
[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68179-68186]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21783]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98558; File No. SR-FICC-2023-012]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to the Margin Liquidity Adjustment Charge

September 27, 2023.

I. Introduction

    On August 3, 2023, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2023-012 to amend FICC's Government Securities Division (``GSD'') 
Rulebook (``GSD Rules'') and Mortgage-Backed Securities Division 
(``MBSD'') Clearing Rules (``MBSD Rules,'' and collectively with the 
GSD Rules, the ``Rules'') \3\ to enhance FICC's margin methodology with 
respect to the Margin Liquidity Adjustment Charge (``MLA Charge''). The 
proposed rule change was published for public comment in the Federal 
Register on August 24, 2023.\4\ The Commission has received no comments 
on the proposed rule change. On August 22, 2023, FICC filed Amendment 
No. 1 to the proposed rule change, to make clarifications to the 
proposed rule change.\5\ The proposed

[[Page 68180]]

rule change, as modified by Amendment No. 1, is hereinafter referred to 
as the ``Proposed Rule Change.'' The Commission is publishing this 
notice to solicit comments on Amendment No. 1 from interested persons, 
and, for the reasons discussed below, the Commission is approving the 
Proposed Rule Change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Terms not defined herein are defined in the GSD Rules and 
MBSD Rules, as applicable, available at www.dtcc.com/legal/rules-and-procedures.
    \4\ See Securities Exchange Act Release No. 98163 (Aug. 18, 
2023), 88 FR 58004 (Aug. 24, 2023) (File No. SR-FICC-2023-012) 
(``Notice of Filing'').
    \5\ Amendment No. 1 made clarifications and corrections to 
Exhibit 3b of the filing (Proposed Changes to the Depository Trust 
and Clearing Corporation (``DTCC'') Model Development 
Documentation--FICC Market Liquidity Adjustment Model and Bid-ask 
Charge Model) to include a description of a term used in a 
calculation and to remove an unnecessary chart. These clarifications 
and corrections do not substantively change proposed rule change. 
FICC has requested confidential treatment of Exhibit 3b, pursuant to 
17 CFR 240.24b-2.
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II. Background

    FICC operates two divisions: GSD and MBSD. GSD provides trade 
comparison, netting, risk management, settlement, and central 
counterparty (``CCP'') services for the U.S. Government securities 
market. MBSD provides the same services for the U.S. mortgage-backed 
securities market. GSD and MBSD maintain separate sets of rules, margin 
models, and clearing funds. As a CCP, FICC interposes itself as the 
buyer to every seller and seller to every buyer for the financial 
transactions it clears. As such, FICC is exposed to the risk that one 
or more of its members may fail to make a payment or to deliver 
securities.
    A key tool that FICC uses to manage its credit exposures to its 
members is the daily collection of the Required Fund Deposit (i.e., 
margin) from each member. A member's margin is designed to mitigate 
potential losses associated with liquidation of the member's portfolio 
in the event of that member's default. The aggregated amount of all GSD 
and MBSD members' margin constitutes the GSD Clearing Fund and MBSD 
Clearing Fund, respectively, which FICC would be able to access should 
a defaulted member's own margin be insufficient to satisfy losses to 
FICC caused by the liquidation of that member's portfolio. Each 
member's margin consists of several components, each of which is 
designed to address specific risks faced by FICC arising out of its 
members' trading activity. One of these components is the MLA Charge. 
As described more fully below, the MLA Charge is designed to address 
the risk presented to FICC by member portfolios that contain large net 
unsettled positions in a particular group of securities with a similar 
risk profile or in a particular transaction type.
    In the event of a member default, the Rules \6\ provide FICC with 
the authority to close out and manage the positions in a defaulted 
member's portfolio. The process of closing out a defaulted member's 
portfolio typically involves buying and selling securities that the 
defaulted member was obligated to deliver and receive to and from FICC, 
or otherwise liquidating the portfolio.\7\ FICC's transaction costs to 
liquidate the securities in a defaulted member's portfolio are affected 
by, among other things, the marketability of such securities (``market 
impact costs''). As a general matter, less marketable securities are 
more difficult and costly to liquidate within the three-day assumed 
period of risk. One factor that could reduce the marketability of the 
securities in a defaulted member's portfolio is if the portfolio were 
to contain a large concentration of net unsettled positions in a 
particular group of securities with a similar risk profile or in a 
particular transaction type. Therefore, such portfolios create the risk 
that FICC may face increased transaction costs to liquidate in the 
event of a member default. The MLA Charge is the margin component 
designed to mitigate the foregoing risk.
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    \6\ See GSD Rule 22A (Procedures for When the Corporation Ceases 
to Act) and MBSD Rule 17 (Procedures for When the Corporation Ceases 
to Act), supra note 3.
    \7\ FICC's margin methodology assumes that a defaulted member's 
portfolio would take three days to liquidate in normal market 
conditions.
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A. Current MLA Charge

    To calculate the MLA Charge, FICC categorizes securities into asset 
groups that share similar risk profiles. Under the current GSD Rules, 
the asset groups include: (a) U.S. Treasury securities, which are 
further categorized into subgroups by maturity--those maturing in (i) 
less than one year, (ii) equal to or more than one year and less than 
two years, (iii) equal to or more than two years and less than five 
years, (iv) equal to or more than five years and less than ten years, 
and (v) equal to or more than ten years; (b) Treasury-Inflation 
Protected Securities (``TIPS''), which are further categorized into 
subgroups by maturity--those maturing in (i) less than two years, (ii) 
equal to or more than two years and less than six years, (iii) equal to 
or more than six years and less than eleven years, and (iv) equal to or 
more than eleven years; (c) U.S. agency bonds; and (d) mortgage pools 
transactions.\8\ Under the current MBSD Rules, there is currently one 
mortgage-backed securities asset group.\9\
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    \8\ See GSD Rule 1 (definition of ``Margin Liquidity Adjustment 
Charge''), supra note 3. Additional details regarding the 
calculation of the MLA Charge are set forth in the DTCC Model 
Development Documentation--FICC Market Liquidity Adjustment Model 
and Bid-ask Charge Model (``Model Development Documentation''). FICC 
would revise the Model Development Document to incorporate the 
changes in the Proposed Rule Change and included copies of changes 
to the Model Development Document in Exhibit 3b to the Proposed Rule 
Change. Pursuant to 17 CFR 240.24b-2, FICC requested confidential 
treatment of Exhibit 3b.
    \9\ See MBSD Rule 1 (definition of ``Margin Liquidity Adjustment 
Charge''), supra note 3.
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    FICC designed the MLA Charge calculation to compare the total 
market value of a portfolio's net unsettled positions in a particular 
asset group to the available trading volume of that asset group (or 
subgroup) in the market.\10\ If the market value of the portfolio's net 
unsettled positions in an asset group is large in comparison to the 
available trading volume of that asset group, then FICC faces the risk 
of increased transaction costs to liquidate those positions in the 
event of a member default.\11\
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    \10\ FICC determines average daily trading volume by reviewing 
data that is made publicly available by the Securities Industry and 
Financial Markets Association (``SIFMA''), at https://www.sifma.org/resources/archive/research/statistics. See Notice of Filing, supra 
note 4, at 58006.
    \11\ See id.
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    Calculation of the MLA Charge involves several steps, which are 
generally described as part of the definition of the MLA Charge in Rule 
1.\12\ First, FICC calculates the market impact cost with respect to 
the member's net unsettled positions in each asset group.\13\ To 
determine the market impact cost for net unsettled positions in 
Treasuries maturing in less than one year and TIPS at GSD, FICC uses 
the directional market impact cost, which is a function of the net 
unsettled positions' net directional market value.\14\ To determine the 
market impact cost for all other net unsettled positions at GSD and 
MBSD, FICC adds together two components: (1) the directional market 
impact cost, as described above, and (2) the basis cost, which is based 
on the net unsettled positions' gross market value.\15\ The calculation 
of market impact cost for net unsettled positions in Treasuries 
maturing in less than one year and TIPS does not include basis cost 
because basis risk is negligible for

[[Page 68181]]

these types of positions.\16\ For all asset groups, when determining 
the market impact cost at GSD and MBSD, the net directional market 
value and the gross market value of the net unsettled positions are 
divided by the average daily volumes of the securities in that asset 
group over a lookback period.\17\
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    \12\ See supra notes 8 and 9.
    \13\ See id.
    \14\ The net directional market value of an asset group within a 
portfolio equals the absolute difference between the market value of 
the long net unsettled positions in that asset group, and the market 
value of the short net unsettled positions in that asset group. For 
example, if the market value of the long net unsettled positions is 
$100,000, and the market value of the short net unsettled positions 
is $150,000, the net directional market value of the asset group is 
$50,000. See id.
    \15\ To determine the gross market value of the net unsettled 
positions in each asset group, FICC sums the absolute value of each 
CUISP in the asset group. See id.
    \16\ See id.
    \17\ See supra note 10.
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    Next, FICC compares the calculated market impact cost to a portion 
of the Value at Risk (``VaR'') Charge (``VaR Charge'') that is 
allocated to the net unsettled positions in those asset groups.\18\ If 
the ratio of the calculated market impact cost to a portion of the VaR 
Charge is greater than a prescribed threshold,\19\ FICC applies an MLA 
Charge to that asset group.\20\ If the ratio of these two amounts is 
equal to or less than the threshold, FICC does not apply an MLA Charge 
to that asset group.\21\ In addition, FICC may apply a downward 
adjusting scaling factor in the calculation of the MLA Charge based on 
the ratio of the calculated market impact cost to the 1-day VaR 
Charge.\22\
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    \18\ The VaR Charge is a margin component designed to mitigate 
the risk that market volatility could cause the price of securities 
in a member's portfolio to change between trade execution and 
settlement. See GSD Rule 1 (definition of ``VaR Charge''); MBSD Rule 
1 (definition of ``VaR Charge''), supra note 3. The VaR Charge is 
typically the largest component of a member's margin requirement. 
For purposes of calculating the MLA Charge, FICC uses a portion of 
the VaR Charge that is based on a one-day assumed period of risk and 
calculated by applying a simple square-root of time scaling, 
referred to herein as the ``1-day VaR Charge.'' See Notice of 
Filing, supra note 4, at 58006.
    \19\ The threshold is based on an estimate of the market impact 
cost that is incorporated into the calculation of the 1-day VaR 
Charge, such that FICC only applies an MLA Charge when the 
calculated market impact cost exceeds this prescribed threshold. 
FICC reviews its method for calculating the thresholds from time to 
time. Any changes that FICC deems appropriate would be subject to 
FICC's model risk management governance procedures set forth in the 
Clearing Agency Model Risk Management Framework (``Model Risk 
Management Framework''). See Securities Exchange Act Release Nos. 
81485 (Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-
014); 84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-
2018-010); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-
FICC-2020-004); 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) 
(SR-FICC-2021-006); 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24, 
2022) (SR-FICC-2022-001); and 97890 (July 13, 2023), 88 FR 46287 
(July 19, 2023) (SR-FICC-2023-008).
    \20\ Notice of Filing, supra note 4, at 58006.
    \21\ See id.
    \22\ See id.
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    For each member portfolio, FICC adds together the MLA Charges (if 
any) for each asset group to determine the total MLA Charge for the 
member portfolio.\23\ FICC calculates the final MLA Charge daily, and 
if applicable, includes the MLA Charge as a margin component.\24\
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    \23\ See id.
    \24\ See id.
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B. Current MLA Charge and MLA Excess Amount for Sponsored Members

    A Sponsoring Member is permitted to submit to FICC, for comparison, 
novation, and netting, certain eligible securities transactions of its 
Sponsored Members.\25\ A Sponsored Member may be sponsored by a single 
Sponsoring Member or by multiple Sponsoring Members. FICC requires each 
Sponsoring Member to establish an omnibus account at FICC (separate 
from its regular netting account) for Sponsored Member trading 
activity.\26\ Sponsored Members are generally required to meet the 
definition of a qualified institutional buyer (``QIB''), as defined in 
Rule 144A \27\ under the Securities Act of 1933.\28\
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    \25\ Securities Exchange Act Release No. 51896 (June 21, 2005), 
70 FR 36981 (June 27, 2005) (SR-FICC-2004-22). See GSD Rule 3A, 
supra note 3.
    \26\ See GSD Rule 3A, Section 8, supra note 3.
    \27\ 17 CFR 230.144A.
    \28\ 15 U.S.C. 77a et seq.
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    For operational and administrative purposes, FICC interacts solely 
with the Sponsoring Member as agent for purposes of the day-to-day 
satisfaction of its Sponsored Members' obligations to and from FICC, 
including their securities and funds-only settlement obligations.\29\ 
Sponsoring Members are also responsible for providing FICC with a 
Sponsoring Member Guaranty, whereby the Sponsoring Member guarantees to 
FICC the payment and performance by its Sponsored Members of their 
obligations under the GSD Rules.\30\ Although Sponsored Members are 
principally liable to FICC for their own settlement obligations under 
the GSD Rules, the Sponsoring Member Guaranty requires the Sponsoring 
Member to satisfy those settlement obligations on behalf of a Sponsored 
Member if the Sponsored Member defaults and fails to perform its 
settlement obligations.\31\
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    \29\ See GSD Rule 3A, Section 8, supra note 3.
    \30\ See GSD Rule 1 (definition of ``Sponsoring Member 
Guaranty'') and GSD Rule 3A, Section 2(c), supra note 3.
    \31\ Id.
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    FICC's calculation of the MLA Charge for a Sponsored Member that 
clears through a single account sponsored by a single Sponsoring Member 
is the same as described above in Section II.A.\32\ However, for a 
Sponsored Member that clears through multiple accounts sponsored by 
multiple Sponsoring Members, in addition to calculating an MLA Charge 
for each account as described above, FICC also calculates an MLA Charge 
for the combined net unsettled positions of the Sponsored Member across 
all of its Sponsoring Members (referred to herein as the ``consolidated 
portfolio'').\33\
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    \32\ Notice of Filing, supra note 4, at 58006.
    \33\ See id.
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    Currently, if the MLA Charge of the consolidated portfolio is 
greater than the sum of all MLA Charges for each account of the 
Sponsored Member, FICC charges the difference (referred to herein and 
currently defined in the Rules as the ``MLA Excess Amount'') in 
addition to the applicable MLA Charge.\34\ If the MLA Charge of the 
consolidated portfolio is not greater than the sum of all MLA Charges 
for each account of the Sponsored Member, FICC does not charge the MLA 
Excess Amount.\35\ Instead, FICC charges the applicable MLA Charge for 
each of the Sponsored Member's accounts.\36\
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    \34\ See id.
    \35\ See id.
    \36\ See id.
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    The MLA Excess Amount is designed to capture the additional market 
impact cost that could be incurred when a Sponsored Member defaults, 
and each of its Sponsoring Members, in its capacity as the Sponsored 
Member's guarantor, liquidates net unsettled positions associated with 
that defaulted Sponsored Member.\37\ If large net unsettled positions 
in the same asset group are being liquidated by multiple Sponsoring 
Members, the market impact cost to liquidate those positions could 
increase as Sponsoring Members compete for market liquidity in the same 
asset group at the same time.\38\ The MLA Excess Amount addresses this 
additional market impact cost by capturing any difference between the 
calculations of the MLA Charge for each of the Sponsored Member's 
accounts on both a stand-alone basis and for the consolidated 
portfolio.\39\ The MLA Excess Amount for a Sponsored Member is 
allocated pro rata across each of its Sponsoring Members using a market 
volatility risk-weighted allocation methodology.\40\
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    \37\ See id.
    \38\ See id.
    \39\ See id.
    \40\ Notice of Filing, supra note 4, at 58006-07.
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III. Description of the Proposed Rule Change

A. Amend MLA Charge Calculation and Eliminate MLA Excess Amount

    FICC proposes to amend the MLA Charge calculation for Sponsored 
Members that clear through multiple accounts sponsored by multiple 
Sponsoring Members to better align the amount of the MLA Charge with 
the market impact cost arising from position concentration of the 
Sponsored Member's respective Sponsored Member

[[Page 68182]]

accounts. Specifically, the revised calculation would apportion a 
higher MLA Charge to those Sponsored Member accounts with higher 
relative market impact costs (and lower relative VaR Charges) than the 
current calculation.
    FICC's proposal to amend the MLA Charge calculation for Sponsored 
Members that clear through multiple accounts sponsored by multiple 
Sponsoring Members is designed to mitigate the risk of incurring 
additional market impact costs when a Sponsored Member defaults and 
each of its Sponsoring Members (each, as the Sponsored Member's 
guarantor) liquidate the defaulted Sponsored Member's large net 
unsettled positions in the same asset group.\41\ In light of this 
change to the MLA Charge calculation, FICC also proposes to simplify 
its margin methodology by eliminating the MLA Excess Amount from the 
GSD Rules because the amended MLA Charge calculation would address the 
additional market impact cost that the MLA Excess Amount was originally 
designed to address.\42\ Specifically, for such Sponsored Members, FICC 
proposes to calculate an MLA Charge both (1) for each asset group/
subgroup in the account on a stand-alone basis, as described above in 
Section II.C, and (2) for each asset group/subgroup in the account as 
part of a consolidated portfolio, as described below, with the greater 
amount applied as the MLA Charge for the relevant asset group/subgroup.
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    \41\ See Notice of Filing, supra note 4, at 58007.
    \42\ See id.
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    When calculating the MLA Charge for each asset group/subgroup in 
the account as part of a consolidated portfolio, FICC would first 
calculate the market impact cost for each asset group/subgroup based on 
the aggregate net unsettled positions of that asset group/subgroup in 
the consolidated portfolio. FICC would allocate the market impact cost 
for each asset group/subgroup to each asset group/subgroup in each 
account of the Sponsored Member on a pro rata basis based on the market 
impact cost of that asset group/subgroup in the account.
    Next, FICC would compare the allocated market impact cost for an 
asset group/subgroup to a portion of the VaR Charge that is allocated 
to that asset group/subgroup in the account. If the ratio of the 
allocated market impact cost to a portion of the VaR Charge is greater 
than a prescribed threshold, FICC would apply an MLA Charge for that 
asset group/subgroup. If the ratio of the two amounts is equal to or 
less than this threshold, FICC would not apply an MLA Charge for that 
asset group/subgroup.\43\
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    \43\ As described in further detail in Model Development 
Documentation submitted in the Proposed Rule Change, FICC determines 
the threshold by an optimization process based on the ratio of an 
estimate of the market impact cost to the 1-day VaR Charge. See 
supra note 8; see Notice of Filing, supra note 4, at 58007.
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    When applicable, FICC would calculate the MLA Charge for each asset 
group/subgroup in the account as part of the consolidated portfolio as 
a proportion of the product of (1) the amount by which the ratio of the 
allocated market impact cost for the asset group/subgroup to the 
portion of the VaR Charge allocated to that asset group/subgroup 
exceeds the prescribed threshold,\44\ and (2) a portion of the VaR 
Charge allocated to that asset group/subgroup.
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    \44\ The proposed methodology would calculate the MLA Charge for 
the consolidated portfolio by applying the threshold to asset 
groups/subgroups, as opposed to the current methodology, which 
calculates the MLA Charge for the consolidated portfolio by applying 
the threshold to the entire portfolio. See supra note 8.
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    FICC would then compare the MLA Charge for each asset group/
subgroup in the account on a stand-alone basis against the MLA Charge 
for each asset group/subgroup in the account as part of a consolidated 
portfolio. FICC would apply the greater of these two amounts as the MLA 
Charge for the asset group. FICC would add the applicable MLA Charges 
for each asset group/subgroup together to calculate the total MLA 
Charge for that Sponsored Member account.
    FICC believes that the proposed revisions to the MLA Charge 
calculation for Sponsored Members that clear through multiple accounts 
sponsored by multiple Sponsoring Members would better allocate MLA 
Charges to those Sponsored Member accounts than the current 
calculation, so that the MLA Charge would increase for accounts with 
higher relative market impact costs.\45\ FICC also believes that the 
proposed revisions to the MLA Charge calculation would address the 
market impact costs that the MLA Excess Amount was originally designed 
to address, thereby enabling FICC to eliminate the MLA Excess Amount 
from the GSD Rules.\46\
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    \45\ See Notice of Filing, supra note 4, at 58007.
    \46\ See id.
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B. Revise Description of Asset Groups and/or Subgroups

    As described above in Section II.A, FICC categorizes securities 
into asset groups/subgroups that share similar risk profiles for the 
purpose of calculating the MLA Charge. The current GSD Rules contain a 
list of the asset groups/subgroups.\47\ The current MBSD Rules contain 
a statement that there is one mortgage-backed securities asset 
group.\48\ FICC states that it may need to set and adjust the asset 
groupings from time to time in response to changes in market conditions 
that cause the risk profiles of portfolio positions to shift.\49\ 
However, since the groups/subgroups are currently codified in the GSD 
Rules and MBSD Rules, FICC notes that any changes to the groupings 
would require the filing of a proposed rule change with the Commission, 
which FICC believes does not necessarily provide FICC with the 
flexibility to make timely changes in response to market 
conditions.\50\ Therefore, FICC proposes to retain the asset groups in 
the GSD Rules, but remove the asset subgroups (i.e., the specific 
maturities) from the GSD Rules.\51\ FICC proposes to revise the GSD 
Rules and the MBSD Rules to provide that FICC would publish the asset 
groups and subgroups on FICC's website, and that FICC will provide at 
least 5 business days' advance notice of any changes to the schedule 
via Important Notice.
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    \47\ See GSD Rule 1 (definition of ``Margin Liquidity Adjustment 
Charge''), supra note 3.
    \48\ See MBSD Rule 1 (definition of ``Margin Liquidity 
Adjustment Charge''), supra note 3.
    \49\ See Notice of Filing, supra note 4, at 58008.
    \50\ See id.
    \51\ The revised GSD Rule would contain provisions indicating 
that the asset groupings may be further categorized into subgroups. 
See id.
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    Additionally, to better reflect the different risk profiles of the 
mortgage pools/mortgage-backed securities asset groups, FICC proposes 
to add language in the GSD Rules and MBSD Rules to indicate that 
mortgage pools/mortgage-backed securities asset groups may be further 
categorized into subgroups by mortgage pool types. FICC also proposes 
to revise the MBSD Rules to provide that for the purpose of calculating 
the MLA Charge at MBSD, a member's net unsettled positions in TBA 
transactions, Specified Pool Trades, and Stipulated Trades shall be 
included in one mortgage-backed securities asset group, which may be 
further categorized into subgroups by mortgage pool types.

C. Clarifying and Technical Changes

    FICC proposes to modify certain language in the GSD Rules and MBSD 
Rules to clarify certain aspects of the MLA Charge, without making 
substantive changes to the methodology. Specifically, FICC proposes to 
clarify that for the purpose of determining the MLA Charge amount, FICC 
first calculates the MLA Charge for each asset group/subgroup, and then 
FICC

[[Page 68183]]

adds the MLA Charges together to result in one MLA Charge for each 
member portfolio. FICC also proposes to clarify that FICC calculates 
the market impact cost for the combined net unsettled positions in each 
asset group/subgroup; not for each net unsettled position. Similarly, 
FICC proposes to clarify that the associated VaR Charge allocation is 
also performed for each asset group/subgroup; not for each net 
unsettled position.
    Finally, FICC proposes to make several technical changes to the GSD 
Rules that reflect the correct usage of terms. Specifically, in GSD 
Rule 1, FICC proposes to replace the term ``mortgage pools 
transactions'' with ``mortgage pools,'' and the term ``MLA charge'' 
with ``MLA Charge.''

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \52\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After carefully considering the 
Proposed Rule Change, the Commission finds that the Proposed Rule 
Change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) \53\ of the Act and Rules 17Ad-22(e)(4)(i), 
(e)(6)(i), and (e)(19) thereunder.\54\
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    \52\ 15 U.S.C. 78s(b)(2)(C).
    \53\ 15 U.S.C. 78q-1(b)(3)(F).
    \54\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(19).
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A. Consistency With Section 17A(b)(3)(F) of the Act

1. Prompt and Accurate Clearance and Settlement
    Section 17A(b)(3)(F) of the Act \55\ requires that the rules of a 
clearing agency, such as FICC, be designed to, among other things, 
promote the prompt and accurate clearance and settlement of securities 
transactions and assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible.\56\ The Commission believes that the Proposed Rule Change 
is consistent with Section 17A(b)(3)(F) of the Act for the reasons 
stated below.
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    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ Id.
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    As described above in Section III.A, FICC proposes to amend the MLA 
Charge calculation at GSD for Sponsored Members that clear through 
multiple accounts sponsored by multiple Sponsoring Members. 
Specifically, the amended calculation would apportion a higher MLA 
Charge to those Sponsored Member accounts with higher relative market 
impact costs than the current calculation. As a result, the proposal 
would better align the MLA Charge with the risk arising from position 
concentration in such Sponsored Member portfolios. The Commission 
believes that a closer alignment between the MLA Charge and the risks 
presented by the concentration of securities in Sponsored Member 
portfolios would help facilitate FICC's ability to set margins that 
more accurately reflect the risks posed by such portfolios. Setting 
margins that accurately reflect the risks posed by its members' 
portfolios could reduce the likelihood that FICC would not have 
collected sufficient margin to address losses arising out of a member 
default. Reducing the likelihood that FICC holds insufficient margin to 
address default losses would, in turn, further assure that FICC's 
operation of its critical clearance and settlement services would not 
be disrupted because of insufficient financial resources.
    As part of the Proposed Rule Change, FICC filed Exhibit 3a--Summary 
of Impact Study (``Impact Study''), which provided the actual MLA 
Charges at the member-level, account-level, and CCP-level, from October 
19, 2020 through October 31, 2022, as compared to the MLA Charges that 
FICC would have assessed if the proposed enhancement had been in place 
during that time period.\57\ The Commission reviewed and analyzed the 
Impact Study, which showed, among other things, that had the proposed 
enhancement been in place for Sponsored Members that clear through 
multiple accounts sponsored by multiple Sponsoring Members, it would 
have resulted in an average daily increase of $9.47 million in the 
aggregate MLA Charge for the impacted Sponsored Members. Therefore, the 
Impact Study demonstrates that the proposed MLA Charge calculation 
would enable FICC to set higher margin coverage levels than those using 
the current calculation, providing further assurance that FICC's 
operation of its critical clearance and settlement services would not 
be disrupted because of insufficient financial resources.
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    \57\ FICC has requested confidential treatment of Exhibit 3a, 
pursuant to 17 CFR 240.24b-2.
---------------------------------------------------------------------------

    Additionally, as described above in Section III.A, the proposed 
enhancement to the MLA Charge calculation would enable FICC to simplify 
its margin methodology by eliminating the MLA Excess Amount from the 
GSD Rules because the enhanced MLA Charge calculation would address the 
additional market impact cost that the MLA Excess Amount was originally 
designed to address. Thus, the proposed enhancement to the MLA Charge 
calculation and removal of the MLA Excess Amount from the GSD Rules 
would render FICC's margin methodology more accurate, robust, and 
streamlined, further assuring its effectiveness.
    As described above in Section III.B, FICC proposes to (1) remove 
the enumerated asset subgroups from the GSD Rules, (2) change both the 
GSD Rules and MBSD Rules to indicate that FICC may further categorize 
asset groups into subgroups, and (3) change both the GSD Rules and MBSD 
Rules to indicate that a member's net unsettled positions in TBA 
transactions, Specified Pool Trades, and Stipulated Trades shall be 
included in one mortgage-backed securities asset group, which may be 
further categorized into subgroups by mortgage pool types. FICC states 
that the purpose of these changes is to facilitate FICC's ability to 
timely set and adjust the asset groupings from time to time in response 
to changes in market conditions that cause a shift in the risk profiles 
of portfolio positions. FICC would publish the asset groups and 
subgroups on FICC's website, and that FICC will provide at least 5 
business days' advance notice of any changes to the schedule via 
Important Notice.
    FICC's ability to promptly respond to changing risk profiles of the 
securities in its members' portfolios would better enable FICC to set 
margins that more accurately reflect the risks posed by such 
portfolios. Setting margins that accurately reflect the risks posed by 
its members' portfolios could reduce the likelihood that FICC would not 
have collected sufficient margin to address losses arising out of a 
member default. Reducing the likelihood that FICC holds insufficient 
margin to address default losses would, in turn, further assure that 
FICC's operation of its critical clearance and settlement services 
would not be disrupted because of insufficient financial resources.
    As described above in Section III.C, FICC proposes to make several 
technical changes to the GSD Rules that reflect the correct usage of 
terms. Enhancing the clarity of the GSD Rules would enable members to 
more efficiently and effectively understand and conduct their business 
in accordance with the GSD Rules. When members conduct

[[Page 68184]]

their business in accordance with the GSD Rules, FICC is able to focus 
more of its resources on providing its clearance and settlement 
services.
    Accordingly, for the reasons above, the Commission finds that the 
Proposed Rule Change should help FICC to continue providing prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\58\
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    \58\ 15 U.S.C. 78q-1(b)(3)(F).
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2. Safeguarding Securities and Funds
    As described above in Section II, FICC would access the mutualized 
Clearing Fund should a defaulted member's own margin be insufficient to 
satisfy losses to FICC caused by the liquidation of that member's 
portfolio. As discussed above in Section IV.A.1, FICC's proposals to 
enhance the MLA Charge calculation and eliminate the MLA Excess Amount 
should help ensure that FICC collects sufficient margin from its 
members. Similarly, FICC's proposals to remove the asset subgroups from 
the GSD Rules and otherwise streamline the GSD Rules and MBSD Rules 
with respect to the asset groups/subgroups, should help facilitate 
FICC's ability to promptly respond to changing risk profiles of its 
members' portfolios, and thereby set margins that more accurately 
reflect the risks posed by such portfolios. Accordingly, the Proposed 
Rule Change should help minimize the likelihood that FICC would have to 
access the Clearing Fund, thereby limiting non-defaulting members' 
exposure to mutualized losses.
    The Commission believes that by helping to limit the exposure of 
FICC's non-defaulting members to mutualized losses, the Proposed Rule 
Change would help FICC assure the safeguarding of securities and funds 
which are in its custody or control, consistent with Section 
17A(b)(3)(F) of the Act.\59\
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    \59\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act

    Rule 17Ad-22(e)(4)(i) under the Act requires that each covered 
clearing agency that provides central counterparty services, such as 
FICC, establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\60\ The Commission believes that the proposal is consistent 
with Rule 17Ad-22(e)(4)(i) under the Act for the reasons stated below.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As discussed above in Section IV.A, FICC's proposed enhancement to 
the MLA Charge calculation and removal of the MLA Excess Amount from 
the GSD Rules would render FICC's margin methodology more accurate than 
the current methodology by apportioning a higher MLA Charge to those 
Sponsored Member accounts with higher relative market impact costs. As 
a result, the proposal would better align the MLA Charge with the risk 
arising from position concentration in such Sponsored Member 
portfolios. The Commission has reviewed and analyzed the filing 
materials, including the Impact Study,\61\ and agrees that the proposed 
enhancement to the MLA Charge calculation and removal of the MLA Excess 
Amount from the GSD Rules would enable FICC to set margins that more 
accurately reflect the risks posed by such portfolios than the current 
methodology. As a result, implementing the Proposed Rule Change would 
better enable FICC to collect sufficient margin in connection with 
Sponsored Members that clear through multiple accounts sponsored by 
multiple Sponsoring Members.
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    \61\ See supra note 57.
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    Accordingly, the Commission finds the Proposed Rule Change is 
consistent with Rule 17Ad-22(e)(4)(i) under the Act because it is 
designed to assist FICC in managing its credit exposures to its members 
by maintaining sufficient financial resources to cover its credit 
exposure to the portfolios of Sponsored Members that clear through 
multiple accounts sponsored by multiple Sponsoring Members.\62\
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    \62\ 17 CFR 240.17Ad-22(e)(4)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act

    Rule 17Ad-22(e)(6)(i) under the Act requires that each covered 
clearing agency that provides central counterparty services, such as 
FICC, establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\63\ The Commission believes that the proposal is consistent 
with Rule 17Ad-22(e)(6)(i) under the Act for the reasons stated below.
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    \63\ 17 CFR 240.17Ad-22(e)(6)(i).
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    As discussed above in Section IV.A, FICC's proposed enhancement to 
the MLA Charge calculation and removal of the MLA Excess Amount from 
the GSD Rules would render FICC's margin methodology more accurate than 
the current methodology by apportioning a higher MLA Charge to those 
Sponsored Member accounts with higher relative market impact costs. As 
a result, the proposal would better align the MLA Charge with the risk 
arising from position concentration in such Sponsored Member 
portfolios. The Commission has reviewed and analyzed the filing 
materials, including the Impact Study,\64\ and agrees that the proposed 
enhancement to the MLA Charge calculation and removal of the MLA Excess 
Amount from the GSD Rules would enable FICC to set margins that more 
accurately reflect the risks posed by such portfolios than the current 
methodology. As a result, implementing the Proposed Rule Change would 
better enable FICC to set margin amounts at levels commensurate with 
the risks associated with the portfolios of Sponsored Members that 
clear through multiple accounts sponsored by multiple Sponsoring 
Members.
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    \64\ See supra note 57.
---------------------------------------------------------------------------

    Accordingly, the Commission finds the Proposed Rule Change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act because it is 
designed to assist FICC in maintaining a risk-based margin system that 
considers, and produces margin levels commensurate with, the risks and 
particular attributes of its Sponsored Member portfolios.\65\
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    \65\ 17 CFR 240.17Ad-22(e)(6)(i).
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D. Consistency With Rule 17Ad-22(e)(19) Under the Act

    Rule 17Ad-22(e)(19) under the Act requires that each covered 
clearing agency that provides central counterparty services, such as 
FICC, establish, implement, maintain and enforce written policies and 
procedures reasonably designed to identify, monitor, and manage the 
material risks to the covered clearing agency arising from arrangements 
in which firms that are indirect participants in the covered clearing 
agency rely on the services provided by direct participants to access 
the covered clearing agency's payment, clearing, or settlement 
facilities.\66\ The Commission believes that the proposal is consistent 
with Rule 17Ad-22(e)(19)

[[Page 68185]]

under the Act for the reasons stated below.
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    \66\ 17 CFR 240.17Ad-22(e)(19).
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    As discussed above in Section II.B, FICC's Sponsored Service allows 
eligible members to sponsor their clients into a limited form of FICC 
membership such that a Sponsoring Member is permitted to submit to 
FICC, for comparison, novation, and netting, certain eligible 
securities transactions of its Sponsored Members. Sponsored Members are 
indirect FICC participants that rely on the services provided by direct 
FICC participants (i.e., Sponsoring Members) to access FICC's clearance 
and settlement facilities.\67\ Therefore, Rule17Ad-22(e)(19) requires 
FICC to identify, monitor, and manage the material risks arising from 
the Sponsored Service.\68\
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    \67\ See id.
    \68\ See id.
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    FICC's proposals to amend the MLA Charge calculation and eliminate 
the MLA Excess Amount are designed to address the risks arising from 
Sponsored Members that clear through multiple accounts sponsored by 
multiple Sponsoring Members. As described above in Section II.B, for 
such Sponsored Members, FICC currently calculates an MLA Charge for 
each Sponsored Member account on both a stand-alone and consolidated 
portfolio basis, ultimately applying whichever MLA Charge calculation 
is greater to the Sponsored Member's margin. FICC has identified an 
opportunity to amend the MLA Charge calculation for such Sponsored 
Members to better align the amount of the MLA Charge with the market 
impact cost arising from position concentration in the Sponsored 
Member's respective Sponsored Member accounts. Specifically, the 
revised calculation would apportion a higher MLA Charge to those 
Sponsored Member accounts with higher relative market impact costs than 
the current calculation. The proposed change would also enable FICC to 
simplify its margin methodology by eliminating the MLA Excess Amount 
from the GSD Rules because the enhancement would address the additional 
market impact cost that the MLA Excess Amount was originally designed 
to address. As discussed above in Section IV.A, the Commission believes 
that implementation of these proposals would help facilitate FICC's 
ability to set margins that more accurately and efficiently reflect the 
risks posed by the portfolios of Sponsored Members that clear through 
multiple Sponsoring Members.
    Accordingly, the Commission believes that by improving FICC's 
margin methodology with respect to FICC's Sponsored Members, the 
Proposed Rule Change would help FICC better manage the material risks 
arising from the Sponsored Service, consistent with Rule 17Ad-
22(e)(19).\69\
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    \69\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

    Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
    Send an email to [email protected]. Please include File Number 
SR-FICC-2023-012 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2023-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of FICC and FICC's website at 
https://www.dtcc.com/legal.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to File Number SR-FICC-2023-012 and should 
be submitted on or before October 24, 2023.

VI. Accelerated Approval of the Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to Section 
19(b)(2)(C)(iii) of the Act,\70\ to approve the Proposed Rule Change, 
as modified by Amendment No. 1, prior to the thirtieth day after the 
date of publication of Amendment No. 1 in the Federal Register. As 
noted above, in Amendment No. 1, FICC updated the Exhibit 3b \71\ to 
the Proposed Rule Change to add a missing description of a term used in 
a calculation and to remove an unnecessary chart. Amendment No. 1 
neither modifies the Proposed Rule Change as originally published in 
any substantive manner, nor does Amendment No. 1 affect any rights or 
obligations of FICC or its members. Instead, Amendment No. 1 makes 
technical changes to clarify Exhibit 3b. Additionally, since FICC filed 
Amendment No. 1 on August 22, 2023, the Commission has had sufficient 
time to review and consider Amendment No. 1 as part of its analysis of 
the Proposed Rule Change. Accordingly, the Commission finds good cause, 
pursuant to Section 19(b)(2)(C)(iii) of the Act,\72\ to approve the 
Proposed Rule Change, as modified by Amendment No. 1, prior to the 
thirtieth day after the date of publication of notice of Amendment No. 
1 in the Federal Register.
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    \70\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \71\ See supra note 8.
    \72\ Id.
---------------------------------------------------------------------------

VII. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change, as modified by Amendment No. 1, is consistent 
with the requirements of the Act and in particular with the 
requirements of Section 17A of the Act \73\ and the rules and 
regulations promulgated thereunder.
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    \73\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\74\ that proposed rule change SR-FICC-2023-012, be, and hereby is, 
approved.\75\
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    \74\ 15 U.S.C. 78s(b)(2).
    \75\ In approving the Proposed Rule Change, the Commission 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).


[[Page 68186]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
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    \76\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21783 Filed 10-2-23; 8:45 am]
BILLING CODE 8011-01-P


