Notice2022-23482
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting Approval of Proposed Rule Change To Increase the Minimum Required Fund Deposit for Government Securities Division 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
October 28, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 208 (Friday, October 28, 2022)</title>
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[Federal Register Volume 87, Number 208 (Friday, October 28, 2022)]
[Notices]
[Pages 65268-65271]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-23482]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96136; File No. SR-FICC-2022-006]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Approval of Proposed Rule Change To Increase the Minimum
Required Fund Deposit for Government Securities Division Netting
Members and Sponsoring Members, and Make Other Changes
October 24, 2022.
I. Introduction
On September 9, 2021, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2022-006 (the ``Proposed Rule Change'')
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder \2\ to increase the minimum
Required Fund Deposit for members of FICC's Government Securities
Division (``GSD'') \3\ members, as well as make certain clarifying and
technical changes.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ FICC operates two divisions, GSD and the Mortgage Backed
Securities Division (``MBSD''). GSD provides trade comparison,
netting, risk management, settlement, and central counterparty
(``CCP'') services for the U.S. Government securities market,
including repos. MBSD provides the same services for the U.S.
mortgage-backed securities market. GSD and MBSD maintain separate
sets of rules, margin models, and clearing funds. The proposed rule
change relates solely to GSD, except as discussed in section II.B at
note 19 infra.
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The Proposed Rule Change was published for comment in the Federal
Register on September 22, 2022,\4\ and the Commission has received no
comments on the changes proposed therein. This order approves the
Proposed Rule Change.
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\4\ Securities Exchange Act Release No. 95806 (Sept. 16, 2022),
87 FR 57960 (Sept. 22, 2022) (File No. SR-FICC-2022-006) (``Notice
of Filing'').
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II. Description of the Proposed Rule Change
Currently, FICC requires from each Netting Member a minimum
required margin amount, referred to as the Required Fund Deposit, of
$100,000 that must be made and maintained in cash, and does not require
any specific minimum amount for Sponsoring Members.\5\ FICC proposes to
increase each member's minimum Required Fund Deposit amount to
$1,000,000.
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\5\ Rule 4, section 3 (for Netting Members) and Rule 3A, section
10(c) (for Sponsoring Members). Capitalized terms not defined herein
are defined in the GSD Rules & Procedures (``Rules''), available at
https://www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf. For purposes of this order, ``member'' will be
used to describe Netting Members and Sponsoring Members,
collectively.
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A. Background
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.
FICC conducts daily backtesting to evaluate whether each member's
Required Fund Deposit is sufficient to cover FICC's credit exposures to
that member based on a simulated liquidation of the member's portfolio
on that day.\6\ Backtesting is an ex-post comparison of actual outcomes
with expected outcomes derived from the use of margin models.\7\ A
backtesting deficiency occurs when FICC determines that the projected
liquidation losses to FICC arising in the event of a member's default
would be greater than the member's Required Fund Deposit.\8\ Therefore,
backtesting deficiencies highlight exposure that could subject FICC to
potential losses under normal market conditions in the event that a
member defaults.\9\
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\6\ 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 is performed on a daily basis or
more frequently. See Securities Exchange Act Release Nos. 81485
(Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-014),
84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-2018-
010), 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-FICC-
2020-004), 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (SR-
FICC-2021-006), and 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24,
2022) (SR-FICC-2022-001).
\7\ See 17 CFR 240.17Ad-22(a)(1).
\8\ See Notice of Filing, supra note 4, at 57691.
\9\ Id.
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FICC regularly reviews backtesting results to assess the
effectiveness of its margin requirements.\10\ As part of its review,
FICC investigates the causes of any backtesting deficiencies, paying
particular attention to repeat backtesting deficiencies that would
result in the member's backtesting coverage to fall below the 99%
confidence target to determine if there is an identifiable cause of
repeat backtesting deficiencies.\11\ FICC also evaluates whether
multiple members may experience backtesting deficiencies for the same
underlying reason.\12\
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\10\ Id.
\11\ FICC states that a member's backtesting coverage would fall
below the 99% confidence target if the member has more than two
backtesting deficiency days in a rolling twelve-month period. Id. In
other words, if a member has three or more backtesting deficiency
days during a twelve-month period, then the member's margin would
not be sufficient 99% of the time. FICC believes that its targeted
99% confidence level is consistent with its regulatory requirements
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). Id.; see also 17 CFR
240.17Ad-22 (e)(4)(i), and (e)(6)(iii).
\12\ See Notice of Filing, supra note 4, at 57961.
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Based on its regular reviews, FICC has found that members with
Required Fund Deposits below $100,000 disproportionately experience
repeat backtesting deficiencies because, should the member's settlement
activity abruptly increase, the additional exposure to FICC would not
be mitigated until the collection of the Required Fund Deposit either
intraday or on the next business day.\13\ FICC states it has also found
that its current minimum margin requirement of $100,000 is
disproportionately lower than the minimum margin requirements of other
CCPs that clear similar securities products.\14\
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\13\ Id. at 57961-62.
\14\ See Notice of Filing, supra note 4, at 57962 (citing the
following requirements: the Options Clearing Corporation's (``OCC'')
minimum initial contribution of $500,000, see OCC Rule 1002(d),
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 Chicago Mercantile Exchange's
(``CME'') minimum requirement of $500,000 or $2.5 million depending
on the product types being cleared, see CME Rule 816, 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 National Securities Clearing Corporation's (``NSCC'')
minimum required fund deposit of $250,000, see NSCC Rule 4,
available at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.; LCH Limited's minimum default fund contribution of
GBP 500,000 (approximately $566,000 based on current foreign
currency exchange rate) and of GBP 2,000,000 (approximately $2.3
million based on the current foreign currency exchange rate) for
RepoClear, see LCH Limited Default Rules definition of ``Minimum
Contribution'' and ``Minimum RepoClear Contribution'' 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>; and Ice Clear U.S.'s minimum
contribution to Guaranty Fund of $2 million, see ICE Clear U.S. Rule
301, 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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B. Proposal
In the Proposed Rule Change, FICC proposes to increase its minimum
Required Fund Deposit for its members to $1,000,000.
Specifically, to implement this change for Netting Members, FICC
would revise Section 2(a) of Rule 4 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 would also revise section 3 of GSD Rule 4 to replace the
minimum cash amount from $100,000 to $1 million, to match the proposed
[[Page 65269]]
increased minimum Required Fund Deposit amount. To implement this
change for Sponsoring Members, FICC would revise section 10(c) of Rule
3A (Sponsoring Members and Sponsored Members) to state that the
Sponsoring Member Omnibus Account Required Fund Deposit shall be equal
to the greater of: (i) $1 million or (ii), which is what is currently
in the Rules, the sum of the following: (1) the sum of the VaR Charges
\15\ for all of the Sponsored Members whose activity is represented in
the Sponsoring Member Omnibus Account as derived pursuant to, and (2)
all amounts representing other components of the Sponsoring Member's
Required Fund Deposit computed at the level of the Sponsoring Member
Omnibus Account, other than the VaR Charge. In addition, Section 10(d)
of 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.\16\
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\15\ For Sponsoring Member's the VaR Charge is determined
pursuant to Section 1b(a)(i) of GSD Rule 4 (Clearing Fund and Loss
Allocation). 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, 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).
\16\ See Notice of Filing, supra note 4, at 57963.
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For Repo Brokers, FICC would not propose to change the current
minimum Required Fund Deposit of $5 million.\17\ However, for clarity,
FICC would propose to move the minimum Required Fund Deposit to a
different section of the Rules, to improve organization.\18\
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\17\ Rule 4, section 1b, supra note 5. 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).
\18\ FICC would also make revisions to state 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 to refer to additional payments, charges and premiums being
applied by FICC after application of Minimum Charges, which term
replaces the current term ``minimum Clearing Fund amounts.''
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Finally, FICC proposes to add a sentence to Section 2 of MBSD Rule
4, which addresses required clearing fund deposits, to make clear that,
as is currently the case due to other portions of the rule, the Minimum
Charge for each margin portfolio of a Clearing Member shall be no less
than $100,000.\19\ FICC also proposes to replace (i) ``Clearing Fund
requirement'' with ``Minimum Charge for each margin portfolio'' and
(ii) ``minimum Clearing Fund amounts'' with ``Minimum Charges'' in MBSD
Rule 4, section 2, which FICC believes will enhance clarity.
Furthermore, FICC is proposing a technical change to correct a
reference to the non-Unregistered Investment Pool Clearing Member in
MBSD Rule 4, section 2.
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\19\ Specifically, Rule 4, section 3 of the MBSD Rules, which
addresses the form of a member's required fund deposit, states that
a member must make deposit the lesser of $5,000,000 or 10 percent of
its required fund deposit, with a minimum of $100,000, in cash. The
MBSD Rules are available at https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf (``MBSD Rules'').
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C. Impact Study Results
To support its proposal, FICC relies upon the results of recent
analyses of backtesting and margin.\20\ Specifically, FICC examines the
backtesting coverage of each of its members during the period for a 12-
month period ending June 30, 2022 (``Backtesting Impact Study'') under
the current $100,000 minimum GSD Required Fund Deposit amount compared
to hypothetical (or ``pro forma'') minimum GSD Required Fund Deposit
amounts, including the proposed $1,000,000 amount. The Backtesting
Impact Study shows that the number of member backtesting deficiencies
that would have been eliminated during the period had FICC's minimum
GSD Required Fund Deposit been $1,000,000 compared to $100,000. FICC
then uses the Backtesting Impact Study to analyze the improvement to
each member's backtesting coverage ratio and, taking all members'
backtesting coverage ratio results together, to FICC's Clearing Fund
backtesting coverage.\21\
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\20\ FICC provided a public summary of the information in this
Section II.B in its Notice of Filing, upon which this discussion is
based. See Notice of Filing, supra note 4, at 57962-3. FICC
submitted the data underlying these analyses as a confidential
Exhibit 3 to the Proposed Rule Change pursuant to 17 CFR 240.24b-2.
\21\ The backtesting coverage represents the daily sufficiency
of the aggregate of all members' margin over a rolling 12-month
period. As described in Section II.A above, FICC would be able to
access its clearing fund to cover any losses to it should a member
with insufficient margin default. GSD Rule 4, Section 3, supra note
3.
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According to FICC, 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%.
Specifically, 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 respect to members
that had a Required Fund Deposit of less than $1 million on the
relevant deficiency day(s). FICC states that 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, FICC states that 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 addition, FICC conducted a clearing fund requirement impact
study for the period of July 1, 2021 to June 30, 2022 (``CFR Impact
Study'') on a member-level basis, meaning that it examined the effect
on each member's Required Fund Deposit had the proposal been in place.
According to FICC, the CFR Impact Study indicates that under the
proposal, 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. When comparing the actual, total Clearing Fund deposit of the
current members' Margin Portfolios (that is, including any additional
resources held at FICC in addition to the Required Fund Deposit) with
the proposed minimum Required Fund Deposit amount, however, 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. FICC
states the result of the CFR Impact Study also shows one Repo Broker
that would have
[[Page 65270]]
been impacted, requiring additional Clearing Fund deposit of
approximately $392,000 in either cash or Eligible Clearing Fund
Securities per impacted day. Overall, FICC states that the proposed
changes would have resulted in an average increase in the daily
required margin amount, for all members' deposits in the aggregate, of
$31.4 million (or 0.17%) at GSD during the CFR Impact Study period.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \22\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After careful consideration, the
Commission finds that the Proposed Rule Change is consistent with the
requirements of the Act and the rules and regulations applicable to
FICC.\23\ In particular, the Commission finds that the Proposed Rule
Change is consistent with Section 17A(b)(3)(F) and (b)(3)(I) \24\ of
the Act and Rules 17Ad-22(e)(4) and (e)(6) thereunder.\25\
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\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ The Commission's findings are based on its review of the
Proposed Rule Change, including its analysis of the Backtesting and
CFR Impact Studies, which are summarized in Section II.B above. See
supra note 20 and accompanying text.
\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency, such as FICC, be designed, in part, 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.\26\ The
Commission believes that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act.
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed in Section II.A above, backtesting deficiencies
highlight when a member's margin is insufficient to cover FICC's credit
exposure to that member. If a defaulted member's margin is insufficient
to satisfy losses caused by the closeout of that member's positions,
FICC and its non-defaulting members may be subject to losses. As
summarized in Section II.B above, and based on the Commission's review
and analysis of the material submitted by FICC,\27\ the proposed
increase would have provided FICC with additional resources, which
would have resulted in a decrease in backtesting deficiencies and thus
a reduction in credit exposure to its members under the proposal.
Therefore, the Commission believes FICC would improve the probability
that the increased minimum margin amount it collects is sufficient to
cover FICC's credit exposure to those members, particularly in
instances where the defaulted member's clearing activity abruptly
increases following a period of low or no activity because FICC would
have additional resources available to cover that additional exposure
before collecting additional margin for that increased activity. This
increase could reduce the possibility that FICC or its non-defaulting
members face losses from the close-out process, in the event that FICC
were to have to allocate losses amongst non-defaulting losses pursuant
to its Rules.
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\27\ See supra note 20.
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Moreover, FICC would continue to require that members pay an amount
equal to the minimum Required Fund Deposit amount in cash. The proposal
therefore would enable FICC to have available additional collateral
that is easier for FICC to access quickly to complete end of day
settlement upon a member's default, further reducing the risk of losses
to FICC or non-defaulting members. Accordingly, the Commission believes
the Proposed Rule Change would promote the safeguarding of securities
and funds which are in the custody or control of FICC or for which FICC
is responsible, consistent with Section 17A(b)(3)(F) of the Act.
Finally, as discussed in Section II.B above, FICC proposes
clarifying and technical changes to the GSD and MBSD Rules. Such
changes provide clarifications to members regarding the definitions and
applications of Rules. 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.\28\
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Section 17A(b)(3)(I) of the Act
Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act.\29\ This provision does not
require the Commission to find that a proposed rule change represents
the least anti-competitive means of achieving the goal.\30\ Rather, it
requires the Commission to balance the competitive considerations
against other relevant policy goals of the Act.
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\29\ 15 U.S.C. 78q-1(b)(3)(I).
\30\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978).
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The Commission acknowledges that the impact of increased margin
requirements may present higher costs to some members with lower
operating margins, lower cash reserves or higher costs of capital
compared to other members, which may weaken those members' competitive
positions relative to others. Although some of FICC's members could
experience a burden on competition because of these higher costs, the
Commission concludes any burden to these members is necessary and
appropriate in furtherance of the policy goals under the Act \31\ for
the following reasons.
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\31\ 15 U.S.C. 78q-1(b)(3)(I). Specifically, as discussed in
greater detail in Section III.C and III.D below, the Proposed Rule
Change is necessary and appropriate to further the policy goals
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii), 17 CFR 240.17Ad-
22(e)(4)(i) and (e)(6)(iii).
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As discussed in Section II.A above, FICC seeks to maintain
sufficient resources (i.e., margin) to cover its credit exposures to
its members fully with a high degree of confidence. Conversely, FICC
uses backtesting to determine when a member's margin would have been
insufficient to cover FICC's credit exposure to that member. As
previously discussed, the Backtesting Impact Study shows the proposed
$1,000,000 minimum Required Fund Deposit would have decreased the
number of backtesting deficiencies, thereby increasing the number of
members for which FICC maintained sufficient coverage at a confidence
level of at least 99%. Therefore, the Proposed Rule Change would enable
FICC to better manage its credit exposure to its members by ensuring it
holds sufficient collateral to cover that exposure, thereby reducing
the likelihood that FICC or non-defaulting members would incur losses
resulting from a member default.
Additionally, as described in Section II.B, FICC conducted a
Clearing Fund impact study. Specifically, when comparing the actual,
total Clearing Fund deposit of the current members' Margin Portfolios
with the proposed minimum Required Fund Deposit amount, 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
[[Page 65271]]
Margin Portfolio per impacted day. The result of the CFR Impact Study
also shows one Repo Broker that would have been impacted, requiring an
additional margin 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.
Finally, according to FICC, 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
$1,000,000 with their respective average Net Capital 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.\32\ In addition, 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.\33\
In light of this analysis, and our review of the confidential data
underlying the CFR Impact Study, the Commission believes that the
majority of impacted members likely would not experience a weakened
competitive position compared to others as a result of the Proposed
Rule Change.
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\32\ Notice of Filing, supra note 4, at 57965.
\33\ Id.
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Therefore, the Commission concludes that any competitive burden to
members imposed by the Proposed Rule Change is necessary and
appropriate in furtherance of the Act. Accordingly, the Commission
finds that the Proposed Rule Change is consistent with the requirements
of Section 17A(b)(3)(I) of the Act.\34\
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\34\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) 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 participants and those arising from its payment,
clearing, and settlement processes, including by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\35\
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\35\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above in Section II.A, FICC and its non-defaulting
members may be subject to losses should a defaulted member's own
Required Fund Deposit be insufficient to satisfy losses caused by the
liquidation of that member's portfolio. As summarized in Section II.B
above and based on the Commission's review and analysis of the
underlying data,\36\ the Backtesting Impact Study shows a $1,000,000
minimum Required Fund Deposit would have decreased the number of
backtesting deficiencies, which would likely help FICC better manage
its credit exposure to each of its members and credit exposures arising
from its payment, clearing, and settlement processes.
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\36\ See supra note 23.
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Additionally, as discussed in Section II.B above, FICC would
continue to require that members pay an amount equal to the minimum
Required Fund Deposit amount in cash, which should enable FICC to
better maintain sufficient prefunded margin to mitigate potential
future exposures to its members. Therefore, requiring the proposed
minimum $1,000,000 deposit to be made in cash should reduce the
probability that FICC or non-defaulting members would incur losses
resulting from a member default. Accordingly, the Commission finds that
FICC's proposed increase to its minimum Required Fund Deposit would be
consistent with Rule 17Ad-22(e)(4)(i).\37\
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\37\ 17 CFR 240.17Ad-22(e)(4)(i).
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D. Consistency With Rule 17Ad-22(e)(6)(iii)
Rule 17Ad-22(e)(6)(iii) under the Act requires that a covered
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, 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.\38\
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\38\ 17 CFR 240.17Ad-22(e)(6)(iii).
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As summarized in Section II.A above, 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.
Based on the Backtesting Impact Study, which the Commission has
reviewed and analyzed, approximately 21% of all backtesting
deficiencies occur for those members that maintain a Required Fund
Deposit of less than $1,000,000, and approximately 16% of the
deficiencies of those members would have been eliminated during the
Impact Study Period if the Required Fund Deposit were $1,000,000 or
higher. By raising the minimum Required Fund Deposit amount to
$1,000,000, the Commission believes the proposal should enable FICC to
decrease the number of backtesting deficiencies by members, thereby
improving FICC's backtesting coverage, and thus decrease FICC's
exposure to such members in the event of a member default.
Therefore, the Commission concludes FICC's Proposed Rule Change
should better ensure FICC maintains sufficient margin to cover its
potential future exposure to its members in the interval between the
last margin collection and the close out of positions following a
member default, thereby reducing the likelihood FICC or non-defaulting
members would incur losses as a result. Accordingly, the Commission
finds that FICC's proposed increase to its minimum Required Fund
Deposit would be consistent with Rule 17Ad-22(e)(6)(iii).\39\
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\39\ 17 CFR 240.17Ad-22(e)(6)(iii).
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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 Act and
in particular with the requirements of Section 17A of the Act \40\ and
the rules and regulations promulgated thereunder.
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\40\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\41\ that Proposed Rule Change SR-FICC-2022-006, as modified by Partial
Amendment No. 1, be, and hereby is, approved.\42\
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\41\ 15 U.S.C. 78s(b)(2).
\42\ In approving the Proposed Rule Change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f). See discussion supra Section
III.B.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
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\43\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-23482 Filed 10-27-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on October 28, 2022.
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