[Federal Register Volume 88, Number 144 (Friday, July 28, 2023)]
[Notices]
[Pages 48926-48937]
[FR Doc No: 2023-15981]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97969; File No. SR-FICC-2023-010]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Amend and Restate the
Cross-Margining Agreement between FICC and CM

July 24, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 17, 2023, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared primarily by FICC. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change consists of a proposed Amended and
Restated Cross-Margining Agreement (the ``Restated Agreement'') between
FICC and the Chicago Mercantile Exchange

Inc. (``CME,'' collectively FICC and CME are referred to herein as the
``Clearing Organizations'' or ``Parties''). The proposed Restated
Agreement would replace the current Cross-Margining Agreement between
the Parties (the ``Existing Agreement'') \3\ in its entirety and would
be incorporated into the FICC Government Securities Division (``GSD'')
Rulebook (``GSD Rules''). The proposed rule change does not require any
changes to the text of the GSD Rules.\4\ The proposed Restated
Agreement was attached to this filing as Exhibit 5[sic].\5\
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    \3\ See Securities Exchange Act Release No. 49003 (Dec. 29,
2003), 69 FR 712 (Jan. 6, 2004) (SR-FICC-2003-10). For subsequent
amendments to the Existing Agreement, see Securities Exchange Act
Release Nos. 50790 (Dec. 3, 2004), 69 FR 71456 (Dec. 9, 2004) (SR-
FICC-2004-16); 51178 (Feb. 9, 2005), 70 FR 7982 (Feb. 16, 2005) (SR-
FICC-2005-03); 55217 (Jan. 31, 2007), 72 FR 5774 (Feb. 7, 2007) (SR-
FICC-2006-16); 59498 (Mar. 4, 2009), 74 FR 10321 (Mar. 10, 2009)
(SR-FICC-2009-01); 63986 (Feb. 28, 2011), 76 FR 12144 (Mar. 4, 2011)
(SR-FICC-2010-09); and 72396 (June 16, 2014), 79 FR 35400 (June 20,
2014) (SR-FICC-2014-04).
    \4\ The Existing Agreement is incorporated in the GSD Rules
available at www.dtcc.com/legal/rules-and-procedures.aspx. Unless
otherwise specified, capitalized terms not defined herein shall have
the meanings ascribed to them in the GSD Rules, which includes the
Existing Agreement.
    \5\ Proposed Amended and Restated Cross-Margining Agreement by
Fixed Income Clearing Corporation and Chicago Mercantile Exchange
Inc.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

1. Purpose
Executive Summary
    Generally, the purpose of a cross-margining arrangement between two
clearing organizations is to recognize the offsetting value of
positions maintained by a member (or a member and its affiliate) at the
two clearing organizations for margin purposes. Any resulting margin
reductions create capital efficiencies for common members.
    With regard to its cross-margining arrangement with CME, FICC is
proposing to replace the Existing Agreement with the Restated
Agreement, which would be incorporated into the GSD Rules. The purpose
of the proposed Restated Agreement is to expand the scope and
efficiency of the margin offsets that are available to clearing members
of the two Clearing Organizations under the Existing Agreement, thus
reducing their margin costs and allowing for more efficient capital
usage by members. It would also streamline the default management and
loss sharing processes by making clear that a joint liquidation would
be the preferred method used by the Clearing Organizations in the event
of a member default.
    The key aspects of the proposed Restated Agreement are as follows
(and are described in more detail below):
     Member participation: Participation in the cross-margining
arrangement would continue to be voluntary and the criteria for
participation under the proposed Restated Agreement would remain the
same as it is under the Existing Agreement.\6\
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    \6\ Currently cross-margining is only available for house
(proprietary accounts) of CME clearing members that are also GSD
Netting Members (either directly or through an affiliate).
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     Eligible products: Additional CME products would become
eligible under the proposed Restated Agreement,\7\ allowing for greater
potential margin offsets.
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    \7\ CME will add products to the proposed Restated Agreement as
discussed in more detail below.
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     Calculation of margin and margin reductions: The proposed
Restated Agreement, would simplify the overall margin calculation
process by eliminating the need for application of offset classes of
securities and conversion of CME Eligible Products into equivalent GSD
Treasury security products.\8\ As a result, FICC believes, based on
portfolio specific construction and market conditions, that these
changes should generate margin savings in excess of those under the
Existing Agreement. For example, based on a study comparing margin
savings generated under the Existing Agreement and under the proposed
Restated Agreement over the December 1, 2021 to November 30, 2022
period,\9\ margin savings went from a range of 0.1% to 17.4% under the
Existing Agreement, to a range of 0% to 36.6% under the proposed
Restated Agreement.\10\
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    \8\ References herein to ``offset classes'' refers to the
grouping of securities by maturity for purposes of comparing those
securities to CME Eligible Products whose price volatility is
sufficiently correlated to determine whether long and short
positions could be offset for purposes of determining margin
requirements. Moving to security-level offsets would simplify the
margin calculation process by removing the need to define and work
with categories of securities.
    \9\ The study covered fifteen current Cross-Margining
Participants' actual eligible FICC portfolios and simulated CME
futures portfolios. FICC notes that margin savings will vary based
on portfolio specific construction and market conditions.
    \10\ FICC notes, however, that cross-margining-related margin
requirements account for only nineteen (19) percent of total margin
requirements on average. FICC provided its analysis of the potential
effects on margin requirements to the Commission in a confidential
Exhibit 3 to File No. SR-FICC-2023-010. FICC provided responses to
specific questions raised by Commission staff with regard to the
conceptual review of margin reduction mechanics (e.g., the
applicable margin model, impact of proposed changes), the potential
effect on other margin add-on charges, and how FICC intends to model
Treasury futures. FICC also provided information pertaining to
minimum and maximum margin reduction thresholds, potential effects
of the proposed changes to margin calculations, and model
backtesting.
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     Default management: Under the Existing Agreement, there is
no express language requiring the Parties to attempt to conduct a joint
liquidation. Whereas the proposed Restated Agreement would make clear
that a joint liquidation is the preferred means of liquidation of
cross-margining positions in the event of a member default. A joint
liquidation is optimal because it maximizes the efficiency and
effectiveness of the liquidation process by enabling each Clearing
Organization to recognize reduced risk by offsetting risk positions
together. The proposed Restated Agreement would also provide for the
possible exchange of variation margin during the course of a joint
liquidation. The exchange of variation margin during the course of a
joint liquidation would be an improvement because instead of using
other liquidity resources, it would enable a Party that has a mark-to-
market loss arising out of cross-margining positions to use the
variation margin gains on offsetting cross-margining positions held by
the other Clearing Organization. The Existing Agreement has no such
provisions and they would be added to improve the efficiency of the
default management process.
    FICC believes that the proposed expansion of the scope of CME
Eligible Products (as defined below) available for cross-margining, the
expansion of the scope and efficiency of the margin offsets that would
be available to Cross-Margining Participants,\11\ and the

improvement in the efficiency and effectiveness of the default
management process would enhance the cross-margining arrangement
between FICC and CME. FICC believes that these enhancements would
encourage greater utilization of centralized clearing, thereby
facilitating systemic risk reduction.
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    \11\ Pursuant to the proposed Restated Agreement, ``Cross-
Margining Participant'' means a Joint Clearing Member that has
become, or a Clearing Member that is part of a pair of affiliated
Clearing Members each of which has become, a participant in the
cross-margining arrangement between FICC and CME established
pursuant to the proposed Restated Agreement. In the latter case, the
term ``Cross-Margining Participant'' shall, where the context
requires, refer collectively to the pair of Cross-Margining
Affiliates.
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Background
    The Existing Agreement establishes a cross-margining arrangement
\12\ that allows FICC to consider the net risk of a participant's
related eligible positions at FICC and CME when setting margin
requirements of such positions.\13\
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    \12\ Cross-margining arrangements are addressed in GSD Rule 43,
supra note 4.
    \13\ See Section 5 of the Existing Agreement, ``Calculation of
the Cross-Margining Reduction,'' supra note 4.
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    FICC proposes to enter into the proposed Restated Agreement which
would, among other things, (i) generally expand the list of CME
Eligible Products \14\ available for cross-margining; (ii) remove
certain existing appendices to the Existing Agreement that describe
operational calculations and margin examples, and instead establish
procedures to be included in a separate service level agreement,
including certain other processes covering default management and
changes to the lists of CME Eligible Products and FICC Eligible
Products; (iii) revise and expand the scope and efficiency for
calculating the margin reduction that would apply to a Cross-Margining
Participant's Eligible Positions, including requiring more frequent
exchange of Eligible Position information between CME and FICC that is
used to collateralize risk exposures; (iv) add provisions describing
default management in terms of (x) what steps would be taken in the
event of a joint or separate liquidation of Defaulting Member's
Eligible Positions, and (y) the exchange between the Parties of
``Variation Margin'' during the course of a joint liquidation (as
defined in the proposed Restated Agreement) and loss sharing; and (v)
revise certain other provisions that relate to the Clearing
Organizations' contractual obligations to one another.\15\
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    \14\ See Exhibit A of the proposed Restated Agreement, ``CME
Eligible Products.'' The CME Eligible Products are the following:
CBT 26 2-year T-Note Futures, CBT 3YR 3-year T-Notes Futures, CBT 25
5-Year T-Note Futures, CBT 21 10-year T-Note Futures, CBT 17 U.S.
Treasury Bond Futures, CBT TN Ultra Ten-Year T-Note Futures, CBT UBE
Ultra U.S. Treasury Bond Futures, CBT TWE 20-Year U.S. Treasury Bond
Futures, CBT 41 30 Day Federal Funds Futures, CME ED Eurodollar
Futures, CME 1-Month Eurodollar Futures, CME SR1 One-Month SOFR
Futures, CME SR3 Three-Month SOFR Futures. Id. Of the foregoing, the
following CME products would be newly eligible under the Restated
agreement: CBT 3YR 3-year T-Notes Futures, CBT TN Ultra Ten-Year T-
Note Futures, CBT UBE Ultra U.S. Treasury Bond Futures, CBT TWE 20-
Year U.S. Treasury Bond Futures, CBT 41 30 Day Federal Funds
Futures, CME SR1 One-Month SOFR Futures, and CME SR3 Three-Month
SOFR Futures. As noted above, certain Agency futures have not been
used in the current arrangement and will not be carried into the
proposed Restated Agreement. Specifically, the following CME
products would no longer be eligible: the ``Five Year Agency'' and
``Ten Year Agency'' Futures identified in Appendix B of the Existing
Agreement.
    \15\ These provisions include, but are not limited to, the
confidentiality provisions and removing the arbitration provision.
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Key Terms of the Existing Agreement
    For purposes of additional background, the following is an overview
of the key terms of the Existing Agreement.
1. Daily Margin Calculation
    Under the Existing Agreement, the cross-margining calculation is
not based upon FICC's VaR model. Rather, FICC and CME each separately
hold and manage its own positions and collateral and independently
determine the amount of margin that it would make available for cross-
margining (after they each first conduct their own internal offsets).
Once each Business Day, FICC and CME exchange files with respect to
their members' positions that are eligible for cross-margining. FICC
computes the amount by which a member's margin requirement can be
reduced, by comparing that member's Eligible Positions and related
margin requirements at GSD against those at CME. FICC and CME may then
each reduce the amount of collateral that they collect to reflect the
offsets between the Cross-Margining Participant's positions at FICC and
its (or its Affiliate's) positions at CME.\16\ Currently, the
calculation of the offsets each Clearing Organization applies relies
upon a methodology for the conversion of CME Eligible Products into
equivalent GSD Treasury security products, as well as the use of
minimum margin factors to measure interest rate exposure.
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    \16\ See Section 5 of the Existing Agreement, ``Calculation of
the Cross-Margining Reduction,'' supra note 4.
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    Additionally, the Clearing Organizations limit the potential margin
reductions from cross-margining. Specifically, they apply a
Disallowance Factor to a given CME and GSD Offset Class (an ``Offset
Class'' being a grouping of securities by maturity).\17\ Based on these
Disallowance Factors, margin offsets are determined for each Offset
Class. The sum of these margin offsets provides the member's Cross-
Margining Reduction) at CME and at GSD.\18\
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    \17\ FICC and CME agree on the applicable Disallowance Factors
from time to time. Examples of Disallowance Factor tables are
included in Exhibit B of the Existing Agreement.
    \18\ Pursuant to the Existing Agreement, FICC and CME
unilaterally have the right to (1) not reduce a Cross-Margining
Participant's margin requirement by the Cross-Margining Reduction or
(2) reduce it by less than the Cross-Margining Reduction. However,
the Clearing Organizations may not reduce a Cross-Margining
Participant's margin requirement by more than the Cross-Margining
Reduction. See Section 5 of the Existing Agreement, ``Calculation of
the Cross-Margining Reduction,'' supra note 4.
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2. The Cross-Margining Guaranty and Reimbursement Obligation
    As would also be the case under the proposed Restated Agreement,
under the Existing Agreement, CME agrees to guaranty certain
performance obligations of a Cross-Margining Participant to FICC, and
FICC agrees to guaranty certain performance obligations of a Cross-
Margining Participant to CME. These cross-margining Guaranties \19\ are
necessary to facilitate the Cross-Margining Arrangement and represent
contractual commitments that each Clearing Organization has to the
other.\20\ Specifically, CME and FICC guarantee the Cross-Margining
Participant's performance of its obligations to the other Clearing
Corporation up to the amount of the member's Cross-Margining
Reduction.\21\ There is also a corresponding obligation of the Cross-
Margining Participant to reimburse a Clearing Organization for any
amounts paid under these Guaranties, which obligation is collateralized
by the positions and margin of such Cross-Margining Participant held by
the guarantor (CME or FICC, as applicable).

The provisions in the Existing Agreement covering the cross-margining
Guaranties and the Cross-Margining Participant's Reimbursement
Obligation would remain the same under the proposed Restated
Agreement.\22\
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    \19\ Pursuant to the Existing Agreement, ``Guaranty'' is defined
as ``the obligation of FICC to CME, or of CME to FICC, as in effect
at a particular time with respect to a particular Cross-Margining
Participant as set forth in Sections 8A and 8B of this Agreement.
The term ``Guaranties'' refers to both the Guaranty of CME to FICC
and the Guaranty of FICC to CME [. . .].'' See Section 1 of the
Existing Agreement, ``Definitions,'' supra note 4.
    \20\ See Section 8A, ``Guaranty of FICC to CME,'' and Section 8B
``Guaranty of CME to FICC,'' of the Existing Agreement.
    \21\ Pursuant to the Existing Agreement, ``Cross-Margining
Reduction'' is defined as ``the maximum amount by which a Cross-
Margining Participant's margin requirement at one Clearing
Organization may be reduced (irrespective of the amount by which it
is actually reduced) as calculated in accordance with Section 5 of
this Agreement. The Cross-Margining Reduction at each Clearing
Organization is equal to the sum of the Margin Offsets at that
Clearing Organization. There will always be a specified Cross-
Margining Reduction that one Clearing Organization could be required
to pay the other Clearing Organization. See Section 1 of the
Existing Agreement, ``Definitions,'' supra note 4.
    \22\ The ``Reimbursement Obligation'' is defined under the
Existing Agreement as ``the obligation, as set forth in Section 7(h)
of this Agreement, of a Cross-Margining Participant to a Clearing
Organization that is obligated to make a payment on behalf of such
Cross-Margining Participant or its Cross-Margining Affiliate
pursuant to a Guaranty.''
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3. Member Default Event
    Under the Existing Agreement, there is no express language
requiring the CME and FICC to conduct a joint liquidation at each
Clearing Organization. However, there is language that provides that
unless one of the Parties has elected to not liquidate, FICC and CME
are required to use reasonable efforts to coordinate the liquidation of
the positions covered by the Cross-Margining Arrangement so that
offsetting or hedged positions can be closed out simultaneously.\23\
There are also provisions covering the sharing of losses by CME and
FICC in accordance with the terms of the cross-margining
Guaranties.\24\ The allocation of losses depends upon whether, as to
each Party, the liquidation results in a Cross Margin Gain or Cross
Margin Loss. A narrative description of the loss sharing process is set
forth in Appendix I of the Existing Agreement titled, ``Loss Sharing
Process.'' Additionally, after any payments are made pursuant to the
Guaranties and loss sharing arrangement described above, if one of the
Clearing Organizations computes an Aggregate Net Surplus, and the other
an Aggregate Net Loss, the Existing Agreement includes an obligation
for the Clearing Organization with the surplus to make a ``Maximization
Payment'' \25\ to the other Clearing Organization. There is also an
associated ``Maximization Reimbursement Obligation'' \26\ of the
Defaulting Member to the Clearing Organization that is obligated to
make a Maximization Payment. This provision enables excess collateral
of a Defaulting Member to initially remain with the Clearing
Organizations, if needed, to cover losses.
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    \23\ Section 7(a) of the Existing Agreement, ``Suspension and
Liquidation of a Cross Margining Participant,'' states in pertinent
part that, ``Except to the extent that one Clearing Organization has
determined unilaterally not to liquidate, FICC and CME shall use
reasonable efforts to coordinate the liquidation of the Used
Positions so that offsetting or hedged positions can be closed out
simultaneously.''
    \24\ See Sections 8A, ``Guaranty of FICC to CME'' and 8B,
``Guaranty of CME to FICC,'' of the Existing Agreement, supra note
4.
    \25\ Pursuant to the Existing Agreement, ``Maximization
Payment'' means the additional payment(s), if any, that are required
to be made by FICC to CME, or vice versa, pursuant to Section 8C of
this Agreement after payments are made under the Guaranty. See
Section 8C of the Existing Agreement, ``Maximization Payment,''
supra note 4.
    \26\ Pursuant to the Existing Agreement, ``Maximization
Reimbursement Obligation'' means the obligation, as set forth in
Section 8C(d), of a Cross-Margining Participant to a Clearing
Organization that is obligated to make a Maximization Payment on
behalf of such Cross-Margining Participant or its Cross-Margining
Affiliate pursuant to a Maximization Payment Guaranty. Id.
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A. The Proposed Restated Agreement
Overview
    As noted above, FICC proposes to enter into the proposed Restated
Agreement with CME. The proposed Restated Agreement is primarily
designed to, among other things, (i) expand the scope of CME Eligible
Products, (ii) expand the scope and efficiency of the margin offsets
that are available to Cross-Margining Participants, thus allowing for
more efficient capital usage; (iii) improve the efficiency and
effectiveness of the default management and loss sharing process; and
(iv) as a result of such enhancements, further encourage greater
utilization of centralized clearing, thereby facilitating systemic risk
reduction. The material provisions of the proposed Restated Agreement
are described in detail below.
Key Elements of the Proposed Restated Agreement
Proposal To Expand the List of CME Eligible Products
    Pursuant to the proposed Restated Agreement, the list of CME
products eligible for cross-margining would be amended to include an
expanded list of interest rate futures that are cleared by CME.\27\
Under the Existing Agreement, the interest rate futures and options
contracts eligible for cross-margining are Eurodollar contracts listed
on CME and certain U.S. Treasury contracts listed on the Chicago Board
of Trade Incorporated (``CBOT'').\28\ FICC understands that the purpose
of the change in CME Eligible Products is to provide Cross-Margining
Participants cross-margin benefits that better align with today's CME
Interest Rates futures market structure. The original list of CME's
product set does not include several CME Interest Rate futures
contracts which have now become benchmark products for hedging in the
broader U.S. Treasury Markets, for example the CBT TN Ultra Ten-Year T-
Note Futures and the CBT UBE Ultra U.S. Treasury Bond Futures. The list
would be expanded to include additional U.S. Treasury futures, which
have been added to CME's suite of U.S. Treasury products since the
Existing Agreement was established, and SOFR futures (which CME
launched as a complement to and eventual replacement for Eurodollar
futures). The list of FICC Eligible Products \29\ would be comprised of
U.S. Treasury securities which refers to Treasury notes and bonds, and
would be set forth on Exhibit B to the proposed Restated Agreement,
titled ``FICC Eligible Products.''
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    \27\ See footnote 12 and Exhibit A (CME Eligible Products) of
the proposed Restated Agreement.
    \28\ Supra note 4.
    \29\ See Exhibit B (FICC Eligible Products) of the proposed
Restated Agreement. In the Existing Agreement, certain Agencies are
also included, but these products have been rarely used in the
current arrangement and will not be carried into the proposed
Restated Agreement. Specifically, the following FICC products will
no longer be eligible for cross-margining with CME products:
Treasury bills (maturity of one year or less) and Treasury
Inflation-Protected Securities (TIPS).
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    FICC and CME would each establish on their books and records a
``Cross-Margining Account'' \30\ for each participating member that
would identify for their respective member the transactions, positions
and margin that are subject to the proposed Restated Agreement.\31\
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    \30\ Pursuant to the proposed Restated Agreement, ``Cross-
Margining Account'' means with respect to a Clearing Member of FICC,
the transactions, positions and margin maintained in the Account (as
defined in the GSD Rules) at FICC that are identified in FICC's
books and records as being subject to the proposed Restated
Agreement, and, with respect to a Clearing Member of CME, means a
cross-margining account that is carried on the books of CME for such
Clearing Member that is limited to the transactions, positions and
margin of the Proprietary Accounts of such Clearing Member that are
subject to the proposed Restated Agreement.
    \31\ See Section 1, ``Definitions.'' of the proposed Restated
Agreement.
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Proposal To Establish a Separate Service Level Agreement
    The proposed Restated Agreement also would include provisions
intended to improve the procedures, information sharing, and documented
steps covering the default management process between the Parties.
Specifically, under the proposed Restated Agreement, Section 6(a)
(Daily Procedures for Exchange of Portfolio Cross-Margining Data), FICC
and CME would agree to put in place a separate service level agreement
between the Parties (``SLA''), which would include specified
timeframes, to exchange on each day on which trading in Eligible
Products is conducted and on which FICC and CME both conduct money
settlements (referred to as a ``Business Day''), such information as
may reasonably be required in order to value the positions in the
Cross-Margining Accounts and to

calculate the Cross-Margin Requirement for each Cross-Margining
Participant.\32\ The SLA would also include operational processes
consistent with the default management provisions set forth in the
proposed Restated Agreement. The Parties would update the SLA as their
operational needs evolve over time.
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    \32\ FICC provided the SLA in a confidential Exhibit 3 to File
No. SR-FICC-2023-010.
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    Further, in order to streamline and ensure coordination between the
Clearing Organizations regarding any changes to the products eligible
for cross-margining, the SLA would include the process and criteria
under which FICC or CME may make a request to the other Clearing
Organization to modify its list of CME Eligible Products or FICC
Eligible Products, as applicable. Such process would include that only
those products that do not require a change to FICC's or CME's margin
model would be permitted to be subject to this process,\33\ and that
any modifications would require the mutual written consent of both
Parties.
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    \33\ Proposed changes that require a margin model change would
require an amendment to the proposed Restated Agreement and
regulatory review and approval, as applicable.
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    The SLA would replace certain appendices \34\ to the Existing
Agreement, which would no longer be applicable under the terms of the
proposed Restated Agreement. Operational processes and related
information would instead be incorporated into the SLA, which would
reflect the process changes necessitated by the proposed changes to the
calculation of the cross-margin requirements and loss sharing
arrangements under the proposed Restated Agreement (described below).
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    \34\ The specific Appendices to be removed from the Existing
Agreement in accordance with these proposed changes are: Appendix B
(Example of Disallowance Factor Schedule Applicable to CME Eligible
Products and FICC Eligible Products); Appendix C1 (CME Calculation
Process to Convert Eurodollar Futures and Options into Treasury Cash
Equivalents and to Determine the Applicable CME Offset Classes);
Appendix C2 (Conversion of Futures Contracts into Treasury
Equivalents); Appendix F (Methodology for Allocation of Margin Based
on Order of Increasing Disallowances); Appendix G (Computation of
Cross-Margin Reduction); Appendix H (Data Elements to Be Provided by
CME and Returned by FICC); Appendix I (Loss Sharing Process);
Appendix J (Examples of Loss Sharing Process); and Appendix K
(Timing of the Effectiveness of the Base Amount of the Guaranty).
See Existing Agreement, supra note 4.
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Proposed Changes to the Calculation of Cross-Margin Requirements
    The proposed Restated Agreement would adopt a different methodology
applicable to the daily calculation of a Cross-Margining Participant's
Cross-Margin Requirements. The purpose of the proposed changes is to
expand the scope and efficiency of the margin offsets that are
available to clearing members of GSD and CME under the Existing
Agreement, thus reducing their margin costs and allowing for more
efficient capital usage. This is because by including new Eligible
Products, such as Ultras and 20-Year Treasury Futures, CME and FICC are
able to reduce the risk exposure at more points of the interest rate
curve. The greater margin efficiency is realized by using the security
level sensitivity to calculate the VaR charge, instead of what is done
today, which is to use the net market value of the Eligible Products in
a similar maturity bucket. The proposed new methodology, which is based
on offsetting Eligible Positions at FICC and CME, would also simplify
the overall margin calculation process by eliminating the need to group
securities by maturity and the conversion of CME Eligible Products into
equivalent GSD Treasury security products to facilitate such
grouping.\35\
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    \35\ Grouping securities by maturity along with the conversion
of products may, in some cases, previously have resulted in
overestimating the margin credit that should be provided to a Cross-
Margining Participant because such grouping and conversion of
products is less precise than measuring risk at the individual
security level. However, such overestimation of margin credit is no
longer an issue under the Existing Agreement, as it has been
previously addressed by FICC through a process of daily surveillance
in which any instances of any excess margin credits are identified
and remediated, prior to submission to the Cross-Margining
Participant of their margin reduction amount. FICC provided its
assessment of the excess margin credit issue as well as a
description of how it remediated the issue in a confidential Exhibit
3 to File No. SR-FICC-2023-010.
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    Under the Existing Agreement in order to determine the amount of
margin it collects, each Clearing Organization separately manages its
own positions and collateral, and independently determines the
``Residual Margin Amount'' that remains after each Clearing
Organization conducts its own internal offsets.\36\ This process
requires each Clearing Organization to apply Offset Classes and convert
its Eligible Products into equivalent Eligible Products of the other
Clearing Organization. The proposed Restated Agreement, in contrast,
would provide that FICC and CME each treat a participant's relevant
products as a single portfolio (the ``Combined Portfolio'').\37\
Treatment as a Combined Portfolio provides the ability for the Clearing
Organizations to assess risk at a security level and eliminates the
need to use separate margin calculations and apply offset classes and
conversions of Eligible Products.
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    \36\ See Section 5 of the Existing Agreement, ``Calculation of
the Cross-Margining Reduction,'' supra note 4.
    \37\ See Section 4(a) of the proposed Restated Agreement
(Calculation of Cross-Margining Requirements).
---------------------------------------------------------------------------

    The proposed Restated Agreement would provide that FICC and CME
would independently determine the percentage of margin savings that
would be derived for a Cross-Margining Account \38\ as if it was a
Combined Portfolio. First, pursuant to Section 4(a) of the proposed
Restated Agreement, each Clearing Organization would calculate the
difference between the sum of the (x) ``Stand-Alone Margin
Requirements'' \39\ for the CME Eligible Products and FICC Eligible
Products, and (y) the Combined Portfolio of CME Eligible Products and
FICC Eligible Products. Based on the above, each Clearing Organization
would determine the percentage of margin savings that would be derived
by it by margining the Combined Portfolio.
---------------------------------------------------------------------------

    \38\ Id. Also, FICC would utilize the same Value-at Risk
(``VaR'') calculation method for the FICC Eligible Positions (see
GSD Rule 4, supra note 4) and the CME Eligible Position (i.e., the
same VaR engine for the cash positions and the futures positions).
    \39\ Pursuant to the proposed Restated Agreement, ``Stand-Alone
Margin Requirement'' means, as to each Clearing Organization, the
margin requirement that such Clearing Organization would calculate
with respect to a Cross-Margining Account it carries as if
calculated by such Clearing Organization without regard to this
Agreement or another cross-margining agreement.'' FICC would
calculate this requirement using a its VaR methodology, applying it
also to the standalone CME portfolio, and the Combined Portfolio.
---------------------------------------------------------------------------

    Second, the Clearing Organizations would compare their respective
margin savings percentages with one another, and, if the lesser of such
margin savings percentage exceeds the minimum margin offset threshold
\40\ agreed by the Clearing Organizations, each Clearing Organization
would reduce the amount of margin required to be deposited by a Cross-
Margining Participant by the lower of such margin savings percentages
(referred to as the Cross-Margining Participant's ``Margin
Reduction''). If the respective margin savings percentages of both
Clearing Organizations are less than the agreed

upon margin offset threshold, no Margin Reduction would be applied.\41\
---------------------------------------------------------------------------

    \40\ The Clearing Organizations would set the initial margin
offset threshold at 1% (which may be subject to change) to prevent
any negatively correlated portfolios and/or portfolios with little
to no correlation to receive cross-margin benefit, which requires
the operational coordination between the two Clearing Organizations
in the event of Member default, and they would reserve the right to
amend the threshold from time to time. Changes to the minimum margin
offset threshold would be subject the requirements of the Clearing
Agency Model Risk Management Framework, which addresses review of
margin methodologies, such as the model that would be used for the
proposed Restated Agreement.
    \41\ Supra note 36.
---------------------------------------------------------------------------

    Lastly, the Parties would agree that the Cross-Margin Requirement
with respect to a Cross-Margining Participant may not be changed
without the consent of both Clearing Organizations. Further, CME and
FICC would agree to cause CME Eligible Products and FICC Eligible
Products, respectively, to be cross-margined solely pursuant to the
proposed Restated Agreement, and neither CME nor FICC would permit such
Eligible Products to be subject to any other cross-margining
arrangement.\42\ This feature will prevent underlying Eligible Products
from being double-counted to reduce margin in another cross-margining
program or account, and ensure that each Clearing Organization will
have the appropriate amount of margin to satisfy obligations if a
default occurs.
---------------------------------------------------------------------------

    \42\ See Section 4(b) of the proposed Restated Agreement
(Calculation of Cross-Margining Requirements).
---------------------------------------------------------------------------

Proposed Changes Related to Default Management
1. The Liquidation Process--Overview
    Like the Existing Agreement, the proposed Restated Agreement would
provide that either FICC or CME may at any time exercise any rights
under its Rules to terminate, suspend or otherwise cease to act for or
limit the activities of a Cross-Margining Participant (a ``Defaulting
Member''). Upon such event (a ``Default Event''), the Clearing
Organization that has taken the foregoing actions (referred to as the
``Liquidating CO'') would be required to immediately notify the other
Clearing Organization (referred to for purposes of this provision of
the proposed Restated Agreement as the ``other Clearing Organization'')
of the actions it has taken.\43\ Under the Existing Agreement, absent
certain exceptions, both Clearing Organizations are required to
promptly and prudently liquidate Eligible Positions of the Defaulting
Member. However, in contrast to the Existing Agreement, the proposed
Restated Agreement would provide a different approach to the
liquidation process by delineating a sequence of coordinated steps the
Clearing Organizations are required to take depending upon whether or
not the other Clearing Organization elects to treat the Cross-Margining
Participant as a Defaulting Member under its Rules. The objective of
this proposed new approach is to improve the efficiency and
effectiveness of the default management process and lead to greater
coordination between the Clearing Organizations.
---------------------------------------------------------------------------

    \43\ See Section 7(a) of the proposed Restated Agreement
(Suspension and Liquidation of Cross-Margining Participant).
---------------------------------------------------------------------------

One Clearing Organization Elects To Treat the Member as a Defaulting
Member and the Other Clearing Organization Does Not
    The proposed Restated Agreement includes provisions to cover the
scenario where one Clearing Organization (the ``Liquidating CO'')
elects to treat the Cross-Margining Participant as a Defaulting Member,
and the other Clearing Organization (the Non-Liquidating CO'') does
not.\44\ Generally, the Non-Liquidating CO would provide the
Liquidating CO with cash to cover the margin reduction provided under
the proposed Restated Agreement. The purpose of such cash payment is to
align the Defaulting Member's margin resources with its exposures at
the Liquidating CO.
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

    Specifically, the Non-Liquidating CO would be obligated to require
the Defaulting Member to pay the Non-Liquidating CO in immediately
available funds the sum of (x) its Margin Reduction at the Liquidating
CO, and (y) its Margin Reduction at the Non-Liquidating CO, within one
hour of demand. If the Non-Liquidating CO receives this payment in full
from the Defaulting Member or otherwise, such as from the Non-
Liquidating CO, within such timeframe, the Non-Liquidating CO would be
required, within one hour of such receipt, to pay the Liquidating CO in
immediately available funds the Defaulting Member's Margin Reduction at
the Liquidating CO. After the Non-Liquidating CO makes such payment in
full, then, it would have no further obligations to the Liquidating CO
with respect to the Default Event. If the Non-Liquidating CO does not
receive this payment in full from the Defaulting Member or otherwise,
within one hour of such receipt or other agreed upon timeframe, then
the Non-Liquidating CO would cease to act for the Defaulting Member,
and the provisions of the proposed Restated Agreement pertaining to the
scenario where both Clearing Organizations treat the Member as a
Defaulting Member (discussed immediately below) would apply.\45\
---------------------------------------------------------------------------

    \45\ Id.
---------------------------------------------------------------------------

3. Both Clearing Organizations Elect To Treat the Member as a
Defaulting Member
    If both Clearing Organizations determine to treat the Cross-
Margining Participant as a Defaulting Member, there are three possible
liquidation routes under the proposed Restated Agreement the Clearing
Organizations can take regarding a Defaulting Member. The following
liquidation alternatives would be determined after evaluating the
portfolio exposure, resources, hedging cost and approved through DTCC's
default management governance process.
    First, the Clearing Organizations would attempt in good faith to
conduct a joint liquidation in which the Parties jointly transfer,
liquidate or close out the Eligible Positions in the Cross-Margining
Accounts carried for the Defaulting Member (the ``Relevant
Positions'').\46\
---------------------------------------------------------------------------

    \46\ See Section 7(b)(i) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Second, in the event a Clearing Organization determines that
jointly transferring, liquidating or closing out the Relevant Positions
is not feasible or advisable, the proposed Restated Agreement provides
that either Clearing Organization may offer to buy-out the Relevant
Positions, and any remaining collateral relating thereto, at the last
settlement price for such positions immediately prior to the time such
offer is made.\47\
---------------------------------------------------------------------------

    \47\ See Section 7(b)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Finally, if a Clearing Organization determines that it is not
advisable or feasible to resolve the Default Event pursuant to the
first or second options above, the proposed Restated Agreement provides
that it shall so notify the other Clearing Organization. In such event,
each Clearing Organization would promptly transfer, liquidate or
otherwise close out the Eligible Positions in the Cross-Margining
Account carried for the Defaulting Member at that Clearing
Organization.\48\
---------------------------------------------------------------------------

    \48\ See Section 7(b)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Each of the foregoing liquidation routes is described in detail
below.
a. Joint Liquidation
    A joint liquidation is optimal because it maximizes the efficiency
and effectiveness of the liquidation process by enabling each Clearing
Organization to recognize reduced risk by liquidating offsetting risk
positions together. To the extent there is a joint liquidation, the
proposed Restated Agreement provides for an exchange of variation
margin during the course of the liquidation and loss sharing following
liquidation. The exchange of variation margin during the liquidation
process would be designed to address scenarios in which either CME or
FICC has a payment obligation arising out of cross-margin positions

that could be covered by the variation margin gains on offsetting
cross-margin positions held by the other Clearing Organization. The
Existing Agreement has no such provisions, and they would be added to
the proposed Restated Agreement to improve the efficiency of the
default management process. Following liquidation, payments made as
part of a cross-guaranty between FICC and CME would be designed to
minimize total credit losses across the Clearing Organizations related
to cross-margin positions. The Existing Agreement also includes a
cross-guaranty and loss-sharing provisions but is determined based upon
a significantly more complex formula for calculating closeout gains and
losses post-liquidation than are included in the proposed Restated
Agreement.
    VM Margin: The exchange of Variation Margin \49\ during the joint
liquidation process under certain circumstances would be as follows:
---------------------------------------------------------------------------

    \49\ The proposed Restated Agreement defines ``Variation
Margin'' to mean, with respect to the Cross-Margining Account of a
Defaulting Member, the amounts owed to or by the Defaulting Member,
as applicable, by or to a Clearing Organization due to the mark-to-
market movement arising from or related to the positions in the
Defaulting Member's Cross-Margining Account at CME or the Defaulting
Member's Cross-Margin Positions at FICC from the time immediately
prior to a Default Event until the time the liquidation of a
Defaulting Member is complete for both CME and FICC. See Section 1
(Definitions) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain
\50\ and an Other VM Gain \51\ with respect to a Defaulting Member
(such Clearing Organization being the ``VM Payor''), and the other
Clearing Organization has a Cross-Margin VM Loss with respect to a
Defaulting Member (such Clearing Organization being the ``VM
Receiver''), the proposed Restated Agreement provides that the VM Payor
would make a payment to the VM Receiver in the amount of the VM
Receiver's Cross-Margin VM Loss, but not to exceed the VM Payor's
Cross-Margin VM Gain. The proposed Restated Agreement provides,
however, that the VM Payor will not be required to make such payment to
the extent it reasonably determines that the liquidation of the
Defaulting Member will result in a loss to it following liquidation
\52\ or that the VM Receiver will be limited by statute, court order or
other applicable law from making the payment.\53\
---------------------------------------------------------------------------

    \50\ The proposed Restated Agreement defines ``Cross-Margin VM
Gain'' or ``Cross-Margin VM Loss'' to mean, with respect to the
Cross-Margining Account of a Defaulting Member, the amounts owed to
or by the Defaulting Member, as applicable, by or to a Clearing
Organization due to the mark-to-market movement arising from or
related to the positions in the Defaulting Member's Cross-Margining
Account at CME or the Defaulting Member's Cross-Margin Positions at
FICC. See Section 1 (Definitions) of the proposed Restated
Agreement.
    \51\ The proposed Restated Agreement defines ``Other VM Gain''
or ``Other VM Loss'' to mean, (x) with respect to a Defaulting
Member of FICC, the amounts owed to or by the Defaulting Member, as
applicable, by or to FICC due to the Funds-Only Settlement payments
(as defined in the GSD Rules) arising from or related to the mark-
to-market movement of the portion of the Defaulting Member's GSD
Accounts that does not include the positions in the Cross-Margining
Account at FICC; and (y) with respect to a Defaulting Member of CME,
the amounts owed to or by the Defaulting Member, as applicable, by
or to CME arising from or related to the mark-to-market movement of
the positions (excluding positions in IRS Contracts (as defined
under CME's Rules)) or positions that are commingled with positions
in IRS Contracts pursuant to CME Rule 8G831 in the Defaulting
Member's accounts (but excluding its Cross-Margining Account) at
CME. See Section 1 ``Definitions'' of the proposed Restated
Agreement.
    \52\ See discussion of ``Net Loss'' below.
    \53\ See Section 7(c)(v)(1) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain
and an Other VM Loss (such Clearing Organization being the ``VM
Payor'') and the sum of these amounts is positive (hereinafter
``Aggregate VM Gain''), and the other Clearing Organization has a
Cross-Margin VM Loss with respect to a Defaulting Member (such Clearing
Organization being the ``VM Receiver''), the proposed Restated
Agreement provides that the VM Payor will make a payment to the VM
Receiver in the amount of the VM Receiver's Cross-Margin VM Loss, but
not to exceed the VM Payor's Aggregate VM Gain unless the Clearing
Organizations otherwise agree that the VM Payor shall pay a higher
amount. The proposed Restated Agreement provides, however, that the VM
Payor will not be required to make such payment to the extent it
reasonably determines that the liquidation of the Defaulting Member
will result in a loss to it following liquidation or that the VM
Receiver will be limited by statute, court order or other applicable
law from making the payment.\54\
---------------------------------------------------------------------------

    \54\ See Section 7(c)(v)(2) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If, on any Business Day during the liquidation of a
Defaulting Member, a Clearing Organization has a Cross-Margin VM Gain
and an Other VM Loss with respect to a Defaulting Member and the sum of
these two amounts is negative, and the other Clearing Organization has
a Cross-Margin VM Loss with respect to the Defaulting Member, the
proposed Restated Agreement states that neither Clearing Organization
will be required to make a payment unless otherwise agreed to by the
Parties.\55\
---------------------------------------------------------------------------

    \55\ See Section 7(c)(v)(3) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Following the liquidation of a Defaulting Member, the VM Receiver
must repay any variation margin payments it received from the VM
Payor.\56\ Such repayment obligation, however, shall be netted and
offset against the VM Payor's payment obligation pursuant to the loss
sharing provisions in Section 7 of the Agreement, discussed immediately
below.\57\
---------------------------------------------------------------------------

    \56\ A VM Receiver will only be required to pay such amount to
the VM Payor if it is not prohibited by statute, court order or
other applicable law from making such payment.
    \57\ See Section 7(c)(vi) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    Loss Sharing: The sharing of losses following a joint liquidation
would be calculated under the proposed Restated Agreement as follows:
     Each Clearing Organization would calculate its individual
``Net Gain'' or individual ``Net Loss,'' if any, taking into account
solely its individual ``Collateral on Hand'' and its individual
``Liquidation Cost.'' These terms have specific meanings in the
proposed Restated Agreement as follows:
    [cir] The proposed Restated Agreement defines ``Net Gain'' or ``Net
Loss'' to mean, with respect to the Cross-Margining Account of a
Defaulting Member held at a Clearing Organization, the sum of the (i)
Collateral on Hand; and (ii) Liquidation Cost. If such amount is a
positive number, a Clearing Organization shall be deemed to have a
``Net Gain'' with respect to the relevant account and if such amount is
a negative number, a ``Net Loss.'' \58\
---------------------------------------------------------------------------

    \58\ Supra note 31.
---------------------------------------------------------------------------

    [cir] The proposed Restated Agreement defines ``Collateral on
Hand'' to mean the margin held with respect to the Cross-Margining
Account of a Defaulting Member immediately prior to the time at which
the Default Event occurred.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    [cir] The proposed Restated Agreement defines ``Liquidation Cost''
to mean the aggregate gain or loss realized in the liquidation,
transfer, or management of Eligible Positions held by the Clearing
Organization in the Cross-Margining Account of the Defaulting Member,
including, without limitation, (i) any Variation Margin \60\ owed to
the Defaulting Member by the Clearing Organization and unpaid (which
shall constitute gains); (ii) any Variation Margin owed by the
Defaulting Member

to the Clearing Organization and unpaid (which shall constitute
losses); and (iii) any reasonable costs, fees and expenses incurred by
the Clearing Organization in connection therewith.\61\
---------------------------------------------------------------------------

    \60\ The exchange of Variation Margin during a joint liquidation
is discussed above.
    \61\ Supra note 31.
---------------------------------------------------------------------------

    The Clearing Organizations would determine whether the sum of the
individual Net Gains and Net Losses results in a combined Net Gain or
Net Loss. The Clearing Organizations would then allocate any combined
Net Gain or Net Loss pro rata based on each Clearing Organization's
``Share of the Cross-Margining Requirement'' \62\ (its ``Allocated Net
Gain'' or ``Allocated Net Loss,'' as applicable).\63\
---------------------------------------------------------------------------

    \62\ Under the proposed Restated Agreement, the ``Share of the
Cross-Margining Requirement'' in respect of a Clearing Organization
is the ratio of (i) the margin required for the Cross-Margining
Account at the Clearing Organization after taking into account the
Margin Reduction to (ii) the total Cross-Margining Requirement
across both Clearing Organizations.
    \63\ See Section 7(c)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    If a Clearing Organization has an individual Net Gain that is less
than its Allocated Net Gain, an individual Net Loss that is greater
than its Allocated Net Loss or an individual Net Loss when the joint
liquidation resulted in a combined Net Gain (the ``worse-off party'')
then the other Clearing Organization shall be required to pay to the
worse-off party an amount equal to the difference between the worse-off
party's individual Net Gain or Net Loss and its Allocated Net Gain and
Allocated Net Loss.\64\
---------------------------------------------------------------------------

    \64\ See Section 7(c)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

b. Buy-Out
    As noted above, in the event a Clearing Organization determines
that jointly transferring, liquidating, or closing out the Relevant
Positions is not feasible or advisable, for example if a Member's
portfolio has changed materially since the last cross margin
calculation, any Clearing Organization (``X'') may, upon written notice
to the other Clearing Organization (``Y''), offer to buy-out the
Relevant Positions at the last settlement price for such positions
immediately prior to the time such offer is made and any remaining
collateral relating thereto from Y (which Y may accept or reject in its
sole discretion). The value of the remaining collateral would reflect
the last available price based on market conditions, which for FICC,
would be obtained from its pricing vendor(s). Upon reviewing exposures
of the defaulter's portfolio, the hedge or risk reduction that may be
achieved through a buy-out and comparing the results to the available
risk budget, or defaulter's margin, an economic decision would be made
in consideration of a separate liquidation option. If such a buy-out
occurs, then Y shall have no further obligations to X with respect to
the Default Event. For the avoidance of doubt, the loss sharing
provisions set forth in Default Management section of the Agreement
would not apply.\65\
---------------------------------------------------------------------------

    \65\ See Section 7(b)(ii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

c. Separate Liquidations
    If a Clearing Organization determines that it is not advisable or
feasible to resolve the Default Event pursuant to a joint liquidation
or a buy-out, it would notify the other Clearing Organization. In such
event, each Clearing Organization shall promptly transfer, liquidate or
otherwise close out the Eligible Positions in the Cross-Margining
Account carried for the Defaulting Member at that Clearing
Organization.\66\
---------------------------------------------------------------------------

    \66\ See Section 7(b)(iii) of the proposed Restated Agreement.
---------------------------------------------------------------------------

    The loss sharing provisions that would be applicable under this
separate liquidation scenario would be as follows:
     If, with respect to the Cross-Margining Account of the
Defaulting Member, both Clearing Organizations have a Net Gain or a Net
Loss, no payment will be due to either Clearing Organization in respect
of the Guaranties between FICC and CME referred to in Sections 8 and 9
of the proposed Restated Agreement.\67\
---------------------------------------------------------------------------

    \67\ See Section 7(d) of the proposed Restated Agreement.
---------------------------------------------------------------------------

     If either Clearing Organization has a Net Loss (the
``worse-off party'') and the other has a Net Gain (the ``better-off
party''), then the better-off party will pay the worse-off party the
lesser of the Net Gain or the absolute value of the Net Loss.\68\
---------------------------------------------------------------------------

    \68\ See Sections 7(e) and (f) of the proposed Restated
Agreement. The proposed Restated Agreement provides, however, that
the better-off party shall only be required to pay the amount of
such Net Loss to the worse-off party if it is not prohibited by
statute, court order or other applicable law from making such
payment.
---------------------------------------------------------------------------

    The proposed Restated Agreement would not retain language included
in the Existing Agreement covering the fact that each Clearing
Organization's calculation of Available Margin (as defined in the
Existing Agreement) for loss sharing purposes is subject to such
Clearing Organization's prior satisfaction of its obligations under the
other cross-margining agreements and loss sharing arrangements that it
may have listed on Appendix A.\69\ FICC and the CME are proposing to
eliminate this priority which means that all margin amounts calculated
pursuant to the proposed Restated Agreement would be available to cover
a Clearing Organization's losses. As a result of this change, the
proposed Restated Agreement would not include the priority provision
nor the related Appendix A.
---------------------------------------------------------------------------

    \69\ See Appendix A to the Existing Agreement: (1) with respect
to the CME, the cross-margining agreement between the CME, The
Options Clearing Corporation (``OCC'') and New York Clearing
Corporation dated June 1993 as amended from time to time; and (2)
with respect to FICC, the multilateral netting contract and limited
cross-guaranty agreement among The Depository Trust Company, FICC,
National Securities Clearing Corporation and OCC dated January 1,
2003, supra note 4.
---------------------------------------------------------------------------

Other Terms of the Proposed Restated Agreement
    The proposed Restated Agreement also would continue to include a
number of other provisions intended to either generally maintain the
usual and customary terms for an agreement of this type included in the
Existing Agreement or update them to better reflect the Clearing
Organizations' course of dealing and industry practices. For example,
similar to the Existing Agreement,\70\ the proposed Restated Agreement
would include a confidentiality provision reflecting each Clearing
Organization's obligation not to disclose to a third-party the other
Clearing Organization's Confidential Information except under certain
circumstances. Under the proposed Restated Agreement, this provision
would be updated to reflect that the Clearing Organizations'
confidentiality obligations would survive three (3) years after the
termination of the proposed Restated Agreement. In addition, this
provision would state that an actual or threatened violation by a
Clearing Organization of its confidentiality obligations would entitle
the other Clearing Organization to seek immediate injunctive and other
equitable relief, without the necessity of proving monetary damages or
posting bond or other security. The updated confidentiality provision
included in the proposed Restated Agreement (Section 10,
Confidentiality) would replace the similar provision in the Existing
Agreement.
---------------------------------------------------------------------------

    \70\ See Section 9 of the Existing Agreement,
``Confidentiality,'' supra note 4.
---------------------------------------------------------------------------

    Additionally, the proposed Restated Agreement would retain the
indemnification provision included in the Existing Agreement, but for
purposes of clarity and simplification, would revise the language in
that section that describes the administrative process between the
Clearing

Organizations regarding notification and control of the defense of an
indemnification claim.\71\
---------------------------------------------------------------------------

    \71\ See Section 12(c) (Indemnification) of the proposed
Restated Agreement.
---------------------------------------------------------------------------

    The proposed Restated Agreement would include some revisions to the
language in the Existing Agreement and would add a provision covering
the limitation of liability between FICC and CME. Specifically, a
clause would be added to provide that, to the fullest extent permitted
under applicable law, and other than with respect to a Clearing
Organization's breach of its confidentiality obligations, in no case
would either Clearing Organization be liable to the other for any
indirect, consequential, incidental, punitive, exemplary or special
damages.\72\ The purpose of this new provision is to provide clear and
specific terms regarding each Clearing Organization's potential
liability to the other for these types of damages under the proposed
Restated Agreement.
---------------------------------------------------------------------------

    \72\ See Section 17 (Liability) of the proposed Restated
Agreement.
---------------------------------------------------------------------------

    The proposed Restated Agreement would add certain usual and
customary provisions for an agreement of this type that are not
contained in the Existing Agreement, including that (i) no remedy
conferred by any provision of the proposed Restated Agreement is
intended to be exclusive of any other remedy,\73\ (ii) no provision is
intended, expressly or by implication, to purport to confer a benefit
or right of action upon a third-party,\74\ and (iii) each Clearing
Organization waives any right it may have to a trial by jury with
respect to any litigation directly or indirectly arising out of, under
or in connection with the proposed Restated Agreement, or transactions
contemplated by it.\75\ Also, the proposed Restated Agreement would
include updates to the relevant FICC and CME contacts to whom notices
would be directed.
---------------------------------------------------------------------------

    \73\ See Section 18(l) (Remedies Not Exclusive) of the proposed
Restated Agreement.
    \74\ See Section 18(m) (No Third-Party Beneficiaries) of the
proposed Restated Agreement.
    \75\ See Section 18(n) (Waiver of Jury Trial) of the proposed
Restated Agreement.
---------------------------------------------------------------------------

    In order to simplify and improve its structure, the proposed
Restated Agreement would consolidate into a new separate section,\76\
language addressing the fact that the proposed Restated Agreement,
together with GSD Rules, CME Rules, the Clearing Member Agreement and
any other agreements between FICC, CME and a Cross-Margining
Participant or any Affiliate thereof is, for purposes of Title IV,
Subtitle A of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (12 U.S.C. 4401-4407) a ``netting contract.'' This same
language is currently included in the Existing Agreement but is broken
out across multiple sections. This provision would also state that
``all payments made or to be made hereunder, including payments made in
accordance with this Agreement in connection with the liquidation of a
Cross-Margining Participant are ``covered contractual payment
obligations'' or ``covered contractual payment entitlements,'' as the
case may be, as well as ``covered clearing obligations;'' and for
purposes of the Bankruptcy Code and the Federal Deposit Insurance Act
is considered a ``master netting agreement'' with respect to some or
all of ``swap agreements,'' ``commodity contracts,'' ``forward
contracts,'' and ``securities contracts.'' \77\
---------------------------------------------------------------------------

    \76\ See Section 11 (FDICIA) of the proposed Restated Agreement.
    \77\ Id.
---------------------------------------------------------------------------

    Further, the proposed Restated Agreement would remove the
arbitration clause included in the Existing Agreement in its
entirety.\78\ Instead, the proposed Restated Agreement would add
language to the Governing Law provision stating disputes under the
agreement would be resolved in the federal or state courts located in
New York, New York, including the United States District Court for the
Southern District of New York.\79\ FICC believes that New York venue
and forum are appropriate because New York courts can more efficiently
and effectively adjudicate disputes arising under an agreement governed
by New York law. In addition, New York venue and forum is generally
consistent with FICC's current approach to dispute management.
---------------------------------------------------------------------------

    \78\ See Section 16 of the Existing Agreement, ``Arbitration,''
supra note 4.
    \79\ See Section 18(c) (Governing Law) of the proposed Restated
Agreement.
---------------------------------------------------------------------------

B. Delayed Implementation of the Proposal
    The proposed rule change would become operative within 180 business
days after the later date of the Commission's approval of this proposed
rule change, and the Commodity Futures Trading Commission's approval of
the CME's proposed rule change (collectively, the ``Date of Regulatory
Approval''). Not later than two (2) business days following the date of
the Commission's approval of this proposed rule change, FICC would add
a legend to the proposed Restated Agreement to state that the specified
changes are approved but not yet operative. The legend would also
include the file numbers of the approved proposed rule change, and
would state that once operative, the legend would automatically be
removed from the proposed Restated Agreement. FICC will issue a notice
to members providing notice of the specific operative date at least two
weeks prior to such date.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with
section 17A of the Act \80\ and the rules thereunder applicable to
FICC. Section 17A(b)(3)(F) of the Act, requires, in part, that the
rules of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\81\ FICC is proposing
to replace the Existing Agreement with the proposed Restated Agreement.
As described in the discussion of the proposed changes to the
calculation of cross-margin requirements above, the proposed Restated
Agreement would, among other things, revise and enhance the method for
calculating the margin reduction that would apply to a Cross-Margining
Participant's Eligible Positions, including requiring more frequent
exchange of Eligible Position information between CME and FICC that is
used to collateralize risk exposures. The proposed new methodology
would simplify the overall margin calculation process by eliminating
the need for application of offset classes and the conversion of CME
Eligible Products into equivalent GSD Treasury security products. By
enhancing the method for calculating the margin reduction as described
above, FICC believes that a more appropriate margin reduction would be
calculated. As such, FICC believes that the proposed rule change would
assure the safeguarding of securities and funds which are in the
custody and control of FICC or for which it is responsible.\82\
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    \80\ 15 U.S.C. 78q-1.
    \81\ 15 U.S.C. 78q-1(b)(3)(F).
    \82\ Id.
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    In addition, as described in the discussion of a joint liquidation
above, the proposed Restated Agreement would enhance the efficiency of
the default management process between FICC and CME by providing for
the exchange of Variation Margin under certain circumstances during the
course of a liquidation and by improving the efficiency and
effectiveness of the default management and loss sharing process. By
enhancing these processes, FICC believes that overall default losses

could be minimized and thereby reduce the potential risk to non-
defaulting members. As such, FICC believes that the proposed rule
change would assure the safeguarding of securities and funds which are
in the custody and control of FICC or for which it is responsible.
    Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to remove impediments to and
perfect the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions.\83\ FICC believes
that the proposal is consistent with this requirement for the following
reasons.
---------------------------------------------------------------------------

    \83\ Id.
---------------------------------------------------------------------------

    First, the proposal to amend the list of CME products that would be
eligible for cross-margining would expand the potential opportunity for
cross-margin benefits that Cross-Margining Participants receive.
    Second, the removal of the operational details to an SLA would
streamline the proposed Restated Agreement by removing information that
may not be relevant to the Cross-Margining Participants and would place
this information in a separate document that the Clearing Organizations
can more easily amend as their operational needs evolve.
    Third, the proposal to amend the margin calculation would simplify
the calculation and provide transparency.
    Fourth, the proposed liquidation procedures and loss sharing
arrangements would provide transparency into the steps that the
Clearing Organizations would take during a liquidation and how gains
and losses would be allocated.
    Fifth, the revisions to various provisions throughout the proposed
Restated Agreement would update provisions to ensure that they are
reflective of the current standards and industry practices that each
Clearing Organization adheres to in the ordinary course of business.
    As such, given the foregoing, FICC believes that the proposed rule
change is designed to remove impediments to and perfect the mechanism
of a national system for the prompt and accurate clearance and
settlement of securities transactions.\84\
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    \84\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act requires a covered clearing
agency to establish a risk-based margin system that, at a minimum
considers, and produces margin levels commensurate with, the risks and
particular attributes of each relevant product, portfolio, and
market.\85\ As described above, the proposed Restated Agreement would
revise and enhance the method for calculating the margin reduction that
would apply to a Cross-Margining Participant's Eligible Positions,
including requiring more frequent exchange of Eligible Position
information between CME and FICC that is used to collateralize risk
exposures. The proposed new methodology would simplify the overall
margin calculation process by eliminating the need for application of
offset classes and the conversion of CME Eligible Products into
equivalent GSD Treasury security products. By enhancing the method for
calculating the margin reduction as described above, FICC believes that
a more appropriate margin reduction would be calculated and reduce the
complexity of the calculations. Accordingly, FICC believes the proposed
changes are reasonably designed to establish a risk-based margin system
that, at a minimum considers, and produces margin levels commensurate
with, the risks and particular attributes of each relevant product,
portfolio, and market in a manner consistent with Rule 17Ad-
22(e)(6)(i).\86\
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    \85\ 17 CFR 240.17Ad-22(e)(6)(i).
    \86\ Id.
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    As described above in the discussion of a joint liquidation, FICC
and CME would agree to put in place a separate SLA, which would include
specified timeframes, to exchange on each Business Day, such
information as may reasonably be required in order to value the
positions in the Cross-Margining Account and to calculate the Cross-
Margin Requirement for each Cross-Margining Participant. The SLA would
also include operational processes consistent with the default
management provisions set forth in the proposed Restated Agreement. By
agreeing to share certain information as described herein, FICC
believes that each Clearing Organization would be able to effectively
identify, monitor, and manage risks that may be presented by the
proposed Restated Agreement. Accordingly, FICC believes the proposed
changes are reasonably designed to identify, monitor, and manage risks
related to the link established between FICC and CME in a manner
consistent with Rule 17Ad-22(e)(20) under the Act.\87\
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    \87\ 17 CFR 240.17Ad-22(e)(20).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed rule change to replace the Existing
Agreement with the Restated Agreement could have an impact on
competition. Specifically, FICC believes that the proposed changes
could both burden and promote competition because the margin savings
for the Cross-Margining Participants (and therefore their margin
requirements) would change under the proposed Restated Agreement. As
noted in the Executive Summary in Item 3(a) above[sic], the margin
savings under the Existing Agreement range from 0.1% to 17.4%, whereas
the study conducted by FICC under the proposed Restated Agreement
showed margin savings in the range of 0% to 36.6%. Some Cross-Margining
Participants could see an increase in margin savings under the proposed
rule change and some could see a decrease in margin savings under the
proposed rule change. When the proposal results in decreased margin
savings and therefore higher margin requirements, the proposed rule
change could burden competition for Cross-Margining Participants that
have lower operating margins or higher costs of capital compared to
other Members. When the proposal results in higher margin savings and
therefore lower margin requirements, the proposed rule change could
promote competition by resulting in lower operating costs and capital
efficiencies for Cross-Margining Participants. FICC does not believe
that these impacts are significant because based on FICC's analysis,
the proposal would not result in a significant change to the average
margin requirement of Cross-Margining Participants.
    Regardless of whether the burden on competition discussed above
could be deemed significant, FICC believes that any related burden on
competition would be necessary and appropriate, as permitted by section
17A(b)(3)(I) of the Act, for the following reasons.\88\
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    \88\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes that any burden on competition would be necessary in
furtherance of the Act, specifically section 17A(b)(3)(F) of the
Act.\89\ As stated above, the proposed Restated Agreement, would, among
other things, revise and enhance the method for calculating the margin
reduction that would apply to a Cross-Margining Participant's Eligible
Positions, including requiring more frequent exchange of Eligible
Position information between CME and FICC that is used to collateralize
risk exposure. The proposed new methodology would simplify the overall
margin calculation process by eliminating the need for application of
offset classes and the conversion of CME Eligible Products

into equivalent GSD Treasury security products. By enhancing the method
for calculating the margin reduction as described above, FICC believes
that a more appropriate margin reduction would be calculated.
Therefore, FICC believes this proposed change is consistent with the
requirements of section17A(b)(3)(F) of the Act, which requires that the
Rules be designed to assure the safeguarding of securities and funds
that are in FICC's custody or control or for which it is
responsible.\90\
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    \89\ 15 U.S.C. 78q-1(b)(3)(F).
    \90\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed rule change would also support FICC's
compliance with Rule 17Ad-22(e)(6)(i) under the Act, which requires a
covered clearing agency to establish a risk-based margin system that,
at a minimum considers, and produces margin levels commensurate with,
the risks and particular attributes of each relevant product,
portfolio, and market.\91\ By enhancing the method for calculating the
margin reduction as described above, FICC believes that a more
appropriate margin reduction would be calculated and would reduce the
complexity of the calculations. Accordingly, FICC believes the proposed
changes are reasonably designed to establish a risk-based margin system
that, at a minimum considers, and produces margin levels commensurate
with, the risks and particular attributes of each relevant product,
portfolio, and market in a manner consistent with Rule 17Ad-
22(e)(6)(i).\92\
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    \91\ 17 CFR 240.17Ad-22(e)(6)(i).
    \92\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed rule change would support FICC's
compliance with Rule 17Ad-22(e)(20) under the Act.\93\ Specifically, as
described above, FICC and CME would agree to put in place a separate
SLA, which would cover information exchange between the two parties and
would also include operational processes consistent with the default
management provisions set forth in the proposed Restated Agreement. By
agreeing to the SLA, FICC believes that it would be able to effectively
identify, monitor, and manage risks that may be presented by the
proposed Restated Agreement. Accordingly, FICC believes the proposed
changes are reasonably designed to identify, monitor, and manage risks
related to the link established between FICC and CME in a manner
consistent with Rule 17Ad-22(e)(20) under the Act.\94\
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    \93\ 17 CFR 240.17Ad-22(e)(20).
    \94\ Id.
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    FICC believes that the above-described burden on competition that
could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible, as
described in detail above. The proposed Restated Agreement has been
designed to allow FICC to recognize the offsetting value of positions
maintained by Cross-Margining Participants at the two Clearing
Organizations for margin purposes by using a risk-based margining
approach that would produce margin levels commensurate with, the risks
and particular attributes of each relevant product, portfolio and
market. As such, by enhancing the method for calculating the margin
reduction as described above, FICC believes the proposal is
appropriately designed to meet its risk management goals and its
regulatory obligations.
    Therefore, as described above, FICC believes the proposed changes
are necessary and appropriate in furtherance of FICC's obligations
under the Act, specifically section 17A(b)(3)(F) of the Act \95\ and
Rule 17Ad-22(e)(6)(i) and Rule 17Ad-22(e)(20) under the Act.\96\
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    \95\ 15 U.S.C. 78q-1(b)(3)(F).
    \96\ 17 CFR 240.Ad-22(e)(6)(i), (e)(20).
---------------------------------------------------------------------------

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others

    FICC has not received or solicited any written comments relating to
this proposal. If any written comments are received, they will be
publicly filed as an Exhibit 2 to this filing[sic], as required by Form
19b-4 and the General Instructions thereto. Persons submitting comments
are cautioned that, according to Section IV (Solicitation of Comments)
of the Exhibit 1A in the General Instructions to Form 19b-4, the
Commission does not edit personal identifying information from comment
submissions. Commenters should submit only information that they wish
to make available publicly, including their name, email address, and
any other identifying information.
    All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submitcomments. General questions
regarding the rule filing process or logistical questions regarding
this filing should be directed to the Main Office of the Commission's
Division of Trading and Markets at [email protected] or 202-
551-5777. FICC reserves the right to not respond to any comments
received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include
File Number SR-FICC-2023-010 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2023-010. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public

Reference Room, 100 F Street NE, Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of FICC and on DTCC's website (dtcc.com/legal/sec-rule-filings).
    Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-FICC-2023-010 and should
be submitted on or before August 18, 2023.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\97\
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    \97\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-15981 Filed 7-27-23; 8:45 am]
BILLING CODE 8011-01-P