deliver the amount calculated for each customer on a gross basis. This
would mean that the risk of one customer's positions could not be
offset by the risk of another customer's positions in determining the
amount of customer position margin the broker-dealer would need to have
on deposit at the U.S. Treasury securities CCA. As a result, the
broker-dealer would not be able to deliver assets belonging to one
customer to meet the margin requirement of another customer.
    Proposed Note H(b)(2)(ii) to Item 15 would provide that the
customer position margin is treated in accordance with rules requiring
that the U.S. Treasury securities CCA be limited to investing it in
U.S. Treasury securities with a maturity of one year or less. As
discussed above, proposed Note H(a) would provide that the collateral
delivered to the U.S. Treasury securities CCA by the broker-dealer to
meet the customer position margin requirement must be in the form of
cash or U.S. Treasury securities. The objective is to limit the assets
underlying the debit item to the safest and most liquid instruments.
This objective would be undermined if the U.S. Treasury securities CCA
could invest the cash delivered by the broker-dealer or cash obtained
by using the U.S Treasury securities delivered by the broker-dealer in
assets other than cash and U.S. Treasury securities. Moreover, while
the broker-dealer could deliver customer U.S. Treasury securities with
a maturity greater than one year, the U.S. Treasury securities CCA's
rule would need to limit it to investing customer position margin in
U.S. Treasury securities with a maturity of one year or less. The
object is to limit the investments to the safest most liquid
instruments.
    Proposed Note H(b)(2)(iii) to Item 15 would provide that the
customer position margin is treated in accordance with rules designed
to address the segregation of the broker-dealer's account at the U.S.
Treasury securities CCA that holds the customer position margin and set
strict limitations on the U.S. Treasury securities CCA's ability to use
the margin. The required rules are modeled on the requirements for a
broker-dealer to include a debit with respect to margin delivered to a
security-based swap CCA.\234\ In particular, the note would provide
that the customer position margin is treated in accordance with rules
requiring that it must be held in an account of the broker-dealer at
the U.S. Treasury securities CCA that is segregated from any other
account of the broker-dealer at the U.S. Treasury securities CCA and
that is:
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    \234\ See 17 CFR 240.15c3-3(p)(1)(iii) (defining the term
``qualified clearing agency account''); 17 CFR 240.15c3-3b, Item 15
(permitting a broker-dealer to include a debit in the security-based
swap reserve formula equal to the margin required and on deposit in
a qualified clearing agency account at a clearing agency). See also
84 FR at 43938-42, supra note 99.
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     Used exclusively to clear, settle, novate, and margin U.S.
Treasury securities transactions of the customers of the broker or
dealer;
     Designated ``Special Clearing Account for the Exclusive
Benefit of the Customers of [name of broker-dealer]'';
     Subject to a written notice of the U.S. Treasury
securities CCA provided to and retained by the broker-dealer that the
cash and U.S. Treasury securities in the account are being held by the
U.S. Treasury securities CCA for the exclusive benefit of the customers
of the broker-dealer in accordance with the regulations of the
Commission and are being kept separate from any other accounts
maintained by the broker-dealer or any other clearing member at the
U.S. Treasury securities CCA; and
     Subject to a written contract between the broker-dealer
and the U.S. Treasury securities CCA which provides that the cash and
U.S. Treasury securities in the account are not available to cover
claims arising from the broker-dealer or any other clearing member
defaulting on an obligation to the U.S. Treasury securities CCA or
subject to any other right, charge, security interest, lien, or claim
of any kind in favor of the U.S. Treasury securities CCA or any person
claiming through the U.S. Treasury securities CCA, except a right,
charge, security interest, lien, or claim resulting from a cleared U.S.
Treasury transaction of a customer of the broker-dealer effected in the
account.
    The objective is to protect the customer position margin that the
broker-dealer deposits with the U.S. Treasury securities CCA to margin
its customers' U.S. Treasury security positions by isolating it from
any other assets of the broker-dealer at the U.S. Treasury securities
CCA and to prevent it from being used to cover any obligation other
than an obligation of the broker-dealer's customer resulting from a
U.S. Treasury transaction cleared, settled, and novated in the account.
Further, the account designation and written notice requirements are
designed to alert creditors of the broker-dealer and U.S. Treasury
securities CCA that the assets in this account are not available to
satisfy any claims they may have against the broker-dealer or the U.S.
Treasury securities CCA. The written contract requirement is designed
to limit the U.S. Treasury securities CCA's rights to use the customer
position margin for any purpose other than an obligation of the broker-
dealer's customers. For example, the assets in the account could not be
used to cover an obligation of the broker-dealer to the U.S. Treasury
securities CCA if the broker-dealer defaults on the obligation.
Similarly, the assets in the account could not be used to mutualize the
loss across the U.S. Treasury securities CCA's members if a member
defaulted and its clearing funds were insufficient to cover the loss.

    Proposed Note H(b)(2)(iv) to Item 15 would provide that the
customer position margin is treated in accordance with rules designed
to address how the U.S. Treasury securities CCA holds the customer
position margin. Similar to proposed Note H(b)(2)(iii) to Item 15, the
objective would be to isolate the customer position margin and prevent
it from being used to satisfy the claims any creditors may have against
the U.S. Treasury securities CCA. In particular, the note would provide
that the customer position margin is treated in accordance with rules
of the U.S. Treasury securities CCA requiring that the U.S. Treasury
securities CCA hold the customer position margin itself or at either a
U.S. Federal Reserve Bank or a ``bank'' (as defined in section 3(a)(6)
of the Exchange Act (15 U.S.C. 78c(a)(6)) that is insured by the
Federal Deposit Insurance Corporation. The objective is to have the
U.S. Treasury securities CCA hold the customer position margin at a
safe financial institution. In addition, the rules would need to
provide that the U.S. Treasury securities CCA's account at the U.S.
Federal Reserve Bank or bank be:
     Segregated from any other account of the U.S. Treasury
securities CCA or any other person at the U.S. Federal Reserve Bank or
bank and used exclusively to hold cash and U.S. Treasury securities to
meet current margin requirements of the U.S. Treasury securities CCA
resulting from positions in U.S. Treasury securities of the customers
of the broker-dealer members of the qualified U.S. Treasury securities
CCA;
     Subject to a written notice of the U.S. Federal Reserve
Bank or bank provided to and retained by the U.S. Treasury securities
CCA that the cash and U.S. Treasury securities in the account are being
held by the U.S. Federal Reserve Bank or bank pursuant to Rule 15c3-3
and are being kept separate from any other accounts maintained by the
U.S. Treasury securities CCA or any other person at the U.S. Federal
Reserve Bank or bank; and
     Subject to a written contract between the U.S. Treasury
securities CCA and the U.S. Federal Reserve Bank or bank which provides
that the cash and U.S. Treasury securities in the account are subject
to no right, charge, security interest, lien, or claim of any kind in
favor of the U.S. Federal Reserve Bank or bank or any person claiming
through the U.S. Federal Reserve Bank or bank.
    These conditions with respect to the account designation, written
notice, and written contract would be designed to achieve the same
objectives as the analogous conditions discussed above with respect to
the broker-dealer's account at the U.S. Treasury securities CCA.\235\
---------------------------------------------------------------------------

    \235\ See, e.g., 17 CFR 240.15c3-3a, Note G(b)(2) to Item 14
(setting forth similar requirements when a securities futures
clearing agency holds customer margin at a bank).
---------------------------------------------------------------------------

    Proposed Note H(b)(2)(v) to Item 15 would provide that the customer
position margin is treated in accordance with rules of the clearing
agency requiring systems, controls, policies, and procedures to return
customer position margin to the broker-dealer that is no longer needed
to meet a current margin requirement resulting from positions in U.S.
Treasury securities of the customers of the broker-dealer no later than
the close of the next business day after the day the customer position
margin is no longer needed for this purpose. As discussed above, the
debit would be limited to customer position margin required and on
deposit at the U.S. Treasury securities CCA. This would mean that the
broker-dealer could not include in this debit item the amount of
customer position margin on deposit at the U.S. Treasury securities CCA
that exceeds the broker-dealer's margin requirement resulting from its
customers' cleared U.S. Treasury securities positions. The objective of
this condition is to effectuate the prompt return of customer position
margin to the broker-dealer.
    Proposed Note H(b)(3) to Item 15 would set forth the third
condition for including customer position margin as a debit in the Rule
15c3-3a formula. Under this condition, the Commission would need to
have approved rules of the U.S. Treasury securities CCA that meet the
conditions of proposed Note H and the Commission would had to have
published (and not subsequently withdrawn) a notice that brokers-
dealers may include a debit in the customer reserve formula when
depositing customer position margin to meet a margin requirement of the
U.S. Treasury securities CCA resulting from positions in U.S. Treasury
securities of the customers of the broker-dealer. The Commission staff
would analyze the U.S. Treasury securities CCA's approved rules and
practices regarding the treatment of customer position margin and make
a recommendation as to whether they adequately implement the customer
protection objectives of the conditions set forth in proposed Note H to
Item 15. If satisfied with the staff's recommendation, the Commission
would publish a positive notice. The objective is to permit the debit
only after the Commission has approved the U.S. Treasury securities
CCA's rules pursuant to section 19(b) of the Exchange and published the
notice.\236\ Any changes to those rules and practices that would
undermine these customer protection objectives could result in the
Commission withdrawing the notice, at which point the Commission would
no longer permit the debit.
---------------------------------------------------------------------------

    \236\ See 15 U.S.C. 78s.
---------------------------------------------------------------------------

    Finally, broker-dealers are required to perform a separate reserve
computation for their broker-dealer customers and maintain a separate
reserve account with respect to that computation.\237\ The Rule 15c3-3a
computation provides that this separate PAB reserve computation must be
performed in accordance with the Rule 15c3-3a computation for the
broker-dealer's non-PAB customers, except as provided in Notes to the
PAB Computation.\238\ Therefore, the proposed amendments discussed
above adding a new debit in Item 15 would apply to the PAB reserve
computation. Further, the Commission is proposing to amend Note 9
Regarding the PAB Reserve Bank Account Computation--which permits a
debit in the PAB reserve computation for clearing deposits required to
be maintained at registered clearing agencies--to clarify that the
conditions set forth in new Note H with respect to including a debit in
the non-PAB customer reserve computation would apply to the PAB reserve
computation as well.
---------------------------------------------------------------------------

    \237\ See 17 CFR 240.15c3-3(a)(16) (defining the term ``PAB
account'' to mean a proprietary securities account of a broker-
dealer (which includes a foreign broker-dealer, or a foreign bank
acting as a broker-dealer) other than a delivery-versus-payment
account or a receipt-versus-payment account); 17 CFR 240.15c3-3(e)
(requiring separate reserve accounts and reserve account
computations for PAB accounts).
    \238\ See 17 CFR 240.15c3-3a, Notes 1 through 10 Regarding the
PAB Reserve Bank Account Computation.
---------------------------------------------------------------------------

2. Request for Comment
    The Commission generally requests comments on all aspects of the
proposed amendment to Rule 15c3-3a. In addition, the Commission
requests comments on the following specific issues, with accompanying
data and analysis:
     Do commenters agree or disagree with any particular
aspects of the proposed amendment to Rule 15c3-3? If so, which ones and
why? If commenters disagree with any provision of the proposed rule
amendment, how should such provision be modified and why?
     Rule 15c3-3 defines the term ``excess margin securities''
to mean 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 percent 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. With respect to cleared, settled, and
novated repurchase and reverse purchase agreements in U.S. Treasury
securities, how should this 140 percent test be applied?
     In terms of protecting customer position margin held at
the U.S. Treasury securities CCA, should the Commission adopt other
clearing models? For example, should the Commission adopt an approach
similar to how margin for swaps cleared at a U.S. derivatives clearing
organization is treated? If so, explain how such a model would work in
a liquidation of the broker-dealer under SIPA.
     Are there any legal or operational issues that particular
participants may face as a result of customer position margin held by a
U.S. Treasury securities CCA? Do commenters believe there may be the
need for other regulatory relief or guidance by the Commission or other
regulators to facilitate the holding of such customer margin? Are there
any particular entities that should be exempted from the margin
requirements due to particular legal, operational or other issues?
     Should the Commission adopt further measures to protect
the customer cash and U.S. Treasury securities that are used to meet
the customer position margin requirements of the U.S. Treasury
securities CCA? For example, should the Commission adopt measures to
protect the cash and U.S. Treasury securities in the event of an
insolvency of the U.S. Treasury securities CCA? In this regard, should
the Commission require that the cash and U.S. Treasury securities be
held at a third-party bank in an account that is subject to an
agreement between the U.S. Treasury securities CCA, the broker-dealer,
and the bank that the assets in the account may only be accessed by the
U.S. Treasury securities CCA to cover a loss resulting from a customer
of the broker-dealer failing to meet an obligation to the U.S. Treasury
securities CCA? Would this approach be workable or practical? Please
explain.

D. Compliance Date

    The Commission understands that an existing U.S. Treasury
securities CCA likely would need time and resources to develop and
adopt policies and procedures to implement the standards set forth in
this proposal, if adopted, for its business. In addition, as noted
above, any changes to a U.S. Treasury securities CCA's rules would
require that the CCA file proposed rule changes under section 19(b) of
the Exchange Act and/or section 806 of the Dodd-Frank Act, as
applicable, for the Commission to review and consider such changes for
consistency with the applicable standards. More generally, the
Commission recognizes that the changes set forth in this proposal, if
adopted, including the likely substantial amount of additional
transactions to be submitted for central clearing that are not
currently submitted in large volumes (such as the dealer-to-customer
market) would represent a significant change in current industry
practice that may take time for market participants to navigate.
    The Commission is not proposing a specific compliance date at this
time, but instead seeks comment regarding what would be an appropriate
timeframe.
    The Commission generally solicits comment on what an appropriate
compliance date would be for each of the proposed rule amendments (Rule
17Ad-22(e)(18), Rule 17Ad-22(e)(6)) if adopted. In addition, the
Commission requests comments on the following specific issues, with
accompanying data and analysis:
     How long would U.S. Treasury securities CCAs and market
participants need to implement the proposal if it is adopted
substantially as proposed? What data points would U.S. Treasury
securities CCAs and market participants use to assess the timing? Are
any specific operational or technological issues raised that should be
factored into a proposed compliance date?
     Would staggering the compliance dates for the different
rule amendments proposed help facilitate an orderly implementation of
the proposal, if adopted? For example, would it be appropriate for the
compliance date for paragraphs (ii)(A) and (B) in the definition of an
``eligible secondary market transaction'' to be before the compliance
date for paragraphs (ii)(C) and (D) of the same definition, and if so,
how much before? More generally, if staggering is appropriate, what
would be an appropriate schedule of compliance dates?

IV. Economic Analysis

    The Commission is mindful of the economic effects that may result
from the proposed amendments, including the benefits, costs, and the
effects on efficiency, competition, and capital formation. Exchange Act
section 3(f) requires the Commission, when it is engaged in rulemaking
pursuant to the Exchange Act and is required to consider or determine
whether an action is necessary or appropriate in the public interest,
to consider, in addition to the protection of investors, whether the
action will promote efficiency, competition, and capital
formation.\239\ In addition, Exchange Act section 23(a)(2) requires the
Commission, when making rules pursuant to the Exchange Act, to consider
among other matters the impact that any such rule would have on
competition and not to adopt any rule that would impose a burden on
competition that is not necessary or appropriate in furtherance of the
purposes of the Exchange Act.\240\ This section analyzes the expected
economic effects of the proposed rules relative to the current
baseline, which consists of the current market and regulatory framework
in existence today.
---------------------------------------------------------------------------

    \239\ See 15 U.S.C. 78c(f).
    \240\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In this proposal, the Commission is proposing additional
requirements for any U.S. Treasury securities CCA.\241\ First, 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 CCA submit for clearance
and settlement all eligible secondary market transactions to which they
are a counterparty (``Membership Proposal'').\242\ In addition, the
proposal would require that such CCAs establish written policies and
procedures reasonably designed to, as applicable, identify and monitor
its direct participants' required submission of transactions for
clearing, including, at a minimum, address a failure to submit
transactions. The Commission believes that strengthening the membership
standards will help reduce contagion risk to U.S. Treasury securities
CCAs and bring the benefits of central clearing to more transactions
involving U.S. Treasury securities, thereby lowering the risk of
disruptions to the U.S. Treasury securities market.\243\
---------------------------------------------------------------------------

    \241\ See supra section III.A.
    \242\ See supra section III.A for a description of the
Membership Proposal including the definition of ``eligible secondary
market transaction.''
    \243\ See infra section IV.B.6.
---------------------------------------------------------------------------

    Second, the Commission is proposing 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.\244\ As discussed 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
securities market.
---------------------------------------------------------------------------

    \244\ See supra section III.B.1.
---------------------------------------------------------------------------

    Third, the Commission is proposing requirements that a U.S.
Treasury securities CCA establish, implement, maintain and enforce
written policies and procedures reasonably designed to, as applicable,
ensure that it has appropriate means to facilitate access to clearance
and settlement services of all eligible secondary market transactions
in U.S. Treasury securities, including those of indirect participants
and that the board of directors reviews these policies and procedures
annually.\245\ Although the proposed requirements would not prescribe
specific methods for market participants to obtain indirect access to a
U.S. Treasury securities CCA, it is intended to help ensure that all
U.S. Treasury security CCAs review their indirect access models and
ensure that they facilitate access to clearance and settlement services
in a manner suited to the needs and regulatory requirements of market
participants throughout the U.S. Treasury securities market, including
indirect participants.
---------------------------------------------------------------------------

    \245\ See supra section III.B.2.
---------------------------------------------------------------------------

    Lastly, the Commission is proposing to amend its rules to permit
margin required and on deposit at a U.S. Treasury securities CCA to be
included as a debit item in the customer reserve formula, subject to
certain conditions.\246\ As discussed further below, the Commission
believes that this proposal, in conjunction with the proposal requiring
the separation of house and customer margin, will incentivize and
facilitate additional central clearing in the U.S. Treasury securities
market.
---------------------------------------------------------------------------

    \246\ See supra section III.C.
---------------------------------------------------------------------------

    The discussion of the economic effects of the proposed rule begins
with a discussion of the risks inherent in the clearance and settlement
process and how the use of a CCP can mitigate those risks. This is
followed by a baseline of current U.S. Treasury securities market
practices. The economic analysis then discusses the likely economic
effects of the proposal, as well as its effects on efficiency,
competition, and capital formation. The Commission has, where
practicable, attempted to quantify the economic effects expected to
result from this proposal. In some cases, however, data needed to
quantify these economic effects is not currently available or otherwise
publicly available. For example, the reporting of data for bilaterally-
cleared repo transactions is currently not a regulatory requirement, so
counterparty-specific statistics are not available and any aggregate
statistics on this market segment may not be comprehensive.\247\
Likewise, the reporting of U.S. Treasury securities transactions to
FINRA TRACE has been until recently \248\ limited to cash transactions
in which at least one of the counterparties is a FINRA member, so
analyses based on that data will necessarily be incomplete.
---------------------------------------------------------------------------

    \247\ Samuel J. Hempel, R. Jay Kahn, Vy Nguyen, & Sharon Y.
Ross, Non-centrally Cleared Bilateral Repo (Aug 24, 2022), available
at: https://www.financialresearch.gov/the-ofr-blog/2022/08/24/non-centrally-cleared-bilateral-repo/.
    \248\ Reporting of additional cash transactions to TRACE, by
certain U.S. and foreign banks, began on September 1, 2022 but the
recent nature of that change precludes the Commission from doing any
analysis on that new reporting universe. See generally Federal
Reserve System, Agency Information Collection Activities:
Announcement of Board Approval Under Delegated Authority and
Submission to OMB, 86 FR 59716 (Oct. 28, 2021), available at https://www.govinfo.gov/content/pkg/FR-2021-10-28/pdf/2021-23432.pdf; see
also Supporting Statement for the Treasury Securities and Agency
Debt and Mortgage-Backed Securities Reporting Requirements,
available at https://www.federalreserve.gov/reportforms/formsreview/FR%202956%20OMB%20SS.pdf.
---------------------------------------------------------------------------

    In many cases, and as noted below, the Commission is unable to
quantify these economic effects and solicits comment, including
estimates and data from interested parties, that could help inform the
estimates of the economic effects of the proposal.

A. Broad Economic Considerations

    Clearance and settlement risk is the risk that a counterparty fails
to deliver a security or cash as agreed upon at the time when the
security was traded. One method of reducing such risk is to require one
or both counterparties to the trade to post collateral.\249\ The
purpose of posting collateral in financial transactions is to alleviate
frictions caused by adverse selection and moral hazard.\250\ The amount
of collateral needed to support a set of unsettled trades, however, can
depend on whether trades are cleared bilaterally or through a CCP. In
particular, in cases where market participants have several outstanding
buy and sell orders, central clearing reduces the total collateral
required to support a given set of trades due to multilateral
netting.\251\ A simple example illustrates the effect. Suppose there
are 3 firms trying to complete three bilateral trades among themselves.
Firm A is buying $90 million in U.S. Treasury securities from Firm B,
Firm B is buying $80 million in the same U.S. Treasury securities from
Firm C, and Firm C is buying $100 million in the same U.S. Treasury
securities from Firm A. This would mean that over the settlement cycle,
the firms in this example would need to post collateral to cover a
total of $270 million in gross obligations to complete these three
trades. If these trades were centrally cleared, however, then the net
obligations would be substantially smaller. In this example, the
collateral required would no longer be that required to support $270
million in outstanding obligations, but instead would reduce to $40
million: $20 million for Firm C, and $10 million each for Firms A and
B.\252\ Central clearing can, in part, replace a trading network made
up of a web of bilateral relationships with a simpler hub and spoke
model. As each connection is a potential source of failure, a simpler
system can imply less risk.
---------------------------------------------------------------------------

    \249\ An alternative method of reducing counterparty credit risk
used in the securities industry is delivery versus payment
(``DVP''). Under DVP, counterparties aim to deliver securities and
payment simultaneously, so that the transfer of securities happens
if and only if payment has also been made.
    \250\ For example, if the fulfillment of a contract depends on a
counterparty exerting unobservable and costly effort, collateral can
be used as a commitment device by putting more of the counterparty's
resources at stake in the case of nonfulfillment. See Bengt
Holmstrom & Jean Tirole, Financial Intermediation, Loanable Funds,
and the Real Sector, 112 Q. J. Econ. 663 (Aug. 1997); Albert J.
Menkveld & Guillaume Vuillemey, The Economics of Central Clearing,
13 Ann. Rev. Fin. Econ. 153, 158 (2021).
    \251\ Darrell Duffie & Haoxiang Zhu, Does a Central Clearing
Counterparty Reduce Counterparty Risk? 1 Rev. Asset Pricing Stud. 74
(2011), available at https://academic.oup.com/raps/article-abstract/1/1/74/1528254. The authors note that this benefit scales with the
square root of the number of participants when the trading positions
are statistically independent and identically distributed.
    \252\ This example is from Duffie, supra note 186.
---------------------------------------------------------------------------

    Clearance and settlement through a CCP can also make trades less
``informationally sensitive'' in the sense that the value of the trade
does not depend on information about the creditworthiness of the
counterparties, thereby reducing adverse selection.\253\ This occurs
when the trade is novated to the CCP, and the CCP becomes the buyer to
every seller and the seller to every buyer. This reduces the need for
investors to acquire private information

about the credit risk of their counterparty. By mitigating adverse
selection through the substitution of the CCP's counterparty credit
risk evaluation for a market participant's own, central clearing
through a CCP lowers the cost of trading by market participants and
should increase their willingness to trade, thereby improving market
liquidity. Reducing the information sensitivity of trades also
increases the uniformity of the asset that is traded. In the absence of
novation, the U.S. Treasury security is essentially bundled together
with counterparty risk. That is, when buying or selling a security, if
there is counterparty risk, the pricing depends not only on the
security itself but also on the reliability of the counterparty to the
trade. It is as if, from an economic perspective, one is ``buying''
both the security and the characteristics of the counterparty. Besides
the reduction in adverse selection, eliminating counterparty risk makes
the security a more standard product. Standardization itself increases
liquidity.\254\
---------------------------------------------------------------------------

    \253\ See Gary Gorton & George Pennacchi, Financial
Intermediaries and Liquidity Creation, 45 J. Fin. 49 (1990),
available at https://www.jstor.org/stable/2328809. See also
Francesca Carapella & David Mills, Information Insensitive
Securities: the Benefits of Central Counterparties, Working Paper
(2012), available at https://www.newyorkfed.org/medialibrary/media/research/conference/2012/MP_Workshop/Carapella_Mills_information_insensitive_securities.pdf.
    \254\ See Ben Bernanke, Clearing and Settlement During the
Crash, 3 Rev. Fin. Stud. 133 (1990), available at http://www.bu.edu/econ/files/2012/01/Bernanke-RFS.pdf.
---------------------------------------------------------------------------

    Financial networks that incorporate a CCP can further improve the
resilience of financial markets. The Bank for International Settlements
stated in 2015 that the shift to central clearing had helped to
mitigate the risks that emerged in non-centrally cleared markets before
and during the 2007-2009 financial crisis. Further, it had reduced
financial institutions' exposure to counterparty credit risk shocks
through netting, margining and collateralization.\255\
---------------------------------------------------------------------------

    \255\ Dietrich Domanski, Leonardo Gambacorta, & Cristina
Picillo, Central Clearing: Trends and Current Issues, BIS Q. Rev.
(Dec. 2015), available at https://www.bis.org/publ/qtrpdf/r_qt1512g.pdf.
---------------------------------------------------------------------------

    Another potential benefit of central clearing is that it should
reduce the magnitude of, or even prevent, fire sales of assets. This
mitigation of fire sale risk is achieved when a member defaults and the
CCP manages the liquidation of assets. Central management of the
liquidation of assets may mitigate suboptimal outcomes in the face of
capital or margin constraints. For example, if investors believe that
the counterparty will sell in the case of a missed margin call, other
investors may join the selloff, leading to further declines in asset
prices. If participants can commit to not sell, then a more efficient
equilibrium in which there is no fire sale could be achieved. In this
way, the CCP acts as a way to select into the more efficient
equilibrium by allow members to credibly pre-commit to the auction in
the case of a missed margin call.\256\
---------------------------------------------------------------------------

    \256\ John Kuong, Self-fulfilling Fire Sales: Fragility of
Collateralized Short-term Debt Markets, 34(6) Review of Financial
Studies, 2910-2948 (2021), available at https://academic.oup.com/rfs/article/34/6/2910/5918033?login=true.
---------------------------------------------------------------------------

    Finally, broadening central clearing could lead to a wider group of
liquidity providers, which likely would increase the reliability of
access to funding during periods of market stress.\257\ The reason is
that novation of the trade to a central counterparty reduces one of the
major reasons for not choosing a counterparty: the risk that
counterparty may fail to deliver on its obligations. It also reduces
one of the reasons for failing to provide liquidity, namely concerns
over the credit risk of counterparties. Therefore, as a result of
increased levels of central clearing and the resulting increased
centralization of counterparty credit risk evaluation by a CCP and the
CCP's application of consistent and transparent risk management,\258\
more counterparties --who would also be potential liquidity providers--
would be willing to compete to provide liquidity to buy-side investors
and to each other. In addition, several academic studies of the 2008
financial crisis emphasize the role of intermediary balance sheet
constraints as a cause of financial crises.259 260 Moreover,
losses experienced by market participants can lead to an increase in
risk aversion leading those market participants to exit creating a need
for new market participants to replace them in order to provide
liquidity.\261\ Therefore, either because of increased risk aversion or
because some friction implies that the liquidity providers who find
themselves warehousing the asset can no longer do so due to trading
losses, outside liquidity providers may play an important role in
stabilizing the market. In addition, central clearing facilitates
anonymized all-to-all trading that would enable the provision of market
liquidity by investors.\262 263\
---------------------------------------------------------------------------

    \257\ G-30 Report, supra note 5, at 13.
    \258\ See TMPG White Paper, supra note 20, (``[b]ilateral
clearing involves varying risk management practices that are less
uniform and less transparent to the broader market . . .''). In
addition, FICC has been designated by FSOC as a systemically
important financial market utility, which brings heightened risk
management requirements and additional regulatory supervision by
both its primary regulator and the Board of Governors of the Federal
Reserve System. See supra note 17 and associated text.
    \259\ See, e.g., Markus K. Brunnermeier & Yuliy Sannikov, A
Macroeconomic Model with a Financial Sector, 104 Am. Econ. Rev. 379
(Feb. 2014), available at https://www.aeaweb.org/articles?id=10.1257/aer.104.2.379; See also Zhiguo He & Arvind
Krishnamurthy, Intermediary Asset Pricing, 103 Am. Eco. Rev. 732
(Apr. 2013), available at https://www.aeaweb.org/articles?id=10.1257/aer.103.2.732.
    \260\ Balance sheet constraints and the impact of losses on risk
aversion both apply to liquidity providers, or rather the ability
and willingness of market participants to provide liquidity. This
does not apply to the CCP as it does not supply liquidity.
    \261\ See, e.g., John Y. Campbell & John H. Cochrane, By Force
of Habit: A Consumption-Based Explanation of Aggregate Stock Market
Behavior, 107 J. Pol. Econ. 205 (Apr. 1999), available at https://www.journals.uchicago.edu/doi/abs/10.1086/250059.
    \262\ G-30 Report, supra note 5, at 13. See also Duffie, supra
note 186, at 4 (``Further, given broad access to a CCP, some
Treasury transactions could flow directly from ultimate sellers to
ultimate buyers without necessarily impinging on dealer balance
sheet space.'').
    \263\ The market responded to the stress of 2020 through some
increase in all-to-all trading. See MarketAxess, FIMSAC Slides, at 6
(Oct. 5, 2020), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/mcvey-fimsac-slides-100120.pdf. Additional
central clearing may have enabled a greater increase.
---------------------------------------------------------------------------

B. Baseline

1. U.S. Treasury Securities
    As discussed in section II.A, U.S. Treasury securities are direct
obligations of the U.S. Government issued by the U.S. Department of the
Treasury. After issuance in the primary market U.S. Treasury securities
trade in an active secondary market.\264\ A number of types of market
participants intermediate between end users of U.S. Treasury
securities. These end users may hold U.S. Treasury securities as a
relatively riskless way of saving, as a way of placing a directional
bet on interest rates, or as a means of hedging against deflation. U.S.
Treasury securities can also function directly as a medium of exchange
in some instances, and, as described in more detail below, as
collateral for loans.
---------------------------------------------------------------------------

    \264\ There is also an active market for U.S. Treasury
securities that trade on a ``when-issued'' (WI) basis. ``Based on
Treasury TRACE transactions data, WI trading volume averaged $80
billion per day between July 1, 2019, and June 30, 2020, accounting
for 12 percent of the $651 billion traded daily across all Treasury
securities.'' Fleming, Shachar, and Van Tassel, supra note 38. As
discussed in section III.A.2, supra, for purposes of this Proposal
only the WI market after the auction but before issuance (WI on-the-
run issues) is considered part of the secondary market for U.S.
Treasury securities. Most of the WI trading in the Fleming, Shachar,
and Van Tassel analysis occurred in on-the-run issues. Id. (``WI
trading that occurs up to and including the auction day (account[s]
for about one-third of WI trading) and WI trading that occurs after
the auction day (account[s] for about two-thirds of WI trading'').
For a discussion of how WI trading functions in the context of
central clearing, see Kenneth D. Garbade & Jeffrey F. Ingber, The
Treasury Auction Process: Objectives, Structure, and Recent
Adaptations, 11 Current Issues in Economics and Finance 1 (2005),
available at https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.html.
---------------------------------------------------------------------------

    Market participants refer to the most recently issued U.S. Treasury
securities as ``on-the-run,'' with earlier issues

referred to as ``off-the-run''.\265\ Figure 1 shows the outstanding
value of on-the-run (Panel A) and off-the-run (Panel B) U.S. Treasury
securities. On-the-run U.S. Treasury securities have consistently made
up approximately 3% of the total value of all marketable U.S. Treasury
securities during the 2012-2021 period, but, as Figure 3 shows, account
for a disproportionate share of trading volume. Thus, an on-the-run
security is generally far more liquid than a similar off-the-run
security.
---------------------------------------------------------------------------

    \265\ See supra note 34.

Figure 1: On-the-run and off-the-run U.S. Treasury securities
(trillions) \a\
[GRAPHIC] [TIFF OMITTED] TP25OC22.000

    \a\ Generated from the Federal Reserve Z1 Financial Accounts of
the United States Table L.210 Treasury Securities, Series
FL313161205.Q.

    As of June 30, 2022, the total amount outstanding of marketable
U.S. Treasury securities held by the public was $23.3 trillion.\266\ As
shown in Figure 2, the volume of marketable U.S. Treasury securities
outstanding has increased by approximately $18 trillion since 2000. The
total amount of marketable U.S. Treasury securities issued during 2021
was $20.3 trillion.\267\
---------------------------------------------------------------------------

    \266\ This includes $3.5T in bills, $13.6T in notes, $3.8T in
bonds, 1.8T in TIPs, and 0.6T in floating rate notes. See U.S.
Treasury Bureau of the Fiscal Service, Summary of Treasury
Securities Outstanding, available at https://fiscaldata.treasury.gov/datasets/monthly-statement-public-debt/summary-of-treasury-securities-outstanding.
    \267\ See U.S. Treasury Bureau of the Fiscal Service, Treasury
Debt Position and Activity Report, June 2022, available at https://www.treasurydirect.gov/govt/reports/pd/pd_debtposactrpt_202206.pdf.

Figure 2: Value of Marketable U.S. Treasury Securities Outstanding Over
Time \a\
[GRAPHIC] [TIFF OMITTED] TP25OC22.001

    \a\ Generated from the Federal Reserve Z1 Financial Accounts of
the United States Table L.210 Treasury Securities, Series
FL313161205.Q.

    Trading in the secondary market is reported in Figure 3. According
to industry reports, 65% of the $955.2 billion in average daily trading
volume of U.S. fixed income securities in 2021 was in U.S. Treasury
securities.\268\ As is shown in Figure 3, average weekly trading volume
was approximately $3 trillion in 2021, with notable peaks in March 2020
and early 2021.\269\
---------------------------------------------------------------------------

    \268\ Another 29 percent was Agency MBS, 4 percent corporate
debt, with the remainder in municipal, non-agency mortgage-backed,
Federal agency debt and asset-backed securities. See Securities
Industry and Financial Markets Association (``SIFMA''), US Fixed
Income Securities: Issuance, Trading Volume, Outstanding, available
at https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/us-fixed-income-securities-statistics-sifma/
(as of July 8, 2022) (data sourced from N.Y. Fed, FINRA TRACE, and
MSRB).
    \269\ Id.

Figure 3: Weekly trading volume in U.S. Treasury securities cash market
\a\

[GRAPHIC] [TIFF OMITTED] TP25OC22.002

    \a\ See IAWG Report, supra note 4, at 14.
2. U.S. Treasury Repurchase Transactions
    As described in section II.A.2 supra, a U.S. Treasury repurchase
transaction generally refers to a transaction in which one market
participant sells a U.S. Treasury security to another market
participant, along with a commitment to repurchase the security at a
specified price on a specified later date. Because one side of the
transaction receives cash, and the other side receives securities, to
be returned at a later date, the transaction is a close equivalent to a
cash loan with securities as collateral. The amount paid for the
security serving as collateral may be less than the market price. The
difference divided by the market value of the collateral is known as
the ``haircut.'' A positive haircut implies that the loan is over-
collateralized: the collateral is worth more than the cash that is
loaned. A related term is ``initial margin''--the ratio of the purchase
price to the market value of the collateral.
    General collateral repurchases are an important variation on the
above type of transaction, where one participant lends to another
against a class, not a specific issue, of U.S. Treasury securities.
U.S. Treasury repo for a specific asset is generally a bilateral
arrangement, whereas general collateral repurchases are usually
arranged with a third agent, known as a triparty agent. In bilateral
repo arrangements, the lender has the title of the specific asset in
question, and can sell or re-hypothecate it. In triparty repo, which is
discussed below, the lender has a more limited use of collateral.
However, it is often re-hypothecated within the same triparty system;
namely, a lender may use the collateral from the borrower for its own
borrowing.
    As described in section II.A.2 supra, repurchase agreements are
generally classified by the term over which they take place, either
``overnight'' or ``term.'' In overnight repurchase agreements, the
repurchase of the security takes place the day after the initial
purchase, meaning that these agreements serve, essentially, as
overnight loans collateralized by U.S. Treasury securities. Term
repurchase agreements, conversely, take place over a longer
horizon.\270\
---------------------------------------------------------------------------

    \270\ Overnight repurchase agreements account for 87.5% of daily
transaction volume. See Figure 5 and the associated discussion for
more details. In addition to term repos agreements with fixed
maturity dates, there exist term repurchase agreements with embedded
options that lead to an uncertain maturity date. For example,
``callable'' repos include an option for the lender to call back
debt (i.e., resell securities) at their discretion. ``Open'' repos
have no defined term but rather allow either party to close out at
the contract at any date after initiation of the agreement.
---------------------------------------------------------------------------

    U.S. Treasury repo has various economic uses. First, it is a means
of secured borrowing and lending, allowing some market participants to,
in effect, turn their U.S. Treasury securities into cash positions, and
others to temporarily invest cash that is not in use in a way that
mitigates exposure to, for example, the counterparty risk of a
depository institution. Bilateral repo can allow market participants to
effectively price interest rate expectations into bonds, and to
arbitrage differences in the market prices of closely related U.S.
Treasury securities, because it provides financing for U.S. Treasury
security purchases and facilitates short sales.
    Repos also play a role in monetary policy. The Federal Reserve
operates a reverse repurchase facility in which it receives cash from
eligible market participants in exchange for collateral consisting of
U.S. Treasury securities. The interest rate on these repurchase
agreements is the overnight reverse repurchase offer rate set by the
Federal Reserve to aid implementation of monetary policy by firming up
the floor for the effective Federal funds rate.\271\
---------------------------------------------------------------------------

    \271\ See supra note 164.
---------------------------------------------------------------------------

    The market for repos is dominated by large sophisticated
institutions. The institutions that participate in the market for repos
are also those for whom access to central clearing may be the least
costly economically. Relatedly, although difficult to quantify
precisely, the number of participants is one or more orders of
magnitude greater in the cash market as compared with the repo market:
tens of thousands as opposed to hundreds. As Figure 4 shows, the U.S.
Treasury securities repurchase market is large; throughout 2020 and
into 2021, daily transaction volume ranged between $1.5 and $2.5
trillion per day. Since April 2021, average daily volume has been
considerably higher--approaching $4 trillion per day--coinciding with
the growth in the Federal Reserve's overnight reverse repurchase
operations. Figure 4 further splits these categories out into triparty
repo and bilateral repo. Despite steadily increasing volumes of
centrally cleared repurchase transactions, due in part to the
development of services to enable acceptance of more types of
repurchase transactions at the covered clearing agency, the Commission
understands that the volume of bilateral repurchase transactions that
are cleared and settled directly between the two counterparties remains
substantial, representing

approximately half of all bilateral repurchase transactions in
2021.\272\
---------------------------------------------------------------------------

    \272\ See supra note 150. See also R. Jay Kahn & Luke M. Olson,
Who Participates in Cleared Repo? (July 8, 2021), available at
https://www.financialresearch.gov/briefs/files/OFRBr_21-01_Repo.pdf.

Figure 4: Daily U.S. Treasury Repurchase Transaction Volume \a\
[GRAPHIC] [TIFF OMITTED] TP25OC22.003

    \a\ Figure 4 includes only centrally cleared bilateral
repurchase as significant gaps persist in the coverage of
transaction data in U.S. Treasury repo for non-centrally cleared
bilateral repos. Source: Office of Financial Research Short-term
Funding Monitor--Data Sets, U.S. Repo Markets Data Release,
refreshed daily, available at https://www.financialresearch.gov/short-term-funding-monitor/datasets/repo/. See also IAWG Report,
supra note 4, at 29.

    The triparty segment of the U.S. Treasury securities repurchase
agreement market is large, with an average of approximately $500
billion of daily trading volume in 2020, and has taken on a
substantially larger role since the beginning of 2021, peaking at
nearly $3 trillion in transaction volume in the beginning of 2022.\273\
Of this, overnight repos is the largest segment, making up 87.5% daily
transaction volume, as shown in Figure 5. Although different types of
securities can be used as collateral in triparty repos, over half
(50.9%) of triparty repo collateral since 2015 are U.S. Treasury
securities. That number has grown to 65.5 percent since 2021, as shown
in Panel B of Figure 5.\274\ The remainder are agency securities,
referring to mortgage-backed securities issued by U.S government
agencies and government sponsored enterprises, and various other
securities including corporate bonds, non-U.S. sovereign debt, equity,
municipal debt, and commercial paper.\275\
---------------------------------------------------------------------------

    \273\ See Mark E. Paddrik, Carlos A. Ram[iacute]rez, & Matthew
J. McCormick, FEDS Notes: The Dynamics of the U.S. Overnight
Triparty Repo Market, (Aug. 2, 2021), available at https://www.federalreserve.gov/econres/notes/feds-notes/the-dynamics-of-the-us-overnight-triparty-repo-market-20210802.htm.
    \274\ See SIFMA Research, US Repo Fact Sheet, at 11 (Jan. 2021),
available at https://www.sifma.org/wp-content/uploads/2020/04/2021-US-Repo-Fact-Sheet.pdf.
    \275\ Id.; see Paddrik et al., supra note 273.

Figure 5: Triparty Repurchase Agreement Trading Volume, Splits \a\
[GRAPHIC] [TIFF OMITTED] TP25OC22.004

    \a\ https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo.
3. Central Clearing in the U.S. Treasury Securities Market
    Currently, FICC is the sole provider of clearance and settlement
services for U.S. Treasury securities (see section I, supra). On July
18, 2012, FSOC designated the FICC as a systemically important
financial market utility under Title VIII of the U.S. Dodd-Frank Act.
FSOC assigned this designation on the basis that a failure or a
disruption to FICC could increase the risk of significant liquidity
problems spreading among financial institutions or markets and thereby
threaten the stability of the financial system in the United States.
    Direct membership in FICC generally consists of banks and
registered dealers,

and such members must meet specified membership criteria.\276\ In other
markets, not all active participants are direct members of the clearing
agency. For this reason, it is likely that under the Membership
Proposal, some will access clearing indirectly. At FICC, the indirect
clearing models are its Sponsored Program and a prime broker/
correspondent clearing program.\277\ As of May 3, 2022, FICC has 202
direct members.\278\
---------------------------------------------------------------------------

    \276\ The Commission believes that not all market participants
likely would satisfy a covered clearing agency's stringent
membership criteria. See 17 CFR 17Ad-22(e)(18); FICC Rule 2A, supra
note 47. Even among those that do, legal operational or other
considerations may preclude many market participants from becoming
direct members of a CCP that clears and settles government
securities transactions.
    \277\ See, e.g., FICC Rules, 8, 18, 3A (providing for prime
brokerage and correspondent clearing, as well as sponsored
membership), supra note 47.
    \278\ See FICC Member Directories, available at https://www.dtcc.com/client-center/ficc-gov-directories. (This includes all
members who make use of Netting, Repurchase Netting, and/or GCF
services.).
---------------------------------------------------------------------------

    From a direct participant's perspective, clearing a U.S. Treasury
securities transaction at FICC between that participant and its non-
participant counterparty (i.e., a dealer-to-client trade) need not
result in a separate collection of margin for the customer transaction.
Transactions between direct participants are novated by FICC, and, by
virtue of multilateral netting, all of a member's positions are netted
into a single payment obligation--either to or from the CCP. In
contrast, in a dealer-to-client trade, there is no transaction between
two direct participants that FICC membership rules would require to be
novated to the CCP, and as a result, FICC does not provide any guaranty
of settlement or otherwise risk manage this trade.\279\ In other words,
as one recent publication explained, ``if a dealer were to buy a
security from its own customer and submit this transaction to FICC,
there would be no effect on the dealer's net position at, obligations
to, or guarantees from FICC.'' \280\ Indeed, except for its sponsored
program, because FICC nets all trades at a dealer before calculating
margin, as at present, customer trades with their own dealers generate
no margin requirement and are not collateralized at the CCP.
---------------------------------------------------------------------------

    \279\ See Chicago Fed Insights, supra note 204, at 2 (explaining
that this conclusion follows from that fact that ``FICC nets
members' trades for their own accounts against trades by the
members' customers, so the dealer's and customer's sides of the
trade would cancel out in the netting process.'').
    \280\ Id.
---------------------------------------------------------------------------

    The most frequently used FICC model for accessing the clearing
agency indirectly is the sponsored clearing model, which is generally
used for repo but not for cash transactions. As of October 2021, there
were 27 Sponsoring Members and roughly two thousand Sponsored Members
from 20 approved jurisdictions, with daily volumes ranging from $225-
$280 billion (and peaking in March 2020 at $564 billion).\281\
---------------------------------------------------------------------------

    \281\ See DTCC May 2021 White Paper, supra note 135, at 6.
---------------------------------------------------------------------------

    Sponsored Members participating in FICC's Sponsored Service are
indirect members of FICC, and upon novation of their U.S. Treasury
transactions, FICC becomes obligated to such Sponsored Members.\282\
FICC requires that its Sponsoring Members provide margin on a gross
basis for its Sponsored Member positions.\283\ In FICC's correspondent
clearing and prime brokerage clearing models, which the Commission
understands to be rarely used, the client does not have a legal
relationship with FICC.\284\ FICC only has CCP obligation to the
correspondent clearer or prime broker itself, as applicable, who is a
FICC member. In light of this, FICC net margins the activity in the
accounts of correspondent clearers and prime brokers.
---------------------------------------------------------------------------

    \282\ FICC-GSD Rule 3A sections 3 (membership) and 7 (novation),
supra note 47.
    \283\ FICC Rule 3A, section 10(c), supra note 47. See also DTCC
October 2021 White Paper, supra note 203, at 5-6.
    \284\ FICC Rule 8, supra note 47. See DTCC October 2021 White
Paper, supra note 203, at 5, which reports that $80 billion plus of
activity are observed clearing and settling daily through FICC's
correspondent clearing and prime broker clearing models.
---------------------------------------------------------------------------

    Certain aspects of FICC's Sponsored Service are worth noting, as
they may have an effect on some market participants' willingness to
participate in the service. For example, once a trade is novated, FICC
makes delivery of cash or securities to the Sponsoring Member as agent
for the Sponsored Member.\285\ Therefore, market participants may
consider the ability of their Sponsoring Member to make delivery to
them in situations in which the Sponsoring Member is in default, when
determining whether to use the Sponsored Service. In addition, if a
Sponsoring Member defaults, FICC continues to guarantee any novated
sponsored trades and may determine whether to close out a sponsored
trade and/or to permit the Sponsored Member to settle the trade.\286\
This may lead a potential sponsored member to decline to enter a
sponsoring relationship unless it was willing to trade bilaterally with
those sponsoring firms. The Commission understands that some Sponsoring
Members also may limit which market participant's trades they are
willing to sponsor based on firm type. Sponsored triparty repo is a
relatively recent addition.\287\ Volumes of sponsored repo fluctuate,
but they appear to be substantial as Figure 6 shows.
---------------------------------------------------------------------------

    \285\ FICC Rule 3A, sections 8 and 9, supra note 47.
    \286\ FICC Rule 3, section 14(c), supra note 47.
    \287\ See supra note 66 and note 67 and referencing text.

Figure 6: Sponsored Repo Daily Trading Volume \a\

[GRAPHIC] [TIFF OMITTED] TP25OC22.005

    \a\ Source: FRBNY Repo Operations data, available at https://www.newyorkfed.org/markets/desk-operations/repo. Operation results
in Figure 6 include all repo and reverse repo conducted, including
small value exercises.

    In order for a CCP to perform as the guarantor of trades that have
been novated to it, the CCP must have resources available to absorb the
costs of clearing member non-performance. FICC is required by
Commission rule to have policies and procedures reasonably designed to
maintain financial resources at the minimum to enable it to cover a
wide range of foreseeable stress scenarios that include, but are not
limited to, the default of the participant family that would
potentially cause the largest aggregate credit exposure in extreme but
plausible market conditions.\288\ A CCP's plan to deal with a clearing
member default is referred to as its default waterfall. The default
waterfall provides an identification of resources that the CCP will use
in attempting to recoup losses from clearing member defaults. The FICC
waterfall comprises the defaulting clearing member's contribution
(i.e., margin, as well as any other resources the member has on deposit
such as excess margin, the proceeds from liquidating the member's
portfolio, and any amounts available from cross-guaranty agreements),
the corporate contribution to the clearing fund, followed by non-
defaulting clearing members' margin.\289\
---------------------------------------------------------------------------

    \288\ 17 CFT 240.17Ad-22(e)(4)(iii).
    \289\ FICC Rule 4, sections 6 and 7, supra note 47.
---------------------------------------------------------------------------

    In addition, with respect to liquidity risk, the Commission's rules
require FICC to have policies and procedures reasonably designed to
meet a ``cover-1'' standard and hold qualifying liquid resources
sufficient to complete its settlement obligations in the event of the
default of the largest member and its affiliates.\290\ For example, if
a clearing member has a net long position in a security that has not
yet settled, the CCP must have the cash available to complete the
purchase. The securities can be subsequently liquidated and any losses
that may result would be covered by the resources in the default
waterfall. The first liquidity source that FICC would use in the event
of a member default is the cash portion of the clearing fund.\291\
Second, FICC can pledge securities in the clearing fund as a source of
cash, including securities that would have otherwise been delivered to
the defaulting member.\292\ Should additional liquid resources be
required FICC could make use of the Capped Contingent Liquidity
Facility (``CCLF'').\293\
---------------------------------------------------------------------------

    \290\ Specifically, the Commission's rules require FICC to have
policies and procedures reasonably designed to maintain sufficient
liquid resources at the minimum in all relevant currencies to effect
same-day and, where appropriate, intraday and multiday settlement of
payment obligations with a high degree of confidence under a wide
range of foreseeable stress scenarios that includes, but is not
limited to, the default of the participant family that would
generate the largest aggregate payment obligation for the covered
clearing agency in extreme but plausible market conditions, and to
hold qualifying liquid resources sufficient to meet that
requirement. See 17 CFR 240.17Ad-22(e)(7)(i) and (ii).
    \291\ FICC Rule 4, sections 5 and 6, supra note 47.
    \292\ Id.
    \293\ FICC Rule 22A, section 2a, supra note 47.
---------------------------------------------------------------------------

    The CCLF is a rules-based arrangement in which FICC members are
obligated to participate as a condition of their membership. Should
FICC declare a CCLF event, each member would be obligated to enter into
repurchase agreements with FICC up to a member-specific limit.\294\ The
CCLF is not prefunded, and it is separate from FICC's margin
requirements. Each FICC member is required, by FICC's rules, to attest
that its CCLF requirement has been incorporated into its liquidity
planning and related operational plans at least annually and in the
event of any changes to such Member's CCLF requirement.\295\ Thus, the
members are obligated to have such resources lined up, which can be
costly.\296\
---------------------------------------------------------------------------

    \294\ These repurchase agreements may continue for up to 30
days. See FICC Rule 22A, section 2a(a)(L), supra note 47.
    \295\ FICC Rule 22A, section 2a(d), supra note 47.
    \296\ See Independent Dealer & Trader Association, White Paper
on the Repo Market Affecting U.S. Treasury and Agency MBS, at 8
(Dec. 6, 2019), available at https://static1.squarespace.com/static/5ad0d0abda02bc52f0ad4922/t/5dea7fb6af08dd44e68f48cc/1575649207172/IDTA+-+White+Paper+%2812.6.19%29-c2.pdf (``In light of the fact that
a significant component of a firm's CCLF obligation is based on its
overnight liquidity exposures at FICC, middle-market dealers
immediately took to reducing their reliance on overnight liquidity.
Some middle-market dealers reduced the size of their portfolio and
extended liquidity terms in place of overnight funding, adding to
both financing and opportunity costs. Others have incorporated
liquidity plans for which commitment and administration fees
materially added to the cost of doing business.'').
---------------------------------------------------------------------------

    The CCLF provides a mechanism for FICC to enter into repurchase
transactions based on the clearing activity of the defaulted
participant. Specifically, in the event that FICC declares a CCLF
event, FICC's members would be required to hold and fund their
deliveries to the defaulting member, up to a predetermined capped
dollar amount, by entering into repurchase transactions with FICC until
FICC completes the associated closeout.\297\ The aggregate size of the

CCLF is the historical cover-1 liquidity requirement (i.e., the largest
liquidity need generated by an Affiliated Family during the preceding
six-month period) plus a liquidity buffer (i.e., the greater of 20
percent of the historical cover-1 liquidity requirement or $15
billion).\298\
---------------------------------------------------------------------------

    \297\ See generally FICC Rule 22A, section 2a(b), supra note 47.
For details on the process, see the Order Approving a Proposed Rule
Change to Implement the Capped Contingency Liquidity Facility in the
Government Securities Division Rulebook, Exchange Act Release No.
82090 (Nov. 15, 2017), 82 FR 52457 (Nov. 21, 2017).
    \298\ FICC Rule 1 (definitions of Aggregate Total Amount and
Liquidity Buffer) and 22A, section 2, supra note 47.
---------------------------------------------------------------------------

    The first $15 billion of the total amount of the CCLF is shared, on
a scaled basis, across all members. Any remaining amount is allocated
to members who present liquidity needs greater than $15 billion, using
a liquidity tier structure based on frequency of liquidity created
across liquidity tiers in $5 billion increments.\299\ The size of the
CCLF and each member's share is reset every 6 months or as
appropriate.\300\ Figure 7 provides data on the aggregate amount of the
CCLF from 2018 quarter 4 through 2021 quarter 2. The aggregate size of
the CCLF was over $80 billion in 2021 quarter 2.
---------------------------------------------------------------------------

    \299\ FICC Rule 22A, section 2a(iii), (iv), and (v), supra note
47. See also Exchange Act Release No. 82090, supra note 297, 82 FR
at 55429-30.
    \300\ FICC Rule 22A, section 2a(b)(ii), (iii), (iv), and (v),
supra note 47.

Figure 7: Aggregate CCLF ($MM) at Quarter End \a\
[GRAPHIC] [TIFF OMITTED] TP25OC22.006

    \a\ See CPMI-IOSCO Quantitative Disclosures--FICC, Disclosure
Reference 7.1.6, available at https://www.dtcc.com/legal/policy-and-compliance.
4. Clearing and Settlement by U.S. Treasury Securities Market Segment
    Data on the extent of central clearing in the U.S. Treasury
securities market appears to be lacking. As discussed previously, the
Commission believes that approximately half of bilateral repo trades
are centrally cleared. The percentage of centrally cleared triparty
repo appears to be lower than this, as sponsored triparty clearing is
relatively new. For further details of central clearing in repo, see
section II.A.2, supra.
    The state of cash clearing in the U.S. Treasury securities market
is discussed in section II.A.1 supra. Estimates from the first half of
2017 further suggest that only 13 percent of the cash transactions in
the U.S. Treasury securities market are centrally cleared. These
estimates suggest that another 19 percent of transactions in this
market are subject to so-called hybrid clearing in which one leg of a
transaction facilitated by an IDB platform is centrally cleared and the
other leg of the transaction is cleared bilaterally.\301\
---------------------------------------------------------------------------

    \301\ See IAWG Report, supra note 4, at 30; see also TMPG White
Paper, supra note 21, at 12. The figures are estimated using FR 2004
data covering the first half of 2017 and are based on various
assumptions: (a) primary dealers account for all dealer activity,
(b) 5% of dealers' trading not through an IDB is with another
dealer, (c) the shares of dealer and non-dealer activity in the IDB
market for coupon securities equal the weighted averages of the
shares reported in the Oct. 15 report (that is, 41.5% and 58.5%,
respectively), (d) only dealers trade bills, FRNs, and TIPS in the
IDB market, and e) the likelihood of dealer and non-dealers trading
with one another in the IDB market solely reflects their shares of
overall volume.
---------------------------------------------------------------------------

    Below, we discuss the dealer-to-customer market and the ``inter-
dealer'' market (on IDBs) separately. Tables 1 and 2 show the volumes
in these markets for on-the-run and off-the-run securities.
    Until the mid-2000s, most inter-dealer trading occurred between
primary dealers who were FICC members and it was centrally
cleared.\302\ Today, PTFs actively buy and sell large volumes of U.S.
Treasury securities on an intraday basis using high-speed and other
algorithmic trading strategies.\303\ PTFs are not generally FICC
members and, as such, their trades are often not centrally cleared.
Moreover, PTFs compose a

substantial portion of trading volume, averaging about 20% of overall
U.S. Treasury cash market volume and accounting for around 50-60% of
IDB volume in outright purchases and sales of U.S. Treasury
securities.\304\ Primary dealers, who are FICC members and who transact
the 40-50% of IDB volume not accounted for by PTFs, are required by
Federal Reserve Bank of New York policy to centrally clear their U.S.
Treasury securities primary market cash activity.\305\
---------------------------------------------------------------------------

    \302\ See G-30 Report at 9, supra note 5; IAWG Report, supra
note 4, at 5-6; TMPG White Paper, supra note 21, at 6.
    \303\ See Joint Staff Report, supra note 4, at 32, 35-36, 39.
    \304\ See James Collin Harkrader & Michael Puglia, FEDS Notes:
Principal Trading Firm Activity in Treasury Cash Markets (Aug. 2020)
(``Harkrader and Puglia FEDS Note''), available at https://www.federalreserve.gov/econres/notes/feds-notes/principal-trading-firm-activity-in-treasury-cash-markets-20200804.htm.
    \305\ See supra note 37.
---------------------------------------------------------------------------

    As Tables 1 and 2 below show, during the 6-month period ending in
September 2021 trading volume of on-the-run U.S. Treasury securities
was approximately two and half times that of off-the-run U.S. Treasury
securities. Over half (56.9%) of on-the-run U.S. Treasury security
trading volume and approximately one quarter (28.5%) of off-the-run
U.S. Treasury security trading volume occurred on ATSs (which are also
IDBs) and non-ATS IDBs.\306\ Of the on-the-run U.S. Treasury security
trading volume that occurred on ATS IDBs and non-ATS IDBs, 41.5% were
dealer trades, 44.6% were PTF trades and the remainder were customer
trades. For off-the-run trading in U.S. Treasury securities, the
comparable figures are 72.2% dealer trades, 9.1% PTF trades, and the
remainder are customer trades. In contrast to trades that take place on
an ATS or a non-ATS IDB, 56.9% of on-the-run U.S. Treasury security
transactions and 75.9% of off-the-run U.S. Treasury security
transactions are traded bilaterally. The majority of these (86.0% of
on-the-run and 89.9% of off-the-run) are dealer-to-customer trades.
---------------------------------------------------------------------------

    \306\ The term ``IDB'' typically refers only to IDBs that are
also ATSs. See supra note 43 and associated text.

                           Table 1--On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                               On-the-Run U.S. Treasury Securities Trading Volume
-----------------------------------------------------------------------------------------------------------------
                                                                                Average
                                                                     Number of    weekly  volume   Volume share
                                                                      venues            ($M)            (%)
----------------------------------------------------------------------------------------------------------------
ATSs............................................................              18         812,480            49.7
    Customer trades.............................................              11          52,754             3.2
    Dealer trades...............................................              18         344,781            21.1
    PTF trades..................................................              11         414,945            25.4
Non-ATS Interdealer Brokers.....................................              24         118,067             7.2
    Customer trades.............................................              19          77,334             4.7
    Dealer trades...............................................              23          40,252             2.5
    PTF trades..................................................               9             481         \a\ 0.0
Bilateral dealer-to-dealer trades...............................             352          92,051             5.6
Bilateral dealer-to-customer trades.............................             333         604,823            37.0
Bilateral dealer-to-PTF trades..................................              97           7,250             0.4
                                                                 -----------------------------------------------
        Total...................................................  ..............       1,634,671           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\b\ Non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run U.S.
 Treasury Securities. On-the-run U.S. Treasury Securities are the most recently issued nominal coupon
 securities. 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. Treasury Bills and Floating Rate Notes are excluded. Volume is
 the average weekly dollar volume in par value (in millions of dollars) over the 6-month period, from April 1,
 2021, to September 30, 2021.\c\ Number of Venues is the number of different trading venues in each category and
 the number of distinct MPIDs for bilateral transactions.\d\ Market Share (%) is the measure of the dollar
 volume as a percent of total dollar volume.\e\ The volumes of ATSs and non-ATS interdealer brokers are broken
 out by Customer trades, Dealer trades, and PTF trades within each group.\f\ Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities from Apr. 1, 2021, to Sept. 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.02%.
\b\ This analysis is necessarily limited to transactions reported to TRACE, which may not be all transactions in
  U.S. Treasury securities. Transactions that take place on non-FINRA member ATSs or between two non-FINRA
  members are not reported to TRACE. Entities in the ATS TRACE category encompass the IDBs described in the
  preamble of this release. By contrast, the non-ATS IDB category in TRACE encompasses the voice-based or other
  non-anonymous methods of bringing together buyers and sellers. See supra note 43 and referencing text.
\c\ FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond,
  in dollars. See relevant weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
\d\ Dealers are counted using the number of distinct MPIDs.
\e\ Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer
  brokers, bilateral dealer-to-dealer transactions, and bilateral dealer-to-customer transactions.
\f\ We identify ATS trades and non-ATS interdealer broker trades using MPID. The regulatory version of TRACE for
  U.S. Treasury securities includes an identifier for customer and interdealer trades. Furthermore, we use MPID
  for non-FINRA member subscriber counterparties in the regulatory version of TRACE for U.S. Treasury securities
  to identify PTF trades on ATSs.

                          Table 2--Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                               Off-the-Run U.S. Treasury Securities Trading Volume
-----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
ATSs............................................................              17         110,945            17.3

    Customer trades.............................................              10          13,304             2.1
    Dealer trades...............................................              17          83,668            13.0
    PTF trades..................................................              11          13,973             2.2
Non-ATS Interdealer Brokers.....................................              22          43,604             6.8
    Customer trades.............................................              18          15,092             2.4
    Dealer trades...............................................              21          28,451             4.4
    PTF trades..................................................              12              61         \a\ 0.0
Bilateral dealer-to-dealer trades...............................             509          47,912             7.5
Bilateral dealer-to-customer trades.............................             333         437,665            68.2
Bilateral dealer-to-PTF trades..................................             114           1,415             0.2
                                                                 -----------------------------------------------
        Total...................................................  ..............         641,540           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\b\ non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run
 U.S. Treasury Securities. Off-the-run or ``seasoned'' U.S. Treasury Securities include TIPS, STRIPS, and
 nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of
 Venues is the number of different trading venues in each category and the number of distinct MPIDs for
 bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over
 the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure of the dollar
 volume as a percent of the total dollar volume. The volumes of ATSs and nonATS interdealer brokers are broken
 out by Customer trades, Dealer trades, and PTF trades within each group.\c\ Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities from Apr. 1, 2021, to Sept. 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.01%.
\b\ The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all
  transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two
  non-FINRA members are not reported to TRACE. The analysis based on TRACE is necessarily limited to
  transactions reported to TRACE, which may not be all transactions in government securities. Transactions that
  take place on non-FINRA member ATSs or between two non-FINRA members are not reported to TRACE. Entities in
  the ATS TRACE category encompass the IDBs described in the preamble of this release. By contrast, the non-ATS
  IDB category in TRACE encompasses the voice-based or other non-anonymous methods of bringing together buyers
  and sellers. See supra note 4344 and referencing text.
\c\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury securities. The regulatory version of TRACE for U.S. Treasury securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

a. Dealer-to-Customer Cash U.S. Treasury Securities Market (Off-IDBs)
i. Bilateral Clearing
    In cash U.S. Treasury security transactions that are bilaterally
cleared, the process generally begins with participants initiating the
trade by an electronic or voice trading platform, and both parties
booking the details of the trade in their internal systems and
confirming the details of the trade with one another. Once the details
are confirmed, each party then sends messages to its clearing or
settlement agents to initiate the clearing process. Different types of
institutions use different clearing and settlement agents, with buy-
side firms typically using custodial banks, dealers using clearing
banks, and hedge funds and PTFs using prime brokers. With regard to the
posting of margin, the Commission understands that most bilaterally
cleared trades go unmargined.\307\
---------------------------------------------------------------------------

    \307\ TMPG White Paper, supra note 21, at 3 (``Margining has not
been a common practice for regularly settling bilaterally cleared
transactions . . .'').
---------------------------------------------------------------------------

    Bilaterally cleared trades make up 87% of total trading in the
secondary U.S. Treasury securities market, making them the most
prevalent trade type in the market.\308\ These trades include at least
one party that is not a member of the CCP. The bilateral clearing
process comes with risks. After the trade is executed, the principals
to the trade face counterparty credit risk, in the event that either
party fails to deliver on its obligations.\309\
---------------------------------------------------------------------------

    \308\ TMPG White Paper, supra note 21, at 12. This figure is
estimated from 2017H1 data and includes approximately 19% hybrid
clearing. See supra section III.A.2.b (IDB Transactions) and infra
section IV.b.4.b (iii) for discussions of hybrid clearing.
    \309\ TMPG White Paper, supra note 21, at 13.
---------------------------------------------------------------------------

ii. Central Clearing
    There is essentially no central clearing of dealer-to-client trades
of U.S. Treasury Securities.\310\ Should a trade be centrally cleared,
the CCP receives a notice of the executed trade from both parties, and
after comparison (i.e., matching of the trade details), the CCP
guarantees and novates the contract, where novation refers to the
process by which the CCP becomes the counterparty to both the buyer and
seller in the original trade. Once the trading day ends and all trades
have been reported to the CCP (i.e., end of T+0), the CCP determines
its net obligations to each CCP participant for each security and
communicates the resulting settlement obligations to the
counterparties. The participants then have the obligation to settle
their portion of the trade on T+1. Once this information is
communicated, the participants send instructions to their settlement
agents. In contrast to the bilateral case, central clearing reduces the
credit risk that both parties are exposed to throughout the trade.
While at execution both CCP members hold the usual counterparty credit
risk to one another, this risk is transformed, generally within minutes
of trade execution, when the trade details are sent to the CCP and the
CCP guarantees and novates the trade. Instead, both parties to the
trade now hold centrally cleared credit risk, and the CCP has
counterparty risk to both members.
---------------------------------------------------------------------------

    \310\ See G-30 Report, supra note 5, at 1.

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

b. Cash U.S. Treasury Trades Through an IDB \311\
---------------------------------------------------------------------------

    \311\ See generally TMPG White Paper, supra note 21.
---------------------------------------------------------------------------

    Trades through IDBs can go through three different clearing
processes, as IDBs act as the principals for the buying and selling
entities transacting on the IDB who may or may not be CCP members. When
the purchaser and the seller are CCP members, each leg of the trade is
centrally cleared. When neither of the parties to the trade is a CCP
member, conversely, each leg of the trade is cleared bilaterally.
Finally, when one party to the trade is a CCP member and the other is
not, the CCP member's trade is centrally cleared, while the other leg
of the trade is cleared bilaterally. For clarity, we outline each of
these cases separately.
i. Central Clearing
    In the case where both the buyer and seller are CCP members, the
process is largely the same as the process outlined in section
IV.B.4.a.ii. Since all three parties, buyer, seller, and IDB are CCP
members, there are just two centrally cleared trades submitted
simultaneously, one between the seller and the IDB, and the other
between the IDB and the buyer. Both trades are submitted to the CCP,
which novates the trades, resulting in 4 separate trades. At the end of
T+0, the CCP nets out the IDB's position, and sends the buyer and
seller their net obligations on T+1.
    The credit risk in this trade is largely the same as in the
centrally cleared case without an IDB, though there is now additional
counterparty credit risk on T+0 coming from the IDB's involvement in
the trade. However, this additional counterparty risk is not present
for very long, for two reasons. First, once the trade is submitted for
clearing, counterparty risk shifts from bilateral to centrally cleared
(that is, from the IDB to the CCP). Second, while the IDB holds
centrally cleared credit risk, the position is netted out at the end of
T+0.
ii. Bilateral Clearing
    The case where the non-CCP member buyer and seller use an IDB is
similar to the bilateral clearing case detailed in section IV.B.4.a(i)
supra.\312\ At execution, the trade is placed either by voice or on the
IDB's electronic platform. On T+1, the IDB settles both legs of the
trade. To settle its trade with the IDB, the seller instructs its
settlement agent to send securities against payment to the IDB. This
settlement agent then transfers the securities from the seller to the
securities account of the buyer's settlement agent. The buyer's
settlement agent then credits the securities to the IDB's securities
account. To settle its trade with the buyer, the IDB instructs the
buyer's settlement agent to transfer securities to the buyer's account,
by transferring the securities from the IDB's securities account to the
settlement agent's omnibus account. Finally, the clearing agent credits
the securities to the buyer's securities account, which is maintained
by the clearing agent. Additionally, because the IDB is principal to
both parties, it can clear and settle trades on a net basis with
respect to each party. This netting occurs throughout the day on T+0
and the net position is settled on T+1.
---------------------------------------------------------------------------

    \312\ See also TMPG White Paper, supra note 21, at 23.
---------------------------------------------------------------------------

    Credit risk in this scenario is different than in the centrally
cleared case discussed in the previous section. Because the IDB stands
as principal between the buyer and the seller but does not submit the
trades for central clearing, the IDB, buyer, and seller all hold
counterparty credit risk for net unsettled positions throughout T+0 and
overnight on the net exposures to each party. In addition, unlike the
centrally cleared case where the CCP collects margin from its
counterparties, the Commission understands that IDBs generally do not
collect margin to collateralize this risk.\313\ Further, the IDB is now
involved in settlement, making it subject to the counterparty credit
risk described in section IV.B.4.a(i), supra. In particular, the
settlement agent for the buyer faces credit extension risk from the
IDB, as they deliver cash to the seller's settlement agent prior to the
security being transferred. Once the securities are transferred, this
risk is extinguished.
---------------------------------------------------------------------------

    \313\ See TMPG White Paper, supra note 21, at 3.
---------------------------------------------------------------------------

    Finally, since the trade is not centrally cleared and the IDB
stands as principal between the two parties, the IDB has a legal
obligation to deliver securities to the buyer, even if the seller fails
to deliver or defaults. In practice, an IDB might fail to deliver
securities if the seller fails, generating what is known as a matched
fail, where there is an expectation that the fail will be cured shortly
(to the extent that it is not caused by a creditworthiness or liquidity
event on the seller's part). If the seller is impaired or goes into
bankruptcy, the IDB will likely source securities for delivery to the
buyer, rather than carry an open fail to deliver, due to both its
obligation to deliver securities as well as reputational concerns. For
the same reasons the IDB will likely source cash if the buyer is
impaired or goes into default. Given these obligations, the IDB
actively monitors participants and their positions across its various
platforms. Nevertheless, unlike a CCP, an IDB does not mutualize risk
across all of the participants on its platform. As a result, compared
to a CCP that collects margin and mutualizes losses among its members,
if a counterparty to a bilaterally cleared trade defaults to the IDB,
all else equal there is a greater risk that the IDB would then default
to the other counterparty.
iii. Hybrid Clearing
    In IDB trades where one counterparty to the trade is a FICC member
and the other is a non-FICC member, then a hybrid clearing model is
used in which one side of the trade is cleared through FICC, and the
other is cleared and settled bilaterally. In these cases, the leg of
the trade between the FICC member and the IDB will follow the central
clearing example outlined in section IV.B.4.b.i infra, as FICC members
are generally dealers. Similarly, the leg of the trade between the IDB
and the non-FICC member will be bilaterally cleared as described in
section IV.B.4.b.ii supra, as the non-FICC entities trading on IDBs are
generally PTFs and other unregistered market participants.
5. Margin Practices in U.S. Treasury Secondary Markets
    As described above, posting of margin is one way to manage the risk
of settlement in cash trades. Indeed, for trades that are centrally
cleared, the CCP collects margin on an intraday basis, typically twice
per day.\314\ Varying bespoke arrangements appear to characterize
current margining practices in the bilateral, non-centrally cleared
cash market.\315\ Indeed, a recent publication stated that competitive
pressures in the bilaterally settled market for repo transactions has
exerted downward pressure on haircuts, sometimes to zero.\316\ The
reduction of haircuts, which serve as the primary counterparty credit
risk mitigant in bilateral repos, could result in greater exposure to
potential counterparty default risk in non-centrally cleared repos.
Such arrangements (in both cash

and repo) may not take into account the value of margin in protecting
against systemic events, because they are designed to be optimal for
the counterparties rather than the larger financial market.
---------------------------------------------------------------------------

    \314\ TMPG White Paper, supra note 21, at 3.
    \315\ Id. at 3. Non-centrally cleared cash trades are negotiated
and settled bilaterally, and the Commission has little direct
insight into the arrangements market participants use to manage
their counterparty exposure. The TMPG observes in the White Paper
that non-centrally cleared trades are ``. . . not margined in a
uniform or transparent manner, thereby creating uncertainty about
counterparties' exposure to credit and market risk.'' Id.
    \316\ G-30 Report, supra note 5, at 13.
---------------------------------------------------------------------------

    For centrally cleared cash U.S. Treasury transactions, however,
FICC rules dictate that margin must be posted based on the net
positions of all members with the clearing agency. Positions in
securities with longer maturities--for example, 20+ year U.S. Treasury
bonds--require more margin to be posted because they are more sensitive
to interest rate changes. Required margin is also larger for short
positions, and rises with volatility in the U.S. Treasury securities
market.\317\ For example, during the first quarter of 2020, a period
which includes the U.S. Treasury securities market disruption of March
2020, total initial margin required was 9.4% higher than the previous
quarter and the average total variation margin paid was 72%
higher.\318\
---------------------------------------------------------------------------

    \317\ See FICC Rule 4, section 1b, supra note 47. FICC's margin
requirements are discussed in more detail below. A key component of
the margin requirement is a Value-at-Risk charge, where the
calculated margin requirement is based in part on the historical
volatility of the traded security. Securities that are more
sensitive to interest rates should have higher VaR, all else equal.
    \318\ See CPMI IOSCO Quantitative Disclosure Results for 2020Q1
and 2019Q4, items 6.1.1 and 6.6.1, available at https://www.dtcc.com/legal/policy-and-compliance.
---------------------------------------------------------------------------

    FICC Rules set forth the various components of a member's margin
requirements.\319\ The largest component is a Value-at-Risk (VaR)
charge, which is calculated both intraday and end-of-day and reflects
potential price volatility of unsettled positions. FICC typically
calculates VaR using ten years of historical data; for securities
without the requisite amount of data, FICC instead employs a haircut
approach, where the required margin is some percentage of the traded
security's value. Other components of FICC's margin requirements
include a liquidity adjustment charge, which is levied against members
who have large, concentrated positions in particular securities that
FICC determines to be difficult to liquidate, and special charges that
can be levied in response to changes in aggregate market conditions
(such as increases in market-wide volatility).
---------------------------------------------------------------------------

    \319\ FICC Rule 4, section 1b, supra note 47.
---------------------------------------------------------------------------

    In the market for bilaterally cleared repo, margin typically comes
in the form of overcollateralization. That is, if a lender is providing
$100 of cash, the borrower will provide more than $100 of securities as
collateral. This extra collateral--which is essentially a form of
initial margin--protects the lender by making it more costly for the
borrower to default, while also protecting the lender against the risk
that short-term volatility erodes the value of the posted collateral.
The difference between the cash provided and the value of the
collateral is known colloquially as a ``haircut.'' Triparty repo also
features overcollateralization, where the haircut is again negotiated
bilaterally between the two counterparties.\320\ Data from the Federal
Reserve Bank of New York show that a 2% haircut is the norm in the
Triparty/GCF repo market, though there are occasionally some deviations
from the norm.\321\ Money market funds also generally require margin of
2%, which is generally the case for other investment companies as
well.\322\ Outside of money market funds and other investment
companies, due to the lack of reporting requirements for bilateral
repo, the Commission lacks good insight into margin practices of
participants in the market for bilaterally cleared repo. Anecdotally,
the Commission understands that--as with the cash market--some
participants may not be required to post any margin.\323\
---------------------------------------------------------------------------

    \320\ Although triparty repo transactions are settled through a
clearing bank, the terms of the transactions are bilaterally
negotiated. Although haircuts vary by collateral type, the variance
of haircuts is small for U.S. Treasury repo compared to other
collateral types. See Paddrik, et al., supra note 273.
    \321\ For data on the median, 10th, and 90th percentiles of
overcollateralization in Triparty repo, see https://www.newyorkfed.org/data-and-statistics/data-visualization/tri-party-repo. The median level of overcollateralization has been 2% for the
entire period from May 2010 through June 2022. The 10th and 90th
percentiles are also typically 2%, although the 10th percentile has
occasionally fallen to as low as zero--notably, in the summer of
2010 and again briefly in September 2012--while the 90th percentile
has occasionally spiked to as high as 5%--specifically in January
2017 and again in April of the same year.
    \322\ See MMF Primer, supra note 57.
    \323\ See G-30 Report, supra note 5, at 13 (noting that minimum
margin requirements ``. . . would stop competitive pressures from
driving haircuts down (sometimes to zero), which reportedly has been
the case in recent years.'').
---------------------------------------------------------------------------

    While overcollateralization protects the lender, the bilaterally
cleared repo market generally does not feature the same level of
protection for the borrower. Indeed, one of the main benefits of the
bilateral market to lenders is that it allows them to reuse the
collateral. As a result, borrowers are exposed to settlement risk and
must manage that risk as they see fit. In the triparty repo market,
posted collateral remains in the custody of the clearing bank and
cannot be reused by the lender except as collateral in another triparty
repurchase agreement, reducing settlement risk for the borrower.
    Unlike bilaterally cleared and triparty repo, centrally cleared
repo generally does not feature overcollateralization. Instead, the
counterparties post cash margin to the CCP twice per day, as they do
with trades in the cash market. Borrowers may be required to post more
margin than lenders, similar to how in the bilaterally cleared market
borrowers post margin through overcollateralization while lenders do
not.
6. Disruptions in the U.S. Treasury Securities Market
    There have been significant disruptions in the U.S. Treasury
securities market in recent years. 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.\324\ U.S. Treasury securities are generally not information
sensitive in that their payoff is fixed in nominal terms. Moreover,
there is little evidence that information on inflation risk or
expectations could have driven the volatility observed in these
episodes, raising the possibility that the volatility originated in a
buy-sell imbalance, as opposed to fundamental factors. While a market
failure could be the origin of price volatility, the forward-looking
nature of markets can compound liquidity-driven price movements. The
fear of being unable to exit a position can lead to a ``rush to the
exits,'' leading to yet greater price swings. Because U.S. Treasury
securities are standardized, they generally benefit from a deep, ready
market for transactions. Investors count on the ability to move between
cash and U.S. Treasury securities seamlessly.\325\ This makes events
that reduce liquidity in these markets especially striking and
destabilizing to the overall market.
---------------------------------------------------------------------------

    \324\ See IAWG Report, supra note 4, for further discussion of
these and other disruptions.
    \325\ U.S. Treasury securities are often used as substitutes for
cash. There is anecdotal evidence that during March 2020, some
market participants refused U.S. Treasury securities collateral in
favor of cash.
---------------------------------------------------------------------------

a. COVID-19 Shock of March 2020
    The market for U.S. Treasury securities experienced significant
disruptions in March 2020, characterized by a spike in volume, whose
origins may have been multiple but included high levels of selling by
foreign banks and by hedge funds.\326\ For example, hedge funds, one of
the principal sellers of U.S Treasury futures, hedge their short
futures position by

establishing a long position in the cash market, creating a ``cash-
futures basis trade.'' The cash position of this trade is often highly
levered, using the repo market for financing. In March, as the U.S.
Treasury securities market came under stress and as repo rates
increased in some segments of the repo market, the economics of the
cash-futures basis trade worsened and various funds found it necessary
to unwind at least a portion of their positions. This unwinding of
positions resulted in more outright sales of U.S. Treasury securities
in the cash market, adding further stress through a feedback loop.\327\
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    \326\ See U.S. Credit Markets Interconnectedness and the Effects
of the COVID-19 Economic Shock (Oct. 2020) at 3.
    \327\ Id. at 4. In addition, a similar dynamic was observed in
the risk parity trades, where hedge funds lever up (through the repo
markets) lower volatility fixed-income positions (e.g., government
bonds) to create a risk-equalized portfolio across asset classes.
See id.
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    During this period, bid-ask spreads increased by a factor of 5, and
market depth on inter-dealer brokers decreased by a factor of 10. The
price of 30-year U.S. Treasury securities fell by 10% in one two-day
period. Arbitrage relations appeared to break down throughout the
market.\328\ This may, as discussed above, have led to the winding down
of the cash-futures basis trade, for example, adding to further
stress.\329\ There also appeared to be large-scale selling from foreign
investors, including official institutions, to address their domestic
currency and liquidity needs.\330\
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    \328\ Duffie, supra note 186.
    \329\ See supra note 150.
    \330\ See Colin R. Weiss, Foreign Demand for U.S. Treasury
Securities during the Pandemic (Feds Notes, Jan. 28, 2022),
available at https://www.federalreserve.gov/econres/notes/feds-notes/foreign-demand-for-us-treasury-securities-during-the-pandemic-20220128.htm.
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    Duffie and Liang and Parkinson, among others, have tied these
patterns to underlying U.S. Treasury securities market structure, in
which intermediation capacity may be reduced relative to the size of
the market and ultimate buyers and sellers may have difficulty locating
each other. These authors discuss ways in which central clearing could
have reduced these problems, mitigating the large price swings due to
illiquidity in the market just when it was most needed.\331\ One view
of central clearing is that it may facilitate all-to-all trading, thus
helping ultimate buyers and sellers find each other.\332\ More buyers
and sellers of U.S. Treasury securities could potentially act as
additional sources of liquidity in a market with central clearing.
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    \331\ Duffie, supra note 186; Liang & Parkinson, supra note 32.
    \332\ See Duffie supra note 186.
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b. September 2019 Repo Market Disruptions
    The repo market experienced a substantial disruption starting
September 16, 2019 when overnight repo rates began to rise, and on
September 17, 2019 when the rise in repo rates accelerated
dramatically. During the episode, the Secured Overnight Financing Rate
(SOFR)--a measure of the average cost of overnight repo borrowing--
spiked by 300 basis points to over 5% in the course of 2 days. There
was also a wide dispersion around this average; some trades occurred at
rates as high as 9%. On top of this, the spread between the 1st and
99th percentile rates increased substantially from its average earlier
in 2019 of approximately 25 basis points to approximately 675 basis
points during the disruption. The disruption spilled over into the
other markets, with the Effective Federal Funds Rate (EFFR) rising
above the Federal Reserve target by 5 basis points.
    The disruption occurred amidst two events: first, a large
withdrawal of reserves from the banking system to service corporate tax
payments due September 16; and second, the settlement of U.S. Treasury
securities auctions. Altogether, the tax payments led approximately
$120 billion to flow away from bank reserves, bringing them down to
their lowest level in 5 years.\333\ Moreover, the auction settlement
raised the number of U.S. Treasury securities outstanding, which was
accompanied by an increased demand for cash to fund purchases of these
securities. The need for cash reserves played a role in what appears to
be an unwillingness of banks to lend to one another at very high rates.
Less tangibly, market expectations could have played a role; it is
possible that the spike in rates could have been interpreted as a
signal for a future need of cash reserves, leading banks to conserve
cash regardless of what appeared to be strong economic incentives to do
otherwise.
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    \333\ See Sriya Anbil et al., What Happened in Money Markets in
September 2019? (Feb. 27, 2020), available at https://www.federalreserve.gov/econres/notes/feds-notes/what-happened-in-money-markets-in-september-2019-20200227.htm.
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    While the need for the banking system to replace reserves with cash
may be part of the explanation, in a well-operating market high rates
for overnight borrowing collateralized by U.S. Treasury securities
would have attracted other market participants. Ultimately, as in March
2020, the Federal Reserve injected reserves into the system--the
economic equivalent of lending to banks. The overnight repo operations
totaled $75 billion on September 17, 2019. Besides directly providing
cash, this perhaps signaled the Fed's willingness and ability to lend
as needed to restore rates to levels that would be dictated in the
absence of market frictions. In such a setting, a potential benefit of
enhanced clearing for U.S. Treasury repo and cash is its ability to
reduce those market frictions directly, without official sector
intervention.
c. October 2014 Flash Rally
    In March 2020 U.S. Treasury securities' prices fell, whereas in
September 2019 the rate for lending increased. Both events were
associated in an increase in the cost of borrowing. The events of
October 15, 2014, were different in form: in this instance, yields on
U.S. Treasury bonds fell quickly and dramatically, leading to large
increases in prices, without any clear explanation. The intraday range
for the 10-year bond was 37 basis points, one of the largest on record,
and far outside the typical historical distribution.\334\ October 15,
2014, featured the release of somewhat weaker-than-expected U.S. retail
sales data at 8:30 a.m. ET. While the data appeared to prompt the
initial decline in interest rates, the reaction was far larger than
would have been expected given the modest surprise in the data.
Suggestive of some connection is that the dollar amount of standing
quotes in the central limit order books on cash and futures trading
platforms--a measure of the quantity of liquidity that is commonly
referred to as ``market depth''--fell dramatically in the hour before
the event window.
---------------------------------------------------------------------------

    \334\ See generally Joint Staff Report, supra note 4.
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    A sudden rise in price does not at first appear as potentially
disruptive as a decline. However, it appears that levered market
participants had taken short positions in anticipation of an increase
in yields. Any further increase in price would have forced these
participants to cover their positions. Indeed, hedge funds became net
buyers of U.S. Treasury securities on the morning of October 15, 2014.
The decline in liquidity may have led to a further concern of an
inability to exit positions. In particular, although the share of
trading volume attributed to PTFs on October 15 does not stand out as
unusual relative to the prior period,\335\ PTFs significantly reduced
the dollar amounts of standing quotes in central limit order
books,\336\ leading to greater pressure on the system. This withdrawal
of liquidity appears to have

been motivated by an attempt to manage risk. Lastly, though broker-
dealers increased their trading volume, they provided less liquidity to
the order books by widening their spreads and in some cases withdrawing
for brief periods from the offer side of the book.\337\
---------------------------------------------------------------------------

    \335\ See Joint Staff Report, supra note 4, at 21.
    \336\ See IAWG Report, supra note 4, at 18.
    \337\ See id.
---------------------------------------------------------------------------

    This disruption showed that market liquidity provision had become
more short-term in nature, some liquidity providers were backed by less
capital, and liquidity was more vulnerable to shocks as a result of the
change in the composition of liquidity providers. In addition,
electronic trading permitted rapid increases in orders that removed
liquidity. These vulnerabilities are similar to ones observed during
the March 2020 events.\338\ As in the previously described episodes,
the price swings illustrate the apparent difficulty for outside capital
at accessing the market. Improved market functioning could have allowed
economic incentives to help stabilize the system: end-users of U.S.
Treasury securities could have reacted to the unusually high prices by
selling. However, such participants would have needed access to pricing
and to the ability to trade.
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    \338\ See id.
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7. Affected Persons
a. Covered Clearing Agencies for U.S. Treasury Securities: FICC
    Although the Membership Proposal would apply to all U.S. Treasury
securities CCAs, FICC's Government Securities Division, as noted
previously, is the sole provider of clearance and settlement services
for U.S. Treasury securities. FICC is a wholly owned subsidiary of The
Depository Trust & Clearing Corporation (DTCC); DTCC is a private
corporation whose common shares are owned by fee-paying participants in
DTCC's clearing agency subsidiaries, including FICC.\339\ In 2021 and
2020, FICC's total clearing revenue was approximately $310 and $297.3
million, respectively, and its net income was approximately $13.4 and
18.1 million, respectively.\340\
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    \339\ See generally Notice of No Objection to Advance Notices,
Exchange Act Rel. No. 74142 (Jan. 27, 2015), 80 FR 5188 (Jan. 30,
2015) (not objecting to a proposal that DTCC's new common share
ownership formula will be based solely on fees paid to its
subsidiary clearing agencies).
    \340\ FICC, Financial Statements as of and for the Years Ended
Dec. 31, 2021 and 2020, available at https://www.dtcc.com/-/media/Files/Downloads/legal/financials/2021/FICC-Annual-Financial-Statements-2021-and-2020.pdf
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    The G-30 Report estimated that ``roughly 20 percent of commitments
to settle U.S. Treasury security trades are cleared through FICC.''
\341\ Although various analyses have noted the increased volume of
secondary market U.S. Treasury transactions that are not centrally
cleared,\342\ the dollar value of transactions FICC clears remains
substantial. In 2021, FICC's GSD processed $1.419 quadrillion in U.S.
Government securities.\343\ In March 2020, clearing dollar volume in
U.S. Treasury securities at FICC rose ``to over $6 trillion daily, an
almost 43 percent increase over the usual daily average of $4.2
trillion cleared [at that time].'' \344\
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    \341\ G-30 Report, supra note 5, at 11.
    \342\ See, e.g., IAWG Report, supra note 4, at 5-6 (citing TMPG
White Paper); 2017 Treasury Report, supra note 16, at 81; Joint
Staff Report, supra note 4, at 36-37.
    \343\ Performance Dashboard, DTCC 2021 Annual Report, at 56,
available at https://www.dtcc.com/~/media/files/downloads/about/
annual-reports/DTCC-2021-Annual-Report. FICC's GSD also process U.S.
Government securities that are not U.S. Treasury securities but the
dollar amount processed of such securities is believed to be nominal
by comparison to that of U.S. Treasury securities.
    \344\ DTCC May 2021 White Paper, supra note 135, at 3.
---------------------------------------------------------------------------

    There are differences between the degree of central clearing in the
cash and the repo markets. Based on 2017 data, the TMPG estimated that
13 percent of cash U.S. Treasury securities transactions are centrally
cleared; 68 percent are bilaterally cleared; and 19 percent involve
hybrid clearing, in which only one leg of a transaction on an IDB
platform is centrally cleared.\345\ A Federal Reserve staff analysis of
primary dealer repo and reverse repo transactions during the first half
of 2022 found ``that approximately 20 percent of all repo and 30
percent of reverse repo is centrally cleared via FICC.'' \346\ Measured
by dollar volume, repos, according to DTCC, are the largest component
of the government fixed-income market.\347\ In mid-July 2021, according
to Finadium and based on DTCC data, FICC processed $1.15 trillion in
repo, or roughly 25 percent of the $4.4 trillion U.S. repo market at
that time.\348\ For all of 2021, DTCC reported that FICC processed $251
trillion through its GCF Repo Service.\349\
---------------------------------------------------------------------------

    \345\ See IAWG Report, supra note 4, at 30; see also TMPG White
Paper, supra note 21, at 12.
    \346\ Sebastian Infante, et al., supra note 119 (``Form FR2004
data only cover activities of primary dealers. Therefore, any
estimate based on that data is likely to underestimate the total
size of the repo market. Discussions with market participants
suggest that the nonprimary dealer's market share is smaller than
that attributed to the primary dealers, but growing.''). The authors
also show that all cleared bilateral repo and reverse repo have U.S.
Treasury securities and TIPS as collateral (the authors' Figure 4);
Viktoria Baklanova, Adam Copeland, and Rebecca McCaughrin, Reference
Guide to U.S. Repo and Securities Lending Markets, N.Y. Fed. Staff
Report No. 740, at 11 (rev. Dec. 2015) available at: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf.
    \347\ DTCC, A Guide to Clearance and Settlement, Chapter 8:
Settling Debt Instruments, available at: https://www.dtcc.com/clearance-settlement-guide/#/chapterEight.
    \348\ Finadium, Building Out Industry Data for New Industry
Leads, at 9 (2021), available at: https://finadium.com/wp-content/pdfs/finadium-dtcc-building-out-repo-data.pdf.
    \349\ DTCC 2021 Annual Report, supra note 343, at 56.
---------------------------------------------------------------------------

b. Direct Participants at U.S. Treasury Securities CCAs: FICC Netting
Members
    If adopted, the Membership Proposal would directly affect market
participants that are direct participants in a U.S. Treasury securities
CCA, which currently means only direct participants at FICC's GSD. FICC
direct participants are also referred to as FICC Netting Members. As
previously discussed, FICC Netting Members are the only FICC members
eligible to become a counterparty to FICC to a U.S. Treasury securities
transaction, including repo and reverse repo trades. As of May 3, 2022,
FICC's GSD had 202 Netting Members of which 187 were participants in
FICC's repo netting service.\350\ FICC Netting Members generally
consist of bank-affiliated dealers and registered broker-dealers. These
dealers include all 25 financial institutions currently designated by
the Federal Reserve Bank of New York (N.Y. Fed) as ``primary dealers.''
\351\ In 2021, the average daily trading dollar value in U.S. Treasury
securities by primary dealers was $624.1 billion.\352\ The relative
significance of dealer trading in the cash market for U.S. Treasury
securities can is shown in Figure 8.
---------------------------------------------------------------------------

    \350\ FICC GSD Member Directory, available at: https://www.dtcc.com/-/media/Files/Downloads/client-center/FICC/Mem-GOV-by-name.xlsx. 104 Netting Members participated in FICC's GCF service.
    \351\ Primary dealers are counterparties to the N.Y. Fed in its
implementation of monetary policy and expected to participate
meaningfully in all U.S. Treasury securities auctions for new
issuances of U.S. Treasury securities. https://home.treasury.gov/policy-issues/financing-the-government/quarterly-refunding/primary-dealers. A current list of primary dealers is available at: https://www.newyorkfed.org/markets/primarydealers.
    \352\ SIFMA, 2022 Capital Markets Fact Book, at 56 (July 2022)
available at https://www.sifma.org/wp-content/uploads/2022/07/CM-Fact-Book-2022-SIFMA.pdf (SIMFA's term primary dealers refers to
N.Y. Fed prime brokers). Id. The dollar value of trading in U.S.
Treasury securities by primary dealers has a combined average annual
growth rate of 1.9 percent for the ten year period ending in 2021.
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BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TP25OC22.007

    As previously discussed, the total notional transactions in the
repo market is larger than that of the cash U.S. Treasury securities
market. In 2021, aggregate daily primary dealer outstanding total repo
positions were $4.3 trillion consisting of $2.5 trillion in repo (75%
of which is collateralized by U.S. Treasury securities) and $1.8
trillion in reverse repo (89% of which is collateralized by U.S.
Treasury securities).\353\ As of December 31, 2021, the repo market as
a whole was valued at approximately $5.8 trillion.\354\ Although a
large portion of this activity is cleared by FICC, a large portion is
also not centrally cleared. For 2021, DTCC reported that ``FICC
matches, nets, settles and risk manages repo transactions valued at
more than $3T daily.'' \355\ During the first half of 2022, Federal
Reserve staff estimated that a ``large fraction of primary dealers'
repo (38 percent) and reverse repo (60 percent) activity is in the
uncleared bilateral segment.'' \356\ See Figure 9. Although these
statistics include all collateral types, for the subset of the repo
market that includes a primary dealer on one side, the Commission has
more detailed data. As Figures 10 and 11 show, the vast majority of
uncleared bilateral and tri-party primary dealer repo and reverse repo
collateral consists of U.S. Treasury securities (including TIPS). The
largest remaining components of repo (approximately 40 percent) and
reverse repo activity (approximately 8 percent) are not centrally
cleared but settle on the triparty platform. This is labeled ``Tri-
Party (excluding GCF)'' in Figure 9, and the degree to which Treasury
collateral is used in these transactions is displayed in Figure 11. The
final and by far the smallest component of repo and reverse repo
activity (amounting to about 2% of activity) is triparty repo using
FICC's Sponsored GC service.\357\
---------------------------------------------------------------------------

    \353\ SIFMA Research, US Repo Markets: A Chart Book, at 6, 7,
and 8 (Feb. 2022), available at SIFMA-Research-US-Repo-Markets-
Chart-Book-2022.pdf. Because these are figures for primary dealer
repo and reverse repo, they need not be equal. In the aggregate,
however, repo must equal reverse repo.
    \354\ The Financial Accounts of the United States, L.207, line 1
(Federal Funds and Security Repurchase Agreements) available at
https://www.federalreserve.gov/releases/z1/20220310/html/l207.htm.
    \355\ DTCC 2021 Annual Report, supra note 343, at 32.
    \356\ 2022 Fed Note, supra note 346.
    \357\ Id.

Figure 9 Repo Clearing 2021-2022

[GRAPHIC] [TIFF OMITTED] TP25OC22.008

Figure 10 Uncleared Bilateral Repo and Reverse Repo Collateral 2022
[GRAPHIC] [TIFF OMITTED] TP25OC22.009

Figure 11 Tri-party Repo and Reverse Repo Collateral 2022

[GRAPHIC] [TIFF OMITTED] TP25OC22.010

BILLING CODE 8011-01-C
c. Interdealer Brokers (IDBs)
    Interdealer brokers \358\ and the trading platforms they operate
play a significant role in the markets for U.S. Treasury securities. As
previously discussed, an IDB will generally provide 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
anonymously to all users. When 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 of them. Although there is
no legal requirement for an IDB to be a FICC direct participant/Netting
Member, the Commission believes most IDBs are FICC Netting
Members.\359\ In any event, under FICC's existing rules, if an IDB's
customer in a U.S. Treasury security transaction is not a FICC member,
the IDB's transaction with that customer need not be centrally cleared
and may be bilaterally cleared. As discussed above in section II.A.1,
each transaction at an IDB is split into two pieces: a leg between the
buyer and the IDB and a leg between the IDB and the seller. If the
buyer or seller is a dealer, the respective leg is centrally cleared.
Transaction legs involving PTFs are generally cleared and settled
bilaterally.
---------------------------------------------------------------------------

    \358\ As noted previously, IDB is not used to encompass
platforms that provide voice-based or other non-anonymous methods of
bringing together buyers and sellers of U.S. Treasury securities.
IDB instead refers to electronic platforms providing anonymous
methods of bringing together buyers and sellers.
    \359\ See generally TMPG White Paper, supra note 21. The TMPG
White Paper assumes throughout that IDBs are CCP direct members
(e.g., ``More specifically, the IDB platforms themselves and a
number of platform participants continue to clear and settle through
the CCP.'' TMPG White Paper at 2.)
---------------------------------------------------------------------------