March 10, 2025
Vanessa A. Countryman
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: SEC “Notice of Filing of an Application for Registration as a Clearing Agency Under Section 17A of the Securities Exchange Act of 1934” [Release No. 34-102200; File No. 600-44]

Dear Ms. Countryman:

The Securities Industry and Financial Markets Association (“SIFMA”)¹  and SIFMA’s Asset Management Group (“SIFMA AMG”)²  appreciate the opportunity to provide comments to the Securities and Exchange Commission (“SEC”) in response to the above referenced application (the “Application”) from CME Securities Clearing, Inc. (“CMESC”).³ SIFMA and SIFMA AMG have been active in commenting on the various proposals to enhance the overall resilience of the U.S. Treasury securities market (the “Treasury Market”). Given the role of the Treasury Market in financing U.S. spending and in the global financial system, it is vitally important that the implementation of the requirement for direct participants of clearing agencies to submit their eligible secondary market transactions in U.S. Treasury securities for clearing and settlement (the “transaction submission requirement”)⁴  and the adoption of other changes to the clearing infrastructure for Treasury transactions are done in a way that protects and enhances the depth and liquidity of the Treasury Market.

As we noted in SIFMA’s comment on the SEC’s original proposal of the SEC UST Final Rule,⁵ as well as in the combined comments provided by SIFMA and SIFMA AMG on the rule changes proposed by the Fixed Income Clearing Corporation (“FICC”),⁶ SIFMA and SIFMA AMG understand the significant benefits of central clearing and fully support new developments that will build on and improve the current clearing environment in the Treasury Market. SIFMA and SIFMA AMG strongly support the expansion of access to clearing of Treasury transactions and welcome increased variety in the clearing services available to Treasury Market participants. However, we have identified a number of concerns with the proposed CMESC rulebook (the “Proposed Rules”), or areas in which the Proposed Rules should be enhanced, particularly with respect to key bank regulatory capital treatment and risk management considerations that might preclude certain market participants from becoming Members. The changes we suggest are intended to ensure that the clearing services offered by CMESC have the desired effect of facilitating access to clearing for the largest number of potential participants and thereby comply with CMESC’s obligation under SEC Rule 17ad-22(e)(18)(iv)(C) to have the means to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities. This would ensure that CMESC’s new clearing models do, in fact, increase the total clearing capacity available to the Treasury Market.

Terms used but not defined herein shall have the meaning given to such terms in the Proposed Rules.

Executive Summary

SIFMA and SIFMA AMG strongly urge CMESC to make the following revisions to the Proposed Rules:

• Ensuring appropriate bank regulatory capital treatment: Under the U.S. implementation of the Basel capital rules (the “capital rules”), a banking organization is only permitted to recognize the effects of financial collateral or net transactions for capital purposes if the banking organization satisfies certain requirements. These requirements generally include that the banking organization must have the right to terminate the transaction and net or apply collateral “promptly upon an event of default” under the bilateral agreement between the banking organization and its customer. If a clearing member is unable to meet these requirements, it must hold capital without regard to such collateral or offsetting transactions, i.e., against its “gross exposure” to the customer. The significant costs associated with “gross exposure” capital calculations are such that they typically render it prohibitively expensive for a clearing member to offer clearing services to customers. Therefore, to ensure appropriate capital treatment for the transactions cleared for Users by an authorizing Member, CMESC should (a) provide a clearly defined right for an authorizing Member to trigger CMESC to close out a Defaulting User’s transactions; (b) ensure there is a practical means of perfecting an authorizing Member’s security interest in User margin; and (c) allow authorizing Members to direct CMESC to deliver settlement payments or return margin to such Member upon a User default.
• Interaction with the SEC’s transaction submission requirement: There are a number of ways in which the Proposed Rules interact with the SEC UST Final Rule that should be carefully considered and clarified. In particular, CMESC should (a) clarify that the obligation to submit eligible secondary market transactions for clearing only applies with respect to transactions eligible to be cleared at CMESC; (b) allow all entities within the scope of the transaction submission requirement to become Users; (c) allow banks to obtain membership through a branch without subjecting the entire bank to the transaction submission requirement; (d) future-proof the implementation of the transaction submission requirement by explicitly incorporating any SEC interpretations or guidance relating to the transaction submission requirement; and (e) clarify that
  transactions that have been submitted for clearing but are rejected may continue bilaterally if permissible under the SEC UST Final Rule.
• Margining practices: CMESC should (a) not have discretion to reject a Participant’s request to withdraw excess margin; (b) allow Participants to have flexibility in which assets to use to satisfy initial margin obligations; and (c) offer an additional optional model that would net margin requirements across an authorizing Member’s Users in the Supported User model when the authorizing Member finances the margin for such Users’ transactions.
• Increased Participant control over actions that directly affect Participant risk: CMESC should (a) not allow Users to amend or cancel a transaction without the consent of the authorizing Member; (b) not be able to force a buy-in following a failed settlement of a cleared transaction; and (c) clarify that porting of transactions requires the consent of both the transferee Member and the User.
• Direct relationship between Users and CMESC: In recognition of the direct relationship between Users and CMESC, CMESC should (a) provide information to Members about the settlement, payment and other actions of their Users taken directly with respect to CMESC; (b) not require an authorizing Member to undertake specified due diligence on its Users beyond the Member’s own risk management; and (c) clarify that authorizing Members are not responsible for any liability of a User to CMESC due to any disciplinary action against the User.
• Risk management and default management: CMESC’s risk management and default management capabilities should be refined to enhance risk management and reduce costs for Participants. CMESC should (a) remove duplicative liquidity tools that could have material impacts for Members’ liquidity management; (b) raise the minimum capital requirement for Members; (c) calibrate CMESC’s own contribution to the default waterfall in a way that is risk sensitive; (d) attempt to port transactions of a User upon its authorizing Member’s default and, if porting is not available, attempt to settle such transactions with the User before closing them out; and (e) only use its emergency powers with the approval of, or notice to, the SEC.
• Legal opinions: CMESC should obtain legal opinions in respect of matters that have critical risk management or bank regulatory capital effects, including the bankruptcy remoteness of margin held by CMESC and the treatment of Outstanding Exposure Settlement (“OES”) as settlement, and make such opinions available to Participants on a reliance basis.
• Cross margining: CMESC should ensure that the Independent and Supported User models are compatible with possible future cross-margining solutions between CMESC and the Chicago Mercantile Exchange Inc. (“CME”).

1. SIFMA is the leading trade association for broker-dealers, investment banks and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s one million employees, we advocate on legislation, regulation and business policy affecting retail and institutional investors, equity and fixed income markets and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (“GFMA”). For more information, visit http://www.sifma.org. [↩]
2. SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds, such as hedge funds and private equity funds. [↩]
3. Notice of Filing of an Application for Registration as a Clearing Agency under Section 17A of the Securities Exchange Act of 1934 (Jan. 15, 2025), available here. [↩]
4. Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule with Respect to U.S. Treasury Securities, Release No. 34-99149, 89 FR 2714 (December 13, 2023) (available here) (the “SEC UST Final Rule”). [↩]
5. SIFMA/Institute of International Bankers, Comment Letter on Standard for Covered Clearing Agencies for
   U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities (December 22, 2022, available here). [↩]
6. SIFMA, Comment Letter on Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment
   No. 1, to Modify the GSD Rules to Facilitate Access to Clearance and Settlement Services of All Eligible Secondary Market Transactions in U.S. Treasury Securities (July 31, 2024, available here) (relating to the adoption of new access models); SIFMA/SIFMA AMG, Comment Letter on Notice of Filing of Proposed Rule Change to Modify the GSD Rules Relating to the Adoption of a Trade Submission Requirement (August 9, 2024, available here) (relating to the transaction submission requirement). [↩]