Request for Exemptive Relief Under Section 36 of the Securities Exchange Act of 1934 — Extension of Inter-Affiliate Exception Relief to Mortgage REITs
Summary
SIFMA 1 and SIFMA AMG 2 provided comments to the U.S. Securities and Exchange Commission (SEC) on behalf of Mortgage REITs 3 that maintain, or contemplate establishing, directly or indirectly, wholly-owned captive broker-dealer or futures commission merchant subsidiaries (each, a “Captive Clearing Subsidiary”) that act as direct members of Treasury CCAs (as defined below) for the purpose of accessing central clearing for U.S. Treasury security repurchase agreements and reverse repo agreements (“U.S. Treasury Repos”).
Excerpt
I. Executive Summary
Pursuant to Section 36(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), we hereby request that the U.S. Securities and Exchange Commission (the “Commission”) grant targeted exemptive relief from the condition in the Treasury Clearing Rule 4 requiring that an “affiliated counterparty” be a bank, broker-dealer, futures commission or foreign equivalent (each, an “Exempted Entity”) (such condition, the “Enumerated Entity Condition”) with respect to inter-affiliate U.S. Treasury Repos between any Mortgage REIT (together with its consolidated affiliates, a “REIT Group”) and its directly or indirectly wholly-owned Captive Clearing Subsidiaries.
II. Background
The Treasury Clearing Rule carves out from the clearing mandate U.S. Treasury Repos conducted between a direct participant of a Treasury covered clearing agency (“Treasury CCA”) and a qualifying “affiliated counterparty” (the “Inter-Affiliate Exception”). To qualify for the Inter-Affiliate Exception as originally adopted, the parties must satisfy four conditions:
- Outward-Facing Clearing: The direct participant’s affiliated counterparty must submit for clearing all of its U.S. Treasury Repos where its counterparty to the trade is not its affiliated direct participant (the “Outward-Facing Trade Clearing Condition”).
- Regulatory Status: The affiliated counterparty must itself be an Exempted Entity.
- Majority Ownership: The affiliated counterparty and the direct participant must be linked by a direct or indirect majority ownership interest, whether the counterparty holds such interest in the direct participant, the direct participant holds such interest in the counterparty or a common parent holds a majority ownership interest in both (the “Common Majority Ownership Condition”).
- Financial Consolidation: The affiliated counterparty, the direct participant or their common majority owner must prepare consolidated financial statements under U.S. GAAP or IFRS that incorporate the financial results of the relevant majority-owned entity or entities (the “Accounting Consolidation Condition”).
- SIFMA is the leading trade association for broker-dealers, investment banks, and asset managers operating in the U.S. and global capital markets. On behalf of our industry’s nearly one million employees, we advocate for legislation, regulation, and business policy affecting retail and institutional investors, equity and fixed income markets, and related products and services. We serve as an industry coordinating body to promote fair and orderly markets, informed regulatory compliance, and efficient market operations and resiliency. We also provide a forum for industry policy and professional development. With offices in New York and Washington, D.C., SIFMA is the U.S. regional member of the Global Financial Markets Association (GFMA).
- SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.
- Real estate investment trusts that would be investment companies but for Section 3(c)(5)(C) of the
Investment Company Act of 1940 (“Mortgage REITs”). - On December 13, 2023, the Commission adopted final rules amending Exchange Act Rule 17ad-22
requiring Treasury covered clearing agencies (“Treasury CCAs”) to establish policies and procedures for their direct participants to submit all “eligible secondary market transactions” in U.S. Treasury securities for clearing (the “Treasury Clearing Rule”).