Self-Regulatory Organizations; the Fixed Income Clearing Corporation; Order Granting Approval of Proposed Rule Change To Amend and Restate the Cross-Margining Agreement Between FICC and CME, 63185-63189 [2023-19839]
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Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98327; File No. SR–FICC–
2023–010]
Self-Regulatory Organizations; the
Fixed Income Clearing Corporation;
Order Granting Approval of Proposed
Rule Change To Amend and Restate
the Cross-Margining Agreement
Between FICC and CME
September 8, 2023.
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I. Introduction
On July 17, 2023, the Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change SR–FICC–2023–
010 (‘‘Proposed Rule Change’’) pursuant
to section 19(b) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 1 and Rule 19b–4 2 thereunder to
change the terms of its cross-margining
arrangement with the Chicago
Mercantile Exchange Inc. (‘‘CME’’).3 The
Proposed Rule Change was published
for public comment in the Federal
Register on July 28, 2023.4 The
Commission has received no comments
regarding the Proposed Rule Change.
This order approves the Proposed Rule
Change.
II. Background
FICC is a central counterparty
(‘‘CCP’’), which means it interposes
itself as the buyer to every seller and
seller to every buyer for the financial
transactions it clears. FICC operates two
divisions: the Government Securities
Division (‘‘GSD’’) and the MortgageBacked Securities Division (‘‘MBSD’’).
GSD provides trade comparison, netting,
risk management, settlement, and
central counterparty services for the
U.S. Government securities market. As
such, FICC is exposed to the risk that
one or more of its members may fail to
make a payment or to deliver securities.
A key tool that FICC uses to manage
its credit exposures to its members is
the daily collection of margin from each
member. A member’s margin is
designed to mitigate potential losses
associated with liquidation of the
member’s portfolio in the event of that
member’s default. The aggregated
amount of all GSD members’ margin
constitutes the GSD Clearing Fund,
which FICC would be able to access
should a defaulted member’s own
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Notice of Filing infra note 4, at 88 FR 48926.
4 Securities Exchange Act Release No. 97969 (July
24, 2023), 88 FR 48926 (July 28, 2023) (File No. SR–
FICC–2023–010) (‘‘Notice of Filing’’).
2 17
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margin be insufficient to satisfy losses to
FICC caused by the liquidation of that
member’s portfolio. Each member’s
margin consists of a number of
applicable components, including a
value-at-risk (‘‘VaR’’) charge (‘‘VaR
Charge’’) designed to capture the
potential market price risk associated
with the securities in a member’s
portfolio. The VaR Charge is typically
the largest component of a member’s
margin requirement. The VaR Charge is
designed to cover FICC’s projected
liquidation losses with respect to a
defaulted member’s portfolio at a 99
percent confidence level.
Margin requirements are typically
designed, in part, to recognize the
potential relationship between products
in a member’s portfolio (e.g., some
products may naturally gain value when
others lose value). Members may,
however, hold assets or enter into
transactions that reduce risk, but are not
visible to the CCP. For example, a
market participant might purchase a
debt security, and at the same time,
contract to sell the same security in the
future. The risk to the market
participant is combination of these two
offsetting transactions as opposed to the
risk of each added together because it is
unlikely that both positions would lose
value at the same time under normal
market conditions.
To recognize potential offsets in the
risk presented by related products, FICC
has an ongoing cross-margining
arrangement with CME, which acts as a
CCP for futures related to the debt
instruments that FICC clears.5 The
cross-margining arrangement is
governed by a contract (the ‘‘Existing
Agreement’’) that, among other things,
defines the methodology by which FICC
and CME determine offsets between
cleared products that could reduce the
margin requirement of an FICC
member.6 FICC and CME have
negotiated a new agreement (the
‘‘Restated Agreement’’) that FICC
proposes to adopt to govern the crossmargining arrangement between FICC
and CME.
III. Description of the Proposed Rule
Change
The proposed changes to the crossmargining arrangement are primarily
5 CME provides central counterparty services for
futures, options, and swaps. See Financial Stability
Oversight Council (‘‘FSOC’’) 2012 Annual Report,
Appendix A, https://home.treasury.gov/system/
files/261/here.pdf (last visited July 17, 2023).
6 The Existing Agreement is incorporated in the
GSD Rules available at www.dtcc.com/legal/rulesand-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.
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63185
designed to (i) expand the scope of CME
products eligible for cross-margining,
(ii) replace the methodology for
calculating the margin reductions
available to FICC’s members; 7 and (iii)
improve the default management and
loss sharing processes that FICC and
CME would engage in if a common
member were to default. FICC also
proposes relocating certain timing and
operational aspects of the cross-margin
arrangement to a supporting service
level agreement (the ‘‘SLA’’).8 For
example, the SLA would cover
operational issues such as the creation
and maintenance of special accounts for
managing settlement and liquidation of
a defaulting common member’s cross
margin positions as well as the
operational steps involved in managing
the default of a common member. The
SLA would also define the times by
which FICC and CME would be
expected to exchange certain
information and reports.
The following sections describe the
proposed changes to the crossmargining arrangement in more detail.
A. Products Eligible for Cross-Margining
The margin reductions provided by
FICC and CME to common members are
based on the relationship between the
products that each CCP clears. Only
products specified in the Existing
Agreement currently may be considered
when determining margin reductions
(the ‘‘Eligible Products’’). As noted
above, in the Restated Agreement, FICC
proposes to expand the scope of CME
products eligible for cross-margining.9
FICC also proposes to reduce the scope
of products it clears that would be
eligible for cross-margining.10 The
7 FICC provided data demonstrating that the
proposal would likely increase the range of
potential reduction in margin related to crossmargining positions. 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.
8 FICC provided the SLA in a confidential Exhibit
3 to File No. SR–FICC–2023–010.
9 The following CME products would become
eligible for cross-margining: CBT 3YR 3-year TNotes 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. See Notice of Filing,
88 FR at 48928, n.14. At the same time, certain CME
products would no longer be eligible due to lack of
use under the current arrangement. Id.
10 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). See
Notice of Filing, 88 FR at 48929, n.29. U.S. Treasury
notes and bonds cleared by FICC would continue
to be eligible for cross-margining. See Notice of
Filing, 88 FR at 48929.
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combined effect of the proposed
changes to products eligible for crossmargining would expand the potential
reductions members could receive
through cross-margining program.11 The
new set of products eligible for crossmargining would be listed in exhibits to
the Restated Agreement.12
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B. Methodology for Margining CrossMargin Portfolios
In addition to changing the set of
products eligible for cross-margining,
FICC proposes replacing the
methodology for calculating margin
requirements for cross-margined
positions. The proposed methodology is
designed to more accurately estimate
the risk presented by the cross-margined
positions. Margin requirements set by
the proposed methodology would allow
for, on average, a wider range of margin
reductions; 13 however, because of the
increased accuracy, the proposed
methodology would not reduce FICC’s
ability to cover the credit risk posed by
its members.14
The proposed methodology is also
less complex than the current
methodology. FICC proposes to
calculate the margin reduction from
cross-margining based on the combined
portfolio of eligible products of a
common member (i.e., both the products
cleared at FICC and the related products
cleared at CME) with a VaR
methodology. The proposed
11 FICC provided data demonstrating that the
proposed change in eligible products would have
reduced the average daily margin requirements by
approximately 1.33 percent for the small set of
members who participated in the cross-margining
program. 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.
12 Future changes to FICC’s rules, such as the
terms of the Restated Agreement, are outside the
scope of this proposal. The Restated Agreement and
the SLA provide a mechanism for changing the list
of Eligible Products; however, the agreement would
not alter FICC’s filing obligations pursuant to
section 19(b) of the Exchange Act or section 806(e)
of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010. See 15 U.S.C.
78s(b) and 12 U.S.C. 5465(e).
13 For the small set of members involved in crossmargining, the proposed change would widen the
potential range of margin reductions. See Notice of
Filing, 88 FR at 48927. Specifically, the average
range of reductions to total margin was 0.1 percent
to 17.4 percent under the current methodology, and
would have been 0 percent to 36.6 percent under
the proposed methodology. Id. The overall
reduction to margin at FICC would have been
significantly smaller because cross-margining
related margin requirements account for only small
amount of total margin requirements on average.
See Notice of Filing, 88 FR at 48927, n.10.
14 Backtesting data showed that, even with the
broadened range of margin reductions, FICC’s
ability to cover exposures presented by members
would have improved. FICC provided backtesting
data in a confidential Exhibit to File No. SR–FICC–
2023–010.
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methodology calculates portfolio margin
reductions based on correlations at the
security level. FICC and CME would
separately calculate the potential margin
reduction resulting from offsetting
positions in a common member’s
portfolio using their respective margin
methodologies and agree to reduce the
member’s margin requirement by the
more conservative amount (i.e., the
smaller reduction). Further, FICC
proposes to apply such a margin
reduction only if it exceeds a minimum
threshold.15
Conversely, the current methodology
involves a series of steps to allow FICC
and CME to separately consider offsets
for their respective products. Such steps
include the conversion of products into
other products to facilitate comparison
of a common member’s Treasury and
futures contracts (e.g., FICC would
convert CME products into equivalent
FICC products). The current
methodology also requires FICC and
CME to group products by maturity into
‘‘Offset Classes’’ to facilitate the
calculation of a member’s margin
reduction. As noted above, the current
process is complex and produces less
accurate offsets that could negatively
affect FICC’s ability to cover the
exposures presented by its members.
C. Default Management and Loss
Sharing
FICC proposes to strengthen its
default management coordination with
CME and to simplify the sharing of
losses arising out of a common member
default. The Restated Agreement would
provide three potential default
management paths and would favor
joint action by FICC and CME as a first,
best option. In contrast, the Existing
Agreement merely seeks to align the
time at which the CCPs liquidate a
common member’s positions. With
regard to loss sharing, the Restated
Agreement provides for a relatively
simple division of gains and losses.
Further, the Restated Agreement would
align cashflows through the exchange of
variation margin, which is not
contemplated by the Existing
Agreement.
Default Management Coordination:
The proposed changes would simplify
the scenario in which only one of the
CCPs suspends a common member by
15 The threshold would initially be set at 1
percent to prevent any negatively correlated
portfolios or portfolios with little to no correlation
to receive cross-margin benefit because of the
operational coordination required to provide such
benefit. See Notice of Filing, 88 FR at 48930, n.40.
Additionally, FICC provided information pertaining
to thresholds for the maximum margin reduction
allowable under the proposed rule change as well.
See Notice of Filing, 88 FR at 48927, n.10.
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requiring the common member to repay
the margin reduction realized under the
cross-margin arrangement.16 If the
common member fails to pay back the
margin reduction, then the CCPs must
both suspend and liquidate the
member’s portfolio.17 In the event that
both FICC and CME suspend a common
member, the Restated Agreement is
designed to facilitate joint liquidation of
common member’s cross-margin
portfolio. The Existing Agreement
requires only that FICC and CME make
reasonable efforts to coordinate when
off-setting positions are closed out and
to report losses to each other. In
contrast, the Restated Agreement would
require in the first instance a good faith
attempt to jointly transfer, liquidate, or
close-out positions. The Restated
Agreement would further describe
alternatives where joint liquidation is
either infeasible or inadvisable,
including separate liquidation similar to
what is contemplated under the Existing
Agreement.18
Loss Sharing. The Restated Agreement
would simplify loss sharing in the event
of a common member default and would
introduce a new feature to align
cashflows during default management.
As stated above, the Restated Agreement
is designed to facilitate joint default
management by FICC and CME. In the
event the CCPs jointly transfer,
liquidate, or close-out the common
member’s cross-margin positions, if one
CCP faces a loss greater than (or gain
less than) their share of total losses (or
gains), the other CCP would pay the
difference to ensure that each CCP was
responsible for its respective portion of
losses or gains.19
In the case of a joint liquidation, the
Restated Agreement would also provide
for an exchange of variation margin.
16 For example, assume that FICC suspends
Member A, but CME does not. CME must require
Member A to pay both the margin reduction
provided by FICC (which CME passes to FICC) and
the margin reduction provided by CME (which is
retained by CME). Such a payment would provide
each CCP with the collateral it would have
collected if the common member did not participate
in the cross-margining arrangement.
17 In contrast, the provisions of the Existing
Agreement set out a complex series of conditional
statements and calculations that flow into further
loss sharing provisions in the event that only one
CCP suspends a common member.
18 The Restated Agreement would allow for either
FICC or CME to buy-out the other with regard to
the cross-margined positions of the defaulter.
Failing joint action or buy-out, the Restated
Agreement allows for separate liquidation followed
by loss sharing, similar to the provisions of the
Existing Agreement.
19 Specifically, FICC and CME would each
calculate their respective net gain or loss as well as
the overall combined gain or loss across the CCPs
to determine their respective allocation of losses or
gains arising out the liquidation.
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Such an exchange would improve the
efficiency of the default management
process by aligning cashflows in a
scenario in which either CME or FICC
has a payment obligation arising out of
cross-margin positions that could be
covered by the variation margin gains
on offsetting cross-margin positions
held by the other CCP. The Existing
Agreement does not contemplate any
exchange of variation margin between
FICC and CME.
The Restated Agreement would also
simplify the sharing of losses where
FICC and CME liquidate the defaulter’s
cross-margin positions separately. In the
case of separate liquidations, if either
FICC or CME has a net gain and the
other has a net loss, then the CCP with
the net gain would make a payment to
the CCP with the net loss. Such
payment would be the lesser of the net
gain or net loss realized by the CCPs.20
IV. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Exchange
Act directs the Commission to approve
a proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to such
organization.21 After carefully
considering the Proposed Rule Change,
the Commission finds that the proposal
is consistent with the requirements of
the Exchange Act and the rules and
regulations thereunder applicable to
FICC. More specifically, the
Commission finds that the proposal is
consistent with section 17A(b)(3)(F) of
the Exchange Act,22 and Rules 17Ad–
22(e)(6) and (e)(20) 23 thereunder, as
described in detail below.
A. Consistency With Section
17A(b)(3)(F) of the Exchange Act
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Section 17A(b)(3)(F) of the Exchange
Act requires, among other things, that
the rules of a clearing agency be
designed to remove impediments to and
help perfect the mechanism of a
national system for the prompt and
accurate clearance and settlement of
securities transactions; and to foster
cooperation and coordination with
persons engaged in the clearance and
settlement of securities transactions.24
20 In the event that either FICC or CME buys out
the other’s cross-margin positions and related
collateral, no loss sharing would occur.
21 15 U.S.C. 78s(b)(2)(C).
22 15 U.S.C. 78q–1(b)(3)(F).
23 17 CFR 240.17Ad–22(e)(6) and 17 CFR
240.17Ad–22(e)(20).
24 15 U.S.C. 78q–1(b)(3)(F).
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The Commission has historically
supported and approved crossmargining at clearing agencies and has
recognized the potential benefits of
cross-margining systems, which include
freeing capital through reduced margin
requirements, reducing clearing costs by
integrating clearing functions, reducing
clearing agency risk by centralizing
asset management, and harmonizing
liquidation procedures.25 The
Commission has encouraged crossmargining arrangements as a way to
promote more efficient risk management
across product classes.26 Crossmargining arrangements may be
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
accurate clearance and settlement of
securities through increased
efficiencies.27
The Commission continues to view
cross-margining programs as consistent
with clearing agency responsibilities
under section 17A of the Exchange
Act.28 Cross-margining programs
enhance member liquidity and systemic
liquidity both in times of normal trading
and in times of market stress by
reducing margin requirements for
members, which could prove crucial in
maintaining member liquidity during
periods of market volatility, and
enhancing market liquidity as a
whole.29 By enhancing market liquidity,
cross-margining arrangements remove
impediments to and help perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions.30
Based on a review of the record, and for
the reasons described below, the
Commission believes that the Proposed
Rule Change is consistent with
removing of impediments to and
helping to perfect the mechanism of a
25 See Securities Exchange Act Release No. 63986
(Feb. 28, 2011), 76 FR 12144, 12153 (Mar. 4, 2011)
(File No. SR–FICC–2010–09) (approving the
introduction of cross-margining for positions held
at FICC and New York Portfolio Clearing, LLC)
(citations omitted) (‘‘NYPC Order’’).
26 See id. (citations omitted).
27 See id.
28 See Securities Exchange Act Release No. 90464
(Nov. 19, 2020), 85 FR 75384, 75386 (Nov. 25, 2020
(File No. SR–OCC–2020–010) (approving a second
amended and restated cross-margining agreement
between the Options Clearing Corp. and CME);
Securities Exchange Act Release No. 38584 (May 8,
1997), 62 FR 26602, 26604–05 (May 14, 1997) (File
No. SR–OCC–97–04) (establishing a cross-margining
agreement with the Options Clearing Corp., CME,
and the Commodity Clearing Corporation).
29 See id.
30 See id. See also NYPC Order at 12153.
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63187
national system for the prompt and
accurate clearance and settlement of
securities transactions as well as
fostering cooperation and coordination
with persons engaged in the clearance
and settlement of securities
transactions.
As described above, FICC proposes to
expand the set of products accepted as
part of its cross-margining arrangement
with CME. Expanding the set of Eligible
Products will increase the opportunities
to reduce member margin requirements,
which could support the maintenance of
market participants’ liquidity during
periods of market volatility. The
expansion of product eligibility would
also support market participants’ use of
the national system for the prompt and
accurate clearance and settlement
without being impeded by the market
structure in which different CCPs serve
different asset classes.
Also as described above, the proposed
changes would reduce margin
requirements overall by a small amount
without reducing FICC’s ability to cover
the credit risk posed by its members.
Although the margin reductions
provided by the proposed changes
would not diminish FICC’s ability to
cover the credit risk posed by its
members, the link represented by the
cross-margining arrangement
necessitates cooperation not only during
normal operations, but also following
the default of a common member. The
proposed Restated Agreement details
the processes for default management
and loss sharing. The Restated
Agreement favors joint liquidation by
the parties and also contemplates
alternative default management
scenarios in which a joint liquidation is
not feasible or advisable. The Proposed
Rule Change would also introduce
variation margin sharing across the
CCPs to facilitate default management.
The Commission finds, therefore, that
the Proposed Rule Change is consistent
with the requirements of section
17A(b)(3)(F) of the Exchange Act.31
B. Consistency With Rule 17Ad–22(e)(6)
Under the Exchange Act
Rule 17Ad–22(e)(6)(v) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
cover, if the covered clearing agency
provides central counterparty services,
its credit exposures to its participants by
establishing a risk-based margin system
that, at a minimum, uses an appropriate
method for measuring credit exposure
that accounts for relevant product risk
31 15
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U.S.C. 78q–1(b)(3)(F).
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factors and portfolio effects across
products.32 In adopting Rule 17Ad–
22(e)(6), the Commission provided
guidance that a covered clearing agency
generally should consider in
establishing and maintaining policies
and procedures for margin.33 The
Commission stated that a covered
clearing should consider, in calculating
margin requirements, whether it allows
offsets or reductions in required margin
across products that it clears or between
products that it an another clearing
agency clear, if the risk of one product
is significantly and reliably correlated
with the risk of the other product; and
where two or more clearing agencies are
authorized to offer cross-margining,
whether they have appropriate
safeguards and harmonized overall risk
management systems.34
The Proposed Rule Change would
support the continued allowance of
margin reductions in recognition of the
correlation between products cleared by
CME and FICC. Whether the reduced
margin represents an appropriate
measure of the credit exposure posed to
FICC may be viewed in terms of
whether such margin is sufficient to
cover the potential losses associated
with cross-margined positions following
a member default. As described above,
backtesting data demonstrates that the
proposed margin methodology would
not reduce FICC’s ability to cover the
credit risk posed by its members within
the context of cleared products eligible
for cross-margining under the Restated
Agreement.35 Further, the Restated
Agreement includes provisions to
safeguard FICC against a scenario in
which it ceases to act for a common
member, but CME does not.
Specifically, the Restated Agreement
would require the payment to FICC of
the margin reduction granted under the
cross-margining arrangement, which
would avoid a mismatch between the
margin collected and the portfolio to be
liquidated.
Accordingly, the Commission finds
that the proposed model changes are
consistent with Rule 17Ad–22(e)(6)(v)
under the Exchange Act.36
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C. Consistency With Rule 17Ad–
22(e)(20) Under the Exchange Act
Rule 17Ad–22(e)(20) under the
Exchange Act requires that a covered
clearing agency establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
identify, monitor, and manage risks
related to any link the covered clearing
agency establishes with one or more
other clearing agencies, financial market
utilities, or trading markets.37 The term
financial market utility means any
person that manages or operates a
multilateral system for the purpose of
transferring, clearing, or settling
payments, securities, or other financial
transactions among financial
institutions or between financial
institutions and the person.38 For the
purposes of Rule 17Ad–22(e)(20), link
means, among other things, a set of
contractual and operational
arrangements between two or more
clearing agencies, financial market
utilities, or trading markets that connect
them directly or indirectly for the
purposes of cross margining.39
In adopting Rule 17Ad–22(e)(20), the
Commission provided guidance that a
covered clearing agency generally
should consider in establishing and
maintaining policies and procedures
that address links.40 Notably, the
Commission stated that a covered
clearing should consider whether a link
has a well-founded legal basis, in all
relevant jurisdictions, that supports its
design and provides adequate protection
to the covered clearing agencies
involved in the link.41 The Commission
further stated that, when in a CCP link
arrangement, a covered clearing agency
should consider whether it is able to
cover, at least on a daily basis, its
current and potential future exposures
to the linked CCP and its participant, if
any, fully with a high degree of
confidence without reducing the
covered clearing agency’s own ability to
fulfill its obligations to its own
participants at any time.42
CME is a CCP for futures contracts
and also meets the definition of a
financial market utility.43 The crossmargin arrangement between FICC and
CME, therefore, is a link for the
purposes of Rule 17Ad–22(e)(20), as
defined in Rule 17Ad–22(a)(8). As
described above, FICC proposes to adopt
the Restated Agreement to amend its
cross-margining arrangement with CME.
The terms of the Restated Agreement,
which would replace the Existing
37 17
CFR 240.17Ad–22(e)(20).
U.S.C. 5462(6)(A).
39 17 CFR 240.17Ad–22(a)(8).
40 See Standards for Covered Clearing Agencies,
81 FR at 70841.
41 Id.
42 Id.
43 See FSOC 2012 Annual Report, Appendix A,
https://home.treasury.gov/system/files/261/here.pdf
(last visited July 17, 2023).
38 12
32 17
CFR 240.17Ad–22(e)(6)(v).
Standards for Covered Clearing Agencies,
Exchange Act Release No. 78961, 81 FR 70786,
70819 (Oct. 13, 2016) (File No. S7–03–14)
(‘‘Standards for Covered Clearing Agencies’’).
34 See id.
35 Supra note 14.
36 17 CFR 240.17Ad–22(e)(6)(v).
33 See
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17:47 Sep 13, 2023
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Fmt 4703
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Agreement, would continue to specify,
among other matters, which members
may participate in the arrangement,
which products are eligible for
consideration under the arrangement,
how margin requirements will be set for
positions considered under the
arrangement, and how FICC and CME
would manage the default of member
who participates in the arrangement.
The Restated Agreement would also
address issues of indemnification,
information sharing, and other routine
terms currently addressed in the
Existing Agreement. Further, the
Restated Agreement would also provide
for the use of an SLA that would
provide additional supporting detail
with regard to timing and certain
operational processes related to the
cross-margining arrangement. The
Commission believes that the Restated
Agreement would continue to support
the design of the cross-margin
arrangement between FICC and CME by
addressing matters currently covered in
the Existing Agreement as well as those
changes to the structure of the crossmargin arrangement described above
(e.g., product eligibility, margin
requirements, default management).
Further, the incorporation of certain
timing and operational aspects of the
cross-margining arrangement in a
separate SLA would streamline the
language of the Restated Agreement and
more clearly present operational details,
such as those related to daily settlement
procedures. The CCPs would also have
the ability to review the service level
details separately and modify them
without requiring changes to the full
agreement. Simplifying the presentation
and maintenance of such operational
details would serve to reduce risks
associated with the link between FICC
and CME.
The Proposed Rule Change also
addresses margin reductions, default
management, and loss sharing. With
regard to margin, backtesting data
demonstrates that the proposed margin
methodology would not reduce FICC’s
ability to cover the credit risk posed by
its members.44 The Commission
believes that such backtesting data
suggests that the proposed changes
would support FICC’s ability to cover its
current and potential future exposures
to its participants. The Proposed Rule
Change would support FICC’s ability to
meet its obligations by providing for the
exchange of variation margin between
FICC and CME during the management
of a common member default. With
regard to default management, the
Restated Agreement explicitly
44 Supra
E:\FR\FM\14SEN1.SGM
note 14.
14SEN1
Federal Register / Vol. 88, No. 177 / Thursday, September 14, 2023 / Notices
prioritizes coordination and joint
management of a common member
default. The Commission believes that
such default management and loss
sharing provisions as those proposed in
the Restated Agreement would further
support FICC’s ability to cover its
current and potential future exposures
without reducing its ability to fulfill its
obligations to its own participants.
Accordingly, the Commission finds
that the proposed model changes are
consistent with Rule 17Ad–22(e)(20)
under the Exchange Act.45
V. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change is consistent with the
requirements of the Exchange Act, and
in particular, the requirements of
section 17A of the Exchange Act 46 and
the rules and regulations thereunder.
It is therefore ordered, pursuant to
section 19(b)(2) of the Exchange Act,47
that the Proposed Rule Change (SR–
FICC–2023–010) be, and hereby is,
approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.48
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–19839 Filed 9–13–23; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
[Docket # FAA–2023–1261]
Airport Terminal Program; FY 2024
Funding Opportunity
Federal Aviation
Administration (FAA).
ACTION: Notice of Funding Opportunity.
AGENCY:
The Department of
Transportation (DOT), Federal Aviation
Administration (FAA) announces the
opportunity to apply for approximately
$1 billion in FY 2024 discretionary
funds for the Airport Terminal Program
(ATP), made available under the
Infrastructure Investment and Jobs Act
of 2021 (IIJA), Public Law 117–58,
herein referred to as the Bipartisan
Infrastructure Law (BIL). The purpose of
the ATP is to make annual grants
lotter on DSK11XQN23PROD with NOTICES1
SUMMARY:
45 17
CFR 240.17Ad–22(e)(20).
approving this Proposed Rule Change, the
Commission has considered the proposed rules’
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
47 15 U.S.C. 78s(b)(2).
48 17 CFR 200.30–3(a)(12).
46 In
VerDate Sep<11>2014
17:47 Sep 13, 2023
Jkt 259001
available to eligible airports for airport
terminal and airport-owned Airport
Traffic Control Towers development
projects that address the aging
infrastructure of our nation’s airports.
In addition, ATP grants will align
with DOT’s Strategic Framework
FY2022–2026 at https://
www.transportation.gov/
administrations/office-policy/fy20222026-strategic-frameworkhttps://
www.transportation.gov/
administrations/office-policy/fy20222026-strategic-framework. The FY 2024
ATP will be implemented consistent
with law and in alignment with the
priorities in Executive Order 14052,
Implementation of the Infrastructure
Investments and Jobs Act (86 FR 64355),
which are to invest efficiently and
equitably; promote the competitiveness
of the U.S. economy; improve job
opportunities by focusing on high labor
standards; strengthen infrastructure
resilience to all hazards including
climate change; and to effectively
coordinate with State, local, Tribal, and
territorial government partners.
DATES: Airport sponsors that wish to be
considered for FY 2024 ATP
discretionary funding should submit an
application that meets the requirements
of this Notice of Funding Opportunity
(NOFO) as soon as possible, but no later
than 5:00 p.m. Eastern time, October 16,
2023.
ADDRESSES: Submit applications
electronically at www.faa.gov/bil/
airport-terminals per instructions in this
NOFO.
FOR FURTHER INFORMATION CONTACT:
Robin K. Hunt, Manager, BIL Branch
APP–540, FAA Office of Airports, at
(202) 267–3263 or our FAA BIL email
address: 9-ARP-BILAirports@faa.gov.
SUPPLEMENTARY INFORMATION:
A. Program Description
BIL established the ATP, a
competitive discretionary grant
program, which provides approximately
$1 billion in grant funding annually for
five years (Fiscal Years 2022–2026) to
upgrade, modernize, and rebuild our
nation’s airport terminals and airportowned Airport Traffic Control Towers
(ATCTs). This includes bringing airport
facilities into conformity with current
standards; constructing, modifying, or
expanding facilities as necessary to meet
demonstrated aeronautical demand;
enhancing environmental sustainability;
encouraging actual and potential
competition; and providing a balanced
system of airports to meet the roles and
functions necessary to support civil
aeronautical demand. The FAA is
committed to advancing safe, efficient
PO 00000
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Sfmt 4703
63189
transportation, including projects
funded under the ATP. The ATP also
supports the President’s goals to
mobilize American ingenuity to build
modern infrastructure and an equitable,
clean energy future. In support of
Executive Order 13985, Advancing
Racial Equity and Support for
Underserved Communities Through the
Federal Government (86 FR 7009), the
FAA encourages applicants to consider
how the project will address the
challenges faced by individuals in
underserved communities and rural
areas, as well as accessibility for persons
with disabilities.
The ATP falls under the project grant
authority for the Airport Improvement
Program (AIP) in 49 United States Code
(U.S.C.) § 47104. Per 2 Code of Federal
Regulations (CFR) part 200—Uniform
Administrative Requirements, Cost
Principles, and Audit Requirements for
Federal Awards, the AIP Federal
Assistance Listings Number is 20.106,
with the objective to assist eligible
airports in the development and
improvement of a nationwide system
that adequately meets the needs of civil
aeronautics. The FY 2024 ATP will be
implemented, as appropriate and
consistent with BIL, in alignment with
the priorities in Executive Order 14052,
Implementation of the Infrastructure
Investments and Jobs Act (86 FR 64355),
which are to invest efficiently and
equitably; promote the competitiveness
of the U.S. economy; improve
opportunities for good-paying jobs with
the free and fair choice to join a union
by focusing on high labor standards;
strengthen infrastructure resilience to
all hazards including climate change;
and to effectively coordinate with State,
local, Tribal, and territorial government
partners. Consistent with statutory
criteria and Executive Order 14008,
Tackling the Climate Crisis at Home and
Abroad (86 FR 7619), the FAA also
seeks to fund projects under the ATP
that reduce greenhouse gas emissions
and are designed with specific elements
to address climate change impacts.
Specifically, the FAA is looking to
award projects that align with the
President’s greenhouse gas reduction
goals, promote energy efficiency,
support fiscally responsible land use
and transportation efficient design,
support terminal development
compatible with the use of sustainable
aviation fuels and technologies, increase
climate resilience, incorporate
sustainable and less emissions-intensive
pavement and construction materials as
allowable, and reduce pollution.
The FAA will also consider projects
that advance the goals of the Executive
Orders listed under Section E.2.
E:\FR\FM\14SEN1.SGM
14SEN1
]]>Agencies
[Federal Register Volume 88, Number 177 (Thursday, September 14, 2023)]
[Notices]
[Pages 63185-63189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-19839]
[[Page 63185]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98327; File No. SR-FICC-2023-010]
Self-Regulatory Organizations; the Fixed Income Clearing
Corporation; Order Granting Approval of Proposed Rule Change To Amend
and Restate the Cross-Margining Agreement Between FICC and CME
September 8, 2023.
I. Introduction
On July 17, 2023, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2023-010 (``Proposed Rule Change'')
pursuant to section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to change the
terms of its cross-margining arrangement with the Chicago Mercantile
Exchange Inc. (``CME'').\3\ The Proposed Rule Change was published for
public comment in the Federal Register on July 28, 2023.\4\ The
Commission has received no comments regarding the Proposed Rule Change.
This order approves the Proposed Rule Change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Notice of Filing infra note 4, at 88 FR 48926.
\4\ Securities Exchange Act Release No. 97969 (July 24, 2023),
88 FR 48926 (July 28, 2023) (File No. SR-FICC-2023-010) (``Notice of
Filing'').
---------------------------------------------------------------------------
II. Background
FICC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for the
financial transactions it clears. FICC operates two divisions: the
Government Securities Division (``GSD'') and the Mortgage-Backed
Securities Division (``MBSD''). GSD provides trade comparison, netting,
risk management, settlement, and central counterparty services for the
U.S. Government securities market. As such, FICC is exposed to the risk
that one or more of its members may fail to make a payment or to
deliver securities.
A key tool that FICC uses to manage its credit exposures to its
members is the daily collection of margin from each member. A member's
margin is designed to mitigate potential losses associated with
liquidation of the member's portfolio in the event of that member's
default. The aggregated amount of all GSD members' margin constitutes
the GSD Clearing Fund, which FICC would be able to access should a
defaulted member's own margin be insufficient to satisfy losses to FICC
caused by the liquidation of that member's portfolio. Each member's
margin consists of a number of applicable components, including a
value-at-risk (``VaR'') charge (``VaR Charge'') designed to capture the
potential market price risk associated with the securities in a
member's portfolio. The VaR Charge is typically the largest component
of a member's margin requirement. The VaR Charge is designed to cover
FICC's projected liquidation losses with respect to a defaulted
member's portfolio at a 99 percent confidence level.
Margin requirements are typically designed, in part, to recognize
the potential relationship between products in a member's portfolio
(e.g., some products may naturally gain value when others lose value).
Members may, however, hold assets or enter into transactions that
reduce risk, but are not visible to the CCP. For example, a market
participant might purchase a debt security, and at the same time,
contract to sell the same security in the future. The risk to the
market participant is combination of these two offsetting transactions
as opposed to the risk of each added together because it is unlikely
that both positions would lose value at the same time under normal
market conditions.
To recognize potential offsets in the risk presented by related
products, FICC has an ongoing cross-margining arrangement with CME,
which acts as a CCP for futures related to the debt instruments that
FICC clears.\5\ The cross-margining arrangement is governed by a
contract (the ``Existing Agreement'') that, among other things, defines
the methodology by which FICC and CME determine offsets between cleared
products that could reduce the margin requirement of an FICC member.\6\
FICC and CME have negotiated a new agreement (the ``Restated
Agreement'') that FICC proposes to adopt to govern the cross-margining
arrangement between FICC and CME.
---------------------------------------------------------------------------
\5\ CME provides central counterparty services for futures,
options, and swaps. See Financial Stability Oversight Council
(``FSOC'') 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited July 17,
2023).
\6\ 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.
---------------------------------------------------------------------------
III. Description of the Proposed Rule Change
The proposed changes to the cross-margining arrangement are
primarily designed to (i) expand the scope of CME products eligible for
cross-margining, (ii) replace the methodology for calculating the
margin reductions available to FICC's members; \7\ and (iii) improve
the default management and loss sharing processes that FICC and CME
would engage in if a common member were to default. FICC also proposes
relocating certain timing and operational aspects of the cross-margin
arrangement to a supporting service level agreement (the ``SLA'').\8\
For example, the SLA would cover operational issues such as the
creation and maintenance of special accounts for managing settlement
and liquidation of a defaulting common member's cross margin positions
as well as the operational steps involved in managing the default of a
common member. The SLA would also define the times by which FICC and
CME would be expected to exchange certain information and reports.
---------------------------------------------------------------------------
\7\ FICC provided data demonstrating that the proposal would
likely increase the range of potential reduction in margin related
to cross-margining positions. 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.
\8\ FICC provided the SLA in a confidential Exhibit 3 to File
No. SR-FICC-2023-010.
---------------------------------------------------------------------------
The following sections describe the proposed changes to the cross-
margining arrangement in more detail.
A. Products Eligible for Cross-Margining
The margin reductions provided by FICC and CME to common members
are based on the relationship between the products that each CCP
clears. Only products specified in the Existing Agreement currently may
be considered when determining margin reductions (the ``Eligible
Products''). As noted above, in the Restated Agreement, FICC proposes
to expand the scope of CME products eligible for cross-margining.\9\
FICC also proposes to reduce the scope of products it clears that would
be eligible for cross-margining.\10\ The
[[Page 63186]]
combined effect of the proposed changes to products eligible for cross-
margining would expand the potential reductions members could receive
through cross-margining program.\11\ The new set of products eligible
for cross-margining would be listed in exhibits to the Restated
Agreement.\12\
---------------------------------------------------------------------------
\9\ The following CME products would become eligible for cross-
margining: 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. See Notice of Filing, 88 FR at 48928, n.14. At the
same time, certain CME products would no longer be eligible due to
lack of use under the current arrangement. Id.
\10\ 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).
See Notice of Filing, 88 FR at 48929, n.29. U.S. Treasury notes and
bonds cleared by FICC would continue to be eligible for cross-
margining. See Notice of Filing, 88 FR at 48929.
\11\ FICC provided data demonstrating that the proposed change
in eligible products would have reduced the average daily margin
requirements by approximately 1.33 percent for the small set of
members who participated in the cross-margining program. 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.
\12\ Future changes to FICC's rules, such as the terms of the
Restated Agreement, are outside the scope of this proposal. The
Restated Agreement and the SLA provide a mechanism for changing the
list of Eligible Products; however, the agreement would not alter
FICC's filing obligations pursuant to section 19(b) of the Exchange
Act or section 806(e) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010. See 15 U.S.C. 78s(b) and 12 U.S.C.
5465(e).
---------------------------------------------------------------------------
B. Methodology for Margining Cross-Margin Portfolios
In addition to changing the set of products eligible for cross-
margining, FICC proposes replacing the methodology for calculating
margin requirements for cross-margined positions. The proposed
methodology is designed to more accurately estimate the risk presented
by the cross-margined positions. Margin requirements set by the
proposed methodology would allow for, on average, a wider range of
margin reductions; \13\ however, because of the increased accuracy, the
proposed methodology would not reduce FICC's ability to cover the
credit risk posed by its members.\14\
---------------------------------------------------------------------------
\13\ For the small set of members involved in cross-margining,
the proposed change would widen the potential range of margin
reductions. See Notice of Filing, 88 FR at 48927. Specifically, the
average range of reductions to total margin was 0.1 percent to 17.4
percent under the current methodology, and would have been 0 percent
to 36.6 percent under the proposed methodology. Id. The overall
reduction to margin at FICC would have been significantly smaller
because cross-margining related margin requirements account for only
small amount of total margin requirements on average. See Notice of
Filing, 88 FR at 48927, n.10.
\14\ Backtesting data showed that, even with the broadened range
of margin reductions, FICC's ability to cover exposures presented by
members would have improved. FICC provided backtesting data in a
confidential Exhibit to File No. SR-FICC-2023-010.
---------------------------------------------------------------------------
The proposed methodology is also less complex than the current
methodology. FICC proposes to calculate the margin reduction from
cross-margining based on the combined portfolio of eligible products of
a common member (i.e., both the products cleared at FICC and the
related products cleared at CME) with a VaR methodology. The proposed
methodology calculates portfolio margin reductions based on
correlations at the security level. FICC and CME would separately
calculate the potential margin reduction resulting from offsetting
positions in a common member's portfolio using their respective margin
methodologies and agree to reduce the member's margin requirement by
the more conservative amount (i.e., the smaller reduction). Further,
FICC proposes to apply such a margin reduction only if it exceeds a
minimum threshold.\15\
---------------------------------------------------------------------------
\15\ The threshold would initially be set at 1 percent to
prevent any negatively correlated portfolios or portfolios with
little to no correlation to receive cross-margin benefit because of
the operational coordination required to provide such benefit. See
Notice of Filing, 88 FR at 48930, n.40. Additionally, FICC provided
information pertaining to thresholds for the maximum margin
reduction allowable under the proposed rule change as well. See
Notice of Filing, 88 FR at 48927, n.10.
---------------------------------------------------------------------------
Conversely, the current methodology involves a series of steps to
allow FICC and CME to separately consider offsets for their respective
products. Such steps include the conversion of products into other
products to facilitate comparison of a common member's Treasury and
futures contracts (e.g., FICC would convert CME products into
equivalent FICC products). The current methodology also requires FICC
and CME to group products by maturity into ``Offset Classes'' to
facilitate the calculation of a member's margin reduction. As noted
above, the current process is complex and produces less accurate
offsets that could negatively affect FICC's ability to cover the
exposures presented by its members.
C. Default Management and Loss Sharing
FICC proposes to strengthen its default management coordination
with CME and to simplify the sharing of losses arising out of a common
member default. The Restated Agreement would provide three potential
default management paths and would favor joint action by FICC and CME
as a first, best option. In contrast, the Existing Agreement merely
seeks to align the time at which the CCPs liquidate a common member's
positions. With regard to loss sharing, the Restated Agreement provides
for a relatively simple division of gains and losses. Further, the
Restated Agreement would align cashflows through the exchange of
variation margin, which is not contemplated by the Existing Agreement.
Default Management Coordination: The proposed changes would
simplify the scenario in which only one of the CCPs suspends a common
member by requiring the common member to repay the margin reduction
realized under the cross-margin arrangement.\16\ If the common member
fails to pay back the margin reduction, then the CCPs must both suspend
and liquidate the member's portfolio.\17\ In the event that both FICC
and CME suspend a common member, the Restated Agreement is designed to
facilitate joint liquidation of common member's cross-margin portfolio.
The Existing Agreement requires only that FICC and CME make reasonable
efforts to coordinate when off-setting positions are closed out and to
report losses to each other. In contrast, the Restated Agreement would
require in the first instance a good faith attempt to jointly transfer,
liquidate, or close-out positions. The Restated Agreement would further
describe alternatives where joint liquidation is either infeasible or
inadvisable, including separate liquidation similar to what is
contemplated under the Existing Agreement.\18\
---------------------------------------------------------------------------
\16\ For example, assume that FICC suspends Member A, but CME
does not. CME must require Member A to pay both the margin reduction
provided by FICC (which CME passes to FICC) and the margin reduction
provided by CME (which is retained by CME). Such a payment would
provide each CCP with the collateral it would have collected if the
common member did not participate in the cross-margining
arrangement.
\17\ In contrast, the provisions of the Existing Agreement set
out a complex series of conditional statements and calculations that
flow into further loss sharing provisions in the event that only one
CCP suspends a common member.
\18\ The Restated Agreement would allow for either FICC or CME
to buy-out the other with regard to the cross-margined positions of
the defaulter. Failing joint action or buy-out, the Restated
Agreement allows for separate liquidation followed by loss sharing,
similar to the provisions of the Existing Agreement.
---------------------------------------------------------------------------
Loss Sharing. The Restated Agreement would simplify loss sharing in
the event of a common member default and would introduce a new feature
to align cashflows during default management. As stated above, the
Restated Agreement is designed to facilitate joint default management
by FICC and CME. In the event the CCPs jointly transfer, liquidate, or
close-out the common member's cross-margin positions, if one CCP faces
a loss greater than (or gain less than) their share of total losses (or
gains), the other CCP would pay the difference to ensure that each CCP
was responsible for its respective portion of losses or gains.\19\
---------------------------------------------------------------------------
\19\ Specifically, FICC and CME would each calculate their
respective net gain or loss as well as the overall combined gain or
loss across the CCPs to determine their respective allocation of
losses or gains arising out the liquidation.
---------------------------------------------------------------------------
In the case of a joint liquidation, the Restated Agreement would
also provide for an exchange of variation margin.
[[Page 63187]]
Such an exchange would improve the efficiency of the default management
process by aligning cashflows in a scenario in which either CME or FICC
has a payment obligation arising out of cross-margin positions that
could be covered by the variation margin gains on offsetting cross-
margin positions held by the other CCP. The Existing Agreement does not
contemplate any exchange of variation margin between FICC and CME.
The Restated Agreement would also simplify the sharing of losses
where FICC and CME liquidate the defaulter's cross-margin positions
separately. In the case of separate liquidations, if either FICC or CME
has a net gain and the other has a net loss, then the CCP with the net
gain would make a payment to the CCP with the net loss. Such payment
would be the lesser of the net gain or net loss realized by the
CCPs.\20\
---------------------------------------------------------------------------
\20\ In the event that either FICC or CME buys out the other's
cross-margin positions and related collateral, no loss sharing would
occur.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization.\21\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to FICC. More
specifically, the Commission finds that the proposal is consistent with
section 17A(b)(3)(F) of the Exchange Act,\22\ and Rules 17Ad-22(e)(6)
and (e)(20) \23\ thereunder, as described in detail below.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78s(b)(2)(C).
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(e)(6) and 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Exchange Act
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency be designed to remove
impediments to and help perfect the mechanism of a national system for
the prompt and accurate clearance and settlement of securities
transactions; and to foster cooperation and coordination with persons
engaged in the clearance and settlement of securities transactions.\24\
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission has historically supported and approved cross-
margining at clearing agencies and has recognized the potential
benefits of cross-margining systems, which include freeing capital
through reduced margin requirements, reducing clearing costs by
integrating clearing functions, reducing clearing agency risk by
centralizing asset management, and harmonizing liquidation
procedures.\25\ The Commission has encouraged cross-margining
arrangements as a way to promote more efficient risk management across
product classes.\26\ Cross-margining arrangements may be 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 accurate clearance and
settlement of securities through increased efficiencies.\27\
---------------------------------------------------------------------------
\25\ See Securities Exchange Act Release No. 63986 (Feb. 28,
2011), 76 FR 12144, 12153 (Mar. 4, 2011) (File No. SR-FICC-2010-09)
(approving the introduction of cross-margining for positions held at
FICC and New York Portfolio Clearing, LLC) (citations omitted)
(``NYPC Order'').
\26\ See id. (citations omitted).
\27\ See id.
---------------------------------------------------------------------------
The Commission continues to view cross-margining programs as
consistent with clearing agency responsibilities under section 17A of
the Exchange Act.\28\ Cross-margining programs enhance member liquidity
and systemic liquidity both in times of normal trading and in times of
market stress by reducing margin requirements for members, which could
prove crucial in maintaining member liquidity during periods of market
volatility, and enhancing market liquidity as a whole.\29\ By enhancing
market liquidity, cross-margining arrangements remove impediments to
and help perfect the mechanism of a national system for the prompt and
accurate clearance and settlement of securities transactions.\30\ Based
on a review of the record, and for the reasons described below, the
Commission believes that the Proposed Rule Change is consistent with
removing of impediments to and helping to perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions as well as fostering cooperation and
coordination with persons engaged in the clearance and settlement of
securities transactions.
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\28\ See Securities Exchange Act Release No. 90464 (Nov. 19,
2020), 85 FR 75384, 75386 (Nov. 25, 2020 (File No. SR-OCC-2020-010)
(approving a second amended and restated cross-margining agreement
between the Options Clearing Corp. and CME); Securities Exchange Act
Release No. 38584 (May 8, 1997), 62 FR 26602, 26604-05 (May 14,
1997) (File No. SR-OCC-97-04) (establishing a cross-margining
agreement with the Options Clearing Corp., CME, and the Commodity
Clearing Corporation).
\29\ See id.
\30\ See id. See also NYPC Order at 12153.
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As described above, FICC proposes to expand the set of products
accepted as part of its cross-margining arrangement with CME. Expanding
the set of Eligible Products will increase the opportunities to reduce
member margin requirements, which could support the maintenance of
market participants' liquidity during periods of market volatility. The
expansion of product eligibility would also support market
participants' use of the national system for the prompt and accurate
clearance and settlement without being impeded by the market structure
in which different CCPs serve different asset classes.
Also as described above, the proposed changes would reduce margin
requirements overall by a small amount without reducing FICC's ability
to cover the credit risk posed by its members. Although the margin
reductions provided by the proposed changes would not diminish FICC's
ability to cover the credit risk posed by its members, the link
represented by the cross-margining arrangement necessitates cooperation
not only during normal operations, but also following the default of a
common member. The proposed Restated Agreement details the processes
for default management and loss sharing. The Restated Agreement favors
joint liquidation by the parties and also contemplates alternative
default management scenarios in which a joint liquidation is not
feasible or advisable. The Proposed Rule Change would also introduce
variation margin sharing across the CCPs to facilitate default
management.
The Commission finds, therefore, that the Proposed Rule Change is
consistent with the requirements of section 17A(b)(3)(F) of the
Exchange Act.\31\
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6) Under the Exchange Act
Rule 17Ad-22(e)(6)(v) under the Exchange Act requires that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to cover, if the
covered clearing agency provides central counterparty services, its
credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, uses an appropriate method for
measuring credit exposure that accounts for relevant product risk
[[Page 63188]]
factors and portfolio effects across products.\32\ In adopting Rule
17Ad-22(e)(6), the Commission provided guidance that a covered clearing
agency generally should consider in establishing and maintaining
policies and procedures for margin.\33\ The Commission stated that a
covered clearing should consider, in calculating margin requirements,
whether it allows offsets or reductions in required margin across
products that it clears or between products that it an another clearing
agency clear, if the risk of one product is significantly and reliably
correlated with the risk of the other product; and where two or more
clearing agencies are authorized to offer cross-margining, whether they
have appropriate safeguards and harmonized overall risk management
systems.\34\
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\32\ 17 CFR 240.17Ad-22(e)(6)(v).
\33\ See Standards for Covered Clearing Agencies, Exchange Act
Release No. 78961, 81 FR 70786, 70819 (Oct. 13, 2016) (File No. S7-
03-14) (``Standards for Covered Clearing Agencies'').
\34\ See id.
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The Proposed Rule Change would support the continued allowance of
margin reductions in recognition of the correlation between products
cleared by CME and FICC. Whether the reduced margin represents an
appropriate measure of the credit exposure posed to FICC may be viewed
in terms of whether such margin is sufficient to cover the potential
losses associated with cross-margined positions following a member
default. As described above, backtesting data demonstrates that the
proposed margin methodology would not reduce FICC's ability to cover
the credit risk posed by its members within the context of cleared
products eligible for cross-margining under the Restated Agreement.\35\
Further, the Restated Agreement includes provisions to safeguard FICC
against a scenario in which it ceases to act for a common member, but
CME does not. Specifically, the Restated Agreement would require the
payment to FICC of the margin reduction granted under the cross-
margining arrangement, which would avoid a mismatch between the margin
collected and the portfolio to be liquidated.
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\35\ Supra note 14.
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Accordingly, the Commission finds that the proposed model changes
are consistent with Rule 17Ad-22(e)(6)(v) under the Exchange Act.\36\
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\36\ 17 CFR 240.17Ad-22(e)(6)(v).
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C. Consistency With Rule 17Ad-22(e)(20) Under the Exchange Act
Rule 17Ad-22(e)(20) under the Exchange Act requires that a covered
clearing agency establish, implement, maintain, and enforce written
policies and procedures reasonably designed to identify, monitor, and
manage risks related to any link the covered clearing agency
establishes with one or more other clearing agencies, financial market
utilities, or trading markets.\37\ The term financial market utility
means any person that manages or operates a multilateral system for the
purpose of transferring, clearing, or settling payments, securities, or
other financial transactions among financial institutions or between
financial institutions and the person.\38\ For the purposes of Rule
17Ad-22(e)(20), link means, among other things, a set of contractual
and operational arrangements between two or more clearing agencies,
financial market utilities, or trading markets that connect them
directly or indirectly for the purposes of cross margining.\39\
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\37\ 17 CFR 240.17Ad-22(e)(20).
\38\ 12 U.S.C. 5462(6)(A).
\39\ 17 CFR 240.17Ad-22(a)(8).
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In adopting Rule 17Ad-22(e)(20), the Commission provided guidance
that a covered clearing agency generally should consider in
establishing and maintaining policies and procedures that address
links.\40\ Notably, the Commission stated that a covered clearing
should consider whether a link has a well-founded legal basis, in all
relevant jurisdictions, that supports its design and provides adequate
protection to the covered clearing agencies involved in the link.\41\
The Commission further stated that, when in a CCP link arrangement, a
covered clearing agency should consider whether it is able to cover, at
least on a daily basis, its current and potential future exposures to
the linked CCP and its participant, if any, fully with a high degree of
confidence without reducing the covered clearing agency's own ability
to fulfill its obligations to its own participants at any time.\42\
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\40\ See Standards for Covered Clearing Agencies, 81 FR at
70841.
\41\ Id.
\42\ Id.
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CME is a CCP for futures contracts and also meets the definition of
a financial market utility.\43\ The cross-margin arrangement between
FICC and CME, therefore, is a link for the purposes of Rule 17Ad-
22(e)(20), as defined in Rule 17Ad-22(a)(8). As described above, FICC
proposes to adopt the Restated Agreement to amend its cross-margining
arrangement with CME. The terms of the Restated Agreement, which would
replace the Existing Agreement, would continue to specify, among other
matters, which members may participate in the arrangement, which
products are eligible for consideration under the arrangement, how
margin requirements will be set for positions considered under the
arrangement, and how FICC and CME would manage the default of member
who participates in the arrangement. The Restated Agreement would also
address issues of indemnification, information sharing, and other
routine terms currently addressed in the Existing Agreement. Further,
the Restated Agreement would also provide for the use of an SLA that
would provide additional supporting detail with regard to timing and
certain operational processes related to the cross-margining
arrangement. The Commission believes that the Restated Agreement would
continue to support the design of the cross-margin arrangement between
FICC and CME by addressing matters currently covered in the Existing
Agreement as well as those changes to the structure of the cross-margin
arrangement described above (e.g., product eligibility, margin
requirements, default management).
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\43\ See FSOC 2012 Annual Report, Appendix A, https://home.treasury.gov/system/files/261/here.pdf (last visited July 17,
2023).
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Further, the incorporation of certain timing and operational
aspects of the cross-margining arrangement in a separate SLA would
streamline the language of the Restated Agreement and more clearly
present operational details, such as those related to daily settlement
procedures. The CCPs would also have the ability to review the service
level details separately and modify them without requiring changes to
the full agreement. Simplifying the presentation and maintenance of
such operational details would serve to reduce risks associated with
the link between FICC and CME.
The Proposed Rule Change also addresses margin reductions, default
management, and loss sharing. With regard to margin, backtesting data
demonstrates that the proposed margin methodology would not reduce
FICC's ability to cover the credit risk posed by its members.\44\ The
Commission believes that such backtesting data suggests that the
proposed changes would support FICC's ability to cover its current and
potential future exposures to its participants. The Proposed Rule
Change would support FICC's ability to meet its obligations by
providing for the exchange of variation margin between FICC and CME
during the management of a common member default. With regard to
default management, the Restated Agreement explicitly
[[Page 63189]]
prioritizes coordination and joint management of a common member
default. The Commission believes that such default management and loss
sharing provisions as those proposed in the Restated Agreement would
further support FICC's ability to cover its current and potential
future exposures without reducing its ability to fulfill its
obligations to its own participants.
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\44\ Supra note 14.
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Accordingly, the Commission finds that the proposed model changes
are consistent with Rule 17Ad-22(e)(20) under the Exchange Act.\45\
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\45\ 17 CFR 240.17Ad-22(e)(20).
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of section 17A of the
Exchange Act \46\ and the rules and regulations thereunder.
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\46\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to section 19(b)(2) of the
Exchange Act,\47\ that the Proposed Rule Change (SR-FICC-2023-010) be,
and hereby is, approved.
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\47\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\48\
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\48\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-19839 Filed 9-13-23; 8:45 am]
BILLING CODE 8011-01-P
