[Federal Register Volume 87, Number 205 (Tuesday, October 25, 2022)]
[Proposed Rules]
[Pages 64610-64682]
[FR Doc No: 2022-20288]

Vol. 87

Tuesday,

No. 205

October 25, 2022

Part III

Securities and Exchange Commission

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17 CFR Part 240

Standards for Covered Clearing Agencies for U.S. Treasury Securities
and Application of the Broker-Dealer Customer Protection Rule With
Respect to U.S. Treasury Securities; Proposed Rule

Federal Register / Vol. 87 , No. 205 / Tuesday, October 25, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-95763; File No. S7-23-22]
RIN 3235-AN09

Standards for Covered Clearing Agencies for U.S. Treasury
Securities and Application of the Broker-Dealer Customer Protection
Rule With Respect to U.S. Treasury Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'')
proposes to amend the standards applicable to covered clearing agencies
for U.S. Treasury securities to require that such covered clearing
agencies have written policies and procedures reasonably designed to
require that every direct participant of the covered clearing agency
submit for clearance and settlement all eligible secondary market
transactions in U.S. Treasury securities to which it is a counterparty.
In addition, the Commission proposes additional amendments to the
Covered Clearing Agency Standards, with respect to risk management.
These requirements are designed to protect investors, reduce risk, and
increase operational efficiency. Finally, the Commission proposes to
amend the broker-dealer customer protection rule to permit margin
required and on deposit with covered clearing agencies for U.S.
Treasury securities to be included as a debit in the reserve formulas
for accounts of customers and proprietary accounts of broker-dealers
(``PAB''), subject to certain conditions.

DATES: Comments should be received on or before December 27, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to [email protected]. Please include
File Number S7-23-22 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-23-22. 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 website (http://www.sec.gov/rules/proposed.shtml).
Comments are also available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Operating conditions may limit access to the Commission's Public
Reference Room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Elizabeth L. Fitzgerald, Assistant
Director, Office of Clearance and Settlement at<PHONE_NUMBER>,
Division of Trading and Markets; Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Associate Director, at
(202) 551-5521; Randall W. Roy, Deputy Associate Director, at (202)
551-5522; Raymond Lombardo, Assistant Director, at<PHONE_NUMBER>; Sheila
Dombal Swartz, Senior Special Counsel, at<PHONE_NUMBER>; or Nina
Kostyukovsky, Special Counsel, at<PHONE_NUMBER>, Office of Broker-
Dealer Finances, Division of Trading and Markets; U.S. Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: First, the Commission proposes to amend 17
CFR 240.17Ad-22(e)(18) (``Rule 17Ad-22(e)(18)'') to require covered
clearing agencies that provide central counterparty (``CCP'') services
for U.S. Treasury securities to establish, implement, maintain and
enforce written policies and procedures reasonably designed, as
applicable, to establish objective, risk-based and publicly disclosed
criteria for participation, which require that any direct participant
of such a covered clearing agency submit for clearance and settlement
all the eligible secondary market transactions in U.S. Treasury
securities to which such direct participant is a counterparty. In
addition, these policies and procedures must be reasonably designed, as
applicable, to identify and monitor the covered clearing agency's
direct participants' submission of transactions for clearing as
required above, including how the covered clearing agency would address
a failure to submit transactions. These policies and procedures must
also be reasonably designed, as applicable, to ensure that the covered
clearing agency 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 board of directors of such U.S.
Treasury securities CCA must review annually. The Commission would
define eligible secondary market transactions as a secondary market
transaction in U.S. Treasury securities of a type accepted for clearing
by a registered covered clearing agency that is either a repurchase or
reverse repurchase agreement collateralized by U.S. Treasury
securities, in which one of the counterparties is a direct participant,
or certain specified categories of cash purchase or sale transactions.
Second, the Commission proposes to amend 17 CFR 240.17Ad-22(e)(6)(i)
(``Rule 17Ad-22(e)(6)(i)'') to require that a covered clearing agency
providing central counterparty services for U.S. Treasury securities
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, calculate, collect,
and hold margin for transactions in U.S. Treasury securities submitted
on behalf of an indirect participant separately from those submitted on
behalf of the direct participant. In connection with these proposed
amendments, the Commission is also proposing to include as part of 17
CFR 240.17Ad-22(a) (``Rule 17Ad-22(a)'') definitions of ``U.S. Treasury
security,'' ``central bank,'' ``eligible secondary market
transaction,'' ``international financial institution,'' and ``sovereign
entity.'' Third, the Commission proposes to amend 17 CFR 240.15c3-3a
(``Rule 15c3-3a'') to permit margin required and on deposit at covered
clearing agencies providing central counterparty services for U.S.
Treasury securities to be included by broker-dealers as a debit in the
customer and PAB reserve formulas, subject to certain conditions.

Table of Contents

I. Introduction

    A. The Commission's Role in Facilitating the National System of
Clearance and Settlement for Securities, Including Treasury
Securities
    B. The Role of Central Counterparty Services
    C. Existing CCP Services for the U.S. Treasury Market
    D. Proposal
    E. Current Regulatory and Industry Discussions Regarding the
U.S. Treasury Market
II. Background
    A. Current U.S. Treasury Market Structure and Central Clearing
Within That Structure
    1. Cash Market
    2. U.S. Treasury Repo Market
    B. Current Regulatory Framework
    1. Clearing Agency Regulation Under Section 17A of the Exchange
Act
    2. The Broker-Dealer Customer Protection Rule
III. Proposed Amendments
    A. U.S. Treasury Securities CCA Membership Requirements
    1. Requirement To Clear Eligible Secondary Market Transactions
    2. Eligible Secondary Market Transactions
    a. Repo Transactions
    b. Purchases and Sales of U.S. Treasury Securities
    i. IDB Transactions
    ii. Other Cash Transactions
    c. Exclusions From the Definition of an Eligible Secondary
Market Transaction
    i. Official Sector Exclusions From the Membership Proposal
    ii. Natural Person Exclusion
    3. How the Membership Proposal Facilitates Prompt and Accurate
Clearance and Settlement in the U.S. Treasury Market
    4. Policies and Procedures Regarding Direct Participants'
Transactions
    5. Request for Comment
    F. Other Changes to Covered Clearing Agency Standards
    1. Netting and Margin Practices for House and Customer Accounts
    2. Facilitating Access to U.S. Treasury Securities CCAs
    3. Request for Comment
    G. Proposed Amendments to Rule15c3-3a
    1. Proposal
    2. Request for Comment
    H. Compliance Date
IV. Economic Analysis
    A. Broad Economic Considerations
    B. Baseline
    1. U.S. Treasury Securities
    2. U.S. Treasury Repurchase Transactions
    3. Central Clearing in the U.S. Treasury Securities Market
    4. Clearing and Settlement by U.S. Treasury Securities Market
Segment
    a. Dealer-to-Customer Cash U.S. Treasury Securities Market (off-
IDBs)
    i. Bilateral Clearing
    ii. Central Clearing
    b. Cash U.S. Treasury Trades Through an IDB
    i. Central Clearing
    ii. Bilateral Clearing
    iii. Hybrid Clearing
    5. Margin Practices in U.S. Treasury Secondary Markets
    6. Disruptions in the U.S. Treasury Securities Market
    a. COVID-19 Shock of March 2020
    b. September 2019 Repo Market Disruptions
    c. October 2014 Flash Rally
    7. Affected Persons
    a. Covered Clearing Agencies for U.S. Treasury Securities: FICC
    b. Direct Participants at U.S. Treasury Securities CCAs: FICC
Netting Members
    c. Interdealer Brokers (IDBs)
    d. Other Market Participants
    i. FICC Sponsored Members
    ii. Other Market Participants That Are Not FICC Sponsored
Members
    e. Triparty Agent: Bank of New York Mellon
    f. Custodian Banks/Fedwire Securities Service (FSS)
    C. Analysis of Benefits, Costs, and Impact on Efficiency,
Competition, and Capital Formation
    1. Benefits
    a. U.S. Treasury Securities CCA Membership Requirements
    i. Scope of the Membership Proposal
    ii. Application of the Membership Proposal to Repo Transactions
    iii. Application of the Membership Proposal to Purchases and
Sales of U.S. Treasury Securities
    iv. Policies and Procedures Regarding Direct Participants'
Transactions
    b. Other Changes to Covered Clearing Agency Standards
    i. Netting and Margin Practices for House and Customer Accounts
    ii. Facilitating Access to U.S. Treasury Securities CCAs
    c. Proposed Amendments to Rules 15c3-3 and 15c3-3a
    2. Costs
    a. Costs to FICC of the Membership Proposal
    i. Costs Attendant to an Increase in CCLF
    ii. Costs of the Membership Proposal in Terms of Increased
Margining for Existing FICC Members
    b. Costs to Non-FICC Members as a Result of the Membership
Proposal
    c. Other Changes to Covered Clearing Agency Standards
    i. Netting and Margin Practices for House and Customer Accounts
    ii. Facilitating Access to U.S. Treasury Securities CCAs
    d. Proposed Amendments to Rules 15c3-3 and 15c3-3a
    3. Effect on Efficiency, Competition, and Capital Formation
    a. Efficiency
    i. Price Transparency
    ii. Operational and Balance Sheet Efficiency
    b. Competition
    c. Capital Formation
    D. Reasonable Alternatives
    1. Require U.S. Treasury Securities CCAs to Have Policies and
Procedures Requiring Only IDB Clearing Members to Submit U.S.
Treasury Securities Trades With Non-members for Central Clearing
    2. Require U.S. Treasury Securities CCAs to Have Policies and
Procedures Requiring the Submission of All Repurchase Agreements
With No Change to Requirements for the Submission of Cash
Transactions
    3. Include All Cash Transactions Within the Scope of the
Membership Proposal With Exceptions for Central Banks, Sovereign
Entities, International Financial Institutions, and Natural Persons
    4. Require U.S. Treasury Securities CCAs To Change CCA Access
Provisions and Netting and Margin Practices for House and Customer
Accounts and Rule 15c3-3
    E. Request for Comment
V. Paperwork Reduction Act
    A. Proposed Amendment to Rule 17Ad-22(e)(6)
    B. Proposed Amendment to Rule 17Ad-22(e)(18)(iv)
    C. Request for Comment
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
    A. Clearing Agencies
Statutory Authority

I. Introduction

A. The Commission's Role in Facilitating the National System of
Clearance and Settlement for Securities, Including Treasury Securities

    In 1975, Congress added section 17A to the Securities Exchange Act
of 1934 (``Exchange Act'') as part of the Securities Acts Amendments of
1975, which directed the Commission to facilitate the establishment of
(i) a national system for the prompt and accurate clearance and
settlement of securities transactions (other than exempt securities
which typically includes U.S. Treasury securities, except as discussed
further below), and (ii) linked or coordinated facilities for clearance
and settlement of securities transactions.\1\ In so doing, Congress
made several findings related to the importance of the clearance and
settlement of securities transactions and the relationship of clearance
and settlement of securities transactions to the protection of
investors.\2\ The Commission carries out its statutory mandate in this
regard through its supervision and regulation of registered clearing
agencies, which may provide

different services to the market including, but not limited to, central
counterparty services.
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    \1\ See 15 U.S.C. 78q-1; Report of the Senate Committee on
Banking, Housing & Urban Affairs, S. Rep. No. 94-75, at 4 (1975)
(stating the Committee's belief that ``the banking and security
industries must move quickly toward the establishment of a fully
integrated national system for the prompt and accurate processing
and settlement of securities transactions'').
    \2\ See 15 U.S.C. 78q-1(a)(1)(A) (finding that ``[t]he prompt
and accurate clearance and settlement of securities transactions . .
. are necessary for the protection of investors and persons
facilitating transactions by and acting on behalf of investors'');
see also 15 U.S.C. 78q-1(B), (C), and (D) (setting forth additional
findings related to the national system of clearance and
settlement).
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    In 1986, Congress passed the Government Securities Act, which,
among other things, authorized the Commission to regulate clearing
agencies engaged in the clearance and settlement of government
securities transactions, including those in U.S. Treasury securities,
by providing that government securities would not be considered exempt
securities for purposes of section 17A of the Exchange Act.\3\ This
inclusion of government securities, including U.S. Treasury securities,
within the Commission's authority for the national system of clearance
and settlement underscores the importance of, among other things, the
U.S. Treasury market.
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    \3\ Government Securities Act of 1986, section 102(a); 15 U.S.C.
78c(a)(12)(B)(i).
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    U.S. Treasury securities play a critical and unique role in the
U.S. and global economy, serving as a significant investment instrument
and hedging vehicle for investors, a risk-free benchmark for other
financial instruments, and an important mechanism for the Federal
Reserve's implementation of monetary policy.\4\ Consequently,
confidence in the U.S. Treasury market, and in its ability to function
efficiently, even in times of stress, is critical to the stability of
the global financial system.\5\
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    \4\ See, e.g., Staffs of the U.S. Department of the Treasury,
Board of Governors of the Federal Reserve System, Federal Reserve
Bank of New York, U.S. Securities and Exchange Commission, and U.S.
Commodity Futures Trading Commission, Recent Disruptions and
Potential Reforms in the U.S. Treasury Market: A Staff Progress
Report, at 1 (Nov. 2021), available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf (``Inter-Agency Working
Group for Treasury Market Surveillance (``IAWG'') Report''); Staffs
of the U.S. Department of the Treasury, Board of Governors of the
Federal Reserve System, Federal Reserve Bank of New York, U.S.
Securities and Exchange Commission, and U.S. Commodity Futures
Trading Commission, Joint Staff Report: The U.S. Treasury Market on
October 15, 2014, at 1, 8 (2015), available at https://home.treasury.gov/system/files/276/joint-staff-report-the-us-treasury-market-on-10-15-2014.pdf (``Joint Staff Report''). These
reports represent the views of Commission and other Federal
regulatory staff. The reports are not a rule, regulation, or
statement of the Commission. The Commission has neither approved nor
disapproved the content in the reports. These reports, like all
staff reports, have no legal force or effect: they do not alter or
amend applicable law, and they create no new or additional
obligations for any person.
    \5\ Group of Thirty Working Group on Treasury Market Liquidity,
U.S. Treasury Markets: Steps Toward Increased Resilience, at 1
(2021), available at https://group30.org/publications/detail/4950
(``G-30 Report'').
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B. The Role of Central Counterparty Services

    The Commission defines a CCP as a clearing agency that interposes
itself between the counterparties to securities transactions, acting
functionally as the buyer to every seller and the seller to every
buyer.\6\ The Commission previously has stated that registered clearing
agencies that provide CCP services can help increase the safety and
efficiency of securities trading, while reducing costs.\7\ These
benefits could be particularly significant in times of market stress,
as CCPs would mitigate the potential for a single market participant's
failure to destabilize other market participants or the financial
system more broadly, and/or reduce the effects of misinformation and
rumors.\8\ A CCP also addresses concerns about counterparty risk by
substituting the creditworthiness and liquidity of the CCP for the
creditworthiness and liquidity of the counterparties.\9\ Further, the
Commission has recognized that ``the centralization of clearance and
settlement activities at covered clearing agencies allows market
participants to reduce costs, increase operational efficiency, and
manage risks more effectively.'' \10\ However, the Commission has also
recognized that this centralization of activity at clearing agencies
makes risk management at such entities a critical function, as
reflected in the adoption of additional enhanced Commission
requirements, discussed further in section II.B.1 infra.\11\
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    \6\ 17 CFR 240.17Ad-22(a)(2).
    \7\ Covered Clearing Agency Standards Proposing Release,
Exchange Act Release No. 71699 (Mar. 12, 2014), 79 FR 29507, 29510
(May 27, 2014) (``CCA Standards Proposing Release'').
    \8\ See, e.g., Order Granting Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection with Request of Liffe
Administration and Management and Lch.Clearnet Ltd. Related to
Central Clearing of Credit Default Swaps, and Request for Comments,
Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139, 140 (Jan.
2, 2009).
    \9\ Id.
    \10\ CCA Standards Proposing Release, supra note 7, 79 FR at
29587.
    \11\ See, e.g., id. at 29510.
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    Since the enactment of the Securities Acts Amendments of 1975, the
Commission has had extensive experience with the risks associated with
bilateral clearing and the benefits of centralized clearance and
settlement systems for securities. Based on its experience supervising
registered clearing agencies, the Commission believes that, over the
years, the clearing agencies registered with the Commission that
provide CCP services have reduced costs of securities trading, and have
been carefully structured, consistent with the Commission's statutory
and regulatory authority, to provide the benefits of clearing, such as
multilateral netting \12\ and centralized default management, while
also managing and reducing counterparty risk. To further the
establishment of linked and coordinated facilities for clearance and
settlement of securities transactions, the Commission adopted 17 CFR
240.17Ad-22, which sets forth standards for clearing agencies
registered with the Commission. These standards address all aspects of
a CCP's operations, including financial risk management, operational
risk, default management, governance, and participation requirements.
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    \12\ With multilateral netting, the CCP is able to offset
obligations involving the same security across multiple
counterparties, thereby reducing the overall amount of securities
and funds that need to be delivered. See notes 251 and 252 and
accompanying text infra for additional explanation, as well as an
example, of multilateral netting.
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C. Existing CCP Services for the U.S. Treasury Market

    Currently, only one registered clearing agency, the Fixed Income
Clearing Corporation (``FICC''),\13\ provides CCP services for U.S.
Treasury securities transactions, including cash transactions and
repurchase transactions (``repos''), which are described more fully in
section II.A infra.\14\ As a CCP, FICC novates transactions between two
counterparties, effectively becoming the buyer to every seller and the
seller to every buyer, and guarantees the settlement of the novated
transactions. This means that FICC is exposed to a number of risks
arising from such transactions, including counterparty credit risk.\15\
Because the vast majority of counterparty credit risk is managed
bilaterally in the U.S. Treasury market, as discussed more fully in
section III.A.3 infra, FICC may face potential contagion risk arising
from transactions entered into by one of its participants, even if
those transactions are not centrally cleared.\16\ Currently, most of

FICC's direct participants are banks and broker-dealers, while other
types of entities, such as registered investment companies, investment
advisers, and asset owners, rely on FICC's direct participants to
access central clearing indirectly and are not direct participants of
FICC.
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    \13\ FICC has two divisions. The Government Securities Division
generally provides clearing services for U.S. Treasury securities,
and the Mortgage-Backed Securities Division, generally provides
clearing services for mortgage-backed securities. For purposes of
this release, references to FICC will refer to FICC's Government
Securities Division (``GSD''), unless otherwise indicated.
    \14\ For purposes of this release, an entity providing CCP
services in the U.S. Treasury market and therefore serving as a
covered clearing agency will be referred to as a ``U.S. Treasury
securities CCA.''
    \15\ Counterparty credit risk refers to the potential for a
market participant's counterparty to a given transaction to default
on the transaction and therefore the market participant will not
receive either the cash or securities necessary to settle the
transaction.
    \16\ See, e.g., U.S. Department of the Treasury, A Financial
System That Creates Economic Opportunities Capital Markets, at 81
(Oct. 2017), available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017
Treasury Report'') (discussing issues caused by fragmented central
clearing with respect to [interdealer brokers] at FICC and
describing this contagion risk and stating ``if a large [proprietary
trading firm] with unsettled trading volumes were to fail, the
failure could introduce risk to the market and market
participants'').
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    As the only entity providing CCP services in the U.S. Treasury
market, if FICC were unable to provide its CCP services for any reason,
it could have a broad and severe impact on the overall U.S. economy, as
the Financial Stability Oversight Council (``FSOC'') recognized when it
designated FICC as a systemically important financial market utility in
2012.\17\ Designation of an entity as a systemically important
financial market utility brings heightened risk management requirements
and additional regulatory supervision, by both its primary regulator
and the Board of Governors of the Federal Reserve System.\18\ The
Commission relied, in part, on this heightened supervisory authority
under Title VIII of the Dodd-Frank Act to adopt the Covered Clearing
Agency Standards.
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    \17\ Financial Stability Oversight Council, 2012 Annual Report,
Appendix A, available at http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf (``FSOC 2012 Annual Report'').
    \18\ Id. at 119. The Commission previously has acknowledged that
the Clearing Supervision Act reflects Congressional recognition that
multilateral clearing or settlement activities ``may reduce risks
for clearing participants and the broader financial system,'' but
also may create ``new risks that require multilateral payment,
clearing or settlement activities to be well-designed and operated
in a safe and sound manner.'' Exchange Act Release No. 64017 (Mar.
3, 2014), 76 FR 14472, 14474 (Mar. 16, 2011) (``Clearing Agency
Standards Proposing Release''); see also 12 U.S.C. 5462(9),
5463(a)(2). The Commission also recognized that the Clearing
Supervision Act is designed, in part, to provide a regulatory
framework to help address such risk management issues, ``which is
generally consistent with the Exchange Act requirement that clearing
agencies be organized in a manner so as to facilitate prompt and
accurate clearance and settlement, safeguard securities and funds
and protect investors.'' Id.
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    Over the past several years, both the private and public sectors
have observed the increased volume of U.S. Treasury secondary market
transactions that are not centrally cleared.\19\ However, because data
for these transactions is subject to different and incomplete reporting
requirements, it is difficult to quantify this activity. The best
available estimates at this time are those developed by private sector
organizations. In particular, the Treasury Market Practice Group \20\
estimates that only 13 percent of the overall volume in U.S. dollars of
U.S. Treasury cash transactions were centrally cleared as of the first
half of 2017, and that an additional 19 percent were what the TMPG
refers to as ``hybrid'' clearing, that is, executed on an interdealer
broker platform (as described in section II.A.1 infra) in which one
counterparty is a member of a CCA and submits its transaction with the
interdealer broker for central clearing, while the other counterparty
is not a member of a CCA and bilaterally clears its transaction with
the interdealer broker.\21\ In addition, the G-30 Report estimated that
``roughly 20 percent of commitments to settle U.S. Treasury security
trades are cleared through FICC.'' \22\
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    \19\ See, e.g., IAWG Report, supra note 4, at 5-6; 2017 Treasury
Report, supra note 15, at 81; Joint Staff Report, supra note 4, at
36-37.
    \20\ The Treasury Market Practices Group (``TMPG'') is a group
of ``market professionals committed to supporting the integrity and
efficiency of the Treasury, agency debt, and agency mortgage-backed
securities markets.'' See https://www.newyorkfed.org/TMPG/index.html. The TMPG is sponsored by the Federal Reserve Bank of New
York. Id.
    \21\ TMPG, White Paper on Clearing and Settlement in the
Secondary Market for U.S. Treasury Securities, at 12 (July 2019),
available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf (``TMPG White Paper''). These
estimates use FR2004 data, which are reports provided to the Federal
Reserve Bank of New York regarding primary dealer market activity in
U.S. Government securities, covering the first half of 2017 and are
based on various assumptions specified in the TMPG White Paper. See
also FR2004, Government Securities Dealer Reports, available at
https://www.federalreserve.gov/apps/reportforms/reportdetail.aspx?sOoYJ+5BzDZq2f74T6b1cw.
    \22\ G-30 Report, supra note 5, at 11. See also IAWG Report,
supra note 4, at 5-6; Joint Staff Report, supra note 4, at 36-37.
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    Both the TMPG and the Group of 30 also identified the significant
risks associated with bilateral clearing.\23\ For example, the TMPG
stated that ``[b]ilateral clearing involves varying risk management
practices that are less uniform and less transparent to the broader
market and may be less efficient with regard to netting exposures and
use of collateral as compared to central clearing. An increase in
bilaterally cleared trades likely increases the aggregate liquidity
risk in the clearing and settlement process because, unlike a CCP,
bilateral arrangements may not have the discipline of establishing a
contingent liquidity risk framework or uniform requirements for
emergency liquidity.'' \24\
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    \23\ TMPG White Paper, supra note 21, at 3.
    \24\ Id.
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D. Proposal

    The Commission believes that a covered clearing agency, including
one that provides CCP services,\25\ is most effective when its
participation standards enable the CCA to understand and control the
risks presented by its direct participants because such standards are
an important tool to limit the potential for member defaults and, as a
result, losses to non-defaulting members in the event of a member
default, thereby protecting the securities market as a whole.\26\ For
example, when proposing the Covered Clearing Agency Standards in Rule
17Ad-22 in 2014, the Commission explained that ``[a]ppropriate minimum
operational, legal, and capital requirements for membership that are
maintained and enforced through the supervisory practices of a clearing
agency help to ensure all members will be reasonably capable of meeting
their various obligations to the clearing agency in stressed market
conditions and upon member default.'' \27\ To that end, the
Commission's rules governing the participation requirements of a CCA
are designed to achieve that goal. Rule 17Ad-22(e)(18) requires that a
CCA establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable, establish objective,
risk-based and publicly disclosed criteria for participation,\28\ and
17 CFR 240.17Ad-22(e)(19) (``Rule 17Ad-22(e)(19)'') requires a CCA to
maintain written policies and procedures reasonably designed to, as
applicable, identify, monitor and manage the material risks to it
arising from arrangements in which firms that are indirect participants
in the CCA rely on the services provided to it by direct participants
to access the CCA's payment, clearing, or settlement facilities.\29\
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    \25\ Hereafter covered clearing agencies are referred to as
``CCAs.''
    \26\ Covered Clearing Agency Standards Adopting Release,
Exchange Act Release No. 78961 (Sep. 28, 2016), 81 FR 70786, 70839
(Oct. 13, 2016) (``CCA Standards Adopting Release''); see also CCA
Standards Proposing Release, supra note 7, 79 FR at 29552.
    \27\ CCA Standards Proposing Release, supra note 7, 79 FR at
29552; see also CCA Standards Adopting Release, supra note 25, 81 FR
at 70839.
    \28\ 17 CFR 240.17Ad-22(e)(18).
    \29\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

    As described more fully in section III infra, the increasing volume
of non-centrally cleared transactions in U.S. Treasury securities may
render U.S. Treasury securities CCAs more susceptible to member
defaults from risks outside the transactions cleared by the CCA, and as
a result the

Commission is proposing to amend Rule 17Ad-22(e)(18). In particular,
and as set forth more fully below, the Commission believes that
amending Rule 17Ad-22(e)(18) to require the CCAs to address their
direct participants' non-centrally cleared transactions, both for repos
and certain categories of cash transactions, will help reduce contagion
risk to the CCA and bring the benefits of central clearing to more
transactions involving U.S. Treasury securities, thereby lowering
overall systemic risk in the market. As discussed further in section
III.A.3 infra, these benefits include centralized default management,
increased multilateral netting, and reduction of settlement fails. The
Commission also believes that increasing the volume of transactions
submitted for central clearing is consistent with promoting the prompt
and accurate clearance and settlement of securities transactions.\30\
---------------------------------------------------------------------------

    \30\ See Self-Regulatory Organizations; Fixed Income Clearing
Corporation; Order Granting Approval of a Proposed Rule Change
Relating to Trade Submission Requirements and Pre-Netting, Exchange
Act Release No. 51908 (June 22, 2005), 70 FR 37450 (June 29, 2005)
(describing a rule designed to bring additional transactions into
FICC's netting system as ``clearly designed to promote the prompt
and accurate clearance and settlement of those transactions and to
preserve the safety and soundness of the national clearance and
settlement system.'').
---------------------------------------------------------------------------

    The Commission also proposes to impose additional requirements on
how U.S. Treasury securities CCAs calculate, collect, and hold margin
posted on behalf of indirect participants (i.e., customers) who rely on
the services of a direct participant (i.e., the member of the U.S.
Treasury securities CCA) to access the CCA's services. As set forth in
more detail below, the Commission believes that such requirements also
will improve the risk management practices at U.S. Treasury securities
CCAs and incentivize and facilitate additional central clearing in the
U.S. Treasury market, thereby lowering systemic risk. Individually and
collectively, these two proposals should further incentivize and
facilitate additional central clearing.
    In addition, the Commission recognizes that the proposal 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 securities positions. Currently, broker-dealers are not
permitted to include a debit in the customer reserve formula equal to
this amount of margin or, more generally, to use customer cash or
customer fully paid or excess margin securities to meet a margin
requirement. To address this, the Commission proposes an amendment
that, subject to certain conditions, would allow the broker-dealer to
include a debit in the customer or PAB reserve formula when delivering
customer cash or U.S. Treasury securities to meet the margin
requirement at an entity providing CCP services in the U.S. Treasury
market.

E. Current Regulatory and Industry Discussions Regarding the U.S.
Treasury Market

    In normal market conditions, the U.S. Treasury market has
functioned extremely well. Even under stress, the market generally has
been highly resilient. However, several episodes in the U.S. Treasury
market, including the ``flash rally'' of 2014, the U.S. Treasury repo
market stress of September 2019, and the COVID-19 shock of March 2020,
have raised questions about the U.S. Treasury market's continued
capacity to absorb shocks and what factors may be limiting the
resilience of the U.S. Treasury market under stress.\31\ Although
different in their scope and magnitude, these events all generally
involved dramatic increases in market price volatility and/or sharp
decreases in available liquidity.
---------------------------------------------------------------------------

    \31\ G-30 Report, supra note 5, at 1; IAWG Report, supra note 4,
at 7; Peter Ryan and Robert Toomey, Improving Capacity and
Resiliency in US Treasury Markets: Part I (Mar. 24, 2021), available
at https://www.sifma.org/resources/news/improving-capacity-and-resiliency-in-us-treasury-markets-part-1/.
---------------------------------------------------------------------------

    A number of recent publications and industry discussions have
considered the overall structure and resilience of the U.S. Treasury
market, in light of, among other things, the market events noted
above.\32\ The Commission believes that, although this proposal will
not, by itself, necessarily prevent future market disruptions, the
proposal will support efficiency by reducing counterparty credit risk
and improving transparency, as discussed in section III.A.3 infra.
Moreover, the Commission believes that enhancing the membership
standards applicable to U.S. Treasury securities CCAs should improve
the resilience of such CCAs by expanding their ability to manage the
risks arising from direct participants who currently engage in non-
centrally cleared transactions away from the CCA. In addition, the
Commission believes that the risk management standards should
facilitate and incentivize additional central clearing, thereby
bringing the benefits of additional central clearing to the market for
U.S. Treasury securities.
---------------------------------------------------------------------------

    \32\ See generally IAWG Report, supra note 4; G-30 Report, supra
note 5; Nellie Liang & Patrick Parkinson, Enhancing Liquidity of the
U.S. Treasury Market Under Stress (Dec. 16, 2020), available at
https://www.brookings.edu/wp-content/uploads/2020/12/WP72_Liang-Parkinson.pdf (``Liang & Parkinson'').
---------------------------------------------------------------------------

    The Commission believes that these changes should lower systemic
risk in the U.S. Treasury market by increasing the volume of
transactions that are subject to central clearing and ensuring that
those additional transactions are subject to standardized risk
management. The Commission also believes that increased central
clearing would provide greater transparency into the market and could,
potentially facilitate all-to-all trading.\33\ The Commission believes
that these benefits arising from central clearing should help improve
the functioning of the U.S. Treasury market.
---------------------------------------------------------------------------

    \33\ See notes 184 through 186 infra.
---------------------------------------------------------------------------

II. Background

A. Current U.S. Treasury Market Structure and Central Clearing Within
That Structure

    U.S. Treasury securities are direct obligations of the U.S.
Government issued by the U.S. Department of the Treasury (``Treasury
Department''). Market participants use U.S. Treasury securities as an
investment instrument and as a hedging vehicle, among other things. For
example, U.S. Treasury securities are often used as collateral in
lending arrangements or as margin on other financial transactions. The
Treasury Department issues several different types of securities,
including U.S. Treasury bills, nominal coupons notes and bonds,
Floating Rate Notes, and Treasury Inflation-Protected Securities
(``TIPS''). For each U.S. Treasury security type, the most recently
issued (``on-the-run'') securities are the most liquid in the secondary
market.\34\ Market participants commonly refer to securities issued
prior to ``on-the-run'' securities as ``off-the-run'' securities.
Trading in off-the-run U.S. Treasury securities has always been less
active than on-the-run trading, and price discovery primarily occurs in
on-the-run securities.\35\
---------------------------------------------------------------------------

    \34\ On-the-run U.S. Treasury securities are the most recently
auctioned nominal coupon securities. These securities are referred
to as ``on-the-run'' starting the day after they are auctioned.
Nominal coupon securities pay a fixed semi-annual coupon and are
currently issued at original maturities of 2, 3, 5, 7, 10, 20, and
30 years. These standard maturities are commonly referred to as
``benchmark'' securities because the yields for these securities are
used as references to price a number of private market transactions.
    \35\ Joint Staff Report, supra note 4, at 35-36. Price discovery
also occurs in when-issued trading of U.S. Treasury securities prior
to and on the day of the auction (pre- on-the-run trading). See note
38 infra.
---------------------------------------------------------------------------

    The U.S. Treasury market consists of two components: the primary
market

and the secondary market. The primary market is where the Treasury
Department auctions securities (i.e., debt) to the public through a
competitive bidding process and subsequently issues awarded securities
to finance the Federal government.\36\ These U.S. Treasury securities,
which are issued after the auction, are marketable securities and are
primarily sold to financial institutions. Financial institutions
designated by the Federal Reserve Bank of New York as ``primary
dealers'' are expected to submit competitive bids on a pro-rata basis
and participate meaningfully in all U.S. Treasury auctions at
reasonably competitive rates or yields.\37\ U.S. Treasury securities
are typically issued a few days after the auction and trade on the
secondary market.\38\ The secondary market is where the subsequent
trading of U.S. Treasury securities occurs. The secondary market
includes the ``cash market,'' for outright purchases and sales of
securities, and the repo market, where one participant sells a U.S.
Treasury security to another participant, along with a commitment to
repurchase the security at a specified price on a specified later
date.\39\ This proposal applies to the secondary market for U.S.
Treasury securities.
---------------------------------------------------------------------------

    \36\ TMPG White Paper, supra note 21, at 6. The Federal Reserve
Bank of New York serves as fiscal agent for the U.S. Treasury in
conducting auctions of marketable U.S. Treasury debt. See 12 U.S.C.
391.
    \37\ See Federal Reserve Bank of New York, Administration of
Relationships with Primary Dealers, available at https://www.newyorkfed.org/markets/primarydealers.html. Specifically,
primary dealers are required to be either (1) a registered broker-
dealer or government securities broker-dealer, which is approved as
a member of the Financial Industry Regulatory Authority, Inc. and
has net regulatory capital of at least $50 million, or (2) a state
or federally chartered bank or savings association (or a state or
federally licensed branch or agency of a foreign bank) that is
subject to bank supervision and maintains at least $1 billion in
Tier 1 capital. Id. Thus, for those primary dealers that fall into
the former category, they are a subset of the broader set of
registered broker-dealers or government securities broker-dealers,
which may also participate in the Treasury market, as discussed
further in section II.A.1 and 2 infra.
    \38\ The Treasury Department typically announces a new security
that it intends to sell several days before the auction at which it
is first sold to the public. These securities begin trading after
announcement before the auction and through issuance, which occurs a
few days after the auction. Such trading is known generally as
``when-issued'' trading; however, in the timeframe between the
announcement and the auction, such trading is known as when-issued
and referred to as such by market participants, but after the
auction and before issuance, the securities are typically referred
to simply as on-the-run, consistent with market practice. Michael
Fleming, Or Shachar, and Peter Van Tassel, Treasury Market When-
Issued Trading Activity, Liberty Street Economics (Nov. 30, 2020)
(``Fleming, Shachar, and Van Tassel''), available at https://libertystreeteconomics.newyorkfed.org/2020/11/treasury-market-when-issued-trading-activity/.
    \39\ See IAWG Report, supra note 4, at 3. The secondary market
also includes the market for U.S. Treasury futures, which trade
electronically on the Chicago Board of Trade, a designated contract
market operated by the Chicago Mercantile Exchange (``CME'') Group,
and centrally cleared by CME Clearing. U.S. Treasury futures are
generally regulated by the U.S. Commodity Futures Trading Commission
and are not the subject of this proposal.
---------------------------------------------------------------------------

1. Cash Market
    The cash market has two main components: the interdealer market and
the dealer-to-customer market. In the interdealer market, dealers
primarily trade with each other and with principal trading firms
(``PTFs''), which trade as principals for their own accounts. The
majority of trading in the interdealer market in on-the-run U.S.
Treasury securities occurs on electronic platforms operated by
interdealer brokers that bring together buyers and sellers anonymously
using order books or other trading facilities supported by advanced
electronic trading technology (``IDBs'').\40\ These IDBs are generally
direct participants of a U.S. Treasury securities CCA and stand as
counterparties to both sides of each trade on their platforms.\41\
---------------------------------------------------------------------------

    \40\ Joint Staff Report, supra note 4, at 11, 35-36.
    \41\ IAWG Report, supra note 4, at 21.
---------------------------------------------------------------------------

    Typically, an IDB provides a trading facility for multiple buyers
and sellers for U.S. Treasury securities to enter orders at specified
prices and sizes and have these orders displayed to all users on an
anonymous basis. The trading facility automatically matches these
orders according to priority and execution rules that are programmed in
the trading facility. When a match occurs and a trade is executed, the
IDB then books two trades, with the IDB functioning as the principal to
each respective counterparty, thereby protecting the anonymity of each
party, but taking on credit risk from each counterparty.\42\
---------------------------------------------------------------------------

    \42\ TMPG White Paper, supra note 21, at 6.
---------------------------------------------------------------------------

    Although the term ``IDB'' is sometimes used to refer to platforms
that may provide voice-based or other trading technology, as referenced
below, in this release, consistent with existing commentary on the U.S.
Treasury markets, the term IDB does not encompass platforms that
provide voice-based or other non-anonymous methods of bringing together
buyers and sellers of U.S. Treasury securities and instead refers to
electronic platforms providing anonymous methods of bringing together
buyers and sellers.\43\
---------------------------------------------------------------------------

    \43\ The entities referred to as IDBs here are encompassed in
the ATSs category in the tables set forth in section IV.B.1 infra
because of the way that such IDBs are categorized in TRACE.
Specifically, the ``ATS'' category in TRACE encompasses these IDBs.
By contrast, the non-ATS IDBs category in TRACE encompasses the
voice-based or other non-anonymous methods of bringing together
buyers and sellers, which are also sometimes referred to as
interdealer brokers by market participants.
---------------------------------------------------------------------------

    The majority of trades in the interdealer markets are trades in
``on-the-run'' issues. The majority of interdealer trading for off-the-
run U.S. Treasury securities occurs via bilateral transactions through
traditional voice-assisted brokers and electronic trading platforms
offering various protocols to bring together buyers and sellers,
although some interdealer trading in off-the-run U.S. Treasury
securities does occur on IDBs that anonymously bring together buyers
and sellers.\44\
---------------------------------------------------------------------------

    \44\ Joint Staff Report, supra note 4, at 35.
---------------------------------------------------------------------------

    Until the mid-2000s, most interdealer trading occurred between
primary dealers, who are required to be members of FICC, and was
centrally cleared.\45\ However, in recent years, much of the trading on
IDBs, in terms of number of trades and overall volume, has been
conducted by PTFs.\46\
---------------------------------------------------------------------------

    \45\ G-30 Report, supra note 5, at 9; IAWG Report, supra note 4,
at 5-6; TMPG White Paper, supra note 21, at 6. See also supra note
37 (setting forth conditions for being a primary dealer).
    \46\ G-30 Report, supra note 5, at 1.
---------------------------------------------------------------------------

    Most IDBs are FICC direct participants, and the trades between an
IDB, that is a FICC direct participant, and another FICC direct
participant are submitted for central clearing to FICC, which, as noted
above, is currently the only U.S. Treasury securities CCA. Various
types of market participants are direct participants of FICC, including
dealers (both bank-affiliated and independent), banks, and IDBs. FICC's
current rules generally require that FICC direct participants submit
for clearing all trades with other FICC direct participants.\47\
However, FICC's rules do not require that a trade between a FICC direct
participant and a party that is not a FICC direct participant be
submitted for clearing. Therefore, for trades on IDBs between a party
that is not a FICC direct participant (which, on an IDB, is generally a
PTF) and a dealer which is a FICC direct participant--which results in
two separate transactions, between the IDB and the dealer, on the one
hand, and between the IDB and the PTF, on the other hand--the
transaction between the dealer and the IDB would be centrally cleared.
But the transaction

between a PTF which is not a FICC member and the IDB, on the other
side, would not be centrally cleared and instead would be settled
bilaterally with the IDB, often through a clearing agent acting on
behalf of the non-FICC direct participant.\48\
---------------------------------------------------------------------------

    \47\ FICC Rule 2A section 7(e) (requirement that FICC Netting
Members submit to FICC all of its eligible trades with other Netting
Members); FICC Rule 18 section 2 (similar requirement with regard to
Repo transactions). The Rules for FICC's GSD are available at
https://www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf. Unless otherwise indicated, all references to
``FICC Rule'' in this release refer to the GSD Rulebook.
    \48\ See TMPG White Paper, supra note 21, at Figures 5A and 5B
(providing graphical description of this type of clearing).
---------------------------------------------------------------------------

    A 2015 inter-agency staff publication found that PTFs account for
more than half of the trading activity in the futures and electronic
IDB markets for U.S. Treasury securities, providing the vast majority
of market depth, and questioned whether trades cleared by such firms
outside of a CCP are subject to the same level of risk mitigation.\49\
In 2018, the TMPG determined that ``a majority of trades in the
secondary [cash] Treasury market now clear bilaterally, a trend that is
contrary to the direction of recent regulatory requirements in other
markets (i.e., swaps) that for some products mandate clearing and for
others encourage it through higher margin requirements on bilaterally
cleared transactions.'' \50\ The trading volume of non-FICC members, at
least in the cash U.S. Treasury market, is now estimated to exceed that
of FICC members.\51\ Whether or not a trade is centrally cleared
impacts the risk management requirements applicable to the trade.
Specifically, trades cleared and settled outside of a CCP may not be
subject to the same extent of risk management associated with central
clearing, which includes requirements for margin determined by a
publicly disclosed method that applies objectively and uniformly to all
members of the CCP, loss mutualization, and liquidity risk
management.\52\
---------------------------------------------------------------------------

    \49\ Joint Staff Report, supra note 4, at 2, 55.
    \50\ TMPG White Paper, supra note 21, at 2.
    \51\ IAWG Report, supra note 4, at 30; TMPG White Paper, supra
note 21, at 12.
    \52\ IAWG Report, supra note 4, at 30; G-30 Report, supra note
5.
---------------------------------------------------------------------------

    Dealer-to-customer trading generally involves ``off-the-run''
issues more often than the interdealer market and typically is
conducted via voice or electronically (i.e., electronic ``request for
quote'' systems referred to section IV infra as non-ATS IDBs).\53\
Trading in the dealer-to-customer cash market is generally--and has
historically been--conducted through bilateral transactions. Customers
have not traditionally traded directly with other end users.\54\
Rather, non-dealers primarily trade with dealers, and dealers use the
interdealer market as a source of orders and trading interest to help
facilitate their trading with customers in the dealer-to-customer
market. Generally, trades in the dealer-to-customer market are not
centrally cleared.\55\
---------------------------------------------------------------------------

    \53\ G-30 Report, supra note 5, at 1; TMPG White Paper, supra
note 21, at 1-2.
    \54\ See Exchange Act Release No. 90019 (Sep. 28, 2020), 85 FR
87106, 87108 (Dec. 30, 2020).
    \55\ G-30 Report, supra note 5, at 1; IAWG Report, supra note 4,
at 3; TMPG White Paper, supra note 21, at 6.
---------------------------------------------------------------------------

2. U.S. Treasury Repo Market
    In a U.S. Treasury repo transaction, one party sells a U.S.
Treasury security to another party, along with a commitment to
repurchase the security at a specified price on a specified later date.
A reverse repo transaction is the same transaction from the buyer's
perspective.\56\ The effect of such a repo transaction is similar to a
cash loan, using the U.S. Treasury securities as collateral. The
difference in price between the purchase and repurchase is typically
converted to an interest rate, and represents the ``cost'' of the loan.
U.S. Treasury repos can use a particular security as collateral (known
in the industry as ``specific collateral'') or can designate a broad
class of securities as collateral (known as ``general collateral'').
Most U.S. Treasury repos are overnight, though the parties can set the
term for longer (generally no longer than one year).
---------------------------------------------------------------------------

    \56\ For purposes of this release, we generally refer to both
repos and reverse repos collectively as ``repos.''
---------------------------------------------------------------------------

    The U.S. Treasury repo market plays a key role in facilitating the
flow of cash and securities in the financial system by allowing market
participants to access low cost secured financing, supporting dealer
market-making activities, enabling institutional investors with large
cash balances to invest cash on a secured basis, and contributing to
price discovery and efficient capital allocation.\57\ The Federal
Reserve also engages in U.S. Treasury repos to bring about liquidity in
the financial system, implement monetary policy, and promote financial
stability. As of March 31, 2022, total repo assets were approximately
$6 trillion, while repo liabilities were approximately $5.6 trillion,
with over half collateralized by U.S. Treasury securities.\58\ Of that
amount, 38 percent is attributable to the Federal Reserve's reverse
repo programs, 27 percent to securities dealers, 20 percent to what is
referred to as ``rest of world'' and includes, among other entities,
foreign hedge funds, and the rest to banks, mortgage real estate
investment trusts, and insurance companies.\59\
---------------------------------------------------------------------------

    \57\ Viktoria Baklanova, Isaac Kuznits, Trevor Tatum, Primer:
Money Market Funds and the Repo Market (Feb. 18, 2021), available at
https://www.sec.gov/files/mmfs-and-the-repo-market-021721.pdf (``MMF
Primer'').
    \58\ The Financial Accounts of the United States (Q1 2022),
available at https://www.federalreserve.gov/releases/z1/20220609/html/l207.htm. The difference between repo assets and repo
liabilities in the Financial Accounts is largely attributed to
incomplete repo data collections and is calculated as instrument
discrepancies.
    \59\ See id.
---------------------------------------------------------------------------

    Depending on clearing and settlement practices, the U.S. Treasury
repo market consists of four main components: (1) non-centrally
cleared, settled bilaterally, (2) centrally cleared, settled
bilaterally, (3) non-centrally cleared, settled on a triparty platform,
and (4) centrally cleared, settled on a triparty platform.
    For non-centrally cleared bilateral U.S. Treasury repos, the
parties agree to the terms and settle the trades between themselves,
without involving a CCP or other third-party. As mentioned above,
FICC's rules require its direct participants to submit for central
clearing all eligible trades with other direct participants. Therefore,
non-centrally cleared bilateral U.S. Treasury repos involve at least
one party that is not a FICC direct participant (e.g., a hedge fund);
such repos may also involve a repo structure that FICC does not accept
for clearing.
    For centrally cleared bilateral U.S. Treasury repos, the parties
are FICC direct participants that submit agreed-upon trade details to
FICC for central clearing, and those trades are settled delivery versus
payment using the members' clearing banks and/or Fedwire Securities
Service.\60\ Additionally, some institutional participants (e.g., money
market funds and hedge funds) that are not FICC direct participants
also centrally clear repos through FICC's sponsored service. In 2005,
FICC established this service (the ``Sponsored Service''), allowing
eligible direct participants (Sponsoring Members) to sponsor their
clients into a limited form of FICC membership and then to submit
certain eligible securities transactions of their clients (Sponsored
Members) to FICC for central clearing.\61\ FICC interacts solely with
the Sponsoring Member/direct participant as agent for purposes of the
Sponsoring Member's clients/Sponsored Members' obligations to and from
FICC. Sponsoring Members also guarantee to FICC the payment and
performance obligations of their Sponsored

Members.\62\ Sponsoring Members can be either bank direct participants
of FICC which meet certain capital and other requirements or any other
FICC direct participant which meets what FICC determines to be the
appropriate financial resource requirements; in practice, Sponsoring
Members include both banks and broker-dealers.\63\ Sponsored Members
have to be ``qualified institutional buyers'' as defined by Rule 144A
under the Securities Act of 1933, as amended, or otherwise meet the
financial standards necessary to be a ``qualified institutional
buyer,'' and currently, Sponsored Members generally consist of hedge
funds, money market funds, other asset managers, and smaller banks.\64\
---------------------------------------------------------------------------

    \60\ See note 249 infra.
    \61\ See Self-Regulatory Organizations; Fixed Income Clearing
Corporation; Order Approving a Proposed Rule Change Establishing a
Sponsored Membership Program, Exchange Act Release No. 51896 (June
21, 2005), 70 FR 36981 (June 27, 2005).
    \62\ See Exchange Act Release No. 51896 (June 21, 2005), 70 FR
36981 (June 27, 2005); see also FICC Rule 3A, supra note 47. For
general information and statistics regarding the Sponsored Service,
see https://www.dtcc.com/clearing-services/ficc-gov/sponsored-membership, as well as section IV.B.7.d.i infra. The Sponsored
Service also allows the submission of cash transactions; however, at
this time, the service is generally used only for U.S. Treasury repo
transactions.
    \63\ See FICC Rule 3A, section 2(a) and (b), supra note 47; FICC
Membership Listing, available at https://www.dtcc.com/-/media/Files/Downloads/client-center/FICC/Mem-GOV-by-name.xlsx (identifying
Sponsoring Members as those with Omnibus accounts).
    \64\ See FICC Rule 3A, section 3(a), supra note 47; FICC
Sponsored Membership Listing, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    For non-centrally cleared triparty U.S. Treasury repos, cash
lenders (e.g., money market funds) provide financing to cash borrowers
(e.g., dealers). The parties agree to the terms of a trade and arrange
for a clearing bank to facilitate settlement. Like non-centrally
cleared bilateral repos, at least one party to the transaction is not a
FICC member. While the clearing bank provides a triparty platform to
help facilitate the movement of cash and securities among accounts of
counterparties to the transaction, it does not itself become a
counterparty to the transactions and does not guarantee either
counterparty's performance of its obligations. Collateral posted to the
triparty platform generally cannot be repledged outside the platform,
thereby protecting against settlement fails.\65\
---------------------------------------------------------------------------

    \65\ See generally Reference Guide to U.S. Repo and Securities
Lending Markets (Nov. 9, 2015), available at https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf.
---------------------------------------------------------------------------

    For centrally cleared U.S. Treasury triparty repos, the parties are
FICC members that submit agreed-upon trade details to FICC for central
clearing through FICC's General Collateral Finance (``GCF'') Repo
Service. Unlike centrally cleared bilateral repos, these triparty repos
are settled on the clearing bank's triparty platform. Like centrally
cleared bilateral repos, centrally cleared triparty repos are novated
by FICC, and FICC acts as a CCP for these transactions, including by
collecting margin pursuant to its margin methodology for such
transactions. Until recently, centrally cleared triparty repos were
only conducted through the GCF Repo Service, i.e., between two direct
members of FICC. However, in September 2021, FICC introduced its
Sponsored General Collateral Service (``Sponsored GC Service''), which
enables centrally cleared triparty repos between a sponsored member and
its sponsoring member.\66\ The Sponsored GC Service accepts general
collateral in a number of generic CUSIPs, and though U.S. Treasury
securities are among the general collateral types acceptable in the
Sponsored GC Service, other types of collateral including agency and
mortgage backed securities are acceptable for use as collateral as
well.\67\ Each type of eligible collateral for the Sponsored GC Service
is assigned its own generic CUSIP number, and security types are not
mixed.\68\
---------------------------------------------------------------------------

    \66\ Exchange Act Release No. 92808 (Aug. 30, 2021), 86 FR 49580
(Sept. 3, 2021). Currently, the Bank of New York Mellon operates the
triparty platform that facilitates trades conducted via the GCF Repo
Service and Sponsored GC Service.
    \67\ See generally DTCC Sponsored General Collateral Service,
available at https://www.dtcc.com/-/media/Files/Downloads/Clearing-Services/FICC/GOV/SponsoredGC-FS-INTL.pdf.
    \68\ Id.
---------------------------------------------------------------------------

B. Current Regulatory Framework

1. Clearing Agency Regulation Under Section 17A of the Exchange Act
    As noted above, when Congress added section 17A to the Exchange Act
as part of the Securities Acts Amendments of 1975, it directed the
Commission to facilitate the establishment of (i) a national system for
the prompt and accurate clearance and settlement of securities
transactions (other than exempt securities) and (ii) linked or
coordinated facilities for clearance and settlement of securities
transactions,\69\ and the Government Securities Act of 1986
specifically included government securities within the scope of section
17A.\70\ In facilitating the establishment of the national clearance
and settlement system, the Commission must have due regard for the
public interest, the protection of investors, the safeguarding of
securities and funds, and maintenance of fair competition among brokers
and dealers, clearing agencies, and transfer agents.\71\ The
Commission's ability to achieve these goals is based upon the
regulation of clearing agencies registered with the Commission.\72\
Specifically, section 17A of the Exchange Act provides the Commission
with authority to adopt rules as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Exchange Act (including for the prompt and
accurate clearance and settlement of securities transactions) and
prohibits a clearing agency from engaging in any activity in
contravention of such rules and regulations.\73\
---------------------------------------------------------------------------

    \69\ See supra note 1.
    \70\ Specifically, the Government Securities Act, among other
things, authorized the Commission to regulate clearing agencies
engaged in the clearance and settlement of government securities
transactions, including those in U.S. Treasury securities, by
providing that government securities would no longer be exempt
securities for purposes of section 17A of the Exchange Act.
Government Securities Act of 1986, section 102(a); 15 U.S.C.
78c(a)(12)(B)(i).
    \71\ See 15 U.S.C. 78q-1(a)(2)(A).
    \72\ Under the Exchange Act and the regulations thereunder, any
entity providing such central counterparty services is a clearing
agency and must register with the Commission or seek an exemption
from registration. 15 U.S.C. 78q-1(b)(1); see also 17 CFR 240.17Ad-
22(a)(5) (defining covered clearing agency).
    \73\ See 15 U.S.C. 78q-1(d)(1); see also 15 U.S.C. 78q-1(b)(2)
(referring to the Commission's ability to adopt rules with respect
to the application of section 17A). As noted above, for purposes of
section 17A, the Commission's authority over securities also
includes ``government securities.'' Government Securities Act of
1986, section 102(a); 15 U.S.C. 78c(a)(12)(B)(i).
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    The Commission has exercised its broad authority to prescribe
requirements for the prompt and accurate clearance and settlement of
securities transactions and the safeguarding of securities and funds
described above. As noted above, most recently, the Commission has
promulgated the Covered Clearing Agency standards, which apply to,
among others, any entity providing CCP services, such as FICC.\74\
These standards require covered clearing agencies, to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, as applicable, meet certain minimum standards
regarding, among other things, operations, governance, and risk
management.
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    \74\ See supra note 7 and 17 CFR 240.17Ad-22(a)(5).
---------------------------------------------------------------------------

    The Commission has previously explained that membership
requirements like those set forth in this proposal are an important
tool for managing a clearing agency's risk. For example, when proposing
the Covered Clearing Agency Standards, the Commission explained that
appropriate minimum membership requirements, including operational,
legal, and capital requirements, help ``to ensure all

members will be reasonably capable of meeting their various obligations
to the clearing agency in stressed market conditions and upon member
default.'' \75\ Clearing agency member defaults have long been a
concern of the Commission; the Commission has explained that ``[m]ember
defaults challenge the safe functioning of a clearing agency by
creating credit and liquidity risks, which impede a clearing agency's
ability to settle securities transactions in a timely manner.'' \76\
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    \75\ CCA Standards Proposing Release, supra note 7, 79 FR at
29552; see also CCA Standards Adopting Release, supra note 25, 81 FR
at 70839 (stating that the use of risk-based criteria helps to
protect investors ``by limiting the participants of a covered
clearing agency to those for which the covered clearing agency has
assessed the likelihood of default.'').
    \76\ CCA Standards Proposing Release, supra note 7, 79 FR at
29552.
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    In particular, among other things, the Covered Clearing Agency
Standards impose requirements on a covered clearing agency with respect
to both its direct and indirect participants. For example, Rule 17Ad-
22(e)(18) requires that covered clearing agencies establish implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable, establish objective, risk-based and
publicly disclosed criteria for participation.\77\ Similarly, Rule
17Ad-22(e)(19) imposes requirements on a covered clearing agency to
maintain written policies and procedures reasonably designed to, as
applicable, identify, monitor and manage the risks posed to it by
indirect participants.\78\
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    \77\ 17 CFR 240.17Ad-22(e)(18).
    \78\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

2. The Broker-Dealer Customer Protection Rule
    Rule 15c3-3 is designed ``to give more specific protection to
customer funds and securities, in effect forbidding brokers and dealers
from using customer assets to finance any part of their businesses
unrelated to servicing securities customers; e.g., a firm is virtually
precluded from using customer funds to buy securities for its own
account.'' \79\ To meet this objective, Rule 15c3-3 requires a broker-
dealer that maintains custody of customer securities and cash (a
``carrying broker-dealer'') to take two primary steps to safeguard
these assets, as described below. The steps are designed to protect
customers by segregating their securities and cash from the broker-
dealer's proprietary business activities. If the broker-dealer fails
financially, the customer securities and cash should be readily
available to be returned to the customers. In addition, if the failed
broker-dealer is liquidated in a formal proceeding under the Securities
Investor Protection Act of 1970 (``SIPA''), the customer securities and
cash should be isolated and readily identifiable as ``customer
property'' and, consequently, available to be distributed to customers
ahead of other creditors.\80\
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    \79\ See Exchange Act Release No. 21651 (Jan. 11, 1985), 50 FR
2690, 2690 (Jan. 18, 1985). See also Exchange Act Release No. 9856
(Nov. 10, 1972), 37 FR 25224, 25224 (Nov. 29, 1972).
    \80\ See 15 U.S.C. 78aaa et seq. At a high level, in such a
liquidation, SIPA would provide for the appointment of a trustee,
who is required to return customer name securities to customers of
the debtor (15 U.S.C. 78fff-2(c)(2)), distribute the fund of
``customer property'' ratably to customers (15 U.S.C. 78fff-2(b)),
and pay, with money from the SIPC fund, remaining customer net
equity claims, to the extent provided by the Act (15 U.S.C. 78fff-
2(b) and 3(a)). Customer property is defined as ``cash and
securities (except customer name securities delivered to the
customer) at any time received, acquired, or held by or for the
account of a debtor from or for the securities accounts of a
customer, and the proceeds of any such property transferred by the
debtor, including property unlawfully converted.'' 15 U.S.C.
7lll(4).
---------------------------------------------------------------------------

    The first step required by Rule 15c3-3 is that a carrying broker-
dealer must maintain physical possession or control over customers'
fully paid and excess margin securities.\81\ Control means the broker-
dealer must hold these securities in one of several locations specified
in Rule 15c3-3 and free of liens or any other interest that could be
exercised by a third-party to secure an obligation of the broker-
dealer.\82\ Permissible locations include a clearing corporation and a
bank, as defined in section 3(a)(6) of the Exchange Act.\83\
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    \81\ See 17 CFR 240.15c3-3(d). The term ``fully paid
securities'' means all securities carried for the account of a
customer in a cash account as defined in Regulation T (12 CFR 220.1
et seq.), as well as securities carried for the account of a
customer in a margin account or any special account under Regulation
T that have no loan value for margin purposes, and all margin equity
securities in such accounts if they are fully paid: provided,
however, that the term fully paid securities does not apply to any
securities purchased in transactions for which the customer has not
made full payment. 17 CFR 240.15c3-3(a)(3). The term ``margin
securities'' means those securities carried for the account of a
customer in a margin account as defined in section 4 of Regulation T
(12 CFR 220.4), as well as securities carried in any other account
(such accounts referred to as ``margin accounts'') other than the
securities referred to in paragraph (a)(3) of Rule 15c3-3. 17 CFR
240.15c3-3(a)(4). The term ``excess margin securities'' means those
securities referred to in paragraph (a)(4) of Rule 15c3-3 carried
for the account of a customer having a market value in excess of
140% of the total of the debit balances in the customer's account or
accounts encompassed by paragraph (a)(4) of Rule 15c3-3 which the
broker-dealer identifies as not constituting margin securities. 17
CFR 240.15c3-3(a)(5).
    \82\ See 17 CFR 240.15c3-3(c). Customer securities held by the
carrying broker-dealer are not assets of the firm. Rather, the
carrying broker-dealer holds them in a custodial capacity, and the
possession and control requirement is designed to ensure that the
carrying broker-dealer treats them in a manner that allows for their
prompt return.
    \83\ Id.
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    The second step is that a carrying broker-dealer must maintain a
reserve of funds or qualified securities in an account at a bank that
is at least equal in value to the net cash owed to customers.\84\ The
account must be titled ``Special Reserve Bank Account for the Exclusive
Benefit of Customers'' (``customer reserve account'').\85\ The amount
of net cash owed to customers is computed weekly pursuant to a formula
set forth in 17 CFR 240.15c3-3a (``Rule 15c3-3a'').\86\ Under the
formula, the broker-dealer adds up customer credit items and then
subtracts from that amount customer debit items.\87\ The credit items
include credit balances in customer accounts and funds obtained through
the use of customer securities.\88\ The debit items include money owed
by customers (e.g., from margin lending), securities borrowed by the
broker-dealer to effectuate customer short sales, and required margin
posted to certain clearing agencies as a consequence of customer
securities transactions.\89\ If credit items exceed debit items, the
net amount must be on deposit in the customer reserve account in the
form of

cash and/or qualified securities.\90\ A broker-dealer cannot make a
withdrawal from the customer reserve account until the next computation
and even then only if the computation shows that the reserve
requirement has decreased.\91\ The broker-dealer must make a deposit
into the customer reserve account if the computation shows an increase
in the reserve requirement.
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    \84\ 17 CFR 240.15c3-3(e). The term ``qualified security'' is
defined in Rule 15c3-3 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. See 17 CFR 240.15c3-3(a)(6).
    \85\ See 17 CFR 240.15c3-3(e)(1). The purpose of giving the
account this title is to alert the bank and creditors of the broker-
dealer that this reserve fund is to be used to meet the broker-
dealer's obligations to customers (and not the claims of general
creditors) in the event the broker-dealer must be liquidated in a
formal proceeding.
    \86\ Some broker-dealers perform a daily computation in order to
more dynamically match the deposit requirement with the amount of
net cash owed to customers. For example, a broker-dealer that
performs a weekly computation generally cannot withdraw excess cash
or U.S. Treasury securities from the account until the following
week even if the value of the account assets exceeds the net cash
owed to customers. Further, the rule permits certain broker-dealers
to perform a monthly computation. See 17 CFR 240.15c3-3(e)(3).
    \87\ See id.
    \88\ See 17 CFR 240.15c3-3a, Items 1-9. Broker-dealers are
permitted to use customer margin securities to, for example, obtain
bank loans to finance the funds used to lend to customers to
purchase the securities. The amount of the bank loan is a credit in
the formula because this is the amount that the broker-dealer would
need to pay the bank to retrieve the securities. Similarly, broker-
dealers may use customer margin securities to make stock loans to
other broker-dealers in which the lending broker-dealer typically
receives cash in return. The amount payable to the other broker-
dealer on the stock loan is a credit in the formula because this is
the amount the broker-dealer would need to pay the other broker-
dealer to retrieve the securities.
    \89\ See 17 CFR 240.15c3-3a, Items 10-14.
    \90\ 17 CFR 240.15c3-3(e). Customer cash is a balance sheet item
of the carrying broker-dealer (i.e., the amount of cash received
from a customer increases the amount of the carrying broker-dealer's
assets and creates a corresponding liability to the customer). The
reserve formula is designed to isolate these broker-dealer assets so
that an amount equal to the net liabilities to customers is held as
a reserve in the form of cash or U.S. Government securities. The
requirement to establish this reserve is designed to effectively
prevent the carrying broker-dealer from using customer funds for
proprietary business activities such as investing in securities. The
goal is to put the carrying broker-dealer in a position to be able
to readily meet its cash obligations to customers by requiring the
firm to make deposits of cash and/or U.S. Government securities into
the customer reserve account in the amount of the net cash owed to
customers.
    \91\ See 17 CFR 240.15c3-3(e).
---------------------------------------------------------------------------

    The Rule 15c3-3a formula permits the broker-dealer to offset
customer credit items only with customer debit items.\92\ This means
the broker-dealer can use customer cash to facilitate customer
transactions such as financing customer margin loans and borrowing
securities to make deliveries of securities customers have sold
short.\93\ The broker-dealer margin rules require securities customers
to maintain a minimum level of equity in their securities accounts. In
addition to protecting the broker-dealer from the consequences of a
customer default, this equity serves to over-collateralize the
customers' obligations to the broker-dealer. This buffer protects the
customers whose cash was used to facilitate the broker-dealer's
financing of securities purchases. For example, if the broker-dealer
fails, the customer debits, because they generally are over-
collateralized, should be attractive assets for another broker-dealer
to purchase or, if not purchased by another broker-dealer, they should
be able to be liquidated to a net positive equity.\94\ The proceeds of
the debits sale or liquidation can be used to repay the customer cash
used to finance the customer obligations. This cash plus the funds and/
or U.S. Treasury securities held in the customer reserve account should
equal or exceed the total amount of customer credit items (i.e., the
total amount owed by the broker-dealer to its customers).\95\
---------------------------------------------------------------------------

    \92\ See 17 CFR 240.15c3-3a.
    \93\ For example, if a broker-dealer holds $100 for customer A,
the broker-dealer can use that $100 to finance a security purchase
of customer B. The $100 the broker-dealer owes customer A is a
credit in the formula and the $100 customer B owes the broker-dealer
is a debit in the formula. Therefore, under the Rule 15c3-3a formula
there would be no requirement to maintain cash and/or U.S.
Government securities in the customer reserve account. However, if
the broker-dealer did not use the $100 held in customer A's account
for this purpose, there would be no offsetting debit and,
consequently, the broker-dealer would need to have on deposit in the
customer reserve account cash and/or U.S. Government securities in
an amount at least equal to $100.
    \94\ The attractiveness of the over-collateralized debits
facilitates the bulk transfer of customer accounts from a failing or
failed broker-dealer to another broker-dealer.
    \95\ See Exchange Act Release No. 18417 (Jan. 13, 1982), 47 FR
3512, 3513 (Jan. 25, 1982) (``The alternative approach is founded on
the concept that, if the debit items in the Reserve Formula can be
liquidated at or near their contract value, these assets along with
any cash required to be on deposit under the [customer protection]
rule, will be sufficient to satisfy all liabilities to customers
(which are represented as credit items in the Reserve Formula).'').
---------------------------------------------------------------------------

    As noted above, debit items in the Rule 15c3-3a formula include
margin required and on deposit at certain clearing agencies. In
particular, Item 13 of the Rule 15c3-3a formula identifies as a debit
item margin required and on deposit with the Options Clearing
Corporation for all option contracts written or purchased in accounts
of securities customers.\96\ Similarly, Item 14 of the Rule 15c3-3a
formula identifies as a debit item margin related to security futures
products written, purchased, or sold in accounts carried for security-
based swap customers required and on deposit with a clearing agency
registered with the Commission under section 17A of the Exchange Act
\97\ or a derivatives clearing organization (``DCO'') registered with
the Commodities Futures Trading Commission under section 5b of the
Commodity Exchange Act.\98\ These debit items reflect the fact that
customer options and security futures transactions that are cleared
generate margin requirements in which the broker-dealer must deliver
collateral to the Options Clearing Corporation in the case of options
or a clearing agency or DCO in the case of security futures products.
Further, 17 CFR 240.15c3-3b (``Rule 15c3-3b'') sets forth a customer
reserve formula for security-based swaps.\99\ Items 13 and 14 of this
formula are identical to Items 13 and 14 of the Rule 15c3-3a formula.
The Rule 15c3-3b formula also permits a debit item for margin related
to cleared security-based swaps required and on deposit in a qualified
clearing agency account at a clearing agency registered pursuant to
section 17A of the Exchange Act.
---------------------------------------------------------------------------

    \96\ See 17 CFR 240.15c3-3a, Item 13.
    \97\ 15 U.S.C. 78q-1.
    \98\ 7 U.S.C. 78q-1.
    \99\ See also Exchange Act Release No. 86175 (Jun. 21, 2019), 84
FR 43872, 43938-42 (Aug. 22, 2019) (adopting a reserve computation
for security-based swaps that permits a debit for margin delivered
to a security-based swap clearing agency).
---------------------------------------------------------------------------

    Identifying the collateral delivered to the Options Clearing
Corporation, a clearing agency, or a DCO as a debit item permits the
broker-dealer to offset credit items, which reduces the amount of cash
or qualified securities that must be deposited in the customer reserve
account. In addition, under SIPA, ``customer property'' in a
liquidation proceeding of a broker-dealer includes resources provided
through the use or realization of customers' debit cash balances and
other customer-related debit items as defined by the Commission by
rule.\100\ Therefore, by defining margin required and on deposit at the
Options Clearing Corporation, a clearing agency, or a DCO as a debit
item in Rule 15c3-3a, this property is available to the trustee to be
used to return cash and securities to the failed broker-dealer's
customers ahead of any other creditors of the broker-dealer.
---------------------------------------------------------------------------

    \100\ See 15 U.S.C. 78lll(4)(B).
---------------------------------------------------------------------------

III. Proposed Amendments

A. U.S. Treasury Securities CCA Membership Requirements

    For the reasons set forth below, the Commission believes that
direct participants in a U.S. Treasury securities CCA not centrally
clearing cash or repo transactions in U.S. Treasury securities creates
contagion risk to CCAs clearing and settling in these markets, as well
as to the market as a whole, and that this contagion risk can be
ameliorated at least in part by increasing the number of such
transactions that are centrally cleared. Currently, the only U.S.
Treasury securities CCA requires its direct participants to submit for
central clearing are their cash and repo transactions in U.S. Treasury
securities with other direct participants.\101\ However, the CCA's
rules do not require its direct participants to submit either cash or
repo transactions \102\ with

persons who are not direct participants for central clearing. The
Commission now proposes to amend the Covered Clearing Agency Standards
to impose additional requirements for any covered clearing agency that
provides central counterparty services for transactions in U.S.
Treasury securities regarding membership in such CCA.
---------------------------------------------------------------------------

    \101\ FICC Rule 2A, section 7(e), supra note 47 (requirement
that FICC Netting Members submit to FICC all of their eligible
trades with other Netting Members); FICC Rule 18, section 2 (similar
requirement with regard to Repo transactions); cf. FICC Rule 3,
section 8(e) (providing clearing requirement for FICC IDB Members).
    \102\ With regard to Sponsored GC Repos, as noted above, these
transactions can be secured with generic CUSIPs that include U.S.
Treasury securities, and with other generic CUSIPs that include
other securities, such as agency securities and mortgage backed
securities. Because the Membership Proposal is limited to eligible
secondary market transactions in U.S. Treasury securities, it would
not apply to Sponsored GC Repo generic CUSIPs that do not include
U.S. Treasury securities.
---------------------------------------------------------------------------

    Specifically, the proposal would require that such CCAs establish
written policies and procedures reasonably designed to, as applicable,
establish objective, risk-based, and publicly disclosed criteria for
participation, which require that the direct participants of such
covered clearing agency submit for clearance and settlement all
eligible secondary market transactions to which they are a
counterparty. As described in more detail below, an eligible secondary
market transaction in U.S. Treasury securities would be defined to
include:
     Repurchase agreements and reverse repurchase agreements in
which one of the counterparties is a direct participant;
     Any purchases and sales entered into by a direct
participant if the direct participant (A) brings together multiple
buyers and sellers using a trading facility (such as a limit order
book) and (B) is a counterparty to both the buyer and seller in two
separate transactions; and
     Any purchases and sales of U.S. Treasury securities
between a direct participant and a counterparty that is a registered
broker-dealer, government securities dealer, or government securities
broker, a hedge fund, or an account at a registered broker-dealer,
government securities dealer, or government securities broker where
such account may borrow an amount in excess of one-half of the value of
the account or may have gross notional exposure of the transactions in
the account that is more than twice the value of the account.
    However, any transaction (both cash transactions and repos) where
the counterparty to the direct participant of the CCA is a central
bank, sovereign entity, international financial institution, or a
natural person would be excluded from the definition of an eligible
secondary market transaction. In addition, the proposal would require
that such CCAs establish written policies and procedures reasonably
designed to, as applicable, identify and monitor their direct
participants' submission of transactions for clearing, including how
the CCA would address a failure to submit transactions.
    For the reasons set forth below, the Commission believes that
taking these incremental steps, which build on the existing rules of
the only U.S. Treasury securities CCA, will strengthen risk management
at the current and any other future U.S. Treasury securities CCA.
Further, the Commission believes that this proposal would bring the
benefits of clearance and settlement to a potentially significant
portion of the U.S. Treasury securities market.
    This section first explains what the Membership Proposal is and to
whom and what aspects of the U.S. Treasury markets it applies.\103\ It
then describes what constitutes an eligible secondary market
transaction and what transactions are excluded from that definition.
Finally, it discusses the benefits of the Membership Proposal.
---------------------------------------------------------------------------

    \103\ The Commission would add this requirement to the current
text of Rule 17Ad-22(e)(18). The Commission is also proposing to
adjust the numbering of Rule 17Ad-22(e)(18), 17 CFR 240.17Ad-
22(e)(18). But other than adding this proposal as new Rule 17Ad-
22(e)(18)(iv), the Commission is not proposing any other substantive
changes to the current text of Rule 17Ad-22(e)(18). The other
changes to Rule 17Ad-22(e)(18) are entirely stylistic and designed
to enhance readability in light of the proposed addition of Rule
17Ad-22(e)(18)(iv). In addition, the Commission proposes to define a
U.S. Treasury security as ``any security issued by the U.S.
Department of the Treasury.'' This term is not currently defined in
Rule 17Ad-22, and this definition would be codified as Rule 17Ad-
22(a)(23).
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1. Requirement To Clear Eligible Secondary Market Transactions
    The Membership Proposal would apply to ``direct participants'' in a
U.S. Treasury securities CCA, which would distinguish entities that
access a CCA directly (i.e., members of the CCA) from indirect
participants who ``rely on the services provided by direct participants
to access the covered clearing agency's payment, clearing or settlement
facilities.'' \104\ For purposes of the Covered Clearing Agency
Standards, ``participants'' of a CCA are referred to as ``members'' or
``direct participants'' to differentiate these entities from ``direct
participants' customers'' or ``indirect participants.'' \105\
Consequently, for purposes of this proposal and consistent with the
terminology already used in the Covered Clearing Agency Standards,\106\
the term ``direct participants'' would refer to the entities that
directly access a U.S. Treasury securities CCA (generally banks and
broker-dealers), and the term ``indirect participants'' would refer to
those entities which rely on a direct participant to clear and settle
their U.S. Treasury securities transactions with the U.S. Treasury
securities CCA (generally their customers or clients).\107\
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    \104\ 17 CFR 240.17Ad-22(e)(18) and (19). See also CCA Standards
Proposing Release, supra note 7, at 29553 (noting that some market
participants would not meet a covered clearing agency's direct
participation requirements and proposing risk management
requirements for indirect and tiered participants).
    \105\ See, e.g., 17 CFR 240.14Ad-22 (e)(6) (referring to
participants) and (e)(2)(vi) (referring to direct participants'
customers). In addition, the Exchange Act defines a participant of a
clearing agency as ``any person who uses a clearing agency to clear
or settle securities transactions or to transfer, pledge, lend, or
hypothecate securities.'' 15 U.S.C. 78c(a)(24). Indirect
participants are expressly excluded from the Exchange Act definition
of a ``participant'' of a clearing agency because the Exchange Act
provides that a person whose only use of a clearing agency is
through another person who is a participant or as a pledgee of
securities is not a ``participant'' of the clearing agency. Id.
    \106\ See 17 CFR 240.17Ad-22(e)(19) (referring to firms that are
indirect participants in a covered clearing agency as those that
``rely on the services provided by direct participants to access the
covered clearing agency's payment, clearing, or settlement
facilities'').
    \107\ For example, FICC maintains the Sponsored Service. See
supra notes 64 through 66 and accompanying text. Because sponsored
members cannot clear or settle government securities transactions
without a sponsoring member, the Commission believes that these
sponsored members are not ``direct participants.'' As noted above,
such persons are referred to in this release as ``indirect
participants'' or ``customers.''
---------------------------------------------------------------------------

    Moreover, persons who provide services in connection with clearance
and settlement, such as settlement agent, settlement bank, or clearing
bank services, and do not submit trades for clearing to a U.S. Treasury
securities CCA would not be ``direct participants'' or ``indirect
participants'' within the meaning of this proposal and the terminology
used in the Covered Clearing Agency Standards.\108\
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    \108\ The Commission recognizes that some entities may access
more limited services of a U.S. Treasury securities CCA without use
of its CCP services. For example, FICC provides ``comparison only''
services for a certain membership type. See FICC Rule 8, supra note
47. Consistent with the definition of a ``participant'' under the
Exchange Act, such entities would not be considered participants of
a CCA and therefore would not be subject to this proposed
requirement.
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2. Eligible Secondary Market Transactions
    As discussed further below, the Commission would also define what
constitutes an eligible secondary market transaction in U.S. Treasury
securities subject to the Membership Proposal.\109\ This definition
would apply to all types of transactions that are of a type currently
accepted for clearing at a U.S. Treasury securities CCA; it would not
impose a requirement on a U.S.

Treasury securities CCA to offer additional products for clearing.
---------------------------------------------------------------------------

    \109\ The Commission proposes to define the scope of an
``eligible secondary market transaction,'' including transactions
that would be excluded from that definition, in Proposed Rule 17Ad-
22(a).
---------------------------------------------------------------------------

    The proposal does not apply to the primary market, i.e., the
issuance and sale of a U.S. Treasury security to a primary dealer or
other bidder in a U.S. Treasury auction. By statute, the Treasury
Department is authorized to borrow money on behalf of the Federal
government through the sale and issuance of U.S. Treasury securities to
the public.\110\ The terms and conditions for the sale and issuance for
these securities are contained in the applicable Treasury Department
auction rules or the securities offering (or auction)
announcements.\111\ The Treasury Department determines when auctions
will occur and in what amounts and retains discretion as to the conduct
of auctions, including, among other things, whether to award more or
less than the amount of securities specified in an auction announcement
and reserves the right to modify the terms and conditions of an
auction.\112\ In addition, the Treasury Department gives successful
bidders the option of instructing that ``delivery and payment be made
through the clearing corporation for securities awarded to the
submitter for its own account, but it does not require the use of a
clearing corporation for delivery and payment in connection with
securities awarded in the auctions.\113\ In light of the existing
regulatory regime for these primary market transactions, as well as the
role of such transactions in directly financing the Federal government,
the Commission believes that it would be inappropriate for the
Membership Proposal to include primary market transactions.
---------------------------------------------------------------------------

    \110\ 31 U.S.C. 3101 et seq.
    \111\ Uniform Offering Circular, 31 CFR 356. The circular covers
all aspects of the sale and issue of U.S. Treasury securities,
including bidding, certifications, payment, determination of auction
awards, and settlement.
    \112\ See, e.g., Treasury Marketable Securities Offering
Announcement Press Releases, available at https://www.treasurydirect.gov/instit/annceresult/press/press_secannpr.htm;
31 CFR 356.33.
    \113\31 CFR 356.17(d)(2).
---------------------------------------------------------------------------

    As stated above,\114\ U.S. Treasury securities start trading after
the auction announcement, before the auction and continue trading
through issuance and afterwards. The trading that occurs after
announcement and prior to issuance is generally referred to as when-
issued trading and it covers two distinct periods: before the auction
and after the auction. The latter, i.e., when-issued trades that occur
the day after the auction are considered on-the-run on some IDBs. All
when-issued transactions are reported to TRACE.\115\ In addition, based
on its supervisory experience, the Commission understands that FICC
already clears when-issued securities. Accordingly, in light of the
fact that trading in when issued securities that takes place the day
after the auction shares similar characteristics to secondary market
transactions and such trading is already reported as a secondary market
transaction, the Membership Proposal would apply to when-issued trades
that occur the day after the auction and are considered on-the-run on
some IDBs, to the extent that such when-issued trades otherwise meet
the definition of an eligible secondary market transaction, as
discussed further in section III.A.2 infra. However, since when-issued
trading that takes place before and including the day of the auction
does not share these characteristics and is primarily used as a tool
for price discovery leading to the auction, such transactions would not
be encompassed by the Membership Proposal.
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    \114\ See note 38 supra.
    \115\ Trades in a security that occurred the day after it was
auctioned accounted, on average, for approximately 12% of all trades
in U.S. Treasury securities between July 1, 2019, and June 30, 2020,
with approximately half of such trades taking place on an IDB. Id.
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a. Repo Transactions
    The Commission proposes to include all U.S. Treasury repurchase and
reverse repurchase agreements entered into by a direct participant of a
U.S. Treasury securities CCA as eligible secondary market transactions
subject to the Membership Proposal, subject to the exclusions discussed
in section III.A.2.c infra.\116\ As noted above, the U.S. Treasury repo
market plays a key role in facilitating the flow of cash and securities
in the financial system by allowing market participants to access
financing, supporting dealer market-making activities, enabling
institutional investors with large cash balances to invest cash on a
secured basis, and contributing to price discovery and efficient
capital allocation, as well as supporting the calculation of the
Secured Overnight Financing Rate (``SOFR'') by the Federal Reserve Bank
of New York.\117\ Significant gaps persist in the coverage of
transaction data in U.S. Treasury repo activity, but the available data
indicates that the volume of repo transactions that are bilaterally
cleared and settled remains substantial.\118\ For example, recent
research with respect to primary dealers indicates that 38 percent of
their repo and 60 percent of their reverse repo activity is not
centrally cleared, and, overall, that 20 percent of all their repo and
30 percent of their reverse repo activity is centrally cleared through
FICC.\119\ Nevertheless, FICC lacks visibility into its members' non-
centrally cleared repo trades, and the default of one counterparty can
have cascading effects on multiple other market participants, including
members of FICC, thereby risking contagion to the CCP.
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    \116\ See paragraphs (i) and (iii) of the definition of an
``eligible secondary market transaction'' in Proposed Rule 17Ad-
22(a).
    \117\ MMF Primer, supra note 57; see also Secured Overnight
Financing Rate Data, available at https://www.newyorkfed.org/markets/reference-rates/sofr.
    \118\ IAWG Report, supra note 4, at 29 (stating that non-
centrally cleared bilateral repo represents a significant portion of
the market, roughly equal in size to centrally cleared repo) (citing
a 2015 pilot program by the Treasury Department); see also TMPG,
Clearing and Settlement Practices for Treasury Secured Financing
Transactions Working Group Update (``TMPG Repo White Paper''), at 1
(Nov. 5, 2021), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CSP_SFT_Note.pdf; Katy Burne,
``Future Proofing the Treasury Market,'' BNY Mellon Aerial View, at
7 (Nov. 2021), available at https://www.bnymellon.com/content/dam/bnymellon/documents/pdf/aerial-view/future-proofing-the-us-treasury-market.pdf.coredownload.pdf (noting that 63% of repo transactions
remain non-centrally cleared according to Office of Financial
Research data as of Sept. 10, 2021).
    \119\ Sebastian Infante, et al., Insights from revised Form
FR2004 into primary dealer securities financing and MBS activity
(Aug. 5, 2022), available at https://www.federalreserve.gov/econres/notes/feds-notes/insights-from-revised-form-fr2004-into-primary-dealer-securities-financing-and-mbs-activity-20220805.htm. See
section IV.B.2 for a more detailed discussion of this analysis.
---------------------------------------------------------------------------

    In addition, particularly with respect to banks and dealers, an
important potential benefit of repo central clearing stems from
mitigating the constraints on intermediaries' balance sheets under the
existing accounting and regulatory capital rules.\120\ Recent research
indicates that for primary dealers, use of the centrally cleared
bilateral repo market leads to a reduction in balance sheet allocation
of approximately 20 percent relative to their total repo exposure.\121\
The Commission believes that the benefit of this resulting additional
balance sheet capacity could be shared by all market participants

through improved market liquidity and smooth market functioning.\122\
---------------------------------------------------------------------------

    \120\ In effect, accounting rules allow purchases and sales of
the same security to be netted but do not allow repos of the same
security to be netted, unless the repos are with the same
counterparty and the trades have been documented under a master
netting agreement. See, e.g., G-30 Report, supra note 5, at 13;
Program on International Financial Systems, Mandatory Central
Clearing for U.S. Treasuries and U.S. Treasury Repos, at 25-27 (Nov.
2021), available at https://www.pifsinternational.org/wp-content/uploads/2021/11/PIFS-Mandatory-Central-Clearing-for-U.S.-Treasury-Markets-11.11.2021.pdf (``PIFS Paper''). Thus, if a dealer's repos
are all with a U.S. Treasury securities CCA, greater netting is
allowed.
    \121\ Infante, et al., supra note 117.
    \122\ See Committee on the Global Financial System, Repo Market
Functioning, at 24 (Apr. 2017), available at https://www.bis.org/publ/cgfs59.pdf.
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    Moreover, it appears that, as with cash markets, risk management
practices in the bilateral clearance and settlement of repos are not
uniform across market participants and are not transparent.\123\
Indeed, a recent publication stated that competitive pressures in the
bilaterally settled market for repo transactions have exerted downward
pressure on haircuts, sometimes to zero.\124\ The reduction of
haircuts, which serve as a counterparty credit risk mitigant in
bilateral repos, could result in greater exposure to potential
counterparty default risk in non-centrally cleared repos.
---------------------------------------------------------------------------

    \123\ TMPG Repo White Paper, supra note 118, at 1.
    \124\ G-30 Report, supra note 5, at 13.
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    By contrast, a U.S. Treasury securities CCA is subject to the
Commission's risk management requirements addressing financial,
operational, and legal risk management, which include, among other
things, margin requirements commensurate with the risks and particular
attributes of each relevant product, portfolio, and market.\125\
Therefore, repos cleared at a U.S. Treasury securities CCA would be
subject to transparent risk management standards that are publicly
available and applied uniformly and objectively to all participants in
the CCA.
---------------------------------------------------------------------------

    \125\ 17 CFR 240.17Ad-22(e)(6).
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    As discussed in section II.A.2 supra, many market participants have
already chosen to centrally clear some of their repo transactions. FICC
provides central clearing for its direct participants in both centrally
cleared bilateral and triparty repo. In addition, in the Sponsored
Program, FICC recently has made several changes to the program with the
intent of increasing overall participation in the service and ensuring
that market participants can use the service consistent with their
applicable regulatory requirements and business strategies. For
example, in 2021, FICC expanded the available products to allow
Sponsored Members to clear triparty repos through the program,\126\ in
addition to the existing ability to sponsor bilateral repo into central
clearing. There are now approximately 30 Sponsoring Members and 1,900
Sponsored Members with access to central clearing, including money
market funds, hedge funds, and other asset managers.\127\
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    \126\ See, e.g., supra note 64; Self-Regulatory Organizations;
Fixed Income Clearing Corporation; Order Approving a Proposed Rule
Change to Expand Sponsoring Member Eligibility in the Government
Securities Division Rulebook and Make Other Changes, Exchange Act
Release No. 85470 (Mar. 29, 2019), 84 FR 13328 (Apr. 4, 2019).
    \127\ See FICC Membership Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    Recent research indicates that, as of the second quarter of 2022,
money market funds held had close to $63 billion in centrally cleared
U.S. Treasury repos, or 3% of their total Treasury repo volume.\128\
Most of that centrally cleared repo is through FICC's Sponsored Program
away from the triparty platform.\129\ In addition, certain private
funds participate in the centrally cleared Treasury repo market,
through FICC's Sponsored Program. These firms benefit from improved
ability to access the repo market and more advantageous pricing.\130\
The Commission considered these currently available methods for
accessing central clearing for U.S. Treasury repos for both dealers and
buy-side entities when determining to propose the inclusion of repos as
eligible secondary market transactions and believes that this factor
further supports its determination.
---------------------------------------------------------------------------

    \128\ Viktoria Baklanova et al., Money Market Funds in the
Treasury Market (Sept. 1, 2022), available at https://www.sec.gov/files/mmfs-treasury-market-090122.pdf (``MMFs in the Treasury
Market'').
    \129\ Id.
    \130\ See, e.g., G-30 Report, supra note 5, at 13 (``Buyside
firms benefit because dealers are willing to intermediate cleared
repos at narrower spreads, which are reflected in part in higher
rates paid to buyside repo investors on cleared repos than on
uncleared repos and in part in lower rates charged to repo borrowers
(including hedge funds and smaller broker-dealers) on cleared
repos.'').
---------------------------------------------------------------------------

b. Purchases and Sales of U.S. Treasury Securities
    An estimated 68 percent of the overall dollar value of cash market
transactions in U.S. Treasury securities are not centrally cleared, and
an estimated 19 percent of the overall dollar value of such
transactions are subject to so-called hybrid clearing (as stated
above).\131\ The Commission has identified certain categories of
purchases and sales of U.S. Treasury securities that it believes should
be part of the definition of an eligible secondary market transaction
subject to the Membership Proposal, i.e., for which U.S. Treasury
securities CCAs would be obligated to impose membership rules to
require clearing of such transactions, for the reasons described below.
The Commission believes that including this set of transactions in the
eligible secondary market definition and therefore subjecting these
transactions to the Membership Proposal represents an incremental first
step to address potential risks arising to a U.S. Treasury securities
CCA.
---------------------------------------------------------------------------

    \131\ IAWG Report, supra note 4, at 30; see also TMPG White
Paper, supra note 21, at 12.
---------------------------------------------------------------------------

i. IDB Transactions
    The Commission proposes to include within the definition of an
eligible secondary market transaction any purchase or sale between a
direct participant of a U.S. Treasury securities CCA and any
counterparty, if the direct participant of the covered clearing agency
(A) brings together multiple buyers and sellers using a trading
facility (such as a limit order book) and (B) is a counterparty to both
the buyer and seller in two separate transactions.\132\ As a result,
this definition will only encompass the transactions of those IDBs in
the Treasury market that are direct participants of a U.S. Treasury
securities CCA and stand as counterparties to both sides of each trade
on their platforms.\133\
---------------------------------------------------------------------------

    \132\ See paragraph (ii)(A) of the definition of an ``eligible
secondary market transaction'' in Proposed Rule 17Ad-22(a).
    \133\ See notes 40-43 and accompanying text supra.
---------------------------------------------------------------------------

    The Commission believes that this aspect of the Membership Proposal
generally would result in the benefits described in section III.A.3
infra. Chiefly, the Commission believes that this aspect of the
Membership Proposal would specifically address the potential for
contagion risk associated with hybrid clearing that a number of
commentators have highlighted. As explained above, the configuration of
counterparty risk presented by hybrid clearing allows the U.S. Treasury
securities CCA to manage the risks arising from the IDB-CCA direct
participant transaction, on the one hand, but the U.S. Treasury
securities CCA cannot manage the risks arising from the IDB's
offsetting transaction with its non-member counterparty and the
potential counterparty credit risk and settlement risk arising to the
IDB from that trade.\134\ Thus, under the current hybrid clearing
model, the U.S. Treasury securities CCA is indirectly exposed to the
IDB's non-centrally cleared transaction, but it lacks the ability to
risk manage its indirect exposure to this non-centrally cleared leg of
the transaction. Specifically, it does not know who the ultimate

counterparty of the transaction is and cannot collect margin on that
transaction. This, in turn, results in margin collection at the CCP
which is based upon only one transaction and has been calculated to
cover this seemingly directional position, as well as an inability to
net these offsetting transactions and provide the benefits of central
clearing. In particular, if the IDB's non-CCP member counterparty fails
to settle a transaction that is subject to hybrid clearing, such IDB
may not be able to settle the corresponding transaction that has been
cleared with the U.S. Treasury securities CCA due to a lack of
financial resources at the IDB, which could lead the IDB to
default.\135\ As part of its existing default management procedures,
the U.S. Treasury securities CCA could seek to mutualize its losses
from the IDB's default, which could in turn transmit stress to the
market as a whole.
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    \134\ See, e.g., TMPG White Paper, supra note 21, at 22 (noting
that in a hybrid clearing arrangement, an IDB's rights and
obligations to the CCP are not offset and the IDB is not in a net
zero settlement position with respect to the CCP at settlement
date). Thus, the IDB is not able to net all of its positions for
clearing at a U.S. Treasury securities CCA, and the IDB's positions
appear to the CCA to be directional, which impacts the amount of
margin that the CCA collects for the transaction.
    \135\ See IAWG Report, supra note 4, at 31; Depository Trust and
Clearing Corporation, More Clearing, Less Risk: Increasing Centrally
Cleared Activity in the U.S. Treasury Cash Market, at 5 (May 2021),
available at https://www.dtcc.com/-/media/Files/PDFs/DTCC-US-Treasury-Whitepaper.pdf (``DTCC May 2021 White Paper'').
---------------------------------------------------------------------------

    As noted above, the Commission has previously stated that
membership requirements help to guard against defaults of any CCP
member, as well as to protect the CCP and the financial system as a
whole from the risk that one member's default could cause others to
default, potentially including the CCP itself. Further, contagion
stemming from a CCP member default could undermine confidence in the
financial system as a whole, even if the health of the CCP is not
implicated. This is because the default could cause others to back away
from participating in the market. This risk of decreased participation
could be particularly problematic if the defaulting participant was an
IDB, whose withdrawal from the market could impact other market
participants' ability to access the market for on-the-run U.S. Treasury
securities, approximately 49.7% of which trade on IDBs.\136\ Including
such transactions as eligible secondary market transactions subject to
the Membership Proposal would therefore help protect against this risk
by requiring that a U.S. Treasury securities CCA ensure that direct
participants who are IDBs centrally clear both sides of their
transactions, thereby eliminating the various aspects of potential
contagion risk posed by so-called hybrid clearing.
---------------------------------------------------------------------------

    \136\ TMPG White Paper, supra note 21, at 32; section IV.B.4
(Table 1) infra.
---------------------------------------------------------------------------

ii. Other Cash Transactions
    The Commission proposes to include certain additional categories of
cash transactions of U.S. Treasury securities by the direct
participants of a U.S. Treasury securities CCA in the definition of an
eligible secondary market transaction subject to the Membership
Proposal.
    First, the Commission is proposing that the definition of an
eligible secondary market transaction include those cash purchase and
sale transactions in which the counterparty of the direct participant
is a registered broker-dealer, government securities broker, or
government securities dealer.\137\ Each of these entities is a type of
market intermediary that is engaged in the business of effecting
transactions in securities for the account of others (in the case of
brokers) or for their own accounts (in the case of dealers).\138\ As
stated in section II.A.1 supra, in 2018, the TMPG determined that a
majority of trades in the secondary cash Treasury market now clear
bilaterally,\139\ and estimated that the trading volume of non-FICC
members exceeds that of FICC members.\140\ As a result, the Commission
believes that their collective trading activity likely is responsible
for a not insignificant portion of the volume of transactions involving
Treasury securities and could present contagion risk to a U.S. Treasury
securities CCA.\141\ In addition, registered broker-dealers, government
securities brokers, or dealers that are not direct members of a U.S.
Treasury securities CCA are typically ``introducing firms'' that
establish mechanisms to clear and settle their transactions. For
example, currently, many registered brokers and dealers rely on the
correspondent clearing service provided by FICC to have a FICC member
submit their transactions for clearing at FICC.\142\
---------------------------------------------------------------------------

    \137\ See paragraph (ii)(B) of the definition of an ``eligible
secondary market transaction'' in Proposed Rule 17Ad-22(a). See also
15 U.S.C. 78o(a) and 78o-5(a) (requirement to register) and 78c(4),
(5), (43), and (44) (definitions of broker, dealer, government
securities dealer, and government securities broker). The Commission
acknowledges that the transactions encompassed by paragraph (ii)(B)
in the definition of an ``eligible secondary market transaction'' in
Proposed Rule 17Ad-22(a) could also encompass certain transactions
that would be encompassed by paragraph (ii)(A) of the same proposed
definition, in the event that the direct participant is an IDB
transacting with a registered broker-dealer. However, the set of
transactions encompassed by paragraph (ii)(B) of the proposed
definition is broader than that of paragraph (ii)(A). The Commission
believes that this overlap is appropriate because these paragraphs
of the proposed definition are designed to accomplish different
purposes, which is not impacted by the potential overlap.
    \138\ See generally TMPG, Automated Trading in Treasury Markets
(White Paper) (June 2015), available at https://www.newyorkfed.org/TMPG/medialibrary/microsites/tmpg/files/TPMG-June-2015-Automated-Trading-White-Paper.pdf (``TMPG Automated Trading White Paper'').
    \139\ TMPG White Paper, supra note 21, at 2.
    \140\ IAWG Report, supra note 4, at 30; TMPG White Paper, supra
note 21, at 12.
    \141\ See supra note 15 and TMPG Automated Trading White Paper,
supra note 138.
    \142\ See, e.g., FICC Rule 8 (describing the service), supra
note 47; FICC Executing Firm Master List, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    The Commission believes that the benefits that would result from
imposing a requirement on U.S. Treasury securities CCAs to require that
their direct participants submit for clearing and settlement such
transactions in which their counterparties are registered broker-
dealers or government securities brokers or government securities
dealers would be consistent with the benefits of central clearing set
forth in section III.A.3 infra. Moreover, because these entities are
already either part of or able to access the national system of
clearance and settlement, there should be fewer obstacles to submission
of such trades.
    Second, the Commission proposes to include within the definition of
an eligible secondary market transaction any purchase and sale
transaction between a direct participant of a U.S. Treasury securities
CCA and a hedge fund, that is any private fund (other than a
securitized asset fund): (a) with respect to which one or more
investment advisers (or related persons of investment advisers) may be
paid a performance fee or allocation calculated by taking into account
unrealized gains (other than a fee or allocation the calculation of
which may take into account unrealized gains solely for the purpose of
reducing such fee or allocation to reflect net unrealized losses); (b)
that may borrow an amount in excess of one-half of its net asset value
(including any committed capital) or may have gross notional exposure
in excess of twice its net asset value (including any committed
capital); or (c) that may sell securities or other assets short or
enter into similar transactions (other than for the purpose of hedging
currency exposure or managing duration). This definition of a hedge
fund is consistent with the Commission's definition of a hedge fund in
Form PF.\143\
---------------------------------------------------------------------------

    \143\ 17 CFR 279.9 (Form PF Glossary of Terms).
---------------------------------------------------------------------------

    The Commission's intent in including transactions with hedge funds
in the definition of an eligible market transaction is two-fold. First,
hedge funds generally can engage in trading

strategies that may pose heightened risks of potential financial
distress to their counterparties, including those who are direct
participants of a U.S. Treasury securities CCA. For example, the
Commission observed when proposing Form PF that hedge funds often use
financial institutions that may have systemic importance to obtain
leverage, and that hedge funds may employ investment strategies that
may use leverage, derivatives, complex structured products, and short
selling in an effort to generate returns, as well as employ strategies
involving high volumes of trading and concentrated investments.\144\
The Commission recognized that the strategies employed by hedge funds
``can increase the likelihood that the fund will experience stress or
fail, and amplify the effects on financial markets.'' \145\ The
Commission also stated that significant hedge fund failures, resulting