Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Modify the GSD Rulebook Relating to Default Management and Porting With Respect to Indirect Participant Activity

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104412; File No. SR-FICC-2025-015]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change, as Modified by Amendment No. 1, To Modify the GSD Rulebook Relating to Default Management and Porting With Respect to Indirect Participant Activity</SUBJECT> <DATE>December 16, 2025.</DATE> On June 6, 2025, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change SR-FICC-2025-015 pursuant to Section 19(b) of the Securities Exchange Act of 1934 (“Exchange Act”)  thereunder to modify FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”)  <SU>3</SU> <FTREF/> to enhance and clarify FICC's default management rules as they apply to the Sponsored Service and Agent Clearing Service, and to facilitate the porting of indirect participant activity from one intermediary Netting Member to another intermediary Netting Member. The proposed rule change was published for public comment in the <E T="04">Federal Register</E> on June 23, 2025. <SU>4</SU> <FTREF/> <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>  Terms not defined herein are defined in the GSD Rules, <E T="03">available at www.dtcc.com/legal/rules-and-procedures.aspx.</E> </FTNT> <FTNT> <SU>4</SU>  Securities Exchange Act Release No. 103282 (June 17, 2025), 90 FR 26656 (June 23, 2025) (File No. SR-FICC-2025-015) (“Notice of Filing”). </FTNT> The Commission has received comments regarding the substance of the changes proposed in the proposed rule change. <SU>5</SU> <FTREF/> In addition, the Commission has received a letter from FICC in response to the public comments. <SU>6</SU> <FTREF/> On July 31, 2025, pursuant to Section 19(b)(2) of the Exchange Act, <SU>7</SU> <FTREF/> the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule change. <SU>8</SU> <FTREF/> <FTNT> <SU>5</SU>  Comments on the Proposed Rule Change are <E T="03">available at https://www.sec.gov/comments/sr-ficc-2025-015/srficc2025015.htm.</E> </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> Letter from Laura Klimpel, Managing Director, Head of Fixed Income and Financing Solutions, The Depository Trust & Clearing Corporation (“DTCC”) (Sept. 29, 2025) (“FICC Letter”), <E T="03">supra</E> note 5. </FTNT> <FTNT> <SU>7</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>8</SU>  Securities Exchange Act Release No. 103557 (July 28, 2025), 90 FR 36088 (July 31, 2025) (File No. SR-FICC-2025-015). </FTNT> On September 16, 2025, FICC filed Amendment No. 1 to the proposed rule change. Notice of FICC's filing of Amendment No. 1 was published for public comment in the <E T="04">Federal Register</E> on September 23, 2025, whereupon the Commission also instituted proceedings to determine whether to approve or disapprove the proposed rule change, as modified by Amendment No. 1. <SU>9</SU> <FTREF/> For the reasons discussed below, the Commission is approving the proposed rule change, as modified by Amendment No. 1. <FTNT> <SU>9</SU>  Securities Exchange Act Release No. 104001 (Sept. 18, 2025), 90 FR 45850 (Sept. 23, 2025) (File No. SR-FICC-2025-015) (“Notice of Amendment No. 1”). </FTNT> <HD SOURCE="HD1">I. Description of the Proposed Rule Change</HD> <HD SOURCE="HD2">A. Background</HD> FICC, through GSD, serves as a central counterparty (“CCP”) and provider of clearance and settlement services for transactions in U.S. Treasury securities. As a CCP, FICC novates transactions between two counterparties, effectively becoming the buyer to every seller and the seller to every buyer, and guarantees settlement of the novated transactions. GSD's CCP services are available directly to entities that are approved under the GSD Rules to be Netting Members and indirectly to other market participants through GSD's indirect access models, the Sponsored Service and Agent Clearing Service, described more fully below. A CCP is exposed to a number of risks that arise from novating trades, including counterparty credit risk, because the CCP guarantees the performance of every novated trade and thereby becomes the entity exposed to potential financial loss if a counterparty defaults on its obligations to deliver cash and/or securities. FICC addresses these risks through a risk management framework that governs, among other things, various actions that FICC may take following the default of its Netting Members, including those Netting Members that act as intermediaries for indirect participants as either Sponsoring Members or Agent Clearing Members. As described more fully below, FICC believes that enhancing the GSD Rules regarding default management (particularly for Agent Clearing Members) and porting would encourage greater participation in central clearing by improving market participants' understanding of how GSD would manage a default that may occur within GSD's indirect access models. <SU>10</SU> <FTREF/> <FTNT> <SU>10</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 4, 90 FR at 26656-57. During the Commission's review of FICC's recent proposed rule change to adopt and enhance GSD Rule provisions regarding access models ( <E T="03">See</E> Securities Exchange Act Release No. 101694 (Nov. 21, 2024), 89 FR 93784 (Nov. 27, 2024) (SR-FICC-2024-005)), the Commission received comments requesting that FICC disclose more information regarding the governance of default management under the various access models, indicating that the absence of explicit default management provisions in the GSD Rules presents an obstacle to greater participation in central clearing. Comments are <E T="03">available at https://www.sec.gov/comments/sr-ficc-2024-005/srficc2024005.htm.</E> </FTNT> <HD SOURCE="HD3">GSD's Indirect Access Models</HD> The GSD Rules provide for two indirect access models, the Sponsored Service and the Agent Clearing Service. <SU>11</SU> <FTREF/> The Sponsored Service and the Agent Clearing Service provide Indirect Participants with different options to access FICC's clearance and settlement services. The primary differences between the two services are that (1) Indirect Participants within the Sponsored Service must establish a limited purpose GSD membership, whereas Indirect Participants within the Agent Clearing Service do not establish any such membership, and (2) Sponsored Member Trades are margined on a gross basis, whereas Agent Clearing Transactions may be margined on a net basis when recorded in the same Agent Clearing Member Omnibus Account. <FTNT> <SU>11</SU>   <E T="03">See</E> GSD Rule 3A and GSD Rule 8, <E T="03">supra</E> note 3. </FTNT> As described in GSD Rule 3A, the Sponsored Service permits Members that are approved to be Sponsoring Members to sponsor certain institutional firms ( <E T="03">i.e.,</E> Sponsored Members) into GSD membership. <SU>12</SU> <FTREF/> For these relationships, FICC establishes and maintains a “Sponsoring Member Omnibus Account” on its books where it records the transactions of the Sponsoring Member's Sponsored Members (“Sponsored Member Trades”). <SU>13</SU> <FTREF/> For purposes of managing the risks presented by Sponsored Member Trades, activity recorded in a Sponsoring Member Omnibus Account is margined on a gross ( <E T="03">i.e.,</E> Sponsored Member-by-Sponsored Member) basis and cannot be netted across Sponsored Members. <SU>14</SU> <FTREF/> <FTNT> <SU>12</SU>   <E T="03">See</E> note 3. </FTNT> <FTNT> <SU>13</SU>   <E T="03">See</E> GSD Rule 2B and GSD Rule 1 (definition of “Sponsored Member Trade”), <E T="03">supra</E> note 3. </FTNT> <FTNT> <SU>14</SU>   <E T="03">See</E> Section 10 of GSD Rule 3A and GSD Rule 4, <E T="03">supra</E> note 3. </FTNT> Although a Sponsored Member is a limited member of GSD and the legal counterparty to FICC for any submitted transactions, the Sponsoring Member unconditionally guarantees to FICC the payment and performance of a Sponsored Member's obligations to FICC (“Sponsoring Member Guaranty”). <SU>15</SU> <FTREF/> Therefore, FICC relies on the financial resources of the Sponsoring Member in relying upon the Sponsoring Member Guaranty. <FTNT> <SU>15</SU>   <E T="03">See</E> GSD Rule 1 (definition of “Sponsoring Member Guaranty”) and Section 2(c) of GSD Rule 3A, <E T="03">supra</E> note 3. </FTNT> FICC's Agent Clearing Service facilitates agent-style trading by allowing Members that are approved to be Agent Clearing Members to submit trades of their customers ( <E T="03">i.e.,</E> Executing Firm Customers) to GSD for clearance and settlement. <SU>16</SU> <FTREF/> FICC establishes and maintains an “Agent Clearing Member Omnibus Account” on its books where it records the transactions of the Agent Clearing Member's Executing Firm Customers (“Agent Clearing Transactions”). <SU>17</SU> <FTREF/> Unlike Sponsored Members, Executing Firm Customers do not become limited members of GSD. Agent Clearing Members act as both processing agent and credit intermediary for their customers in clearing, and Executing Firm Customers are identified on Agent Clearing Transactions when such activity is submitted to FICC. FICC may net the Agent Clearing Transactions of one or more Executing Firm Customers whose activity is recorded in the same Agent Clearing Member Omnibus Account for purposes of calculating the required margin deposits. <FTNT> <SU>16</SU>   <E T="03">See</E> GSD Rule 8, <E T="03">supra</E> note 3. </FTNT> <FTNT> <SU>17</SU>   <E T="03">See</E> GSD Rule 2B and GSD Rule 1 (definition ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 138k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━