Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, To Establish a Guaranty Fund at the Government Securities Division

SECURITIES AND EXCHANGE COMMISSION [Release No. 34-106053; File No. SR-FICC-2026-008] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 1, To Establish a Guaranty Fund at the Government Securities Division August 6, 2026. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 24, 2026, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-FICC-2026-008. On August 4, 2026, FICC filed Partial Amendment No. 1 to make clarifications and corrections to the proposed rule change. 3 The proposed rule change, as modified by Partial Amendment No. 1 (hereinafter, the “Proposed Rule Change”), is described in Items I, II and III below, which Items have been prepared primarily by the clearing agency. The Commission is publishing this notice to solicit comments on the Proposed Rule Change from interested persons. 1  15 U.S.C. 78s(b)(1). 2  17 CFR 240.19b-4. 3  Partial Amendment No. 1 made certain changes the description of the proposed rule change. Specifically, Partial Amendment No. 1 corrects certain figures in the description of the proposed rule change regarding the anticipated impact on FICC's Members for the average overall Guaranty Fund size. Additionally, Partial Amendment No. 1 clarifies certain statements regarding the effects on Member Backtesting Charges had the proposed changes been in place during the period of the Backtesting Study. These clarifications and corrections have been incorporated, as appropriate, into the description of the proposed rule change in Item II below. FICC filed the proposed rule change as an advance notice (SR-FICC-2026-802) with the Commission pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”) and Rule 19b-4 under the Act, 17 CFR 240.19b-4. A copy of the advance notice is available at www.dtcc.com/legal/sec-rule-filings. On August 4, 2026, FICC filed Partial Amendment No. 1 to the advance notice to make the same clarifications and corrections to the advance notice as Partial Amendment No. 1 to the proposed rule change. I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change The Proposed Rule Change consists of modifications to FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”)  4 in connection with the proposed establishment of a guaranty fund designed to cover losses that may arise due to a Member default or a non-default loss event (“Guaranty Fund”). 4  Capitalized terms not defined herein shall have the meaning assigned to such terms in the GSD Rules, available at www.dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the Proposed Rule Change and discussed any comments it received on the Proposed Rule Change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Executive Summary FICC, through GSD and the Mortgage-Backed Securities Division (“MBSD”) (each a “Division” and together the “Divisions”), serves as a central counterparty (“CCP”) and provider of clearance and settlement services for fixed income transactions. FICC-GSD, specifically, provides CCP services in U.S. government securities, as well as repurchase and reverse repurchase transactions involving U.S. government securities. 5 5  GSD also clears and settles certain transactions on securities issued or guaranteed by U.S. government agencies and government sponsored enterprises. FICC proposes to establish a Guaranty Fund at GSD, which would be designed to cover and mutualize the risk of losses that may occur as a result of (i) a Defaulting Member Event  6 under a wide range of foreseeable stress scenarios or (ii) a Declared Non-Default Loss Event. 7 The Guaranty Fund would provide an additional source of prefunded financial resources, separate from the Clearing Fund, to serve as GSD's “default fund”  8 and enable FICC to treat its Member's Clearing Fund deposits as “initial margin,”  9 excluding the Clearing Fund from loss mutualization and supporting bankruptcy remote treatment for Clearing Fund deposits at GSD. 6  A “Defaulting Member Event” is defined in the GSD Rules as a determination by FICC to cease to act for a Member pursuant to GSD Rule 21 or Rule 22. See Section 7 of GSD Rule 4 (Clearing Fund and Loss Allocation), supra note 4. These GSD Rules provide that FICC's Board of Directors may suspend a Member or prohibit or limit a Member's access to FICC's services in enumerated circumstances; this includes, among other things, a default in delivering funds or securities to FICC, a Member insolvency or a Member experiencing such financial or operational difficulties that FICC determines, in its discretion, that restriction on access to services is necessary for its protection and for the protection of its membership. See GSD Rule 21 (Restrictions on Access to Services) and GSD Rule 22 (Insolvency of a Member), supra note 4. 7  A “Declared Non-Default Loss Event” is a determination by the FICC Board of Directors that a loss or liability incident to the clearance and settlement business of FICC may be a significant and substantial loss or liability that may materially impair the ability of FICC to provide clearance and settlement services in an orderly manner and will potentially generate losses to be mutualized among Members in order to ensure that FICC may continue to offer clearance and settlement services in an orderly manner. See Section 7 of Rule 4 of the GSD Rules, supra note 4. 8  A CCP's default fund is typically used to mutualize certain risks, such as losses that may occur under extreme but plausible stress scenarios that exceed a defaulting member's initial margin. 9  Initial margin is collateral collected by a CCP to cover its current and potential future exposure to participants in the interval between the last margin collection and the close out of positions following a participant default. Initial margin is generally not mutualized and used only to cover the losses of the participant posting such initial margin. As part of the proposal, FICC would make the following changes to the GSD Rules: • Adopt new GSD Rule 4A (Guaranty Fund) to set forth requirements for the Guaranty Fund, including, among other things, that (i) FICC performs daily stress testing using historical and hypothetical scenarios for purposes of sizing the Guaranty Fund; (ii) FICC sizes the Guaranty Fund each month at an amount sufficient to cover the stress test deficiency ( i.e., losses observed in daily stress testing over required Clearing Fund deposits) that may arise as a result of the default of the two Netting Member Affiliated Families  10 that would potentially cause the largest aggregate credit exposure for FICC in extreme but plausible market conditions (a “Cover 2 Standard” or “Cover 2 Requirement”); (iii) all deposits to the Guaranty Fund must be made in cash; and (iv) FICC has the authority to resize the Guaranty Fund on an intramonth basis if stress test deficiencies breach certain established thresholds; 10  “Affiliated Family” is defined in the GSD Rules as a group of Members, excluding from the group any Member that is a securities clearinghouse, depository, exchange or other market infrastructure, in which each Member in the group is an Affiliate of at least one other Member in the group. See Section 1 of GSD Rule 1 (Definitions), supra note 4. • Modify GSD Rule 4 and the Margin Component Schedule to (i) support bankruptcy remote treatment for Clearing Fund deposits; (ii) exclude the Clearing Fund from loss mutualization; (iii) provide FICC with the authority to require additional margin deposits from Netting Members if their stress test deficiencies exceed predetermined thresholds in relation to the total Required Fund Deposits of all other Members (excluding such Member or Affiliated Family) or would cause the Guaranty Fund to exceed upper bound parameters established for limiting the resizing of the Guaranty Fund; (iv) clarify that FICC would no longer have the authority to “borrow” Clearing Fund deposits of non-defaulting Members to provide liquidity to FICC to meet its settlement obligations; (v) provide FICC with the authority to exchange a Netting Member's Clearing Fund deposit in the form of cash for U.S. Treasury securities to provide liquidity to FICC to meet its settlement obligations; and (vi) eliminate fixed minimum Required Fund Deposit amounts and adjust the associated minimum cash composition requirements accordingly. • Relocate the loss allocation rules in Section 7 (Loss Allocation Waterfall, Off-the-Market Transactions) of GSD Rule 4 to new proposed Rule 4C (Loss Allocation) and modify those rules to (i) incorporate the proposed Guaranty Fund into the GSD loss allocation waterfall and exclude the Clearing Fund from the calculation of loss allocation obligations; (ii) eliminate the concept of Tier One Netting Members and Tier Two Members and exclude CCIT Members and Registered Investment Company Netting Members from loss allocation; (iii) adopt a new five-day “cooling-off period” for Defaulting Member Events and Declared Non-Default Loss Events (also referred to as an “Event Period”); and (iv) impose an assessment cap on loss allocation during each Event Period equal to two times (or 200 percent of) the Member's Guaranty Fund requirement for any Event Period in lieu of the existing loss allocation rounds system. • Make other conforming changes throughout the GSD Rules to reflect the adoption of the Guaranty Fund as described herein. FICC has discussed this proposal with Members, who generally expressed support for the proposed changes. By establishing a separate Guaranty Fund for loss mutualization and capping each Netting Member's loss allocation in Defaulting Member Events and Declared Non-Default Loss Events that occur during an Event Period at 200 percent of the Netting Member's Guaranty Fund requirement, FICC would provide greater transparency around each Member's potential exposures to FICC. The proposed Guaranty Fund, which would be sized and allocated based on the results of daily stress testing under a wide range of foreseeable historical and hypothetical scenarios, would also provide a more risk sensitive measure of FICC's stress exposures. FICC also notes that by establishing a Guaranty Fund and sizing it to a Cover 2 Standard, the proposal would align FICC's risk management practices more closely with other global CCPs, including other clearing agencies registered with the Commission and approved to clear U.S. Treasury activity, promoting greater consistency across the market's systemically important infrastructures. 11 11  For example, CME Securities Clearing Inc. and ICE Clear Credit LLC maintain default funds that are separate from initial margin and sized to a Cover 2 Standard. See Chapter 4 of the Rules of CME Securities Clearing Inc., available at www.cmegroup.com/rulebook/cmesc/, and Chapter 8 of the Treasury Clearing Rules of ICE Clear Credit LLC, available at www.ice.com/clear-credit/us-treasury-clearing. The proposal also includes changes to the GSD Rules to make it clear that Members' Clearing Fund deposits represent initial margin, excluding the Clearing Fund from the loss allocation calculation, and to facilitate the ability of Members to conclude that Clearing Fund deposits are bankruptcy remote  12 from FICC within the meaning of the Basel capital framework. The proposed changes would protect the Clearing Fund deposits of all Members from loss mutualization in the event of a Member default scenario where the losses incurred by FICC exceed the resources of the defaulting Member. The proposed changes would protect non-defaulting Members' Clearing Fund deposits from an FICC insolvency and thereby facilitate the ability of Clearing Members to conclude they do not need to hold regulatory capital against such deposits, providing additional capital relief to such Members, as discussed in further detail below. 12  FICC would obtain a legal memorandum from outside counsel regarding the bankruptcy remote treatment of the Clearing Fund. Background FICC-GSD maintains financial resources in the form of its Clearing Fund designed to enable it to cover potential losses resulting from the failure of the Member or Member family to which it has the largest credit exposure. FICC-GSD collects Clearing Fund deposits from its Members using a risk-based margin methodology. These amounts operate, individually, as the Member's initial margin, and the aggregate of all such Members' deposits is referred to collectively as the Clearing Fund, which operates as GSD's default fund. This risk-based methodology enables FICC to identify the risks posed by a Member's unsettled portfolio and to quickly adjust and collect additional deposits as needed to cover those risks. Each Member's required Clearing Fund deposit (or Required Fund Deposit) is calculated at least twice daily for GSD Members pursuant to a formula set forth in GSD Rule 4 and the Margin Component Schedule of the GSD Rules. 13 The Clearing Fund is sized to an amount sufficient to cover a wide range of potential stress scenarios, including the default of the Member and its affiliated Members that would cause the largest aggregate credit exposure to GSD in extreme but plausible market conditions (that is, to a “Cover 1 Standard”). 13   See Rule 4 and Margin Component Schedule of the GSD Rules, supra note 4. Currently, under GSD Rule 4, if there is a loss (i) as a result of an obligation of a defaulting Member to FICC that was not fully satisfied by the application of its resources or the proceeds from the liquidation of its portfolio, or (ii) due to an event other than a Member default ( i.e., a Declared Non-Default Loss Event), FICC has recourse to the loss allocation waterfall. FICC allocates losses differently between Tier One Netting Members, which generally include all Netting Members unless otherwise specified by FICC, and Tier Two Members, which include CCIT Members and Registered Investment Company Netting Members. 14 14   See Section 7 of GSD Rule 4, supra note 4. Under the current GSD Rules, triggering events for loss allocation purposes, which may include both Member defaults and non-default events, are grouped together chronologically into discrete “Event Periods” of ten business days. 15 Losses arising from a group of events that occurred within the same Event Period, whether a default loss or a non-default loss, would be allocated as follows: 15   See id. • Before the allocation of losses to Members, FICC would apply 50 percent of its General Business Risk Capital Requirement as of the end of the calendar quarter immediately preceding the applicable event period (referred to as the “Corporate Contribution”), or such greater amount as the Board of Directors may determine to satisfy the losses. 16 16  The amount of the Corporate Contribution to be applied to any losses arising from events that may occur in subsequent event periods during the next 250 business days would be reduced to the remaining unused portion of the Corporate Contribution amount, if any. If the losses are attributable to only one Division, the Corporate Contribution to the losses would be up to the amount then available. If the losses occur simultaneously at both Divisions, the Corporate Contribution to the losses would be applied ratably between the Divisions. See Section 7a of GSD Rule 4, supra note 4. • If a loss is related to a Defaulting Member Event, FICC would allocate the loss between the Tier One Netting Members and the Tier Two Members, and the loss allocation process applicable to Tier One Netting Members and Tier Two Members would proceed via two separate, parallel, and simultaneous streams. If a loss is related to a Declared Non-Default Loss Event, FICC would allocate the loss to Tier One Netting Members. Tier Two Members are not subject to loss allocation with respect to Declared Non-Default Loss Events. 17 17   See Section 7 of GSD Rule 4, supra note 4. Losses relating to the events within the same Event Period may be allocated iteratively. • With respect to Tier One Netting Members, if a loss remains after applying the Corporate Contribution, FICC would allocate the remaining amount among Tier One Netting Members that were Tier One Netting Members on the first day of the applicable Event Period, ratably in accordance with their average daily Required Fund Deposit over the prior 70 business days or such shorter period of time that the Tier One Netting Member has been a Tier One Netting Member, divided by the sum of the average Required Fund Deposit amounts of all Tier One Netting Members subject to loss allocation in such round. Each Tier One Netting Member must pay its allocation amount within two business days of receiving notice of the amount. 18 18   See id. • With respect to Tier Two Members, if a loss remains after applying the Corporate Contribution, FICC would allocate the remaining amount to Tier Two Members to the extent they traded with the defaulting Member and their trades resulted in the loss. FICC would assess Tier Two Members ratably based on their loss as a percentage of the entire amount of the remaining loss attributable to Tier Two Members. Tier Two Members are required to pay their loss allocation obligation in full. 19 19   Id. The GSD Clearing Fund also acts as a source of liquidity for FICC. FICC's qualifying liquid resources  20 are described in the Clearing Agency Liquidity Risk Management Framework (“LRM Framework”)  21 and include (i) cash deposits to the respective Clearing Funds  22 of GSD and MBSD and (ii) the Capped Contingency Liquidity Facility (“CCLF”) for each of GSD and MBSD. Collectively, these resources provide FICC with liquidity to complete end-of-day settlement in the event of the default of a GSD Netting Member. 23 20  “Qualifying liquid resources,” as defined by Rule 17ad-22(a) under the Act, include three types of assets: (i) cash held either at the central bank of issue or at creditworthy commercial banks; (ii) assets that are readily available and convertible into cash through prearranged funding arrangements, such as: (A) committed arrangements without material adverse change provisions, including (1) lines of credit, (2) foreign exchange swaps and (3) repurchase agreements, or (B) other prearranged funding arrangements determined to be highly reliable even in extreme but plausible market conditions by the board of directors of the covered clearing agency following a review conducted for this purpose not less than annually; and (iii) other assets that are readily available and eligible for pledging to (or conducting other appropriate forms of transactions with) a relevant central bank, if the covered clearing agency has access to routine credit at such central bank in a jurisdiction that permits said pledges or other transactions by the covered clearing agency. See 17 CFR 240.17ad-22(a). 21  FICC and its affiliate clearing agencies, The Depository Trust Company and National Securities Clearing Corporation (together, the “Clearing Agencies”), have adopted the LRM Framework, which sets forth the manner in which FICC measures, monitors and manages the liquidity risks that arise in or are borne by it. See Securities Exchange Act Release No. 82377 (Dec. 21, 2017), 82 FR 61617 (Dec. 28, 2017) (SR-DTC-2017-004; SR-FICC-2017-008; SR-NSCC-2017-005). Following the establishment of the Guaranty Fund, FICC would file a proposed rule change to amend the LRM Framework to include the Guaranty Fund and the authority to exchange a Netting Member's Clearing Fund deposit in the form of cash for U.S. Treasury securities to provide liquidity to FICC as sources of qualifying liquid resources for FICC-GSD. 22  Cash deposits to the Clearing Funds are held either at a Federal Reserve Bank or creditworthy commercial banks that provide same-day access to funds. 23  The Commission also recently issued a Notice of No Objection to FICC's proposal to establish a commercial paper program in order to raise prefunded default liquidity (“Commercial Paper Program”). The Commercial Paper Program, once implemented, would also constitute an additional source of qualifying liquid resources for FICC. See Securities Exchange Act Release No. 105319 (Apr. 27, 2026), 91 FR 23318 (Apr. 30, 2026) (SR-FICC-2026-801). The Clearing Agencies also maintain a Clearing Agency Stress Testing Framework (“ST Framework”), which sets forth the manner in which FICC (i) performs stress testing of the sufficiency of its prefunded financial resources and (ii) determines the amount and regularly tests the sufficiency of FICC's liquidity resources. 24 FICC would utilize its existing stress testing methodology and scenarios, as described in the ST Framework, to size and test the sufficiency of the proposed Guaranty Fund. 24   See Securities Exchange Act Release No. 82368 (Dec. 19, 2017), 82 FR 61082 (Dec. 26, 2017) (SR-DTC-2017-005; SR-FICC-2017-009; SR-NSCC-2017-006). Following the establishment of the Guaranty Fund, FICC would file a proposed rule change to amend the ST Framework to make conforming changes to reflect the utilization of FICC's stress testing methodology and scenarios in sizing and testing the sufficiency of the Guaranty Fund. Description of Proposed Change FICC proposes to establish a Guaranty Fund for GSD, which is designed to cover losses that may arise due to a Member default or a non-default loss event and enable FICC to support bankruptcy remote treatment for its Clearing Fund deposits. The proposed changes would include, among other things: • Adopting new GSD Rule 4A (Guaranty Fund) to set forth requirements for the Guaranty Fund, including, among other things, that (i) FICC performs daily stress testing using historical and hypothetical scenarios for purposes of sizing the Guaranty Fund; (ii) FICC sizes the Guaranty Fund at an amount sufficient to meet a Cover 2 Requirement; (iii) all deposits to the Guaranty Fund must be made in cash; and (iv) FICC has the authority to resize the Guaranty Fund on an intramonth basis if stress test deficiencies breach certain thresholds. • Modifying GSD Rule 4 and the Margin Component Schedule to (i) support bankruptcy remote treatment for Clearing Fund deposits; (ii) exclude the Clearing Fund from loss mutualization; (iii) provide FICC with the authority to require additional margin deposits from Netting Members if their stress test deficiencies exceed predetermined thresholds in relation to the total Required Fund Deposits of all other Members (excluding such Member or Affiliated Family) or would cause the Guaranty Fund to exceed upper bound parameters established for limiting the resizing of the Guaranty Fund; (iv) clarify that FICC would no longer have the authority to “borrow” Clearing Fund deposits of non-defaulting Members to provide liquidity to FICC to meet its settlement obligations; (v) provide FICC with the authority to exchange a Netting Member's Clearing Fund deposit in the form of cash for U.S. Treasury securities to provide liquidity to FICC to meet its settlement obligations; and (vi) eliminate fixed minimum Required Fund Deposit amounts and adjust the associated minimum cash composition requirements accordingly. • Relocating the loss allocation rules in Section 7 of GSD Rule 4 to a new Rule 4C (Loss Allocation) and modifying the rules to (i) incorporate the proposed Guaranty Fund into the loss allocation rules and exclude the Clearing Fund from loss mutualization; (ii) eliminate the concept of Tier One Netting Members and Tier Two Members and exclude CCIT Members and Registered Investment Company Netting Members from loss allocation; (iii) adopt a new five-day “cooling off period” for Defaulting Member Events and Declared Non-Default Loss Events (also referred to as an “Event Period”); and (iv) impose an assessment cap on loss allocation during each cooling-off period equal to two times (or 200 percent of) the Member's Guaranty Fund requirement for each Event Period in lieu of the existing loss allocation rounds system. • Make other conforming changes throughout the GSD Rules to reflect the adoption of the Guaranty Fund as described herein. The proposed changes are discussed in detail below. 1. Proposed Establishment of a Guaranty Fund FICC proposes to adopt new GSD Rule 4A (Guaranty Fund) to set forth requirements for the proposed Guaranty Fund. The proposed rules would describe (i) general terms and requirements applicable to the Guaranty Fund; (ii) the maintenance of the Guaranty Fund; (iii) the form and investment of Guaranty Fund deposits; (iv) daily stress testing requirements for the Guaranty Fund; (v) the monthly sizing of the Guaranty Fund; (vi) intramonth resizing of the Guaranty Fund; (vii) the allocation of Guaranty Fund requirements among Netting Members; (viii) the setting of initial Guaranty Fund Requirements for new Netting Members and adjustments to Guaranty Fund Requirements due to certain business activities of Netting Members; (ix) the purpose and use of Guaranty Fund; and (x) the withdrawal of excess Guaranty Fund deposits, replenishing of any deficits in Guaranty Fund, and return of Guaranty Fund deposits after a Member withdraws from membership at GSD. The term “Guaranty Fund” would be defined in GSD Rule 1 to mean the Guaranty Fund established by FICC pursuant to Rule 4A (as proposed herein), which shall be comprised of the aggregate of all contributions of Netting Members, excluding Registered Investment Company Netting Members. The proposed definition would further provide that the Guaranty Fund may be used to cover losses incurred by FICC as a result of a Defaulting Member Event or Declared Non-Default Loss Event. The term “Guaranty Fund Deposit” would also be defined in GSD Rule 1 as the deposit to the Guaranty Fund made by a Netting Member pursuant to Rule 4A (as proposed herein). The proposed Guaranty Fund would be sized to a Cover 2 Requirement based on the results of daily stress testing using a range of historical and hypothetical scenarios. FICC would size the Guaranty Fund on a monthly basis; however, FICC would retain authority to resize the Guaranty Fund on an intramonth basis if it observes stress test deficiencies that breach certain established thresholds. Each Netting Member's required Guaranty Fund contribution would be determined as their pro rata share of the Cover 2 Requirement based on average daily largest stress test deficiencies. FICC would also have the authority to impose additional margin charges on a Netting Member or Affiliated Family whose Stress Test Deficiencies (as defined in Section 1.d. below) either (i) exceed predetermined thresholds in relation to the total Required Fund Deposits of all other Members (excluding such Member or Affiliated Family) or (ii) would cause either the monthly or intramonth size of the Guaranty Fund to exceed upper bound parameters established for limiting the resizing of the Guaranty Fund. The proposed Guaranty Fund and associated GSD Rules are discussed in detail below. a. General Rules Section 1 of proposed Rule 4A would set forth general provisions applicable to the Guaranty Fund and proposed Rule 4A. Specifically, Section 1 of proposed Rule 4A would clarify that, for purposes of proposed Rule 4A, the term Netting Member shall not include Registered Investment Company Netting Members, except for purposes of determining the total size of the Guaranty Fund or the application of any potential Stress Test Deficiency Charge, as defined below. 25 The proposed rule is intended to reflect the elimination of the concept of Tier Two Members and the exclusion of Registered Investment Company Netting Members (as well as CCIT Members, to which proposed Rule 4A would not apply) from Guaranty Fund requirements and the calculation of loss allocation obligations, which are discussed in further detail below. 25  For example, a Registered Investment Company Netting Member's Stress Test Deficiencies would be included in stress testing for purposes of determining the overall Cover 2 Requirement for the Guaranty Fund. However, Registered Investment Company Netting Member stress test exposures would not be considered in the Guaranty Fund allocation process. In addition, Section 1 of proposed Rule 4A would provide that FICC shall maintain on its public website information regarding the stress test scenarios, Guaranty Fund sizing parameters, and intramonth resizing thresholds used to determine the size of the Guaranty Fund. FICC believes that making these key details available on its public website would promote clarity and transparency for its Members, market participants, and the general public. b. Maintenance of Guaranty Fund Section 2 of proposed Rule 4A would require each Netting Member to make and maintain on an ongoing basis a contribution to the Guaranty Fund. The proposed rule would further provide that the amount of each Netting Member's required Guaranty Fund contribution (referred to as the “Guaranty Fund Requirement”) as well as the timing of payment of the Guaranty Fund Requirement shall be determined by FICC in accordance with the terms of proposed Rule 4A, as further discussed below. In addition, FICC would update GSD Rule 1 to include a definition for Guaranty Fund Requirement to mean a Netting Member's required Guaranty Fund contribution as determined in accordance with proposed Rule 4A. c. Form and Investment of Guaranty Fund Section 3 of proposed Rule 4A would require that each Netting Member's Guaranty Fund Requirement be made in the form of cash in immediately-available funds and would permit FICC to invest cash in the Guaranty Fund in accordance with the Clearing Agency Investment Policy. 26 Under the proposed rule, each Netting Member would be entitled to such interest earned or paid on Guaranty Fund Cash deposits as FICC may determine from time to time. FICC believes that requiring Guaranty Fund contributions to be provided in cash would provide an important source of qualifying liquid resources for FICC. 26   See Securities Exchange Act Release No. 79528 (Dec. 12, 2016), 81 FR 91232 (Dec. 16, 2016) (SR-DTC-2016-007; SR-FICC-2016-005; SR-NSCC-2016-003). FICC would file a separate proposed rule change with the Commission to update the Clearing Agency Investment Policy to permit the overnight investment of Guaranty Fund cash in either commercial bank deposits or its FRBNY account (similar to the Clearing Fund). d. Daily Stress Testing Section 4(a) of proposed Rule 4A would require that FICC perform daily stress testing of its total financial resources at least once each day using a wide range of foreseeable scenarios, including both historical and hypothetical scenarios. Such daily stress testing would be used to determine “Stress Test Deficiencies” for purposes of sizing the Guaranty Fund. The term “Stress Test Deficiency” would be defined in GSD Rule 1 to mean the losses observed in FICC's daily stress testing in excess of applicable Required Fund Deposits of Netting Members or an Affiliated Family of Netting Members. As proposed herein, the Required Fund Deposits of Netting Members would be treated as initial margin at GSD. As a result, FICC believes the proposed approach for determining Stress Test Deficiencies would be consistent with practices of other CCPs, including other clearing agencies registered with the Commission and approved to clear U.S. Treasury activity, utilizing a “stress loss over initial margin” approach to sizing and testing the sufficiency of CCP default funds. 27 As noted above, FICC would leverage its stress testing methodology and inventory of stress scenarios, as described in the ST Framework, for its daily stress testing for the Guaranty Fund. 28 27  For example, CME Securities Clearing Inc. sizes its guaranty fund to a cover two standard that measures the shortfall between the stress loss and collateral on deposit for initial margin. See Rule 402(a) of the Rules of CME Securities Clearing Inc., supra note 11. ICE Clear Credit LLC also determines the amount of required contributions to its Treasury Guaranty Fund based on stress loss over initial margin concepts. See Rule 801(a) of the Treasury Clearing Rules of ICE Clear Credit LLC, supra note 11. 28   See supra note 24. e. Monthly Sizing of Guaranty Fund Section 4(b) of proposed Rule 4A would describe the monthly sizing of the Guaranty Fund. Specifically, the proposed rule would provide that the size of the Guaranty Fund would be established on a monthly basis at an amount determined by FICC to be sufficient to cover the Stress Test Deficiency that may arise as a result of the default of the two Netting Member Affiliated Families that would potentially cause the largest aggregate credit exposure for FICC in extreme but plausible market conditions ( i.e., the Cover 2 Requirement). The proposed rule would further provide that FICC may maintain the Guaranty Fund size at an amount larger than the Cover 2 Requirement ( e.g., by applying an additional buffer amount) based on FICC's assessment of historical or recently observed Stress Test Deficiencies, fluctuations in Member portfolios, fluctuations in volatility or market conditions, or to prevent significant fluctuations in Guaranty Fund Requirements that may result in a deficiency in the Cover 2 Requirement or the need for imminent or frequent intramonth resizing. In addition, the proposed rule would provide that FICC may establish parameters (or “collars”) to limit monthly fluctuations in the size of the Guaranty Fund, which would apply to both increases or decreases in the size of the overall Guaranty Fund. 29 29  FICC would initially establish parameter values of (i) 20 percent to limit month-over-month increases such that the size of the Guaranty Fund cannot increase by more than 20 percent from the beginning of one month to the beginning of the subsequent month and (ii) 15 percent to limit month-over-month decreases such that the size of the Guaranty Fund cannot decrease by more than 15 percent from the beginning of one month to the beginning of the subsequent month. These parameter values would be subject to periodic review and adjustment and would be subject to the governance process set forth in the Clearing Agency Model Risk Management Framework (“MRM Framework”). The Clearing Agencies have adopted and maintain the MRM Framework, which sets forth the model risk management practices that the Clearing Agencies follow to identify, measure, monitor, and manage the risks associated with the design, development, implementation, use, and validation of quantitative models. See Securities Exchange Act Release No. 81485 (Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-DTC-2017-008; SR-FICC-2017-014; SR-NSCC-2017-008). Section 4(b) of proposed Rule 4A would further provide that, if FICC observes Stress Test Deficiencies for a Netting Member or Affiliated Family that (i) exceed predetermined thresholds in relation to the total Required Fund Deposits of all other Members (excluding such Member or Affiliated Family) or (ii) would cause the Guaranty Fund to be greater than the amount of the upper bound parameter established for the sizing of the Guaranty Fund, FICC may impose a “Stress Test Deficiency Charge” on the Netting Members driving such stress test exposures. The proposed Stress Test Deficiency Charge is designed to enable FICC to (i) mitigate future deficiencies that could impact the size of the Guaranty Fund and/or (ii) reduce the allocation of any Guaranty Fund resizing that exceeds the upper bound parameter or cap. The proposed Stress Test Deficiency Charge would be set forth in the Margin Component Schedule of the GSD Rules, as described in Section 2.c. below. FICC believes that the proposed approach would help FICC to limit significant month-over-month changes in the size of the Guaranty Fund and align with a “defaulter pays” approach to addressing the additional risk presented by those Members driving significant stress test exposures, providing important stability and predictability for monthly changes in the Guaranty Fund and Netting Members' individual contribution requirements. Section 4(b) of proposed Rule 4A would also require that, unless otherwise notified by FICC that it will receive such information at a different time, FICC shall inform each Netting Member of its monthly Guaranty Fund Requirement no later than the first Business Day of each month. Pursuant to the proposed rule, any deficit in a Netting Member's Guaranty Fund Requirement must be funded by the Monthly Guaranty Fund Deposit Deadline on the first Business Day of each month unless otherwise determined by FICC. The term “Monthly Guaranty Fund Deposit Deadline” would be defined in GSD Rule 1 to mean the deadline set forth by FICC for such purpose in its procedures, unless FICC has issued a notice extending such deadline pursuant to the GSD Rules. 30 30  FICC generally expects to notify Members of their monthly contribution requirement by no later than 11:00 a.m. Eastern Time on the first business day of each month and would require all deficits to be satisfied by 2:45 p.m. Eastern Time on the first business day of the month. In addition, Section 4(b) of proposed Rule 4A would state that the Guaranty Fund Requirement of each Netting Member to the Guaranty Fund would be determined pursuant to the allocation calculation set forth in the proposed rules, as discussed in Section 1.g. below. Section 4(b) of proposed Rule 4A would also permit FICC to recalculate the size of the Guaranty Fund more frequently than monthly or reestablish the monthly size of the Guaranty Fund under certain circumstances set forth in the proposed rules, as discussed in Section 1.f. below. In connection with these proposed changes, FICC would also update GSD Rule 1 to include a definition for “Cover 2 Requirement” that refers to the meaning given to that term in Section 4 of proposed Rule 4A. f. Intramonth Resizing of Guaranty Fund Section 4(c) of proposed Rule 4A would set forth requirements for any intramonth resizing of the Guaranty Fund. Under the proposed rule, if at any time FICC observes a daily Stress Test Deficiency that exceeds certain thresholds established by FICC (“Intramonth Resizing Threshold”), FICC would have the authority to reestablish the size of the Guaranty Fund on an intramonth basis (“Intramonth Resizing”) at an amount determined by FICC to reduce such Stress Test Deficiency below the Intramonth Resizing Threshold (“Adjusted Guaranty Fund Size”). The proposed rule would also provide that FICC may establish parameters to limit intramonth fluctuations in the size of the Guaranty Fund, similar to the collars established for monthly sizing of the Guaranty Fund discussed above. Pursuant to the proposed rule, the re-allocation of Guaranty Fund Requirements due to any Intramonth Resizing would be done based on the Adjusted Guaranty Fund Size pursuant to the standard allocation formula used for monthly Guaranty Fund sizing discussed in Section 1.g. below. Under the proposed rule, FICC would notify each Netting Member of any Intramonth Resizing of the Guaranty Fund, and any deficit due to an Intramonth Resizing of the Guaranty Fund must be funded by the Intramonth Guaranty Fund Deposit Deadline on the same Business Day of notification unless otherwise determined by FICC. The term “Intramonth Guaranty Fund Deposit Deadline” would be defined in GSD Rule 1 as the deadline set forth by FICC for such purpose in its procedures, unless FICC has issued a notice extending such deadline pursuant to the GSD Rules. 31 The terms “Intramonth Resizing Threshold” and “Intramonth Resizing” would also be defined in GSD Rule 1 as having the definitions set forth in Section 4 of proposed Rule 4A. 31  FICC generally expects to notify Members of any intra-month collection by no later than 11:00 a.m. Eastern Time and would require any deficits to be satisfied by 2:45 p.m. Eastern Time. In addition to resizing the Guaranty Fund, FICC would also propose rules to allow FICC to collect Stress Test Deficiency Charges directly from those Netting Members or Affiliated Families whose Stress Test Deficiencies (i) exceed predetermined thresholds in relation to the total Required Fund Deposits of all other Members (excluding such Member or Affiliated Family) or (ii) would cause the Guaranty Fund to be greater than the amount of the upper bound parameter established for any intramonth resizing of the Guaranty Fund. FICC believes that the proposed approach would align with a “defaulter pays” approach to addressing the additional risk presented by those Members whose Stress Test Deficiencies drive significant stress test exposures at FICC on an intramonth basis and also help to provide important stability and predictability for potential intramonth changes in the Guaranty Fund. The proposed Stress Test Deficiency Charge is discussed in further detail in Section 2.c. below. g. Allocation of Guaranty Fund Requirements Section 4(d) of proposed Rule 4A would set forth the allocation calculation used to determine each Netting Member's Guaranty Fund Requirement. Pursuant to the proposed rule, each Netting Member's Guaranty Fund Requirement shall be calculated as the greater of (i) the Netting Member's pro rata share of the largest Cover 2 Requirement observed over a designated lookback period or (ii) the minimum Guaranty Fund Requirement as determined by FICC from time to time (“Minimum Guaranty Fund Requirement”). The Minimum Guaranty Fund Requirement for each Netting Member would be set by FICC at an amount no less than $100,000 and no greater than $5 million, 32 and each Netting Member's pro rata share of the largest Cover 2 Requirement would be determined using each Netting Member's average daily largest Stress Test Deficiencies as compared to the sum of all Netting Members' average daily largest Stress Test Deficiencies over a designated lookback period. 33 In addition, the term Minimum Guaranty Fund Requirement would be defined in GSD Rule 1 as having the definitions set forth in Section 4 of proposed Rule 4A. 32  FICC would initially set the Minimum Guaranty Fund Requirement at $1 million, subject to adjustment pursuant to FICC's internal market risk management procedures. FICC would review the Minimum Guaranty Fund Requirement on at least an annual basis to ensure that it is calibrated to an amount that is consistent with achieving FICC's targets for the sufficiency of total prefunded financial resources. Netting Members would be notified of any changes to the Minimum Guaranty Fund Requirement via Important Notice and update to the FICC website at least one business day in advance. 33  FICC would initially establish this lookback period as a rolling 12-month period, which may be subject to periodic adjustment under the governance process set forth in the MRM Framework. See supra note 29. FICC believes that the proposed allocation methodology would appropriately allocate each Netting Member's contribution to the Guaranty Fund, and their associated loss allocation obligations, in direct proportion to the risk presented by each Netting Member's contribution to Stress Test Deficiencies observed by FICC under its daily stress testing. h. Initial and Adjusted Guaranty Fund Requirements Sections 4(e) and 4(f) of proposed Rule 4A would describe initial Guaranty Fund Requirements for new Netting Members and FICC's authority to adjust Guaranty Fund Requirements in the event of actions such as mergers, consolidations, position transfers, and business expansions. Section 4(e) of proposed Rule 4A would state that the initial Guaranty Fund Requirement of each new Netting Member would be equal to the Minimum Guaranty Fund Requirement established by FICC pursuant to Section 4(d) of proposed Rule 4A. In addition, proposed Section 4(e) would permit FICC to adjust the Guaranty Fund Requirement of a Netting Member, until such time as FICC determines, to address any change in the risk profile of such Netting Member due to mergers, consolidations, position transfers, business expansions, membership approval or other similar events. FICC believes that the proposed initial and adjusted Guaranty Fund Requirement processes are appropriate to allocate the expected risks that may be presented by Netting Members until such time as those risks can be incorporated into FICC's stress test results over the applicable lookback period. i. Purpose and Use of Guaranty Fund; Replenishing Deficits in the Guaranty Fund Section 5 of proposed Rule 4A would describe the intended purpose and use of the Guaranty Fund. Pursuant to the proposed rule, each Netting Member's deposit to the Guaranty Fund may be used by FICC (i) to secure each Netting Member's performance of obligations to FICC, including, without limitation, each Netting Member's obligations with respect to any loss allocations as set forth in proposed Rule 4C (discussed below) and any obligations arising from a Cross-Guaranty Agreement pursuant to GSD Rule 41 (Cross Guaranty Agreements) or a Cross-Margining Agreement pursuant to GSD Rule 43 (Cross-Margining Arrangements); (ii) to provide liquidity to FICC to meet its settlement obligations, including, without limitation, through the direct use of cash in the Guaranty Fund; and (iii) for investment as set forth in Section 3 of proposed Rule 4A (as discussed above). The proposed rule would further provide that, upon the occurrence of a Defaulting Member Event with respect to a Netting Member, FICC shall, after appropriate application of such Netting Member's Clearing Fund and other funds in the accounts of such Netting Member, apply such Netting Member's Guaranty Fund Deposit to satisfy any loss, liability, or the performance of any obligations to FICC prior to applying the Corporate Contribution or allocating losses pursuant to proposed Rule 4C. The proposed rule would also clarify that each time FICC uses any part of the Guaranty Fund to provide liquidity to FICC to meet its settlement obligations for more than 30 calendar days, FICC, at the Close of Business on such 30th calendar day (or, if such day is not a Business Day, on the first Business Day thereafter) from the day of such use, shall consider the amount used but not yet replenished by FICC as a loss to the Guaranty Fund and immediately allocate such loss in accordance with proposed Rule 4C. Section 7 of proposed Rule 4A would then describe the requirements for Netting Members to replenish any deficits in the Guaranty Fund. Specifically, the proposed rule would state that, if FICC's application or use of a Netting Member's Guaranty Fund Deposit as permitted pursuant to proposed Rule 4C results in any deficiency in the Netting Member's Guaranty Fund Requirement, the Netting Member shall, upon FICC's demand, satisfy the deficit in its Guaranty Fund Requirement, immediately or within such time as FICC shall require, subject to the Loss Allocation Caps set forth in proposed Rule 4C (as described in Section 3 below). The proposed rule would further state that if the Netting Member fails to do so, FICC may take disciplinary action against such Netting Member pursuant to Rule 21 or Rule 48, and any such disciplinary action that FICC takes or the voluntary or involuntary cessation of membership shall not affect the Netting Member's obligations to FICC or any remedy to which FICC may be entitled under applicable law. j. Withdraw of Excess and Return of Guaranty Fund Deposits Sections 6 and 8 of proposed Rule 4A would describe the withdrawal of excess Guaranty Fund Deposits and the return of a Netting Member's Guaranty Fund Requirement after their withdrawal from membership at GSD. Section 6 of proposed Rule 4A would provide that, following the completion of any resizing of the Guaranty Fund, FICC would determine whether the amount deposited by a Member in the Guaranty Fund is in excess of its Guaranty Fund Requirement (“Excess Guaranty Fund Deposit”). If FICC has determined that an Excess Guaranty Fund Deposit exists, FICC would notify each such Member of such excess and return the Member's Excess Guaranty Fund Deposit in accordance with such procedures as FICC may set forth from time to time, subject to FICC's rights to require additional amounts to be deposited by a Member. However, the proposed rule would further provide that Excess Guaranty Fund Deposits shall not be returned to a Member to the extent that such return would (i) reduce the amount of the Member's Cross-Guaranty Repayment Deposit to the Guaranty Fund below the amount required to be maintained pursuant to Section 4 of Rule 41 or (ii) reduce the amount of the Member's Cross-Margining Repayment Deposit to the Guaranty Fund below the amount required to be maintained pursuant to Section 6 of Rule 43 (