Justia Agencies And Commissions Securities And Exchange Commission Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Extension of Review Period of Advance Notice To Modify the GSD Rules (i) Regarding the Separate Calculation, Collection and Holding of Margin for Proprietary Transactions and That for Indirect Participant Transactions, and (ii) To Address the Conditions of Note H to Rule 15c3-3a, 21586-21602 [2024-06578]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Extension of Review Period of Advance Notice To Modify the GSD Rules (i) Regarding the Separate Calculation, Collection and Holding of Margin for Proprietary Transactions and That for Indirect Participant Transactions, and (ii) To Address the Conditions of Note H to Rule 15c3-3a, 21586-21602 [2024-06578]

Download as PDF ddrumheller on DSK120RN23PROD with NOTICES1 21586 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices information regarding the private funds they advise on Form PF. These advisers are the respondents to the collection of information. Form PF is designed to facilitate the Financial Stability Oversight Council’s (‘‘FSOC’’) monitoring of systemic risk in the private fund industry and to assist FSOC in determining whether and how to deploy its regulatory tools with respect to nonbank financial companies. The Commission and the Commodity Futures Trading Commission may also use information collected on Form PF in their regulatory programs, including examinations, investigations and investor protection efforts relating to private fund advisers. Form PF divides respondents into two broad groups, Large Private Fund Advisers and smaller private fund advisers. ‘‘Large Private Fund Advisers’’ are advisers with at least $1.5 billion in assets under management attributable to hedge funds (‘‘large hedge fund advisers’’), advisers that manage ‘‘liquidity funds’’ and have at least $1 billion in combined assets under management attributable to liquidity funds and registered money market funds (‘‘large liquidity fund advisers’’), and advisers with at least $2 billion in assets under management attributable to private equity funds (‘‘large private equity fund advisers’’). All other respondents are considered smaller private fund advisers. The Commission estimates that most filers of Form PF have already made their first filing, and so the burden hours applicable to those filers will reflect only ongoing burdens, and not start-up burdens. Accordingly, the Commission estimates the total annual reporting and recordkeeping burden of the collection of information for each respondent is as follows: (a) For smaller private fund advisers making their first Form PF filing, an estimated amortized average annual burden of 13 hours for each of the first three years; (b) for smaller private fund advisers that already make Form PF filings, an estimated amortized average annual burden of 15 hours for each of the next three years; (c) for smaller private fund advisers, an estimated average annual burden of 5 hours for event reporting for smaller private equity fund advisers for each of the next three years; (d) for large hedge fund advisers making their first Form PF filing, an estimated amortized average annual burden of 108 hours for each of the first three years; (e) for large hedge fund advisers that already make Form PF filings, an VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 estimated amortized average annual burden of 600 hours for each of the next three years; (f) for large hedge fund advisers, an estimated average annual burden of 10 hours for current reporting for each of the next three years; (g) for large liquidity fund advisers making their first Form PF filing, an estimated amortized average annual burden of 67 hours for each of the first three years; (h) for large liquidity fund advisers that already make Form PF filings, an estimated amortized average annual burden of 284 hours for each of the next three years; (i) for large private equity fund advisers making their first Form PF filing, an estimated amortized average annual burden of 84 hours for each of the first three years; (j) for large private equity fund advisers that already make Form PF filings, an estimated amortized average annual burden of 128 hours for each of the next three years; and (k) for large private equity fund advisers, an estimated average annual burden of 5 hours for event reporting for each of the next three years. With respect to annual internal costs, the Commission estimates the collection of information will result in approximately 122.89 burden hours per year on average for each respondent. With respect to external cost burdens, the Commission estimates a range from $0 to $50,000 per adviser. Estimates of average burden hours and costs are made solely for the purposes of the Paperwork Reduction Act and are not derived from a comprehensive or even representative survey or study of the costs of Commission rules and forms. The changes in burden hours are due to the staff’s estimates of the time costs and external costs that result from the adopted amendments, the use of updated data, and the use of different methodologies to calculate certain estimates. Compliance with the collection of information requirements of Form PF is mandatory for advisers that satisfy the criteria described in Instruction 1 to the Form. Responses to the collection of information will be kept confidential to the extent permitted by law. The Commission does not intend to make public information reported on Form PF that is identifiable to any particular adviser or private fund, although the Commission may use Form PF information in an enforcement action. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number. PO 00000 Frm 00104 Fmt 4703 Sfmt 4703 The public may view background documentation for this information collection at the following website: www.reginfo.gov. Find this particular information collection by selecting ‘‘Currently under 30-day Review—Open for Public Comments’’ or by using the search function. Written comments and recommendations for the proposed information collection should be sent within 30 days of publication of this notice by April 29, 2024 to (i) MBX.OMB.OIRA.SEC_desk_officer@ omb.eop.gov and (ii) David Bottom, Director/Chief Information Officer, Securities and Exchange Commission, c/ o John Pezzullo, 100 F Street NE, Washington, DC 20549, or by sending an email to: PRA_Mailbox@sec.gov. Dated: March 25, 2024. Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–06629 Filed 3–27–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–99845; File No. SR–FICC– 2024–802] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Extension of Review Period of Advance Notice To Modify the GSD Rules (i) Regarding the Separate Calculation, Collection and Holding of Margin for Proprietary Transactions and That for Indirect Participant Transactions, and (ii) To Address the Conditions of Note H to Rule 15c3–3a March 22, 2024. Pursuant to section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’) 1 and Rule 19b–4(n)(1)(i) under the Securities Exchange Act of 1934 (‘‘Act’’),2 notice is hereby given that on March 14, 2024, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the advance notice as described in Items I, II and III below, which Items have been prepared by the clearing agency.3 The Commission is publishing this notice to solicit comments on the 1 12 U.S.C. 5465(e)(1). CFR 240.19b–4(n)(1)(i). 3 On March 14, 2024, FICC filed this advance notice as a proposed rule change (SR–FICC–2024– 007) with the Commission pursuant to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b–4 thereunder, 17 CFR 240.19b–4. A copy of the proposed rule change is available at dtcc.com/legal/ sec-rule-filings. 2 17 E:\FR\FM\28MRN1.SGM 28MRN1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices advance notice from interested persons and to extend the review period of the Advance Notice. I. Clearing Agency’s Statement of the Terms of Substance of the Advance Notice ddrumheller on DSK120RN23PROD with NOTICES1 This advance notice consists of modifications to FICC’s Government Securities Division (‘‘GSD’’) Rulebook (‘‘Rules’’) 4 to (1) provide for FICC to calculate, collect, and hold margin for the proprietary transactions of a Netting Member separately and independently from the margin for transactions that the Netting Member submits to FICC on behalf of indirect participants; (2) simplify and revise the account types through which Members may record transactions at FICC and adopt a new Rule 2B to provide clearer public disclosures through the Rules regarding the GSD account structure; (3) allow Netting Members to elect for margin for indirect participant transactions to be calculated on a gross basis (i.e., an indirect participant-by-indirect participant basis) and legally segregated from the margin for the Netting Member’s proprietary transactions (as well as those of other indirect participants); (4) align FICC’s margin calculation methodology with the expanded account types and enhance public disclosure through the Rules of that calculation methodology; and (5) simplify the requirements for brokered transactions so that they only apply to transactions executed by an Inter-Dealer Broker Netting Member on the trading platform offered by that Inter-Dealer Broker Netting Member. These proposed rule changes are primarily designed to ensure that FICC has appropriate rules regarding the separate and independent calculation, collection, and holding of margin for proprietary transactions and that for indirect participant transactions in accordance with the requirements of Rule 17Ad–22(e)(6)(i) under the Act, and that FICC has appropriate rules to satisfy the conditions of Note H to Rule 15c3–3a under the Act for a brokerdealer to record a debit in the customer and broker-dealer proprietary account reserve formulas.5 4 Terms not defined herein are defined in the Rules, available at www.dtcc.com/∼/media/Files/ Downloads/legal/rules/ficc_gov_rules.pdf. 5 See Securities Exchange Act Release No. 99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024) (S7–23– 22) (‘‘Adopting Release’’, and the rules adopted therein referred to herein as ‘‘Treasury Clearing Rules’’). See also 17 CFR 240.15c3–3a. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Advance Notice In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the advance notice and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement on Comments on the Advance Notice 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, 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 www.sec.gov/regulatory-actions/how-tosubmit-comments. General questions regarding the rule filing process or logistical questions regarding this filing should be directed to the Main Office of the SEC’s Division of Trading and Markets at tradingandmarkets@sec.gov or 202–551–5777. FICC reserves the right not to respond to any comments received. (B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act Executive Summary of Proposed Changes On December 13, 2023, the Commission adopted amendments to the covered clearing agency standards that apply to covered clearing agencies that clear transactions in U.S. Treasury securities (each a ‘‘Treasury CCA’’), including FICC.6 These amendments require, among other things, that FICC ‘‘calculates, collects, and holds margin 6 See PO 00000 supra note 5. Frm 00105 Fmt 4703 Sfmt 4703 21587 amounts from a direct participant for its proprietary positions in U.S. Treasury securities separately and independently from margin calculated and collected from that direct participant in connection with U.S. Treasury securities transactions by an indirect participant that relies on the services provided by the direct participant to access the covered clearing agency’s payment, clearing, or settlement facilities.’’ 7 As described below, the proposed rules are designed to comply with these requirements. Additionally, in the Treasury Clearing Rules, the Commission amended its broker-dealer customer protection rule (‘‘Rule 15c3–3’’) 8 and the reserve formulas thereunder (‘‘Rule 15c3–3a’’) 9 to permit broker-dealers to include margin required and on deposit at a Treasury CCA as a debit item in the reserve formulas under certain conditions.10 The proposed rules are also designed to satisfy these conditions and, therefore, would permit brokerdealer Netting Members of FICC to include margin collected from their customers and on deposit at a Treasury CCA as a debit item in the reserve formulas. First, the proposed changes would provide for the separate and independent calculation, collection, and holding of (i) margin deposited by a Netting Member to support its proprietary transactions and (ii) margin deposited by a Netting Member to support the transactions of an indirect participant. Specifically, FICC would provide in a new Rule 2B that FICC can establish proprietary Accounts to record the transactions that the Netting Member enters into for its own benefit and separately establish indirect participant Accounts to record transactions that the Netting Member submits to FICC for clearance and settlement on behalf of an indirect participant. Under this proposed Rule 2B, only proprietary transactions may be recorded in a proprietary Account, and only indirect participant transactions may be recorded in an indirect participant Account. FICC is also proposing revisions in Rule 4 to identify what types of transactions may be included together in a Margin Portfolio that FICC utilizes to determine a Netting Member’s margin requirement. Specifically, FICC would revise the Margin Portfolio definition to make clear that a Margin Portfolio cannot include both proprietary and indirect 7 17 CFR 240.17Ad–22(e)(6)(i). CFR 240.15c3–3. 9 17 CFR 240.15c3–3a. 10 See supra note 5. 8 17 E:\FR\FM\28MRN1.SGM 28MRN1 ddrumheller on DSK120RN23PROD with NOTICES1 21588 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices participant Accounts. Because proposed Rule 2B would not permit transactions of indirect participants to be recorded in the same Account as a Netting Member’s proprietary transactions, a Margin Portfolio would only be able to consist of the same type of proprietary or indirect participant transactions, not both. As a result, the transactions a Netting Member submits to FICC on behalf of an indirect participant would no longer be netted against a Netting Member’s proprietary transactions for purposes of calculating a Netting Member’s margin requirements. In addition, to ensure separate collection and holding of margin deposited for proprietary and indirect participant transactions, FICC is specifying its practice in Rule 4 that a Netting Member must identify the different Account types for which a deposit is made on its wire instructions. In order to facilitate these proposed changes, the rule changes would clarify the types of accounts in which Netting Members may record transactions. FICC’s ‘‘Accounts’’ are not custodial accounts in which FICC holds assets, but rather a mechanism for FICC to record and group transactions. These records are utilized by FICC in connection with its calculation of a Netting Member’s margining, settlement, and other obligations. The proposed rule changes would provide greater clarity regarding the purpose and use of these accounts through the public disclosures in the Rules. The proposed rules would do this by revising the definition of ‘‘Account’’ in Rule 1 and changing the names of certain Accounts to better reflect their function. The proposed rule changes would also create in a new Rule 2B a roadmap of the types of Accounts FICC maintains and what is recorded in those Accounts. Second, the proposed rule changes would allow for the segregation of certain customer margin in a manner that satisfies the conditions for a brokerdealer to record a debit in the customer or PAB reserve formula under recently added Note H to Rule 15c3–3a.11 As noted above, the Commission amended Rule 15c3–3a to permit broker-dealers to include margin required and on deposit at a Treasury CCA as a debit item in the reserve formulas under certain conditions, including that the margin be collected in accordance with the rules of the Treasury CCA that impose the certain requirements.12 Such requirements are set forth in the Treasury Clearing Rules and Section (b)(2) of Note H to Rule 15c3–3a, and 11 17 CFR 240.15c3–3a. supra note 5. 12 See VerDate Sep<11>2014 20:27 Mar 27, 2024 include, among other things, (1) the margin must be calculated separately for each customer and the broker-dealer must deliver that amount of margin for each customer on a gross basis; (2) the margin must be held in an account of the broker-dealer at the Treasury CCA that is segregated from any other account of the broker-dealer at the Treasury CCA and that is, among other things, used exclusively to clear, settle, novate, and margin U.S. Treasury securities transactions of the customers of the broker-dealer; and (3) the Treasury CCA has systems, controls, policies, and procedures to return the assets to the broker-dealer that are no longer needed to meet current margin requirements resulting from positions in U.S. Treasury securities of the customers of the broker-dealer.13 The proposed changes are designed to comply with these requirements. Specifically, FICC is proposing to permit a Netting Member, including a non-broker-dealer Netting Member, to designate any of its indirect participants Accounts for segregation. For any Account so designated, FICC would calculate the margin requirements applicable to the Account on a gross basis, meaning that FICC would not net the transactions of one indirect participant against the transactions of another indirect participant. In addition, FICC would segregate the margin deposited to support the transactions in the Account from any margin securing a Netting Member’s proprietary positions, both on FICC’s own books and records and at FICC’s custodians. FICC would only be able to use such segregated margin to satisfy the obligations of the customer for whom such margin is held. FICC would not be able to apply such margin to the proprietary obligations of the Netting Member that deposited it with FICC or to the obligations of any other Netting Member or participant. FICC would also set forth specific procedures to allow Netting Members to obtain the return of excess segregated margin. The aim of these changes is both to allow brokerdealer Netting Members to collect margin from customers and deposit it with FICC and to provide all customers, including those that access FICC through non-broker-dealers, to be able to segregate margin they deposit. Third, the proposed rules would align the description of FICC’s margin methodology with the revised Account types, consolidate the terms relating to margin calculation in a single, easily identifiable schedule, and make certain changes to the methodology to increase 13 See Jkt 262001 PO 00000 17 CFR 240.15c3–3a. Supra note 5. Frm 00106 Fmt 4703 Sfmt 4703 precision and predictability. To achieve these goals, the proposed rules would move the margin calculation methodology, including the relevant defined terms currently located in various Rules, into a new Margin Component Schedule. The proposed rules would also revise Rule 4 to make clear that a Netting Member’s margin requirement is the sum of the margin amounts calculated for each type of Account in which transactions are recorded for the Netting Member. Further, the proposed rules would set forth a method for allocating net unsettled positions to individual indirect participants for purposes of calculating margin requirements. In addition, the proposed rules would revise and clarify the calculation of the excess capital premium component of the Clearing Fund, to cap such amount at two times the amount by which a Netting Member’s VaR Charge exceeds its Netting Member Capital, clarify the capital amounts that are used in the calculation of such amount, limit FICC’s discretion to waive the amount, and provide that FICC may calculate the premium based on updated available information. The proposed changes would also take steps to ensure that the excess capital premium does not result in differential treatment of indirect participants simply because of the particular capital level of the Netting Member providing access to FICC’s clearance and settlement systems. Lastly, the proposed rule changes would modify the terms relating to brokered transactions to require that only transactions that an Inter-Dealer Broker Netting Member executes on the Inter-Dealer Broker Netting Member’s own trading platform benefit from favorable loss allocation treatment.14 FICC believes that making these changes would improve FICC’s risk management and promote access by ensuring that its differential treatment of different parties and transactions has a sound risk management justification. Background FICC, through GSD, serves as a central counterparty and provider of clearance and settlement services for the U.S. government securities markets. Margin is a key tool that FICC uses to manage its credit exposures to its members. The aggregated amount of all GSD members’ 14 See Rule 4, Section 7 (‘‘Notwithstanding the foregoing, however, an Inter-Dealer Broker Netting Member, or a Non-IDB Repo Broker with respect to activity in its Segregated Repo Account, shall not be subject to an aggregate loss allocation in an amount greater than $5 million pursuant to this Section 7 for losses and liabilities resulting from an Event Period.’’), supra note 4. E:\FR\FM\28MRN1.SGM 28MRN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices margin constitutes the GSD Clearing Fund (referred to herein as the ‘‘Clearing Fund’’). The objective of the Clearing Fund is to mitigate potential losses to FICC associated with liquidating a member’s portfolio in the event FICC ceases to act for that member (hereinafter referred to as a ‘‘default’’).15 Under Rule 4 (Clearing Fund and Loss Allocation), Netting Members are required to make deposits to the Clearing Fund in an amount (‘‘Required Fund Deposit’’) determined by reference to certain components. In determining a Netting Member’s Required Fund Deposit, FICC may consider not only the Netting Member’s proprietary transactions, but also the transactions that the Netting Member submits on behalf of indirect participants. However, the treatment of the indirect participant transactions for purposes of calculating the Required Fund Deposit can vary depending on whether those transactions are cleared under the Sponsored Service or prime brokerage/ correspondent clearing services. Netting Members are required to instruct FICC to record those transactions in one of the position-keeping accounts (each, an ‘‘Account’’) that FICC establishes and maintains for the Netting Member. The Account in which a transaction is recorded is relevant for determining the margin requirement associated with that transaction under the Rules. Currently, a Netting Member may instruct FICC to record in the same Account, currently known as a ‘‘Netting Member Account,’’ both the proprietary transactions of the Netting Member and transactions that the Netting Member carries for indirect participants through the prime brokerage/correspondent clearing services. Sponsored Member Trades, discussed in greater detail below, must be recorded in a separate Account. Under Rule 4, a Netting Member’s Clearing Fund requirement, other than that arising from Sponsored Member Trades, is calculated on a net basis across all transactions recorded in the same Account of the Netting Member (or, if the Netting Member has elected to have multiple Accounts form part of the same ‘‘Margin Portfolio,’’ all transactions recorded in all such Accounts).16 The Sponsored Service permits Netting Members that are approved to be ‘‘Sponsoring Members,’’ to sponsor certain institutional firms, referred to as ‘‘Sponsored Members,’’ into GSD membership.17 FICC establishes and maintains a ‘‘Sponsoring Member Omnibus Account’’ on its books in which it records the transactions of the Sponsoring Member’s Sponsored Members (‘‘Sponsored Member Trades’’).18 To determine a Sponsoring Member’s Clearing Fund requirement in relation to Sponsored Member Trades recorded in the Sponsoring Member’s Sponsoring Member Omnibus Account, FICC calculates the ‘‘VaR Charge’’ 19 and the ‘‘MLA Charge’’ 20 component for each Sponsored Member such that it does not net the Sponsored Member Trades of one Sponsored Member against the Sponsored Member Trades of another Sponsored Member, even though those Sponsored Member Trades are recorded in the same Sponsoring Member Omnibus Account.21 For all of the other components, FICC calculates the components by reference to the Sponsoring Member Omnibus Account as a whole (i.e., without regard to which Sponsored Member entered into which Sponsored Member Trade). In no instance does FICC net transactions recorded in a Sponsoring Member’s Sponsoring Member Omnibus Account against other transactions of the Sponsoring Member for purposes of calculating the Sponsoring Member’s Required Fund Deposit. As an alternative to the Sponsored Service, a Netting Member (in such capacity, a ‘‘Submitting Member’’) may submit to FICC eligible transactions on behalf of the Submitting Member’s customers (each, in such capacity, an ‘‘Executing Firm’’) through FICC’s existing prime broker/correspondent clearing services.22 As noted above, under the current Rules, a Submitting Member may instruct FICC to record such a transaction in the same Account at FICC as the Submitting Member’s proprietary transactions. Accordingly, if transactions a Submitting Member submits on behalf of Executing Firms through the prime broker/correspondent clearing services are recorded in the same Account as the Netting Member’s proprietary transactions (or in an Account that forms part of the same 17 See Rule 3A, supra note 4. Rule 1 (definition of ‘‘Sponsored Member Trades’’), supra note 4. 19 See Rule 1 (definition of ‘‘VaR Charge’’), supra note 4. 20 See Rule 1 (definition of ‘‘MLA Charge’’), supra note 4. 21 See Rule 3A, Section 10 (describing how the Required Fund Deposit for Sponsored Member Trades is calculated), supra note 4. 22 See Rule 8, supra note 4. 18 See 15 The Rules identify when FICC may cease to act for a member and the types of actions FICC may take. For example, FICC may suspend a firm’s membership with FICC or prohibit or limit a member’s access to FICC’s services in the event that member defaults on a financial or other obligation to FICC. See Rule 21 (Restrictions on Access to Services), supra note 4. 16 See Rule 4, supra note 4. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 21589 Margin Portfolio as an Account in which a Netting Member’s proprietary transactions are recorded), FICC nets such transactions against one another in calculating the Netting Member’s Required Fund Deposit.23 As noted above, the proposed rules would implement the amendments to Rule 17Ad–22(e)(6)(i) that require FICC to calculate, collect, and hold margin from a direct participant for its proprietary transactions in U.S. Treasury securities separately and independently from the margin calculated and collected for the U.S. Treasury transactions of an indirect participant that relies on the services provided by the direct participant to access FICC’s payment, clearing, or settlement facilities.24 The proposed rules would also clarify and simplify FICC’s account structure and improve the transparency of FICC’s public disclosures of its margining methodology. The proposed rules are also designed to allow broker-dealer Netting Members of FICC to collect margin from their customers and deposit that margin with FICC. As stated above, a Netting Member is responsible for the Clearing Fund obligations arising from the activity of indirect participant customers (i.e., Sponsored Members and Executing Firms). FICC understands from engagement with broker-dealer Netting Members and their indirect participant customers that, due to the requirements of Rule 15c3–3 25 and Rule 15c3–3a,26 broker-dealer Netting Members are effectively unable to deposit with FICC any margin collected from indirect participants to support those indirect participants’ transactions and must instead use proprietary resources. The Treasury Clearing Rules’ recent amendments to Rule 15c3–3a permit 23 Contemporaneously with this proposed rule change, FICC has submitted a separate proposed rule change (File No. SR–FICC–2024–005) under which FICC is proposing to rename its primer broker/correspondent clearing services the ‘‘Agent Clearing Service,’’ ‘‘Submitting Members’’ as ‘‘Agent Clearing Members’’, and ‘‘Executing Firms’’ as ‘‘Executing Firm Customers.’’ This separate proposed rule change would require that a Netting Member using the Agent Clearing Service submit transactions for Executing Firm Customers through an Agent Clearing Member Omnibus Account, to be recorded separately from its other clearing activity, including its proprietary activity. It would also add a definition for transactions eligible to be submitted by an Agent Clearing Member on behalf of its Executing Firm Customers (‘‘Agent Clearing Transactions’’). These proposed terms are used throughout this filing. These proposed changes are pending regulatory approval. A copy of this proposed rule change is available at www.dtcc.com/ legal/sec-rule-filings. 24 17 CFR 240.17Ad–22(e)(6)(i). See supra note 5. 25 17 CFR 240.15c3–3. 26 17 CFR 240.15c3–3a. E:\FR\FM\28MRN1.SGM 28MRN1 21590 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices broker-dealers to include margin required and on deposit at a Treasury CCA as a debit item in the reserve formulas under certain conditions.27 As described in more detail below, the proposed changes would address those conditions. Therefore, the proposal would allow broker-dealer Netting Members to collect margin from customers and deposit it with FICC and to permit all customers, including those that access FICC through non-brokerdealers, to segregate margin they deposit. Finally, the proposed rule changes would address the treatment of transactions submitted to FICC by InterDealer Broker Netting Members and certain Netting Members that operate similarly to Inter-Dealer Broker Netting Members (‘‘Non-IDB Repo Brokers’’). The Rules currently cap the amount of loss allocation that may applied to an Inter-Dealer Broker Netting Member or Non-IDB Repo Broker in respect of transactions submitted by such Netting Members to FICC for clearance and settlement (‘‘Brokered Transactions’’). This treatment is based on the more limited risk that Brokered Transactions present relative to other transactions. Description of Proposed Rule Changes 1. Segregate Indirect Participant Margin Requirements and Amend the GSD Account Structure The proposed rule changes would provide for the separate calculation, collection, and holding of margin supporting a Netting Member’s Proprietary Transactions and the margin supporting the transactions a Netting Member submits on behalf of indirect participants, in accordance with the requirements of Rule 17Ad–22(e)(6)(i), adopted under the Treasury Clearing Rules.28 In connection with these changes, the proposal would also clarify the types of accounts in which Netting Members may record transactions and adopt a roadmap to its account structure in a new Rule 2B. ddrumheller on DSK120RN23PROD with NOTICES1 A. Separately Calculate, Collect and Hold Indirect Participant and Proprietary Margin Requirements i. Limit Margin Portfolios to Accounts of the Same Type The separate calculation of proprietary and customer margin would be accomplished by clarifying that each Margin Portfolio may only include Accounts of the same Type (i.e., Dealer Accounts, Broker Accounts, Agent Clearing Member Omnibus Account, 27 See 28 17 supra note 5. CFR 240.17Ad–22(e)(6)(i). VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 and Sponsoring Member Omnibus Accounts). FICC would make this clarification by amending the definition of ‘‘Margin Portfolio’’ in Rule 1 and revising Rule 4, Section 1a, which would be renumbered Section 1b in light of changes described below, to provide that each Margin Portfolio may not contain more than one Type of Account (even if such Accounts are both Segregated Indirect Participants Accounts). By virtue of these changes, transactions recorded in different Types of Accounts could not be netted against each other when calculating Required Fund Deposit or Segregated Customer Margin Requirements. Since Proprietary Transactions and transactions submitted for indirect participants could not (by virtue of the changes described below) be recorded in the same Type of Account, the changes relating to Margin Portfolios would result in margin for a Netting Member’s Proprietary Transactions being calculated separately and independently from margin calculated for the transactions that the Netting Member submits on behalf of indirect participants. As conforming changes, paragraphs (b) and (c) of Section 1b, which currently provide for such separate margin calculations in certain contexts, would no longer be needed since the Margin Portfolio definition and other changes described above would achieve such separate calculations. ii. Required Fund Deposit Portions and Segregated Customer Margin Requirements To further clarify how FICC would calculate and collect a Netting Member’s margin requirements, the proposed rule changes would make other revisions to Rule 4. Specifically, Rule 4, Section 2, which currently describes a Netting Member’s Required Fund Deposit requirement, would be revised to provide that a Netting Member’s Required Fund Deposit consists of the sum of amounts (each, a ‘‘Required Fund Deposit Portion’’) calculated for each Type of Account, other than Segregated Indirect Participants Accounts. For Segregated Indirect Participants Accounts, there would, as mentioned below, be a Segregated Customer Margin Requirement, which would be the sum of the amounts calculated for the Netting Member’s (i) Sponsoring Member Omnibus Accounts designated as Segregated Indirect Participants Accounts and (ii) Agent Clearing Member Omnibus Accounts designated as Segregated Indirect Participants Accounts. PO 00000 Frm 00108 Fmt 4703 Sfmt 4703 In connection with these changes, FICC would add a corresponding definition of ‘‘Required Fund Deposit Portion’’ to Rule 1. FICC would also adopt a defined term referring to the Required Fund Deposit Portion for a Netting Member’s Agent Clearing Member Omnibus Account (‘‘Agent Clearing Member Omnibus Account Required Fund Deposit’’) and amend the defined term for the Required Fund Deposit Portion for a Netting Member’s Sponsoring Member Omnibus Account (the Sponsoring Member Omnibus Account Required Fund Deposit). In addition, conforming changes would be made to the separately proposed Rule 8, Section 7(g) that would describe the requirement of an Agent Clearing Member to make and maintain an Agent Clearing Member Omnibus Account Required Deposit and that the calculation of such requirement would be performed separately from the calculation for Margin Portfolios consisting of the Agent Clearing Member’s Proprietary Transactions. Similar conforming changes would be made to Rule 3A, Section 10 relating to a Sponsoring Member’s Sponsoring Member Omnibus Account Required Fund Deposit. iii. Separate Deposit IDs To Facilitate Separate Collection and Holding of Margin To ensure that margin for Proprietary Transactions is not only calculated separately and independently but also collected and held separately and independently of margin for indirect participant transactions, a new Rule 4, Section 2a would be added to the Rules. This section would require each Required Fund Deposit Portion to be made to FICC using a separate Deposit ID, which is an existing operational mechanism used by Netting Members to identify the type of Account for which a Required Fund Deposit is being made. A new Rule 4, Section 2b would impose a similar requirement in respect of Segregated Customer Margin Requirements. The use of these separate Deposit IDs would result in margin for each Type of Account being separately transferred to FICC and FICC recording on its books the separate margin amounts for each Type of Account. FICC would also adopt a definition of ‘‘Deposit ID’’ in Rule 1. Rule 4, Sections 2a and 2b would also require FICC to report a Netting Member’s Required Fund Deposit and Segregated Customer Margin Requirement twice daily, which is the same timing interval on which FICC currently reports a Netting Member’s margin requirement. The report would E:\FR\FM\28MRN1.SGM 28MRN1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices also specify the amount of margin attributable to each Required Fund Deposit Portion or Segregated Indirect Participants Account, as applicable, so that the Netting Member can transfer the different margin amounts separately. ddrumheller on DSK120RN23PROD with NOTICES1 iv. Eliminate Permitted Margin Affiliates In connection with these proposed rule changes, the proposal would eliminate the concept of Permitted Margin Affiliates, which allows a Member to elect to include its Accounts in the same Margin Portfolio with the Accounts of an affiliate that is also a Member, in accordance with the Rules.29 In this way, a Member and its affiliate can net their transactions for purposes of calculating their margin requirements. In order to support the proposed change described above, which are designed to provide for the separate calculation, collection, and holding of margin, FICC believes that retaining the option for Members to designate Permitted Margin Affiliates would create unnecessary complexity. No Netting Member currently has a Permitted Margin Affiliate, and FICC would need to examine how such a cross-affiliate margining arrangement would function within the context of the proposed revisions to the account structure and margin methodology in order to determine what steps would be needed to implement such an arrangement consistently with the standards applicable to covered clearing agencies. Therefore, FICC is proposing to eliminate the Permitted Margin Affiliate concept at this time. In order to implement this change, the proposal would remove the definition of ‘‘Permitted Margin Affiliate’’ from Rule 1, and remove references to Permitted Margin Affiliates from Rule 4, Section 1a (to be renamed Section 1b, as noted above); Rule 4, Section 1b (which would be removed and replaced by disclosures in the proposed Margin Component Schedule, as discussed below); Rule 4, Sections 4 and 6; Rule 21, Section 1; Rule 22, Section 2; and Rule 29, Section (a). B. Proposed Roadmap to Account Structure Through New Rule 2B and Revision to Account Structure FICC is proposing to adopt a new Rule 2B that would describe the types of Accounts FICC is able to maintain for Netting Members, identify the activity 29 See Rule 1 (defining ‘‘Permitted Margin Affiliates’’) and Rule 4, Section 1a(a) and (b) (permitting Members to include Accounts of their Permitted Margin Affiliates in their Margin Portfolio). Supra note 4. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 that would be recorded in each type of Account, and generally provide a roadmap to market participants of FICC’s account structure. i. Section 1—Establishment of Proprietary Accounts Rule 2B, Section 1 would provide that FICC can establish and maintain certain ‘‘Proprietary Accounts’’ to record transactions that a Netting Member enters into for its own benefit (‘‘Proprietary Transactions’’), rather than for the benefit of indirect participants. Proprietary transactions would not include transactions that a Netting Member enters into on behalf of an affiliate. The Proprietary Accounts available for recording Proprietary Transactions would include ‘‘Dealer Accounts,’’ which would be available for all Netting Members, and ‘‘Cash Broker Accounts’’ and ‘‘Repo Broker Accounts,’’ which would only be available for Inter-Dealer Broker Netting Members. Dealer Accounts would be for purposes of recording a Netting Member’s Proprietary Transactions (other than, in the case of an Inter-Dealer Broker Netting Member, its Brokered Transactions), while Cash Broker Accounts would be for purposes of recording an Inter-Dealer Broker Netting Member’s Brokered Transactions (other than Brokered Repo Transactions), and Repo Broker Accounts would be for purposes of recording an Inter-Dealer Broker Netting Member’s Brokered Repo Transactions. Rule 2B, Section 1 would make clear that, as under FICC’s existing Rules, FICC can establish multiple Proprietary Accounts of the same Type for the Netting Member. In connection with these changes, FICC is proposing to adopt new, corresponding definitions of Proprietary Transactions, Proprietary Accounts, and Cash Broker Accounts in Rule 1, and to make corresponding amendments to the definitions of Dealer Account and Repo Broker Account. FICC is also proposing to remove from Rule 1 the defined term ‘‘Netting Member Account’’ and replace references to such Account with references to Dealer Account. ii. Section 2—Establishment of NonProprietary Accounts Rule 2B, Section 2 would provide that FICC can establish and maintain certain ‘‘Indirect Participants Accounts’’ to record transactions that a Netting Member submits to FICC on behalf of Sponsored Members and Executing Firm Customers. These Indirect Participants Accounts would include, in the case of a Sponsoring Member, Sponsoring Member Omnibus Accounts PO 00000 Frm 00109 Fmt 4703 Sfmt 4703 21591 for purposes of recording Sponsored Member Trades, and, in the case of an Agent Clearing Member, Agent Clearing Member Omnibus Accounts for purposes of recording Agent Clearing Transactions of its Executing Firm Customers. Rule 2B, Section 2 would also make clear that FICC can establish multiple Indirect Participants Accounts of the same Type for the Netting Member. In connection with these changes, FICC is proposing to add to Rule 1 a new definition of Indirect Participants Account, which would include Agent Clearing Member Omnibus Accounts and Sponsoring Member Omnibus Accounts, and to correspondingly amend the definition of Sponsoring Member Omnibus Accounts. iii. Section 3—Segregation Designations for Indirect Participants Accounts Rule 2B, Section 3 would permit a Sponsoring Member or Agent Clearing Member to designate any of its Indirect Participants Accounts as a segregated customer account (a ‘‘Segregated Indirect Participants Account’’). The purpose of such a designation, as further described below, would be to give Netting Members a mechanism to direct FICC to calculate and segregate margin deposited in connection with the Account in accordance with the conditions described in Note H to Rule 15c3–3a (‘‘Note H’’), as further described below.30 In connection with this revision, a new definition for ‘‘Segregated Indirect Participant’’ would be added to Rule 1 to mean a Sponsored Member or an Executing Firm Customer whose transactions are recorded in a Segregated Indirect Participants Account. Rule 2B, Section 3 would provide that the designation of an Account as a Segregated Indirect Participants Account constitutes a representation to FICC by the Netting Member that the Netting Member intends to meet all margin requirements with respect to such Account using assets deposited by the Segregated Indirect Participants with the Netting Member, with the exception of temporary ‘‘prefunding’’ by the Netting Member while a margin call to the Segregated Indirect Participant is outstanding. The purpose of this representation is to ensure that only margin deposited by customers, not the Netting Member’s proprietary assets, is eligible for segregation. Rule 2B, Section 3 would further provide that the margin requirement (‘‘Segregated Customer Margin 30 17 E:\FR\FM\28MRN1.SGM CFR 240.15c3–3a. 28MRN1 21592 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices Requirement’’) calculated for a Segregated Indirect Participants Account would equal the sum of the margin requirements that apply to each Segregated Indirect Participant whose transactions are recorded in the Account, as though each such Segregated Indirect Participant were a Netting Member. By virtue of this change and as further described below, in calculating the Segregated Customer Margin Requirement for a Segregated Indirect Participants Account, FICC would not net the transactions of multiple Segregated Indirect Participants against one another. A corresponding definition of ‘‘Segregated Customer Margin Requirement’’ would be added to Rule 1 to mean the amount of cash and securities that a Netting Member is required to deposit with FICC to support the obligations arising under transactions recorded in its Segregated Indirect Participants Accounts. As described in greater detail below, such amounts would be further described and addressed in Rule 4, Section 2(a)(v) and (vi). ddrumheller on DSK120RN23PROD with NOTICES1 iv. Section 4—Designation of Account When Submitting Transactions Lastly, Rule 2B, Section 4 would require a Netting Member, at the time it submits a Transaction to FICC for clearance and settlement, to designate the Account in which the particular transaction should be recorded. Any such designation would constitute a representation to FICC that the transaction is of a type that may be recorded in that Account in accordance with the Rules. The purpose of such representation would be to ensure that Netting Members record only their Proprietary Transactions in Proprietary Accounts, which separate recordation is necessary for the separate and independent calculation, collection, and holding of margin for direct participant and indirect participant transactions. In addition, Rule 2B, Section 4 would provide that, when submitting a transaction on behalf of a Sponsored Member or Executing Firm Customer, a Netting Member must include an identifier for the applicable Sponsored Member or Executing Firm Customer. This requirement is consistent with an existing requirement in the Schedule of Required Data Submission Items in the Rules and ensures that FICC continues to have the ability to accurately calculate the Required Fund Deposit and Segregated Customer Margin Requirements appropriately. This requirement also facilitates FICC’s ability to engage in risk management and market surveillance in accordance VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 with the covered clearing agency standards. In connection with these changes, FICC also proposes to remove from Rule 1 the term ‘‘Netting Member Account,’’ as such defined term would no longer be used. References to Netting Member Accounts throughout the Rules would be revised to ‘‘Dealer Accounts’’, which would more clearly distinguish these Accounts from Broker Accounts, the other type of Proprietary Accounts. FICC would also remove Section 11 of Rule 3, which currently concern the types of Accounts that Netting Members may open. Rule 2B would now describe the Types of Accounts Netting Members may request as well as the transactions that may be recorded in such Accounts. The foregoing changes are designed to ensure that proprietary and indirect participant transactions are recorded in separate Accounts. This would assist FICC in tracking and managing the risks associated with a Netting Member’s proprietary and indirect participant transactions. It would also facilitate compliance with the revised covered clearing agency standards regarding the separate calculation, collection, and holding of indirect participant and proprietary margin, which is described in further detail below. v. Simplification and Revision of Account Structure To support the foregoing changes, FICC is proposing to provide further clarity on what an Account is for purposes of the Rules. Under the Rules, ‘‘Accounts’’ at FICC are not cash, securities, or other kinds of custodial accounts through which FICC holds assets for a Netting Member. Instead, FICC Accounts are a recordkeeping mechanism by which FICC records certain transactions submitted by Netting Members to FICC for clearance and settlement. This recordkeeping mechanism allows FICC to determine which transactions should be netted against one another in determining various obligations of the Netting Member, including its funds-only settlement amount and securities settlement obligations and its Required Fund Deposit. As discussed above, generally speaking, all transactions recorded in the same Account are netted for purposes of determining these obligations (though certain components of the Required Fund Deposit arising from Sponsored Member Trades are calculated on a gross basis, as described above). FICC is proposing to amend the definition of ‘‘Account’’ in Rule 1 to make clear that an ‘‘Account’’ means an account maintained by FICC to record transactions. In addition, FICC is PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 proposing to adopt a new defined term, ‘‘Type of Account’’ or ‘‘Type,’’ to refer to the different kinds of Accounts described above. FICC is also proposing to eliminate the concept of a Market Professional Cross-Margining Account, which refers to an Account carried by FICC for a Netting Member that is limited to Eligible Positions of Market Professionals or an Account that is carried by a Netting Member for Market Professionals that are party to a MarketProfessional Agreement for CrossMargining. FICC does not currently have in place a cross-margining arrangement for market professional indirect participants and would need to examine how such an arrangement would function within the context of the proposed revisions to the Account structure and margin methodology in order to determine what steps would be needed to implement such an arrangement consistently with the standards applicable to covered clearing agencies. Therefore, FICC is proposing to eliminate the Market Professional Cross-Margining Account concept at this time. In order to implement this change, the proposal would remove the definition of ‘‘Market Professional Cross-Margining Account’’ from Rule 1 and remove provisions concerning Market Professional Cross-Margining Accounts from Rule 1, Rule 4 and Rule 29. 2. Proposed Rule Changes Relating to Note H of Rule 15c3–3a As described above, FICC would permit Netting Members to designate certain Indirect Participants Accounts as Segregated Indirect Participants Accounts. Such a designation would have the effect of causing FICC to calculate, collect, and hold the required margin for transactions recorded in such Accounts in accordance with the conditions for recording a debit in the customer reserve formula set forth in Note H of Rule 15c3–3a.31 A. Gross Calculation of Segregated Customer Margin Requirements In order to satisfy the requirement of Section (b)(2)(i) of Note H to Rule 15c3– 3a that the margin requirement be calculated on a gross basis,32 new Rule 2B would, as noted above, provide that when calculating the Segregated Customer Margin Requirement, FICC would not net the transactions of multiple Segregated Indirect Participants, but would net the transactions of a single Segregated 31 17 CFR 240.15c3–3a. 32 Id. E:\FR\FM\28MRN1.SGM 28MRN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices Indirect Participant that are recorded in the same Account. In addition, the revised Rule 4, Section 1b would require FICC to calculate a Netting Member’s Segregated Customer Margin Requirement with respect to a particular Segregated Indirect Participants Account as the sum of the margin requirements applicable to each Segregated Indirect Participant whose transactions are recorded in such Account, as though each Segregated Indirect Participant were a separate Netting Member with a single Margin Portfolio consisting of such transactions. These provisions would result in FICC calculating separate margin amounts for each Segregated Indirect Participant and for such amounts to be collected on a gross basis. FICC would also include language in the new Margin Component Schedule to achieve gross margining of Segregated Indirect Participants Accounts. Specifically, in Section 1 of the new Margin Component Schedule discussed below, new language would require each Netting Member for which FICC maintains a Segregated Indirect Participants Account to deposit with FICC Segregated Customer Margin equal to the sum of the Segregated Customer Margin Requirements for all such Accounts. Such language would further provide that each Segregated Customer Margin Requirement will be calculated twice daily and equal the sum of the amounts calculated pursuant to Section 3 of the Margin Component Schedule for each Segregated Indirect Participant whose transactions are recorded in the relevant Segregated Indirect Participants Account. Section 3 of the new Margin Component Schedule, in turn, would set out the methodology for calculating such margin amounts. That section would provide for FICC to perform substantially the same calculation it currently performs when determining a Netting Member’s Required Fund Deposit, except (i) such calculation would be performed on a Segregated Indirect Participant-by-Segregated Indirect Participant basis as though each Segregated Indirect Participant represented a separate Margin Portfolio and (ii) FICC would not impose an Excess Capital Premium. With regard to the latter, FICC does not believe it would be appropriate to require an indirect participant to deposit with FICC additional margin on account of the capital position of its Netting Member. The Excess Capital Premium is designed to address the risk that a Netting Member with low capital relative to its VaR Charge will not be VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 able to perform its obligations. However, Segregated Customer Margin cannot be applied to a Netting Member’s obligations (other than to perform on behalf of the individual indirect participant for whom the Segregated Customer Margin is held). Accordingly, requiring indirect participants to deposit an additional Excess Capital Premium would not serve a risk management purpose. Further, requiring indirect participants who access FICC’s clearance and settlement systems through a Netting Member with low capital to deposit more margin than indirect participants who access FICC’s clearance and settlement system through other Netting Members would treat similarly situated indirect participants differently without an appropriate basis to do so. Moreover, it could lead to concentration among Netting Members, as indirect participants would be disincentivized to access clearing through smaller Netting Members, since smaller Netting Members typically have lower net capital. For similar reasons, FICC would not add Segregated Customer Margin to Section 4 of the Margin Component Schedule, which describes FICC’s ability to impose increased Required Fund Deposits under certain circumstances. However, when determining whether to increase the Required Fund Deposit of a Netting Member under the circumstances described in Section 4, FICC may consider the risk presented by a Netting Member in view of all activity it submits to FICC, including activity of indirect participants. As a conforming change, FICC would revise the definitions of most of the components utilized for calculating a Netting Member’s Segregated Customer Margin Requirement as well as associated definitions to provide that these apply to Segregated Indirect Participants on a Segregated Indirect Participant-by-Segregated Indirect Participant basis. These definitions include the Backtesting Charge, the Holiday Charge, the Intraday Supplemental Fund Deposit, the Margin Liquidity Adjustment or MLA Charge, the Margin Proxy, the Minimum Margin Amount,33 the Portfolio Differential Charge, the Unadjusted GSD Margin Portfolio Amount, and the VaR Charge. 33 FICC has filed a proposed rule change and related advance notice to adopt a Minimum Margin Amount at GSD (File Nos. SR–FICC–2024–003 and SR–FICC–2024–801). This proposal is pending regulatory approval, and the filings are available at www.dtcc.com/legal/sec-rule-filings. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 21593 B. Segregation of Customer Margin Deposits In order to satisfy the segregation requirements of Section (b)(2)(iii) of Note H to Rule 15c3–3a,34 FICC is proposing a number of changes to the Rules. First, FICC is proposing to adopt a new definition of ‘‘Segregated Customer Margin’’ in Rule 1, which definition would refer to ‘‘all securities and funds deposited by a Sponsoring Member or an Agent Clearing Member with the Corporation to satisfy its Segregated Customer Margin Requirement.’’ FICC would also adopt a new Rule 4, Section 1a. That provision would require a Netting Member to deposit Segregated Customer Margin with FICC equal to the Netting Member’s Segregated Customer Margin Requirement in accordance with the timing provisions generally applicable to Required Fund Deposits. i. Establishment of Segregated Accounts In order to satisfy the requirements of Section (b)(2)(iii) of Note H that margin ‘‘be held in an account of the broker or dealer at the qualified clearing agency that is segregated from any other account of the broker or dealer at the qualified clearing agency,’’ 35 Rule 4, Section 1a would provide for FICC to establish on its books and records for each Netting Member that deposits Segregated Customer Margin a ‘‘Segregated Customer Margin Custody Account’’ corresponding to each Segregated Indirect Participants Account of such Netting Member. Segregated Customer Margin Custody Account would be defined in Rule 1 as ‘‘a securities account within the meaning of the NYUCC maintained by the Corporation, in its capacity as securities intermediary as such term is used in the NYUCC, for an Agent Clearing Member or Sponsoring Member for the benefit of such Member’s Segregated Indirect Participants.’’ In other words, in contrast to the other FICC Accounts, which, as discussed above, are position record-keeping accounts rather than custodial accounts, each Segregated Customer Margin Custody Account would be a ‘‘securities account’’ within the meaning of the NYUCC. As noted above, FICC is also proposing to amend the definition of ‘‘Account’’ in Rule 1 to make clear that such term refers only to an account maintained by FICC for a Netting Member to record transactions submitted by that Netting Member. FICC believes this change would help to 34 17 CFR 240.15c3–3a. 35 Id. E:\FR\FM\28MRN1.SGM 28MRN1 21594 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 distinguish ‘‘Accounts,’’ which are simply a transaction recordation mechanism, from the ‘‘Segregated Customer Margin Custody Account,’’ which is a traditional custodial account to which FICC would credit cash and securities. Rule 4, Section 1a would further provide that any assets credited to the Segregated Customer Margin Custody Account would be treated as financial assets within the meaning of the NYUCC. These changes would have the effect of making FICC the ‘‘securities intermediary’’ in respect of each Segregated Customer Margin Custody Account and the Netting Member, on behalf of its Segregated Indirect Participants, the ‘‘entitlement holder’’ under the NYUCC.36 By virtue of these designations, the Segregated Customer Margin held by FICC would be reserved for the Netting Member (on behalf of its Segregated Indirect Participants), including in an FICC insolvency.37 Rule 4, Section 1a would further provide that all Segregated Customer Margin deposited with FICC to support the obligations arising under the transactions recorded in a given Segregated Indirect Participants Account be credited to the corresponding Segregated Customer Margin Custody Account. In other words, rather than treat Segregated Customer Margin as general Clearing Fund, FICC would record such margin in a specific Segregated Customer Margin Custody Account maintained by FICC on its books and records for the Netting Member that deposited such Segregated Customer Margin, which Account would be separate from any other Accounts maintained by FICC for the Netting Member, including fellow Segregated Customer Margin Custody Accounts. In furtherance of the goal of segregation, FICC would also amend Rule 4, Section 3a to provide that any interest on Segregated Customer Margin consisting of cash be paid to Netting Members.38 36 UCC § 8–102(7) (‘‘‘Entitlement holder’ means a person identified in the records of a securities intermediary as the person having a security entitlement against the securities intermediary. . . .’’). 37 See UCC § 8–503. 38 Rule 4, Section 1a would also specify New York as the ‘‘securities intermediary’s jurisdiction’’ for purposes of the NYUCC and specify that New York law would govern all issues specified in Article 2(1) of the Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary, July 5, 2006, 17 U.S.T. 401, 46 I.L.M. 649 (entered into force Apr. 1, 2017) (the ‘‘Hague Securities Convention’’). These changes are designed to ensure that New York law governs each Segregated Customer Margin Custody Account. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 ii. Exclusive Use, Account Designation, and Exclusive Benefit To satisfy the requirements of Section (b)(2)(iii)(A) of Note H that customer margin be ‘‘used exclusively to clear, settle, novate, and margin U.S. Treasury securities transactions of the customers of the broker or dealer;’’ 39 FICC would provide in Rule 4, Section 1a that the Segregated Customer Margin credited to a Segregated Customer Margin Custody Account would be used exclusively to settle and margin transactions in U.S. Treasury securities recorded in the corresponding Segregated Indirect Participants Account. Rule 4, Section 1a would also provide that the Segregated Customer Margin Custody Account would be designated on FICC’s books and records as a ‘‘Special Clearing Account for the Exclusive Benefits of the Customers of [the relevant Sponsoring Member or Agent Clearing Member].’’ This is in accordance with the designation requirements of Section (b)(2)(iii)(B) of Note H.40 Section (b)(2)(iii)(C) of Note H requires that the account at the clearing agency to which customer margin is credited be subject to a written notice from the clearing agency to the brokerdealer stating that the margin credited to the account is being held ‘‘for the exclusive benefit of the customers of the broker or dealer in accordance with the regulations of the Commission and [is] being kept separate from any other accounts maintained by the broker or dealer or any other clearing member at the qualified clearing agency.’’ 41 Rule 4, Section 1a would provide for FICC to provide this notice to any Netting Member that is a Registered Broker or Registered Dealer and has designated an account as a Segregated Indirect Participants Account. iii. Limitation on Permitted Liens and Use of Margin Deposits FICC is also proposing changes to the Rules to satisfy the condition of Section (b)(2)(iii)(D) of Note H that the account established pursuant to Section (b)(2)(iii), i.e., each Segregated Customer Margin Custody Account, be subject to a written contract providing that the customer margin in the account, i.e., the Segregated Customer Margin, not be available to cover claims arising from the broker-dealer or any other clearing member defaulting on an obligation to the Treasury CCA, or be subject to any other right, charge, security interest, lien, or claim of any kind in favor of the 39 17 CFR 240.15c3–3a. qualified clearing agency or any person claiming through the qualified clearing agency, except a right, charge, security interest, lien, or claim resulting from a cleared U.S. Treasury securities transaction of a customer of the brokerdealer effected in the account.42 Specifically, FICC is proposing to amend the security interest each Netting Member provides to FICC under Rule 4, Section 4. That security interest, which is binding on the Netting Member and FICC through the incorporation of the Rules into the membership agreement between FICC and such Netting Member, currently applies to all cash and securities deposited by a Netting Member with FICC pursuant to Rule 4 and Rule 13 (defined in the Rules as the ‘‘Actual Deposit’’) and secures all obligations of the Netting Member to FICC. FICC is proposing to amend Rule 4, Section 4 to exclude Segregated Customer Margin from the scope of the Actual Deposit. Such Segregated Customer Margin would instead be subject to a separate security interest pursuant to which the Segregated Customer Margin would secure only obligations arising out of Segregated Indirect Participants Accounts. FICC would also make a conforming change to Rule 3A, Section 10(f) to make clear that the security interest described therein only applies to the security interest granted in the Actual Deposit. In addition, the bulk of the provisions of the Rules concerning Clearing Fund, including those relating to FICC’s ability to use Clearing Fund, would not apply to Segregated Customer Margin since such margin would not form part of the Clearing Fund. The only exceptions are the language in Rule 3A, Section 10(f) stating that margin obligations are secured by the Actual Deposit; the language in Rule 3A, Section 10(g) concerning fines applicable to a failure to meet margin requirements; the language in Rule 4, Section 3a concerning the requirement that cash margin deposits be made in immediately available funds; the language in Rule 4, Section 3b regarding the haircutting, delivery, qualification, and substitution requirements for securities margin; and the language in Rule 4, Section 9 relating to the requirement of Netting Members to deliver margin. These changes would ensure that FICC’s broad use rights in respect of Clearing Fund, e.g., for loss mutualization, do not apply to Segregated Customer Margin. In addition, FICC is proposing to amend Rule 4, Section 5 to provide that, on each Business Day, FICC would 40 Id. 41 Id. PO 00000 Frm 00112 42 Id. Fmt 4703 Sfmt 4703 E:\FR\FM\28MRN1.SGM 28MRN1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 calculate the portion of Segregated Customer Margin that supports each Segregated Indirect Participant’s transactions. FICC may only use such portion to secure or settle the performance of the obligations of that Segregated Indirect Participant (or its Sponsoring Member or Agent Clearing Member with respect to the Segregated Indirect Participant) or for permitted investment purposes described below. It would further provide that FICC would not be permitted to use Segregated Customer Margin supporting one Segregated Indirect Participant’s transaction to secure or settle any other person’s transactions, including those of a fellow Segregated Indirect Participant. These changes would thus not only prohibit FICC from using Segregated Customer Margin to cover the obligations of the broker-dealer Netting Member in respect of its Proprietary Transactions or those of any other Netting Member in accordance with the requirements of Section (b)(2)(iii)(D) of Note H, but they would also limit ‘‘fellow customer risk’’ for Segregated Indirect Participants (i.e., the risk that one customer incurs a loss on account of a default of another customer because the clearing organization applies margin deposited by the first customer to the second customer’s obligations).43 FICC believes these changes would facilitate greater access to its clearance and settlement services. FICC is proposing to require that the Segregated Margin Requirement be no lower than $1 million per Segregated Indirect Participant, and that the same form of deposit requirements set forth in Rule 4, Section 3 apply to Segregated Customer Margin such that no less than $1 million per Segregated Indirect Participant consist of cash. These changes would be accomplished through a new subsection (c) of Rule 4, Section 3 and reflected in the Margin Component Schedule. First, this minimum requirement is consistent with the $1 million minimum cash requirement applicable to each Margin Portfolio of a Netting Member. FICC believes it is appropriate to apply the same minimum cash requirement to each Segregated Indirect Participant that 43 In the event of the insolvency, resolution, or liquidation of a Netting Member, a Segregated Indirect Participant’s ability to recover any funds or securities it has posted to its Netting Member in connection with an FICC-cleared transaction or that the Netting Member receives from FICC in connection with such a transaction will depend on the relevant insolvency, resolution, or liquidation regime. FICC would not, except as directed by the relevant insolvency, resolution, or liquidation officials in accordance with applicable law, make any payments or transfer any assets directly to an indirect participant. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 it currently applies to each Margin Portfolio because, as described above, FICC would be required to calculate the margin requirements for these participants on a gross basis, as if each Segregated Indirect Participant were a separate Margin Portfolio, and would be restricted from using these funds to address any losses other than losses resulting from the participant for whom the funds are held. Second, because FICC would be restricted from using these funds to address any losses other than losses resulting from the indirect participant for whom these funds are deposited, FICC believes this minimum requirement is appropriate to mitigate the risk exposures presented by this limitation. FICC’s daily backtesting of the sufficiency of Clearing Fund deposits has revealed a heightened likelihood of backtesting deficiencies for those Members with lower deposits that are not sufficient to mitigate any abrupt intraday change in their exposures.44 Based on the analysis and impact studies FICC conducted in connection with a recent increase to minimum Required Fund Deposit for Netting Members,45 FICC has determined that a $1 million minimum requirement is the appropriate minimum amount to optimize the balance between financial impact of the requirement to Members and FICC’s ability to continue to meet its regulatory obligation to maintain a backtesting performance coverage ratio above its 99 percent coverage target. FICC is not able to predict how many indirect participants may elect to submit activity to FICC through a Segregated Indirect Participants Account, or the size and volume of that activity. However, because the margin requirements for each Segregated Indirect Participant would be calculated in the same manner as the requirements for each Margin Portfolio, it believes that these studies provide it with an appropriate approximation of the risks it may face if margin deposits for these Accounts are not subject to a minimum requirement. C. Holding Segregated Customer Margin Deposits in Bank and FRBNY Accounts To satisfy the eligible custodian conditions set forth in Section (b)(2)(iv) of Note H,46 FICC is proposing to amend 44 As a covered clearing agency, FICC is required under Rule 17Ad–22(e)(6)(vi) to conduct backtests of its margin model at least once a day. 17 CFR 240.17Ad–22(e)(6)(vi). FICC’s backtesting performance target is 99 percent. 45 See Securities Exchange Act Release No. 96136 (Oct. 24, 2022), 87 FR 65268 (Oct. 28, 2022) (SR– FICC–2022–006). 46 17 CFR 240.15c3–3a. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 21595 Rule 4, Section 1a to provide that all Segregated Customer Margin be held in an account of FICC at a bank within the meaning of the Act that is insured by the Federal Deposit Insurance Corporation, or at the Federal Reserve Bank of New York. Rule 4, Section 1a would also provide that such account would be segregated from any other account of FICC and would be used exclusively to hold Segregated Customer Margin, in accordance with Section (b)(2)(iv)(A) of Note H to Rule 15c3– 3a.47 To satisfy the requirements of Sections (b)(2)(iv)(B) and (C) of Note H,48 Rule 4, Section 1a would further provide that each such account would be subject to (i) a written notice of the bank or Federal Reserve Bank provided to and retained by FICC that the account is being held by the bank or Federal Reserve Bank pursuant to Rule 15c3–3 and is being kept separate from any other accounts maintained by FICC or any other person at the bank or Federal Reserve Bank and (ii) a written contract between FICC and the bank or Federal Reserve Bank which provides that the Segregated Customer Margin in the account is subject to no right, charge, security interest, lien, or claim of any kind in favor of the bank or Federal Reserve Bank or any person claiming through the bank or Federal Reserve Bank. D. Investment Restrictions on Segregated Customer Margin Cash In accordance with Section (b)(2)(ii) of Note H,49 Rule 4, Section 1a would be amended to require FICC to only invest Segregated Customer Margin consisting of cash in U.S. Treasury securities with a maturity of one year or less. FICC will propose changes to the Clearing Agency Investment Policy by a separate proposed rule change filing to address the separate holding and investment of Segregated Customer Margin cash, consistent with the disclosures proposed to be added to Rule 4. Pursuant to those changes, FICC would only hold Segregated Customer Margin consisting of cash in a cash deposit account at the Federal Reserve Bank of New York or, pending the opening of such account, another FDICinsured bank and does not intend to make any other investment of these funds. E. Return of Segregated Customer Margin Lastly, in order to satisfy the condition in section (b)(2)(v) of Note H 47 Id. 48 Id. 49 Id. E:\FR\FM\28MRN1.SGM 28MRN1 21596 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices that a Treasury CCA adopt rules requiring systems, controls, policies, and procedures to return excess customer margin to a broker-dealer,50 FICC is proposing to adopt certain amendments to Rule 4, Section 10. Under the proposed rule changes, Rule 4, Section 10 would be revised to require FICC to calculate twice each Business Day the excess of a Netting Member’s Segregated Customer Margin over the Segregated Customer Margin Requirement (such amount, the ‘‘Excess Segregated Customer Margin’’).51 In addition, FICC would adopt a new Rule 4, Section 10(b) that would require FICC to return a Netting Member’s Excess Segregated Customer Margin at the Netting Member’s request. In order to manage the risk of a Segregated Indirect Participant’s transactions in accordance with the requirements of Rule 17Ad– 22(e)(6) under the Act,52 FICC would retain the discretion to retain such Excess Segregated Customer Margin if the Netting Member has any outstanding payment or margin obligation with respect to the transactions of any Segregated Indirect Participant. However, proposed Section 10(b) of Rule 4 would provide that, unlike in the case with Clearing Fund, FICC would not be able to retain Excess Segregated Customer Margin due to any obligation of the Netting Member that is unrelated to the Segregated Indirect Participants Account, unless FICC is either required to do so by applicable law or is authorized to do so by the Commission. ddrumheller on DSK120RN23PROD with NOTICES1 3. Align Margin Methodology With Proposed Account Structure and Enhance Public Disclosures of Margin Components and Clearing Fund Methodology FICC is proposing changes to the Rules to reorganize, clarify, and refine its margin calculation methodology. FICC is not changing the method by which it calculates the various margin components. A. Consolidate Margin Components and Clearing Fund Calculation Methodology in Proposed Margin Component Schedule In order to improve the clarity and transparency of its margin components and Clearing Fund calculation methodology, FICC is proposing to move the calculation methodology from Rule 4, Sections 1b, and 2a, Rule 3, 50 Id. 51 The twice each Business Day interval would also apply to the calculation of a Netting Member’s excess Required Fund Deposit, since that is the interval on which FICC currently performs such calculation. 52 17 CFR 240.17Ad–22(e)(6). VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 Section 14, and Rule 3A, Section 10, as well as the associated definitions of the margin components and associated terms, including Backtesting Charge, Blackout Period Exposure Adjustment, Excess Capital Differential, Excess Capital Ratio, Excess Capital Premium, Holiday Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment Charge or MLA Charge, Margin Proxy, Minimum Margin Amount,53 Portfolio Differential Charge, Unadjusted GSD Margin Portfolio Amount, VaR Charge, VaR Floor and VaR Floor Percentage Amount to a new Margin Component Schedule. As noted above, this methodology would not change, and would continue to be substantively the same as that which currently exists under Rule 4 and Rule 3A, Section 10. The Margin Component Schedule would include existing and refined descriptions of the manner and method by which FICC would calculate a Netting Member’s Required Fund Deposit and Segregated Customer Margin Requirement. FICC believes that describing its margin calculation methodology in a single schedule would facilitate access to its clearing and settlement services by making it easier for market participants to identify and review that methodology. FICC would also make conforming changes to provisions of the Rules that reference the margin calculation methodology of Rule 4 so that such provisions reference the Schedule of Margin Components. Section 1 of the Margin Component Schedule would provide that both a Netting Member’s Required Fund Deposit and its Segregated Customer Margin Requirement would be calculated twice each Business Day and that the Netting Member would be required to meet such requirements. This is the same time interval in which FICC currently calculates and collects a Netting Member’s margin requirements. Section 2 of the Margin Component Schedule would set forth the methodology for calculating a Netting Member’s Required Fund Deposit. As discussed above, Section 3 of the Margin Component Schedule would set forth the methodology for calculating a Netting Member’s Segregated Customer Margin Requirement. Section 4 of the Margin Component Schedule would set forth the terms under which FICC may impose increased Required Fund Deposits. These terms would be substantively the same as those currently in Rule 4 and Rule 3A, Section 10. 53 Supra PO 00000 note 33. Frm 00114 Fmt 4703 Section 5 of the Margin Component Schedule would contain the relevant definitions for the margin methodology calculation. These would be substantively the same as the existing definitions in Rule 1, with certain changes. As noted above, the definitions of Backtesting Charge, Blackout Period Exposure Adjustment, Excess Capital Differential, Excess Capital Ratio, Excess Capital Premium, Holiday Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment or MLA Charge, Margin Proxy, Minimum Margin Amount,54 Portfolio Differential Charge, Unadjusted GSD Margin Portfolio Amount, VaR Charge, VaR Floor and VaR Floor Percentage Amount would be revised to provide for such charges to be calculated for purposes of Segregated Customer Margin Requirements on a Segregated Indirect Participant-bySegregated Indirect Participant basis. In addition, the MLA Charge definition would be amended to provide that, if a Segregated Indirect Participant clears through multiple Accounts (including Accounts of different Netting Members), then the MLA Charge applicable to its transactions carried in a given Segregated Indirect Participants Account would equal the greater of (i) an amount calculated only with regard to the transactions maintained in that Account (i.e., without regard to the other Accounts in which the Segregated Indirect Participant’s transactions are recorded) and (ii) an amount calculated on a consolidated portfolio basis (i.e., taking into account the transactions carried in each of the Accounts). This is currently the same methodology that is used for Sponsored Members that clear through multiple Accounts. B. Revise Definition of ‘‘Current Net Settlement Positions’’ In order to refine its margin calculation methodology, FICC is also proposing to amend the definition in Rule 1 of Current Net Settlement Positions to provide for Current Net Settlement Positions in a Sponsoring Member Omnibus Account or Segregated Indirect Participants Account that are not clearly allocable to an individual Sponsored Member or Segregated Indirect Participant to be allocated, for purposes of calculating margin requirements, pro rata to the Sponsored Members or Segregated Indirect Participants that had, as of the end of the preceding Business Day, positions in the same direction and CUSIP as the un-allocable Current Net Unsettled Positions. This situation could arise if, for example, a transaction 54 Supra Sfmt 4703 E:\FR\FM\28MRN1.SGM note 33. 28MRN1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 recorded in a Sponsoring Member Omnibus Account or Segregated Indirect Participants Account fails to settle. FICC believes this methodology facilitates a reasonable and fair allocation for purposes of calculating gross margin requirements. FICC would make a corresponding deletion to the language of Rule 3A, Section 7 that addresses the treatment of such positions in Sponsoring Member Omnibus Accounts. Currently Rule 3A, Section 7(a)(i) provides that Net Settlement Positions per CUSIP shall be calculated for each Sponsored Member in the same manner set forth in Rule 11 for Netting Members. The proposed changes to the definition of Current Net Settlement Positions would, however, result in a different calculation of the Net Settlement Positions per CUSIP for Sponsored Members whose positions are recorded in a Sponsoring Member Omnibus Account than for Netting Members. Therefore, the statement in Rule 3A, Section 7 would no longer be correct and would be removed from the Rules. C. Enhance the Methodology for Calculating the Excess Capital Premium FICC is also proposing to amend the terms related to the Excess Capital Premium, one of the components of the Required Fund Deposit calculation, in order to make such calculation more precise and predictable. Currently, the Excess Capital Premium applicable to a Netting Member equals the Netting Member’s ‘‘Excess Capital Ratio’’ (i.e., its VaR Charge divided by its Netting Member Capital) multiplied by its ‘‘Excess Capital Differential’’ (i.e., the amount by which a Netting Member’s VaR Charge exceeds its Netting Member Capital). However, FICC currently reserves the right to collect less than this amount or to return some or all of this amount. FICC is proposing to make the Excess Capital Premium more precise and predictable by revising the definition to (i) cap such amount at two times a Netting Member’s Excess Capital Differential, (ii) provide that FICC would use the Netting Member Capital amounts set forth in the Netting Member’s most recent Form X–17–A–5 (Financial and Operational Combined Uniform Single (‘‘FOCUS’’) Report or Consolidated Report of Condition and Income (‘‘Call Report’’), as applicable, (iii) permit FICC in its discretion to accept updated amounts provided by a Netting Member prior to the issuance of the Netting Member’s next financial report, and (iv) set forth a specific procedure through which FICC may waive the Excess Capital Premium. With VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 regard to (iv), the proposed rule changes would provide that only a Managing Director in FICC’s Group Chief Risk Office could grant waiver of an Excess Capital Premium and only in exigent circumstances if FICC observed extreme market conditions or other unexpected changes in factors, based on all relevant facts and circumstances, including the degree to which a Netting Member’s capital position and trading activity compare or correlate to the prevailing exigent circumstances and whether FICC can effectively address the risk exposure presented by a Netting Member without the collection of the Excess Capital Premium from that Netting Member. Any such waiver would need to be documented in a written report made available to the relevant Netting Member. FICC believes that these changes, which are substantially similar to changes recently adopted by the National Securities Clearing Corporation, would enhance the ability of Netting Members to identify what their Excess Capital Premium will be and to ensure such amount is accurately calibrated.55 FICC would also amend the defined term ‘‘Netting Member Capital’’ in Rule 1 to refer to a Netting Member’s Net Capital, Net Assets, or Equity Capital, as applicable based on the Netting Member’s type of regulation. The definition of ‘‘Net Capital,’’ in turn, would be revised to refer specifically to the net capital of a Netting Member as reported on its most recent FOCUS Report or, if a Netting Member is not required to file a FOCUS Report, on its most recent financial statements or equivalent reporting. ‘‘Equity Capital’’ would be defined in Rule 1 to mean the equity capital of a Netting Member as reported on its most recent Call Report, or if a Netting Member is not required to file a Call Report, on its most recent financial statements or equivalent reporting. FICC believes these changes would increase predictability and understanding of how FICC calculates the Excess Capital Premium. FICC would also remove obsolete references to margin requirements for pending transactions since FICC does not apply margin requirements to such transactions. D. Exclude Segregated Customer Margin From Calculation of Excess Capital Premium Charge FICC is also proposing to revise the definitions of Excess Capital Ratio and Excess Capital Differential in the Margin 55 See Securities Exchange Act Release No. 96786 (Feb. 1, 2023), 88 FR 8013 (Feb. 7, 2023) (SR– NSCC–2022–005). PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 21597 Component Schedule to exclude the VaR Charge calculated with respect to Segregated Indirect Participants. The VaR Charge assessed for each Segregated Indirect Participant would be satisfied by the Segregated Indirect Participant, and not by the Netting Member. As noted above, the Excess Capital Premium is designed to address the risk that a Netting Member with low capital relative to value-at-risk is not able to perform its obligations. However, Segregated Customer Margin cannot be applied to satisfy a Netting Member’s obligations (other than to perform on behalf of the individual indirect participant for whom the Segregated Customer Margin is held). Therefore, including the VaR Charge that is calculated for a Segregated Indirect Participant and is satisfied by the capital of that Segregated Indirect Participant in the calculation of the Netting Member’s Excess Capital Premium could result in assessing an Excess Capital Premium for that Netting Member that is greater than the amount required to mitigate the risk that the Excess Capital Premium is designed to address. The proposed change is also designed to ensure that the Excess Capital Premium does not result in differential treatment of Netting Members that act as intermediaries for Segregated Indirect Participants. E. Other Clarifications and Conforming Changes In connection with the changes described above, FICC would make other clarifications and conforming changes to the Rules. First, FICC would move the definition of ‘‘Legal Risk’’ from Rule 4 to the definitions in Rule 1. This term refers to the risk that FICC may be unable to either access Required Fund Deposits or take action following the insolvency or bankruptcy of a Netting Member as the result of a law, rule or regulation applicable to the Netting Member.56 Because this term is used in multiple places in the Rules, including in the new Margin Component Schedule, moving the definition to Rule 1 would make it easier for a reader to find that definition. FICC would also delete the definition of the term ‘‘Minimum Charge’’ from Rule 1 and move the use of this term from Rule 4 to Sections 2(c) and 3(c) of the Margin Component Schedule. While FICC would continue to apply a requirement that Netting Members maintain a minimum amount for each Margin Portfolio or Segregated Margin Requirement, as discussed above, FICC 56 See E:\FR\FM\28MRN1.SGM Rule 4, Section 2(d), supra note 4. 28MRN1 21598 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices believes using a defined term for this concept is not necessary and could cause confusion about the requirement. The proposed change to remove the defined term and instead just explain the requirement in these sections of the Margin Component Guide would simplify and, therefore, clarify, the Rules in this regard. ddrumheller on DSK120RN23PROD with NOTICES1 4. Clarifications to Treatment of Brokered Transactions FICC is proposing to refine the definition of Brokered Transactions and remove conditions that Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers must meet in order to receive favorable loss allocation treatment. Currently, Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers must meet a set of conditions described in Section 8 of Rule 3 to be subject to a cap on the application of FICC’s loss allocation procedure of no greater than $5 million.57 FICC believes this favorable loss allocation treatment is appropriate because the Netting Member is not undertaking a directional position with respect to the transactions. Instead, each transaction has a counterparty other than the Netting Member that will ultimately deliver the securities or pay the cash. FICC is proposing to revise the Rules related to Brokered Transactions so that the favorable loss allocation treatment applies only to the transactions that present this limited risk. In particular, FICC is proposing to revise the definition of Brokered Transactions to only encompasses transactions entered into by an Inter-Dealer Broker Netting Member on the Inter-Dealer Broker Netting Member’s own trading platform. This rule change would limit the definition of these transactions to transactions for which an Inter-Dealer Broker is standing in between two counterparties and is thus completely flat. In connection with this change, FICC would eliminate the conditions that Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers must meet in order to be subject to such favorable treatment. As noted above, the proposed Rule 2B would clarify that only InterDealer Broker Netting Members are able to maintain Cash Broker Accounts or 57 See Rule 3, Section 8 (such conditions require that an Inter-Dealer Broker Netting Member ‘‘(A) limit its business to acting exclusively as a Broker; (B) conduct all of its business in Repo Transactions with Netting Members; and (C) conduct at least 90 percent of its business in transactions that are not Repo Transactions, measured based on its overall dollar volume of submitted sides over the prior month, with Netting Members’’) and Rule 4, Section 7, supra note 4. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 Repo Broker Accounts, and that only Brokered Transactions may be submitted through such Accounts, as appropriate. Therefore, FICC believes the revised definition of Brokered Transactions and the revisions to the Account structure would collectively serve the risk-mitigation function that the conditions in Rule 3, Section 8 achieve, but in a much more effective manner and in a manner that is easier for FICC to monitor. As such, those conditions would be removed from the Rules. Finally, FICC would remove the category of Non-IDB Repo Brokers from the Rules. Non-IDB Repo Brokers are currently defined as Netting Members other than Inter-Dealer Broker Netting Members that operate in the same manner as a Broker and have agreed to meet the same requirements imposed on Inter-Dealer Broker Netting Members.58 As described above, FICC believes the favorable loss allocation treatment is appropriate only for Inter-Dealer Broker Netting Members that submit Brokered Transactions, as such term would be defined. Therefore, FICC would delete the references to such parties and associated terms. In connection with these changes, the proposal would delete the defined term for ‘‘Non-IDB Repo Broker’’ as that term would no longer be used in the Rules. Implementation Timeframe Subject to the completion of all regulatory actions required with respect to this proposal,59 FICC expects to implement the proposal by no later than March 31, 2025, and would announce the effective date of the proposed changes by an Important Notice posted to FICC’s website. Expected Effect on Management of Risk FICC believes that the proposed rule changes to separately and independently calculate, collect, and hold the margin for a Netting Member’s proprietary transactions from the margin for the transactions of indirect participants, to limit Brokered Transactions to those entered into by an Inter-Dealer Broker Netting Member on its own trading platform, to set forth a segregation arrangement for certain indirect participant margin, and to clarify FICC’s account structure and consolidate its margin methodology in a single accessible Margin Component Schedule would enhance FICC’s and its Netting Members’ risk management. 58 Currently, only one Netting Member is a NonIDB Repo Broker. 59 Supra note 3. PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 The separate calculation of margin for a Netting Member’s proprietary and indirect participant transactions would ensure that the quantum of margin that FICC collects from a Netting Member more precisely reflects the separate risk profiles of the Netting Member’s proprietary portfolio of transactions and the portfolio of transactions that the Netting Member submits to FICC on behalf of indirect participants. This approach would also provide FICC with a more detailed understanding of potential risks arising from the various types of transactions that it clears. The revisions to the Brokered Transactions definition would also help facilitate a more precise identification and calibration of potential risks attendant to different transaction types. In this context, the revisions would ensure that only those transactions that present the limited risk for which FICC’s Brokered Transactions provisions are designed benefit from a more favorable loss allocation treatment. And they would ensure that other types of transactions are maintained in Dealer Accounts, alongside other regular market activity. FICC further believes that the proposed changes to clarify FICC’s account structure and consolidate its margin methodology in a single accessible Margin Component Schedule would enhance risk management by furthering public awareness of how FICC assesses margin requirements. Such greater awareness would allow Netting Members and indirect participants to make more informed choices about how the various types of portfolios they present for clearing would be risk managed by FICC, which in turn should allow such parties to better anticipate and provision for any financial resourcing and liquidity needs that might arise from margin calls for those portfolios. FICC additionally believes that the proposed margin segregation arrangement would reduce risk by enhancing the ability of Netting Members to collect margin from indirect participants and deposit that margin with FICC. Currently, broker-dealer Netting Members must finance the margin obligations of their indirect participants’ transactions because they cannot record a debit in the Rule 15c3– 3a formulas for margin deposited with FICC. In addition, non-broker-dealer Netting Members may often need to finance the margin obligations of their indirect participants’ transactions because the absence of a segregation arrangement makes it impossible or undesirable for indirect participants to use their own assets to satisfy such E:\FR\FM\28MRN1.SGM 28MRN1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices margin obligations. Such financing can expose Netting Members to the risk of an indirect participant default. FICC’s proposed segregation arrangement would serve to reduce the need for Netting Members to provide financing by allowing Netting Members to collect margin from indirect participants and deposit that margin with FICC. Such collection and depositing would reduce the risk to a Netting Member of an indirect participant default because the Netting Member can look to the margin for credit support. As a result, collecting and depositing the indirect participant’s margin in a segregated account at FICC would limit the likelihood that a default of an indirect participant gives rise to distress at the Netting Member that could limit its ability to perform to FICC. By the same token, the segregated account structure FICC is proposing to hold indirect participant margin should help those indirect participants manage their risks to their Netting Member, fellow Netting Member customers, and even FICC itself because the account structure would ensure that such margin is only available to cover losses arising from a default by the indirect participant’s position. ddrumheller on DSK120RN23PROD with NOTICES1 Consistency With Section 805 of the Clearing Supervision Act FICC believes the proposed rule changes are consistent with the Clearing Supervision Act.60 Specifically, FICC believes these changes are consistent with the risk management objectives and principles of Section 805.61 1. Consistency With Section 805(b) of the Clearing Supervision Act Section 805(b) provides that ‘‘[t]he objectives and principles for the risk management standards prescribed under subsection (a) shall be to (1) promote robust risk management; (2) promote safety and soundness; (3) reduce systemic risks; and (4) support the stability of the broader financial system.’’ 62 As described in greater detail below, the proposed rule changes to clarify FICC’s account structure and margin calculation methodology would improve public understanding of FICC’s margining and recordkeeping processes and thereby facilitate greater access to the systemic risk-reducing benefits of FICC’s central clearing services. The proposed changes would do this by revising the definition of ‘‘Account’’ to make clear that FICC Accounts are for purposes of recording transactions, providing a roadmap in Rule 2B 60 12 U.S.C. 5461 et seq. U.S.C. 5464. 62 12 U.S.C. 5464(b). 61 12 VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 identifying the types of Accounts FICC maintains for Netting Members and which transactions may be recorded in such Accounts, amending Rule 4 to clarify the types of transactions that may be included in a Margin Portfolio, and consolidating the components of FICC’s margin calculation methodology currently in Rules 1 and 4 into an accessible Margin Component Schedule and refining the description of FICC’s margin calculation methodology. The proposed change to eliminate the Permitted Margin Affiliates from the Rules would also lead to clearer Rules and, therefore, improved public understanding of FICC’s margining practices by removing a concept that is not being used by Netting Members. The collective impact of these changes would be to enhance the ability of Netting Members and indirect participants to make more informed choices about how the various types of portfolios they present for clearing would be risk managed by FICC, which in turn should allow such parties to better anticipate and provision for any financial resourcing and liquidity needs that might arise from margin calls for those portfolios. Enhanced understanding and decision-making by market participants of FICC’s riskreducing central clearing services would promote easier and more diverse access to such services. This expanded access, in turn, would promote robust risk management across the U.S. Treasury market since expanded access also result in expanded application of FICC’s risk management measures, including margin requirements. With this expanded application also comes clearer understanding by market participants of the potential financial resource and liquidity needs necessary to satisfy FICC’s margin requirements, and therefore the ability of market participants to anticipate and manage those needs on a more organized and orderly basis. Thus, expanded and more transparent application of these risk management measures would promote safety and soundness across the diversity of participants in the U.S. Treasury markets, thereby also reducing systemic risk and supporting stability of the broader financial system. The proposed changes to create a segregation arrangement for certain indirect participant margin would also facilitate broader access to the riskreducing benefits of FICC’s central clearing services. As noted above, broker-dealer and other Netting Members must often finance the margin obligations of their indirect participants. In addition to increasing a Netting Member’s risk exposure to indirect PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 21599 participants, such financing increases the costs to the Netting Member of providing access to central clearing. The proposed rules would facilitate greater access to FICC’s clearance and settlement systems by creating a segregation arrangement that would allow broker-dealer and other Netting Members to collect margin from their indirect participants and deposit that margin with FICC. Such collection and depositing would reduce the costs and attendant liquidity needs to such Netting Members of providing access to FICC’s clearance and settlement services via margin payments, thereby increasing the diversity and scope of market participants able to access central clearing while also ensuring that expanded access to central clearing does not increase funding and liquidity risk for the Netting Members. By improving the position of the Netting Members in this regard, the proposed changes can reduce systemic risk that can be triggered by a large Netting Member liquidity stress event or where an indirect participant default also causes a Netting Member to default. For the same reasons, the outcome of these proposed changes promotes safety and soundness and the stability of the broader financial system. By the same token, the segregated account structure FICC is proposing to hold indirect participant margin should help indirect participants who access central clearing to manage more effectively their risks to their Netting Member, fellow Netting Member customers, and even FICC itself because the account structure would ensure that such margin is only available to cover losses arising from a default by the indirect participant’s position. Thus, the proposed changes would promote robust risk management at indirect participants and, by reducing the risk that indirect participants may not be able to access their margin upon the default of another party, also reduce the risk that the indirect participant will suffer a related default or market stress event. For this reason, the proposals further promote safety and soundness, reduce systemic risk, and support the stability of the broader financial system. The proposed rule changes to separately and independently calculate the margin for a Netting Member’s proprietary transactions from the margin for the transactions of indirect participants, adopt a method for allocating net unsettled positions to individual indirect participants for purposes of calculating margin requirements, and to limit the scope of Brokered Transactions to those executed by an Inter-Dealer Broker Netting E:\FR\FM\28MRN1.SGM 28MRN1 21600 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 Member on its own trading platform would also promote robust risk management, and safety and soundness at FICC by reducing the potential risk to FICC arising from indirect participant transactions and provide FICC with a better understanding of the source of potential risk arising from the transactions that it clears.63 They would also ensure that only those transactions that present the limited risk for which FICC’s Brokered Transactions provisions are designed benefit from the favorable loss allocation treatment, which further promotes robust risk management at FICC. The proposed changes would also incentivize Netting Members and indirect participants to make more informed choices about how the various types of portfolios they present for clearing would be risk managed by FICC, which in turn should allow such parties to better anticipate and provision for any financial resourcing and liquidity needs that might arise from margin calls for those portfolios. As already explained above, these outcomes applied across the various actors in the U.S. Treasury market would, in turn, reduce systemic risks and support the stability of the broader financial system. As a result, FICC believes the proposed changes will collectively advance Section 805(b)’s objectives and principles of promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the stability of the broader financial system.64 2. Consistency With Section 805(a)(2) of the Clearing Supervision Act Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities, like FICC. Accordingly, the Commission has adopted risk management standards under this section and under section 17A of the Act.65 The Section 17A standards require registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for their operations and risk management practices on an ongoing basis.66 FICC believes that the proposed changes are consistent with Rules 17Ad–22(e)(4)(i), (e)(6)(i), (e)(18)(ii), (e)(18)(iii), (e)(18)(iv)(C), 63 See Adopting Release, supra note 2, at 144. 64 Id. 65 17 CFR 240.17Ad–22(e). 66 Id. VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 (e)(19), and (e)(23)(ii), each promulgated under the Act.67 Rule 17Ad–22(e)(4)(i) under the Act requires that FICC establish, implement, maintain, and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.68 The proposed rule changes to separately and independently calculate, collect, and hold the margin for a Netting Member’s proprietary transactions from the margin for the transactions of indirect participants, to limit Brokered Transactions to those entered into by an Inter-Dealer Broker Netting Member on its own trading platform, and to increase the precision of the Excess Capital Premium would enhance FICC’s risk management. These changes would ensure that the quantum of margin that FICC collects from a Netting Member reflects the separate risk profiles of the Netting Member’s portfolio of Proprietary Transactions and portfolio transactions that the Netting Member submits to FICC on behalf of indirect participants, ensure that only those transactions that present the limited risk for which FICC’s Brokered Transactions provisions are designed benefit from favorable loss allocation treatment, and calibrate the Excess Capital Premium based on the most readily available information. Collectively, these changes would enhance the ability of FICC to manage the risk of the transactions it clears and settles and cover its credit exposure to its participants with a high degree of confidence. The proposed change to require a minimum cash requirement of $1 million per Segregated Indirect Participant would mitigate the greater risk exposure presented to FICC by the limitations on its use of these deposits. As discussed above, FICC’s daily backtesting of the sufficiency of Clearing Fund deposits has revealed a heightened likelihood of backtesting deficiencies for those Members with lower deposits that are not sufficient to mitigate any abrupt intraday change in their exposures, and a $1 million minimum requirement was appropriate to mitigate the risks of backtesting deficiencies while balancing the 67 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), (e)(18)(ii), (e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii). 68 17 CFR 240.17Ad–22(e)(4)(i). PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 financial impact of this requirement on Members.69 Because FICC is required to calculate the margin requirements for Segregated Indirect Participants on a gross basis, as if each Segregated Indirect Participant were a separate Margin Portfolio, it believes it is also appropriate to apply the same minimum requirement that it applies to each Margin Portfolio. By maintaining sufficient resources to cover its credit exposures fully with a high degree of confidence, the proposed change supports FICC’s ability to identify, measure, monitor, and, through the collection of Segregated Customer Margin, manage its credit exposures to these indirect participants. Therefore, FICC believes adopting this minimum requirement is consistent with the requirements of Rule 17Ad–22(e)(4)(i) under the Act.70 Rule 17Ad–22(e)(6)(i) under the Act requires FICC to establish written policies and procedures reasonably designed to calculate, collect, and hold margin amounts from a direct participant for its proprietary positions in Treasury securities separately and independently from margin calculated and collected from that direct participant in connection with U.S. Treasury securities transactions by an indirect participant that relies on the services provided by the direct participant to access FICC’s payment, clearing, or settlement facilities.71 The proposed rule changes would require that each Margin Portfolio only consist of activity from the same Type of Account, ensuring that proprietary transactions and transactions submitted to FICC on behalf of indirect participants are margined separately, and to require Netting Members to use separate Deposit IDs for different transaction types. As noted above, the proposed changes to Rule 2B, Section 3 would require FICC to calculate the Segregated Customer Margin Requirement for a particular Segregated Indirect Participants Account as the sum of the requirements applicable to each Segregated Indirect Participant whose transactions are recorded in such Account, as though each Segregated Indirect Participant were a separate Netting Member with a single Margin Portfolio consisting of such transactions. These provisions would result in FICC calculating separate margin amounts for each Segregated Indirect Participant and for such amounts to be collected on a gross basis. Finally, the proposed changes to Rule 4, Section 1a would 69 Supra note 45. CFR 240.17Ad–22(e)(4)(i). 71 17 CFR 240.17Ad–22(e)(6). 70 17 E:\FR\FM\28MRN1.SGM 28MRN1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices provide for FICC to establish on its books and records for each Netting Member that deposits Segregated Customer Margin a ‘‘Segregated Customer Margin Custody Account’’ corresponding to each Segregated Indirect Participants Account of such Netting Member. Collectively, these proposed changes would ensure that a Netting Member’s proprietary transactions are not netted with indirect participant transactions for purposes of margin calculation and that margin for indirect participant transactions is collected and held separately and independently from margin for a Netting Member’s proprietary transactions. Rule 17Ad–22(e)(18)(ii) under the Act requires FICC to establish objective, risk-based, and publicly disclosed criteria for participation, which require participants to have sufficient financial resources and robust operational capacity to meet obligations arising from participation in FICC.72 The proposed changes to consolidate FICC’s margin methodology in a Margin Component Schedule, to identify the particular Required Fund Deposit Portions and Segregated Customer Margin Requirements, and to elaborate on the calculation of the Excess Capital Premium and the circumstances in which FICC would waive the application of such premium would improve public disclosure of FICC’s margin methodology and the obligations that Netting Members and their indirect participants would have as a result of their participation in FICC’s clearance and settlement system. In particular, the proposed changes would provide Netting Members and their indirect participants with a single, standalone schedule that they can review in order to understand how FICC would calculate margin obligations for their transactions. The proposed changes would also improve public disclosure by allowing Netting Members and their indirect participants to see how the various Accounts and Margin Portfolios give rise to separate inputs into the total margin calculation and how and when a Netting Member may face an increase in margin on account of the Excess Capital Premium. Rule 17Ad–22(e)(18)(iii) under the Act requires that FICC establish written policies and procedures reasonably designed to monitor compliance with its participant requirements on an ongoing basis.73 The proposed changes to require Netting Members to designate the Account in which a transaction is to be recorded and to identify the 72 17 73 17 CFR 240.17Ad–22(e)(18)(ii). CFR 240.17Ad–22(e)(18)(iii). VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 Sponsored Member or Executing Firm Customer for whom the transaction is submitted on that transaction record would help facilitate FICC’s ability to monitor which transactions are being entered into by which entities. This enhanced monitoring of participant activity would thus allow FICC to better monitor participants’ compliance with FICC’s various requirements in accordance with Rule 17Ad– 22(e)(18)(iii).74 Rule 17Ad–22(e)(18)(iv)(C) under the Act requires, among other things, that FICC, as a covered clearing agency that provides central counterparty services for transactions in U.S. Treasury securities, ensure that it has appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities, including those of indirect participants.75 FICC believes that the proposed changes giving Netting Members the ability to elect for margin deposited by indirect participants and deposited with FICC to be segregated would facilitate access to FICC’s clearance and settlement systems by giving indirect participants greater optionality. The proposed rule changes would allow a Netting Member and its indirect participant to choose whether (i) the indirect participant will post margin under a customer protection framework that is similar to that which exists in other cleared contexts,76 (ii) the Netting Member will finance the margin 74 Id. 75 17 CFR 240.17Ad–22(e)(18)(iv)(C). Contemporaneously with this proposed rule change, FICC and its affiliates, National Securities Clearing Corporation and The Depository Trust Company, have submitted separate proposed rule changes (File Nos. SR–FICC–2024–006, SR–NSCC– 2024–003 and SR–DTC–2024–003) under which they are proposing to amend the Clearing Agency Risk Management Framework to address the requirement under Rule 17Ad–22(e)(18)(iv)(C) that FICC’s Board review its policies and procedures related to compliance with that rule on an annual basis. These proposed changes are pending regulatory approval. Copies of the proposed rule changes are available at www.dtcc.com/legal/secrule-filings. 76 Both the Options Clearing Corporation and the U.S. derivatives clearing organizations allow for, or require, the segregation of customer margin and/or positions. See generally OCC By-Laws Sections 3, 27 (outlining the various accounts that OCC may maintain for a clearing member and the extent to which the positions and margin recorded to such accounts may applied to other obligations); 7 U.S.C. 6d (outlining the segregation rules applicable to commodity futures and cleared swap transactions); Order Granting Conditional Exemptions under the Securities Exchange Act of 1934 in Connection with the Portfolio Margining of Cleared Swaps and Security-Based Swaps that are Credit Default Swaps, Securities Exchange Release No. 93501 (Nov. 1, 2021), 86 FR 61357 (Nov. 5, 2021) (S7–13– 12) (providing that certain cleared security-based swaps may be portfolio margined in a cleared swaps account subject to the rules generally applicable to cleared swaps). PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 21601 for the indirect participant’s transactions, or (iii) the indirect participant will deposit margin but without the protection (or higher margin requirements) associated with a segregation arrangement. FICC believes that such optionality would facilitate access in accordance with Rule 17Ad– 22(e)(18)(iv)(C) by allowing Netting Members and their indirect participants to adopt a margining arrangement that is most consistent with their business objectives and applicable regulatory, operational, and practical constraints. Rule 17Ad–22(e)(19) under the Act requires that FICC identify, monitor, and manage the material risks to the covered clearing agency arising from arrangements in which firms that are indirect participants in FICC rely on the services provided by direct participants to access FICC’s clearance and settlement facilities.77 The proposed changes to separately and independently calculate margin for proprietary and indirect participant transactions, adopt a method for allocating net unsettled positions to individual indirect participants for purposes of calculating margin requirements and require a Netting Member to represent that margin deposited in relation to a Segregated Indirect Participants Account is generally margin collected from an indirect participant would reduce the potential risk to FICC arising from indirect participant transactions. These changes would ensure that the margin FICC collects from a Netting Member reflects the separate risk profiles of the Netting Member’s proprietary portfolio and the portfolio of transactions it submits to FICC on behalf of indirect participants. They would also provide FICC with a better understanding of the source of potential risk arising from the transactions that it clears and incentivize Netting Members to maintain more balanced proprietary portfolios, since such portfolios would lead to lower margin requirements. In addition, the proposed representation by Netting Members that they generally intend to satisfy Segregated Customer Margin Requirements with assets collected from indirect participants rather than proprietary assets would reduce the risk of FICC’s proposed margin segregation arrangement by limiting such arrangement to indirect participant assets and ensuring that proprietary assets a Netting Member deposits with FICC are available for loss mutualization purposes. Rule 17Ad–22(e)(23)(ii) under the Act requires FICC to establish written 77 17 E:\FR\FM\28MRN1.SGM CFR 240.17Ad–22(e)(19). 28MRN1 21602 Federal Register / Vol. 89, No. 61 / Thursday, March 28, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 policies and procedures providing sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in FICC.78 The proposed rule changes to consolidate and clarify FICC’s margin calculation methodology in the proposed Margin Component Schedule, adopt a method for allocating net unsettled positions to individual indirect participants for purposes of calculating margin requirements and to clarify the calculation of the Excess Capital Premium would make it easier for both Netting Members and indirect participants to identify and price the potential margining costs associated with how one chooses to submit transactions to FICC for clearance and settlement. III. Date of Effectiveness of the Advance Notice, and Timing for Commission Action The proposed change may be implemented if the Commission does not object to the proposed change within 60 days of the later of (i) the date that the proposed change was filed with the Commission or (ii) the date that any additional information requested by the Commission is received. The clearing agency shall not implement the proposed change if the Commission has any objection to the proposed change. The Commission may extend the period for review by an additional 60 days if the proposed change raises novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension. A proposed change may be implemented in less than 60 days from the date the advance notice is filed, or the date further information requested by the Commission is received, if the Commission notifies the clearing agency in writing that it does not object to the proposed change and authorizes the clearing agency to implement the proposed change on an earlier date, subject to any conditions imposed by the Commission. The clearing agency shall post notice on its website of proposed changes that are implemented. The proposal shall not take effect until all regulatory actions required with respect to the proposal are completed. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the advance notice is 78 17 CFR 240.17Ad–22(e)(23)(ii). VerDate Sep<11>2014 20:27 Mar 27, 2024 Jkt 262001 consistent with the Clearing Supervision 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 rule-comments@ sec.gov. Please include file number SR– FICC–2024–802 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549. All submissions should refer to file number SR–FICC–2024–802. 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 advance notice that are filed with the Commission, and all written communications relating to the advance notice 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 Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 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 (https:// dtcc.com/legal/sec-rule-filings.aspx). 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–2024–802 and should be submitted on or before April 18, 2024. V. Date and Timing for Commission Action Section 806(e)(1)(G) of the Clearing Supervision Act provides that FICC may implement the changes if it has not received an objection to the proposed changes within 60 days of the later of (i) the date that the Commission receives an advance notice or (ii) the date that PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 any additional information requested by the Commission is received,79 unless extended as described below. Pursuant to section 806(e)(1)(H) of the Clearing Supervision Act, the Commission may extend the review period of an advance notice for an additional 60 days, if the changes proposed in the advance notice raise novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension.80 Here, as the Commission has not requested any additional information, the date that is 60 days after FICC filed the advance notice with the Commission is May 13, 2024. However, the Commission is extending the review period of the Advance Notice for an additional 60 days under section 806(e)(1)(H) of the Clearing Supervision Act 81 because the Commission finds the Advance Notice is both novel and complex, as discussed below. The Commission believes that the changes proposed in the Advance Notice raise novel and complex issues. The Advance Notice concerns a matter of first impression for the Commission, as it concerns recently adopted margin collection and account segregation requirements for Treasury CCAs.82 The Commission has not yet considered such a proposal pursuant to Rule 17Ad– 22(e)(6)(i) and the amendments to Rule 15c3–3 under the Act 83 and the material aspects of the proposal are detailed, substantial, and interrelated with other risk management practices at FICC. Accordingly, the Commission, pursuant to section 806(e)(1)(H) of the Clearing Supervision Act,84 extends the review period for an additional 60 days so that the Commission shall have until July 12, 2024 to issue an objection or non-objection to advance notice SR– FICC–2024–802. All submissions should refer to File Number SR–FICC–2024–802 and should be submitted on or before April 18, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.85 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–06578 Filed 3–27–24; 8:45 am] BILLING CODE 8011–01–P 79 12 80 12 U.S.C. 5465(e)(1)(G). U.S.C. 5465(e)(1)(H). 81 Id. 82 See supra note 5. CFR 240.17Ad–22(e)(6)(i) and 17 CFR 240.15c3–3. 84 12 U.S.C. 5465(e)(1)(H). 85 17 CFR 200.30–3(a)(91) and 17 CFR 200.30– 3(a)(94). 83 17 E:\FR\FM\28MRN1.SGM 28MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 61 (Thursday, March 28, 2024)]
[Notices]
[Pages 21586-21602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-06578]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99845; File No. SR-FICC-2024-802]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Extension of Review Period of Advance Notice To 
Modify the GSD Rules (i) Regarding the Separate Calculation, Collection 
and Holding of Margin for Proprietary Transactions and That for 
Indirect Participant Transactions, and (ii) To Address the Conditions 
of Note H to Rule 15c3-3a

March 22, 2024.
    Pursuant to section 806(e)(1) of Title VIII of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities 
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on March 
14, 2024, Fixed Income Clearing Corporation (``FICC'') filed with the 
Securities and Exchange Commission (``Commission'') the advance notice 
as described in Items I, II and III below, which Items have been 
prepared by the clearing agency.\3\ The Commission is publishing this 
notice to solicit comments on the

[[Page 21587]]

advance notice from interested persons and to extend the review period 
of the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On March 14, 2024, FICC filed this advance notice as a 
proposed rule change (SR-FICC-2024-007) with the Commission pursuant 
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is 
available at dtcc.com/legal/sec-rule-filings.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice

    This advance notice consists of modifications to FICC's Government 
Securities Division (``GSD'') Rulebook (``Rules'') \4\ to (1) provide 
for FICC to calculate, collect, and hold margin for the proprietary 
transactions of a Netting Member separately and independently from the 
margin for transactions that the Netting Member submits to FICC on 
behalf of indirect participants; (2) simplify and revise the account 
types through which Members may record transactions at FICC and adopt a 
new Rule 2B to provide clearer public disclosures through the Rules 
regarding the GSD account structure; (3) allow Netting Members to elect 
for margin for indirect participant transactions to be calculated on a 
gross basis (i.e., an indirect participant-by-indirect participant 
basis) and legally segregated from the margin for the Netting Member's 
proprietary transactions (as well as those of other indirect 
participants); (4) align FICC's margin calculation methodology with the 
expanded account types and enhance public disclosure through the Rules 
of that calculation methodology; and (5) simplify the requirements for 
brokered transactions so that they only apply to transactions executed 
by an Inter-Dealer Broker Netting Member on the trading platform 
offered by that Inter-Dealer Broker Netting Member.
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    \4\ Terms not defined herein are defined in the Rules, available 
at www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf.
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    These proposed rule changes are primarily designed to ensure that 
FICC has appropriate rules regarding the separate and independent 
calculation, collection, and holding of margin for proprietary 
transactions and that for indirect participant transactions in 
accordance with the requirements of Rule 17Ad-22(e)(6)(i) under the 
Act, and that FICC has appropriate rules to satisfy the conditions of 
Note H to Rule 15c3-3a under the Act for a broker-dealer to record a 
debit in the customer and broker-dealer proprietary account reserve 
formulas.\5\
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    \5\ See Securities Exchange Act Release No. 99149 (Dec. 13, 
2023), 89 FR 2714 (Jan. 16, 2024) (S7-23-22) (``Adopting Release'', 
and the rules adopted therein referred to herein as ``Treasury 
Clearing Rules''). See also 17 CFR 240.15c3-3a.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the advance notice 
and discussed any comments it received on the advance notice. 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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice 
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, 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 www.sec.gov/regulatory-actions/how-to-submit-comments. General questions regarding 
the rule filing process or logistical questions regarding this filing 
should be directed to the Main Office of the SEC's Division of Trading 
and Markets at [email protected] or 202-551-5777.
    FICC reserves the right not to respond to any comments received.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Executive Summary of Proposed Changes
    On December 13, 2023, the Commission adopted amendments to the 
covered clearing agency standards that apply to covered clearing 
agencies that clear transactions in U.S. Treasury securities (each a 
``Treasury CCA''), including FICC.\6\ These amendments require, among 
other things, that FICC ``calculates, collects, and holds margin 
amounts from a direct participant for its proprietary positions in U.S. 
Treasury securities separately and independently from margin calculated 
and collected from that direct participant in connection with U.S. 
Treasury securities transactions by an indirect participant that relies 
on the services provided by the direct participant to access the 
covered clearing agency's payment, clearing, or settlement 
facilities.'' \7\ As described below, the proposed rules are designed 
to comply with these requirements.
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    \6\ See supra note 5.
    \7\ 17 CFR 240.17Ad-22(e)(6)(i).
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    Additionally, in the Treasury Clearing Rules, the Commission 
amended its broker-dealer customer protection rule (``Rule 15c3-3'') 
\8\ and the reserve formulas thereunder (``Rule 15c3-3a'') \9\ to 
permit broker-dealers to include margin required and on deposit at a 
Treasury CCA as a debit item in the reserve formulas under certain 
conditions.\10\ The proposed rules are also designed to satisfy these 
conditions and, therefore, would permit broker-dealer Netting Members 
of FICC to include margin collected from their customers and on deposit 
at a Treasury CCA as a debit item in the reserve formulas.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.15c3-3.
    \9\ 17 CFR 240.15c3-3a.
    \10\ See supra note 5.
---------------------------------------------------------------------------

    First, the proposed changes would provide for the separate and 
independent calculation, collection, and holding of (i) margin 
deposited by a Netting Member to support its proprietary transactions 
and (ii) margin deposited by a Netting Member to support the 
transactions of an indirect participant. Specifically, FICC would 
provide in a new Rule 2B that FICC can establish proprietary Accounts 
to record the transactions that the Netting Member enters into for its 
own benefit and separately establish indirect participant Accounts to 
record transactions that the Netting Member submits to FICC for 
clearance and settlement on behalf of an indirect participant. Under 
this proposed Rule 2B, only proprietary transactions may be recorded in 
a proprietary Account, and only indirect participant transactions may 
be recorded in an indirect participant Account. FICC is also proposing 
revisions in Rule 4 to identify what types of transactions may be 
included together in a Margin Portfolio that FICC utilizes to determine 
a Netting Member's margin requirement. Specifically, FICC would revise 
the Margin Portfolio definition to make clear that a Margin Portfolio 
cannot include both proprietary and indirect

[[Page 21588]]

participant Accounts. Because proposed Rule 2B would not permit 
transactions of indirect participants to be recorded in the same 
Account as a Netting Member's proprietary transactions, a Margin 
Portfolio would only be able to consist of the same type of proprietary 
or indirect participant transactions, not both. As a result, the 
transactions a Netting Member submits to FICC on behalf of an indirect 
participant would no longer be netted against a Netting Member's 
proprietary transactions for purposes of calculating a Netting Member's 
margin requirements. In addition, to ensure separate collection and 
holding of margin deposited for proprietary and indirect participant 
transactions, FICC is specifying its practice in Rule 4 that a Netting 
Member must identify the different Account types for which a deposit is 
made on its wire instructions.
    In order to facilitate these proposed changes, the rule changes 
would clarify the types of accounts in which Netting Members may record 
transactions. FICC's ``Accounts'' are not custodial accounts in which 
FICC holds assets, but rather a mechanism for FICC to record and group 
transactions. These records are utilized by FICC in connection with its 
calculation of a Netting Member's margining, settlement, and other 
obligations. The proposed rule changes would provide greater clarity 
regarding the purpose and use of these accounts through the public 
disclosures in the Rules. The proposed rules would do this by revising 
the definition of ``Account'' in Rule 1 and changing the names of 
certain Accounts to better reflect their function. The proposed rule 
changes would also create in a new Rule 2B a roadmap of the types of 
Accounts FICC maintains and what is recorded in those Accounts.
    Second, the proposed rule changes would allow for the segregation 
of certain customer margin in a manner that satisfies the conditions 
for a broker-dealer to record a debit in the customer or PAB reserve 
formula under recently added Note H to Rule 15c3-3a.\11\ As noted 
above, the Commission amended Rule 15c3-3a to permit broker-dealers to 
include margin required and on deposit at a Treasury CCA as a debit 
item in the reserve formulas under certain conditions, including that 
the margin be collected in accordance with the rules of the Treasury 
CCA that impose the certain requirements.\12\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.15c3-3a.
    \12\ See supra note 5.
---------------------------------------------------------------------------

    Such requirements are set forth in the Treasury Clearing Rules and 
Section (b)(2) of Note H to Rule 15c3-3a, and include, among other 
things, (1) the margin must be calculated separately for each customer 
and the broker-dealer must deliver that amount of margin for each 
customer on a gross basis; (2) the margin must be held in an account of 
the broker-dealer at the Treasury CCA that is segregated from any other 
account of the broker-dealer at the Treasury CCA and that is, among 
other things, used exclusively to clear, settle, novate, and margin 
U.S. Treasury securities transactions of the customers of the broker-
dealer; and (3) the Treasury CCA has systems, controls, policies, and 
procedures to return the assets to the broker-dealer that are no longer 
needed to meet current margin requirements resulting from positions in 
U.S. Treasury securities of the customers of the broker-dealer.\13\ The 
proposed changes are designed to comply with these requirements.
---------------------------------------------------------------------------

    \13\ See 17 CFR 240.15c3-3a. Supra note 5.
---------------------------------------------------------------------------

    Specifically, FICC is proposing to permit a Netting Member, 
including a non-broker-dealer Netting Member, to designate any of its 
indirect participants Accounts for segregation. For any Account so 
designated, FICC would calculate the margin requirements applicable to 
the Account on a gross basis, meaning that FICC would not net the 
transactions of one indirect participant against the transactions of 
another indirect participant. In addition, FICC would segregate the 
margin deposited to support the transactions in the Account from any 
margin securing a Netting Member's proprietary positions, both on 
FICC's own books and records and at FICC's custodians. FICC would only 
be able to use such segregated margin to satisfy the obligations of the 
customer for whom such margin is held. FICC would not be able to apply 
such margin to the proprietary obligations of the Netting Member that 
deposited it with FICC or to the obligations of any other Netting 
Member or participant. FICC would also set forth specific procedures to 
allow Netting Members to obtain the return of excess segregated margin. 
The aim of these changes is both to allow broker-dealer Netting Members 
to collect margin from customers and deposit it with FICC and to 
provide all customers, including those that access FICC through non-
broker-dealers, to be able to segregate margin they deposit.
    Third, the proposed rules would align the description of FICC's 
margin methodology with the revised Account types, consolidate the 
terms relating to margin calculation in a single, easily identifiable 
schedule, and make certain changes to the methodology to increase 
precision and predictability. To achieve these goals, the proposed 
rules would move the margin calculation methodology, including the 
relevant defined terms currently located in various Rules, into a new 
Margin Component Schedule. The proposed rules would also revise Rule 4 
to make clear that a Netting Member's margin requirement is the sum of 
the margin amounts calculated for each type of Account in which 
transactions are recorded for the Netting Member. Further, the proposed 
rules would set forth a method for allocating net unsettled positions 
to individual indirect participants for purposes of calculating margin 
requirements. In addition, the proposed rules would revise and clarify 
the calculation of the excess capital premium component of the Clearing 
Fund, to cap such amount at two times the amount by which a Netting 
Member's VaR Charge exceeds its Netting Member Capital, clarify the 
capital amounts that are used in the calculation of such amount, limit 
FICC's discretion to waive the amount, and provide that FICC may 
calculate the premium based on updated available information. The 
proposed changes would also take steps to ensure that the excess 
capital premium does not result in differential treatment of indirect 
participants simply because of the particular capital level of the 
Netting Member providing access to FICC's clearance and settlement 
systems.
    Lastly, the proposed rule changes would modify the terms relating 
to brokered transactions to require that only transactions that an 
Inter-Dealer Broker Netting Member executes on the Inter-Dealer Broker 
Netting Member's own trading platform benefit from favorable loss 
allocation treatment.\14\ FICC believes that making these changes would 
improve FICC's risk management and promote access by ensuring that its 
differential treatment of different parties and transactions has a 
sound risk management justification.
---------------------------------------------------------------------------

    \14\ See Rule 4, Section 7 (``Notwithstanding the foregoing, 
however, an Inter-Dealer Broker Netting Member, or a Non-IDB Repo 
Broker with respect to activity in its Segregated Repo Account, 
shall not be subject to an aggregate loss allocation in an amount 
greater than $5 million pursuant to this Section 7 for losses and 
liabilities resulting from an Event Period.''), supra note 4.
---------------------------------------------------------------------------

Background
    FICC, through GSD, serves as a central counterparty and provider of 
clearance and settlement services for the U.S. government securities 
markets. Margin is a key tool that FICC uses to manage its credit 
exposures to its members. The aggregated amount of all GSD members'

[[Page 21589]]

margin constitutes the GSD Clearing Fund (referred to herein as the 
``Clearing Fund''). The objective of the Clearing Fund is to mitigate 
potential losses to FICC associated with liquidating a member's 
portfolio in the event FICC ceases to act for that member (hereinafter 
referred to as a ``default'').\15\
---------------------------------------------------------------------------

    \15\ The Rules identify when FICC may cease to act for a member 
and the types of actions FICC may take. For example, FICC may 
suspend a firm's membership with FICC or prohibit or limit a 
member's access to FICC's services in the event that member defaults 
on a financial or other obligation to FICC. See Rule 21 
(Restrictions on Access to Services), supra note 4.
---------------------------------------------------------------------------

    Under Rule 4 (Clearing Fund and Loss Allocation), Netting Members 
are required to make deposits to the Clearing Fund in an amount 
(``Required Fund Deposit'') determined by reference to certain 
components. In determining a Netting Member's Required Fund Deposit, 
FICC may consider not only the Netting Member's proprietary 
transactions, but also the transactions that the Netting Member submits 
on behalf of indirect participants. However, the treatment of the 
indirect participant transactions for purposes of calculating the 
Required Fund Deposit can vary depending on whether those transactions 
are cleared under the Sponsored Service or prime brokerage/
correspondent clearing services. Netting Members are required to 
instruct FICC to record those transactions in one of the position-
keeping accounts (each, an ``Account'') that FICC establishes and 
maintains for the Netting Member. The Account in which a transaction is 
recorded is relevant for determining the margin requirement associated 
with that transaction under the Rules. Currently, a Netting Member may 
instruct FICC to record in the same Account, currently known as a 
``Netting Member Account,'' both the proprietary transactions of the 
Netting Member and transactions that the Netting Member carries for 
indirect participants through the prime brokerage/correspondent 
clearing services. Sponsored Member Trades, discussed in greater detail 
below, must be recorded in a separate Account.
    Under Rule 4, a Netting Member's Clearing Fund requirement, other 
than that arising from Sponsored Member Trades, is calculated on a net 
basis across all transactions recorded in the same Account of the 
Netting Member (or, if the Netting Member has elected to have multiple 
Accounts form part of the same ``Margin Portfolio,'' all transactions 
recorded in all such Accounts).\16\
---------------------------------------------------------------------------

    \16\ See Rule 4, supra note 4.
---------------------------------------------------------------------------

    The Sponsored Service permits Netting Members that are approved to 
be ``Sponsoring Members,'' to sponsor certain institutional firms, 
referred to as ``Sponsored Members,'' into GSD membership.\17\ FICC 
establishes and maintains a ``Sponsoring Member Omnibus Account'' on 
its books in which it records the transactions of the Sponsoring 
Member's Sponsored Members (``Sponsored Member Trades'').\18\ To 
determine a Sponsoring Member's Clearing Fund requirement in relation 
to Sponsored Member Trades recorded in the Sponsoring Member's 
Sponsoring Member Omnibus Account, FICC calculates the ``VaR Charge'' 
\19\ and the ``MLA Charge'' \20\ component for each Sponsored Member 
such that it does not net the Sponsored Member Trades of one Sponsored 
Member against the Sponsored Member Trades of another Sponsored Member, 
even though those Sponsored Member Trades are recorded in the same 
Sponsoring Member Omnibus Account.\21\ For all of the other components, 
FICC calculates the components by reference to the Sponsoring Member 
Omnibus Account as a whole (i.e., without regard to which Sponsored 
Member entered into which Sponsored Member Trade). In no instance does 
FICC net transactions recorded in a Sponsoring Member's Sponsoring 
Member Omnibus Account against other transactions of the Sponsoring 
Member for purposes of calculating the Sponsoring Member's Required 
Fund Deposit.
---------------------------------------------------------------------------

    \17\ See Rule 3A, supra note 4.
    \18\ See Rule 1 (definition of ``Sponsored Member Trades''), 
supra note 4.
    \19\ See Rule 1 (definition of ``VaR Charge''), supra note 4.
    \20\ See Rule 1 (definition of ``MLA Charge''), supra note 4.
    \21\ See Rule 3A, Section 10 (describing how the Required Fund 
Deposit for Sponsored Member Trades is calculated), supra note 4.
---------------------------------------------------------------------------

    As an alternative to the Sponsored Service, a Netting Member (in 
such capacity, a ``Submitting Member'') may submit to FICC eligible 
transactions on behalf of the Submitting Member's customers (each, in 
such capacity, an ``Executing Firm'') through FICC's existing prime 
broker/correspondent clearing services.\22\ As noted above, under the 
current Rules, a Submitting Member may instruct FICC to record such a 
transaction in the same Account at FICC as the Submitting Member's 
proprietary transactions. Accordingly, if transactions a Submitting 
Member submits on behalf of Executing Firms through the prime broker/
correspondent clearing services are recorded in the same Account as the 
Netting Member's proprietary transactions (or in an Account that forms 
part of the same Margin Portfolio as an Account in which a Netting 
Member's proprietary transactions are recorded), FICC nets such 
transactions against one another in calculating the Netting Member's 
Required Fund Deposit.\23\
---------------------------------------------------------------------------

    \22\ See Rule 8, supra note 4.
    \23\ Contemporaneously with this proposed rule change, FICC has 
submitted a separate proposed rule change (File No. SR-FICC-2024-
005) under which FICC is proposing to rename its primer broker/
correspondent clearing services the ``Agent Clearing Service,'' 
``Submitting Members'' as ``Agent Clearing Members'', and 
``Executing Firms'' as ``Executing Firm Customers.'' This separate 
proposed rule change would require that a Netting Member using the 
Agent Clearing Service submit transactions for Executing Firm 
Customers through an Agent Clearing Member Omnibus Account, to be 
recorded separately from its other clearing activity, including its 
proprietary activity. It would also add a definition for 
transactions eligible to be submitted by an Agent Clearing Member on 
behalf of its Executing Firm Customers (``Agent Clearing 
Transactions''). These proposed terms are used throughout this 
filing. These proposed changes are pending regulatory approval. A 
copy of this proposed rule change is available at www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------

    As noted above, the proposed rules would implement the amendments 
to Rule 17Ad-22(e)(6)(i) that require FICC to calculate, collect, and 
hold margin from a direct participant for its proprietary transactions 
in U.S. Treasury securities separately and independently from the 
margin calculated and collected for the U.S. Treasury transactions of 
an indirect participant that relies on the services provided by the 
direct participant to access FICC's payment, clearing, or settlement 
facilities.\24\ The proposed rules would also clarify and simplify 
FICC's account structure and improve the transparency of FICC's public 
disclosures of its margining methodology.
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(e)(6)(i). See supra note 5.
---------------------------------------------------------------------------

    The proposed rules are also designed to allow broker-dealer Netting 
Members of FICC to collect margin from their customers and deposit that 
margin with FICC. As stated above, a Netting Member is responsible for 
the Clearing Fund obligations arising from the activity of indirect 
participant customers (i.e., Sponsored Members and Executing Firms). 
FICC understands from engagement with broker-dealer Netting Members and 
their indirect participant customers that, due to the requirements of 
Rule 15c3-3 \25\ and Rule 15c3-3a,\26\ broker-dealer Netting Members 
are effectively unable to deposit with FICC any margin collected from 
indirect participants to support those indirect participants' 
transactions and must instead use proprietary resources.
---------------------------------------------------------------------------

    \25\ 17 CFR 240.15c3-3.
    \26\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

    The Treasury Clearing Rules' recent amendments to Rule 15c3-3a 
permit

[[Page 21590]]

broker-dealers to include margin required and on deposit at a Treasury 
CCA as a debit item in the reserve formulas under certain 
conditions.\27\ As described in more detail below, the proposed changes 
would address those conditions. Therefore, the proposal would allow 
broker-dealer Netting Members to collect margin from customers and 
deposit it with FICC and to permit all customers, including those that 
access FICC through non-broker-dealers, to segregate margin they 
deposit.
---------------------------------------------------------------------------

    \27\ See supra note 5.
---------------------------------------------------------------------------

    Finally, the proposed rule changes would address the treatment of 
transactions submitted to FICC by Inter-Dealer Broker Netting Members 
and certain Netting Members that operate similarly to Inter-Dealer 
Broker Netting Members (``Non-IDB Repo Brokers''). The Rules currently 
cap the amount of loss allocation that may applied to an Inter-Dealer 
Broker Netting Member or Non-IDB Repo Broker in respect of transactions 
submitted by such Netting Members to FICC for clearance and settlement 
(``Brokered Transactions''). This treatment is based on the more 
limited risk that Brokered Transactions present relative to other 
transactions.
Description of Proposed Rule Changes
1. Segregate Indirect Participant Margin Requirements and Amend the GSD 
Account Structure
    The proposed rule changes would provide for the separate 
calculation, collection, and holding of margin supporting a Netting 
Member's Proprietary Transactions and the margin supporting the 
transactions a Netting Member submits on behalf of indirect 
participants, in accordance with the requirements of Rule 17Ad-
22(e)(6)(i), adopted under the Treasury Clearing Rules.\28\ In 
connection with these changes, the proposal would also clarify the 
types of accounts in which Netting Members may record transactions and 
adopt a roadmap to its account structure in a new Rule 2B.
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

A. Separately Calculate, Collect and Hold Indirect Participant and 
Proprietary Margin Requirements
i. Limit Margin Portfolios to Accounts of the Same Type
    The separate calculation of proprietary and customer margin would 
be accomplished by clarifying that each Margin Portfolio may only 
include Accounts of the same Type (i.e., Dealer Accounts, Broker 
Accounts, Agent Clearing Member Omnibus Account, and Sponsoring Member 
Omnibus Accounts).
    FICC would make this clarification by amending the definition of 
``Margin Portfolio'' in Rule 1 and revising Rule 4, Section 1a, which 
would be renumbered Section 1b in light of changes described below, to 
provide that each Margin Portfolio may not contain more than one Type 
of Account (even if such Accounts are both Segregated Indirect 
Participants Accounts).
    By virtue of these changes, transactions recorded in different 
Types of Accounts could not be netted against each other when 
calculating Required Fund Deposit or Segregated Customer Margin 
Requirements. Since Proprietary Transactions and transactions submitted 
for indirect participants could not (by virtue of the changes described 
below) be recorded in the same Type of Account, the changes relating to 
Margin Portfolios would result in margin for a Netting Member's 
Proprietary Transactions being calculated separately and independently 
from margin calculated for the transactions that the Netting Member 
submits on behalf of indirect participants. As conforming changes, 
paragraphs (b) and (c) of Section 1b, which currently provide for such 
separate margin calculations in certain contexts, would no longer be 
needed since the Margin Portfolio definition and other changes 
described above would achieve such separate calculations.
ii. Required Fund Deposit Portions and Segregated Customer Margin 
Requirements
    To further clarify how FICC would calculate and collect a Netting 
Member's margin requirements, the proposed rule changes would make 
other revisions to Rule 4. Specifically, Rule 4, Section 2, which 
currently describes a Netting Member's Required Fund Deposit 
requirement, would be revised to provide that a Netting Member's 
Required Fund Deposit consists of the sum of amounts (each, a 
``Required Fund Deposit Portion'') calculated for each Type of Account, 
other than Segregated Indirect Participants Accounts. For Segregated 
Indirect Participants Accounts, there would, as mentioned below, be a 
Segregated Customer Margin Requirement, which would be the sum of the 
amounts calculated for the Netting Member's (i) Sponsoring Member 
Omnibus Accounts designated as Segregated Indirect Participants 
Accounts and (ii) Agent Clearing Member Omnibus Accounts designated as 
Segregated Indirect Participants Accounts.
    In connection with these changes, FICC would add a corresponding 
definition of ``Required Fund Deposit Portion'' to Rule 1. FICC would 
also adopt a defined term referring to the Required Fund Deposit 
Portion for a Netting Member's Agent Clearing Member Omnibus Account 
(``Agent Clearing Member Omnibus Account Required Fund Deposit'') and 
amend the defined term for the Required Fund Deposit Portion for a 
Netting Member's Sponsoring Member Omnibus Account (the Sponsoring 
Member Omnibus Account Required Fund Deposit). In addition, conforming 
changes would be made to the separately proposed Rule 8, Section 7(g) 
that would describe the requirement of an Agent Clearing Member to make 
and maintain an Agent Clearing Member Omnibus Account Required Deposit 
and that the calculation of such requirement would be performed 
separately from the calculation for Margin Portfolios consisting of the 
Agent Clearing Member's Proprietary Transactions. Similar conforming 
changes would be made to Rule 3A, Section 10 relating to a Sponsoring 
Member's Sponsoring Member Omnibus Account Required Fund Deposit.
iii. Separate Deposit IDs To Facilitate Separate Collection and Holding 
of Margin
    To ensure that margin for Proprietary Transactions is not only 
calculated separately and independently but also collected and held 
separately and independently of margin for indirect participant 
transactions, a new Rule 4, Section 2a would be added to the Rules. 
This section would require each Required Fund Deposit Portion to be 
made to FICC using a separate Deposit ID, which is an existing 
operational mechanism used by Netting Members to identify the type of 
Account for which a Required Fund Deposit is being made.
    A new Rule 4, Section 2b would impose a similar requirement in 
respect of Segregated Customer Margin Requirements. The use of these 
separate Deposit IDs would result in margin for each Type of Account 
being separately transferred to FICC and FICC recording on its books 
the separate margin amounts for each Type of Account. FICC would also 
adopt a definition of ``Deposit ID'' in Rule 1.
    Rule 4, Sections 2a and 2b would also require FICC to report a 
Netting Member's Required Fund Deposit and Segregated Customer Margin 
Requirement twice daily, which is the same timing interval on which 
FICC currently reports a Netting Member's margin requirement. The 
report would

[[Page 21591]]

also specify the amount of margin attributable to each Required Fund 
Deposit Portion or Segregated Indirect Participants Account, as 
applicable, so that the Netting Member can transfer the different 
margin amounts separately.
iv. Eliminate Permitted Margin Affiliates
    In connection with these proposed rule changes, the proposal would 
eliminate the concept of Permitted Margin Affiliates, which allows a 
Member to elect to include its Accounts in the same Margin Portfolio 
with the Accounts of an affiliate that is also a Member, in accordance 
with the Rules.\29\ In this way, a Member and its affiliate can net 
their transactions for purposes of calculating their margin 
requirements.
---------------------------------------------------------------------------

    \29\ See Rule 1 (defining ``Permitted Margin Affiliates'') and 
Rule 4, Section 1a(a) and (b) (permitting Members to include 
Accounts of their Permitted Margin Affiliates in their Margin 
Portfolio). Supra note 4.
---------------------------------------------------------------------------

    In order to support the proposed change described above, which are 
designed to provide for the separate calculation, collection, and 
holding of margin, FICC believes that retaining the option for Members 
to designate Permitted Margin Affiliates would create unnecessary 
complexity. No Netting Member currently has a Permitted Margin 
Affiliate, and FICC would need to examine how such a cross-affiliate 
margining arrangement would function within the context of the proposed 
revisions to the account structure and margin methodology in order to 
determine what steps would be needed to implement such an arrangement 
consistently with the standards applicable to covered clearing 
agencies. Therefore, FICC is proposing to eliminate the Permitted 
Margin Affiliate concept at this time.
    In order to implement this change, the proposal would remove the 
definition of ``Permitted Margin Affiliate'' from Rule 1, and remove 
references to Permitted Margin Affiliates from Rule 4, Section 1a (to 
be renamed Section 1b, as noted above); Rule 4, Section 1b (which would 
be removed and replaced by disclosures in the proposed Margin Component 
Schedule, as discussed below); Rule 4, Sections 4 and 6; Rule 21, 
Section 1; Rule 22, Section 2; and Rule 29, Section (a).
B. Proposed Roadmap to Account Structure Through New Rule 2B and 
Revision to Account Structure
    FICC is proposing to adopt a new Rule 2B that would describe the 
types of Accounts FICC is able to maintain for Netting Members, 
identify the activity that would be recorded in each type of Account, 
and generally provide a roadmap to market participants of FICC's 
account structure.
i. Section 1--Establishment of Proprietary Accounts
    Rule 2B, Section 1 would provide that FICC can establish and 
maintain certain ``Proprietary Accounts'' to record transactions that a 
Netting Member enters into for its own benefit (``Proprietary 
Transactions''), rather than for the benefit of indirect participants. 
Proprietary transactions would not include transactions that a Netting 
Member enters into on behalf of an affiliate.
    The Proprietary Accounts available for recording Proprietary 
Transactions would include ``Dealer Accounts,'' which would be 
available for all Netting Members, and ``Cash Broker Accounts'' and 
``Repo Broker Accounts,'' which would only be available for Inter-
Dealer Broker Netting Members. Dealer Accounts would be for purposes of 
recording a Netting Member's Proprietary Transactions (other than, in 
the case of an Inter-Dealer Broker Netting Member, its Brokered 
Transactions), while Cash Broker Accounts would be for purposes of 
recording an Inter-Dealer Broker Netting Member's Brokered Transactions 
(other than Brokered Repo Transactions), and Repo Broker Accounts would 
be for purposes of recording an Inter-Dealer Broker Netting Member's 
Brokered Repo Transactions. Rule 2B, Section 1 would make clear that, 
as under FICC's existing Rules, FICC can establish multiple Proprietary 
Accounts of the same Type for the Netting Member.
    In connection with these changes, FICC is proposing to adopt new, 
corresponding definitions of Proprietary Transactions, Proprietary 
Accounts, and Cash Broker Accounts in Rule 1, and to make corresponding 
amendments to the definitions of Dealer Account and Repo Broker 
Account. FICC is also proposing to remove from Rule 1 the defined term 
``Netting Member Account'' and replace references to such Account with 
references to Dealer Account.
ii. Section 2--Establishment of Non-Proprietary Accounts
    Rule 2B, Section 2 would provide that FICC can establish and 
maintain certain ``Indirect Participants Accounts'' to record 
transactions that a Netting Member submits to FICC on behalf of 
Sponsored Members and Executing Firm Customers. These Indirect 
Participants Accounts would include, in the case of a Sponsoring 
Member, Sponsoring Member Omnibus Accounts for purposes of recording 
Sponsored Member Trades, and, in the case of an Agent Clearing Member, 
Agent Clearing Member Omnibus Accounts for purposes of recording Agent 
Clearing Transactions of its Executing Firm Customers. Rule 2B, Section 
2 would also make clear that FICC can establish multiple Indirect 
Participants Accounts of the same Type for the Netting Member.
    In connection with these changes, FICC is proposing to add to Rule 
1 a new definition of Indirect Participants Account, which would 
include Agent Clearing Member Omnibus Accounts and Sponsoring Member 
Omnibus Accounts, and to correspondingly amend the definition of 
Sponsoring Member Omnibus Accounts.
iii. Section 3--Segregation Designations for Indirect Participants 
Accounts
    Rule 2B, Section 3 would permit a Sponsoring Member or Agent 
Clearing Member to designate any of its Indirect Participants Accounts 
as a segregated customer account (a ``Segregated Indirect Participants 
Account''). The purpose of such a designation, as further described 
below, would be to give Netting Members a mechanism to direct FICC to 
calculate and segregate margin deposited in connection with the Account 
in accordance with the conditions described in Note H to Rule 15c3-3a 
(``Note H''), as further described below.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

    In connection with this revision, a new definition for ``Segregated 
Indirect Participant'' would be added to Rule 1 to mean a Sponsored 
Member or an Executing Firm Customer whose transactions are recorded in 
a Segregated Indirect Participants Account.
    Rule 2B, Section 3 would provide that the designation of an Account 
as a Segregated Indirect Participants Account constitutes a 
representation to FICC by the Netting Member that the Netting Member 
intends to meet all margin requirements with respect to such Account 
using assets deposited by the Segregated Indirect Participants with the 
Netting Member, with the exception of temporary ``prefunding'' by the 
Netting Member while a margin call to the Segregated Indirect 
Participant is outstanding. The purpose of this representation is to 
ensure that only margin deposited by customers, not the Netting 
Member's proprietary assets, is eligible for segregation.
    Rule 2B, Section 3 would further provide that the margin 
requirement (``Segregated Customer Margin

[[Page 21592]]

Requirement'') calculated for a Segregated Indirect Participants 
Account would equal the sum of the margin requirements that apply to 
each Segregated Indirect Participant whose transactions are recorded in 
the Account, as though each such Segregated Indirect Participant were a 
Netting Member. By virtue of this change and as further described 
below, in calculating the Segregated Customer Margin Requirement for a 
Segregated Indirect Participants Account, FICC would not net the 
transactions of multiple Segregated Indirect Participants against one 
another. A corresponding definition of ``Segregated Customer Margin 
Requirement'' would be added to Rule 1 to mean the amount of cash and 
securities that a Netting Member is required to deposit with FICC to 
support the obligations arising under transactions recorded in its 
Segregated Indirect Participants Accounts. As described in greater 
detail below, such amounts would be further described and addressed in 
Rule 4, Section 2(a)(v) and (vi).
iv. Section 4--Designation of Account When Submitting Transactions
    Lastly, Rule 2B, Section 4 would require a Netting Member, at the 
time it submits a Transaction to FICC for clearance and settlement, to 
designate the Account in which the particular transaction should be 
recorded. Any such designation would constitute a representation to 
FICC that the transaction is of a type that may be recorded in that 
Account in accordance with the Rules. The purpose of such 
representation would be to ensure that Netting Members record only 
their Proprietary Transactions in Proprietary Accounts, which separate 
recordation is necessary for the separate and independent calculation, 
collection, and holding of margin for direct participant and indirect 
participant transactions.
    In addition, Rule 2B, Section 4 would provide that, when submitting 
a transaction on behalf of a Sponsored Member or Executing Firm 
Customer, a Netting Member must include an identifier for the 
applicable Sponsored Member or Executing Firm Customer. This 
requirement is consistent with an existing requirement in the Schedule 
of Required Data Submission Items in the Rules and ensures that FICC 
continues to have the ability to accurately calculate the Required Fund 
Deposit and Segregated Customer Margin Requirements appropriately. This 
requirement also facilitates FICC's ability to engage in risk 
management and market surveillance in accordance with the covered 
clearing agency standards.
    In connection with these changes, FICC also proposes to remove from 
Rule 1 the term ``Netting Member Account,'' as such defined term would 
no longer be used. References to Netting Member Accounts throughout the 
Rules would be revised to ``Dealer Accounts'', which would more clearly 
distinguish these Accounts from Broker Accounts, the other type of 
Proprietary Accounts. FICC would also remove Section 11 of Rule 3, 
which currently concern the types of Accounts that Netting Members may 
open. Rule 2B would now describe the Types of Accounts Netting Members 
may request as well as the transactions that may be recorded in such 
Accounts.
    The foregoing changes are designed to ensure that proprietary and 
indirect participant transactions are recorded in separate Accounts. 
This would assist FICC in tracking and managing the risks associated 
with a Netting Member's proprietary and indirect participant 
transactions. It would also facilitate compliance with the revised 
covered clearing agency standards regarding the separate calculation, 
collection, and holding of indirect participant and proprietary margin, 
which is described in further detail below.
v. Simplification and Revision of Account Structure
    To support the foregoing changes, FICC is proposing to provide 
further clarity on what an Account is for purposes of the Rules. Under 
the Rules, ``Accounts'' at FICC are not cash, securities, or other 
kinds of custodial accounts through which FICC holds assets for a 
Netting Member. Instead, FICC Accounts are a recordkeeping mechanism by 
which FICC records certain transactions submitted by Netting Members to 
FICC for clearance and settlement. This recordkeeping mechanism allows 
FICC to determine which transactions should be netted against one 
another in determining various obligations of the Netting Member, 
including its funds-only settlement amount and securities settlement 
obligations and its Required Fund Deposit. As discussed above, 
generally speaking, all transactions recorded in the same Account are 
netted for purposes of determining these obligations (though certain 
components of the Required Fund Deposit arising from Sponsored Member 
Trades are calculated on a gross basis, as described above). FICC is 
proposing to amend the definition of ``Account'' in Rule 1 to make 
clear that an ``Account'' means an account maintained by FICC to record 
transactions. In addition, FICC is proposing to adopt a new defined 
term, ``Type of Account'' or ``Type,'' to refer to the different kinds 
of Accounts described above.
    FICC is also proposing to eliminate the concept of a Market 
Professional Cross-Margining Account, which refers to an Account 
carried by FICC for a Netting Member that is limited to Eligible 
Positions of Market Professionals or an Account that is carried by a 
Netting Member for Market Professionals that are party to a Market-
Professional Agreement for Cross-Margining. FICC does not currently 
have in place a cross-margining arrangement for market professional 
indirect participants and would need to examine how such an arrangement 
would function within the context of the proposed revisions to the 
Account structure and margin methodology in order to determine what 
steps would be needed to implement such an arrangement consistently 
with the standards applicable to covered clearing agencies. Therefore, 
FICC is proposing to eliminate the Market Professional Cross-Margining 
Account concept at this time.
    In order to implement this change, the proposal would remove the 
definition of ``Market Professional Cross-Margining Account'' from Rule 
1 and remove provisions concerning Market Professional Cross-Margining 
Accounts from Rule 1, Rule 4 and Rule 29.
2. Proposed Rule Changes Relating to Note H of Rule 15c3-3a
    As described above, FICC would permit Netting Members to designate 
certain Indirect Participants Accounts as Segregated Indirect 
Participants Accounts. Such a designation would have the effect of 
causing FICC to calculate, collect, and hold the required margin for 
transactions recorded in such Accounts in accordance with the 
conditions for recording a debit in the customer reserve formula set 
forth in Note H of Rule 15c3-3a.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

A. Gross Calculation of Segregated Customer Margin Requirements
    In order to satisfy the requirement of Section (b)(2)(i) of Note H 
to Rule 15c3-3a that the margin requirement be calculated on a gross 
basis,\32\ new Rule 2B would, as noted above, provide that when 
calculating the Segregated Customer Margin Requirement, FICC would not 
net the transactions of multiple Segregated Indirect Participants, but 
would net the transactions of a single Segregated

[[Page 21593]]

Indirect Participant that are recorded in the same Account.
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    In addition, the revised Rule 4, Section 1b would require FICC to 
calculate a Netting Member's Segregated Customer Margin Requirement 
with respect to a particular Segregated Indirect Participants Account 
as the sum of the margin requirements applicable to each Segregated 
Indirect Participant whose transactions are recorded in such Account, 
as though each Segregated Indirect Participant were a separate Netting 
Member with a single Margin Portfolio consisting of such transactions. 
These provisions would result in FICC calculating separate margin 
amounts for each Segregated Indirect Participant and for such amounts 
to be collected on a gross basis.
    FICC would also include language in the new Margin Component 
Schedule to achieve gross margining of Segregated Indirect Participants 
Accounts. Specifically, in Section 1 of the new Margin Component 
Schedule discussed below, new language would require each Netting 
Member for which FICC maintains a Segregated Indirect Participants 
Account to deposit with FICC Segregated Customer Margin equal to the 
sum of the Segregated Customer Margin Requirements for all such 
Accounts. Such language would further provide that each Segregated 
Customer Margin Requirement will be calculated twice daily and equal 
the sum of the amounts calculated pursuant to Section 3 of the Margin 
Component Schedule for each Segregated Indirect Participant whose 
transactions are recorded in the relevant Segregated Indirect 
Participants Account.
    Section 3 of the new Margin Component Schedule, in turn, would set 
out the methodology for calculating such margin amounts. That section 
would provide for FICC to perform substantially the same calculation it 
currently performs when determining a Netting Member's Required Fund 
Deposit, except (i) such calculation would be performed on a Segregated 
Indirect Participant-by-Segregated Indirect Participant basis as though 
each Segregated Indirect Participant represented a separate Margin 
Portfolio and (ii) FICC would not impose an Excess Capital Premium.
    With regard to the latter, FICC does not believe it would be 
appropriate to require an indirect participant to deposit with FICC 
additional margin on account of the capital position of its Netting 
Member. The Excess Capital Premium is designed to address the risk that 
a Netting Member with low capital relative to its VaR Charge will not 
be able to perform its obligations. However, Segregated Customer Margin 
cannot be applied to a Netting Member's obligations (other than to 
perform on behalf of the individual indirect participant for whom the 
Segregated Customer Margin is held). Accordingly, requiring indirect 
participants to deposit an additional Excess Capital Premium would not 
serve a risk management purpose. Further, requiring indirect 
participants who access FICC's clearance and settlement systems through 
a Netting Member with low capital to deposit more margin than indirect 
participants who access FICC's clearance and settlement system through 
other Netting Members would treat similarly situated indirect 
participants differently without an appropriate basis to do so. 
Moreover, it could lead to concentration among Netting Members, as 
indirect participants would be disincentivized to access clearing 
through smaller Netting Members, since smaller Netting Members 
typically have lower net capital.
    For similar reasons, FICC would not add Segregated Customer Margin 
to Section 4 of the Margin Component Schedule, which describes FICC's 
ability to impose increased Required Fund Deposits under certain 
circumstances. However, when determining whether to increase the 
Required Fund Deposit of a Netting Member under the circumstances 
described in Section 4, FICC may consider the risk presented by a 
Netting Member in view of all activity it submits to FICC, including 
activity of indirect participants.
    As a conforming change, FICC would revise the definitions of most 
of the components utilized for calculating a Netting Member's 
Segregated Customer Margin Requirement as well as associated 
definitions to provide that these apply to Segregated Indirect 
Participants on a Segregated Indirect Participant-by-Segregated 
Indirect Participant basis. These definitions include the Backtesting 
Charge, the Holiday Charge, the Intraday Supplemental Fund Deposit, the 
Margin Liquidity Adjustment or MLA Charge, the Margin Proxy, the 
Minimum Margin Amount,\33\ the Portfolio Differential Charge, the 
Unadjusted GSD Margin Portfolio Amount, and the VaR Charge.
---------------------------------------------------------------------------

    \33\ FICC has filed a proposed rule change and related advance 
notice to adopt a Minimum Margin Amount at GSD (File Nos. SR-FICC-
2024-003 and SR-FICC-2024-801). This proposal is pending regulatory 
approval, and the filings are available at www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------

B. Segregation of Customer Margin Deposits
    In order to satisfy the segregation requirements of Section 
(b)(2)(iii) of Note H to Rule 15c3-3a,\34\ FICC is proposing a number 
of changes to the Rules. First, FICC is proposing to adopt a new 
definition of ``Segregated Customer Margin'' in Rule 1, which 
definition would refer to ``all securities and funds deposited by a 
Sponsoring Member or an Agent Clearing Member with the Corporation to 
satisfy its Segregated Customer Margin Requirement.'' FICC would also 
adopt a new Rule 4, Section 1a. That provision would require a Netting 
Member to deposit Segregated Customer Margin with FICC equal to the 
Netting Member's Segregated Customer Margin Requirement in accordance 
with the timing provisions generally applicable to Required Fund 
Deposits.
---------------------------------------------------------------------------

    \34\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

i. Establishment of Segregated Accounts
    In order to satisfy the requirements of Section (b)(2)(iii) of Note 
H that margin ``be held in an account of the broker or dealer at the 
qualified clearing agency that is segregated from any other account of 
the broker or dealer at the qualified clearing agency,'' \35\ Rule 4, 
Section 1a would provide for FICC to establish on its books and records 
for each Netting Member that deposits Segregated Customer Margin a 
``Segregated Customer Margin Custody Account'' corresponding to each 
Segregated Indirect Participants Account of such Netting Member. 
Segregated Customer Margin Custody Account would be defined in Rule 1 
as ``a securities account within the meaning of the NYUCC maintained by 
the Corporation, in its capacity as securities intermediary as such 
term is used in the NYUCC, for an Agent Clearing Member or Sponsoring 
Member for the benefit of such Member's Segregated Indirect 
Participants.'' In other words, in contrast to the other FICC Accounts, 
which, as discussed above, are position record-keeping accounts rather 
than custodial accounts, each Segregated Customer Margin Custody 
Account would be a ``securities account'' within the meaning of the 
NYUCC.
---------------------------------------------------------------------------

    \35\ Id.
---------------------------------------------------------------------------

    As noted above, FICC is also proposing to amend the definition of 
``Account'' in Rule 1 to make clear that such term refers only to an 
account maintained by FICC for a Netting Member to record transactions 
submitted by that Netting Member. FICC believes this change would help 
to

[[Page 21594]]

distinguish ``Accounts,'' which are simply a transaction recordation 
mechanism, from the ``Segregated Customer Margin Custody Account,'' 
which is a traditional custodial account to which FICC would credit 
cash and securities.
    Rule 4, Section 1a would further provide that any assets credited 
to the Segregated Customer Margin Custody Account would be treated as 
financial assets within the meaning of the NYUCC. These changes would 
have the effect of making FICC the ``securities intermediary'' in 
respect of each Segregated Customer Margin Custody Account and the 
Netting Member, on behalf of its Segregated Indirect Participants, the 
``entitlement holder'' under the NYUCC.\36\ By virtue of these 
designations, the Segregated Customer Margin held by FICC would be 
reserved for the Netting Member (on behalf of its Segregated Indirect 
Participants), including in an FICC insolvency.\37\
---------------------------------------------------------------------------

    \36\ UCC Sec.  8-102(7) (```Entitlement holder' means a person 
identified in the records of a securities intermediary as the person 
having a security entitlement against the securities intermediary. . 
. .'').
    \37\ See UCC Sec.  8-503.
---------------------------------------------------------------------------

    Rule 4, Section 1a would further provide that all Segregated 
Customer Margin deposited with FICC to support the obligations arising 
under the transactions recorded in a given Segregated Indirect 
Participants Account be credited to the corresponding Segregated 
Customer Margin Custody Account. In other words, rather than treat 
Segregated Customer Margin as general Clearing Fund, FICC would record 
such margin in a specific Segregated Customer Margin Custody Account 
maintained by FICC on its books and records for the Netting Member that 
deposited such Segregated Customer Margin, which Account would be 
separate from any other Accounts maintained by FICC for the Netting 
Member, including fellow Segregated Customer Margin Custody Accounts. 
In furtherance of the goal of segregation, FICC would also amend Rule 
4, Section 3a to provide that any interest on Segregated Customer 
Margin consisting of cash be paid to Netting Members.\38\
---------------------------------------------------------------------------

    \38\ Rule 4, Section 1a would also specify New York as the 
``securities intermediary's jurisdiction'' for purposes of the NYUCC 
and specify that New York law would govern all issues specified in 
Article 2(1) of the Convention on the Law Applicable to Certain 
Rights in Respect of Securities Held with an Intermediary, July 5, 
2006, 17 U.S.T. 401, 46 I.L.M. 649 (entered into force Apr. 1, 2017) 
(the ``Hague Securities Convention''). These changes are designed to 
ensure that New York law governs each Segregated Customer Margin 
Custody Account.
---------------------------------------------------------------------------

ii. Exclusive Use, Account Designation, and Exclusive Benefit
    To satisfy the requirements of Section (b)(2)(iii)(A) of Note H 
that customer margin be ``used exclusively to clear, settle, novate, 
and margin U.S. Treasury securities transactions of the customers of 
the broker or dealer;'' \39\ FICC would provide in Rule 4, Section 1a 
that the Segregated Customer Margin credited to a Segregated Customer 
Margin Custody Account would be used exclusively to settle and margin 
transactions in U.S. Treasury securities recorded in the corresponding 
Segregated Indirect Participants Account.
---------------------------------------------------------------------------

    \39\ 17 CFR 240.15c3-3a.
---------------------------------------------------------------------------

    Rule 4, Section 1a would also provide that the Segregated Customer 
Margin Custody Account would be designated on FICC's books and records 
as a ``Special Clearing Account for the Exclusive Benefits of the 
Customers of [the relevant Sponsoring Member or Agent Clearing 
Member].'' This is in accordance with the designation requirements of 
Section (b)(2)(iii)(B) of Note H.\40\
---------------------------------------------------------------------------

    \40\ Id.
---------------------------------------------------------------------------

    Section (b)(2)(iii)(C) of Note H requires that the account at the 
clearing agency to which customer margin is credited be subject to a 
written notice from the clearing agency to the broker-dealer stating 
that the margin credited to the account is being held ``for the 
exclusive benefit of the customers of the broker or dealer in 
accordance with the regulations of the Commission and [is] being kept 
separate from any other accounts maintained by the broker or dealer or 
any other clearing member at the qualified clearing agency.'' \41\ Rule 
4, Section 1a would provide for FICC to provide this notice to any 
Netting Member that is a Registered Broker or Registered Dealer and has 
designated an account as a Segregated Indirect Participants Account.
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

iii. Limitation on Permitted Liens and Use of Margin Deposits
    FICC is also proposing changes to the Rules to satisfy the 
condition of Section (b)(2)(iii)(D) of Note H that the account 
established pursuant to Section (b)(2)(iii), i.e., each Segregated 
Customer Margin Custody Account, be subject to a written contract 
providing that the customer margin in the account, i.e., the Segregated 
Customer Margin, not be available to cover claims arising from the 
broker-dealer or any other clearing member defaulting on an obligation 
to the Treasury CCA, or be subject to any other right, charge, security 
interest, lien, or claim of any kind in favor of the qualified clearing 
agency or any person claiming through the qualified clearing agency, 
except a right, charge, security interest, lien, or claim resulting 
from a cleared U.S. Treasury securities transaction of a customer of 
the broker-dealer effected in the account.\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    Specifically, FICC is proposing to amend the security interest each 
Netting Member provides to FICC under Rule 4, Section 4. That security 
interest, which is binding on the Netting Member and FICC through the 
incorporation of the Rules into the membership agreement between FICC 
and such Netting Member, currently applies to all cash and securities 
deposited by a Netting Member with FICC pursuant to Rule 4 and Rule 13 
(defined in the Rules as the ``Actual Deposit'') and secures all 
obligations of the Netting Member to FICC. FICC is proposing to amend 
Rule 4, Section 4 to exclude Segregated Customer Margin from the scope 
of the Actual Deposit. Such Segregated Customer Margin would instead be 
subject to a separate security interest pursuant to which the 
Segregated Customer Margin would secure only obligations arising out of 
Segregated Indirect Participants Accounts. FICC would also make a 
conforming change to Rule 3A, Section 10(f) to make clear that the 
security interest described therein only applies to the security 
interest granted in the Actual Deposit.
    In addition, the bulk of the provisions of the Rules concerning 
Clearing Fund, including those relating to FICC's ability to use 
Clearing Fund, would not apply to Segregated Customer Margin since such 
margin would not form part of the Clearing Fund. The only exceptions 
are the language in Rule 3A, Section 10(f) stating that margin 
obligations are secured by the Actual Deposit; the language in Rule 3A, 
Section 10(g) concerning fines applicable to a failure to meet margin 
requirements; the language in Rule 4, Section 3a concerning the 
requirement that cash margin deposits be made in immediately available 
funds; the language in Rule 4, Section 3b regarding the haircutting, 
delivery, qualification, and substitution requirements for securities 
margin; and the language in Rule 4, Section 9 relating to the 
requirement of Netting Members to deliver margin. These changes would 
ensure that FICC's broad use rights in respect of Clearing Fund, e.g., 
for loss mutualization, do not apply to Segregated Customer Margin.
    In addition, FICC is proposing to amend Rule 4, Section 5 to 
provide that, on each Business Day, FICC would

[[Page 21595]]

calculate the portion of Segregated Customer Margin that supports each 
Segregated Indirect Participant's transactions. FICC may only use such 
portion to secure or settle the performance of the obligations of that 
Segregated Indirect Participant (or its Sponsoring Member or Agent 
Clearing Member with respect to the Segregated Indirect Participant) or 
for permitted investment purposes described below. It would further 
provide that FICC would not be permitted to use Segregated Customer 
Margin supporting one Segregated Indirect Participant's transaction to 
secure or settle any other person's transactions, including those of a 
fellow Segregated Indirect Participant.
    These changes would thus not only prohibit FICC from using 
Segregated Customer Margin to cover the obligations of the broker-
dealer Netting Member in respect of its Proprietary Transactions or 
those of any other Netting Member in accordance with the requirements 
of Section (b)(2)(iii)(D) of Note H, but they would also limit ``fellow 
customer risk'' for Segregated Indirect Participants (i.e., the risk 
that one customer incurs a loss on account of a default of another 
customer because the clearing organization applies margin deposited by 
the first customer to the second customer's obligations).\43\ FICC 
believes these changes would facilitate greater access to its clearance 
and settlement services.
---------------------------------------------------------------------------

    \43\ In the event of the insolvency, resolution, or liquidation 
of a Netting Member, a Segregated Indirect Participant's ability to 
recover any funds or securities it has posted to its Netting Member 
in connection with an FICC-cleared transaction or that the Netting 
Member receives from FICC in connection with such a transaction will 
depend on the relevant insolvency, resolution, or liquidation 
regime. FICC would not, except as directed by the relevant 
insolvency, resolution, or liquidation officials in accordance with 
applicable law, make any payments or transfer any assets directly to 
an indirect participant.
---------------------------------------------------------------------------

    FICC is proposing to require that the Segregated Margin Requirement 
be no lower than $1 million per Segregated Indirect Participant, and 
that the same form of deposit requirements set forth in Rule 4, Section 
3 apply to Segregated Customer Margin such that no less than $1 million 
per Segregated Indirect Participant consist of cash. These changes 
would be accomplished through a new subsection (c) of Rule 4, Section 3 
and reflected in the Margin Component Schedule.
    First, this minimum requirement is consistent with the $1 million 
minimum cash requirement applicable to each Margin Portfolio of a 
Netting Member. FICC believes it is appropriate to apply the same 
minimum cash requirement to each Segregated Indirect Participant that 
it currently applies to each Margin Portfolio because, as described 
above, FICC would be required to calculate the margin requirements for 
these participants on a gross basis, as if each Segregated Indirect 
Participant were a separate Margin Portfolio, and would be restricted 
from using these funds to address any losses other than losses 
resulting from the participant for whom the funds are held.
    Second, because FICC would be restricted from using these funds to 
address any losses other than losses resulting from the indirect 
participant for whom these funds are deposited, FICC believes this 
minimum requirement is appropriate to mitigate the risk exposures 
presented by this limitation. FICC's daily backtesting of the 
sufficiency of Clearing Fund deposits has revealed a heightened 
likelihood of backtesting deficiencies for those Members with lower 
deposits that are not sufficient to mitigate any abrupt intraday change 
in their exposures.\44\ Based on the analysis and impact studies FICC 
conducted in connection with a recent increase to minimum Required Fund 
Deposit for Netting Members,\45\ FICC has determined that a $1 million 
minimum requirement is the appropriate minimum amount to optimize the 
balance between financial impact of the requirement to Members and 
FICC's ability to continue to meet its regulatory obligation to 
maintain a backtesting performance coverage ratio above its 99 percent 
coverage target.
---------------------------------------------------------------------------

    \44\ As a covered clearing agency, FICC is required under Rule 
17Ad-22(e)(6)(vi) to conduct backtests of its margin model at least 
once a day. 17 CFR 240.17Ad-22(e)(6)(vi). FICC's backtesting 
performance target is 99 percent.
    \45\ See Securities Exchange Act Release No. 96136 (Oct. 24, 
2022), 87 FR 65268 (Oct. 28, 2022) (SR-FICC-2022-006).
---------------------------------------------------------------------------

    FICC is not able to predict how many indirect participants may 
elect to submit activity to FICC through a Segregated Indirect 
Participants Account, or the size and volume of that activity. However, 
because the margin requirements for each Segregated Indirect 
Participant would be calculated in the same manner as the requirements 
for each Margin Portfolio, it believes that these studies provide it 
with an appropriate approximation of the risks it may face if margin 
deposits for these Accounts are not subject to a minimum requirement.
C. Holding Segregated Customer Margin Deposits in Bank and FRBNY 
Accounts
    To satisfy the eligible custodian conditions set forth in Section 
(b)(2)(iv) of Note H,\46\ FICC is proposing to amend Rule 4, Section 1a 
to provide that all Segregated Customer Margin be held in an account of 
FICC at a bank within the meaning of the Act that is insured by the 
Federal Deposit Insurance Corporation, or at the Federal Reserve Bank 
of New York. Rule 4, Section 1a would also provide that such account 
would be segregated from any other account of FICC and would be used 
exclusively to hold Segregated Customer Margin, in accordance with 
Section (b)(2)(iv)(A) of Note H to Rule 15c3-3a.\47\ To satisfy the 
requirements of Sections (b)(2)(iv)(B) and (C) of Note H,\48\ Rule 4, 
Section 1a would further provide that each such account would be 
subject to (i) a written notice of the bank or Federal Reserve Bank 
provided to and retained by FICC that the account is being held by the 
bank or Federal Reserve Bank pursuant to Rule 15c3-3 and is being kept 
separate from any other accounts maintained by FICC or any other person 
at the bank or Federal Reserve Bank and (ii) a written contract between 
FICC and the bank or Federal Reserve Bank which provides that the 
Segregated Customer Margin in the account is subject to no right, 
charge, security interest, lien, or claim of any kind in favor of the 
bank or Federal Reserve Bank or any person claiming through the bank or 
Federal Reserve Bank.
---------------------------------------------------------------------------

    \46\ 17 CFR 240.15c3-3a.
    \47\ Id.
    \48\ Id.
---------------------------------------------------------------------------

D. Investment Restrictions on Segregated Customer Margin Cash
    In accordance with Section (b)(2)(ii) of Note H,\49\ Rule 4, 
Section 1a would be amended to require FICC to only invest Segregated 
Customer Margin consisting of cash in U.S. Treasury securities with a 
maturity of one year or less. FICC will propose changes to the Clearing 
Agency Investment Policy by a separate proposed rule change filing to 
address the separate holding and investment of Segregated Customer 
Margin cash, consistent with the disclosures proposed to be added to 
Rule 4. Pursuant to those changes, FICC would only hold Segregated 
Customer Margin consisting of cash in a cash deposit account at the 
Federal Reserve Bank of New York or, pending the opening of such 
account, another FDIC-insured bank and does not intend to make any 
other investment of these funds.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

E. Return of Segregated Customer Margin
    Lastly, in order to satisfy the condition in section (b)(2)(v) of 
Note H

[[Page 21596]]

that a Treasury CCA adopt rules requiring systems, controls, policies, 
and procedures to return excess customer margin to a broker-dealer,\50\ 
FICC is proposing to adopt certain amendments to Rule 4, Section 10. 
Under the proposed rule changes, Rule 4, Section 10 would be revised to 
require FICC to calculate twice each Business Day the excess of a 
Netting Member's Segregated Customer Margin over the Segregated 
Customer Margin Requirement (such amount, the ``Excess Segregated 
Customer Margin'').\51\ In addition, FICC would adopt a new Rule 4, 
Section 10(b) that would require FICC to return a Netting Member's 
Excess Segregated Customer Margin at the Netting Member's request. In 
order to manage the risk of a Segregated Indirect Participant's 
transactions in accordance with the requirements of Rule 17Ad-22(e)(6) 
under the Act,\52\ FICC would retain the discretion to retain such 
Excess Segregated Customer Margin if the Netting Member has any 
outstanding payment or margin obligation with respect to the 
transactions of any Segregated Indirect Participant.
---------------------------------------------------------------------------

    \50\ Id.
    \51\ The twice each Business Day interval would also apply to 
the calculation of a Netting Member's excess Required Fund Deposit, 
since that is the interval on which FICC currently performs such 
calculation.
    \52\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

    However, proposed Section 10(b) of Rule 4 would provide that, 
unlike in the case with Clearing Fund, FICC would not be able to retain 
Excess Segregated Customer Margin due to any obligation of the Netting 
Member that is unrelated to the Segregated Indirect Participants 
Account, unless FICC is either required to do so by applicable law or 
is authorized to do so by the Commission.
3. Align Margin Methodology With Proposed Account Structure and Enhance 
Public Disclosures of Margin Components and Clearing Fund Methodology
    FICC is proposing changes to the Rules to reorganize, clarify, and 
refine its margin calculation methodology. FICC is not changing the 
method by which it calculates the various margin components.
A. Consolidate Margin Components and Clearing Fund Calculation 
Methodology in Proposed Margin Component Schedule
    In order to improve the clarity and transparency of its margin 
components and Clearing Fund calculation methodology, FICC is proposing 
to move the calculation methodology from Rule 4, Sections 1b, and 2a, 
Rule 3, Section 14, and Rule 3A, Section 10, as well as the associated 
definitions of the margin components and associated terms, including 
Backtesting Charge, Blackout Period Exposure Adjustment, Excess Capital 
Differential, Excess Capital Ratio, Excess Capital Premium, Holiday 
Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment 
Charge or MLA Charge, Margin Proxy, Minimum Margin Amount,\53\ 
Portfolio Differential Charge, Unadjusted GSD Margin Portfolio Amount, 
VaR Charge, VaR Floor and VaR Floor Percentage Amount to a new Margin 
Component Schedule. As noted above, this methodology would not change, 
and would continue to be substantively the same as that which currently 
exists under Rule 4 and Rule 3A, Section 10.
---------------------------------------------------------------------------

    \53\ Supra note 33.
---------------------------------------------------------------------------

    The Margin Component Schedule would include existing and refined 
descriptions of the manner and method by which FICC would calculate a 
Netting Member's Required Fund Deposit and Segregated Customer Margin 
Requirement. FICC believes that describing its margin calculation 
methodology in a single schedule would facilitate access to its 
clearing and settlement services by making it easier for market 
participants to identify and review that methodology. FICC would also 
make conforming changes to provisions of the Rules that reference the 
margin calculation methodology of Rule 4 so that such provisions 
reference the Schedule of Margin Components.
    Section 1 of the Margin Component Schedule would provide that both 
a Netting Member's Required Fund Deposit and its Segregated Customer 
Margin Requirement would be calculated twice each Business Day and that 
the Netting Member would be required to meet such requirements. This is 
the same time interval in which FICC currently calculates and collects 
a Netting Member's margin requirements. Section 2 of the Margin 
Component Schedule would set forth the methodology for calculating a 
Netting Member's Required Fund Deposit. As discussed above, Section 3 
of the Margin Component Schedule would set forth the methodology for 
calculating a Netting Member's Segregated Customer Margin Requirement. 
Section 4 of the Margin Component Schedule would set forth the terms 
under which FICC may impose increased Required Fund Deposits. These 
terms would be substantively the same as those currently in Rule 4 and 
Rule 3A, Section 10.
    Section 5 of the Margin Component Schedule would contain the 
relevant definitions for the margin methodology calculation. These 
would be substantively the same as the existing definitions in Rule 1, 
with certain changes. As noted above, the definitions of Backtesting 
Charge, Blackout Period Exposure Adjustment, Excess Capital 
Differential, Excess Capital Ratio, Excess Capital Premium, Holiday 
Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment 
or MLA Charge, Margin Proxy, Minimum Margin Amount,\54\ Portfolio 
Differential Charge, Unadjusted GSD Margin Portfolio Amount, VaR 
Charge, VaR Floor and VaR Floor Percentage Amount would be revised to 
provide for such charges to be calculated for purposes of Segregated 
Customer Margin Requirements on a Segregated Indirect Participant-by-
Segregated Indirect Participant basis. In addition, the MLA Charge 
definition would be amended to provide that, if a Segregated Indirect 
Participant clears through multiple Accounts (including Accounts of 
different Netting Members), then the MLA Charge applicable to its 
transactions carried in a given Segregated Indirect Participants 
Account would equal the greater of (i) an amount calculated only with 
regard to the transactions maintained in that Account (i.e., without 
regard to the other Accounts in which the Segregated Indirect 
Participant's transactions are recorded) and (ii) an amount calculated 
on a consolidated portfolio basis (i.e., taking into account the 
transactions carried in each of the Accounts). This is currently the 
same methodology that is used for Sponsored Members that clear through 
multiple Accounts.
---------------------------------------------------------------------------

    \54\ Supra note 33.
---------------------------------------------------------------------------

B. Revise Definition of ``Current Net Settlement Positions''
    In order to refine its margin calculation methodology, FICC is also 
proposing to amend the definition in Rule 1 of Current Net Settlement 
Positions to provide for Current Net Settlement Positions in a 
Sponsoring Member Omnibus Account or Segregated Indirect Participants 
Account that are not clearly allocable to an individual Sponsored 
Member or Segregated Indirect Participant to be allocated, for purposes 
of calculating margin requirements, pro rata to the Sponsored Members 
or Segregated Indirect Participants that had, as of the end of the 
preceding Business Day, positions in the same direction and CUSIP as 
the un-allocable Current Net Unsettled Positions. This situation could 
arise if, for example, a transaction

[[Page 21597]]

recorded in a Sponsoring Member Omnibus Account or Segregated Indirect 
Participants Account fails to settle. FICC believes this methodology 
facilitates a reasonable and fair allocation for purposes of 
calculating gross margin requirements.
    FICC would make a corresponding deletion to the language of Rule 
3A, Section 7 that addresses the treatment of such positions in 
Sponsoring Member Omnibus Accounts. Currently Rule 3A, Section 7(a)(i) 
provides that Net Settlement Positions per CUSIP shall be calculated 
for each Sponsored Member in the same manner set forth in Rule 11 for 
Netting Members. The proposed changes to the definition of Current Net 
Settlement Positions would, however, result in a different calculation 
of the Net Settlement Positions per CUSIP for Sponsored Members whose 
positions are recorded in a Sponsoring Member Omnibus Account than for 
Netting Members. Therefore, the statement in Rule 3A, Section 7 would 
no longer be correct and would be removed from the Rules.
C. Enhance the Methodology for Calculating the Excess Capital Premium
    FICC is also proposing to amend the terms related to the Excess 
Capital Premium, one of the components of the Required Fund Deposit 
calculation, in order to make such calculation more precise and 
predictable. Currently, the Excess Capital Premium applicable to a 
Netting Member equals the Netting Member's ``Excess Capital Ratio'' 
(i.e., its VaR Charge divided by its Netting Member Capital) multiplied 
by its ``Excess Capital Differential'' (i.e., the amount by which a 
Netting Member's VaR Charge exceeds its Netting Member Capital). 
However, FICC currently reserves the right to collect less than this 
amount or to return some or all of this amount.
    FICC is proposing to make the Excess Capital Premium more precise 
and predictable by revising the definition to (i) cap such amount at 
two times a Netting Member's Excess Capital Differential, (ii) provide 
that FICC would use the Netting Member Capital amounts set forth in the 
Netting Member's most recent Form X-17-A-5 (Financial and Operational 
Combined Uniform Single (``FOCUS'') Report or Consolidated Report of 
Condition and Income (``Call Report''), as applicable, (iii) permit 
FICC in its discretion to accept updated amounts provided by a Netting 
Member prior to the issuance of the Netting Member's next financial 
report, and (iv) set forth a specific procedure through which FICC may 
waive the Excess Capital Premium. With regard to (iv), the proposed 
rule changes would provide that only a Managing Director in FICC's 
Group Chief Risk Office could grant waiver of an Excess Capital Premium 
and only in exigent circumstances if FICC observed extreme market 
conditions or other unexpected changes in factors, based on all 
relevant facts and circumstances, including the degree to which a 
Netting Member's capital position and trading activity compare or 
correlate to the prevailing exigent circumstances and whether FICC can 
effectively address the risk exposure presented by a Netting Member 
without the collection of the Excess Capital Premium from that Netting 
Member. Any such waiver would need to be documented in a written report 
made available to the relevant Netting Member. FICC believes that these 
changes, which are substantially similar to changes recently adopted by 
the National Securities Clearing Corporation, would enhance the ability 
of Netting Members to identify what their Excess Capital Premium will 
be and to ensure such amount is accurately calibrated.\55\
---------------------------------------------------------------------------

    \55\ See Securities Exchange Act Release No. 96786 (Feb. 1, 
2023), 88 FR 8013 (Feb. 7, 2023) (SR-NSCC-2022-005).
---------------------------------------------------------------------------

    FICC would also amend the defined term ``Netting Member Capital'' 
in Rule 1 to refer to a Netting Member's Net Capital, Net Assets, or 
Equity Capital, as applicable based on the Netting Member's type of 
regulation. The definition of ``Net Capital,'' in turn, would be 
revised to refer specifically to the net capital of a Netting Member as 
reported on its most recent FOCUS Report or, if a Netting Member is not 
required to file a FOCUS Report, on its most recent financial 
statements or equivalent reporting. ``Equity Capital'' would be defined 
in Rule 1 to mean the equity capital of a Netting Member as reported on 
its most recent Call Report, or if a Netting Member is not required to 
file a Call Report, on its most recent financial statements or 
equivalent reporting. FICC believes these changes would increase 
predictability and understanding of how FICC calculates the Excess 
Capital Premium.
    FICC would also remove obsolete references to margin requirements 
for pending transactions since FICC does not apply margin requirements 
to such transactions.
D. Exclude Segregated Customer Margin From Calculation of Excess 
Capital Premium Charge
    FICC is also proposing to revise the definitions of Excess Capital 
Ratio and Excess Capital Differential in the Margin Component Schedule 
to exclude the VaR Charge calculated with respect to Segregated 
Indirect Participants.
    The VaR Charge assessed for each Segregated Indirect Participant 
would be satisfied by the Segregated Indirect Participant, and not by 
the Netting Member. As noted above, the Excess Capital Premium is 
designed to address the risk that a Netting Member with low capital 
relative to value-at-risk is not able to perform its obligations. 
However, Segregated Customer Margin cannot be applied to satisfy a 
Netting Member's obligations (other than to perform on behalf of the 
individual indirect participant for whom the Segregated Customer Margin 
is held). Therefore, including the VaR Charge that is calculated for a 
Segregated Indirect Participant and is satisfied by the capital of that 
Segregated Indirect Participant in the calculation of the Netting 
Member's Excess Capital Premium could result in assessing an Excess 
Capital Premium for that Netting Member that is greater than the amount 
required to mitigate the risk that the Excess Capital Premium is 
designed to address.
    The proposed change is also designed to ensure that the Excess 
Capital Premium does not result in differential treatment of Netting 
Members that act as intermediaries for Segregated Indirect 
Participants.
E. Other Clarifications and Conforming Changes
    In connection with the changes described above, FICC would make 
other clarifications and conforming changes to the Rules. First, FICC 
would move the definition of ``Legal Risk'' from Rule 4 to the 
definitions in Rule 1. This term refers to the risk that FICC may be 
unable to either access Required Fund Deposits or take action following 
the insolvency or bankruptcy of a Netting Member as the result of a 
law, rule or regulation applicable to the Netting Member.\56\ Because 
this term is used in multiple places in the Rules, including in the new 
Margin Component Schedule, moving the definition to Rule 1 would make 
it easier for a reader to find that definition.
---------------------------------------------------------------------------

    \56\ See Rule 4, Section 2(d), supra note 4.
---------------------------------------------------------------------------

    FICC would also delete the definition of the term ``Minimum 
Charge'' from Rule 1 and move the use of this term from Rule 4 to 
Sections 2(c) and 3(c) of the Margin Component Schedule. While FICC 
would continue to apply a requirement that Netting Members maintain a 
minimum amount for each Margin Portfolio or Segregated Margin 
Requirement, as discussed above, FICC

[[Page 21598]]

believes using a defined term for this concept is not necessary and 
could cause confusion about the requirement. The proposed change to 
remove the defined term and instead just explain the requirement in 
these sections of the Margin Component Guide would simplify and, 
therefore, clarify, the Rules in this regard.
4. Clarifications to Treatment of Brokered Transactions
    FICC is proposing to refine the definition of Brokered Transactions 
and remove conditions that Inter-Dealer Broker Netting Members and Non-
IDB Repo Brokers must meet in order to receive favorable loss 
allocation treatment.
    Currently, Inter-Dealer Broker Netting Members and Non-IDB Repo 
Brokers must meet a set of conditions described in Section 8 of Rule 3 
to be subject to a cap on the application of FICC's loss allocation 
procedure of no greater than $5 million.\57\ FICC believes this 
favorable loss allocation treatment is appropriate because the Netting 
Member is not undertaking a directional position with respect to the 
transactions. Instead, each transaction has a counterparty other than 
the Netting Member that will ultimately deliver the securities or pay 
the cash.
---------------------------------------------------------------------------

    \57\ See Rule 3, Section 8 (such conditions require that an 
Inter-Dealer Broker Netting Member ``(A) limit its business to 
acting exclusively as a Broker; (B) conduct all of its business in 
Repo Transactions with Netting Members; and (C) conduct at least 90 
percent of its business in transactions that are not Repo 
Transactions, measured based on its overall dollar volume of 
submitted sides over the prior month, with Netting Members'') and 
Rule 4, Section 7, supra note 4.
---------------------------------------------------------------------------

    FICC is proposing to revise the Rules related to Brokered 
Transactions so that the favorable loss allocation treatment applies 
only to the transactions that present this limited risk. In particular, 
FICC is proposing to revise the definition of Brokered Transactions to 
only encompasses transactions entered into by an Inter-Dealer Broker 
Netting Member on the Inter-Dealer Broker Netting Member's own trading 
platform. This rule change would limit the definition of these 
transactions to transactions for which an Inter-Dealer Broker is 
standing in between two counterparties and is thus completely flat.
    In connection with this change, FICC would eliminate the conditions 
that Inter-Dealer Broker Netting Members and Non-IDB Repo Brokers must 
meet in order to be subject to such favorable treatment. As noted 
above, the proposed Rule 2B would clarify that only Inter-Dealer Broker 
Netting Members are able to maintain Cash Broker Accounts or Repo 
Broker Accounts, and that only Brokered Transactions may be submitted 
through such Accounts, as appropriate. Therefore, FICC believes the 
revised definition of Brokered Transactions and the revisions to the 
Account structure would collectively serve the risk-mitigation function 
that the conditions in Rule 3, Section 8 achieve, but in a much more 
effective manner and in a manner that is easier for FICC to monitor. As 
such, those conditions would be removed from the Rules.
    Finally, FICC would remove the category of Non-IDB Repo Brokers 
from the Rules. Non-IDB Repo Brokers are currently defined as Netting 
Members other than Inter-Dealer Broker Netting Members that operate in 
the same manner as a Broker and have agreed to meet the same 
requirements imposed on Inter-Dealer Broker Netting Members.\58\ As 
described above, FICC believes the favorable loss allocation treatment 
is appropriate only for Inter-Dealer Broker Netting Members that submit 
Brokered Transactions, as such term would be defined. Therefore, FICC 
would delete the references to such parties and associated terms. In 
connection with these changes, the proposal would delete the defined 
term for ``Non-IDB Repo Broker'' as that term would no longer be used 
in the Rules.
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    \58\ Currently, only one Netting Member is a Non-IDB Repo 
Broker.
---------------------------------------------------------------------------

Implementation Timeframe
    Subject to the completion of all regulatory actions required with 
respect to this proposal,\59\ FICC expects to implement the proposal by 
no later than March 31, 2025, and would announce the effective date of 
the proposed changes by an Important Notice posted to FICC's website.
---------------------------------------------------------------------------

    \59\ Supra note 3.
---------------------------------------------------------------------------

Expected Effect on Management of Risk
    FICC believes that the proposed rule changes to separately and 
independently calculate, collect, and hold the margin for a Netting 
Member's proprietary transactions from the margin for the transactions 
of indirect participants, to limit Brokered Transactions to those 
entered into by an Inter-Dealer Broker Netting Member on its own 
trading platform, to set forth a segregation arrangement for certain 
indirect participant margin, and to clarify FICC's account structure 
and consolidate its margin methodology in a single accessible Margin 
Component Schedule would enhance FICC's and its Netting Members' risk 
management.
    The separate calculation of margin for a Netting Member's 
proprietary and indirect participant transactions would ensure that the 
quantum of margin that FICC collects from a Netting Member more 
precisely reflects the separate risk profiles of the Netting Member's 
proprietary portfolio of transactions and the portfolio of transactions 
that the Netting Member submits to FICC on behalf of indirect 
participants. This approach would also provide FICC with a more 
detailed understanding of potential risks arising from the various 
types of transactions that it clears.
    The revisions to the Brokered Transactions definition would also 
help facilitate a more precise identification and calibration of 
potential risks attendant to different transaction types. In this 
context, the revisions would ensure that only those transactions that 
present the limited risk for which FICC's Brokered Transactions 
provisions are designed benefit from a more favorable loss allocation 
treatment. And they would ensure that other types of transactions are 
maintained in Dealer Accounts, alongside other regular market activity.
    FICC further believes that the proposed changes to clarify FICC's 
account structure and consolidate its margin methodology in a single 
accessible Margin Component Schedule would enhance risk management by 
furthering public awareness of how FICC assesses margin requirements. 
Such greater awareness would allow Netting Members and indirect 
participants to make more informed choices about how the various types 
of portfolios they present for clearing would be risk managed by FICC, 
which in turn should allow such parties to better anticipate and 
provision for any financial resourcing and liquidity needs that might 
arise from margin calls for those portfolios.
    FICC additionally believes that the proposed margin segregation 
arrangement would reduce risk by enhancing the ability of Netting 
Members to collect margin from indirect participants and deposit that 
margin with FICC. Currently, broker-dealer Netting Members must finance 
the margin obligations of their indirect participants' transactions 
because they cannot record a debit in the Rule 15c3-3a formulas for 
margin deposited with FICC. In addition, non-broker-dealer Netting 
Members may often need to finance the margin obligations of their 
indirect participants' transactions because the absence of a 
segregation arrangement makes it impossible or undesirable for indirect 
participants to use their own assets to satisfy such

[[Page 21599]]

margin obligations. Such financing can expose Netting Members to the 
risk of an indirect participant default. FICC's proposed segregation 
arrangement would serve to reduce the need for Netting Members to 
provide financing by allowing Netting Members to collect margin from 
indirect participants and deposit that margin with FICC. Such 
collection and depositing would reduce the risk to a Netting Member of 
an indirect participant default because the Netting Member can look to 
the margin for credit support. As a result, collecting and depositing 
the indirect participant's margin in a segregated account at FICC would 
limit the likelihood that a default of an indirect participant gives 
rise to distress at the Netting Member that could limit its ability to 
perform to FICC. By the same token, the segregated account structure 
FICC is proposing to hold indirect participant margin should help those 
indirect participants manage their risks to their Netting Member, 
fellow Netting Member customers, and even FICC itself because the 
account structure would ensure that such margin is only available to 
cover losses arising from a default by the indirect participant's 
position.
Consistency With Section 805 of the Clearing Supervision Act
    FICC believes the proposed rule changes are consistent with the 
Clearing Supervision Act.\60\ Specifically, FICC believes these changes 
are consistent with the risk management objectives and principles of 
Section 805.\61\
---------------------------------------------------------------------------

    \60\ 12 U.S.C. 5461 et seq.
    \61\ 12 U.S.C. 5464.
---------------------------------------------------------------------------

1. Consistency With Section 805(b) of the Clearing Supervision Act
    Section 805(b) provides that ``[t]he objectives and principles for 
the risk management standards prescribed under subsection (a) shall be 
to (1) promote robust risk management; (2) promote safety and 
soundness; (3) reduce systemic risks; and (4) support the stability of 
the broader financial system.'' \62\ As described in greater detail 
below, the proposed rule changes to clarify FICC's account structure 
and margin calculation methodology would improve public understanding 
of FICC's margining and recordkeeping processes and thereby facilitate 
greater access to the systemic risk-reducing benefits of FICC's central 
clearing services. The proposed changes would do this by revising the 
definition of ``Account'' to make clear that FICC Accounts are for 
purposes of recording transactions, providing a roadmap in Rule 2B 
identifying the types of Accounts FICC maintains for Netting Members 
and which transactions may be recorded in such Accounts, amending Rule 
4 to clarify the types of transactions that may be included in a Margin 
Portfolio, and consolidating the components of FICC's margin 
calculation methodology currently in Rules 1 and 4 into an accessible 
Margin Component Schedule and refining the description of FICC's margin 
calculation methodology. The proposed change to eliminate the Permitted 
Margin Affiliates from the Rules would also lead to clearer Rules and, 
therefore, improved public understanding of FICC's margining practices 
by removing a concept that is not being used by Netting Members.
---------------------------------------------------------------------------

    \62\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The collective impact of these changes would be to enhance the 
ability of Netting Members and indirect participants to make more 
informed choices about how the various types of portfolios they present 
for clearing would be risk managed by FICC, which in turn should allow 
such parties to better anticipate and provision for any financial 
resourcing and liquidity needs that might arise from margin calls for 
those portfolios. Enhanced understanding and decision-making by market 
participants of FICC's risk-reducing central clearing services would 
promote easier and more diverse access to such services. This expanded 
access, in turn, would promote robust risk management across the U.S. 
Treasury market since expanded access also result in expanded 
application of FICC's risk management measures, including margin 
requirements. With this expanded application also comes clearer 
understanding by market participants of the potential financial 
resource and liquidity needs necessary to satisfy FICC's margin 
requirements, and therefore the ability of market participants to 
anticipate and manage those needs on a more organized and orderly 
basis. Thus, expanded and more transparent application of these risk 
management measures would promote safety and soundness across the 
diversity of participants in the U.S. Treasury markets, thereby also 
reducing systemic risk and supporting stability of the broader 
financial system.
    The proposed changes to create a segregation arrangement for 
certain indirect participant margin would also facilitate broader 
access to the risk-reducing benefits of FICC's central clearing 
services. As noted above, broker-dealer and other Netting Members must 
often finance the margin obligations of their indirect participants. In 
addition to increasing a Netting Member's risk exposure to indirect 
participants, such financing increases the costs to the Netting Member 
of providing access to central clearing. The proposed rules would 
facilitate greater access to FICC's clearance and settlement systems by 
creating a segregation arrangement that would allow broker-dealer and 
other Netting Members to collect margin from their indirect 
participants and deposit that margin with FICC. Such collection and 
depositing would reduce the costs and attendant liquidity needs to such 
Netting Members of providing access to FICC's clearance and settlement 
services via margin payments, thereby increasing the diversity and 
scope of market participants able to access central clearing while also 
ensuring that expanded access to central clearing does not increase 
funding and liquidity risk for the Netting Members. By improving the 
position of the Netting Members in this regard, the proposed changes 
can reduce systemic risk that can be triggered by a large Netting 
Member liquidity stress event or where an indirect participant default 
also causes a Netting Member to default. For the same reasons, the 
outcome of these proposed changes promotes safety and soundness and the 
stability of the broader financial system.
    By the same token, the segregated account structure FICC is 
proposing to hold indirect participant margin should help indirect 
participants who access central clearing to manage more effectively 
their risks to their Netting Member, fellow Netting Member customers, 
and even FICC itself because the account structure would ensure that 
such margin is only available to cover losses arising from a default by 
the indirect participant's position. Thus, the proposed changes would 
promote robust risk management at indirect participants and, by 
reducing the risk that indirect participants may not be able to access 
their margin upon the default of another party, also reduce the risk 
that the indirect participant will suffer a related default or market 
stress event. For this reason, the proposals further promote safety and 
soundness, reduce systemic risk, and support the stability of the 
broader financial system.
    The proposed rule changes to separately and independently calculate 
the margin for a Netting Member's proprietary transactions from the 
margin for the transactions of indirect participants, adopt a method 
for allocating net unsettled positions to individual indirect 
participants for purposes of calculating margin requirements, and to 
limit the scope of Brokered Transactions to those executed by an Inter-
Dealer Broker Netting

[[Page 21600]]

Member on its own trading platform would also promote robust risk 
management, and safety and soundness at FICC by reducing the potential 
risk to FICC arising from indirect participant transactions and provide 
FICC with a better understanding of the source of potential risk 
arising from the transactions that it clears.\63\ They would also 
ensure that only those transactions that present the limited risk for 
which FICC's Brokered Transactions provisions are designed benefit from 
the favorable loss allocation treatment, which further promotes robust 
risk management at FICC. The proposed changes would also incentivize 
Netting Members and indirect participants to make more informed choices 
about how the various types of portfolios they present for clearing 
would be risk managed by FICC, which in turn should allow such parties 
to better anticipate and provision for any financial resourcing and 
liquidity needs that might arise from margin calls for those 
portfolios. As already explained above, these outcomes applied across 
the various actors in the U.S. Treasury market would, in turn, reduce 
systemic risks and support the stability of the broader financial 
system.
---------------------------------------------------------------------------

    \63\ See Adopting Release, supra note 2, at 144.
---------------------------------------------------------------------------

    As a result, FICC believes the proposed changes will collectively 
advance Section 805(b)'s objectives and principles of promoting robust 
risk management, promoting safety and soundness, reducing systemic 
risks, and supporting the stability of the broader financial 
system.\64\
---------------------------------------------------------------------------

    \64\ Id.
---------------------------------------------------------------------------

2. Consistency With Section 805(a)(2) of the Clearing Supervision Act
    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe risk management standards for the payment, 
clearing, and settlement activities of designated clearing entities, 
like FICC. Accordingly, the Commission has adopted risk management 
standards under this section and under section 17A of the Act.\65\ The 
Section 17A standards require registered clearing agencies to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for their operations and risk management practices on an 
ongoing basis.\66\ FICC believes that the proposed changes are 
consistent with Rules 17Ad-22(e)(4)(i), (e)(6)(i), (e)(18)(ii), 
(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii), each 
promulgated under the Act.\67\
---------------------------------------------------------------------------

    \65\ 17 CFR 240.17Ad-22(e).
    \66\ Id.
    \67\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(18)(ii), 
(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\68\ The proposed rule changes 
to separately and independently calculate, collect, and hold the margin 
for a Netting Member's proprietary transactions from the margin for the 
transactions of indirect participants, to limit Brokered Transactions 
to those entered into by an Inter-Dealer Broker Netting Member on its 
own trading platform, and to increase the precision of the Excess 
Capital Premium would enhance FICC's risk management. These changes 
would ensure that the quantum of margin that FICC collects from a 
Netting Member reflects the separate risk profiles of the Netting 
Member's portfolio of Proprietary Transactions and portfolio 
transactions that the Netting Member submits to FICC on behalf of 
indirect participants, ensure that only those transactions that present 
the limited risk for which FICC's Brokered Transactions provisions are 
designed benefit from favorable loss allocation treatment, and 
calibrate the Excess Capital Premium based on the most readily 
available information.
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Collectively, these changes would enhance the ability of FICC to 
manage the risk of the transactions it clears and settles and cover its 
credit exposure to its participants with a high degree of confidence.
    The proposed change to require a minimum cash requirement of $1 
million per Segregated Indirect Participant would mitigate the greater 
risk exposure presented to FICC by the limitations on its use of these 
deposits. As discussed above, FICC's daily backtesting of the 
sufficiency of Clearing Fund deposits has revealed a heightened 
likelihood of backtesting deficiencies for those Members with lower 
deposits that are not sufficient to mitigate any abrupt intraday change 
in their exposures, and a $1 million minimum requirement was 
appropriate to mitigate the risks of backtesting deficiencies while 
balancing the financial impact of this requirement on Members.\69\ 
Because FICC is required to calculate the margin requirements for 
Segregated Indirect Participants on a gross basis, as if each 
Segregated Indirect Participant were a separate Margin Portfolio, it 
believes it is also appropriate to apply the same minimum requirement 
that it applies to each Margin Portfolio. By maintaining sufficient 
resources to cover its credit exposures fully with a high degree of 
confidence, the proposed change supports FICC's ability to identify, 
measure, monitor, and, through the collection of Segregated Customer 
Margin, manage its credit exposures to these indirect participants. 
Therefore, FICC believes adopting this minimum requirement is 
consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the 
Act.\70\
---------------------------------------------------------------------------

    \69\ Supra note 45.
    \70\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires FICC to establish 
written policies and procedures reasonably designed to calculate, 
collect, and hold margin amounts from a direct participant for its 
proprietary positions in Treasury securities separately and 
independently from margin calculated and collected from that direct 
participant in connection with U.S. Treasury securities transactions by 
an indirect participant that relies on the services provided by the 
direct participant to access FICC's payment, clearing, or settlement 
facilities.\71\ The proposed rule changes would require that each 
Margin Portfolio only consist of activity from the same Type of 
Account, ensuring that proprietary transactions and transactions 
submitted to FICC on behalf of indirect participants are margined 
separately, and to require Netting Members to use separate Deposit IDs 
for different transaction types. As noted above, the proposed changes 
to Rule 2B, Section 3 would require FICC to calculate the Segregated 
Customer Margin Requirement for a particular Segregated Indirect 
Participants Account as the sum of the requirements applicable to each 
Segregated Indirect Participant whose transactions are recorded in such 
Account, as though each Segregated Indirect Participant were a separate 
Netting Member with a single Margin Portfolio consisting of such 
transactions. These provisions would result in FICC calculating 
separate margin amounts for each Segregated Indirect Participant and 
for such amounts to be collected on a gross basis. Finally, the 
proposed changes to Rule 4, Section 1a would

[[Page 21601]]

provide for FICC to establish on its books and records for each Netting 
Member that deposits Segregated Customer Margin a ``Segregated Customer 
Margin Custody Account'' corresponding to each Segregated Indirect 
Participants Account of such Netting Member. Collectively, these 
proposed changes would ensure that a Netting Member's proprietary 
transactions are not netted with indirect participant transactions for 
purposes of margin calculation and that margin for indirect participant 
transactions is collected and held separately and independently from 
margin for a Netting Member's proprietary transactions.
---------------------------------------------------------------------------

    \71\ 17 CFR 240.17Ad-22(e)(6).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18)(ii) under the Act requires FICC to establish 
objective, risk-based, and publicly disclosed criteria for 
participation, which require participants to have sufficient financial 
resources and robust operational capacity to meet obligations arising 
from participation in FICC.\72\ The proposed changes to consolidate 
FICC's margin methodology in a Margin Component Schedule, to identify 
the particular Required Fund Deposit Portions and Segregated Customer 
Margin Requirements, and to elaborate on the calculation of the Excess 
Capital Premium and the circumstances in which FICC would waive the 
application of such premium would improve public disclosure of FICC's 
margin methodology and the obligations that Netting Members and their 
indirect participants would have as a result of their participation in 
FICC's clearance and settlement system. In particular, the proposed 
changes would provide Netting Members and their indirect participants 
with a single, standalone schedule that they can review in order to 
understand how FICC would calculate margin obligations for their 
transactions. The proposed changes would also improve public disclosure 
by allowing Netting Members and their indirect participants to see how 
the various Accounts and Margin Portfolios give rise to separate inputs 
into the total margin calculation and how and when a Netting Member may 
face an increase in margin on account of the Excess Capital Premium.
---------------------------------------------------------------------------

    \72\ 17 CFR 240.17Ad-22(e)(18)(ii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18)(iii) under the Act requires that FICC establish 
written policies and procedures reasonably designed to monitor 
compliance with its participant requirements on an ongoing basis.\73\ 
The proposed changes to require Netting Members to designate the 
Account in which a transaction is to be recorded and to identify the 
Sponsored Member or Executing Firm Customer for whom the transaction is 
submitted on that transaction record would help facilitate FICC's 
ability to monitor which transactions are being entered into by which 
entities. This enhanced monitoring of participant activity would thus 
allow FICC to better monitor participants' compliance with FICC's 
various requirements in accordance with Rule 17Ad-22(e)(18)(iii).\74\
---------------------------------------------------------------------------

    \73\ 17 CFR 240.17Ad-22(e)(18)(iii).
    \74\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(18)(iv)(C) under the Act requires, among other 
things, that FICC, as a covered clearing agency that provides central 
counterparty services for transactions in U.S. Treasury securities, 
ensure that it has appropriate means to facilitate access to clearance 
and settlement services of all eligible secondary market transactions 
in U.S. Treasury securities, including those of indirect 
participants.\75\ FICC believes that the proposed changes giving 
Netting Members the ability to elect for margin deposited by indirect 
participants and deposited with FICC to be segregated would facilitate 
access to FICC's clearance and settlement systems by giving indirect 
participants greater optionality. The proposed rule changes would allow 
a Netting Member and its indirect participant to choose whether (i) the 
indirect participant will post margin under a customer protection 
framework that is similar to that which exists in other cleared 
contexts,\76\ (ii) the Netting Member will finance the margin for the 
indirect participant's transactions, or (iii) the indirect participant 
will deposit margin but without the protection (or higher margin 
requirements) associated with a segregation arrangement. FICC believes 
that such optionality would facilitate access in accordance with Rule 
17Ad-22(e)(18)(iv)(C) by allowing Netting Members and their indirect 
participants to adopt a margining arrangement that is most consistent 
with their business objectives and applicable regulatory, operational, 
and practical constraints.
---------------------------------------------------------------------------

    \75\ 17 CFR 240.17Ad-22(e)(18)(iv)(C). Contemporaneously with 
this proposed rule change, FICC and its affiliates, National 
Securities Clearing Corporation and The Depository Trust Company, 
have submitted separate proposed rule changes (File Nos. SR-FICC-
2024-006, SR-NSCC-2024-003 and SR-DTC-2024-003) under which they are 
proposing to amend the Clearing Agency Risk Management Framework to 
address the requirement under Rule 17Ad-22(e)(18)(iv)(C) that FICC's 
Board review its policies and procedures related to compliance with 
that rule on an annual basis. These proposed changes are pending 
regulatory approval. Copies of the proposed rule changes are 
available at www.dtcc.com/legal/sec-rule-filings.
    \76\ Both the Options Clearing Corporation and the U.S. 
derivatives clearing organizations allow for, or require, the 
segregation of customer margin and/or positions. See generally OCC 
By-Laws Sections 3, 27 (outlining the various accounts that OCC may 
maintain for a clearing member and the extent to which the positions 
and margin recorded to such accounts may applied to other 
obligations); 7 U.S.C. 6d (outlining the segregation rules 
applicable to commodity futures and cleared swap transactions); 
Order Granting Conditional Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Portfolio Margining of Cleared 
Swaps and Security-Based Swaps that are Credit Default Swaps, 
Securities Exchange Release No. 93501 (Nov. 1, 2021), 86 FR 61357 
(Nov. 5, 2021) (S7-13-12) (providing that certain cleared security-
based swaps may be portfolio margined in a cleared swaps account 
subject to the rules generally applicable to cleared swaps).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(19) under the Act requires that FICC identify, 
monitor, and manage the material risks to the covered clearing agency 
arising from arrangements in which firms that are indirect participants 
in FICC rely on the services provided by direct participants to access 
FICC's clearance and settlement facilities.\77\ The proposed changes to 
separately and independently calculate margin for proprietary and 
indirect participant transactions, adopt a method for allocating net 
unsettled positions to individual indirect participants for purposes of 
calculating margin requirements and require a Netting Member to 
represent that margin deposited in relation to a Segregated Indirect 
Participants Account is generally margin collected from an indirect 
participant would reduce the potential risk to FICC arising from 
indirect participant transactions.
---------------------------------------------------------------------------

    \77\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

    These changes would ensure that the margin FICC collects from a 
Netting Member reflects the separate risk profiles of the Netting 
Member's proprietary portfolio and the portfolio of transactions it 
submits to FICC on behalf of indirect participants. They would also 
provide FICC with a better understanding of the source of potential 
risk arising from the transactions that it clears and incentivize 
Netting Members to maintain more balanced proprietary portfolios, since 
such portfolios would lead to lower margin requirements. In addition, 
the proposed representation by Netting Members that they generally 
intend to satisfy Segregated Customer Margin Requirements with assets 
collected from indirect participants rather than proprietary assets 
would reduce the risk of FICC's proposed margin segregation arrangement 
by limiting such arrangement to indirect participant assets and 
ensuring that proprietary assets a Netting Member deposits with FICC 
are available for loss mutualization purposes.
    Rule 17Ad-22(e)(23)(ii) under the Act requires FICC to establish 
written

[[Page 21602]]

policies and procedures providing sufficient information to enable 
participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in FICC.\78\ The proposed 
rule changes to consolidate and clarify FICC's margin calculation 
methodology in the proposed Margin Component Schedule, adopt a method 
for allocating net unsettled positions to individual indirect 
participants for purposes of calculating margin requirements and to 
clarify the calculation of the Excess Capital Premium would make it 
easier for both Netting Members and indirect participants to identify 
and price the potential margining costs associated with how one chooses 
to submit transactions to FICC for clearance and settlement.
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    \78\ 17 CFR 240.17Ad-22(e)(23)(ii).
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III. Date of Effectiveness of the Advance Notice, and Timing for 
Commission Action

    The proposed change may be implemented if the Commission does not 
object to the proposed change within 60 days of the later of (i) the 
date that the proposed change was filed with the Commission or (ii) the 
date that any additional information requested by the Commission is 
received. The clearing agency shall not implement the proposed change 
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60 
days if the proposed change raises novel or complex issues, subject to 
the Commission providing the clearing agency with prompt written notice 
of the extension. A proposed change may be implemented in less than 60 
days from the date the advance notice is filed, or the date further 
information requested by the Commission is received, if the Commission 
notifies the clearing agency in writing that it does not object to the 
proposed change and authorizes the clearing agency to implement the 
proposed change on an earlier date, subject to any conditions imposed 
by the Commission.
    The clearing agency shall post notice on its website of proposed 
changes that are implemented.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the advance 
notice is consistent with the Clearing Supervision 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-2024-802 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-FICC-2024-802. 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 advance notice that are filed 
with the Commission, and all written communications relating to the 
advance notice 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 Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 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 (https://
dtcc.com/legal/sec-rule-filings.aspx). 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-2024-802 and should be submitted on or 
before April 18, 2024.

V. Date and Timing for Commission Action

    Section 806(e)(1)(G) of the Clearing Supervision Act provides that 
FICC may implement the changes if it has not received an objection to 
the proposed changes within 60 days of the later of (i) the date that 
the Commission receives an advance notice or (ii) the date that any 
additional information requested by the Commission is received,\79\ 
unless extended as described below.
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    \79\ 12 U.S.C. 5465(e)(1)(G).
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    Pursuant to section 806(e)(1)(H) of the Clearing Supervision Act, 
the Commission may extend the review period of an advance notice for an 
additional 60 days, if the changes proposed in the advance notice raise 
novel or complex issues, subject to the Commission providing the 
clearing agency with prompt written notice of the extension.\80\
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    \80\ 12 U.S.C. 5465(e)(1)(H).
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    Here, as the Commission has not requested any additional 
information, the date that is 60 days after FICC filed the advance 
notice with the Commission is May 13, 2024. However, the Commission is 
extending the review period of the Advance Notice for an additional 60 
days under section 806(e)(1)(H) of the Clearing Supervision Act \81\ 
because the Commission finds the Advance Notice is both novel and 
complex, as discussed below.
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    \81\ Id.
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    The Commission believes that the changes proposed in the Advance 
Notice raise novel and complex issues. The Advance Notice concerns a 
matter of first impression for the Commission, as it concerns recently 
adopted margin collection and account segregation requirements for 
Treasury CCAs.\82\ The Commission has not yet considered such a 
proposal pursuant to Rule 17Ad-22(e)(6)(i) and the amendments to Rule 
15c3-3 under the Act \83\ and the material aspects of the proposal are 
detailed, substantial, and interrelated with other risk management 
practices at FICC.
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    \82\ See supra note 5.
    \83\ 17 CFR 240.17Ad-22(e)(6)(i) and 17 CFR 240.15c3-3.
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    Accordingly, the Commission, pursuant to section 806(e)(1)(H) of 
the Clearing Supervision Act,\84\ extends the review period for an 
additional 60 days so that the Commission shall have until July 12, 
2024 to issue an objection or non-objection to advance notice SR-FICC-
2024-802.
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    \84\ 12 U.S.C. 5465(e)(1)(H).
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    All submissions should refer to File Number SR-FICC-2024-802 and 
should be submitted on or before April 18, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\85\
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    \85\ 17 CFR 200.30-3(a)(91) and 17 CFR 200.30-3(a)(94).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-06578 Filed 3-27-24; 8:45 am]
BILLING CODE 8011-01-P

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