Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Modify the GSD Rules To Facilitate Access to Clearance and Settlement of All Eligible Secondary Market Transactions in U.S. Treasury Securities

I. Introduction

On March 11, 2024, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SR-FICC-2024-005 pursuant to Section 19(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder to modify FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”) to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities. On March 19, 2024, FICC filed Partial Amendment No. 1 to make clarifications and corrections to the proposed rule change. The proposed rule change, as modified by Partial Amendment No. 1, is referred to herein as the “Proposed Rule Change.” The Proposed Rule Change was published for public comment in the Federal Register on March 27, 2024. The Commission has received comments regarding the substance of the changes proposed in the Proposed Rule Change.

On May 1, 2024, pursuant to Section 19(b)(2) of the Exchange Act, the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change. The Commission is instituting proceedings, pursuant to Section 19(b)(2)(B) of the Exchange Act, to determine whether to approve or disapprove the Proposed Rule Change.

II. Summary of the Proposed Rule Change

A. Background

FICC, through GSD, serves as a central counterparty and provides real-time trade matching, clearing, risk management and netting for cash purchases and sales of U.S. Treasury securities as well as repurchase and reverse repurchase transactions involving U.S. Treasury securities. Currently, FICC is the sole provider of clearance and settlement services for U.S. Treasury securities.

On December 13, 2023, the Commission adopted amendments to the standards applicable to covered clearing agencies, such as FICC, requiring each such clearing agency for U.S. Treasury securities to have written policies and procedures reasonably designed to, among other things, 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 the clearing agency's direct and indirect participants.

GSD's central counterparty services are currently available directly to entities that are approved under the GSD Rules to be Netting Members.

Currently, there are different Netting Member application categories based upon the type of legal entity ( i.e., Bank Netting Member, Dealer Netting Member, Inter-Dealer Broker Netting Member) and whether an entity is incorporated in the United States or not ( i.e., a Foreign Netting Member). Netting Member applicants must meet both financial and operational minimum eligibility requirements and, as GSD Members, must adhere to ongoing minimum membership standards. Furthermore, both the minimum eligibility requirements and ongoing standards vary depending on the relevant Netting Membership category. However, in general, all Netting Member categories may access the services available through GSD's Comparison System and Netting System.

Market participants may also access GSD's clearing services indirectly through a Netting Member. There are currently two indirect participation models to facilitate this—the Sponsored Service and the correspondent clearing/prime broker services. Each of these indirect participation models gives market participants different options to consider in accessing FICC's clearance and settlement services. The primary difference between the two models is that an indirect participant who becomes a Sponsored Member must establish an indirect, limited purpose GSD membership, whereas the correspondent clearing/prime broker services do not require an indirect member to establish any relationship with GSD.

The Sponsored Service permits Netting Members, approved under the GSD Rules as “Sponsoring Members,” to sponsor certain institutional firms, referred to as “Sponsored Members,” into GSD membership. The Sponsoring Member is permitted to submit to FICC for comparison, novation, and netting certain types of eligible transactions either between itself and its Sponsored Members ( i.e., “done with”), or between the Sponsored Members and other third-party Netting Members ( i.e., “done away”). For operational and administrative purposes, a Sponsored Member appoints its Sponsoring Member to act as processing agent with respect to the Sponsored Member's satisfaction of its securities and funds-only settlement obligations.

A Sponsored Member is a GSD Member and the legal counterparty to FICC for any submitted transactions. However, the Sponsoring Member unconditionally guarantees to FICC the Sponsored Member's performance under a Sponsoring Member Guaranty, which guarantees to FICC the payment and performance of a Sponsored Member's obligations to FICC. Therefore, FICC relies on the financial resources of the Sponsoring Member in relying upon the Sponsoring Member Guaranty. If a Sponsoring Member fails to perform under the Sponsoring Member Guaranty, FICC may cease to act for the Sponsoring Member both as a Sponsoring Member as well as a Netting Member.

Netting Members may also submit to FICC eligible activity on behalf of their customers through the correspondent clearing/prime broker services. Currently, the Netting Member is referred to as the “Submitting Member” and the customer is referred to as the “Executing Firm.” Unlike the Sponsored Service, FICC has no relationship with the Executing Firm, and all obligations ( i.e., margin and settlement) under the GSD Rules remain with the Submitting Member. Executing Firms may execute trades with any Netting Member, including their submitting Netting Member ( i.e., “done with” transactions), or a customer of any other Netting Member in clearing ( i.e., “done away” transactions). Additionally, Submitting Members have the option of either netting Executing Firm activity with other activity they submit to FICC ( i.e., Submitting Member proprietary activity) or segregating Executing Firm activity in separate accounts. In all cases, however, the Submitting Member must identify the relevant Executing Firm(s) on the FICC transaction submission file.

B. Proposed Changes

First, FICC proposes to re-name GSD's existing correspondent clearing/prime broker services the “Agent Clearing Service,” which would continue to allow Netting Members to submit, on behalf of their customers, transactions to FICC for novation. FICC believes that this proposed change would improve the transparency of the GSD Rules regarding the availability and operations of this service to both Netting Members and, indirectly, their customers. FICC also believes this proposed change would enhance the ability of indirect participants to identify the correspondent clearing/prime broker services as a workable “done away” model that allows indirect participants to access clearing through multiple direct participants.

FICC would require Agent Clearing Members to process and record their customers' activity in separate “Agent Clearing Member Omnibus Accounts” to facilitate FICC's ability to monitor and, ultimately, risk manage that activity appropriately. FICC would also require Agent Clearing Members to provide FICC with certain customer information, pursuant to the existing ongoing membership requirements in the GSD Rules. FICC believes this information sharing would better enable FICC to identify and manage the risks posed by such indirect participants and would support FICC's compliance with the requirements of Rule 17ad-22(e)(18)(iii) under the Exchange Act to monitor compliance with its participation requirements on an ongoing basis.

Second, FICC proposes to update certain qualifications for GSD's membership categories. These proposed rule changes would (1) eliminate the current two Sponsoring Member categories and apply to all Sponsoring Members the qualifications applicable to the current Category 2 Sponsoring Members, (2) remove the requirement that Sponsored Members either be “qualified institutional buyers” as such term is defined by Rule 144A under the Securities Act of 1933, or satisfy the financial requirements of such definition, (3) clarify the eligibility criteria for non-U.S. Netting Member applicants, and (4) describe how FICC may consider Netting Member applicants that do not qualify under an existing Netting Member category. FICC believes these proposed changes would support FICC's continued maintenance of objective, risk-based and publicly disclosed participation criteria and, therefore, facilitate open access to GSD's clearing services.

Finally, FICC proposes changes to the GSD Rules designed to describe the criteria and related requirements regarding direct and indirect access to GSD's clearing services. FICC believes these proposed changes should enhance the ability of market participants, and in particular indirect participants, to understand and evaluate the comparative tradeoffs of using GSD's central clearing services depending on the relevant access model.

III. Proceedings To Determine Whether To Approve or Disapprove the Proposed Rule Change and Grounds for Disapproval Under Consideration

The Commission is instituting proceedings pursuant to Section 19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule Change should be approved or disapproved. Institution of proceedings is appropriate at this time in view of the legal and policy issues raised by the Proposed Rule Change. Institution of proceedings does not indicate that the Commission has reached any conclusions with respect to any of the issues involved. Rather, the Commission seeks and encourages interested persons to comment on the Proposed Rule Change, which would provide the Commission with arguments to support the Commission's analysis as to whether to approve or disapprove the Proposed Rule Change.

Pursuant to Section 19(b)(2)(B) of the Exchange Act, the Commission is providing notice of the grounds for disapproval under consideration. The Commission is instituting proceedings to allow for additional analysis of, and input from commenters with respect to, the Proposed Rule Change's consistency with Section 17A of the Exchange Act and the rules thereunder, including the following provisions:

• Section 17A(b)(3)(F) of the Exchange Act, which requires, among other things, that the rules of a clearing agency are designed to promote the prompt and accurate clearance and settlement of securities transactions, as well as to foster cooperation and coordination with persons engaged in the clearance and settlement of securities transactions; and, in general, to protect investors and the public interest;

• Rule 17ad-22(e)(18)(i) under the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to establish objective, risk-based, and publicly disclosed criteria for participation, which permit fair and open access by direct and, where relevant, indirect participants and other financial market utilities;

• Rule 17ad-22(e)(18)(ii) under the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed 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 the clearing agency;

• Rule 17ad-22(e)(18)(iv)(C) under the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to establish objective, risk-based, and publicly disclosed criteria for participation, which, when the covered clearing agency provides central counterparty services in 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;

• Rule 17ad-22(e)(19) under the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to identify, monitor, and manage the material risks to the covered clearing agency arising from arrangements in which firms that are indirect participants in the covered clearing agency rely on the services provided by direct participants to access the covered clearing agency's payment, clearing, or settlement facilities; and

• Rule 17ad-22(e)(23)(ii) under the Exchange Act, which requires that a covered clearing agency establish, implement, maintain, and enforce written policies and procedures reasonably designed to provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency.

The Commission asks that the commenters address the sufficiency of FICC's statements in support of the Proposed Rule Change, which are set forth in the Notice of Filing, in addition to any other comments they may wish to submit about the Proposed Rule Change. In particular, the Commission seeks comment on the following questions and asks commenters to submit data where appropriate to support their views.

1. What are commenters' views on whether the changes in the Proposed Rule Change are consistent with Rule 17ad-22(e)(18)(iv)(C), i.e., that it is reasonably designed to ensure that FICC has appropriate means to facilitate access to clearance and settlement services of all eligible secondary market transactions covered by Rule 17ad-22(e)(18)(iv)(A), including the transactions of indirect participants? With respect to how the proposed rule change addresses “done with” and “done away” transactions of indirect participants (as those transactions were described in part II.A above), what are commenters' views about whether that proposed approach is consistent with Rule 17ad-22(e)(18)(iv)(c) and Section 17A(b)(3) of the Exchange Act?

2. As suggested by commenters, should the proposed rule change be revised to include additional requirements for the proposed change to meet Rule 17ad-22(e)(18)(iv)(C)'s requirement that the proposed rule facilitate access to clearance and settlement of all eligible secondary market transaction of all eligible secondary market transactions covered by Rule 17ad-22(e)(18)(iv)(A), including the transactions of indirect participants?

3. For example, in terms of additional requirements, what are commenters' views on whether FICC needs to include a porting mechanism ( i.e., a process at FICC to transfer a customer's positions from one direct participant to another, particularly in the event of the default of the direct participant submitting the customer's positions) in order for the rules to facilitate access to clearance and settlement services?

4. In addition, what are commenters' views on whether changes to particular clearing models at FICC are necessary for the rules to facilitate access to clearance and settlement services? Which clearing model(s) ( i.e., Sponsored or Agent Clearing Programs), and which margin configuration(s), ( i.e., segregated and/or net), are the most appropriate place to make such requirements?

5. Are there other steps FICC must take for the proposed rule change to facilitate those transactions consistent with Section 17A of the Exchange Act, including, but not limited to, Section 17A(b)(3)(E)?

IV. Procedure: Request for Written Comments

The Commission requests that interested persons provide written submissions of their views, data, and arguments with respect to the issues identified above, as well as any other concerns they may have with the Proposed Rule Change. In particular, the Commission invites the written views of interested persons concerning whether the Proposed Rule Change is consistent with Section 17A(b)(3)(F) and Rules 17ad-22(e)(18)(iii), (e)(18)(iv)(C), (e)(19), and (e)(23)(ii) of the Exchange Act, or any other provision of the Exchange Act, or the rules and regulations thereunder. Although there do not appear to be any issues relevant to approval or disapproval that would be facilitated by an oral presentation of views, data, and arguments, the Commission will consider, pursuant to Rule 19b-4(g) under the Exchange Act, any request for an opportunity to make an oral presentation.

The Commission asks that commenters address the sufficiency of FICC's statements in support of the Proposed Rule Change, which are set forth in the Notice of Filing in addition to any other comments they may wish to submit about the Proposed Rule Change.

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
• Send an email torule-comments@sec.gov. Please include file number SR-FICC-2024-005 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-FICC-2024-005. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website ( https://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the Proposed Rule Change that are filed with the Commission, and all written communications relating to the Proposed Rule Change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission's Public 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 such filing also will be available for inspection and copying at the principal office of FICC and on FICC's website ( www.dtcc.com/legal/sec-rule-filings ).

Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection.

All submissions should refer to File Number SR-FICC-2024-005 and should be submitted on or before July 18, 2024. Rebuttal comments should be submitted by August 1, 2024.