Notice2022-12733
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting Approval of Proposed Rule Change To Revise the MBSD Clearing Rules To Move Certain DRC Items (Mark-to-Market Items, Cash Obligation Items and Accrued Principal and Interest) From the Required Fund Deposit Calculation to Cash Settlement, Revise Certain Thresholds and Parameters in the Intraday Mark-to-Market Charge, Establish a New Intraday VaR Charge and Make Certain Other Clarifications
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
June 14, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 114 (Tuesday, June 14, 2022)</title>
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[Federal Register Volume 87, Number 114 (Tuesday, June 14, 2022)]
[Notices]
[Pages 36014-36018]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-12733]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95070; File No. SR-FICC-2022-002]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Approval of Proposed Rule Change To Revise the MBSD
Clearing Rules To Move Certain DRC Items (Mark-to-Market Items, Cash
Obligation Items and Accrued Principal and Interest) From the Required
Fund Deposit Calculation to Cash Settlement, Revise Certain Thresholds
and Parameters in the Intraday Mark-to-Market Charge, Establish a New
Intraday VaR Charge and Make Certain Other Clarifications
June 8, 2022.
I. Introduction
On April 8, 2022, the Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change SR-FICC-2022-002 (``Proposed Rule Change'')
pursuant to Section 19(b) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to amend the
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD
Rules'') \3\ to (1) move certain items from FICC's collection of margin
(i.e., the Required Fund Deposit) to its cash settlement process,
including, specifically, deleting the Deterministic Risk Component
(``DRC'') from the Required Fund Deposit calculation, moving certain
items currently in the DRC (i.e., Mark-to-Market items, cash obligation
items, and accrued principal and interest) to Cash Settlement, and
retaining the six days' interest for Fails item currently in the DRC
calculation as a separate part of the Required Fund Deposit; (2) revise
the definition of Intraday Mark-to Market Charge to reflect the
movement of the DRC items to Cash Settlement and to revise certain
thresholds and parameters; (3) establish a new intraday VaR Charge; and
(4) make other clarifying changes in the MBSD Rules, as described in
more detail below. In addition, it would also make certain conforming
changes to the Methodology and Model Operations Document--MBSD
Quantitative Risk
[[Page 36015]]
Model \4\ to implement the proposed changes to the MBSD Rules.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms not otherwise defined herein are defined
in the MBSD Rules, as applicable, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">http://www.dtcc.com/legal/rules-and-procedures</a>.
\4\ As part of the Proposed Rule Change, FICC filed Exhibit 5B--
Methodology and Model Operations Document MBSD Quantitative Risk
Model. Pursuant to 17 CFR 240.24b-2, FICC requested confidential
treatment of Exhibit 5B.
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The Proposed Rule Change was published for public comment in the
Federal Register on April 25, 2022.\5\ The Commission received no
comments regarding the substance of the Proposed Rule Change.\6\ This
order approves the Proposed Rule Change.
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\5\ Securities Exchange Act Release No. 94745 (Apr. 19, 2022),
87 FR 24369 (Apr. 25, 2022) (File No. SR-FICC-2022-002) (``Notice of
Filing'').
\6\ The Commission received one comment letter that does not
bear on the purpose or legal basis of the Proposed Rule Change. The
comment on the Proposed Rule Change is available at <a href="https://www.sec.gov/comments/sr-ficc-2022-002/srficc2022002-20125933-286378.htm">https://www.sec.gov/comments/sr-ficc-2022-002/srficc2022002-20125933-286378.htm</a>.
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II. Description of the Proposed Rule Change
A. Background
FICC, through MBSD, serves as a central counterparty (``CCP'') and
provider of clearance and settlement services for the mortgage-backed
securities markets. A key tool that FICC uses to manage its respective
credit exposures to its members is the daily collection of margin from
each member, which is referred to as each member's Required Fund
Deposit. The aggregated amount of all members' margin constitutes the
Clearing Fund, which FICC would 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 a number of applicable components.
Specifically, the margin (or Required Fund Deposit) currently consists
of the greater of a minimum charge \7\ or the sum of the following
components: the VaR Charge,\8\ the DRC (discussed further below), a
special charge (to the extent determined to be appropriate, based on
market conditions and other financial and operational capabilities of
the Member),\9\ and, if applicable, the Backtesting Charge,\10\ Holiday
Charge,\11\ Intraday Mark-to-Market Charge,\12\ and the Margin
Liquidity Adjustment Charge.\13\
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\7\ MBSD Rule 1, supra note 3.
\8\ MBSD Rules 1 and 4 section 2(c)(i), supra note 3. The VaR
Charge is generally the largest component of the Required Fund
Deposit. It is designed to provide an estimate of FICC's projected
liquidation losses with respect to a defaulted member's portfolio at
a 99 percent confidence level, and it is based on the potential
price volatility of unsettled positions using a sensitivity-based
Value-at-Risk model. As an alternative to this calculation, FICC
also uses a haircut-based calculation as the member's VaR Charge if
that charge exceeds the amount determined by the model-based
calculation. Fixed Income Clearing Corporation Disclosure Framework
for Covered Clearing Agencies and Financial Market Infrastructures
(``FICC Disclosure Framework''), at 64, available at <a href="https://www.dtcc.com/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf">https://www.dtcc.com/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf</a>; see also Exchange Act Release No.
92303 (June 30, 2021), 86 FR 35855 (July 7, 2021).
\9\ MBSD Rule 4, Section 2(c)(iii), supra note 3.
\10\ MBSD Rules 1 and 4 section 2(c)(iv), supra note 3. The
Backtesting Charge is calculated to mitigate exposures to MBSD
caused by settlement risks that may not be adequately captured by
MBSD's portfolio volatility model. FICC Disclosure Framework, supra
note 8, at 64.
\11\ The Holiday Charge approximates the exposure that a
Clearing Member's trading activity on the applicable holiday could
pose to FICC. MBSD Rule1, supra note 3.
\12\ The Intraday Mark-to-Market Charge is an additional charge
that is collected to mitigate FICC's exposures that may arise due to
intraday changes in the size, composition and constituent security
prices of such member's portfolio. MBSD Rule 1, supra note 3.
\13\ The Margin Liquidity Adjustment Charge addresses the risk
presented to MBSD when a member's portfolio contains large net
unsettled positions in a particular group of securities with a
similar risk profile or in a particular asset type. FICC Disclosure
Framework, supra note 8, at 64; MBSD Rule 4, Section 2(c), supra
note 3.
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The DRC is designed to bring a member's portfolio of open positions
to market value. It reflects mark-to-market results on outstanding
positions, regardless of settlement date, cash items and adjustments
that are the result of netting, and principal and interest exposure on
failed positions.\14\ Specifically, this charge is calculated as (i)
the Mark-to-Market Debit; minus (ii) the Mark-to-Market Credit; plus
(iii) a cash obligation item debit; minus (iv) a cash obligation item
credit; plus or minus (v) accrued principal and interest.\15\ FICC also
includes another parameter, six days' interest for Fails, in the DRC
calculation.\16\ Currently, when collected as part of a member's
Required Fund Deposit, the member may pay a portion of the DRC in
Eligible Clearing Fund Securities.\17\
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\14\ FICC Disclosure Framework, supra note 8, at 65.
\15\ Id.; see also MBSD Rule 1 (defining DRC) and 4 Section
2(c)(ii).
\16\ See Notice of Filing, supra note 5, 87 FR 24372.
\17\ MBSD Rule 4, Section 2, supra note 3.
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Cash settlement is a daily process of generating a net credit or
debit cash amount for each Member and settling those cash amounts
between Members and MBSD, as applicable.\18\ The cash settlement
process is a cash pass-through process; i.e., those Members that are in
a net debit position are obligated to submit payments that are then
used to pay Members in a net credit position.\19\
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\18\ MBSD Rule 11, supra note 3; FICC Disclosure Framework,
supra note 8, at 80.
\19\ Id.
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B. Move Mark-to-Market Related Charges From the Required Fund Deposit
Calculation to Cash Settlement
MBSD calculates, and then collects, its members' margin, including
the various components thereof, once per day, at the start of the day,
based on a member's prior end-of-day positions.\20\ As noted above, one
of the components of the daily margin is the DRC.\21\ FICC states that
this aspect of the margin calculation is designed to mitigate the risk
arising out of the value change between the contract/settlement value
of a Clearing Member's open positions and the market value at the end
of the prior day.\22\ Thus, when the DRC is calculated, a debit or
credit is added to the Required Fund Deposit amount of each Clearing
Member, which raises or lowers the amount, respectively.\23\
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\20\ MBSD Rule 4, Section 2, supra note 3.
\21\ MBSD Rules 1 and 4, Section 2(c)(ii), supra note 3.
\22\ See Notice of Filing, supra note 5, 87 FR 24371.
\23\ FICC Disclosure Framework, supra note 8, at 65.
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FICC proposes to move all of the mark-to-market components (i.e.,
the Mark-to-Market Debit and Credit, cash obligation items and the
accrued principal and interest) currently in the DRC (except for six
days' interest for Fails \24\) to Cash Settlement. The six days'
interest for Fails in the DRC calculations would be added directly to
the Required Fund Deposit calculation and not moved to Cash Settlement.
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\24\ A Fail is a transaction the clearing of which has not
occurred or has not been reported to FICC as having occurred on the
Contractual Settlement Date (or expiration date). See MBSD Rule 1,
supra note 3.
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FICC states that while these proposed changes would impact how
Clearing Members pay those amounts (i.e., through Cash Settlement
rather than as part of the Required Fund Deposit), these changes would
not affect the manner in which these items are calculated or the
amounts that Clearing Members are paying with respect to these
items.\25\ However, all of the items that are being moved to Cash
Settlement would be required to be settled in cash.\26\ As such, the
proposed changes would require that Clearing Members satisfy their DRC
obligations in cash as part of Cash Settlement, rather than through a
mix of cash and Eligible Clearing Fund Securities as is permitted to
satisfy Required Fund Deposit obligations.\27\ FICC states that these
changes would ensure the unrealized gains from mark-to-market changes
do
[[Page 36016]]
not leave the Required Fund Deposit insufficient to cover future
exposure.\28\
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\25\ See Notice of Filing, supra note 5, 87 FR 24369-24370.
\26\ MBSD Rule 11, supra note 3.
\27\ MBSD Rule 4, Section 2, supra note 3.
\28\ See Notice of Filing, supra note 5, 87 FR 24369-24370.
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C. Revise the Intraday Mark-to-Market Charge Definition To Reflect
Movement of Mark-to-Market Charges to Cash Settlement and To Revise
Thresholds and Parameters
FICC proposes to modify its definition of ``Intraday Mark-to-Market
Charge'' to reflect the proposed movement of the Mark-to-Market items
and related items to Cash Settlement. The Intraday Mark-to-Market
Charge is an additional charge that is collected from a member (unless
waived or altered by FICC) to mitigate FICC's exposures that may arise
due to intraday changes in the size, composition and constituent
security prices of such member's portfolio.\29\ As part of the
proposal, FICC would amend the definition of the Intraday Mark-to-
Market Charge to reflect the movement of the particular items (i.e.,
the mark-to-market debit and credit, cash obligation items, and accrued
principal and interest) from the calculation of the margin due from a
particular member to the member's cash settlement process.
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\29\ MBSD Rule 1, supra note 3.
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In addition, FICC proposes to revise and remove certain thresholds
set forth in its rules. Currently, the thresholds apply to members that
(i) experience an adverse intraday mark-to-market change that equals or
exceeds (x) a threshold dollar amount of $1,000,000, as compared to the
member's start-of-day mark-to-market requirement including, if
applicable, any subsequently collected, ark-to-market amount, and (y) a
threshold percentage of 30 percent as compared to the daily VaR Charge,
and (ii) have 12-month backtesting coverage below 99 percent.\30\
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\30\ MBSD Rule 1, supra note 3.
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As part of this proposal, FICC would identify floors in for the
dollar threshold and percentage threshold, instead of the currently
provided specific thresholds, and it would also remove the backtesting
coverage parameter. FICC currently has the ability to waive these
thresholds and the parameter under certain circumstances under the MBSD
Rules.\31\ FICC represents that, consistent with this authority, its
current practice is to waive or adjust these thresholds and parameter
in volatile market conditions.\32\ As such, according to FICC, the
proposed changes to the Intraday Mark-to-Market Charge definition would
align the MBSD Rules with FICC's current practice.\33\
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\31\ Id.
\32\ See Notice of Filing, supra note 5, 87 FR 24370.
\33\ Id.
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FICC states that by removing the set percentages, and providing a
floor of not less than $1,000,000 for the Dollar Threshold and not less
than 10 percent of the daily VaR Charge for the Percentage Threshold,
members would have a better understanding of the thresholds that FICC
is using to determine whether to apply the Intraday Mark-to-Market
Charge, thereby providing greater transparency and certainty regarding
its application.\34\ Neither the current calculation methodology nor
the key components of the Intraday Mark-to-Market Charge would
change.\35\
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\34\ See id., at 24373.
\35\ See Notice of Filing, supra note 5, 87 FR 24370.
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In addition, the proposed rules would remove the Surveillance
Threshold provision. FICC can collect an Intraday Mark-to-Market Charge
under certain circumstances in which a member meets a certain
Surveillance Threshold.\36\ FICC represents that it currently does not
apply that provision, does not intend to apply that provision in the
future, and does not believe it is necessary.\37\ As such, FICC states
that removing the provision would align the MBSD Rules with FICC's
current practice.\38\
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\36\ MBSD Rule 1, supra note 3.
\37\ See Notice of Filing, supra note 5, 87 FR 24370.
\38\ Id.
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D. Establish a Formal VaR Charge
FICC proposes to amend the MBSD Rules to include a formal Intraday
VaR Charge.\39\ FICC currently monitors VaR intraday and periodically
requires intraday VaR collections under certain conditions, using its
existing authority to collect a special charge.\40\
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\39\ See Notice of Filing, supra note 5, 87 FR 24370.
\40\ MBSD Rule 4 Section 2, supra note 3. According to FICC, if
a member's portfolio has an intraday VaR Charge increase exceeding
100% and $1 million from the start-of-day VaR Charge, FICC would
assess a special charge, typically on Securities Industry and
Financial Markets Association (SIFMA) designated settlement dates,
and require the member to make an intraday payment to the Required
Fund Deposit. In addition, FICC represents that a member may also be
subject to an intraday VaR collection on any non-SIFMA designated
settlement date if the member's portfolio has an intraday VaR Charge
increase exceeding 100% and $1 million and it is deemed by FICC that
the increase in VaR could lead to a backtesting deficiency or push a
member below 99% backtest coverage. See Notice of Filing, supra note
54, 87 FR at 24374.
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FICC states that it has occasionally observed significant intraday
changes to market price volatility and significant changes to the size
and composition of members' portfolios that could cause the amount
collected as the VaR Charge at the start of that Business Day to no
longer be sufficient to mitigate the volatility risks that such
positions present to FICC.\41\ FICC therefore proposes the ability to
adjust the percentage amount and dollar threshold or other parameters
of the Intraday VaR Charge from time to time, as appropriate, to
continue to reflect a threshold that mitigates the volatility risks
that such positions present to FICC.\42\ The proposed rule change would
not implement substantive or material changes to the risk this charge
is designed to mitigate, or to the overall methodology or key
components of the calculation of this charge.\43\ FICC proposes to
remove the discretion to apply the Intraday VaR Charge under certain
circumstances compared to when it implements the special charge,
thereby making application of the Intraday VaR Charge more automatic
and transparent on all dates. According to FICC, the introduction of
the Intraday VaR Charge would result in more consistent intraday VaR
collections when compared to the current practice, on both SIFMA
designated settlement dates and non-SIFMA designated settlement
dates.\44\
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\41\ See Notice of Filing, supra note 5, 87 FR 24374.
\42\ Id.
\43\ Id.
\44\ See id. at 24370.
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D. Make Certain Clarifying Changes
FICC proposes to make certain clarifying changes to the MBSD Rules.
Specifically, FICC proposes to move certain definitions so that they
are in alphabetical order, re-letter certain subsections that follow to
conform to the deletion of certain subsections, and update certain
cross-references to reflect other changes set forth herein.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations
thereunder applicable to such organization.\45\ After carefully
considering the Proposed Rule Change, the Commission finds that the
proposal is consistent with the requirements of the Exchange Act and
the rules and regulations thereunder applicable to FICC. More
specifically, the Commission finds that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of the Exchange Act,\46\ and Rules
17Ad-22(e)(4)(i), (e)(6)(i) and
[[Page 36017]]
(e)(6)(iii), each promulgated under the Act,\47\ as described in detail
below.
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\45\ 15 U.S.C. 78s(b)(2)(C).
\46\ 15 U.S.C. 78q-1(b)(3)(F).
\47\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (iii).
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A. Consistency With Section 17A(b)(3)(F)
Section 17A(b)(3)(F) of the Exchange Act requires, among other
things, that the rules of a clearing agency, such as NSCC, be designed
to promote the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible.\48\
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\48\ 15 U.S.C. 78q-1(b)(3)(F).
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As described in Section II B above, FICC proposes to move certain
mark-to-market components items from its margin collection (as part of
a member's Required Fund Deposit) to Cash Settlement. The Commission
believes that moving these specified items (i.e., the mark-to-market
debit and credit, cash obligation items, and accrued principal and
interest) from the calculation of margin due from a particular member
to the member's cash settlement process would better segregate the
unrealized gains or losses associated with the member's portfolio from
the portion of the margin that measures potential future exposure and
limit the build-up of systemic risk. Currently, because of the fact
that these items are collected with the member's margin, in the
Required Fund Deposit, the overall amount collected may be reduced by
credits relating to unrealized mark-to-market gains. During the time
between the last margin collection and the close out of a Clearing
Member's position, however, such gains may reduce without a
corresponding increase in the Required Fund Deposit, leaving the
Required Fund Deposit insufficient to cover the future exposure. As
such, the proposed rule change would ensure the unrealized gains from
mark-to-market changes do not leave the Required Fund Deposit
insufficient to cover future exposure. These changes would help ensure
that FICC collects sufficient margin and thus more effectively cover
its credit exposures to its members.
In addition, as described in Section II.C above, the proposed rule
change to revise the Intraday Mark-to-Market Charge to remove the
specific thresholds and provide a floor for the Dollar Threshold and
the Percentage Threshold, remove the Coverage Target from the
definition, and remove the Surveillance Threshold from the definition,
provides the ability for FICC to adjust the application of the Intraday
Mark-to-Market Charge default thresholds more quickly, effectively, and
flexibly in response to adverse or changes in market conditions,
thereby helping to ensure that FICC collects sufficient resources to
cover its exposures to its members in volatile market conditions.
Further, as described in Section II.D above, FICC proposes to establish
a formal Intraday VaR Charge. This proposed change enables FICC to
better address any changes to market price volatility or the size of a
member's portfolio that occur intraday such that, in the event of a
member default, FICC's operations would not be disrupted, and non-
defaulting Members would not be exposed to losses they cannot
anticipate or control. Accordingly, the Commission believes the
proposed rule would allow FICC to mitigate changes in in volatility
that could occur intraday.\49\
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\49\ The Commission also reviewed and considered confidential
analyses provided by FICC which analyzed the impact that these
specified changes would have on margin collected by FICC. (As part
of the Proposed Rule Change, FICC filed Exhibit 3--Confidential
Supporting Information. Pursuant to 17 CFR 240.24b-2, FICC requested
confidential treatment of Exhibit 3.) The Commission generally
believes that the impact analyses, as summarized by FICC in the
Notice, see Notice of Filing, supra note 5, 87 FR at 24369, further
support its findings with respect to the consistency of the proposed
changes with Section 17A(b)(3)(F) in that the changes set forth in
Sections II.C and D above with respect to the Intraday Mark-to-
Market Charge and Intraday VaR Charge would increase the amount of
resources collected by FICC and that, with respect to the changes
set forth in II.B regarding the movement of certain DRC items to
cash settlement, the changes would have some impact on the amount of
resources collected in cash.
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For these reasons, the Commission believes that implementing these
changes set forth in Sections II.B, C, and D should help ensure that,
in the event of a member default, FICC's operation of its critical
clearance and settlement services would not be disrupted because of
insufficient financial resources. Accordingly, the Commission finds
that the changes to the DRC should help FICC to continue providing
prompt and accurate clearance and settlement of securities transactions
in the event of a member default, consistent with Section 17A(b)(3)(F)
of the Act.
Moreover, as described above in Section I.A., 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. The changes of moving the DRC to the cash
pass-through, amending the definition of the Intraday Mark-to-Market
Charge, and instituting a regular Intraday VaR Charge should help
ensure that FICC has collected sufficient margin from members, 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 minimum margin amount
should 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.\50\
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\50\ Id.
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Finally, as described in Sections II.B, C, and D, the proposed rule
changes would amend the Rules to improve transparency. Such changes
provide clarifications to Clearing Members regarding the definitions
and applications of Rules. For instance, as described in Section II.C,
by removing set percentages and providing a floor of not less than
$1,000,000 for the Dollar Threshold and not less than 10 percent of the
daily VaR Charge for the Percentage Threshold, the Commission believes
that Clearing Members will have better understanding of the default
thresholds that FICC is using to determine whether to apply the
Intraday Mark-to-Market Charge. The Commission believes that such
changes would ensure that the Rules are accurate and clear to Members,
thus promoting prompt and accurate clearance and settlement, which is
consistent with Section 17A(b)(3)(F) of the Act.\51\
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\51\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) under the Act \52\ requires a covered
clearing agency, like FICC, to 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 exposures arising from its payment, clearing,
and settlement processes by maintaining sufficient financial resources
to cover its credit exposure to each participant fully with a high
degree of confidence.
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\52\ 17 CFR 240.17Ad-22(e)(4)(i).
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As discussed above in Section II.D, FICC is introducing an Intraday
VaR Charge, which FICC would charge the Intraday VaR Charge on both
SIFMA designated settlement dates and non-SIFMA designated settlement
dates if the thresholds are crossed, regardless of whether the increase
in VaR could lead to a backtesting deficiency or push a Clearing Member
below 99% backtest coverage. As such, the Commission believes that the
introduction of the Intraday VaR Charge would result in more consistent
intraday VaR collections when compared to the
[[Page 36018]]
current practice, on both SIFMA designated settlement dates and non-
SIFMA designated settlement dates. The Commission also believes that
the proposed Intraday VaR Charge would effectively mitigate the risks
related to intraday increases in volatility and would address the
increased risks FICC may face related to liquidating a Clearing
Member's portfolio following that Clearing Member's default.
Accordingly, the Commission believes the proposed rule would
enhance FICC's ability to effectively identify, measure and monitor its
credit exposures and would enhance its ability to maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence, consistent with Rule 17Ad-
22(e)(4)(i) under the Act.\53\
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\53\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) \54\ under the Act requires, in part, a
clearing agency 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.
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\54\ 17 CFR 240.17Ad-22(e)(6)(i).
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A member's margin (in the form of its Required Fund Deposit) is
made up of risk-based components that are calculated and assessed daily
to limit FICC's credit exposures to its members. As discussed in
Section II.B, FICC proposes to move DRC items to Cash Settlement. The
Commission believes that the proposed rule change should help ensure
that FICC produces margin levels commensurate with, the risks and
particular attributes of each relevant product, portfolio, and market
by better segregating the unrealized gains or losses associated with a
Clearing Member's margin portfolio from the portion of the margin that
measures potential future exposure. Further, as discussed in Section
II.C, FICC proposes to amend and remove certain thresholds and
parameters in its determination of the Intraday Mark-to-Market Charge,
and as discussed in Section II.D, FICC proposes to introduce an
Intraday VaR Charge, which is designed to more effectively address the
risks presented by significant intraday changes to market price
volatility or a clearing member's portfolio. The Commission believes
these changes should enable FICC to assess a more appropriate level of
margin that accounts for increases in these risks that may occur
intraday.\55\
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\55\ The Commission also reviewed and considered the results of
FICC's impact analyses and believes that the analyses further
support its findings regarding the consistency of the proposed
changes with Rule 17Ad-22(e)(6)(i), for the reasons discussed in
note 49 supra.
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Accordingly, the Commission believes the proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\56\
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\56\ Id.
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D. Consistency With 17Ad-22(e)(6)(iii)
Rule 17Ad-22(e)(6)(iii) under the Act \57\ requires a covered
clearing agency to 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, calculates margin sufficient to cover its
potential future exposure to participants in the interval between the
last margin collection and the close out of positions following a
participant default.
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\57\ 17 CFR 240.17Ad-22(e)(6)(iii).
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As discussed above in Section II.B, FICC proposes to move certain
DRC items to Cash Settlement. The Commission believes the proposed rule
change would better segregate the unrealized gains or losses associated
with a Clearing Member's margin portfolio from the portion of the
margin that measures potential future exposure and limit the build-up
of systemic risk. By segregating the unrealized mark-to-market gains
and losses from the Required Fund Deposit, the Commission believes that
the proposed changes would allow FICC to calculate amounts that are
sufficient to cover FICC's potential future exposure to Clearing
Members in the interval between the last margin collection and the
close out of positions following a participant default. Therefore, the
Commission believes the proposed change is consistent with Rule 17Ad-
22(e)(6)(iii) under the Act.\58\
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\58\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the
Exchange Act, and in particular, the requirements of Section 17A of the
Exchange Act \59\ and the rules and regulations thereunder.
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\59\ In approving this Proposed Rule Change, the Commission has
considered the proposed rules' impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\60\ that the Proposed Rule Change (SR-FICC-2022-002) be,
and hereby is, approved.
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\60\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\61\
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\61\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12733 Filed 6-13-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on June 14, 2022.
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