IIB Urges SEC to Eliminate Extraterritorial Application of FICC Treasury Clearing Proposal

The Institute of International Bankers ("IIB") opposed the extraterritorial reach of a proposed rule amendment by the Fixed Income Clearing Corporation ("FICC"). The proposed rule would require foreign banks whose US branches are FICC clearing members to be subject to the SEC's clearing mandate on US Government Securities as to their global operations, not just trades that touch the United States.

In its comment letter, the IIB argued against the proposed requirement that an entire foreign bank, rather than just its US-based branch, would be deemed a FICC clearing member if its US branch became a FICC clearing member. The IIB stated: "To the extent that the Foreign Bank Membership Rule would expand the mandate to apply beyond a foreign bank's U.S. branch or agency, as the netting member, to the bank as a whole, worldwide, then it would inappropriately expand the mandate to apply extraterritorially to the transactions between the bank's foreign branches and foreign counterparties, where there is no U.S. nexus."

The IIB also argued that such extraterritorial expansion could lead to unconsidered consequences, such as enforceability issues in different jurisdictions and the practicality of foreign counterparties' participation in central clearing. It warned that these issues might cause foreign investors to reconsider their involvement in the US Treasury market, potentially shifting investments to other government bonds, which could increase US borrowing costs and affect market liquidity and resilience. The IIB emphasized, "all of these issues could lead foreign counterparties to question their participation in the U.S. Treasury security market when they have alternative government bond markets in which they could invest without raising these issues or more generally incurring the costs of central clearing."