May 24, 2024
Vanessa A. Countryman
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: SEC “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” [Release No. 34-99817; File No. SR-FICC-2024-005] and “Notice of Filing of Proposed Rule Change 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” [Release No. 34-99844; File No. SR-FICC-2024-007]

Dear Ms. Countryman:

The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”)¹ appreciates the opportunity to provide comments to the Securities and Exchange Commission (the “Commission”) in response to the above referenced rule changes (the “Proposed Rules”) proposed by the Fixed Income Clearing Corporation (“FICC”). The Proposed Rules have been issued by FICC to operationalize and implement the Commission’s recently adopted rules requiring the central clearing of transactions involving U.S. Treasury securities (the “Treasury Clearing Rules”)²

Introduction

SIFMA AMG’s members are active participants in the market for U.S. Treasury securities. For this reason, we have a strong interest in promoting stability in that market and ensuring that the implementation of the Treasury Clearing Rules will protect the interests of the investor community. While we support the objectives of improving the resilience and integrity of the U.S. Treasury securities market, we continue to be concerned about the potential negative impact that the implementation of the Treasury Clearing Rules may have on the liquidity, resilience, and overall functioning of the Treasury securities market absent meaningful enhancements to the SEC’s ruleset and the FICC operating model.

The impact of the Treasury Clearing Rules will depend in large measure on how FICC amends its rulebook. The Treasury Clearing Rules achieve the clearing mandate by requiring “covered clearing agencies” (“CAAs”) to modify their policies and procedures, and FICC is currently the only CCA. The Proposed Rules are FICC’s response to the Commission’s directive to CAAs to (i) increase the number of ways market participants can access central clearing of covered treasury security transactions and (ii) specify how margin will be calculated, collected and held, including where a direct participant deposits the margin of an indirect participant in a “segregated account”.

While we appreciate the effort that went into developing the Proposed Rules, we believe that they fall short of the objectives established by the Commission and are either incomplete, or insufficient, in many respects. In our view, FICC should either revise substantial portions of its Proposed Rules or provide further information to the market regarding its proposals, including its access models. A discussion of these considerations, as well as our recommendations to update and clarify the Proposed
Rules is presented below.³

Executive Summary

The approach in our letter can be summarized as follows:

1. FICC Must Ensure That its Proposals Facilitate “Done-Away” Trading in a Manner that Fulfills the Access Requirements Mandated under the Final Rule. We urge FICC to revise the Proposed Rules to properly incentivize Netting Members to facilitate done away trading in the manner envisioned in the Treasury Clearing Rules.

2. FICC Should Provide a Mechanism for Indirect Participants to Designate Segregation of Margin. We recommend that FICC revise the Proposed Rules to give indirect participants the ability to elect segregation of margin held at FICC. Relatedly, we also ask that FICC confirm that indirect participants can post as margin, and elect segregation of, collateral obtained from margin
lending transactions.

3. FICC should allow Indirect Participants to Close Out their Positions with Defaulting Netting Members and, in Lieu Thereof, Elect to Receive Payments Directly From FICC. We recommend that FICC provide a mechanism for indirect participants to liquidate their positions executed with defaulting Netting Members. To the extent this is not feasible, indirect participants should then have the ability to elect to receive payment directly from FICC, with FICC using any customer⁴ funds held at FICC to satisfy such amounts owed. Additionally, we urge FICC to provide a framework for allowing Executing Firm Customers under the Agent Clearing Model to close out their trades with defaulting Netting Members.

4. The Proposed Rules should Provide a Mechanism Allowing Customers to “Port,” or Transfer, Transactions from One Netting Member to another Netting Member. We urge FICC to adopt a mechanism by which indirect participants can port their trades from one Netting Member to another Netting Member, especially with respect to any term repo positions.

5. FICC Should Not Require a Minimum Deposit of $1 million. We recommend that FICC reject the $1 million minimum deposit requirement for each Segregated Indirect Participant Account and instead require Netting Members to determine a properly calibrated margin requirement for each customer based on its risk management policies and procedures.

6. FICC Should Detail and Explain How its Rules Will be Adapted to Facilitate Access to Cross-Margining Solutions for both Direct Participants and Indirect Participants. We ask that FICC supplement the Proposed Rules with a proposal for cross-margining U.S. Treasury transactions cleared at FICC with transactions cleared through other clearinghouses and fully address how such cross-margining would be handled in the event of a Netting Member and/or clearing member bankruptcy.

7. The Proposed Rules should not Preclude Netting Members From Satisfying the Clearing Mandate by Clearing Through Other Clearing Venues. We request that FICC revisit and, if necessary, revise, the portions of the Proposed Rules that appear to mandate clearing through FICC.

8. FICC Should Clarify, and Potentially Further Limit, the Circumstances under Which “Fellow-Customer Risk” Could Arise under the Proposed Rules. Our members would like clarity as to when FICC would exercise any right that could introduce an element of fellow customer risk and adopt reasonable limits to FICC’s ability to withhold Excess Segregated Customer Margin.

9. The Commission Should Not Approve the Proposed Rules until FICC Publishes a Robust Legal Enforceability Analysis and Otherwise Addresses Indirect Participants’ Ability to Close-out Netting Members. FICC should provide market participants with the required legal analysis regarding the enforceability of the Proposed Rules. In doing so, FICC can draw from the extensive analysis conducted by the industry over the years, for example, when implementing the segregation model for cleared swaps under the CFTC’s LSOC model.

10. FICC should Better Articulate the Use Cases for Each Proposed Access Model and, if Necessary, Simplify or Reduce the Number of Proposed Access Models. We request that FICC better articulate the relative benefits of each proposed access model and why one market participant would elect to adopt one model over another. It should also provide the industry with information supporting the position that it can accommodate a vast array of new accounts. To the extent it cannot do these things, FICC should consider reducing the number of proposed access models and rethink how it is responding to requirements imposed on it by the Treasury Clearing Rules.

11. FICC Should Consider the Cross-Border Application of its Proposed Rules and Provide a Framework for Foreign Netting Members’ and Indirect Participants’ Compliance with the Proposed Rules. We request that FICC collect information on how its Proposed Rules may impact market participants of varying types in the Cross-Border context and, as necessary, provide a workable framework for how such market participants – specifically indirect participants subject to limitations on the ability to post margin – can comply with the Proposed Rules.

1. 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. [↩]
2. 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, Exchange Act Release No. 99149 (Dec. 13, 2023), 89 Fed. Reg. 2,714 (Jan. 16, 2024) (the “Treasury Clearing Adopting Release”). [↩]
3. Terms used but not defined herein shall have the meaning given to such terms in the Proposed Rules or the Treasury Clearing Rules, as applicable. [↩]
4. For the purposes of this letter, we refer to “indirect participants” and “customers” interchangeably for the convenience of the reader. [↩]