from their investment positions or use of leverage or both, could
result in material losses at the financial institutions that lend to
them if collateral securing this lending is inadequate, and that these
losses could have systemic implications if they require these financial
institutions to scale back their lending efforts or other financing
activities generally.\146\
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    \144\ Proposing Release, Reporting by Investment Advisers to
Private Funds and Certain Commodity Pool Operators and Commodity
Trading Advisors on Form PF, Release No. IA-3145 (Jan. 26, 2011), 76
FR 8068, 8073 (Feb. 12, 2011) (``Form PF Proposing Release''). The
Commission adopted the hedge fund definition with some amendments
thereafter. Final Rule, Reporting by Investment Advisers to Private
Funds and Certain Commodity Pool Operators and Commodity Trading
Advisors on Form PF, Release No. IA-3308 (Oct. 31, 2011), 76 FR
71127 (Nov. 16, 2011).
    \145\ Form PF Proposing Release, supra note 144, 76 FR at 8073
(citing President's Working Group on Financial Markets, Hedge Funds,
Leverage, and the Lessons of Long Term Capital Management (Apr.
1999), at 23).
    \146\ Id. (also noting that the simultaneous failure of several
similarly positioned hedge funds could create contagion through the
financial markets if the failing funds had to liquidate their
investment positions at firesale prices).
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    Similarly, the FSOC acknowledged, in light of recent market events,
the importance of understanding how hedge fund activities may impact
the broader market, including ``how financial strain at hedge funds--
particularly those with significant leverage--could create risks to
financial stability, and how a reduction in financial intermediation by
hedge funds during periods of market stress could exacerbate market
impairment.'' \147\ Thus, as a general matter, the Commission believes
that if any of a hedge fund's activities, even those that are not
related to the U.S. Treasury market, cause financial stress to a
counterparty that is a direct participant of a U.S. Treasury securities
CCA, the inclusion of a hedge fund's U.S. Treasury securities cash
transactions with a direct participant in the definition of an eligible
secondary market transaction should help ensure that such financial
stress would not transmit to the U.S. Treasury securities CCA and
through to the U.S. Treasury market.
---------------------------------------------------------------------------

    \147\ FSOC Statement on Nonbank Financial Intermediation (Feb.
4, 2022), available at https://home.treasury.gov/news/press-releases/jy0587.
---------------------------------------------------------------------------

    In addition, hedge funds are increasingly large players in the U.S.
Treasury market. For example, as of the fourth quarter of 2021, the
Commission's Private Funds Statistics indicated that qualifying hedge
funds held aggregate gross notional exposure of $1,760 billion in U.S.
Treasury securities.\148\ However, qualifying hedge funds generally
report central clearing of about 15 percent of their overall net asset
value.\149\ There has been a great deal of commentary regarding the
role of hedge funds in the U.S. Treasury markets, particularly with
respect to the March 2020 market events.\150\ For example, the FSOC
observed that hedge funds were among the three largest types of sellers
of Treasury securities, materially contributing to the Treasury market
disruption during this period, although not as its sole cause.\151\ The
IAWG staffs stated that, in March 2020, hedge funds were among the
largest sellers of Treasury securities as expected price relationships
broke down, highly levered positions magnified losses, and some funds
faced margin calls.\152\
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    \148\ Private Funds Statistics for Q4 2021, Table 46 (July 22,
2022), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q4.pdf.
Qualifying hedge funds refers to those hedge funds that have a net
asset value (individually or in combination with any feeder funds,
parallel funds and/or dependent parallel managed accounts) of at
least $500 million as of the last day of any month in the fiscal
quarter immediately preceding its most recently completed fiscal
quarter. See Form PF (Glossary of Terms).
    \149\ Private Funds Statistics for Q4 2021, Figure 17 (July 22,
2022), available at https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2021-q4.pdf.
    \150\ See generally Ayelen Banegas et al., Sizing Hedge Funds'
Treasury Market Activities and Holdings (Oct. 6, 2021), available at
https://www.federalreserve.gov/econres/notes/feds-notes/sizing-hedge-funds-treasury-market-activities-and-holdings-20211006.htm;
see also Daniel Barth & R. Jay Kahn, Hedge Funds and the Treasury
Cash-Futures Disconnect (Apr. 1, 2021), available at https://www.financialresearch.gov/working-papers/2021/04/01/hedge-funds-and-the-treasury-cash-futures-disconnect/; Hedge Fund Treasury Trading
and Funding Fragility: Evidence from the COVID-19 Crisis, available
at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.
    \151\ FSOC Feb. 2022, supra note 172; see also IAWG, supra note
4, at 34.
    \152\ IAWG, supra note 4, at 34. See also SEC Staff Report on
U.S. Credit Markets Interconnectedness and the Effects of the COVID-
19 Economic Shock (Oct. 2020), available at https://www.sec.gov/files/US-Credit-Markets_COVID-19_Report.pdf.
---------------------------------------------------------------------------

    This demonstrates the potential contagion risk that could arise
from hedge funds' activities in the U.S. Treasury market. Similar to
the risks posed to a U.S. Treasury securities CCA by non-centrally
cleared trades entered into by an IDB, non-centrally cleared
transactions entered into between hedge funds and direct participants
of the CCA could cause risks to the CCA in the event that the hedge
fund is not able to meet its obligations to the direct participant,
which could, in turn, create stress to the direct participant and
through to the CCA. Therefore, including the direct participant's
purchase and sale transactions with hedge funds within the definition
of an eligible secondary market transaction should reduce the potential
for financial distress arising from the transactions that could affect
the direct participant and the U.S. Treasury securities CCA. This
aspect of the proposal would also result in consistent and transparent
risk management being applied to such transactions, as discussed
further in section III.A.3 infra.
    The Commission believes that defining a hedge fund in a manner
consistent with Form PF is reasonable, because such definition should
encompass those funds that use strategies that the Commission has
determined merit additional reporting to allow a better picture of the
potential systemic risks posed by such activities.\153\ Including
transactions with such funds within the definition of an eligible
secondary market transaction should help to limit the potential

contagion risk that could arise from any financial distress experienced
at such a fund that could, in turn, be transmitted to a direct
participant of a U.S. Treasury securities CCA (and to the CCA) via any
non-centrally cleared transactions. Specifically, using such definition
would allow the definition of an eligible secondary market transaction
to include transactions between direct participants of a U.S. Treasury
securities CCA and a private fund whose characteristics make it more
likely that it would have an impact on systemic risk, i.e., its ability
to short sell and take on significant leverage. For example, as the
Commission recently stated, large investment losses or a margin default
involving one large highly levered hedge fund may have systemic risk
implications, and large investment losses at multiple hedge funds may
indicate market stress that could have systemic effects.\154\ The
Commission believes that using a definition consistent with that of
Form PF to identify transactions with a U.S. Treasury securities CCA's
direct participant as part of the definition of an eligible secondary
market transaction subject to the Membership Proposal should capture
transactions with entities whose default would be most likely to cause
potential contagion risk to the Treasury securities CCA. For example,
hedge funds' use of leverage can make them more vulnerable to liquidity
shocks, which could, in turn, make them unable to deliver in a
transaction with a direct participant of a U.S. Treasury securities
CCA.
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    \153\ Final Rule, Reporting by Investment Advisers to Private
Funds and Certain Commodity Pool Operators and Commodity Trading
Advisors on Form PF, Release No. IA-3308 (Oct. 31, 2011), 76 FR
71127 (Nov. 16, 2011). The reporting requirements for Form PF vary
based on the amount of private fund assets under management for an
investment adviser registered with the Commission. For example, if
an investment adviser's private fund assets under management,
including with respect to hedge funds, are less than $150 million on
the last day of the most recent fiscal year, then the investment
adviser is not required to file Form PF. Separately, additional
reporting requirements apply to large hedge fund advisers with at
least $1.5 billion in hedge fund assets under management. See Form
PF, Instructions 1 and 3. However, the Commission believes that
including all hedge funds within paragraph (ii)(C) of the definition
of an ``eligible secondary market transaction'' in Proposed Rule
17Ad-22(a) would be consistent with its overall policy goals for
central clearing in the U.S. Treasury market and ensuring that hedge
fund transactions with direct participants in a U.S. Treasury
securities CCA do not adversely impact the direct participant and,
potentially, the CCA.
    \154\ Proposing Release, Amendments to Form PF To Require
Current Reporting and Amend Reporting Requirements for Large Private
Equity Advisers and Large Liquidity Fund Advisers, Release No. IA-
5950 (Jan. 26, 2022), 87 FR 9106, 9109 (Feb. 17, 2022).
---------------------------------------------------------------------------

    Third, the Commission proposes to include within the definition of
an eligible secondary market transaction subject to the Membership
Proposal any purchase and sale transaction between a direct participant
of a U.S. Treasury securities CCA and an account at a registered
broker-dealer, government securities dealer, or government securities
broker that either may borrow an amount in excess of one-half of the
net value of the account or may have gross notional exposure of the
transactions in the account that is more than twice the net value of
the account.\155\ This would apply to accounts that can take on
significant leverage, that is, by borrowing an amount that is more than
one half of its net value or take on exposures worth more than twice
the account's net value.
---------------------------------------------------------------------------

    \155\ See paragraph (ii)(D) of the definition of an ``eligible
secondary market transaction'' in Proposed Rule 17Ad-22(a).
---------------------------------------------------------------------------

    The Commission believes that the inclusion of transactions with
such accounts within the definition of an eligible secondary market
transaction should allow the proposal to encompass transactions between
direct participants of a U.S. Treasury securities CCA and a prime
brokerage account, which, based on the Commission's supervisory
knowledge, may hold assets of entities, such as, for example, private
funds or separately managed accounts, and may use leverage that poses a
risk to U.S. Treasury securities CCA and the broader financial system.
Covering such accounts would also allow for inclusion of, for example,
accounts used by family offices or separately managed accounts that may
use strategies more similar to those of a hedge fund. The account
provider (i.e., the prime broker) does not have access to, or knowledge
of, the account owner's entire portfolio of assets and is limited to
the assets in that particular account. Therefore, the account provider
may be unable to make a counterparty whole in the event of a default by
the account owner if the account has taken on significant leverage.
Typically, the entity providing an account has a lien or some other
priority on assets in the account to make a counterparty whole if
necessary. By including the account, and not the entity using the
account, this aspect of the proposal is targeted to the activity that
could bring the most potential risk to a U.S. Treasury securities CCA
and the financial system more generally.
c. Exclusions From the Definition of an Eligible Secondary Market
Transaction
    The Commission is proposing to exclude transactions between direct
participants of a U.S. Treasury securities CCA and certain
counterparties from the definition of an eligible secondary market
transaction in U.S. Treasury securities. These exclusions would apply
to any purchase or sale transaction in U.S. Treasury securities or
repurchase or reverse repurchase agreement collateralized by U.S.
Treasury securities. First, recognizing the importance of U.S. Treasury
securities not only to the financing of the United States government,
but also their central role in the formulation and execution of
monetary policy and other governmental functions, the Commission is
proposing to exclude any transactions in U.S. Treasury securities
between a direct participant of a U.S. Treasury securities CCA and a
central bank. For similar reasons, the Commission is also proposing to
exclude any transactions in U.S. Treasury securities between a direct
participant of a U.S. Treasury securities CCA and a sovereign entity or
an international financial institution.\156\ Together, these exclusions
are referred to as the ``Official Sector Exclusions.''
---------------------------------------------------------------------------

    \156\ As discussed more fully below, these exclusions would be
codified in paragraph (iii) of the definition of an ``eligible
secondary market transaction'' in Proposed Rule 17Ad-22(a).
---------------------------------------------------------------------------

    In addition, the Commission is also proposing to exclude
transactions in U.S. Treasury securities between a direct participant
of a U.S. Treasury securities CCA and a natural person. The Commission
does not believe that such transactions should be included in light of
the likely low volumes of transactions entered into by natural persons
and the low potential for contagion risk arising from such
transactions.
i. Official Sector Exclusions From the Membership Proposal
    The Official Sector Exclusions are designed to permit domestic and
international policy makers, i.e., central banks, to continue to pursue
important policy goals. Because these transactions should present
limited to no risk of contagion to a U.S. Treasury securities CCA, the
Commission believes that these exclusions are appropriate.
    For purposes of the Official Sector Exclusion, the Commission
proposes to define a central bank as a reserve bank or monetary
authority of a central government (including the Board of Governors of
the Federal Reserve System or any of the Federal Reserve Banks). The
proposed definition would also include the Bank for International
Settlements (``BIS'').\157\ The BIS is owned by central banks.\158\ The
Commission therefore believes it is appropriate to include the BIS in
the definition of central bank for purposes of this proposal. The
Commission proposes to define a sovereign entity as a central
government (including the U.S. Government), or an agency, department,
or ministry of a central government.\159\ Finally, the Commission
proposes to define an international financial institution by specifying
the entities, i.e., (1) African Development Bank; (2) African
Development Fund; (3) Asian Development Bank; (4) Banco Centroamericano
de Integraci[oacute]n Econ[oacute]mica; (5) Bank for Economic
Cooperation and Development in the

Middle East and North Africa; (6) Caribbean Development Bank; (7)
Corporaci[oacute]n Andina de Fomento; (8) Council of Europe Development
Bank; (9) European Bank for Reconstruction and Development; (10)
European Investment Bank; (11) European Investment Fund; (12) European
Stability Mechanism; (13) Inter-American Development Bank; (14) Inter-
American Investment Corporation; (15) International Bank for
Reconstruction and Development; (16) International Development
Association; (17) International Finance Corporation; (18) International
Monetary Fund; (19) Islamic Development Bank; (20) Multilateral
Investment Guarantee Agency; (21) Nordic Investment Bank; (22) North
American Development Bank, and providing that the term would also
include any other entity that provides financing for national or
regional development in which the United States government is a
shareholder or contributing member.\160\
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    \157\ The Commission proposes to codify this definition in
Proposed Rule 17Ad-22(a).
    \158\ See https://www.bis.org/about/index.htm (noting that ``the
BIS is owned by 63 central banks, representing countries from around
the world that together account for about 95% of world GDP'').
    \159\ The Commission proposes to codify this definition in
Proposed Rule 17Ad-22(a).
    \160\ The Commission proposes to codify this definition in
Proposed Rule 17Ad-22(a). Cf. 17 CFR 50.76(b) (CFTC definition of
international financial institution for purposes of exemptions from
swap clearing requirement).
---------------------------------------------------------------------------

    The Commission believes that the proposed exclusion is appropriate
to central banks because these entities are created by statute and are
part of, or aligned with, a central government.\161\ Further, the
purpose of a central bank is generally to effectuate monetary policy
for its respective nation.\162\ For example, transactions in U.S.
Treasury securities are an important tool in the fiscal and monetary
policy of the United States, as well as other jurisdictions.\163\ In
particular, cash and repo transactions in U.S. Treasury securities are
one of the primary tools used by the Federal Reserve Bank of New York
to conduct open market transactions at the direction of the Federal
Open Market Committee.\164\ The System Open Market Account, which is
managed by the Federal Reserve Bank of New York's System Open Market
Trading Desk, is ``the largest asset on the Federal Reserve's balance
sheet.'' \165\ In light of the key role of open market operations
conducted by the Federal Reserve Bank of New York in the monetary
policy of the United States, the Commission believes an exemption from
the Membership Proposal is appropriate for the Federal Reserve
System.\166\ In particular, the Commission believes the Federal Reserve
System should be free to choose the clearance and settlement mechanisms
that are most appropriate to effectuating its policy objectives.
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    \161\ The authorizing statutes generally provide that the
government owns all or part of the capital stock or equity interest
of the central bank. See, e.g., Capital of the ECB Protocol on the
Statute of the European System of Central Banks and of the European
Central Bank (``ECB Protocol''), Article 28.2, available at https://www.ecb.europa.eu/ecb/legal/pdf/en_statute_2.pdf.
    \162\ See, e.g., ECB Protocol Statute, supra note 106, Article
3.1; Bank of Japan Act, Articles 1 and 2, available at https://www.boj.or.jp/en/about/boj_law/index.htm/#p01.
    \163\ 12 U.S.C. 225a (defining goals of monetary policy); see
also https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm.
    \164\ See Federal Reserve Bank; Monetary Policy Implementation,
available at https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation.
    \165\ Id.
    \166\ Congress similarly exempted transactions in which one
counterparty is a member of the Federal Reserve System from the
regulation of swaps and security based swaps in Title VII of the
Dodd-Frank Act. See 15 U.S.C. 78c(a)(68)(A) (noting that a security-
based swap is a swap, as defined in 7 U.S.C. 1a(47), subject to
certain other conditions); 7 U.S.C. 1a(47)(B)(ix) (excluding from
the definition of swap any transaction in which one counterparty
``is a Federal Reserve bank, the Federal Government, or a Federal
agency that is expressly backed by the full faith and credit of the
United States'').
---------------------------------------------------------------------------

    Further, the Commission believes that the Official Sector Exclusion
should extend to foreign central banks, sovereign entities and
international financial institutions for similar reasons and for
reasons of international comity. Congress has decided to permit
international financial institutions to enjoy a number of privileges
and immunities from U.S. law,\167\ which suggests that in these
circumstances, the Commission should not place additional requirements
on these institutions' transactions in U.S. Treasury securities. In
addition, in light of ongoing expectations that Federal Reserve Banks
and agencies of the Federal government would not be subject to foreign
regulatory requirements in their transactions in the sovereign debt of
other nations, the Commission believes principles of international
comity counsel in favor of exempting foreign central banks, sovereign
entities, and international financial institutions.\168\
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    \167\ See, e.g., the International Organization and Immunities
Act (22 U.S.C. 288) and the Foreign Sovereign Immunities Act (28
U.S.C. 1602). The United States has taken appropriate actions to
implement international obligations with respect to such immunities
and privileges. See, e.g., International Bank for Reconstruction and
Development (the ``World Bank'') and International Monetary Fund (22
U.S.C. 286g and 22 U.S.C. 286h), the European Bank for
Reconstruction and Development (22 U.S.C. 290l-6), the Multilateral
Investment Guarantee Agency (22 U.S.C. 290k-10), the Africa
Development Bank (22 U.S.C. 290-8), the African Development Fund (22
U.S.C. 290g-7), the Asian Development Bank (22 U.S.C. 285g), the
Inter-American Development Bank (22 U.S.C. 283g), the Bank for
Economic Cooperation and Development in the Middle East and North
Africa (22 U.S.C. 290o), and the Inter-American Investment
Corporation (22 U.S.C. 283hh).
    \168\ For similar reasons, the CFTC has similarly determined to
exempt swap transactions involving foreign central banks, sovereign
entities, and international financial institutions from the
statutory requirement that swap transactions be cleared with a
Derivatives Clearing Organization. See 17 CFR 50.75, 50.76; Swap
Clearing Exemptions, 85 FR 76428, 76429-30, 76432 (Nov. 30, 2020).
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ii. Natural Person Exclusion
    The Commission is also proposing to exclude from the Membership
Proposal otherwise eligible secondary market transactions in U.S.
Treasury securities between a direct participant of a U.S. Treasury
securities CCA and a natural person. The Commission believes that such
an exclusion is appropriate because natural persons generally transact
in small volumes and would not present much, if any, contagion risk to
a U.S. Treasury securities CCA.\169\
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    \169\ For example, although it is not a precise indicator of
activity by natural persons in the U.S. Treasury markets, the data
available on household holdings of U.S. Treasury securities
indicates that their activity is not significant to the overall
market. See, e.g., The Financial Accounts of the United States, at
119 (Q1 2022) (indicating that less than 3.1% of marketable U.S.
Treasury securities are held by the household sector), available at
https://www.federalreserve.gov/releases/z1/20220609/z1.pdf.
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3. How the Membership Proposal Facilitates Prompt and Accurate
Clearance and Settlement in the U.S. Treasury Market
    The Commission believes that the Membership Proposal would promote
the prompt and accurate clearance and settlement of U.S. Treasury
securities transactions, providing several benefits to the market for
U.S. Treasury securities as a whole.
    First, the Commission believes that the Membership Proposal would
decrease the overall amount of counterparty credit risk in the
secondary market for U.S. Treasury securities. Because a U.S. Treasury
securities CCA would novate and guarantee each transaction submitted
for central clearing, it would become a counterparty to each
transaction, as the buyer to every seller and the seller to every
buyer. The U.S. Treasury securities CCA would be able to risk manage
these transactions centrally, pursuant to risk management procedures
that the Commission has reviewed and approved, and would guarantee
settlement of the trade in the event of a direct participant default.
    By contrast, bilaterally cleared cash transactions in U.S. Treasury
securities are subject to variable risk management methodologies in
which exposures are often less mitigated with less rigorous

practices compared to CCP risk management.\170\ Indeed, although
various SRO margin rules provide for the collection of margin for
certain transactions in U.S. Treasury securities, transactions between
dealers and institutional customers are subject to a variable ``good-
faith'' margin standard, which the Commission understands--based on its
supervisory experience--can often result in fewer financial resources
collected to margin exposures than those that would be collected if a
CCP margin model, like the one used at FICC, were used.\171\ The
Membership Proposal is designed to ameliorate these risks by requiring
Treasury securities CCAs to establish policies and procedures that
require their direct participants to submit for clearance and
settlement their eligible secondary market transactions, which would
include all repo transactions, and specified cash transactions in U.S.
Treasury securities, which are most likely to pose contagion risk to a
U.S. Treasury securities CCA.
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    \170\ TMPG White Paper, supra note 21, at 29.
    \171\ Although FINRA rules provide for the collection of margin
for cash U.S. Treasury transactions, see FINRA Rule 4210(e)(2)(A)
(setting forth margin rule for FINRA members for collection of
margin on Treasuries and certain other bonds) these rules do not
necessarily apply to exempt accounts, see FINRA Rule 4210(e)(2)(F)
(permitting FINRA members not to collect margin from exempt accounts
and providing for a capital charge for any uncollected mark-to-
market loss); FINRA Rule 4210(a)(13) (defining exempt account).
Although SRO rules also require a broker-dealer to establish
procedures to review limits and types of credit extended to all
customers, formulate their own ``house'' margin requirements, and
review the need for instituting higher margin requirements than are
required for individual securities or customer accounts, based on
the Commission's supervisory experience, the resulting margin
collection is often less than that required pursuant to FICC's
margin model.
---------------------------------------------------------------------------

    In particular, the Membership Proposal is designed to reduce the
amount of ``contagion risk'' to a U.S. Treasury securities CCA arising
from what has been described as ``hybrid clearing,'' as discussed
above.\172\ In a hybrid transaction, the leg of the trade between an
IDB, which is a FICC member, and a FICC member counterparty is
submitted to FICC for clearance and settlement but the leg between the
IDB and a non-FICC member counterparty is not.\173\ Consequently, this
FICC-member counterparty would no longer have exposure to the IDB and
vice versa. But the IDB must settle the other leg of the trade
bilaterally with its non-FICC member counterparty, and the IDB and the
non-FICC member counterparty would face counterparty credit risk to
each other until the transaction settles. Although this release has
discussed ``hybrid clearing,'' and, more generally, contagion risk,
with respect to IDB transactions, the general concept can apply more
broadly, in that a FICC member's transactions that are not submitted
for central clearing pose an indirect risk to the CCP as any default on
a bilaterally settled transaction could impact the FICC member's
financial resources and ability to meet its obligations to FICC. The
Commission believes that requiring U.S. Treasury securities CCAs to
impose, as a condition of membership, an obligation on their direct
participants to submit all eligible secondary market transactions for
central clearing should address the transactions most likely to cause
contagion risk.
---------------------------------------------------------------------------

    \172\ TMPG White Paper, supra note 21, at 8 n.11 (``IDB
platforms act as blind brokers to provide anonymity to their
customers. Under the blind broker model, the IDB serves as principal
so what might appear to be a single trade between two customers is
really two: one between the broker and the buyer and one between the
broker and the seller. The buyer and seller are no longer directly
exposed to each other, but both are exposed to the blind broker, and
the blind broker is exposed to both buyer and seller.'').
    \173\ TMPG White Paper, supra note 21, at 9.
---------------------------------------------------------------------------

    Second, the Commission believes that the Membership Proposal would
also help any U.S. Treasury securities CCA to avoid a potential
disorderly member default. When cash market transactions are cleared
bilaterally, market participants typically enter into bespoke
arrangements to govern clearance and settlement with each of their
trading counterparties, resulting in multiple interconnected
counterparty credit risk exposures. Aside from the inefficiency of
multiple sets of bilateral documentation that may differ in key
respects, such as the amount of margin required, the default of one
counterparty can have cascading effects on multiple other market
participants. Defaults in bilaterally settled transactions are likely
to be less orderly and subject to variable default management
techniques because bilaterally settled transactions are not subject to
the default management processes that are required to be in place and
publicly disclosed at a CCP.\174\ Centralized default management is a
key feature of central clearing. Because the CCP has novated and
guaranteed the transactions, it is uniquely positioned to coordinate
the default of a member for trades that it has centrally cleared, and
the non-defaulting members can rely on the CCP to complete the
transactions of the defaulting member and cover any resulting losses
using the defaulting member's resources and/or its default management
tools. Even in a situation where two CCPs have to coordinate the
default of a joint member, that coordination should result in more
efficiency and market confidence than multiple bilateral settlements.
---------------------------------------------------------------------------

    \174\ See Rule 17Ad-22(e)(13) and (e)(23)(i).
---------------------------------------------------------------------------

    The Commission previously has stated that a CCP's default
management procedures would provide certainty and predictability about
the measures available to a covered clearing agency in the event of a
default which would, in turn facilitate the orderly handling of member
defaults and would enable members to understand their obligations to
the covered clearing agency in extreme circumstances.\175\ By contrast,
as the TMPG has observed, independent management of bilateral credit
risk by each participant in the clearance and settlement chain likely
creates uncertainty about the levels of exposure across market
participants and may make runs more likely, and any loss stemming from
closing out the position of a defaulting counterparty is a loss to the
non-defaulting counterparty and hence a reduction in its capital in
many scenarios.\176\ Moreover, the high quality and credit status of
U.S. Treasury securities does not eliminate the potential risk of
clearing and settling these securities in the event of a default of a
counterparty to a secondary market transaction. For example, if a large
participant in a U.S. Treasury trade defaults, it can leave a
counterparty with a short position to cover, which may take place as
prices of U.S. Treasury securities move rapidly.\177\ In particular,
the Commission notes that the market for U.S. Treasury securities
experienced stresses in 1986, 1994, and 2008, with more recent episodes
detailed in the recent IAWG Report.\178\
---------------------------------------------------------------------------

    \175\ CCA Standards Proposing Release, supra note 7, 79 FR at
29545.
    \176\ TMPG White Paper, supra note 21, at 32.
    \177\ TMPG White Paper, supra note 21, at 32 and at 13 n. 17
(noting counterparty risk associated with the Long-Term Capital
Management experience in 1998).
    \178\ IAWG Report, supra note 4.
---------------------------------------------------------------------------

    Having a CCP drawing on its expertise to manage hedging and an
orderly liquidation of the portfolio(s) of a party (or parties) in
default would constitute an improvement to uncoordinated liquidations.
A covered clearing agency, including a U.S. Treasury securities CCA, is
required to establish, implement, maintain and enforce written policies
and procedures reasonably designed to, as applicable, ensure the CCA
has the authority and operational capacity to contain losses and
liquidity demands and continue to meet its obligations, which must be

tested annually.\179\ This transparent and established approach to
potential defaults stands in contrast to the variable practices that
currently prevail in the bilateral market, which are not subject to
similar regulation. For these reasons, the Commission believes that a
requirement for a U.S. Treasury securities CCA to require that its
direct participants submit for clearance and settlement all the
transactions encompassed by the definition of an eligible secondary
market transaction would help reduce the potential for disorderly
defaults, and runs, thereby bolstering the health of the CCP and the
market as a whole--consistent with the purpose of robust membership
requirements the Commission contemplated in the Covered Clearing Agency
Standards, and the Commission's statutory charge to promote the prompt
and accurate clearance and settlement of securities transactions.\180\
---------------------------------------------------------------------------

    \179\ See 17 CFR 240.17Ad-22(e)(13).
    \180\ See 15 U.S.C. 78q-1(a)(2)(A).
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    Third, the Commission believes that the Membership Proposal will
further the prompt and accurate clearance and settlement of U.S.
Treasury securities by increasing the multilateral netting of
transactions in these instruments, thereby reducing operational and
liquidity risks, among others. Central clearing of transactions nets
down gross exposures across participants, which reduces firms'
exposures while positions are open and reduces the magnitude of cash
and securities flows required at settlement.\181\ Consistent with the
Commission's previous statements in this regard, FICC's failure to
receive all eligible trading activity of an active market participant
reduces the value of its vital multilateral netting process and causes
FICC to be less well-situated to prevent future market crises.\182\
Others have also noted that these reductions, particularly in cash and
securities flow would reduce liquidity risks associated with those
settlements and counterparty credit risks associated with failures to
deliver on the contractual settlement date,\183\ not only for CCP
members but for the CCP itself, thereby promoting the safeguarding of
U.S. Treasury securities and funds in the custody or control of the CCA
and increasing the likelihood of prompt and accurate clearance and
settlement of such transactions. In fact, it has been suggested that
additional central clearing, based on assumptions broader than the
proposal set forth in this release, may have lowered dealers' daily
settlement obligations in the cash market by 60 percent in the run-up
and aftermath of the March 2020 U.S. Treasury market disruption and
reduced settlement obligations by 70 percent during the disruption
itself.\184\ The reduction in exposure is not limited to the cash
market. For example, it has been estimated that introduction of central
clearing for dealer-to-client repos would have reduced dealer exposures
from U.S. Treasury repos by over 80% (from $66.5 billion to $12.8
billion) in 2015.\185\
---------------------------------------------------------------------------

    \181\ IAWG Report, supra note 4, at 30. For an example of
multilateral netting, please see note 252 and accompanying text
infra.
    \182\ Exchange Act Release No. 51908, supra note 30.
    \183\ G-30 Report, supra note 5, at 13; see also PIFS Paper,
supra note 120, at 28-31.
    \184\ G-30 Report, supra note 5, at 13 n.21 (citing Michael
Fleming & Frank Keane, Staff Report No. 964: Netting Efficiencies of
Marketwide Central Clearing, Federal Reserve Bank of New York (Apr.
2021), available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr964.pdf). However, this analysis relies
upon the assumption that all dealers' purchases and sales of U.S.
Treasury securities transactions would be centrally cleared and,
therefore, netted; this proposal, if adopted, would not result in
the same scope of central clearing, as it would apply only to
eligible secondary market transactions of direct participants in a
U.S. Treasury securities CCA.
    \185\ Office of Financial Research, Benefits and Risks of
Central Clearing in the Repo Market, 5-6 (Mar. 9, 2017), available
at https://www.financialresearch.gov/briefs/files/OFRBr_2017_04_CCP-for-Repos.pdf.
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    The benefits of multilateral netting flowing from central clearing
can improve market safety by lowering exposure to settlement failures,
which would also tend to promote the prompt and accurate clearance and
settlement of U.S. Treasury securities transactions.\186\ Multilateral
netting can also reduce the amount of balance sheet required for
intermediation and could also enhance dealer capacity to make markets
during normal times and stress events because existing bank capital and
leverage requirements recognize the risk-reducing effects of
multilateral netting of trades that CCP clearing accomplishes.\187\
---------------------------------------------------------------------------

    \186\ Darrel Duffie, Still the World's Safe Haven, Hutchison
Center on Fiscal & Monetary Policy, at 15 (June 2020), available at
https://www.brookings.edu/wp-content/uploads/2020/05/WP62_Duffie_v2.pdf (``Duffie'').
    \187\ IAWG Report, supra note 4, at 30; Liang & Parkinson, supra
note 32, at 9; Duffie, supra note 186, at 16-17.
---------------------------------------------------------------------------

    Fourth, the potential benefits associated with the multilateral
netting of transactions at a CCP that the Membership Proposal is
designed to bring about could in turn help to unlock further
improvements in U.S. Treasury market structure. The increase in
clearing and consequent reduction in counterparty credit risk could
``enhance the ability of smaller bank and independent dealers to
compete with the incumbent bank dealers.'' \188\ Similarly, decreased
counterparty credit risk--and potentially lower costs for
intermediation--could result in narrower spreads, thereby enhancing
market quality.\189\ Moreover, increased accessibility of central
clearing in U.S. Treasury markets could support movement toward all-to-
all trading, even potentially in the repo market, which would further
improve market structure and resiliency, although a movement in that
direction is not assured.\190\ This potential movement would stem from
the fact that increased central clearing of U.S. Treasury securities
transactions would, in turn, result in decreased counterparty risk,
making all-to-all trading more attractive, that is, a market
participant would be more willing to trade with any counterparty if a
CCP were to serve as its ultimate counterparty.
---------------------------------------------------------------------------

    \188\ Liang & Parkinson, supra note 32, at 9.
    \189\ G-30 Report, supra note 5, at 13
    \190\ IAWG Report, supra note 4, at 30; Duffie, supra note 186,
at 16; G-30 Report, supra note 5, at 13. All-to-all trading would be
characterized by the ability for a bid or offer submitted by one
market participant to be accepted by any other market participant,
with trades executed at the best bid or offer. See, e.g., Liang &
Parkinson, supra note 32, at 9. All-to-all trading could improve the
quality of trade execution in normal market conditions and broaden
and stabilize the supply of market liquidity under stress. See,
e.g., G-30 Report, supra note 5, at 10.
---------------------------------------------------------------------------

    Finally, increased central clearing should enhance regulatory
visibility in the critically important U.S. Treasury market.
Specifically, central clearing increases the transparency of settlement
risk to regulators and market participants, and in particular allows a
CCP to identify concentrated positions and crowded trades, adjusting
margin requirements accordingly, which should help reduce significant
risk to the CCP and to the system as a whole.\191\ In light of the role
of U.S. Treasury securities in financing the federal government, it is
important that regulators improve their visibility into this market.
Increased clearing would provide greater insight into the often opaque
repo market, as discussed further in section III.A.2.a supra, as well
as to the cash market where TRACE faces certain limitations, as
discussed in section IV infra. Increased central clearing would also
allow for a more aggregated view of market activity in one place.
---------------------------------------------------------------------------

    \191\ Duffie, supra note 186, at 15; IAWG Report, supra note 4,
at 30 (centralization of transactions at a CCP ``can simplify data
collection and improve visibility into market conditions for the
authorities and, to some degree, for market participants'').

---------------------------------------------------------------------------

4. Policies and Procedures Regarding Direct Participants' Transactions
    The proposal would also require that a U.S. Treasury securities CCA
establish written policies and procedures reasonably designed to, as
applicable, identify and monitor its direct participants' required
submission of transactions for clearing, including, at a minimum,
addressing a direct participant's failure to submit transactions.\192\
The Commission believes that such a requirement should help ensure that
a U.S. Treasury securities CCA has a framework in place for oversight
of participants' compliance with the policies that would be adopted as
part of the Membership Proposal requiring the submission of specified
eligible secondary market transactions for clearing. Without such
policies and procedures, it would be difficult for the CCA to assess if
the direct participants are complying with the Membership Proposal, if
adopted.
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    \192\ See Proposed Rule 17Ad-22(e)(18)(iv)(B).
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    The Commission believes that there are a number of possible methods
that a U.S. Treasury securities CCA could establish to assess its
direct participants' compliance with the policies and procedures
adopted pursuant to the Membership Proposal. For example, a U.S.
Treasury securities CCA could seek attestation from its direct
participants as to their submission of the required transactions.
    The Commission believes that requiring a U.S. Treasury securities
CCA to adopt policies and procedures that address a failure of a direct
participant to submit transactions that are required to be submitted is
consistent with section 17A(b)(3)(G) of the Exchange Act. That section
requires that the rules of a registered clearing agency provide that
its participants shall be appropriately disciplined for violation of
any provision of the rules of the clearing agency by expulsion,
suspension, limitation of activities, functions, and operations, fine,
censure, or any other fitting sanction. The Commission believes that
policies and procedures consistent with this aspect of the proposal
should specify how a U.S. Treasury securities CCA would penalize its
participants who do not submit the required transactions, whether by a
particular fine or other action. Understanding the consequences of not
complying with any Membership Proposal, if adopted, should, in turn,
help incentivize compliance.
5. Request for Comment
    The Commission generally requests comments on all aspects of the
Membership Proposal. In addition, the Commission requests comments on
the following specific issues, with accompanying data and analysis:
     Do commenters agree or disagree with any particular
aspects of the Membership Proposal, including the definition of an
eligible secondary market transaction? If so, which ones and why? If
commenters disagree with any provision of the proposed rule, how should
such provision be modified and why?
     Do commenters agree that transactions entered into by
direct participants of a U.S. Treasury securities CCA that are not
centrally cleared at the CCA present a contagion risk to the CCA, and
thereby present systemic risk? Why or why not? Are there other benefits
that expanded central clearing would bring that the Commission has not
identified?
     Do commenters agree that the Commission should target the
Membership Proposal, through the definition of an eligible secondary
market transaction, at a subset of transactions entered into by direct
participants of a U.S. Treasury securities CCA? Should the Commission
instead require that a U.S. Treasury securities CCA adopt policies and
procedures reasonably designed to require that its direct participants
submit for clearance and settlement all of their transactions in U.S.
Treasury securities?
     What implications would the increased transaction volume
at a U.S. Treasury securities CCA have for participation in the U.S.
Treasury market and for the U.S. Treasury market more broadly? For
example, would the Membership Proposal help create all-to-all trading
in the U.S. Treasury securities market?
     What impact would the Membership Proposal have on the
liquidity risk of a U.S. Treasury securities CCA and how a Treasury
securities CCA manages its liquidity risk consistent with Rule 17Ad-
22(e)(7) (17 CFR 240.17Ad-22(e)(7))? \193\ For example, what would be
the potential impact to FICC's Capped Contingent Liquidity Facility
(``CCLF'') and its participants' obligations under that requirement?
\194\ Are there any changes the Commission could adopt to the
Membership Proposal that would, in turn, lead to a different impact on
FICC's liquidity exposure and/or CCLF? As FICC, or any other U.S.
Treasury securities CCA that may enter the market, considers
implementing the Membership Proposal, are there actions it can take
that may reduce its liquidity risk?
---------------------------------------------------------------------------

    \193\ 17 CFR 240.17Ad-22(e)(7).
    \194\ FICC Rule 22A, section 2a, supra note 47.
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     More generally, what impact would the Membership Proposal
have on other risks facing a U.S. Treasury securities CCA, including,
for example, credit risk and operational risk, and how a U.S. Treasury
securities CCA manages its liquidity risk consistent with the
applicable Covered Clearing Agency Standards? Are there other changes
that a U.S. Treasury securities CCA should make to expand the use of
central clearing?
     In the event that a U.S. Treasury securities CCA were to
offer clearance and settlement services for securities lending
transactions in which U.S. Treasury securities are borrowed, should the
Commission include such transactions in the definition of an eligible
secondary market transaction in Proposed Rule 17Ad-22(a)? Would a
failure to include such securities lending transactions in the
definition of ``eligible secondary market transactions'' create
opportunities for gaming or evasion of the requirements of Proposed
Rule 17Ad-22(e)(18)(iv)(A)? Are there economic or other distinctions
that mitigate against including securities lending transactions in the
definition of an eligible secondary market transaction?
     In light of the fact that the Membership Proposal requires
only a U.S. Treasury securities CCA to have written policies and
procedures reasonably designed to require its direct members clear
their eligible secondary market transactions, is there a risk that
market participants will cease their direct participation in U.S.
Treasury securities CCAs?
     Similarly, are market participants more likely to move
some or all of their U.S. Treasury market activities from entities that
are direct participants of a U.S. Treasury securities CCA into other
affiliated entities? To what extent would a U.S. Treasury securities
CCA be exposed to these other transactions? Should the Commission adopt
rules to prohibit evasion of a U.S. Treasury securities CCA's
membership requirements through the use of affiliates?
     Should either the repurchase, reverse repurchase, or
purchase and sale transactions of certain direct participants of a U.S.
Treasury securities CCA, e.g., smaller or mid-sized dealers that would
otherwise be subject to the Membership Proposal, be excluded from the
definition of an eligible secondary

market transaction, such that a U.S. Treasury securities CCA would not
need to have written policies and procedures requiring that all such
direct participants' transactions in U.S. Treasury securities be
cleared? If so, how would the risks described above in this release be
mitigated? What criteria should be used to identify any direct
participants who are excepted from Proposed Rule 17Ad-22(e)(18)(iv)(A)?
Should any such exemption be subject to a gross notional value or other
cap? If so, how should that cap be set? Should any exemption from the
Membership Proposal be conditioned on the exchange of margin, haircuts
and/or other risk management measures?
     As an alternative to the Membership Proposal, should the
Commission establish volume thresholds for transactions by the direct
participants of a Treasury CCA that should be submitted to the Treasury
CCA for clearance and settlement? If so, what would be the appropriate
volume thresholds?
     Do commenters agree that when-issued transactions that
take place after the day of the auction and are considered on-the-run
by some IDBs are part of the secondary market and would, therefore, be
subject to the Membership Proposal, to the extent that such when-issued
trades otherwise meet the definition of an eligible secondary market
transaction in Proposed Rule 17Ad-22(a)? Do commenters also agree that
when-issued securities transactions should not be considered part of
the secondary market if they take place before and including the day of
the auction? Do commenters have views more generally on whether when-
issued transactions, either before, including, or after the day of the
auction, are part of the primary or secondary market?
     In light of the likely additional balance sheet capacity
that flows from clearing repo transactions in U.S. Treasury
securities,\195\ should the definition of an eligible secondary market
transaction in Proposed Rule 17Ad-22(a) be limited to repo
transactions? Are there any other reasons why the definition of
eligible secondary market transactions in Proposed Rule 17Ad-22(a)
should be limited to repo transactions? Please explain.
---------------------------------------------------------------------------

    \195\ See supra note 121 and accompanying text.
---------------------------------------------------------------------------

     As noted above, both bilateral and triparty repos are
currently eligible for central clearing. Should the Commission limit
Proposed Rule 17Ad-22(a) to either bilateral or triparty repo? Why or
why not? Are there differences in prevailing haircuts or collateral
that would make it more desirable to limit Proposed Rule 17Ad-22(a) to
bilateral or triparty repo? What other considerations might be relevant
to distinguishing between bilateral and triparty repo in the context of
Proposed Rule 17Ad-22(a)?
     In light of the particular contagion risk posed by hybrid
clearing at IDBs, should the definition of eligible secondary market
transaction in Proposed Rule 17Ad-22(a) be limited to transactions--
repurchase or outright purchase and sale or both--brokered by an IDB?
Why or why not?
     Is the inclusion of purchase and sale transactions of a
registered broker-dealer or government securities broker or government
securities dealer in the definition of eligible secondary market
transaction in Proposed Rule 17Ad-22(a) appropriate? Why or why not? Is
the participation of the entities set forth in paragraph (ii)(B) of the
proposed definition of an ``eligible secondary market transaction'' in
Proposed Rule 17Ad-22(a) in the national system of clearance and
settlement likely to increase the potential risk their eligible
secondary market transactions in U.S. Treasury securities pose to a
U.S. Treasury securities CCA? Are there other reasons that
participation in the national system of clearance and settlement should
be the basis for being subject to the Membership Proposal? Are there
other entities, e.g., banks that also participate in the national
system of clearance of and settlement and that should, on the same
logic be included as part of paragraph (ii)(B) of the proposed
definition of an ``eligible secondary market transaction'' in Proposed
Rule 17Ad-22(a)? Do commenters have any data and/or quantification of
the approximate dollar value of transactions that would be encompassed
by paragraph (ii)(B) of the definition of an ``eligible secondary
market transaction'' in Proposed Rule 17Ad-22(a)? Are they material
enough to warrant inclusion in the Membership Proposal?
     Could inclusion of transactions between a direct
participant of a U.S. Treasury securities CCA and a registered broker-
dealer or government securities broker or dealer in the definition of
an eligible secondary market transaction result in pro- or anti-
competitive effects in the market for intermediation in the market for
U.S. Treasury securities, particularly as some registered broker-
dealers have already highlighted that additional central clearing may
affect their ability to compete with those firms with larger market
share?
     Is the inclusion of the secondary market purchase and sale
transactions between a direct participant of a U.S. Treasury securities
CCA and a hedge fund in the definition of an ``eligible secondary
market transaction'' in Proposed Rule 17Ad-22(a) desirable or
appropriate? Why or why not? Do commenters agree that this aspect of
the proposal would address the risks posed by hedge funds transacting
in the U.S. Treasury market?
     Do commenters agree with the definition of a hedge fund in
paragraph (ii)(C) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a)? If not, what should that
definition be? Would a more limited definition of a hedge fund, e.g.,
using only one of the subsections (a) through (c) of the proposed
definition (and if so, which ones), be easier to administer or better
targeted to reach transactions potentially posing risk to the CCA? For
example, would a more limited definition that incorporated only
subsection (b) of the proposed definition regarding leverage be used in
paragraph (ii)(C) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a) be a preferable approach?
     Should the definition of a hedge fund be limited so that,
to qualify as a hedge fund under the leverage prong of the definition
in subsection (b), a fund would have to continue to satisfy that
subsection, but also must have actually borrowed or used any leverage
during the past 12 months, excluding any borrowings secured by unfunded
commitments (i.e., subscription lines of credit); and/or to qualify as
a hedge fund under the short selling prong of the definition in
subsection (c), the fund must have actually engaged in the short
selling activities described in that subsection during the past 12
months? If the Commission were to revise the proposed definition, would
excluding actual borrowings secured by unfunded commitments (i.e.,
subscription lines of credit) appropriately exclude private equity
funds, which typically engage in such borrowings? Should any revised
definition require actual borrowing or short selling in the last 12
months? Alternatively, should any revised definition require a longer
or shorter time period, such as 18 months or nine months, or different
time periods for borrowing versus short selling?
     Should the definition of a hedge fund be limited to hedge
funds managed by an investment adviser registered with the Commission?
     Should the inclusion of transactions between hedge funds
and direct participants of a U.S. Treasury securities CCA be limited to
hedge funds of a certain size or hedge funds managed by

investment advisers of a certain size? If so, what is the appropriate
threshold to use? For example, should the Commission limit the
definition of a hedge fund to apply only to those with net asset value
of at least $500 million? Is a fund of that size more likely to have an
impact on particular markets in which it invests or on its particular
counterparties? Or should the Commission limit the definition of a
hedge fund to those which are managed by an investment adviser with,
for example, at least $150 million in private fund assets under
management?
     Instead of including a definition of a hedge fund in
paragraph (ii)(C) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a), should the Commission
incorporate by reference the definition of a hedge fund set forth in
Form PF?
     Do commenters agree that a U.S. Treasury securities CCA
should be required to adopt rules requiring that a direct participant
of the CCA submit for clearing all transactions between the participant
and an account at a registered broker-dealer, government securities
dealer, or government securities broker where such account may borrow
an in excess of one-half of the net value of the account or may have
gross notional exposure of the transactions in the account that is more
than twice the net value of the account as described in paragraph
(ii)(D) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a)? Why or why not? Do
commenters agree that there is an additional benefit from capturing
these additional transactions beyond those in paragraph (ii)(D) of the
definition of an ``eligible secondary market transaction'' in Proposed
Rule 17Ad-22(a)?
     Can the inclusion of particular accounts within the set of
counterparties included in the definition of an eligible secondary
market transaction in paragraph (ii) of the definition of an ``eligible
secondary market transaction'' in Proposed Rule 17Ad-22(a) be
administered by a U.S. Treasury securities CCA and/or its direct
participant? Would a direct participant be able to know whether its
counterparty is such an account?
     Should the particular accounts included within paragraph
(ii)(D) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a) also include accounts with
banks? Why or why not?
     Do commenters agree that particular accounts identified in
paragraph (ii)(D) of the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a) pose (or have the potential
to pose) potential contagion risk to a U.S. Treasury securities CCA as
described in section III.A.3 supra, such that their purchase and sale
transactions of secondary market U.S. Treasury securities should be
included in the Membership Proposal? If so, does the definition of a
specified account in paragraph (ii)(D) of the definition of an
``eligible secondary market transaction'' in Proposed Rule 17Ad-22(a)
adequately capture the range of specified accounts that could pose (or
have the potential to pose) significant system risk? If not, how should
the definition of a specified account in paragraph (ii)(D) of the
definition of an ``eligible secondary market transaction'' in Proposed
Rule 17Ad-22(a) be adjusted to better capture this risk? For example,
should the use of actual leverage in the preceding 12 months be
required for such an account? Should different leverage thresholds or
gross notional exposures be used? Should there be a size threshold in
terms of the size of the account or the entity holding the account? Why
or why not?
     Instead of identifying a particular set of eligible
secondary market cash transactions in Proposed Rule 17Ad-22(a), should
the Commission instead require that a U.S. Treasury securities CCA (i)
require its direct participants to submit their U.S. Treasury security
repurchase and reverse repurchase transactions, and (ii) in the event
that a direct participant has such repurchase or reverse repurchase
transactions to submit, require that the direct participant also submit
its cash transactions? Would this approach be easier to administer?
Would this approach capture the systemic and contagion risks to a U.S.
Treasury securities CCA described above?
     Should the definition of an ``eligible secondary market
transaction'' in Proposed Rule 17Ad-22(a) include all secondary market
purchase and sale transactions by a direct participant of a U.S.
Treasury securities CCA in the definition of an eligible secondary
market transaction? If so, why? Would doing so materially protect U.S.
Treasury CCAs from the potential risks discussed above? Would such a
broad requirement have salutary effects on the market for U.S. Treasury
as a whole, for example by helping to foster an all-to-all market for
U.S. Treasury securities or in other ways?
     Are there other potential accounts, entities or market
participants whose U.S. Treasury security purchase and sale activity as
counterparties to direct participants of a U.S. Treasury securities CCA
that should be included in the definition of an ``eligible secondary
market transaction'' in Proposed Rule 17Ad-22(a)? For example, should
the Commission include purchase and sale activity in which the direct
participant's counterparty is a registered investment company, a money
market fund, or other buy-side entity? Has the Commission identified an
appropriate set of purchase and sale transactions to include in the
definition of an ``eligible secondary market transaction'' in Proposed
Rule 17Ad-22(a)? Why or why not? If the Commission were to include
additional purchase and sale activity, should it do so in a staggered
or sequenced manner?
     Are there particular purchases and sales of U.S. Treasury
securities involving a direct participant of a U.S. Treasury securities
CCA that the Commission should include or exclude from the definition
of an ``eligible secondary market transaction'' in Proposed Rule 17Ad-
22(a)? Should the Commission include or exclude such transactions based
on their potential to transmit risk to a U.S. Treasury securities CCA
and the financial system as whole? If so, has the Commission identified
the purchase and sale transactions most likely to be the source of such
risk? If not, what criteria should the Commission use to identify the
purchase and sale transactions that should be included or excluded?
     Is the Official Sector Exclusion to the definition of an
eligible secondary market transaction appropriate? Why or why not? Does
this proposed exclusion appropriately take into account transactions
made on behalf of a central bank, sovereign entity, or international
financial institution, i.e., by an intermediary?
     Do commenters agree with the definitions of a central
bank, sovereign entity, and international financial institution used in
the Official Sector Exclusion? Why or why not?
     To the extent that they meet the proposed definition of a
``sovereign entity'' in Proposed Rule 17Ad-22(a), should sovereign
wealth funds or other state-owned investment vehicles be removed from
the Official Sector Exclusion? If so, how should these entities be
defined for this purpose? Do these entities use leverage or otherwise
pose risk to a U.S. Treasury securities CCA that is more similar to the
entities that are subject to the Membership Proposal? Why or why not?
Are there other factors the Commission should consider in deciding
whether to exclude sovereign wealth funds from the Official Sector
Exclusion?
     Is the Official Sector Exclusion to the Membership
Proposal appropriate in

light of the fact that foreign governments and central banks are
significant participants in the market for U.S. Treasury securities,
accounting for a significant portion of sales during the volatility in
U.S. Treasury securities during March 2020?
     Do central banks, sovereign entities, or international
financial institutions, as defined in Proposed Rule 17Ad-22(a), pose
risks to their counterparties that could potentially be transmitted
back to a U.S. Treasury securities CCA and on to the broader financial
system? How could such risk be mitigated? Should the Commission
condition the Official Sector Exclusion, as set forth in paragraph
(iii) of the definition of an ``eligible secondary market transaction''
in Proposed Rule 17Ad-22(a), on the exchange of margin, haircuts and/or
other risk management measures?
     How would a U.S. Treasury securities CCA craft policies
and procedures reasonably designed to permit it to identify (and
therefore exclude its members') transactions subject to the Official
Sector Exclusion?
     Should the Official Sector Exclusion to the Membership
Proposal include state or local governments? Why or why not? If so, how
should these entities be defined for this purpose? Do these entities
use leverage or otherwise pose risk to a U.S. Treasury securities CCA
that is more similar to the entities that are subject to the Membership
Proposal? Are there other factors the Commission should consider in
deciding whether to include state or local governments within the
Official Sector Exclusion?
     Is the exclusion of transactions with natural persons from
the definition of an ``eligible secondary market transaction'' in
Proposed Rule 17Ad-22(a) appropriate? If natural persons are
transacting repurchase or reverse repurchase transactions with direct
participants of a U.S. Treasury securities CCA, is there any reason to
exclude those transactions from the Membership Proposal? What
proportion of the specified accounts in paragraph (iii)(C) of the
definition of an ``eligible secondary market transaction'' in Proposed
Rule 17Ad-22(a) would be subject to the natural person exclusion
contemplated in Proposed Rule 17Ad-22(a)? Is the exclusion of those
accounts appropriate?
     Should the exclusion of transactions with natural persons
from the definition of an ``eligible secondary market transaction'' in
Proposed Rule 17Ad-22(a) be conditioned on the exchange of margin,
haircuts and/or other risk management measures? If so what measures
would be appropriate for this exclusion?
     Should the natural person exclusion in paragraph (iii) of
the definition of an ``eligible secondary market transaction'' in
Proposed Rule 17Ad-22(a) be subject to a volume or size cap, a net
worth threshold, or any other limitation? If so, how should such
limitation be set?
     Should inter-affiliate transactions be excluded from the
definition of an eligible secondary market transaction by adding an
exclusion to the definition in Proposed Rule 17Ad-22(a) for all such
transactions? Why or why not? How should exceptions be identified?
Should the Commission condition this potential exclusion from the
Membership Proposal for inter-affiliate transactions on the exchange of
margin, haircuts and/or other risk management measures?
     Should any additional exclusion to the definition of an
eligible secondary market transaction in Proposed Rule 17Ad-22(a) be
limited to certain transaction volumes or account size thresholds or to
particular counterparties? If so, how should these thresholds or
counterparty levels be set? Should they be accompanied by a transition
period when a previously exempted transaction becomes subject to the
clearing requirement? Would a U.S. Treasury securities CCA be able to
write policies and procedures that would be effective in accomplishing
this task while still promoting central clearing of other U.S. Treasury
securities transactions?
     Are there any legal, operational or other considerations
that could impede an indirect participant's ability to participate
indirectly as proposed under the Membership Proposal? Are there any
particular changes to the Membership Proposal that could help
facilitate their ability to participate as indirect participants?
Should any other indirect participants or transactions be excluded from
the Membership Proposal on the basis of any such legal, operational or
other considerations?
     Are there other changes the Commission can make to the
design of the Membership Proposal to improve the resiliency of and
liquidity in the U.S. Treasury securities market?
     Do commenters agree with Proposed Rule 17Ad-
22(e)(18)(iv)(B) that would require a U.S. Treasury securities CCA to
have policies and procedures to identify and monitor its direct
participants' submission of transactions for clearing as required in
the Membership Proposal, including how the CCA would address a failure
to submit transactions? Why or why not?
     What types of policies and procedures should a U.S.
Treasury securities CCA implement to comply with the requirements of
Proposed Rule 17Ad-22(e)(18)(iv)(B), if adopted? What level of detail
and transparency would commenters find appropriate regarding such
policies and procedures?
     Do commenters believe that a U.S. Treasury securities CCA
could develop appropriate procedures to comply with the requirements of
Proposed Rule 17Ad-22(e)(18)(iv)(B), if adopted?
     In the event that there were to be more than one U.S.
Treasury securities CCA, should the Commission amend Rule 17Ad-
22(e)(20) (17 CFR 240.17Ad-22(e)(20)) to require each such CCA to
establish a link with each other Treasury CCA so that the direct
participant of either Treasury CCA may satisfy the requirements of
Proposed Rule 17Ad-22(e)(18)(iv) without becoming a direct participant
of each Treasury CCA? Are there any other steps that the Commission
should take?
     Will the Membership Proposal have any impact on
competition in the provision of CCP services in the U.S. Treasury
market? Will the Membership Proposal inappropriately concentrate risk
in a single U.S. Treasury securities CCA?

B. Other Changes to Covered Clearing Agency Standards

    As proposed, the Membership Proposal will likely result in a
significant increase in the volume of U.S. Treasury securities
transactions submitted for central clearing, including transactions of
market participants that currently may not submit such transactions for
central clearing. For example, as noted above, approximately 68% of the
overall dollar volume of cash market activity in the U.S. Treasury
market is bilaterally cleared, and dealer-to-customer trading appears
to comprise significant portion of that market.\196\ Further, it
appears that the customer side of this market is heterogeneous with
diverse participants, including pension funds and asset managers who,
as noted above, do not participate in central clearing to a great
extent, especially for cash market transactions.\197\
---------------------------------------------------------------------------

    \196\ See note 20 supra.
    \197\ IAWG Report, supra note 4, at 3.
---------------------------------------------------------------------------

    The Commission believes that certain additional changes to its
Covered Clearing Agency Standards that would apply only to U.S.
Treasury securities CCAs are warranted in light of the Membership
Proposal. Such changes, described further below, are designed to
improve risk management by and access

to the US Treasury securities CCA, and will also serve to help manage
the risks and facilitate access that would likely result from the
Membership Proposal. Thus, as part of ensuring its written policies and
procedures are reasonably designed to ensure all of its direct
participants clear all eligible secondary market transactions in U.S.
Treasury securities, the Commission proposes to require that U.S.
Treasury securities CCAs establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
calculate, collect, and hold margin for a direct participant's
proprietary positions separately from the margin calculated and
collected from that direct participant in connection with U.S. Treasury
securities transactions by an indirect participant (customer) that
relies on the services provided by the direct participant to access the
U.S. Treasury securities CCA. This proposal would prohibit a U.S.
Treasury securities CCA from netting customer and proprietary
positions. In addition, the Commission proposes to require that U.S.
Treasury securities CCAs establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
ensure that they have 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, which policies and procedures the board of directors
reviews annually.\198\
---------------------------------------------------------------------------

    \198\ For example, to the extent that the additional
transactions may present different risks on an intraday basis, a
U.S. Treasury securities CCA should consider its policies and
procedures in light of that risk, especially with respect to
policies and procedures designed to meet the requirements of Rules
17Ad-22(e)(6) and (7) (17 CFR 240.17Ad-22(e)(6) and (7)).
---------------------------------------------------------------------------

    To the extent that changes to the U.S. Treasury securities CCA's
rules or procedures are necessary in light of these proposed amendments
to the Covered Clearing Agency Standards, the U.S. Treasury securities
CCA, as a self-regulatory organization, would be required file such
changes for Commission review and approval, as appropriate, under
section 19(b) of the Exchange Act.\199\ In addition, if a U.S. Treasury
securities CCA has been designated as a systemically important
financial market utility, changes to programs allowing indirect
participants to clear or changes to margin methodologies or practices
may need to be filed as advance notices, to the extent that the changes
materially impact the nature or level of risk presented by that covered
clearing agency, which would therefore require consultation with the
Federal Reserve Board of Governors as well.\200\
---------------------------------------------------------------------------

    \199\ See 78 U.S.C. 78s; 17 CFR 240.19b-4.
    \200\ See 12 U.S.C. 8465; 17 CFR 240.19b-4.
---------------------------------------------------------------------------

1. Netting and Margin Practices for House and Customer Accounts
    The Commission believes that, in conjunction with the Membership
Proposal, further proposed changes with respect to risk management
requirements could also reduce the potential risk to the U.S. Treasury
securities CCA arising from such transactions. As described more fully
below, the Commission is proposing amendments to Rule 17Ad-22(e)(6)(i)
to require a U.S. Treasury securities CCA to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable, calculate, collect, and hold margin amounts
from a direct participant for its proprietary U.S. Treasury securities
positions 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. Such
changes should allow a U.S. Treasury securities CCA to better
understand the source of potential risk arising from the U.S. Treasury
securities transactions it clears and potentially further incentivize
central clearing, as discussed further below.
    Currently, the Commission's rules do not address how a U.S.
Treasury securities CCA should calculate, collect, and hold margin
amounts for any U.S. Treasury securities transactions, cash or repo,
that a direct participant may submit on behalf of an indirect
participant. This means that a U.S. Treasury securities CCA generally
may determine a participant's margin for both proprietary and client
positions using the methodology that it determines to be appropriate,
while still remaining responsible for complying more generally with the
applicable margin requirements under Rule 17Ad-22(e)(6).\201\
---------------------------------------------------------------------------

    \201\ Specifically, Rule 17Ad-22(e)(6) requires that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable, cover
its credit exposure to its participants by establishing a risk-based
margin system that, at a minimum and among others: considers, and
produces margin levels commensurate with, the risks and particular
attributes of each relevant product, portfolio, and market; and
calculates margin sufficient to cover its potential future exposure
to participants in the interval between the last margin collection
and the close out of positions following a participant default. 17
CFR 240.17Ad-22(e)(6)(i and iii).
---------------------------------------------------------------------------

    For example, in practice, at what is currently the only U.S.
Treasury securities CCA, clearing a U.S. Treasury securities
transaction between a direct participant and its customer, i.e., a
dealer to client trade, would not result in separate collection of
margin for the customer transaction. Transactions between direct
participants are novated by the U.S. Treasury securities CCA, and, by
virtue of multilateral netting, all of a member's positions are netted
into a single payment obligation--either to or from the CCP.\202\ Under
its current client clearing models (except the FICC sponsored member
program),\203\ for a dealer to client trade, although there is no
transaction between two direct participants to novate, FICC novates the
transaction and becomes a counterparty to the direct participant that
has submitted that transaction, but does not have a direct relationship
with the direct participant's client.\204\ FICC margins the
transactions in the direct participant's (i.e., the dealer's) account
on a net basis, allowing any of the trades for the participant's own
accounts to net against trades by the participant's customers.\205\
---------------------------------------------------------------------------

    \202\ See FICC PFMI Disclosure Framework at 10; FICC Rule 11,
section 4.
    \203\ In FICC's sponsored member program, both the Sponsoring
Member and the Sponsored Member are members of FICC, and FICC has
certain obligations to both entities, including a guaranty of
settlement to the Sponsored Member. See generally FICC Rule 3A;
Depository Trust & Clearing Corporation, Making the U.S. Treasury
Market Safer for All Participants: How FICC's Open Access Model
Promotes Central Clearing, at 6 (Oct. 2021), available at https://www.dtcc.com/-/media/Files/Downloads/WhitePapers/Making-the-Treasury-Market-Safer-for-all-Participants.pdf (``DTCC October 2021
White Paper'').
    \204\ Marta Chaffee and Sam-Schulhofer-Wohl, Is a Treasury
Clearing Mandate the Path to Increased Central Clearing, Chicago Fed
Insights, at 2 (June 23, 2021), available at https://www.chicagofed.org/publications/blogs/chicago-fed-insights/2021/treasury-clearing-mandate (explaining that this conclusion follows
from that fact that ``FICC nets members' trades for their own
accounts against trades by the members' customers, so the dealer's
and customer's sides of the trade would cancel out in the netting
process'') (``Chicago Fed Insights'').
    \205\ DTCC October 2021 White Paper, supra note 203, at 5-6.
---------------------------------------------------------------------------

    Under the proposed amendments to Rule 17Ad-22(e)(6)(i), a U.S.
Treasury securities CCA would be required to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable, calculate margin amounts for all
transactions a direct participant submits to the CCP on behalf of
others, separately from the margin that is calculated for transactions
that the direct participant submits on its own

behalf. Such policies and procedures must also provide that margin
collateralizing customer positions be collected separately from margin
collateralizing a direct participant's proprietary positions. The
Commission believes that the customer positions that would be separated
from a direct participant's proprietary positions generally would arise
in the dealer-to-customer market, in which a dealer transacts directly,
as a principal, with its customer, as discussed in section II.A.1
supra. Finally, the CCP would also be required to have policies and
procedures reasonably designed to, as applicable, ensure that any
margin held for customers or other indirect participants of a member is
held in an account separate from those of the direct participant.
    The proposed amendments to Rule 17Ad-22(e)(6)(i) are designed to
ensure that central clearing of U.S. Treasury securities transactions
between direct participants and indirect participants of a covered
clearing agency clearing U.S. Treasury securities would result in the
risk management benefits described above in section III.A.3 supra, as
well as to incentivize additional central clearing in the U.S. Treasury
market. Specifically, the proposed amendments to Rule 17Ad-22(e)(6)(i)
would require that a U.S. Treasury securities CCA calculate, collect,
and hold margin for positions in U.S. Treasury securities transactions
of a direct participant in a U.S. Treasury securities CCA separately
from those of customers or other indirect participants that rely on the
direct participant to access the covered clearing agency's payment,
clearing, or settlement facilities. Because the indirect participant's
positions are no longer netted against the direct participant's
positions prior to being submitted for central clearing, the indirect
participant's positions would be subject to the covered clearing
agency's risk management procedures, including collection of margin
specific to those transactions.\206\ This should, in turn, help avoid
the risk of a disorderly default in the event of a direct participant
default, in that the CCA would be responsible for the central
liquidation of the defaulting participant's trades and would be able to
have a more holistic view of the market than would be available for
competing bilateral efforts to close out transactions with a defaulting
entity. Moreover, the proposed amendments to Rule 17Ad-22 (e)(6)(i)
should result in dealer-to-customer trades gaining more benefits from
central clearing.
---------------------------------------------------------------------------

    \206\ The proposed amendments to Rule 17Ad-22(e)(6)(i) would not
require that a U.S. Treasury securities CCA collect margin from
indirect participants, but rather would ensure that U.S. Treasury
securities CCAs determine margin for transactions submitted on
behalf of indirect participants separately from those of direct
participants.
---------------------------------------------------------------------------

    FICC, in its sponsored membership program, already calculates,
collects, and holds margin amounts for its sponsoring members
separately and independently from those members they sponsor. FICC's
rules specifically provide for the collection of margin for sponsored
member trades on a gross basis, i.e., the total margin amount required
for the separate omnibus account for client trades must be equal to the
sum of the individual margin amounts that would be due if each customer
were margined separately.\207\ The proposed amendments to Rule 17Ad-
22(e)(6)(i), however, would not require that a CCA's direct participant
collect a specified amount of margin from its customers or determine
customer margin in a particular manner, such as on a gross basis; the
calculation and collection of margin between a CCA direct participant
and its customers would be left to other applicable regulations and, to
the extent applicable, bilateral negotiation between the member and its
customer.
---------------------------------------------------------------------------

    \207\ See FICC Rules 1 (definition of Sponsoring Member Omnibus
Account) and 3A, section 10, supra note 47; DTCC October 2021 White
Paper, supra note 203, at 6. Although not required under the
proposed amendments to Rule 17Ad-22(e)(6)(i), calculation of gross
margin for each customer, i.e., the sum of the individual margin
amounts that would be due if each customer were margined separately,
as FICC does for the Sponsored Service, would be permissible under
the proposed amendment.
---------------------------------------------------------------------------

    In these respects, the proposed amendments to Rule 17Ad-22(e)(6)(i)
would require policies and procedures that closely resemble the
calculation, collection, and holding of margin for listed options.
Currently, the covered clearing agency that clears and settles listed
options transactions holds margin for customer trades separately from
the proprietary trades of the submitting participant in an omnibus
account.\208\ When considering and adopting the Covered Clearing Agency
Standards, the Commission noted that customer segregation can be
achieved through such an omnibus account structure, where all
collateral belonging to all customers of a particular member is
commingled and held in a single account segregated from that of the
member,\209\ which is consistent with the practice at the clearing
agency for listed options and the proposed amendments to Rule 17Ad-
22(e)(6)(i).
---------------------------------------------------------------------------

    \208\ See Options Clearing Corp. Rule 601(c)-(d), available at
https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf (``OCC Rules''). This approach is also
similar to the approach used for futures customers. See 17 CFR 1.22
and Advanced Notice of Proposed Rulemaking, Protection of Cleared
Swaps Customers Before and After Commodity Broker Bankruptcies, 75
FR 75162, 75163 (Dec. 2, 2010) (describing the futures model).
    \209\ See CCA Standards Proposing Release, supra note 7, 79 FR
at 29547; CCA Standards Adopting Release, supra note 25, 81 FR at
70832-33.
---------------------------------------------------------------------------

    The approach proposed here would also be similar to the
requirements applicable to cleared swaps, in that it would require the
separation of proprietary and customer funds and securities held at a
U.S. Treasury securities CCA.\210\ However, it would not require any
particular method for how customer funds and securities are segregated,
which differs from the requirements applicable to derivatives clearing
organizations clearing swaps. Such entities are subject to what has
been referred to as a legally segregated, operationally commingled
(``LSOC'') approach.\211\ Under such an approach, customer collateral
may be held in one combined account and commingled, but in the event of
a customer default, the collateral of non-defaulting customers would
not be available to cover any losses attributable to the defaulting
customer (i.e., they would be legally separated from the collateral of
the defaulting customer).\212\ In other words, the LSOC model mitigates
``fellow customer risk'' arising from the default of a customer within
the omnibus account. The Commission previously has declined to require
such an approach for covered clearing agencies, preferring to allow
each covered clearing agency to determine the method that works best
for the products it clears and markets it serves.\213\ When discussing
that conclusion, the Commission also noted that this type of
segregation does not occur at the CCP level under the current market
structure for cash securities and listed options, and that customer
positions and funds in the cash securities and listed options markets
are protected under SIPA, which is not the case for futures and cleared
swaps.\214\
---------------------------------------------------------------------------

    \210\ See 7 U.S.C. 6d(f)(2).
    \211\ 17 CFR 22.15.
    \212\ See, e.g., Protection of Cleared Swaps Customer Contracts
and Collateral; Conforming Amendments to the Commodity Broker
Bankruptcy Provisions, 77 FR 6336, 6339 (Feb. 7, 2012) (describing
the LSOC approach and adopting final rules for this approach).
    \213\ See CCA Standards Adopting Release, supra note 25, 81 FR
at 70832.
    \214\ Id. at 70833 (citing 15 U.S.C. 78eee et seq.).
---------------------------------------------------------------------------

    By contrast to the rules for margin for futures and cleared swaps,
the proposed amendments to Rule 17Ad-22(e)(6)(i) would not require that
a CCP clearing and settling transactions in U.S.

Treasury securities calculate and collect margin for each customer on a
gross basis.\215\ Instead, the CCP would have the discretion to collect
a single netted amount for each clearing member's customer account as a
whole, i.e., netting each customer's margin against that of other
customers within the overall customer account. This is generally how
margin is collected for listed options,\216\ where, as noted above,
SIPA acts to protect customer securities and funds at a participant
broker-dealer.\217\ However, in order for a registered broker-dealer to
take advantage of the proposed debit in proposed item 15 of 17 CFR
240.15c-3-3a, if adopted, a U.S. Treasury securities CCA must collect
margin on a gross basis, as discussed in section III.C infra.
---------------------------------------------------------------------------

    \215\ See 17 CFR 39.13(g)(8)(A and C) (requiring the collection
of initial margin for each customer account equal to the sum of the
initial margin accounts that would be required if the individual
customer were a direct participant and prohibiting a derivatives
clearing organization from netting, or permitting its clearing
members to, net positions of different customers against one
another).
    \216\ See OCC Rule 810(a)-(c), supra note 208.
    \217\ See supra note 210.
---------------------------------------------------------------------------

2. Facilitating Access to U.S. Treasury Securities CCAs
    The Commission understands that the various models currently
available to access central clearing in the U.S. Treasury market may
not meet the needs of the many different types of market participants
who transact in U.S. Treasury securities with the direct participants
of a U.S. Treasury Securities CCA. Although some market participants
may choose to become a member of a U.S. Treasury securities CCA, this
approach likely would not be viable for a broad range of participants
in the U.S. Treasury market for legal, operational and other reasons.
Currently, there are several methods available to allow market
participants to access CCP services through a FICC member.\218\
However, based on its supervisory experience, the Commission
understands that these models may not meet the regulatory or business
needs of all market participants, including indirect participants whose
transactions with direct participants would likely be encompassed by
rules that FICC would impose, as required by the Membership Proposal if
adopted, that its direct participants submit for clearance and
settlement all eligible secondary market transactions in U.S. Treasury
securities. Consequently, the Commission believes that the access
models used at a U.S. Treasury securities CCA will need to be revisited
to help ensure that more transactions by indirect participants
(particularly in the dealer-to-customer market) could be submitted to
comply with the Membership Proposal, if adopted.
---------------------------------------------------------------------------

    \218\ See, e.g., FICC Rules 3A, 8, 18, supra note 47 (providing
for prime brokerage and correspondent clearing and sponsored
membership); see also October 2021 White Paper, supra note 198, at
5-7.
---------------------------------------------------------------------------

    With regard to methods of access, the Commission understands
indirect participants may have significantly different preferences with
respect to how they access and obtain clearing services from direct
participants of U.S. Treasury securities CCAs. For example, certain
market participants may tend to prefer to bundle trading and execution
services with a single entity that is a U.S. Treasury securities CCA
member for regulatory, operational, and other reasons.\219\ By
contrast, other market participants would prefer to be able to utilize
clearing services unbundled from execution services from U.S. Treasury
securities CCA members and would prefer that such members operate their
clearing services independently from execution services, as appears
common in other asset classes.\220\ In addition, some market
participants have expressed concerns with the way FICC's direct
participants conduct their business regarding access for indirect
participants, specifically, that FICC direct participants sponsoring
indirect members are not willing to submit transactions for such
indirect participants to which the direct participant is not a party
(i.e., ``done away'' transactions).\221\ These concerns, however, are
based on the business decisions of FICC's direct participants rather
than the operation of FICC's Rules; although FICC does not restrict its
Sponsoring Members' ability to be both a trading counterparty and
submitting clearing member for an indirect participant, FICC's Rules
allow direct participants in its sponsored membership program to submit
``done away'' transactions, if they so choose. Accordingly, as
currently constituted, FICC's rules permit but do not require that its
direct participants accept such transactions.\222\
---------------------------------------------------------------------------

    \219\ DTCC October 2021 White Paper, supra note 203, at 5, 7.
    \220\ Futures Industry Association Principal Traders Group,
Clearing a Path to a More Resilient Treasury Market, at 10 (Jul.
2021), available at https://www.fia.org/sites/default/files/2021-07/FIA-PTG_Paper_Resilient%20Treasury%20Market_FINAL.pdf (``FIA PTG
Whitepaper'').
    \221\ Id. at 7-9.
    \222\ See DTCC October White Paper, supra note 203, at 6-7;
Exchange Act Release No. 85470 (Mar. 29, 2019), supra note 126
(approving changes to FICC's Rules to allow Sponsored Members to
transact with FICC members that are not their Sponsoring Member).
---------------------------------------------------------------------------

    The Commission is proposing Rule 17Ad-22(e)(18)(iv)(C) to require
that a U.S. Treasury securities CCA establish, implement, maintain and
enforce written policies and procedures reasonably designed to, as
applicable, 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, which policies and procedures the U.S. Treasury
securities CCA's board of directors reviews annually. Although this new
provision would not prescribe specific methods for market participants
to obtain indirect access to a U.S. Treasury securities CCA, it is
intended to help ensure that all U.S. Treasury security CCAs review
their indirect access models and ensure that they facilitate access to
clearance and settlement services in a manner suited to the needs and
regulatory requirements of market participants throughout the U.S.
Treasury securities market, including indirect participants.
    This new proposed requirement would further expand current Rule
17Ad-22(e)(18), which requires that a covered clearing agency
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, establish objective,
risk-based and publicly disclosed criteria for participation, which
permit fair and open access by direct and, where relevant indirect
participants. Because the Membership Proposal likely would require
direct participants to submit additional eligible secondary market
transactions for clearing, thereby raising the need for the direct
participants to centrally clear transactions with indirect participants
that are not currently submitted for clearing, the Commission believes
that expanding Rule 17Ad-22(e)(18) to provide additional requirements
regarding a U.S. Treasury securities CCA's consideration of whether it
has ensured appropriate access for indirect participants should help
facilitate adoption and implementation of the Membership Proposal, as
it will provide additional or reworked models which direct participants
can use to submit their transactions executed on behalf of or with
indirect participants for central clearing, and lead to better risk
management of the risks posed by indirect participants to a U.S.
Treasury securities CCA.
    To facilitate compliance with this proposed requirement, the
Commission believes that a U.S. Treasury securities CCA generally
should conduct an initial

review of its access models and related policies and procedures. As it
conducts this review, in view of the critical services it provides, the
U.S. Treasury securities CCA generally should seek to provide access in
as flexible a means as possible, consistent with its responsibility to
provide sound risk management and comply with other provisions of the
Exchange Act, the Covered Clearing Agency Standards, and other
applicable regulatory requirements. The Commission believes that the
U.S. Treasury securities CCA generally should consider a wide variety
of 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. To ensure that it
considers a sufficiently broad set of perspectives, the U.S. Treasury
securities CCA generally should consult with a wide-range of
stakeholders, including indirect participants, as it seeks to comply
with proposed rule 17Ad-22(e)(18)(iv)(B).
    The Commission believes that a U.S. Treasury securities CCA
generally should review any instance in which its policies and
procedures treat transactions differently based on the identity of the
participant submitting the transaction, the fact that an indirect
participant who is a party to the transaction, or the method of
execution, or in any other way, and confirm that any variation in the
treatment of such transactions is necessary and appropriate to meet the
minimum standards regarding, among other things, operations,
governance, and risk management identified in the Covered Clearing
Agency Standards. The review by a U.S. Treasury securities CCA's board
of directors under proposed Rule 17Ad-22(e)(18)(iv)(B) generally should
include consideration whether to establish policies and procedures that
enable direct members to submit to the U.S. Treasury securities CCA
eligible transactions for clearance and settlement that have been
executed by two indirect participants of the U.S. Treasury securities
CCA, which could potentially help address some of the concerns
potential participants raised about the inability to present ``done
away'' trades for clearance and settlement described above. Finally, a
U.S. Treasury securities CCA generally should consider whether to
include in its policies and procedures non-discrimination principles,
similar to those the CFTC promulgated to foster the clearance and
settlement of swaps,\223\ to the extent that they are applicable to the
clearance and settlement of U.S. Treasury securities. Taken together,
initiatives such as these, along with others identified by a U.S.
Treasury securities CCA through consultations with relevant
stakeholders--including indirect participants--should help ensure that
a U.S. Treasury securities CCA is offering appropriate means to
facilitate access to its clearance and settlement services for U.S.
Treasury securities. To the extent that a U.S. Treasury securities
CCA's initial (or any subsequent) review occasions a change to its
rules, such U.S. Treasury securities CCA would need to file such
changes for Commission review and approval, as appropriate, under
section 19(b) of the Exchange Act and Title VIII of the Dodd-Frank
Act.\224\
---------------------------------------------------------------------------

    \223\ See 17 CFR 39.12(a)(1)(vi).
    \224\ See 15 U.S.C. 78s(b); 17 CFR 240.19b-4; 12 U.S.C. 5465(e).
---------------------------------------------------------------------------

    Further, as noted above, the Commission is proposing to require
annual review by the CCA's board of directors of the CCA's written
policies and procedures designed to ensure that the CCA 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. The Commission believes that
such requirement is important to ensure that such policies regarding
access to clearance and settlement services, including for indirect
participants, are addressed at the most senior levels of the governance
framework of the covered clearing agency, consistent with the
importance of such requirements. The review by a U.S. Treasury
securities CCA's board of directors under proposed Rule 17Ad-
22(e)(18)(iv)(B) generally should include consideration whether the
U.S. Treasury securities CCA's written policies and procedures are
reasonably designed to ensure 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.
3. Request for Comment
    The Commission generally requests comments on all aspects of new
proposed Rules 17Ad-22(e)(6)(i) and 17Ad-22(e)(18)(iv)(C). In addition,
the Commission requests comments on the following specific issues, with
accompanying data and analysis:
     Do commenters agree or disagree with any particular
aspects of proposed Rule 17Ad-22(e)(6)(i)? If so, which ones and why?
If commenters disagree with any provision of the proposed rule, how
should such provision be modified and why?
     Do commenters agree that the transactions in a direct
participant's customer account would generally consist of its
transactions in the dealer-to-customer market, as a principal to
transactions with its customers? Should the Commission further define
or distinguish between proprietary and customer positions in the
proposed rule text?
     As discussed above, the proposed amendments to Rule 17Ad-
22(e)(6)(i) do not require a particular approach to the methodology
used for calculating customer margin, that is, whether customer margin
should be determined on a gross or net basis, by contrast to the gross
margin requirement for customer margin for futures and cleared
swaps.\225\ Should the Commission consider further amendments to Rule
17Ad-22(e)(6) or other Commission rules to include such a requirement?
If so, how would such a requirement interact with SIPA \226\ and the
Bankruptcy Code \227\ in the event of a broker-dealer default?
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    \225\ See 17 CFR 39.13(g).
    \226\ See 15 U.S.C. 78aaa et seq.
    \227\ See 11 U.S.C. 1 et seq.
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     Do commenters believe that additional requirements with
respect to the collection of margin at the customer level, i.e.,
further segregation of customer margin within a customer account (such
as an LSOC model) would bring particular costs or benefits to the
market? How would any such additional requirement interact with SIPA
and the Bankruptcy Code in the event of a broker-dealer default?
     More generally, what impact would the proposed amendment
to Rule 17Ad-22(e)(6)(i)(A) have on bankruptcy issues arising under
SIPA? Would additional SIPA or bankruptcy issues arise in the event of
additional margin requirements similar to those for futures and/or
cleared swaps?
     Would the proposed amendment to Rule 17Ad-22(e)(6)(i)
potentially support (or not support) the expanded use of cross-
margining agreements?
     Do commenters believe that the proposed amendment to Rule
17Ad-22(e)(6)(i) would increase (or decrease) the amount of margin
required to be collected from direct participants of a U.S. Treasury
securities CCA?
     Do commenters agree that the requirement to separately
calculate, collect, and hold customer margin would further incentivize
central clearing in the U.S. Treasury market?
     Do commenters agree or disagree with any particular
aspects of proposed Rule 17Ad-22(e)(18)(iv)(C)? If so, which

ones and why? If commenters disagree with any provision of the proposed
rule, how should such provision be modified and why?
     Do commenters agree that proposed Rule 17Ad-
22(e)(18)(iv)(C) is sufficient to facilitate access to the clearance
and settlement services of a U.S. Treasury securities CCA for both
direct and indirect participants?
     Do commenters agree that certain market participants may
not be able to satisfy a covered clearing agency's membership criteria?
If so, which particular entities, and what are the reasons?
     In addition, do commenters agree that particular legal,
operational or other considerations may further preclude many market
participants from becoming direct members of a U.S. Treasury securities
CCA? If so, which entities, and why? For example, are there particular
requirements under the Investment Company Act of 1940 or Investment
Advisers Act of 1940 that may preclude particular registered funds or
their sponsors from participating as direct clearing members?
     Among market participants that cannot become direct
members of a U.S. Treasury securities CCA, are there particular
entities that may be further precluded from participating as indirect
participants? If so, which entities, and what might be some of the
legal, operational or other considerations that may preclude them from
becoming indirect participation?
     Are there specific changes to the current indirect
participation models that could help facilitate participation by
certain market participants? In addition, are there specific changes to
particular Commission rules that could facilitate further participation
of indirect participants?
     Would a separation between trade execution and clearing
services at broker-dealers pose issues for any of the market
participants in the market for U.S. Treasury securities?
     Would a separation between trade execution and clearing
services at broker-dealers lead to regulatory arbitrage in view of the
fact that the Commission generally does not regulate banks that are not
otherwise registered with the Commission?
     Should the Commission amend the Covered Clearing Agency
standards to require that a U.S. Treasury securities CCA, in turn,
require its direct participants to clear transactions executed between
indirect participants but submitted to a direct participant for
clearing? How effective is such a rule likely to be in view of the
restriction in Exchange Act section 17A(b)(3)(E),\228\ which prohibits
any clearing agency from imposing any schedule of prices, or fixing
rates or other fees, for services rendered by its participants?
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    \228\ 15 U.S.C. 78q-1(b)(3)(E).
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C. Proposed Amendments to Rule15c3-3a

1. Proposal
    The proposed rules discussed above could cause a substantial
increase in the margin broker-dealers must post to a U.S. Treasury
securities CCA resulting from their customers' cleared U.S. Treasury
positions. Currently, Rules 15c3-3 and 15c3-3a do not permit broker-
dealers to include a debit in the customer reserve formula equal to the
amount of margin required and on deposit at a U.S. Treasury securities
CCA. This is because no U.S. Treasury securities CCA has implemented
rules and practices designed to segregate the margin and limit it to
being used solely to cover obligations of the broker-dealer's
customers. Therefore, increases in the amount of margin required to be
deposited at a U.S. Treasury securities CCA as a result of the
Membership Proposal would result in corresponding increases in the need
to use broker-dealers' cash and securities to meet these requirements.
    To facilitate implementation of the Membership Proposal, the
Commission is proposing to amend Rule 15c3-3a to permit margin required
and on deposit at a U.S. Treasury securities CCA to be included as a
debit item in the customer reserve formula, subject to the conditions
discussed below. This new debit item would offset credit items in the
Rule 15c3-3a formula and, thereby, free up resources that could be used
to meet the margin requirements of a U.S. Treasury securities CCA. The
new debit item would be reported on a newly created Item 15 of the Rule
15c3-3a reserve formula. The proposed amendments also would set forth a
number of conditions that would need to be met to include the debit in
the reserve formula. As discussed below, these proposed conditions are
designed to permit the inclusion of the debit only under conditions
that would provide maximum protection to the broker-dealer's customers.
The goal is to facilitate implementation of the Membership Proposal in
a way that does not diminish the customer-protection objective of Rules
15c3-3 and 15c3-3a.
    The proposed conditions would be set forth in a new Note H to the
reserve formula similar to how the conditions for including a debit in
the reserve formula with respect to margin required and on deposit at a
securities futures clearing agency or DCO are set forth in Note G. The
proposed amendments are based, in part, on the conditions in Note G and
the requirements in Rules 15c3-3 and 15c3-3b for including a debit with
respect to margin required and on deposit at security-based swap
clearing agency. The Note G conditions and requirements of Rules 15c3-3
and 15c3-3b similarly are designed to permit the debit under
circumstances that provide protection to customers.
    Under the proposed amendments, current Item 15 of the Rule 15c3-3a
formula would be renumbered Item 16.\229\ Proposed Item 15 would
identify as a debit in the Rule 15c3-3a formula margin required and on
deposit with a clearing agency registered with the Commission under
section 17A of the Exchange Act resulting from the following types of
transactions in U.S. Treasury securities in customer accounts that have
been cleared, settled, and novated by the clearing agency: (1)
purchases and sales of U.S. Treasury securities; and (2) U.S. Treasury
securities repurchase and reverse repurchase agreements (together
``customer position margin''). As proposed, this debit item would be
limited to customer position margin required and on deposit at a
clearing agency that clears, settles, and novates transactions in U.S.
Treasury securities. Except for the debits identified in current Items
13 and 14 of the Rule 15c3-3a formula, margin required and on deposit
at other types of clearing agencies or for other types of securities
transactions would not qualify as a debit item under this proposal.
Further, this debit item would be limited to customer position margin
required and on deposit at the U.S. Treasury securities CCA as a result
of U.S. Treasury positions in customer accounts. Margin required and on
deposit at the U.S. Treasury securities CCA as result of the broker-
dealer's proprietary U.S. Treasury positions could not be included in
this debit item. This proposed limitation would effectuate a
fundamental aspect of Rule 15c3-3: that customer cash and securities
not be used by the broker-dealer to finance its proprietary business
activities.\230\ Finally, the debit would be limited to customer
position margin required and on deposit at the

U.S. Treasury securities CCA. This would mean that the broker-dealer
could not include in this debit item amounts on deposit at the U.S.
Treasury securities CCA that exceed the broker-dealer's margin
requirement resulting from its customers' cleared U.S. Treasury
securities positions. This limitation is designed to prevent the
broker-dealer from artificially increasing the amount of the debit item
by depositing cash and securities at the U.S. Treasury securities CCA
that are not needed to meet a margin requirement resulting from its
customers' U.S. Treasury securities positions.
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    \229\ Current Item 15 is where the broker-dealer reflects the
amount, if any, that total credits exceed total debits.
    \230\ As discussed above in section II.B.2., debit items offset
credit items thereby reducing the amount of cash or qualified
securities that need to be held in the customer reserve account to
cover the broker-dealer's cash liabilities to its customers.
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    As proposed, Item 15 of the Rule 15c3-3a formula would have a Note
H that sets forth a number of conditions that would need to be met to
include the amount of customer position margin required and on deposit
at the U.S. Treasury securities CCA as a debit. Each of the conditions
in Note H to Item 15 would need to be met for a broker-dealer to
include a debit equal to the amount of customer position margin on
deposit at the U.S. Treasury securities CCA.
    The first condition would be set forth in Note H(a), which would
provide that the debit item could be included in the Rule 15c3-3a
formula to the extent that the customer position margin is in the form
of cash or U.S. Treasury securities and is being used to margin U.S.
Treasury securities positions of the customers of the broker-dealer
that are cleared, settled, and novated at the U.S. Treasury securities
CCA. The objective is to limit the assets underlying the debit item to
the safest and most liquid instruments, given that the debit item would
offset credit items (cash owed to customers).\231\ As discussed above,
the liquidity of the debit items protects the customers whose cash or
securities are used to finance or facilitate customer transactions.
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    \231\ See, e.g., 17 CFR 240.15c3-3(e) (limiting the assets that
can be deposited into the customer reserve account to cash and
qualified securities); 17 CFR 240.15c3-3(a)(6) (defining the term
``qualified security'' to mean a security issued by the United
States or a security in respect of which the principal and interest
are guaranteed by the United States).
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    Proposed Note H(b) to Item 15 would set forth three conditions that
would need to be met to include the amount of customer position margin
required and on deposit at the U.S. Treasury securities CCA as a debit
item. The first condition set forth in Note H(b)(1) would provide that
the customer position margin must consist of cash owed to the customer
of the broker-dealer or U.S. Treasury securities held in custody by the
broker-dealer for the customer that was delivered by the broker-dealer
to meet to meet a margin requirement resulting from that customer's
U.S. Treasury securities positions cleared, settled, and novated at the
U.S. Treasury securities CCA and not for any other customer's or the
broker-dealer's U.S. Treasury securities positions cleared, settled,
and novated at the U.S. Treasury securities CCA.\232\ In sum, to meet
this condition, the broker-dealer would need to: (1) use customer
assets exclusively to meet the customer position margin requirement;
(2) use a particular customer's assets exclusively to meet the amount
of the customer position margin requirement resulting from that
customer's cleared U.S. Treasury securities positions; and (3) have
delivered the customer's assets to the U.S. Treasury securities CCA.
The objective of the first component of this condition--the need to use
customer assets exclusively--is to segregate the customer assets being
used to meet the customer position margin requirement from the broker-
dealer's proprietary assets. Additional conditions would provide that
the U.S. Treasury securities CCA must hold the assets being used to
meet the customer position margin requirement in an account of the
broker-dealer that is segregated from any other account of the broker-
dealer and is identified as being held for the exclusive benefit of the
broker-dealer's customers. The first prong of the condition is designed
to ensure that only customer assets are held in the account.
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    \232\ Cash owed by a broker-dealer to customers is a credit item
that is included in Item 1 to the Rule 15c3-1a formula. Thus, cash
owed to customers that is used to meet a customer position margin
requirement will be accounted for as a credit in Item 1. Further,
when a broker-dealer uses customer margin securities to borrow funds
or execute a securities loan transaction, the firm must put a credit
in the formula. See Items 2 and 3 to Rule 15c3-3a. The credit items
are designed to require the broker-dealer to reserve sufficient
funds to be able to retrieve securities collateralizing the borrowed
funds or that have been loaned. There is not a specific Item in the
Rule 15c3-3a formula to include the credit arising from the broker-
dealer's use of customers' U.S. Treasury securities to meet a
customer position margin requirement. Consequently, the Commission
is proposing to amend Note B to Item 2 of the Rule 15c3-1a formula
to instruct broker-dealers to include as a credit in Item 2 the
market value of customers' U.S. Treasury securities on deposit at a
U.S. Treasury securities CCA that meets the definition of a
``qualified clearing agency'' in Note H.
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    The objective of the second component of this condition--the need
to use a particular customer's assets exclusively to meet the amount of
the customer position margin requirement resulting from that customer's
cleared U.S. Treasury securities positions--is to avoid the use of one
customer's assets to meet another customer's margin requirement. For
example, FICC's Sponsored Member program allows its members to sponsor
a person's (i.e., a Sponsored Member's) U.S. Treasury securities
transactions for clearance and settlement. FICC interacts solely with
the sponsoring member as processing agent for purposes of the day-to-
day satisfaction of the Sponsored Member's obligation to or from FICC,
including the Sponsored Member's cash and securities settlement
obligations. However, FICC calculates a separate margin requirement for
each Sponsored Member's trading activity and the sum of each sponsored
member's margin calculation is the aggregate margin requirement that
must be met by the sponsoring member. Further, this margin is held in
an omnibus account that is separate from the account that holds the
Sponsoring Member's net margin obligation for non-sponsored securities
transactions.\233\ In this scenario, the U.S. Treasury securities CCA's
margin calculations and resulting requirements can be traced to a
specific customer's cleared U.S. Treasury securities positions.
Consequently, the broker-dealer would be able to allocate the amount of
the U.S. Treasury securities CCA's daily customer position margin
requirement attributable to a specific customer. Under this component
of the first condition, the broker-dealer would need to deliver cash or
U.S. Treasury securities belonging to that specific customer to meet
the amount of the U.S. Treasury securities CCA's customer position
margin requirement resulting from that customer's cleared U.S. Treasury
securities positions. This would mitigate the risk to all the broker-
dealer's customers by limiting when their assets can be used to meet
the U.S. Treasury securities CCA's customer position margin
requirement.
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    \233\ See note 207 supra.
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    The objective of the third component of the first condition--that
the broker-dealer had delivered the customer's assets to the U.S.
Treasury securities CCA--is to address the potential that a customer
may use more than one broker-dealer to engage in U.S. Treasury
securities transactions. In this case, two or more broker-dealers may
be subject to customer position margin requirements of the U.S.
Treasury securities CCA resulting from the customer's cleared U.S.
Treasury securities positions. The intent is to prevent a broker-dealer
from including as a debit the amount of customer position margin that
another broker-dealer delivered to the U.S. Treasury securities CCA
with respect to U.S. Treasury securities positions of a

customer of both the broker-dealers. The amount that a given broker-
dealer's debit items can offset its credit items should be limited to
the amount customer position margin it delivered to the U.S. Treasury
securities CCA. Otherwise, the customers of the broker-dealer would be
put at risk for transactions effected by another broker-dealer.
    Proposed Note H(b)(2) to Item 15 would set forth the second
condition for including customer position margin as a debit in the Rule
15c3-3a formula. Under this condition, the customer position margin
would need to treated in accordance with rules of the U.S. Treasury
securities CCA designed to protect and segregate the customer position
margin and the U.S. Treasury securities CCA and broker-dealer would
need to be in compliance with those rules (as applicable).
    Proposed Note H(b)(2)(i) to Item 15 would provide that the customer
position margin is treated in accordance with rules requiring the
qualified U.S. Treasury securities CCA to calculate a separate margin
amount for each customer of the broker-dealer and the broker-dealer to
deliver that amount of margin for each customer on a gross basis. As
discussed above, a component of the condition in proposed Note H(b)(1)
is that the broker-dealer use a particular customer's assets
exclusively to meet the amount of the customer position margin
requirement resulting from that customer's cleared U.S. Treasury
securities positions. This condition in proposed Note H(b)(2) is
designed to facilitate that condition in proposed Note H(b)(1) by
requiring that the U.S. Treasury securities CCA has rules to perform
separate customer position margin calculations for each customer of the
broker-dealer. This would allow the broker-dealer to allocate the
amount of the customer position margin requirement attributable to each
of its customers. In addition, the condition would provide that the
U.S. Treasury securities CCA has rules requiring the broker-dealer to