FIA Asks SEC and FICC to Revise Proposals on U.S. Treasury Settlement and Clearance

FIA urged the SEC and the Fixed Income Clearing Corporation ("FICC") to consider the challenges that the FICC proposals on U.S. Treasury clearance and settlement present to futures commission merchants ("FCMs") and other market participants. FIA asked the regulators to work with FCMs to revise the FICC proposals and update the FICC Rules as per FIA's recommendations. (See related coverage.)

In a comment letter, FIA responded to FICC's proposed rule changes to (i) modify the FICC Government Securities Division Rulebook to facilitate access to clearance and settlement services of all eligible secondary market transactions in U.S. Treasury securities and (ii) provide for the separate calculation, collection, and holding of margin supporting proprietary transactions by a FICC Netting Member or that a Netting Member submits on behalf of indirect participants.

FIA argued that the FICC rule proposals:

• conflict with CFTC regulatory obligations applicable to FCMs. FIA asked FICC to confirm that the Applicable Law Exclusion will continue to apply to FCMs. FIA argued that FCMs (i) should not need to submit a trade to FICC until the CFTC approves FCMs’ clearing U.S. Treasury securities through a clearing agency under CFTC regulations and (ii) are able to take the required steps to implement the approved model(s). (Otherwise, FIA maintained, FCMs would violate applicable law, rule or regulation in using either the existing Sponsored Service or the proposed Agent Clearing Service.) Further, FIA recommended that the FICC proposals be amended to provide CFTC-compliant customer segregated sub-accounts for FCMs and that alternative access methods should be explored, (i.e., through existing broker-dealer netting membership or through an FCM netting membership.)
• should clarify the accounting treatment of the agent clearing service. FIA urged FICC to obtain accounting confirmation that a U.S. GAAP reporting entity acting as an Agent Clearing Member would not be required to record the transactions it clears for its Executing Firm Customers on its balance sheet.
• should include provisions addressing treatment of the open positions of a sponsored member and an executing firm customer if it defaults or if FICC ceases to act for or suspends its sponsoring member or agent clearing member.
• should confirm that funds-only settlement amounts are not considered margin and not subject to segregation requirements under the FICC Proposals.

FIA requested that (i) FICC work with FCMs and the CFTC to develop alternative CFTC-compliant access models that are analogous to, but more streamlined and fit for purpose for FCMs than, the proposed Agent Clearing Service; (ii) if the SEC chooses to adopt the FICC proposals, it require FICC to preserve the Applicable Law Exclusions for FCMs while appropriate relief is sought from the CFTC to recognize FICC as an acceptable counterparty and otherwise align the FICC proposals with CFTC requirements and (iii) with respect to the Agent Clearing Service, FICC provide clarification of the accounting treatment under the Agent Clearing Service.