Notice2022-20499
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Increase the Minimum Required Fund Deposit for GSD Netting Members and Sponsoring Members, and Make Other Changes
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
September 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 183 (Thursday, September 22, 2022)</title>
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[Federal Register Volume 87, Number 183 (Thursday, September 22, 2022)]
[Notices]
[Pages 57960-57967]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-20499]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95806; File No. SR-FICC-2022-006]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Increase the Minimum
Required Fund Deposit for GSD Netting Members and Sponsoring Members,
and Make Other Changes
September 16, 2022.
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 September 9, 2022, Fixed Income Clearing Corporation (``FICC'')
filed
[[Page 57961]]
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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'') and
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD
Rules,'' and collectively with the GSD Rules, the ``Rules'') \3\ in
order to increase the minimum Required Fund Deposit for GSD Netting
Members and Sponsoring Members (collectively, ``members''), as well as
make certain clarifying and technical changes, as described in greater
detail below.
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\3\ Terms not defined herein are defined in the GSD Rules,
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf, and the MBSD Rules, available at
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
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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
FICC is proposing to increase the minimum Required Fund Deposit for
members, as described in greater detail below.
Background
As part of its market risk management strategy, FICC manages its
credit exposure to members by determining the appropriate Required Fund
Deposit to the Clearing Fund and monitoring its sufficiency, as
provided for in the Rules.\4\ The Required Fund Deposit serves as each
member's margin. The objective of a member's Required Fund Deposit is
to mitigate potential losses to FICC associated with liquidation of
member's portfolio in the event FICC ceases to act for that member
(hereinafter referred to as a ``default'').\5\ The aggregate of all
member's Required Fund Deposits, together with certain other deposits
required under the Rules, constitutes the Clearing Fund, which FICC
would access, among other instances, should a defaulting member's own
Clearing Fund deposit be insufficient to satisfy losses to FICC caused
by the liquidation of that member's portfolio.
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\4\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 3. FICC's market risk management strategy is designed to comply
with Rule 17Ad-22(e)(4) under the Act, where these risks are
referred to as ``credit risks.'' 17 CFR 240.17-Ad-22(e)(4).
\5\ The Rules identify when FICC may cease to act for a member
and the types of actions FICC may take. For example, GSD is
permitted to cease to act for (i) a Member pursuant to GSD Rule 22A
(Procedures for When the Corporation Ceases to Act), (ii) a
Sponsoring Member pursuant to Section 14 of GSD Rule 3A (Sponsoring
Members and Sponsored Members), and (iii) a Sponsored Member
pursuant to Section 13 of GSD Rule 3A (Sponsoring Members and
Sponsored Members). Supra note 3.
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Pursuant to the Rules, each member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
designed to address specific risks faced by FICC, as identified within
GSD Rule 4.\6\ Currently, FICC requires a minimum Required Fund Deposit
of $100,000 be made and maintained in cash.\7\ The same requirement
applies to the GSD Sponsoring Members; \8\ however, for GSD Repo
Brokers, the minimum Required Fund Deposit amount is $5 million.\9\
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\6\ GSD Rule 4. Supra note 3.
\7\ GSD Rule 4, Section 3. Supra note 3.
\8\ GSD Rule 3A, Section 10(d). Supra note 3.
\9\ GSD Rule 4, Section 1b. Supra note 3. Currently, if a Repo
Broker has two Margin Portfolios, with Broker Account(s) in one
Margin Portfolio and Dealer Account(s) in the other Margin
Portfolio, the total minimum Required Fund Deposit applicable to the
Repo Broker would be $5.1 million, i.e., $5 million minimum Required
Fund Deposit for the Margin Portfolio with Broker Account(s) and
$100,000 minimum Required Fund Deposit for the Margin Portfolio with
Dealer Account(s).
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FICC's margining methodologies are designed to mitigate market,
liquidity and other risks. FICC regularly assesses its margining
methodologies to evaluate whether margin levels are commensurate with
the particular risk attributes of each relevant product, portfolio, and
market. In connection with such reviews, FICC has determined that there
are circumstances where the current minimum Required Fund Deposit
amount at GSD is insufficient to manage FICC's risk in the event of an
abrupt or sudden increase in a member's activity.
FICC employs daily backtesting to determine the adequacy of each
member's Required Fund Deposit.\10\ FICC compares the Required Fund
Deposit \11\ for each member with the simulated liquidation gains/
losses using the actual positions in the member's portfolio, and the
actual historical security returns. A backtesting deficiency occurs
when a member's Required Fund Deposit would not have been adequate to
cover the projected liquidation losses estimated from a member's
settlement activity based on the backtesting results. FICC investigates
the cause(s) of any backtesting deficiencies. As part of this
investigation, FICC pays particular attention to members with
backtesting deficiencies that bring the coverage for that member below
the 99% confidence target (i.e., if the member had more than two
backtesting deficiency days in a rolling twelve-month period) to
determine if there is an identifiable cause of repeat backtesting
deficiencies.\12\ FICC also evaluates whether multiple members may
experience backtesting deficiencies for the same underlying reason.
Backtesting deficiencies highlight exposure that could subject FICC to
potential losses in the event that a member defaults.
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\10\ The Model Risk Management Framework (``Model Risk
Management Framework'') sets forth the model risk management
practices of FICC and states that Value at Risk (``VaR'') and
Clearing Fund requirement coverage backtesting would be performed on
a daily basis or more frequently. See Securities Exchange Act
Release Nos. 81485 (August 25, 2017), 82 FR 41433 (August 31, 2017)
(SR-FICC-2017-014), 84458 (October 19, 2018), 83 FR 53925 (October
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), and 94271 (February 17, 2022),
87 FR 10411 (February 24, 2022) (SR-FICC-2022-001).
\11\ Members may be required to post additional collateral to
the Clearing Fund in addition to their Required Fund Deposit amount.
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements),
supra note 3 (providing that adequate assurances of financial
responsibility of a member may be required, such as increased
Clearing Fund deposits). For backtesting comparisons, FICC uses the
Required Fund Deposit amount, without regard to the actual, total
collateral posted by the member to the Clearing Fund.
\12\ The 99% confidence target is consistent with Rule 17Ad-
22(e)(6)(iii) which requires FICC to calculate margin to cover its
``potential future exposure'' which is defined in Rule 17Ad-
22(a)(13) to mean the ``maximum exposure estimated to occur at a
future point in time with an established single-tailed confidence
level of at least 99 percent with respect to the estimated
distribution of future exposure.'' 17 CFR 240.17Ad-22(a)(13) and
(e)(6)(iii).
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While multiple factors may contribute to a member's backtesting
deficiency, a position increase by a member after the calculation of
each member's Required Fund Deposit may be a factor that leads to the
member incurring backtesting
[[Page 57962]]
deficiencies due to the additional exposure that is not mitigated until
the collection of the Required Fund Deposit occurs intraday, or on the
next Business Day. This factor is heightened for those members that
have a low or minimum Required Fund Deposit because there are less
deposits to mitigate any abrupt change in their portfolio exposure.
Typical examples where a member's required Clearing Fund deposit
amount is the same as the current minimum Required Fund Deposit amount
of $100,000 include (1) when a new member has activated its clearing
accounts at FICC and is growing its business, (2) when a member has
limited or infrequent clearing activity, and (3) when a member is
winding down its business and is in the process of retiring its FICC
membership. In each of these circumstances, an abrupt increase in
clearing activity following a period of low or no clearing activity
could cause FICC to be under-margined with respect to the member and
may result in backtesting deficiencies. This is because if a member
with low or no clearing activity were to have an abrupt increase in
clearing activity after the calculation of the member's Required Fund
Deposit (which would have been calculated based on a period of low or
no clearing activity), it could lead to the member incurring
backtesting deficiencies due to the additional exposure to FICC from
the increase in clearing activity that may not be mitigated until the
collection of the Required Fund Deposit either intraday or on the next
Business Day. Therefore, FICC is proposing to increase the GSD minimum
Required Fund Deposit amount in order to address the risk that FICC
becomes under-margined in circumstances when a member's required
Clearing Fund deposit amount is the same as the current GSD minimum
Required Fund Deposit amount, i.e., $100,000.
In determining the appropriate minimum Required Fund Deposit
amount, FICC reviewed different minimum Required Fund Deposit amounts
to determine the anticipated effects of increasing the minimum Required
Fund Deposits on Clearing Fund coverage and on backtesting results,
i.e., $500,000 versus $1 million. FICC also conducted a review of
minimum deposit requirements of registered clearing agencies and
foreign central counterparty clearing houses (``CCPs'') to compare
FICC/GSD's minimum Required Fund Deposit amount with the deposits
required by registered clearing agencies and foreign CCPs. Based on the
results of the reviews and the comparison of other registered clearing
agencies and foreign CCPs, FICC believes that a proposed minimum
Required Fund Deposit amount of $1 million for GSD would provide an
appropriate balance of improving member backtesting results and FICC/
GSD's Clearing Fund coverage while minimizing the impact to members.
To assess the impact on GSD backtesting coverage if the GSD minimum
Required Fund Deposit amount were increased from $100,000 to $1
million, FICC conducted a backtesting impact study for the 12-month
period ended June 30, 2022 (``Backtesting Impact Study''). The result
of the Backtesting Impact Study indicates that using $1 million as
GSD's minimum Required Fund Deposit amount would have reduced the
number of members with backtesting coverage below 99%.\13\ The
Backtesting Impact Study shows 70 members below 99% backtesting
coverage as of June 30, 2022 with a collective 396 backtesting
deficiencies in GSD. Approximately 21% (i.e., 85 out of 396) of the
backtesting deficiencies occurred with members that had a Required Fund
Deposit of less than $1 million on the relevant deficiency day(s). If
the proposed changes had been in place during the Backtesting Impact
Study period, approximately 16% (i.e., 65 out of 396) of the
backtesting deficiencies incurred by the members would have been
eliminated, and the total number of members that were below the 99%
confidence target as of June 30, 2022 would have been reduced by 8.
Overall, a $1 million minimum requirement would have increased GSD's
12-month backtesting coverage 0.22%, eliminated 65 backtesting
deficiencies, and improved the rolling twelve-month backtesting
coverage for 8 members to above 99% confidence target. In contrast, if
a $500,000 minimum Required Fund Deposit had been applied during the
same study period, GSD's 12-month backtesting coverage would have
increased by 0.13%, 38 backtesting deficiencies would have been
eliminated, and the rolling twelve-month backtesting coverage for 3
members would have been improved to above 99% confidence target. In
summary, if the minimum Required Fund Deposit at GSD during the study
period had been set to $1 million compared to $500,000, there would
have been 27 more backtesting deficiencies eliminated (i.e., 65 instead
of 38 or an approximately 71% increase in the number of backtesting
deficiencies that could have been eliminated), 5 more members would be
brought back to above 99% confidence target (i.e., 8 instead of 3 or an
approximately 166% increase in the number of members brought back to
above 99% confidence target), and the overall GSD backtesting coverage
would have increased an additional 0.09%.
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\13\ Backtesting percentages indicate the risk that a minimum
Required Fund Deposit would be insufficient to manage risk in the
event of a member's default. A backtesting coverage that is below
the 99% confidence target for a member means that the member has had
more than two backtesting deficiency days in a rolling twelve-month
period, i.e., assuming the member had a full year of trading
history. As indicated above, consistent with Rule 17Ad-
22(e)(6)(iii), FICC pays particular attention to members with
backtesting deficiencies that bring the results for that member
below the 99% confidence target to determine if there is an
identifiable cause of repeat backtesting deficiencies. Supra note
12.
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FICC's review of the requirements of other clearing agencies and
foreign CCPs indicated that FICC/GSD's current minimum Required Fund
Deposit requirement of $100,000 was significantly lower than minimum
deposits or equivalent required by such other entities.\14\ While the
minimum required fund deposits of such other entities is not
dispositive as to the risk borne by FICC or the proper fund deposit
amounts to offset such risk, it is indicative of the amounts that users
of other similarly situated entities can expect to pay as a minimum
required fund deposit to use the services of the clearing agencies and
foreign CCPs and the impact to such users. The comparison shows that
entities using other clearing agencies and foreign CCPs pay
significantly more in minimum
[[Page 57963]]
fund deposits to use similar services than the current minimum Required
Fund Deposit amount at GSD.
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\14\ For example, the minimum initial contribution for The
Options Clearing Corporation (``OCC'') is $500,000. See Rule 1002(d)
of the OCC Rules, available at <a href="https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf">https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf</a>. The minimum
guaranty fund deposit for Chicago Mercantile Exchange (``CME'') is
$500,000 or $2.5 million depending on the product types being
cleared. See Rule 816 of the CME Rulebook, available at <a href="https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/8/8.pdf">https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/8/8.pdf</a>. The
minimum Required Fund Deposit for National Securities Clearing
Corporation (``NSCC'') is $250,000. See Rule 4 of NSCC Rulebook,
available at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf. The minimum default fund contribution for LCH
Limited is GBP 500,000 (approximately $579,000 based on current
foreign currency exchange rate). See definition of ``Minimum
Contribution'' in the LCH Limited Default Rules, available at
<a href="https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf">https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf</a>. The minimum RepoClear default
fund contribution for LCH Ltd. is GBP 2,000,000 (approximately $2.3
million based on the current foreign currency exchange rate). See
definition of ``Minimum RepoClear Contribution'' in the LCH Limited
Default Rules, available at <a href="https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf">https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf</a>. The minimum
contribution to Ice Clear U.S. Guaranty Fund is $2 million. See Rule
301 of ICE Clear U.S., Inc. Rules, available at <a href="https://www.ice.com/publicdocs/rulebooks/clear/ICE_Clear_US_Rules.pdf">https://www.ice.com/publicdocs/rulebooks/clear/ICE_Clear_US_Rules.pdf</a>.
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FICC also conducted a Clearing Fund requirement impact study for
the period of July 1, 2021 to June 30, 2022 (``CFR Impact Study''). The
result of the CFR Impact Study indicates that if the proposed changes
had been in place during the CFR Impact Study period, approximately 47%
(81 out of a total of 174) of the current members' Margin Portfolios
would have been impacted, with an average and a weighted average (with
weights based on number of impacted days) additional Required Fund
Deposit of approximately $686,000 and $792,000, respectively, for each
such Margin Portfolio per impacted day. However, when comparing the
actual, total Clearing Fund deposit of the current members' Margin
Portfolios with the proposed minimum Required Fund Deposit amount, only
approximately 13% (23 out of a total 174) of such members' Margin
Portfolios would have been impacted, requiring an average and a
weighted average (with weights based on number of impacted days)
additional cash deposit of approximately $649,000 and $715,000,
respectively, for each such Margin Portfolio per impacted day. The
result of the CFR Impact Study also shows one Repo Broker that would
have been impacted, requiring additional Clearing Fund deposit of
approximately $392,000 in either cash or Eligible Clearing Fund
Securities per impacted day. Overall, the proposed changes would have
resulted in an average increase in daily Required Fund Deposit of $31.4
million (or 0.17%) at GSD during the CFR Impact Study period.
Based on the Backtesting Impact Study and the CFR Impact Study
results discussed above, FICC believes that $1 million is the
appropriate minimum Required Fund Deposit amount at GSD that would
minimize the financial impact to its members while improving member
backtesting results and FICC/GSD's Clearing Fund coverage.
As is currently provided for in the Rules, FICC/GSD is proposing to
continue to require that members deposit in cash an amount not less
than the minimum Required Fund Deposit.\15\ FICC permits members to
satisfy their Required Fund Deposit obligations through a combination
of cash and open account indebtedness secured by Eligible Clearing Fund
Securities.\16\ Cash deposits are fungible. FICC would therefore be
further strengthening its liquidity resources by requiring each member
(including Repo Brokers) to deposit at least $1 million in cash to the
GSD Clearing Fund.
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\15\ Currently, all members (including Repo Brokers) are
required to have at least $100,000 of the Required Fund Deposit in
cash. See GSD Rule 4, Section 3. Supra note 3.
\16\ Id.
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Proposed Rule Changes
In order to implement the proposed increase in the minimum Required
Fund Deposit amount to $1 million for the Sponsoring Members, Section
10(c) of GSD Rule 3A (Sponsoring Members and Sponsored Members) would
be revised to state that the Sponsoring Member Omnibus Account Required
Fund Deposit shall be equal to the greater of: (i) $1 million or (ii)
the sum of the following: (1) the sum of the VaR Charges for all of the
Sponsored Members whose activity is represented in the Sponsoring
Member Omnibus Account as derived pursuant to Section 1b(a)(i) of GSD
Rule 4 (Clearing Fund and Loss Allocation), and (2) all amounts derived
pursuant to the provisions of GSD Rule 4 other than pursuant to Section
1b(a)(i) of GSD Rule 4 computed at the level of the Sponsoring Member
Omnibus Account. In addition, Section 10(d) of GSD Rule 3A would be
revised to replace the minimum cash amount from $100,000 to $1 million
to match the proposed increased minimum Required Fund Deposit amount
for the Sponsoring Members.
In order to implement the proposed increase in the minimum Required
Fund Deposit amount to $1 million for the GSD Netting Members, Section
2(a) of GSD Rule 4 would be revised to state that each Netting Member
shall be required to make a Required Fund Deposit to the Clearing Fund
equal to the greater of (i) the Minimum Charge or (ii) the Total
Amount. FICC is also proposing to add a sentence to Section 2(a) of GSD
Rule 4 that makes it clear that the Minimum Charge applicable to each
Netting Member, other than a Repo Broker, shall be no less than $1
million. In addition, for better organization of the subject matter and
clarity, FICC is proposing to move two sentences in GSD Rule 4 from
Section 1b to Section 2(a) with revisions: one stipulates that the
Minimum Charge applicable to each Repo Broker shall be no less than $5
million for each Margin Portfolio with Broker Account(s) and no less
than $1 million for each Margin Portfolio with Dealer Account(s) and
the other refers to additional payments, charges and premiums being
applied by FICC after application of Minimum Charges, which replaces
``minimum Clearing Fund amounts''. Lastly, Section 3 of GSD Rule 4
would be revised to replace the minimum cash amount from $100,000 to $1
million to match the proposed increased minimum Required Fund Deposit
amount.
Although FICC is not proposing to increase the minimum Required
Fund Deposit for MBSD at this time, for clarity and transparency, FICC
is proposing to add a sentence to Section 2 of MBSD Rule 4 (Clearing
Fund and Loss Allocation) that would make it clear the Minimum Charge
for each margin portfolio of a Clearing Member shall be no less than
$100,000. To enhance clarity in Section 2 of MBSD Rule 4, FICC is also
proposing to replace (i) ``Clearing Fund requirement'' with ``Minimum
Charge for each margin portfolio'' and (ii) ``minimum Clearing Fund
amounts'' with ``Minimum Charges''. Furthermore, FICC is proposing a
technical change to correct a reference to the non-Unregistered
Investment Pool Clearing Member in Section 2 of MBSD Rule 4.
Implementation Timeframe
Subject to approval by the Commission, FICC would implement the
proposed changes by no later than 60 Business Days after such approval
and would announce the effective date of the proposed changes by an
Important Notice posted to its website.
2. Statutory Basis
FICC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, FICC believes
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \17\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(iii),\18\ each as
promulgated under the Act, for the reasons described below.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to, among other things, assure the safeguarding of securities and funds
which are in the custody or control of FICC or for which it is
responsible.\19\ FICC believes the proposed rule changes are designed
to assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because they are
designed to enable FICC to require the necessary margin for members who
have a minimum Required Fund Deposit to limit its exposure to such
members in the event of a member default. Having adequate margin for
such members would help ensure that FICC does not
[[Page 57964]]
need to use its own resources, or the Eligible Clearing Fund Securities
and funds of non-defaulting members, to cover losses in the event of a
default of such members. Specifically, the proposed rule change seeks
to remedy potential situations that are described above where FICC
could be under-margined. By ensuring that members that have the minimum
Required Fund Deposit amount are adequately covering FICC's risk of
loss, FICC would be reducing the risk of losses, which would need to be
addressed by using non-defaulting members' securities or funds, or
FICC's funds. In addition, by requiring that members pay an amount not
less than the minimum Required Fund Deposit amount in cash, FICC would
be making available additional collateral that is easier to access upon
a member's default, further reducing the risk of losses and using non-
defaulting members' securities or funds, or FICC's funds, for
liquidity. Therefore, FICC believes the proposed rule change enhances
the safeguarding of securities and funds that are in the custody or
control of FICC, consistent with Section 17(b)(3)(F) of the Act.\20\
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to members and those arising from its
payment, clearing, and settlement processes, including by maintaining
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence.\21\ As described above,
FICC believes that the proposed changes would enable it to better
identify, measure, monitor, and, through the collection of members'
Required Fund Deposits, manage its credit exposures to members by
maintaining sufficient resources to cover those credit exposures fully
with a high degree of confidence. More specifically, as indicated by
the Backtesting Impact Study results, raising the minimum Required Fund
Deposit amount to $1 million at GSD would decrease the number of
backtesting deficiencies and help ensure that FICC maintains the
coverage of credit exposures for more members at a confidence level of
at least 99%. In addition, by requiring members pay an amount not less
than the minimum Required Fund Deposit amount in cash, FICC would be
making available collateral that is easier to access when members
default, thus further reducing the potential risk of loss from having
to use non-defaulting members' securities or funds, or FICC's funds,
for liquidity. Therefore, FICC believes that the proposed changes would
enhance FICC's ability to effectively identify, measure, monitor and
manage its credit exposures and would enhance its ability to maintain
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence. As such, FICC believes
the proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under
the Act.\22\
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\21\ 17 CFR 240.17Ad-22(e)(4)(i).
\22\ Id.
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Rule 17Ad-22(e)(6)(iii) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its members by
establishing a risk-based margin system that, at a minimum, calculates
margin sufficient to cover its potential future exposure to members in
the interval between the last margin collection and the close out of
positions following a member default.\23\ FICC employs daily
backtesting to determine the adequacy of each member's Required Fund
Deposit, paying particular attention to members that have backtesting
deficiencies below the 99% confidence target. Such backtesting
deficiencies highlight exposure that could subject FICC to potential
losses if a member defaults. As discussed above, FICC has determined
that approximately 16% (i.e., 65 out of 396) of the backtesting
deficiencies would have been eliminated during the Backtesting Impact
Study period if the minimum Required Fund Deposit were $1 million. By
raising the minimum Required Fund Deposit amount to $1 million at GSD,
FICC believes it can decrease the backtesting deficiencies by members,
and thus decrease its exposure to such members in the event of a
default. FICC believes that the increase in margin for those members
that currently have a Required Fund Deposit of less than $1 million
would improve the probabilities that the margin required of such
members is sufficient to cover FICC's potential future exposure to
members in the interval between the last margin collection and the
close out of positions following a member default. Therefore, FICC
believes the proposed change is consistent with Rule 17Ad-22(e)(6)(iii)
under the Act.\24\
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\23\ 17 CFR 240.17Ad-22(e)(6)(iii).
\24\ Id.
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Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\25\ FICC believes the proposed clarifying
and technical changes to the GSD and MBSD Rules would allow FICC to
help promote prompt and accurate clearance and settlement of securities
transactions. This is because the proposed changes to the Rules would
clarify and improve the transparency of the Rules. Enhancing the
clarity and transparency of the Rules would help members to better
understand their rights and obligations regarding FICC's clearance and
settlement services. FICC believes that when members better understand
their rights and obligations regarding FICC's clearance and settlement
services, they can act in accordance with the Rules. FICC believes that
better enabling members to comply with the Rules would promote the
prompt and accurate clearance and settlement of securities transactions
by FICC. As such, FICC believes the proposed clarifying and technical
changes are consistent with Section 17A(b)(3)(F) of the Act.\26\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed changes to increase the minimum
Required Fund Deposit could have an impact on competition.
Specifically, FICC believes that the proposed changes could burden
competition because they would result in larger Required Fund Deposits
for certain members, e.g., members that currently have lower Required
Fund Deposits would have to deposit additional cash and/or Eligible
Clearing Fund Securities, as applicable, to their Clearing Fund
deposits. The proposed changes could impose more of a burden on those
members that have lower operating margins, lower cash reserves or
higher costs of capital compared to other members. Nonetheless, FICC
believes that any burden on competition imposed by the proposed changes
would not be significant and would be both necessary and appropriate in
furtherance of FICC's efforts to mitigate risks and meet the
requirements of the Act, as described in this filing and further below.
FICC believes that any burden on competition presented by the
proposed changes to increase the minimum Required Fund Deposit amount
would not be significant. As discussed above, if the minimum Required
Fund Deposit at GSD had been increased to $1 million during the CFR
Impact Study period, approximately 47% (81 out of a total of 174) of
the current members' Margin Portfolios would have been impacted,
[[Page 57965]]
with an average and a weighted average additional Required Fund Deposit
of approximately $686,000 and $ 792,000, respectively, for each such
Margin Portfolio per impacted day. However, when comparing the actual,
total Clearing Fund deposit of the current members' Margin Portfolios
with the proposed minimum Required Fund Deposit amount, only
approximately 13% (23 out of a total of 174) of such members' Margin
Portfolios would have to deposit additional cash to the Clearing Fund,
with an average and a weighted average cash deposit of approximately
$649,000 and $715,000, respectively, for each such Margin Portfolio per
impacted day. Furthermore, when comparing the average additional cash
deposit amounts that members would be required to make if the minimum
Clearing Fund cash deposit at GSD had been increased to $1 million with
their respective average Net Capital \27\ during the CFR Impact Study
period, the largest average additional cash deposit amount represented
approximately 0.49% of the affected member's average Net Capital.\28\
Similarly, when comparing the average additional Clearing Fund deposit
that members would be required to make, either in cash or Eligible
Clearing Fund Securities, if the minimum Required Fund Deposit amount
at GSD had been increased as proposed with their respective average Net
Capital during the CFR Impact Study period, the largest average
additional Clearing Fund deposit amount represented approximately 1.46%
of the affected member's average Net Capital.\29\
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\27\ As defined in GSD Rule 1 (Definitions), the term ``Net
Capital'' means, as of a particular date, the amount equal to the
net capital of a broker or dealer as defined in SEC Rule 15c3-
1(c)(2), or any successor rule or regulation thereto. Supra note 3.
\28\ The affected member would have had to deposit an additional
$900,000 in cash each impacted day during the CFR Impact Study
period.
\29\ The affected member would have had to deposit an additional
$392,000 in either cash or Eligible Clearing Fund Securities each
impacted day during the CFR Impact Study period.
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In addition, FICC believes that the increase to $1 million is
comparable with what users of other similarly situated registered
clearing agencies and foreign CCPs are expected to pay as a minimum
required deposit for similar services.\30\ Furthermore, by limiting the
proposed Required Fund Deposit to $1 million rather than a higher
minimum Required Fund Deposit, FICC would be minimizing the financial
impact to its members while improving member backtesting results and
FICC/GSD's Clearing Fund coverage.
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\30\ Supra note 14.
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While raising the minimum Required Fund Deposit to $500,000 would
also reduce backtesting deficiencies, it would not reduce them to the
same extent that raising the minimum Required Fund Deposit to $1
million would have. If the minimum Required Fund Deposit were raised to
$1 million rather than $500,000, FICC would have observed 27 fewer
backtesting deficiencies at GSD, which represents an approximately 71%
increase (i.e., 65 instead of 38) in the number of deficiencies that
could have been eliminated. Backtesting deficiencies highlight exposure
that could subject FICC to potential losses in the event that a member
defaults. FICC believes that the additional reduction in exposure that
would occur if the minimum Required Fund Deposit at GSD were raised to
$1 million rather than $500,000 justifies the potential additional
burden for members who currently have a Required Fund Deposit of less
than $1 million.
Even if the burden were deemed significant with respect to certain
members, FICC believes that the above-described burden on competition
that may be created by the proposed changes would be necessary in
furtherance of the Act, specifically Section 17A(b)(3)(F) of the
Act,\31\ because, as described above, the Rules must be designed to
assure the safeguarding of securities and funds that are in FICC's
custody or control or which it is responsible.
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, FICC believes the proposed changes are designed
to assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because they are
designed to enable FICC to require the necessary margin for members who
have a minimum Required Fund Deposit to limit its exposure to such
members in the event of a member default. Having adequate margin for
such members would help ensure that FICC does not need to use its own
resources, or the Eligible Clearing Fund Securities and funds of non-
defaulting members, to cover losses in the event of a default of such
members. Specifically, the proposed changes seek to remedy potential
situations where FICC could be under-margined. By ensuring that members
that have the minimum Required Fund Deposit amount are adequately
covering FICC's risk of loss, FICC would be reducing the risk of
losses, which would need to be addressed by using non-defaulting
members' securities or funds, or FICC's funds. In addition, by
requiring that members pay an amount equal to the minimum Required Fund
Deposit amount in cash, FICC would be making available additional
collateral that is easier to access upon a member's default, further
reducing the risk of losses and using non-defaulting members'
securities or funds, or FICC's funds, for liquidity. Therefore, FICC
believes the proposed changes are necessary in furtherance of Section
17A(b)(3)(F) of the Act.\32\
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\32\ Id.
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In addition, FICC believes these proposed changes are necessary to
support FICC's compliance with Rules 17Ad-22(e)(4)(i) and 17Ad-
22(e)(6)(iii) under the Act,\33\ which require FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to (x) effectively identify, measure, monitor, and
manage its credit exposures to members and those arising from its
payment, clearing, and settlement processes, including by maintaining
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence; and (y) cover its credit
exposures to its members by establishing a risk-based margin system
that, at a minimum, calculates margin sufficient to cover its potential
future exposure to members in the interval between the last margin
collection and the close out of positions following a member default.
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\33\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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As described above, FICC believes increasing the minimum Required
Fund Deposit amount at GSD to $1 million would decrease the number of
backtesting deficiencies and ensure that FICC maintains the coverage of
credit exposures for more members at a confidence level of at least
99%. This outcome is consistent with Rule 17Ad-22(e)(4)(i) which
requires that FICC maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\34\ This outcome is also consistent with Rule 17Ad-
22(e)(6)(iii) which requires that FICC calculate sufficient margin to
cover its ``potential future exposure'' which is defined as the
``maximum exposure estimated to occur at a future point in time with an
established single-tailed confidence level of at least 99 percent with
respect to the estimated distribution of future exposure.'' \35\ FICC
believes that the increase in margin for those members that currently
have a Required Fund Deposit of less than $1 million at GSD would help
ensure that FICC maintain sufficient financial resources to cover its
[[Page 57966]]
credit exposure to each participant fully with a high degree of
confidence and that the margin deposited by such members is sufficient
to cover FICC's potential future exposure in the interval between the
last margin collection and the close out of positions following a
member default. Therefore, FICC believes that these proposed changes
are necessary to support FICC's compliance with Rules 17Ad-22(e)(4)(i)
and 17Ad-22(e)(6)(iii) under the Act.\36\
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\34\ 17 CFR 240.17Ad-22(e)(4)(i).
\35\ 17 CFR 240.17Ad-22(e)(6)(iii).
\36\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
---------------------------------------------------------------------------
FICC believes that the above-described burden on competition that
could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible, as
described in detail above. The proposal would enable FICC to produce
margin levels more commensurate with the risks it faces as a central
counterparty. The proposed increase in minimum Required Fund Deposit at
GSD would be in relation to the credit exposure risks presented by the
class of members that currently have a Required Fund Deposit of less
than $1 million, and each member's Required Fund Deposit would continue
to be calculated with the same parameters and at the same confidence
level for each member. Therefore, members that present similar risk,
regardless of the type of member, would have similar impact on their
Required Fund Deposit amounts.
In addition, based on the comparison with other registered clearing
agencies and foreign CCPs, FICC believes that the increase to $1
million is comparable with what users of other similarly situated
registered clearing agencies and foreign CCPs are expected to pay and
would not be a significant burden on Members.\37\ Furthermore, based on
the results of the Backtesting Impact Study and CFR Impact Study, as
discussed above, FICC believes that a proposed minimum Required Fund
Deposit of $1 million at GSD would provide an appropriate balance of
improving member backtesting results while minimizing the impact to
members by not raising the minimum Required Fund Deposit above $1
million. Therefore, because the proposed changes are designed to
provide FICC with a more appropriate and balanced method of managing
the risks presented by each member while minimizing the impact to
members, FICC believes the proposed changes are appropriately designed
to meet its risk management goals and regulatory obligations.
---------------------------------------------------------------------------
\37\ Supra note 14.
---------------------------------------------------------------------------
FICC believes that it has designed the proposed changes in a way
that is both necessary and appropriate to meet compliance with its
obligations under the Act. Specifically, the proposal to increase the
minimum Required Fund Deposit amount to $1 million at GSD would better
limit FICC's credit exposures to its members. In addition, by
continuing to require that members pay an amount equal to the minimum
Required Fund Deposit amount in cash, FICC would be making available
additional collateral that is easier for FICC to access upon a member's
default, further limiting its credit exposure to members. Therefore, as
described above, FICC believes the proposed changes are necessary and
appropriate in furtherance of FICC's obligations under the Act,
specifically Section 17A(b)(3)(F) of the Act \38\ and Rules 17Ad-
22(e)(4)(i) and 17Ad-22(e)(6)(iii) under the Act.\39\ For these
reasons, the proposed changes are not designed to be an artificial
barrier to entry but a necessary and appropriate change to address
specific risks.
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
\39\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to
this proposal. If any additional written comments are received, they
will be publicly filed as an Exhibit 2 to this filing, as required by
Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
SEC's Division of Trading and Markets at <a href="/cdn-cgi/l/email-protection#d0a4a2b1b4b9beb7b1beb4bdb1a2bbb5a4a390a3b5b3feb7bfa6"><span class="__cf_email__" data-cfemail="eb9f998a8f82858c8a858f868a99808e9f98ab988e88c58c849d">[email protected]</span></a> or
202-551-5777.
FICC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#354740595018565a5858505b4146754650561b525a43"><span class="__cf_email__" data-cfemail="89fbfce5eca4eae6e4e4ece7fdfac9faeceaa7eee6ff">[email protected]</span></a>. Please include
File Number SR-FICC-2022-006 on the subject line.
Paper Comments
<bullet> 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-2022-006. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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
[[Page 57967]]
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of FICC and on
DTCC's website (<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</a>). All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-FICC-2022-006 and should be
submitted on or before October 13, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20499 Filed 9-21-22; 8:45 am]
BILLING CODE 8011-01-P
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This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.