terms not defined herein shall have 
the meanings ascribed to them in the GSD Rules, which includes the 
Existing Agreement.
    \5\ Proposed Amended and Restated Cross-Margining Agreement by 
Fixed Income Clearing Corporation and Chicago Mercantile Exchange 
Inc.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency 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 clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
Executive Summary
    Generally, the purpose of a cross-margining arrangement between two 
clearing organizations is to recognize the offsetting value of 
positions maintained by a member (or a member and its affiliate) at the 
two clearing organizations for margin purposes. Any resulting margin 
reductions create capital efficiencies for common members.
    With regard to its cross-margining arrangement with CME, FICC is 
proposing to replace the Existing Agreement with the Restated 
Agreement, which would be incorporated into the GSD Rules. The purpose 
of the proposed Restated Agreement is to expand the scope and 
efficiency of the margin offsets that are available to clearing members 
of the two Clearing Organizations under the Existing Agreement, thus 
reducing their margin costs and allowing for more efficient capital 
usage by members. It would also streamline the default management and 
loss sharing processes by making clear that a joint liquidation would 
be the preferred method used by the Clearing Organizations in the event 
of a member default.
    The key aspects of the proposed Restated Agreement are as follows 
(and are described in more detail below):
     Member participation: Participation in the cross-margining 
arrangement would continue to be voluntary and the criteria for 
participation under the proposed Restated Agreement would remain the 
same as it is under the Existing Agreement.\6\
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    \6\ Currently cross-margining is only available for house 
(proprietary accounts) of CME clearing members that are also GSD 
Netting Members (either directly or through an affiliate).
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     Eligible products: Additional CME products would become 
eligible under the proposed Restated Agreement,\7\ allowing for greater 
potential margin offsets.
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    \7\ CME will add products to the proposed Restated Agreement as 
discussed in more detail below.
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     Calculation of margin and margin reductions: The proposed 
Restated Agreement, would simplify the overall margin calculation 
process by eliminating the need for application of offset classes of 
securities and conversion of CME Eligible Products into equivalent GSD 
Treasury security products.\8\ As a result, FICC believes, based on 
portfolio specific construction and market conditions, that these 
changes should generate margin savings in excess of those under the 
Existing Agreement. For example, based on a study comparing margin 
savings generated under the Existing Agreement and under the proposed 
Restated Agreement over the December 1, 2021 to November 30, 2022 
period,\9\ margin savings went from a range of 0.1% to 17.4% under the 
Existing Agreement, to a range of 0% to 36.6% under the proposed 
Restated Agreement.\10\
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    \8\ References herein to ``offset classes'' refers to the 
grouping of securities by maturity for purposes of comparing those 
securities to CME Eligible Products whose price volatility is 
sufficiently correlated to determine whether long and short 
positions could be offset for purposes of determining margin 
requirements. Moving to security-level offsets would simplify the 
margin calculation process by removing the need to define and work 
with categories of securities.
    \9\ The study covered fifteen current Cross-Margining 
Participants' actual eligible FICC portfolios and simulated CME 
futures portfolios. FICC notes that margin savings will vary based 
on portfolio specific construction and market conditions.
    \10\ FICC notes, however, that cross-margining-related margin 
requirements account for only nineteen (19) percent of total margin 
requirements on average. FICC provided its analysis of the potential 
effects on margin requirements to the Commission in a confidential 
Exhibit 3 to File No. SR-FICC-2023-010. FICC provided responses to 
specific questions raised by Commission staff with regard to the 
conceptual review of margin reduction mechanics (e.g., the 
applicable margin model, impact of proposed changes), the potential 
effect on other margin add-on charges, and how FICC intends to model 
Treasury futures. FICC also provided information pertaining to 
minimum and maximum margin reduction thresholds, potential effects 
of the proposed changes to margin calculations, and model 
backtesting.
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     Default management: Under the Existing Agreement, there is 
no express language requiring the Parties to attempt to conduct a joint 
liquidation. Whereas the proposed Restated Agreement would make clear 
that a joint liquidation is the preferred means of liquidation of 
cross-margining positions in the event of a member default. A joint 
liquidation is optimal because it maximizes the efficiency and 
effectiveness of the liquidation process by enabling each Clearing 
Organization to recognize reduced risk by offsetting risk positions 
together. The proposed Restated Agreement would also provide for the 
possible exchange of variation margin during the course of a joint 
liquidation. The exchange of variation margin during the course of a 
joint liquidation would be an improvement because instead of using 
other liquidity resources, it would enable a Party that has a mark-to-
market loss arising out of cross-margining positions to use the 
variation margin gains on offsetting cross-margining positions held by 
the other Clearing Organization. The Existing Agreement has no such 
provisions and they would be added to improve the efficiency of the 
default management process.
    FICC believes that the proposed expansion of the scope of CME 
Eligible Products (as defined below) available for cross-margining, the 
expansion of the scope and efficiency of the margin offsets that would 
be available to Cross-Margining Participants,\11\ and the

[[Page 48928]]

improvement in the efficiency and effectiveness of the default 
management process would enhance the cross-margining arrangement 
between FICC and CME. FICC believes that these enhancements would 
encourage greater utilization of centralized clearing, thereby 
facilitating systemic risk reduction.
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    \11\ Pursuant to the proposed Restated Agreement, ``Cross-
Margining Participant'' means a Joint Clearing Member that has 
become, or a Clearing Member that is part of a pair of affiliated 
Clearing Members each of which has become, a participant in the 
cross-margining arrangement between FICC and CME established 
pursuant to the proposed Restated Agreement. In the latter case, the 
term ``Cross-Margining Participant'' shall, where the context 
requires, refer collectively to the pair of Cross-Margining 
Affiliates.
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Background
    The Existing Agreement establishes a cross-margining arrangement 
\12\ that allows FICC to consider the net risk of a participant's 
related eligible positions at FICC and CME when setting margin 
requirements of such positions.\13\
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    \12\ Cross-margining arrangements are addressed in GSD Rule 43, 
supra note 4.
    \13\ See Section 5 of the Existing Agreement, ``Calculation of 
the Cross-Margining Reduction,'' supra note 4.
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    FICC proposes to enter into the proposed Restated Agreement which 
would, among other things, (i) generally expand the list of CME 
Eligible Products \14\ available for cross-margining; (ii) remove 
certain existing appendices to the Existing Agreement that describe 
operational calculations and margin examples, and instead establish 
procedures to be included in a separate service level agreement, 
including certain other processes covering default management and 
changes to the lists of CME Eligible Products and FICC Eligible 
Products; (iii) revise and expand the scope and efficiency for 
calculating the margin reduction that would apply to a Cross-Margining 
Participant's Eligible Positions, including requiring more frequent 
exchange of Eligible Position information between CME and FICC that is 
used to collateralize risk exposures; (iv) add provisions describing 
default management in terms of (x) what steps would be taken in the 
event of a joint or separate liquidation of Defaulting Member's 
Eligible Positions, and (y) the exchange between the Parties of 
``Variation Margin'' during the course of a joint liquidation (as 
defined in the proposed Restated Agreement) and loss sharing; and (v) 
revise certain other provisions that relate to the Clearing 
Organizations' contractual obligations to one another.\15\
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    \14\ See Exhibit A of the proposed Restated Agreement, ``CME 
Eligible Products.'' The CME Eligible Products are the following: 
CBT 26 2-year T-Note Futures, CBT 3YR 3-year T-Notes Futures, CBT 25 
5-Year T-Note Futures, CBT 21 10-year T-Note Futures, CBT 17 U.S. 
Treasury Bond Futures, CBT TN Ultra Ten-Year T-Note Futures, CBT UBE 
Ultra U.S. Treasury Bond Futures, CBT TWE 20-Year U.S. Treasury Bond 
Futures, CBT 41 30 Day Federal Funds Futures, CME ED Eurodollar 
Futures, CME 1-Month Eurodollar Futures, CME SR1 One-Month SOFR 
Futures, CME SR3 Three-Month SOFR Futures. Id. Of the foregoing, the 
following CME products would be newly eligible under the Restated 
agreement: CBT 3YR 3-year T-Notes Futures, CBT TN Ultra Ten-Year T-
Note Futures, CBT UBE Ultra U.S. Treasury Bond Futures, CBT TWE 20-
Year U.S. Treasury Bond Futures, CBT 41 30 Day Federal Funds 
Futures, CME SR1 One-Month SOFR Futures, and CME SR3 Three-Month 
SOFR Futures. As noted above, certain Agency futures have not been 
used in the current arrangement and will not be carried into the 
proposed Restated Agreement. Specifically, the following CME 
products would no longer be eligible: the ``Five Year Agency'' and 
``Ten Year Agency'' Futures identified in Appendix B of the Existing 
Agreement.
    \15\ These provisions include, but are not limited to, the 
confidentiality provisions and removing the arbitration provision.
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Key Terms of the Existing Agreement
    For purposes of additional background, the following is an overview 
of the key terms of the Existing Agreement.
1. Daily Margin Calculation
    Under the Existing Agreement, the cross-margining calculation is 
not based upon FICC's VaR model. Rather, FICC and CME each separately 
hold and manage its own positions and collateral and independently 
determine the amount of margin that it would make available for cross-
margining (after they each first conduct their own internal offsets). 
Once each Business Day, FICC and CME exchange files with respect to 
their members' positions that are eligible for cross-margining. FICC 
computes the amount by which a member's margin requirement can be 
reduced, by comparing that member's Eligible Positions and related 
margin requirements at GSD against those at CME. FICC and CME may then 
each reduce the amount of collateral that they collect to reflect the 
offsets between the Cross-Margining Participant's positions at FICC and 
its (or its Affiliate's) positions at CME.\16\ Currently, the 
calculation of the offsets each Clearing Organization applies relies 
upon a methodology for the conversion of CME Eligible Products into 
equivalent GSD Treasury security products, as well as the use of 
minimum margin factors to measure interest rate exposure.
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    \16\ See Section 5 of the Existing Agreement, ``Calculation of 
the Cross-Margining Reduction,'' supra note 4.
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    Additionally, the Clearing Organizations limit the potential margin 
reductions from cross-margining. Specifically, they apply a 
Disallowance Factor to a given CME and GSD Offset Class (an ``Offset 
Class'' being a grouping of securities by maturity).\17\ Based on these 
Disallowance Factors, margin offsets are determined for each Offset 
Class. The sum of these margin offsets provides the member's Cross-
Margining Reduction) at CME and at GSD.\18\
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    \17\ FICC and CME agree on the applicable Disallowance Factors 
from time to time. Examples of Disallowance Factor tables are 
included in Exhibit B of the Existing Agreement.
    \18\ Pursuant to the Existing Agreement, FICC and CME 
unilaterally have the right to (1) not reduce a Cross-Margining 
Participant's margin requirement by the Cross-Margining Reduction or 
(2) reduce it by less than the Cross-Margining Reduction. However, 
the Clearing Organizations may not reduce a Cross-Margining 
Participant's margin requirement by more than the Cross-Margining 
Reduction. See Section 5 of the Existing Agreement, ``Calculation of 
the Cross-Margining Reduction,'' supra note 4.
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2. The Cross-Margining Guaranty and Reimbursement Obligation
    As would also be the case under the proposed Restated Agreement, 
under the Existing Agreement, CME agrees to guaranty certain 
performance obligations of a Cross-Margining Participant to FICC, and 
FICC agrees to guaranty certain performance obligations of a Cross-
Margining Participant to CME. These cross-margining Guaranties \19\ are 
necessary to facilitate the Cross-Margining Arrangement and represent 
contractual commitments that each Clearing Organization has to the 
other.\20\ Specifically, CME and FICC guarantee the Cross-Margining 
Participant's performance of its obligations to the other Clearing 
Corporation up to the amount of the member's Cross-Margining 
Reduction.\21\ There is also a corresponding obligation of the Cross-
Margining Participant to reimburse a Clearing Organization for any 
amounts paid under these Guaranties, which obligation is collateralized 
by the positions and margin of such Cross-Margining Participant held by 
the guarantor (CME or FICC, as applicable).

[[Page 48929]]

The provisions in the Existing Agreement covering the cross-margining 
Guaranties and the Cross-Margining Participant's Reimbursement 
Obligation would remain the same under the proposed Restated 
Agreement.\22\
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    \19\ Pursuant to the Existing Agreement, ``Guaranty'' is defined 
as ``the obligation of FICC to CME, or of CME to FICC, as in effect 
at a particular time with respect to a particular Cross-Margining 
Participant as set forth in Sections 8A and 8B of this Agreement. 
The term ``Guaranties'' refers to both the Guaranty of CME to FICC 
and the Guaranty of FICC to CME [. . .].'' See Section 1 of the 
Existing Agreement, ``Definitions,'' supra note 4.
    \20\ See Section 8A, ``Guaranty of FICC to CME,'' and Section 8B 
``Guaranty of CME to FICC,'' of the Existing Agreement.
    \21\ Pursuant to the Existing Agreement, ``Cross-Margining 
Reduction'' is defined as ``the maximum amount by which a Cross-
Margining Participant's margin requirement at one Clearing 
Organization may be reduced (irrespective of the amount by which it 
is actually reduced) as calculated in accordance with Section 5 of 
this Agreement. The Cross-Margining Reduction at each Clearing 
Organization is equal to the sum of the Margin Offsets at that 
Clearing Organization. There will always be a specified Cross-
Margining Reduction that one Clearing Organization could be required 
to pay the other Clearing Organization. See Section 1 of the 
Existing Agreement, ``Definitions,'' supra note 4.
    \22\ The ``Reimbursement Obligation'' is defined under the 
Existing Agreement as ``the obligation, as set forth in Section 7(h) 
of this Agreement, of a Cross-Margining Participant to a Clearing 
Organization that is obligated to make a payment on behalf of such 
Cross-Margining Participant or its Cross-Margining Affiliate 
pursuant to a Guaranty.''
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3. Member Default Event
    Under the Existing Agreement, there is no express language 
requiring the CME and FICC to conduct a joint liquidation at each 
Clearing Organization. However, there is language that provides that 
unless one of the Parties has elected to not liquidate, FICC and CME 
are required to use reasonable efforts to coordinate the liquidation of 
the positions covered by the Cross-Margining Arrangement so that 
offsetting or hedged positions can be closed out simultaneously.\23\ 
There are also provisions covering the sharing of losses by CME and 
FICC in accordance with the terms of the cross-margining 
Guaranties.\24\ The allocation of losses depends upon whether, as to 
each Party, the liquidation results in a Cross Margin Gain or Cross 
Margin Loss. A narrative description of the loss sharing process is set 
forth in Appendix I of the Existing Agreement titled, ``Loss Sharing 
Process.'' Additionally, after any payments are made pursuant to the 
Guaranties and loss sharing arrangement described above, if one of the 
Clearing Organizations computes an Aggregate Net Surplus, and the other 
an Aggregate Net Loss, the Existing Agreement includes an obligation 
for the Clearing Organization with the surplus to make a ``Maximization 
Payment'' \25\ to the other Clearing Organization. There is also an 
associated ``Maximization Reimbursement Obligation'' \26\ of the 
Defaulting Member to the Clearing Organization that is obligated to 
make a Maximization Payment. This provision enables excess collateral 
of a Defaulting Member to initially remain with the Clearing 
Organizations, if needed, to cover losses.
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    \23\ Section 7(a) of the Existing Agreement, ``Suspension and 
Liquidation of a Cross Margining Participant,'' states in pertinent 
part that, ``Except to the extent that one Clearing Organization has 
determined unilaterally not to liquidate, FICC and CME shall use 
reasonable efforts to coordinate the liquidation of the Used 
Positions so that offsetting or hedged positions can be closed out 
simultaneously.''
    \24\ See Sections 8A, ``Guaranty of FICC to CME'' and 8B, 
``Guaranty of CME to FICC,'' of the Existing Agreement, supra note 
4.
    \25\ Pursuant to the Existing Agreement, ``Maximization 
Payment'' means the additional payment(s), if any, that are required 
to be made by FICC to CME, or vice versa, pursuant to Section 8C of 
this Agreement after payments are made under the Guaranty. See 
Section 8C of the Existing Agreement, ``Maximization Payment,'' 
supra note 4.
    \26\ Pursuant to the Existing Agreement, ``Maximization 
Reimbursement Obligation'' means the obligation, as set forth in 
Section 8C(d), of a Cross-Margining Participant to a Clearing 
Organization that is obligated to make a Maximization Payment on 
behalf of such Cross-Margining Participant or its Cross-Margining 
Affiliate pursuant to a Maximization Payment Guaranty. Id.
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A. The Proposed Restated Agreement
Overview
    As noted above, FICC proposes to enter into the proposed Restated 
Agreement with CME. The proposed Restated Agreement is primarily 
designed to, among other things, (i) expand the scope of CME Eligible 
Products, (ii) expand the scope and efficiency of the margin offsets 
that are available to Cross-Margining Participants, thus allowing for 
more efficient capital usage; (iii) improve the efficiency and 
effectiveness of the default management and loss sharing process; and 
(iv) as a result of such enhancements, further encourage greater 
utilization of centralized clearing, thereby facilitating systemic risk 
reduction. The material provisions of the proposed Restated Agreement 
are described in detail below.
Key Elements of the Proposed Restated Agreement
Proposal To Expand the List of CME Eligible Products
    Pursuant to the proposed Restated Agreement, the list of CME 
products eligible for cross-margining would be amended to include an 
expanded list of interest rate futures that are cleared by CME.\27\ 
Under the Existing Agreement, the interest rate futures and options 
contracts eligible for cross-margining are Eurodollar contracts listed 
on CME and certain U.S. Treasury contracts listed on the Chicago Board 
of Trade Incorporated (``CBOT'').\28\ FICC understands that the purpose 
of the change in CME Eligible Products is to provide Cross-Margining 
Participants cross-margin benefits that better align with today's CME 
Interest Rates futures market structure. The original list of CME's 
product set does not include several CME Interest Rate futures 
contracts which have now become benchmark products for hedging in the 
broader U.S. Treasury Markets, for example the CBT TN Ultra Ten-Year T-
Note Futures and the CBT UBE Ultra U.S. Treasury Bond Futures. The list 
would be expanded to include additional U.S. Treasury futures, which 
have been added to CME's suite of U.S. Treasury products since the 
Existing Agreement was established, and SOFR futures (which CME 
launched as a complement to and eventual replacement for Eurodollar 
futures). The list of FICC Eligible Products \29\ would be comprised of 
U.S. Treasury securities which refers to Treasury notes and bonds, and 
would be set forth on Exhibit B to the proposed Restated Agreement, 
titled ``FICC Eligible Products.''
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    \27\ See footnote 12 and Exhibit A (CME Eligible Products) of 
the proposed Restated Agreement.
    \28\ Supra note 4.
    \29\ See Exhibit B (FICC Eligible Products) of the proposed 
Restated Agreement. In the Existing Agreement, certain Agencies are 
also included, but these products have been rarely used in the 
current arrangement and will not be carried into the proposed 
Restated Agreement. Specifically, the following FICC products will 
no longer be eligible for cross-margining with CME products: 
Treasury bills (maturity of one year or less) and Treasury 
Inflation-Protected Securities (TIPS).
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    FICC and CME would each establish on their books and records a 
``Cross-Margining Account'' \30\ for each participating member that 
would identify for their respective member the transactions, positions 
and margin that are subject to the proposed Restated Agreement.\31\
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    \30\ Pursuant to the proposed Restated Agreement, ``Cross-
Margining Account'' means with respect to a Clearing Member of FICC, 
the transactions, positions and margin maintained in the Account (as 
defined in the GSD Rules) at FICC that are identified in FICC's 
books and records as being subject to the proposed Restated 
Agreement, and, with respect to a Clearing Member of CME, means a 
cross-margining account that is carried on the books of CME for such 
Clearing Member that is limited to the transactions, positions and 
margin of the Proprietary Accounts of such Clearing Member that are 
subject to the proposed Restated Agreement.
    \31\ See Section 1, ``Definitions.'' of the proposed Restated 
Agreement.
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Proposal To Establish a Separate Service Level Agreement
    The proposed Restated Agreement also would include provisions 
intended to improve the procedures, information sharing, and documented 
steps covering the default management process between the Parties. 
Specifically, under the proposed Restated Agreement, Section 6(a) 
(Daily Procedures for Exchange of Portfolio Cross-Margining Data), FICC 
and CME would agree to put in place a separate service level agreement 
between the Parties (``SLA''), which would include specified 
timeframes, to exchange on each day on which trading in Eligible 
Products is conducted and on which FICC and CME both conduct money 
settlements (referred to as a ``Business Day''), such information as 
may reasonably be required in order to value the positions in the 
Cross-Margining Accounts and to

[[Page 48930]]

calculate the Cross-Margin Requirement for each Cross-Margining 
Participant.\32\ The SLA would also include operational processes 
consistent with the default management provisions set forth in the 
proposed Restated Agreement. The Parties would update the SLA as their 
operational needs evolve over time.
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    \32\ FICC provided the SLA in a confidential Exhibit 3 to File 
No. SR-FICC-2023-010.
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    Further, in order to streamline and ensure coordination between the 
Clearing Organizations regarding any changes to the products eligible 
for cross-margining, the SLA would include the process and criteria 
under which FICC or CME may make a request to the other Clearing 
Organization to modify its list of CME Eligible Products or FICC 
Eligible Products, as applicable. Such process would include that only 
those products that do not require a change to FICC's or CME's margin 
model would be permitted to be subject to this process,\33\ and that 
any modifications would require the mutual written consent of both 
Parties.
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    \33\ Proposed changes that require a margin model change would 
require an amendment to the proposed Restated Agreement and 
regulatory review and approval, as applicable.
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    The SLA would replace certain appendices \34\ to the Existing 
Agreement, which would no longer be applicable under the terms of the 
proposed Restated Agreement. Operational processes and related 
information would instead be incorporated into the SLA, which would 
reflect the process changes necessitated by the proposed changes to the 
calculation of the cross-margin requirements and loss sharing 
arrangements under the proposed Restated Agreement (described below).
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    \34\ The specific Appendices to be removed from the Existing 
Agreement in accordance with these proposed changes are: Appendix B 
(Example of Disallowance Factor Schedule Applicable to CME Eligible 
Products and FICC Eligible Products); Appendix C1 (CME Calculation 
Process to Convert Eurodollar Futures and Options into Treasury Cash 
Equivalents and to Determine the Applicable CME Offset Classes); 
Appendix C2 (Conversion of Futures Contracts into Treasury 
Equivalents); Appendix F (Methodology for Allocation of Margin Based 
on Order of Increasing Disallowances); Appendix G (Computation of 
Cross-Margin Reduction); Appendix H (Data Elements to Be Provided by 
CME and Returned by FICC); Appendix I (Loss Sharing Process); 
Appendix J (Examples of Loss Sharing Process); and Appendix K 
(Timing of the Effectiveness of the Base Amount of the Guaranty). 
See Existing Agreement, supra note 4.
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Proposed Changes to the Calculation of Cross-Margin Requirements
    The proposed Restated Agreement would adopt a different methodology 
applicable to the daily calculation of a Cross-Margining Participant's 
Cross-Margin Requirements. The purpose of the proposed changes is to 
expand the scope and efficiency of the margin offsets that are 
available to clearing members of GSD and CME under the Existing 
Agreement, thus reducing their margin costs and allowing for more 
efficient capital usage. This is because by including new Eligible 
Products, such as Ultras and 20-Year Treasury Futures, CME and FICC are 
able to reduce the risk exposure at more points of the interest rate 
curve. The greater margin efficiency is realized by using the security 
level sensitivity to calculate the VaR charge, instead of what is done 
today, which is to use the net market value of the Eligible Products in 
a similar maturity bucket. The proposed new methodology, which is based 
on offsetting Eligible Positions at FICC and CME, would also simplify 
the overall margin calculation process by eliminating the need to group 
securities by maturity and the conversion of CME Eligible Products into 
equivalent GSD Treasury security products to facilitate such 
grouping.\35\
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    \35\ Grouping securities by maturity along with the conversion 
of products may, in some cases, previously have resulted in 
overestimating the margin credit that should be provided to a Cross-
Margining Participant because such grouping and conversion of 
products is less precise than measuring risk at the individual 
security level. However, such overestimation of margin credit is no 
longer an issue under the Existing Agreement, as it has been 
previously addressed by FICC through a process of daily surveillance 
in which any instances of any excess margin credits are identified 
and remediated, prior to submission to the Cross-Margining 
Participant of their margin reduction amount. FICC provided its 
assessment of the excess margin credit issue as well as a 
description of how it remediated the issue in a confidential Exhibit 
3 to File No. SR-FICC-2023-010.
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    Under the Existing Agreement in order to determine the amount of 
margin it collects, each Clearing Organization separately manages its 
own positions and collateral, and independently determines the 
``Residual Margin Amount'' that remains after each Clearing 
Organization conducts its own internal offsets.\36\ This process 
requires each Clearing Organization to apply Offset Classes and convert 
its Eligible Products into equivalent Eligible Products of the other 
Clearing Organization. The proposed Restated Agreement, in contrast, 
would provide that FICC and CME each treat a participant's relevant 
products as a single portfolio (the ``Combined Portfolio'').\37\ 
Treatment as a Combined Portfolio provides the ability for the Clearing 
Organizations to assess risk at a security level and eliminates the 
need to use separate margin calculations and apply offset classes and 
conversions of Eligible Products.
---------------------------------------------------------------------------

    \36\ See Section 5 of the Existing Agreement, ``Calculation of 
the Cross-Margining Reduction,'' supra note 4.
    \37\ See Section 4(a) of the proposed Restated Agreement 
(Calculation of Cross-Margining Requirements).
---------------------------------------------------------------------------

    The proposed Restated Agreement would provide that FICC and CME 
would independently determine the percentage of margin savings that 
would be derived for a Cross-Margining Account \38\ as if it was a 
Combined Portfolio. First, pursuant to Section 4(a) of the proposed 
Restated Agreement, each Clearing Organization would calculate the 
difference between the sum of the (x) ``Stand-Alone Margin 
Requirements'' \39\ for the CME Eligible Products and FICC Eligible 
Products, and (y) the Combined Portfolio of CME Eligible Products and 
FICC Eligible Products. Based on the above, each Clearing Organization 
would determine the percentage of margin savings that would be derived 
by it by margining the Combined Portfolio.
---------------------------------------------------------------------------

    \38\ Id. Also, FICC would utilize the same Value-at Risk 
(``VaR'') calculation method for the FICC Eligible Positions (see 
GSD Rule 4, supra note 4) and the CME Eligible Position (i.e., the 
same VaR engine for the cash positions and the futures positions).
    \39\ Pursuant to the proposed Restated Agreement, ``Stand-Alone 
Margin Requirement'' means, as to each Clearing Organization, the 
margin requirement that such Clearing Organization would calculate 
with respect to a Cross-Margining Account it carries as if 
calculated by such Clearing Organization without regard to this 
Agreement or another cross-margining agreement.'' FICC would 
calculate this requirement using a its VaR methodology, applying it 
also to the standalone CME portfolio, and the Combined Portfolio.
---------------------------------------------------------------------------

    Second, the Clearing Organizations would compare their respective 
margin savings percentages with one another, and, if the lesser of such 
margin savings percentage exceeds the minimum margin offset threshold 
\40\ agreed by the Clearing Organizations, each Clearing Organization 
would reduce the amount of margin required to be deposited by a Cross-
Margining Participant by the lower of such margin savings percentages 
(referred to as the Cross-Margining Participant's ``Margin 
Reduction''). If the respective margin savings percentages of both 
Clearing Organizations are less than the agreed

[[Page 48931]]

upon margin offset threshold, no Margin Reduction would be applied.\41\
---------------------------------------------------------------------------

    \40\ The Clearing Organizations would set the initial margin 
offset threshold at 1% (which may be subject to change) to prevent 
any negatively correlated portfolios and/or portfolios with little 
to no correlation to receive cross-margin benefit, which requires 
the operational coordination between the two Clearing Organizations 
in the event of Member default, and they would reserve the right to 
amend the threshold from time to time. Changes to the minimum margin 
offset threshold would be subject the requirements of the Clearing 
Agency Model Risk Management Framework, which addresses review of 
margin methodologies, such as the model that would be used for the 
proposed Restated Agreement.
    \41\ Supra note 36.
---------------------------------------------------------------------------

    Lastly, the Parties would agree that the Cross-Margin Requirement 
with respect to a Cross-Margining Participant may not be changed 
without the consent of both Clearing Organizations. Further, CME and 
FICC would agree to cause CME Eligible Products and FICC Eligible 
Products, respectively, to be cross-margined solely pursuant to the 
proposed Restated Agreement, and neither CME nor FICC would permit such 
Eligible Products to be subject to any other cross-margining 
arrangement.\42\ This feature will prevent underlying Eligible Products 
from being double-counted to reduce margin in another cross-margining 
program or account, and ensure that each Clearing Organization will 
have the appropriate amount of margin to satisfy obligations if a 
default occurs.
---------------------------------------------------------------------------

    \42\ See Section 4(b) of the proposed Restated Agreement 
(Calculation of Cross-Margining Requirements).
---------------------------------------------------------------------------

Proposed Changes Related to Default Management
1. The Liquidation Process--Overview
    Like the Existing Agreement, the proposed Restated Agreement would 
provide that either FICC or CME may at any time exercise any rights 
under its Rules to terminate, suspend or otherwise cease to act for or 
limit the activities of a Cross-Margining Participant (a ``Defaulting 
Member''). Upon such event (a ``Default Event''), the Clearing 
Organization that has taken the foregoing actions (referred to as the 
``Liquidating CO'') would be required to immediately notify the other 
Clearing Organization (referred to for purposes of this provision of 
the proposed Restated Agreement as the ``other Clearing Organization'') 
of the actions it has taken.\43\ Under the Existing Agreement, absent 
certain exceptions, both Clearing Organizations are required to 
promptly and prudently liquidate Eligible Positions of the Defaulting 
Member. However, in contrast to the Existing Agreement, the proposed 
Restated Agreement would provide a different approach to the 
liquidation process by delineating a sequence of coordinated steps the 
Clearing Organizations are required to take depending upon whether or 
not the other Clearing Organization elects to treat the Cross-Margining 
Participant as a Defaulting Member under its Rules. The objective of 
this proposed new approach is to improve the efficiency and 
effectiveness of the default management process and lead to greater 
coordination between the Clearing Organizations.
---------------------------------------------------------------------------

    \43\ See Section 7(a) of the proposed Restated Agreement 
(Suspension and Liquidation of Cross-Margining Participant).
---------------------------------------------------------------------------

One Clearing Organization Elects To Treat the Member as a Defaulting 
Member and the Other Clearing Organization Does Not
    The proposed Restated Agreement includes provisions to cover the 
scenario where one Clearing Organization (the ``Liquidating CO'') 
elects to treat the Cross-Margining Participant as a Defaulting Member, 
and the other Clearing Organization (the Non-Liquidating CO'') does 
not.\44\ Generally, the Non-Liquidating CO would provide the 
Liquidating CO with cash to cover the margin reduction provided under 
the proposed Restated Agreement. The purpose of such cash payment is to 
align the Defaulting Member's margin resources with its exposures at 
the Liquidating CO.
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    Specifically, the Non-Liquidating CO would be obligated to require 
the Defaulting Member to pay the Non-Liquidating CO in immediately 
available funds the sum of (x) its Margin Reduction at the Liquidating 
CO, and (y) its Margin Reduction at the Non-Liquidating CO, within one 
hour of demand. If the Non-Liquidating CO receives this payment in full 
from the Defaulting Member or otherwise, such as from the Non-
Liquidating CO, within such timeframe, the Non-Liquidating CO would be 
required, within one hour of such receipt, to pay the Liquidating CO in 
immediately available funds the Defaulting Member's Margin Reduction at 
the Liquidating CO. After the Non-Liquidating CO makes such payment in 
full, then, it would have no further obligations to the Liquidating CO 
with respect to the Default Event. If the Non-Liquidating CO does not 
receive this payment in full from the Defaulting Member or otherwise, 
within one hour of such receipt or other agreed upon timeframe, then 
the Non-Liquidating CO would cease to act for the Defaulting Member, 
and the provisions of the proposed Restated Agreement pertaining to the 
scenario where both Clearing Organizations treat the Member as a 
Defaulting Member (discussed immediately below) would apply.\45\
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

3. Both Clearing Organizations Elect To Treat the Member as a 
Defaulting Member
    If both Clearing Organizations determine to treat the Cross-
Margining Participant as a Defaulting Member, there are three possible 
liquidation routes under the proposed Restated Agreement the Clearing 
Organizations can take regarding a Defaulting Member. The following 
liquidation alternatives would be determined after evaluating the 
portfolio exposure, resources, hedging cost and approved through DTCC's 
default management governance process.
    First, the Clearing Organizations would attempt in good faith to 
conduct a joint liquidation in which the Parties jointly transfer, 
liquidate or close out the Eligible Positions in the Cross-Margining 
Accounts carried for the Defaulting Member (the ``Relevant 
Positions'').\46\
---------------------------------------------------------------------------

    \46\ See Section 7(b)(i) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Second, in the event a Clearing Organization determines that 
jointly transferring, liquidating or closing out the Relevant Positions 
is not feasible or advisable, the proposed Restated Agreement provides 
that either Clearing Organization may offer to buy-out the Relevant 
Positions, and any remaining collateral relating thereto, at the last 
settlement price for such positions immediately prior to the time such 
offer is made.\47\
---------------------------------------------------------------------------

    \47\ See Section 7(b)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Finally, if a Clearing Organization determines that it is not 
advisable or feasible to resolve the Default Event pursuant to the 
first or second options above, the proposed Restated Agreement provides 
that it shall so notify the other Clearing Organization. In such event, 
each Clearing Organization would promptly transfer, liquidate or 
otherwise close out the Eligible Positions in the Cross-Margining 
Account carried for the Defaulting Member at that Clearing 
Organization.\48\
---------------------------------------------------------------------------

    \48\ See Section 7(b)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Each of the foregoing liquidation routes is described in detail 
below.
a. Joint Liquidation
    A joint liquidation is optimal because it maximizes the efficiency 
and effectiveness of the liquidation process by enabling each Clearing 
Organization to recognize reduced risk by liquidating offsetting risk 
positions together. To the extent there is a joint liquidation, the 
proposed Restated Agreement provides for an exchange of variation 
margin during the course of the liquidation and loss sharing following 
liquidation. The exchange of variation margin during the liquidation 
process would be designed to address scenarios in which either CME or 
FICC has a payment obligation arising out of cross-margin positions

[[Page 48932]]

that could be covered by the variation margin gains on offsetting 
cross-margin positions held by the other Clearing Organization. The 
Existing Agreement has no such provisions, and they would be added to 
the proposed Restated Agreement to improve the efficiency of the 
default management process. Following liquidation, payments made as 
part of a cross-guaranty between FICC and CME would be designed to 
minimize total credit losses across the Clearing Organizations related 
to cross-margin positions. The Existing Agreement also includes a 
cross-guaranty and loss-sharing provisions but is determined based upon 
a significantly more complex formula for calculating closeout gains and 
losses post-liquidation than are included in the proposed Restated 
Agreement.
    VM Margin: The exchange of Variation Margin \49\ during the joint 
liquidation process under certain circumstances would be as follows:
---------------------------------------------------------------------------

    \49\ The proposed Restated Agreement defines ``Variation 
Margin'' to mean, with respect to the Cross-Margining Account of a 
Defaulting Member, the amounts owed to or by the Defaulting Member, 
as applicable, by or to a Clearing Organization due to the mark-to-
market movement arising from or related to the positions in the 
Defaulting Member's Cross-Margining Account at CME or the Defaulting 
Member's Cross-Margin Positions at FICC from the time immediately 
prior to a Default Event until the time the liquidation of a 
Defaulting Member is complete for both CME and FICC. See Section 1 
(Definitions) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a 
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain 
\50\ and an Other VM Gain \51\ with respect to a Defaulting Member 
(such Clearing Organization being the ``VM Payor''), and the other 
Clearing Organization has a Cross-Margin VM Loss with respect to a 
Defaulting Member (such Clearing Organization being the ``VM 
Receiver''), the proposed Restated Agreement provides that the VM Payor 
would make a payment to the VM Receiver in the amount of the VM 
Receiver's Cross-Margin VM Loss, but not to exceed the VM Payor's 
Cross-Margin VM Gain. The proposed Restated Agreement provides, 
however, that the VM Payor will not be required to make such payment to 
the extent it reasonably determines that the liquidation of the 
Defaulting Member will result in a loss to it following liquidation 
\52\ or that the VM Receiver will be limited by statute, court order or 
other applicable law from making the payment.\53\
---------------------------------------------------------------------------

    \50\ The proposed Restated Agreement defines ``Cross-Margin VM 
Gain'' or ``Cross-Margin VM Loss'' to mean, with respect to the 
Cross-Margining Account of a Defaulting Member, the amounts owed to 
or by the Defaulting Member, as applicable, by or to a Clearing 
Organization due to the mark-to-market movement arising from or 
related to the positions in the Defaulting Member's Cross-Margining 
Account at CME or the Defaulting Member's Cross-Margin Positions at 
FICC. See Section 1 (Definitions) of the proposed Restated 
Agreement.
    \51\ The proposed Restated Agreement defines ``Other VM Gain'' 
or ``Other VM Loss'' to mean, (x) with respect to a Defaulting 
Member of FICC, the amounts owed to or by the Defaulting Member, as 
applicable, by or to FICC due to the Funds-Only Settlement payments 
(as defined in the GSD Rules) arising from or related to the mark-
to-market movement of the portion of the Defaulting Member's GSD 
Accounts that does not include the positions in the Cross-Margining 
Account at FICC; and (y) with respect to a Defaulting Member of CME, 
the amounts owed to or by the Defaulting Member, as applicable, by 
or to CME arising from or related to the mark-to-market movement of 
the positions (excluding positions in IRS Contracts (as defined 
under CME's Rules)) or positions that are commingled with positions 
in IRS Contracts pursuant to CME Rule 8G831 in the Defaulting 
Member's accounts (but excluding its Cross-Margining Account) at 
CME. See Section 1 ``Definitions'' of the proposed Restated 
Agreement.
    \52\ See discussion of ``Net Loss'' below.
    \53\ See Section 7(c)(v)(1) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a 
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain 
and an Other VM Loss (such Clearing Organization being the ``VM 
Payor'') and the sum of these amounts is positive (hereinafter 
``Aggregate VM Gain''), and the other Clearing Organization has a 
Cross-Margin VM Loss with respect to a Defaulting Member (such Clearing 
Organization being the ``VM Receiver''), the proposed Restated 
Agreement provides that the VM Payor will make a payment to the VM 
Receiver in the amount of the VM Receiver's Cross-Margin VM Loss, but 
not to exceed the VM Payor's Aggregate VM Gain unless the Clearing 
Organizations otherwise agree that the VM Payor shall pay a higher 
amount. The proposed Restated Agreement provides, however, that the VM 
Payor will not be required to make such payment to the extent it 
reasonably determines that the liquidation of the Defaulting Member 
will result in a loss to it following liquidation or that the VM 
Receiver will be limited by statute, court order or other applicable 
law from making the payment.\54\
---------------------------------------------------------------------------

    \54\ See Section 7(c)(v)(2) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a 
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain 
and an Other VM Loss with respect to a Defaulting Member and the sum of 
these two amounts is negative, and the other Clearing Organization has 
a Cross-Margin VM Loss with respect to the Defaulting Member, the 
proposed Restated Agreement states that neither Clearing Organization 
will be required to make a payment unless otherwise agreed to by the 
Parties.\55\
---------------------------------------------------------------------------

    \55\ See Section 7(c)(v)(3) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Following the liquidation of a Defaulting Member, the VM Receiver 
must repay any variation margin payments it received from the VM 
Payor.\56\ Such repayment obligation, however, shall be netted and 
offset against the VM Payor's payment obligation pursuant to the loss 
sharing provisions in Section 7 of the Agreement, discussed immediately 
below.\57\
---------------------------------------------------------------------------

    \56\ A VM Receiver will only be required to pay such amount to 
the VM Payor if it is not prohibited by statute, court order or 
other applicable law from making such payment.
    \57\ See Section 7(c)(vi) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Loss Sharing: The sharing of losses following a joint liquidation 
would be calculated under the proposed Restated Agreement as follows:
     Each Clearing Organization would calculate its individual 
``Net Gain'' or individual ``Net Loss,'' if any, taking into account 
solely its individual ``Collateral on Hand'' and its individual 
``Liquidation Cost.'' These terms have specific meanings in the 
proposed Restated Agreement as follows:
    [cir] The proposed Restated Agreement defines ``Net Gain'' or ``Net 
Loss'' to mean, with respect to the Cross-Margining Account of a 
Defaulting Member held at a Clearing Organization, the sum of the (i) 
Collateral on Hand; and (ii) Liquidation Cost. If such amount is a 
positive number, a Clearing Organization shall be deemed to have a 
``Net Gain'' with respect to the relevant account and if such amount is 
a negative number, a ``Net Loss.'' \58\
---------------------------------------------------------------------------

    \58\ Supra note 31.
---------------------------------------------------------------------------

    [cir] The proposed Restated Agreement defines ``Collateral on 
Hand'' to mean the margin held with respect to the Cross-Margining 
Account of a Defaulting Member immediately prior to the time at which 
the Default Event occurred.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    [cir] The proposed Restated Agreement defines ``Liquidation Cost'' 
to mean the aggregate gain or loss realized in the liquidation, 
transfer, or management of Eligible Positions held by the Clearing 
Organization in the Cross-Margining Account of the Defaulting Member, 
including, without limitation, (i) any Variation Margin \60\ owed to 
the Defaulting Member by the Clearing Organization and unpaid (which 
shall constitute gains); (ii) any Variation Margin owed by the 
Defaulting Member

[[Page 48933]]

to the Clearing Organization and unpaid (which shall constitute 
losses); and (iii) any reasonable costs, fees and expenses incurred by 
the Clearing Organization in connection therewith.\61\
---------------------------------------------------------------------------

    \60\ The exchange of Variation Margin during a joint liquidation 
is discussed above.
    \61\ Supra note 31.
---------------------------------------------------------------------------

    The Clearing Organizations would determine whether the sum of the 
individual Net Gains and Net Losses results in a combined Net Gain or 
Net Loss. The Clearing Organizations would then allocate any combined 
Net Gain or Net Loss pro rata based on each Clearing Organization's 
``Share of the Cross-Margining Requirement'' \62\ (its ``Allocated Net 
Gain'' or ``Allocated Net Loss,'' as applicable).\63\
---------------------------------------------------------------------------

    \62\ Under the proposed Restated Agreement, the ``Share of the 
Cross-Margining Requirement'' in respect of a Clearing Organization 
is the ratio of (i) the margin required for the Cross-Margining 
Account at the Clearing Organization after taking into account the 
Margin Reduction to (ii) the total Cross-Margining Requirement 
across both Clearing Organizations.
    \63\ See Section 7(c)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    If a Clearing Organization has an individual Net Gain that is less 
than its Allocated Net Gain, an individual Net Loss that is greater 
than its Allocated Net Loss or an individual Net Loss when the joint 
liquidation resulted in a combined Net Gain (the ``worse-off party'') 
then the other Clearing Organization shall be required to pay to the 
worse-off party an amount equal to the difference between the worse-off 
party's individual Net Gain or Net Loss and its Allocated Net Gain and 
Allocated Net Loss.\64\
---------------------------------------------------------------------------

    \64\ See Section 7(c)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

b. Buy-Out
    As noted above, in the event a Clearing Organization determines 
that jointly transferring, liquidating, or closing out the Relevant 
Positions is not feasible or advisable, for example if a Member's 
portfolio has changed materially since the last cross margin 
calculation, any Clearing Organization (``X'') may, upon written notice 
to the other Clearing Organization (``Y''), offer to buy-out the 
Relevant Positions at the last settlement price for such positions 
immediately prior to the time such offer is made and any remaining 
collateral relating thereto from Y (which Y may accept or reject in its 
sole discretion). The value of the remaining collateral would reflect 
the last available price based on market conditions, which for FICC, 
would be obtained from its pricing vendor(s). Upon reviewing exposures 
of the defaulter's portfolio, the hedge or risk reduction that may be 
achieved through a buy-out and comparing the results to the available 
risk budget, or defaulter's margin, an economic decision would be made 
in consideration of a separate liquidation option. If such a buy-out 
occurs, then Y shall have no further obligations to X with respect to 
the Default Event. For the avoidance of doubt, the loss sharing 
provisions set forth in Default Management section of the Agreement 
would not apply.\65\
---------------------------------------------------------------------------

    \65\ See Section 7(b)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

c. Separate Liquidations
    If a Clearing Organization determines that it is not advisable or 
feasible to resolve the Default Event pursuant to a joint liquidation 
or a buy-out, it would notify the other Clearing Organization. In such 
event, each Clearing Organization shall promptly transfer, liquidate or 
otherwise close out the Eligible Positions in the Cross-Margining 
Account carried for the Defaulting Member at that Clearing 
Organization.\66\
---------------------------------------------------------------------------

    \66\ See Section 7(b)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    The loss sharing provisions that would be applicable under this 
separate liquidation scenario would be as follows:
     If, with respect to the Cross-Margining Account of the 
Defaulting Member, both Clearing Organizations have a Net Gain or a Net 
Loss, no payment will be due to either Clearing Organization in respect 
of the Guaranties between FICC and CME referred to in Sections 8 and 9 
of the proposed Restated Agreement.\67\
---------------------------------------------------------------------------

    \67\ See Section 7(d) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If either Clearing Organization has a Net Loss (the 
``worse-off party'') and the other has a Net Gain (the ``better-off 
party''), then the better-off party will pay the worse-off party the 
lesser of the Net Gain or the absolute value of the Net Loss.\68\
---------------------------------------------------------------------------

    \68\ See Sections 7(e) and (f) of the proposed Restated 
Agreement. The proposed Restated Agreement provides, however, that 
the better-off party shall only be required to pay the amount of 
such Net Loss to the worse-off party if it is not prohibited by 
statute, court order or other applicable law from making such 
payment.
---------------------------------------------------------------------------

    The proposed Restated Agreement would not retain language included 
in the Existing Agreement covering the fact that each Clearing 
Organization's calculation of Available Margin (as defined in the 
Existing Agreement) for loss sharing purposes is subject to such 
Clearing Organization's prior satisfaction of its obligations under the 
other cross-margining agreements and loss sharing arrangements that it 
may have listed on Appendix A.\69\ FICC and the CME are proposing to 
eliminate this priority which means that all margin amounts calculated 
pursuant to the proposed Restated Agreement would be available to cover 
a Clearing Organization's losses. As a result of this change, the 
proposed Restated Agreement would not include the priority provision 
nor the related Appendix A.
---------------------------------------------------------------------------

    \69\ See Appendix A to the Existing Agreement: (1) with respect 
to the CME, the cross-margining agreement between the CME, The 
Options Clearing Corporation (``OCC'') and New York Clearing 
Corporation dated June 1993 as amended from time to time; and (2) 
with respect to FICC, the multilateral netting contract and limited 
cross-guaranty agreement among The Depository Trust Company, FICC, 
National Securities Clearing Corporation and OCC dated January 1, 
2003, supra note 4.
---------------------------------------------------------------------------

Other Terms of the Proposed Restated Agreement
    The proposed Restated Agreement also would continue to include a 
number of other provisions intended to either generally maintain the 
usual and customary terms for an agreement of this type included in the 
Existing Agreement or update them to better reflect the Clearing 
Organizations' course of dealing and industry practices. For example, 
similar to the Existing Agreement,\70\ the proposed Restated Agreement 
would include a confidentiality provision reflecting each Clearing 
Organization's obligation not to disclose to a third-party the other 
Clearing Organization's Confidential Information except under certain 
circumstances. Under the proposed Restated Agreement, this provision 
would be updated to reflect that the Clearing Organizations' 
confidentiality obligations would survive three (3) years after the 
termination of the proposed Restated Agreement. In addition, this 
provision would state that an actual or threatened violation by a 
Clearing Organization of its confidentiality obligations would entitle 
the other Clearing Organization to seek immediate injunctive and other 
equitable relief, without the necessity of proving monetary damages or 
posting bond or other security. The updated confidentiality provision 
included in the proposed Restated Agreement (Section 10, 
Confidentiality) would replace the similar provision in the Existing 
Agreement.
---------------------------------------------------------------------------

    \70\ See Section 9 of the Existing Agreement, 
``Confidentiality,'' supra note 4.
---------------------------------------------------------------------------

    Additionally, the proposed Restated Agreement would retain the 
indemnification provision included in the Existing Agreement, but for 
purposes of clarity and simplification, would revise the language in 
that section that describes the administrative process between the 
Clearing

[[Page 48934]]

Organizations regarding notification and control of the defense of an 
indemnification claim.\71\
---------------------------------------------------------------------------

    \71\ See Section 12(c) (Indemnification) of the proposed 
Restated Agreement.
---------------------------------------------------------------------------

    The proposed Restated Agreement would include some revisions to the 
language in the Existing Agreement and would add a provision covering 
the limitation of liability between FICC and CME. Specifically, a 
clause would be added to provide that, to the fullest extent permitted 
under applicable law, and other than with respect to a Clearing 
Organization's breach of its confidentiality obligations, in no case 
would either Clearing Organization be liable to the other for any 
indirect, consequential, incidental, punitive, exemplary or special 
damages.\72\ The purpose of this new provision is to provide clear and 
specific terms regarding each Clearing Organization's potential 
liability to the other for these types of damages under the proposed 
Restated Agreement.
---------------------------------------------------------------------------

    \72\ See Section 17 (Liability) of the proposed Restated 
Agreement.
---------------------------------------------------------------------------

    The proposed Restated Agreement would add certain usual and 
customary provisions for an agreement of this type that are not 
contained in the Existing Agreement, including that (i) no remedy 
conferred by any provision of the proposed Restated Agreement is 
intended to be exclusive of any other remedy,\73\ (ii) no provision is 
intended, expressly or by implication, to purport to confer a benefit 
or right of action upon a third-party,\74\ and (iii) each Clearing 
Organization waives any right it may have to a trial by jury with 
respect to any litigation directly or indirectly arising out of, under 
or in connection with the proposed Restated Agreement, or transactions 
contemplated by it.\75\ Also, the proposed Restated Agreement would 
include updates to the relevant FICC and CME contacts to whom notices 
would be directed.
---------------------------------------------------------------------------

    \73\ See Section 18(l) (Remedies Not Exclusive) of the proposed 
Restated Agreement.
    \74\ See Section 18(m) (No Third-Party Beneficiaries) of the 
proposed Restated Agreement.
    \75\ See Section 18(n) (Waiver of Jury Trial) of the proposed 
Restated Agreement.
---------------------------------------------------------------------------

    In order to simplify and improve its structure, the proposed 
Restated Agreement would consolidate into a new separate section,\76\ 
language addressing the fact that the proposed Restated Agreement, 
together with GSD Rules, CME Rules, the Clearing Member Agreement and 
any other agreements between FICC, CME and a Cross-Margining 
Participant or any Affiliate thereof is, for purposes of Title IV, 
Subtitle A of the Federal Deposit Insurance Corporation Improvement Act 
of 1991 (12 U.S.C. 4401-4407) a ``netting contract.'' This same 
language is currently included in the Existing Agreement but is broken 
out across multiple sections. This provision would also state that 
``all payments made or to be made hereunder, including payments made in 
accordance with this Agreement in connection with the liquidation of a 
Cross-Margining Participant are ``covered contractual payment 
obligations'' or ``covered contractual payment entitlements,'' as the 
case may be, as well as ``covered clearing obligations;'' and for 
purposes of the Bankruptcy Code and the Federal Deposit Insurance Act 
is considered a ``master netting agreement'' with respect to some or 
all of ``swap agreements,'' ``commodity contracts,'' ``forward 
contracts,'' and ``securities contracts.'' \77\
---------------------------------------------------------------------------

    \76\ See Section 11 (FDICIA) of the proposed Restated Agreement.
    \77\ Id.
---------------------------------------------------------------------------

    Further, the proposed Restated Agreement would remove the 
arbitration clause included in the Existing Agreement in its 
entirety.\78\ Instead, the proposed Restated Agreement would add 
language to the Governing Law provision stating disputes under the 
agreement would be resolved in the federal or state courts located in 
New York, New York, including the United States District Court for the 
Southern District of New York.\79\ FICC believes that New York venue 
and forum are appropriate because New York courts can more efficiently 
and effectively adjudicate disputes arising under an agreement governed 
by New York law. In addition, New York venue and forum is generally 
consistent with FICC's current approach to dispute management.
---------------------------------------------------------------------------

    \78\ See Section 16 of the Existing Agreement, ``Arbitration,'' 
supra note 4.
    \79\ See Section 18(c) (Governing Law) of the proposed Restated 
Agreement.
---------------------------------------------------------------------------

B. Delayed Implementation of the Proposal
    The proposed rule change would become operative within 180 business 
days after the later date of the Commission's approval of this proposed 
rule change, and the Commodity Futures Trading Commission's approval of 
the CME's proposed rule change (collectively, the ``Date of Regulatory 
Approval''). Not later than two (2) business days following the date of 
the Commission's approval of this proposed rule change, FICC would add 
a legend to the proposed Restated Agreement to state that the specified 
changes are approved but not yet operative. The legend would also 
include the file numbers of the approved proposed rule change, and 
would state that once operative, the legend would automatically be 
removed from the proposed Restated Agreement. FICC will issue a notice 
to members providing notice of the specific operative date at least two 
weeks prior to such date.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with 
section 17A of the Act \80\ and the rules thereunder applicable to 
FICC. Section 17A(b)(3)(F) of the Act, requires, in part, that the 
rules of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\81\ FICC is proposing 
to replace the Existing Agreement with the proposed Restated Agreement. 
As described in the discussion of the proposed changes to the 
calculation of cross-margin requirements above, the proposed Restated 
Agreement would, among other things, revise and enhance the method for 
calculating the margin reduction that would apply to a Cross-Margining 
Participant's Eligible Positions, including requiring more frequent 
exchange of Eligible Position information between CME and FICC that is 
used to collateralize risk exposures. The proposed new methodology 
would simplify the overall margin calculation process by eliminating 
the need for application of offset classes and the conversion of CME 
Eligible Products into equivalent GSD Treasury security products. By 
enhancing the method for calculating the margin reduction as described 
above, FICC believes that a more appropriate margin reduction would be 
calculated. As such, FICC believes that the proposed rule change would 
assure the safeguarding of securities and funds which are in the 
custody and control of FICC or for which it is responsible.\82\
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78q-1.
    \81\ 15 U.S.C. 78q-1(b)(3)(F).
    \82\ Id.
---------------------------------------------------------------------------

    In addition, as described in the discussion of a joint liquidation 
above, the proposed Restated Agreement would enhance the efficiency of 
the default management process between FICC and CME by providing for 
the exchange of Variation Margin under certain circumstances during the 
course of a liquidation and by improving the efficiency and 
effectiveness of the default management and loss sharing process. By 
enhancing these processes, FICC believes that overall default losses

[[Page 48935]]

could be minimized and thereby reduce the potential risk to non-
defaulting members. As such, FICC believes that the proposed rule 
change would assure the safeguarding of securities and funds which are 
in the custody and control of FICC or for which it is responsible.
    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions.\83\ FICC believes 
that the proposal is consistent with this requirement for the following 
reasons.
---------------------------------------------------------------------------

    \83\ Id.
---------------------------------------------------------------------------

    First, the proposal to amend the list of CME products that would be 
eligible for cross-margining would expand the potential opportunity for 
cross-margin benefits that Cross-Margining Participants receive.
    Second, the removal of the operational details to an SLA would 
streamline the proposed Restated Agreement by removing information that 
may not be relevant to the Cross-Margining Participants and would place 
this information in a separate document that the Clearing Organizations 
can more easily amend as their operational needs evolve.
    Third, the proposal to amend the margin calculation would simplify 
the calculation and provide transparency.
    Fourth, the proposed liquidation procedures and loss sharing 
arrangements would provide transparency into the steps that the 
Clearing Organizations would take during a liquidation and how gains 
and losses would be allocated.
    Fifth, the revisions to various provisions throughout the proposed 
Restated Agreement would update provisions to ensure that they are 
reflective of the current standards and industry practices that each 
Clearing Organization adheres to in the ordinary course of business.
    As such, given the foregoing, FICC believes that the proposed rule 
change is designed to remove impediments to and perfect the mechanism 
of a national system for the prompt and accurate clearance and 
settlement of securities transactions.\84\
---------------------------------------------------------------------------

    \84\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires a covered clearing 
agency to establish a risk-based margin system that, at a minimum 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and 
market.\85\ As described above, the proposed Restated Agreement would 
revise and enhance the method for calculating the margin reduction that 
would apply to a Cross-Margining Participant's Eligible Positions, 
including requiring more frequent exchange of Eligible Position 
information between CME and FICC that is used to collateralize risk 
exposures. The proposed new methodology would simplify the overall 
margin calculation process by eliminating the need for application of 
offset classes and the conversion of CME Eligible Products into 
equivalent GSD Treasury security products. By enhancing the method for 
calculating the margin reduction as described above, FICC believes that 
a more appropriate margin reduction would be calculated and reduce the 
complexity of the calculations. Accordingly, FICC believes the proposed 
changes are reasonably designed to establish a risk-based margin system 
that, at a minimum considers, and produces margin levels commensurate 
with, the risks and particular attributes of each relevant product, 
portfolio, and market in a manner consistent with Rule 17Ad-
22(e)(6)(i).\86\
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    \85\ 17 CFR 240.17Ad-22(e)(6)(i).
    \86\ Id.
---------------------------------------------------------------------------

    As described above in the discussion of a joint liquidation, FICC 
and CME would agree to put in place a separate SLA, which would include 
specified timeframes, to exchange on each Business Day, such 
information as may reasonably be required in order to value the 
positions in the Cross-Margining Account and to calculate the Cross-
Margin Requirement for each Cross-Margining Participant. The SLA would 
also include operational processes consistent with the default 
management provisions set forth in the proposed Restated Agreement. By 
agreeing to share certain information as described herein, FICC 
believes that each Clearing Organization would be able to effectively 
identify, monitor, and manage risks that may be presented by the 
proposed Restated Agreement. Accordingly, FICC believes the proposed 
changes are reasonably designed to identify, monitor, and manage risks 
related to the link established between FICC and CME in a manner 
consistent with Rule 17Ad-22(e)(20) under the Act.\87\
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    \87\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed rule change to replace the Existing 
Agreement with the Restated Agreement could have an impact on 
competition. Specifically, FICC believes that the proposed changes 
could both burden and promote competition because the margin savings 
for the Cross-Margining Participants (and therefore their margin 
requirements) would change under the proposed Restated Agreement. As 
noted in the Executive Summary in Item 3(a) above[sic], the margin 
savings under the Existing Agreement range from 0.1% to 17.4%, whereas 
the study conducted by FICC under the proposed Restated Agreement 
showed margin savings in the range of 0% to 36.6%. Some Cross-Margining 
Participants could see an increase in margin savings under the proposed 
rule change and some could see a decrease in margin savings under the 
proposed rule change. When the proposal results in decreased margin 
savings and therefore higher margin requirements, the proposed rule 
change could burden competition for Cross-Margining Participants that 
have lower operating margins or higher costs of capital compared to 
other Members. When the proposal results in higher margin savings and 
therefore lower margin requirements, the proposed rule change could 
promote competition by resulting in lower operating costs and capital 
efficiencies for Cross-Margining Participants. FICC does not believe 
that these impacts are significant because based on FICC's analysis, 
the proposal would not result in a significant change to the average 
margin requirement of Cross-Margining Participants.
    Regardless of whether the burden on competition discussed above 
could be deemed significant, FICC believes that any related burden on 
competition would be necessary and appropriate, as permitted by section 
17A(b)(3)(I) of the Act, for the following reasons.\88\
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    \88\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes that any burden on competition would be necessary in 
furtherance of the Act, specifically section 17A(b)(3)(F) of the 
Act.\89\ As stated above, the proposed Restated Agreement, would, among 
other things, revise and enhance the method for calculating the margin 
reduction that would apply to a Cross-Margining Participant's Eligible 
Positions, including requiring more frequent exchange of Eligible 
Position information between CME and FICC that is used to collateralize 
risk exposure. The proposed new methodology would simplify the overall 
margin calculation process by eliminating the need for application of 
offset classes and the conversion of CME Eligible Products

[[Page 48936]]

into equivalent GSD Treasury security products. By enhancing the method 
for calculating the margin reduction as described above, FICC believes 
that a more appropriate margin reduction would be calculated. 
Therefore, FICC believes this proposed change is consistent with the 
requirements of section17A(b)(3)(F) of the Act, which requires that the 
Rules be designed to assure the safeguarding of securities and funds 
that are in FICC's custody or control or for which it is 
responsible.\90\
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    \89\ 15 U.S.C. 78q-1(b)(3)(F).
    \90\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed rule change would also support FICC's 
compliance with Rule 17Ad-22(e)(6)(i) under the Act, which requires a 
covered clearing agency to establish a risk-based margin system that, 
at a minimum considers, and produces margin levels commensurate with, 
the risks and particular attributes of each relevant product, 
portfolio, and market.\91\ By enhancing the method for calculating the 
margin reduction as described above, FICC believes that a more 
appropriate margin reduction would be calculated and would reduce the 
complexity of the calculations. Accordingly, FICC believes the proposed 
changes are reasonably designed to establish a risk-based margin system 
that, at a minimum considers, and produces margin levels commensurate 
with, the risks and particular attributes of each relevant product, 
portfolio, and market in a manner consistent with Rule 17Ad-
22(e)(6)(i).\92\
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    \91\ 17 CFR 240.17Ad-22(e)(6)(i).
    \92\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed rule change would support FICC's 
compliance with Rule 17Ad-22(e)(20) under the Act.\93\ Specifically, as 
described above, FICC and CME would agree to put in place a separate 
SLA, which would cover information exchange between the two parties and 
would also include operational processes consistent with the default 
management provisions set forth in the proposed Restated Agreement. By 
agreeing to the SLA, FICC believes that it would be able to effectively 
identify, monitor, and manage risks that may be presented by the 
proposed Restated Agreement. Accordingly, FICC believes the proposed 
changes are reasonably designed to identify, monitor, and manage risks 
related to the link established between FICC and CME in a manner 
consistent with Rule 17Ad-22(e)(20) under the Act.\94\
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    \93\ 17 CFR 240.17Ad-22(e)(20).
    \94\ Id.
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    FICC believes that the above-described burden on competition that 
could be created by the proposed changes would be appropriate in 
furtherance of the Act because such changes have been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible, as 
described in detail above. The proposed Restated Agreement has been 
designed to allow FICC to recognize the offsetting value of positions 
maintained by Cross-Margining Participants at the two Clearing 
Organizations for margin purposes by using a risk-based margining 
approach that would produce margin levels commensurate with, the risks 
and particular attributes of each relevant product, portfolio and 
market. As such, by enhancing the method for calculating the margin 
reduction as described above, FICC believes the proposal is 
appropriately designed to meet its risk management goals and its 
regulatory obligations.
    Therefore, as described above, FICC believes the proposed changes 
are necessary and appropriate in furtherance of FICC's obligations 
under the Act, specifically section 17A(b)(3)(F) of the Act \95\ and 
Rule 17Ad-22(e)(6)(i) and Rule 17Ad-22(e)(20) under the Act.\96\
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    \95\ 15 U.S.C. 78q-1(b)(3)(F).
    \96\ 17 CFR 240.Ad-22(e)(6)(i), (e)(20).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    FICC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing[sic], as required by Form 
19b-4 and the General Instructions thereto. Persons submitting comments 
are cautioned that, according to Section IV (Solicitation of Comments) 
of the Exhibit 1A in the General Instructions to Form 19b-4, the 
Commission does not edit personal identifying information from comment 
submissions. Commenters should submit only information that they wish 
to make available publicly, including their name, email address, and 
any other identifying information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submitcomments. General questions 
regarding the rule filing process or logistical questions regarding 
this filing should be directed to the Main Office of the Commission's 
Division of Trading and Markets at [email protected] or 202-
551-5777. FICC reserves the right to not respond to any comments 
received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2023-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2023-010. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public

[[Page 48937]]

Reference Room, 100 F Street NE, Washington, DC 20549, on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of FICC and on DTCC's website (dtcc.com/legal/sec-rule-filings).
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-FICC-2023-010 and should 
be submitted on or before August 18, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\97\
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    \97\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-15981 Filed 7-27-23; 8:45 am]
BILLING CODE 8011-01-P