Notice2023-04580
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise the Description of the Stressed Period Used To Calculate the Value-at-Risk Charge 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
March 7, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 44 (Tuesday, March 7, 2023)</title>
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[Federal Register Volume 88, Number 44 (Tuesday, March 7, 2023)]
[Notices]
[Pages 14189-14194]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-04580]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97001; File No. SR-FICC-2023-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Revise the Description of
the Stressed Period Used To Calculate the Value-at-Risk Charge and Make
Other Changes
March 1, 2023.
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 February 17, 2023, Fixed Income Clearing Corporation (``FICC'')
filed 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 \3\ consists of amendments to the GSD
Methodology Document--GSD Initial Market Risk Margin Model (``GSD QRM
Methodology Document'') \4\ and the MBSD Methodology and Model
Operations Document--MBSD Quantitative Risk Model (``MBSD QRM
Methodology Document'',\5\ and collectively with the GSD QRM
Methodology Document, the ``QRM Methodology Documents'') in order to
revise the description of the stressed period used to calculate the VaR
Charge (as defined below). FICC is also proposing to amend the GSD QRM
Methodology Document in order to clarify the language describing the
floor parameters used for the calculation of the VaR Floor. In
addition, FICC is proposing to amend the QRM Methodology Documents to
make certain technical changes, as described in greater detail below.
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\3\ Capitalized terms used herein and not defined shall have the
meaning assigned to such terms in the FICC's Government Securities
Division (``GSD'') Rulebook (``GSD Rules'') and FICC's Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD
Rules'', and together with the GSD Rules, the ``Rules''), available
at <a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">http://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
\4\ The GSD QRM Methodology Document was filed as a confidential
exhibit in the rule filing and advance notice for GSD sensitivity
VaR. See Securities Exchange Act Release Nos. 83362 (June 1, 2018),
83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 11,
2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801). The GSD QRM
Methodology has been subsequently amended. See Securities Exchange
Act Release Nos. 85944 (May 24, 2019), 84 FR 25315 (May 31, 2019)
(SR-FICC-2019-001), 90182 (October 14, 2020), 85 FR 66630 (October
20, 2020) (SR-FICC-2020-009), 93234 (October 1, 2021), 86 FR 55891
(October 7, 2021) (SR-FICC-2021-007), and 95605 (August 25, 2022),
87 FR 53522 (August 31, 2022) (SR-FICC-2022-005).
\5\ The MBSD QRM Methodology was filed as a confidential exhibit
in the rule filing and advance notice for MBSD sensitivity VaR. See
Securities Exchange Act Release Nos. 79868 (January 24, 2017), 82 FR
8780 (January 30, 2017) (SR-FICC-2016-007) and 79843 (January 19,
2017), 82 FR 8555 (January 26, 2017) (SR-FICC-2016-801). The MBSD
QRM Methodology has been amended. See Securities Exchange Act
Release Nos. 85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-
FICC-2019-001), 90182 (October 14, 2020), 85 FR 66630 (October 20,
2020) (SR-FICC-2020-009), 92303 (June 30, 2021), 86 FR 35854 (July
7, 2021) (SR-FICC-2020-017) and 95070 (June 8, 2022), 87 FR 36014
(June 14, 2022) (SR-FICC-2022-002).
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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 has observed significant volatility in the U.S. government
securities market due to tightening monetary policy, increasing
inflation, and recession fears. The significant volatility has led to
greater risk exposures for FICC. In order to mitigate the increased
risk exposures, FICC has to quickly and timely respond to rapidly
changing market conditions. For example, in order to respond to rapidly
changing market conditions, FICC may need to quickly and timely adjust
the look-back period that FICC uses for purposes of calculating the VaR
Charge with an appropriate stressed period, as needed, to enable FICC
to calculate and collect adequate margin from members. Accordingly,
FICC is proposing to amend the QRM Methodology Documents by revising
the description of the stressed period used to calculate the VaR Charge
in order to enable FICC to quickly and timely adjust the look-back
period used for calculating the VaR Charge with an appropriate stressed
period, as needed. Adjustments to the look-back period could affect the
amount of the VaR Charge that GSD Members are assessed by either
increasing or decreasing such charge to reflect the level of risk the
activities of the GSD Members presented to FICC.
FICC is also proposing to amend the GSD QRM Methodology Document in
order to clarify the language describing the floor parameters used for
the calculation of the VaR Floor. In addition, FICC is proposing to
amend the QRM Methodology Documents to make certain technical changes.
FICC, through GSD and MBSD, serves as a central counterparty
(``CCP'') and provider of clearance and settlement services for the
U.S. government securities and mortgage-backed securities markets. A
key tool that FICC uses to manage its credit exposures to its members
is the daily collection of margin from each member. The aggregated
amount of all GSD and MBSD members' margin constitutes the GSD Clearing
Fund and MBSD Clearing Fund (collectively referred to herein as the
``Clearing Fund''), which FICC would be able to 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, including a
value-at-risk (``VaR'') charge (``VaR Charge'') designed to capture the
potential market price risk associated with the securities in a
member's portfolio. The VaR Charge is typically the largest component
of a member's margin requirement. The VaR Charge is designed to cover
FICC's projected liquidation losses with respect to a defaulted
member's portfolio at a 99% confidence level.
FICC calculates VaR Charge by using a methodology referred to as
the sensitivity approach. The sensitivity approach leverages external
vendor expertise in supplying the market risk attributes, which would
then be incorporated by FICC into the GSD and MBSD models to calculate
the VaR Charge. Specifically, FICC sources security-level risk
sensitivity data and
[[Page 14190]]
relevant historical risk factor time series from an external vendor for
all eligible securities. The sensitivity data is generated by a vendor
based on its econometric, risk and pricing models.
(1) Revise the Description of the Stressed Period Used To Calculate the
VaR Charge
The sensitivity approach provides FICC with the ability to adjust
the look-back period that FICC uses for purposes of calculating the VaR
Charge. In particular, the sensitivity approach leverages external
vendor data to incorporate a look-back period of 10 years, which allows
the GSD and MBSD models to capture periods of historical volatility. In
the event FICC observes that the 10-year look-back period does not
contain a sufficient number of stressed market conditions, FICC will
include an additional period of historically observed stressed market
conditions to the 10-year look-back period.
The QRM Methodology Documents currently describe the additional
stressed period as a configurable continuous period (typically one
year). In addition, the GSD QRM Methodology Document further specifies
the duration of the stressed period as one-year of stressed market
condition. To ensure the GSD and MBSD models are performing as
designed, FICC regularly reviews metrics from various assessments, such
as the proportion of failure (``POF'') test being used to determine
whether the number of member deficiencies, if any, are statistically
significant. While recent POF test results indicate that the GSD and
MBSD models still perform as designed, FICC has observed a number of
instances, for example in certain U.S. Treasury security tenors, where
market volatility produced price returns in excess of the 99%
confidence level calibration of the VaR models in recent months due to
heightened volatility in the market.
In order to provide FICC with more flexibility with respect to the
inclusion of sufficient number of stressed market conditions in the
look-back period so FICC can respond to rapidly changing market
conditions more quickly and timely, FICC is proposing to eliminate this
detailed description of the stressed period from Sections 2.10.1 (The
list of key parameters) and A4.5.16.1 (Stressed VaR Calculation) of the
GSD QRM Methodology Document, as well as Section 5.17.1 (Stressed VaR
Calculation) of the MBSD QRM Methodology Document, and replace it with
a more general description. Specifically, the proposed new description
of the stressed period would provide in Section A4.5.16.1 of the GSD
QRM Methodology Document and Section 5.17.1 of the MBSD QRM Methodology
Document that the ``stressed period'' shall be a period of time that
FICC may add, in its sole discretion, to the 10-year historical look-
back period that includes stressed market conditions that are not
otherwise captured in the look-back period. The proposed new
description would also provide that a stressed period, if added to the
look-back period, shall be no shorter than 6 months and no longer than
36 months, and comprised of either one continuous period specified by a
start date and an end date or comprised of more than one non-continuous
period. In addition, the proposed new description would provide that in
determining whether it is necessary to add a stressed period to the 10-
year historical look-back period and the appropriate length of the
added stressed period, FICC would review all relevant information
available to it at the time of such determination, including, for
example, (1) the nature of the stressed market conditions in the
current 10-year historical look-back period, (2) backtesting coverage
ratios, and (3) market volatility observed by FICC, in its sole
discretion. Furthermore, the proposed new description would provide
that changes to the stressed period shall be approved through FICC's
model governance process, and any current stressed period shall be
documented and published to FICC members at the time such stressed
period becomes effective.
FICC believes that having a more general description would enable
FICC to adjust the stressed period more quickly and timely because the
adjustment process, such as constructing a stressed period comprised of
more than one year's historical data that may not be continuous,\6\
would be more streamlined and not require a rule change.\7\ By being
able to quickly and timely make adjustments to the stressed period,
FICC would have the flexibility to respond to rapidly changing market
conditions more quickly and timely. Having the flexibility to respond
to rapidly changing market conditions more quickly and timely would in
turn help better ensure that FICC calculates and collects adequate
margin from members as well as risk manages its credit exposures to its
members.\8\
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\6\ FICC believes constructing a longer than one-year stressed
period, or a stressed period that may not be continuous, would
enable FICC to (i) better cope with market volatility spikes by
increasing the calibrated volatility level of the VaR models, i.e.,
longer stressed periods generally result in higher calibrated
volatility levels, and (ii) capture a sufficient number of stressed
market conditions.
\7\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature
or level of risks presented by FICC, then FICC is required to file
an advance notice filing. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
\8\ FICC is currently contemplating changing the stressed period
at GSD from one year to 1.5 year while keeping the current one-year
stressed period at MBSD unchanged.
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Nonetheless, as described in the QRM Methodology Documents, the
look-back period would continue to be tracked in the monthly model
parameter report and any changes to the look-back period \9\ would
continue to be subject to DTCC's internal model governance process as
described in the Clearing Agency Model Risk Management Framework.\10\
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\9\ The look-back period includes the stressed period, if any.
\10\ The Clearing Agency Model Risk Management Framework
(``Framework'') sets forth the model risk management practices that
FICC and its affiliates The Depository Trust Company (``DTC'') and
National Securities Clearing Corporation (``NSCC,'' and together
with FICC and DTC, the ``Clearing Agencies'') follow to identify,
measure, monitor, and manage the risks associated with the design,
development, implementation, use, and validation of quantitative
models. The Framework is filed as a rule of the Clearing Agencies.
See Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82
FR 41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008), 88911 (May 20, 2020), 85 FR 31828 (May 27,
2020) (File Nos. SR-DTC-2020-008; SR-FICC-2020-004; SR-NSCC-2020-
008), 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (File No.
SR-FICC-2021-006), 92381 (July 13, 2021), 86 FR 38163 (July 19,
2021) (File No. SR-NSCC-2021-008), 92379 (July 13, 2021), 86 FR
38143 (July 19, 2021) (File No. SR-DTC-2021-003), 94271 (February
17, 2022), 87 FR 10411 (February 24, 2022) (File No. SR-FICC-2022-
001), 94272 (February 17, 2022) 87 FR 10419 (February 24, 2022)
(File No. SR-NSCC-2022-001), and 94273 (February 17, 2022), 87 FR
10395 (February 24, 2022) (File No. SR-DTC-2022-001).
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(2) Clarify the Floor Parameter Language
The VaR Charge is subject to a minimum amount (the ``VaR Floor'')
that FICC employs as an alternative to the amount calculated by the VaR
model for portfolios where the VaR Floor \11\ is greater than the
model-based charge amount. A VaR Floor addresses the risk that the VaR
model may calculate too low a VaR Charge for certain portfolios where
the VaR model applies substantial risk offsets among long and short
positions in different classes of securities that have a high degree of
historical correlation. Because this high degree of historical price
correlation may not apply in future changing market conditions, FICC
applies a VaR Floor in order to protect FICC against such risk in the
event that FICC is
[[Page 14191]]
required to liquidate a large securities portfolio in stressed market
conditions.\12\
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\11\ See definition of ``VaR Charge'' in GSD Rule 1
(Definitions), supra note 3.
\12\ See Securities Exchange Act Release Nos. 83362 (June 1,
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
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VaR Floor at GSD is determined by multiplying the absolute value of
the sum of the Net Long Positions and Net Short Positions of Eligible
Securities, grouped by product and remaining maturity, by a percentage
designated by FICC from time to time for such group. Currently, the GSD
Rules provide that for (i) U.S. Treasury and agency securities, such
percentage shall be a fraction, no less than 10%, of the historical
minimum volatility of a benchmark fixed income index (i.e., haircut
rate) for such group by product and remaining maturity and (ii)
mortgage-backed securities, such percentage shall be a fixed percentage
that is no less than 0.05%.\13\ However, the GSD QRM Methodology
Document specifies these percentages (referred to as floor parameters
therein) for government bond and MBS Pool as simply 10% and 5 Bps,
respectively.
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\13\ Id.
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To avoid inconsistency with the GSD Rules, FICC is proposing
clarifying changes to the floor parameter language in Section 2.10.1 of
the GSD QRM Methodology Document. Specifically, FICC is proposing to
revise the description of the floor parameter for government bond by
deleting the reference to 10% and adding language that state the
parameter is a percentage as designated by FICC from time to time
pursuant to the GSD Rules and applied to the haircut rate of the
respective government bonds. Similarly, for the description of the
floor parameter for MBS Pool, FICC is proposing to revise it by
deleting the reference to 5 Bps and adding language that state the
parameter is a percentage as designated by FICC from time to time
pursuant to the GSD Rules.
In addition, FICC is proposing to add a sentence making it clear
that the floor parameters are tracked in the monthly model parameter
report and that any future changes to the floor parameters would be
subject to DTCC's internal model governance process set forth in the
Clearing Agency Model Risk Management Framework.\14\
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\14\ Supra note 10.
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Lastly, consistent with the proposed changes to the floor
parameters described above, FICC is proposing to delete from the GSD
QRM Methodology Document the language in Sections 3.2.2 (Calculation of
haircut of Treasury and Agency bonds without sensitivity analytics
data) and 3.5 (Total VaR, Core Charge and Standalone VaR) that
references the floor parameters for government bond and MBS pool
positions being tentatively set to 10% and 0.05%, respectively.
(3) Technical Changes
FICC is proposing to make certain technical changes to the GSD QRM
Methodology Document. Specifically, FICC proposes to clarify in
Sections 1.1 (Purpose and scope), A4.5.16 (Stressed VaR), and A4.5.16.1
(Stressed VaR Calculation) of the GSD QRM Methodology Document that
``SVaR'' refers to sensitivity VaR and not stressed VaR. In addition,
FICC is also proposing to fix typographical errors in Sections 2.10.1
(The list of key parameters) and A4.5.16.1 (Stressed VaR Calculation)
of the GSD QRM Methodology Document.
Impact Study
FICC conducted an impact study for the period from January 2021 to
October 2022 (``Impact Study'') which reviewed the overall impact of
the contemplated change to the stressed period (i.e., changing the
current stressed period of one year (September 2008 to August 2009) to
a stressed period of 1.5 years (January 2008 to June 2009) on the GSD
VaR model backtesting coverage and VaR Charge amounts as well as the
effect on the GSD Members during the Impact Study period. The results
of the Impact Study indicates that, if a stressed period of 1.5 years
had been in place for GSD, the GSD's rolling 12-month VaR model
backtesting coverage ratio would have improved by 29 bps (from 98.52%
to 98.81%) as of October 2022 and the associated VaR Charge increase
for GSD would be approximately $387 million (or 2.1%) on average during
that period.
The three GSD Members with the largest average daily VaR Charge
increases in dollar amount during the Impact Study period would have
had increases of approximately $43.7 million, $43.24 million, and
$39.55 million representing an average daily increase for such Members
of 3.4%, 4.4%, and 2.8%, respectively. The three GSD Members with the
largest average daily VaR Charge increases as a percentage of VaR
Charges paid by such Members during the Impact Study period would have
had an average daily increase of 16.6%, 15.7% and 12.7%, respectively,
had the contemplated stressed period been in place.
The three GSD Members with the largest average daily VaR Charge
decreases in dollar amount during the Impact Study period would have
had decreases of approximately $8.59 million, $7.93 million, and $7.24
million representing an average daily decrease for such Members of
4.3%, 1.3%, and 2.9%, respectively. The three GSD Members with the
largest average daily VaR Charge decreases as a percentage of VaR
Charges paid by such Members during the Impact Study period would have
had an average daily decrease of 4.3%, 4.0% and 3.4%, respectively, had
the contemplated stressed period been in place.
Implementation Timeframe
Subject to approval by the Commission, FICC would implement the
proposed rule 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 this proposal 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 changes to the QRM Methodology Documents described above are
consistent with Section 17A(b)(3)(F) of the Act, for the reasons
described below.\15\
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed 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.\16\
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\16\ Id.
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FICC believes that the proposed changes to the QRM Methodology
Documents described in Item II(A)1(1) above to revise the description
of the stressed period used to calculate the VaR Charge are designed to
assure the safeguarding of securities and funds which are in the
custody or control of FICC or for which it is responsible, consistent
with Section 17A(b)(3)(F) of the Act.\17\ As described above, FICC
believes these proposed changes would provide FICC with more
flexibility with respect to the adjustment of the stressed period and
thus allow FICC to respond to rapidly changing market conditions more
quickly and timely. FICC believes that having more flexibility with
respect to this adjustment would enable FICC to more accurately
calculate the necessary margin from members while continuing to limit
its exposure to members such that, in the event of a member default,
FICC's operations would not be disrupted and non-defaulting members
[[Page 14192]]
would not be exposed to losses they cannot anticipate or control. In
this way, these proposed changes are designed to assure the
safeguarding of securities and funds which are in the custody and
control of FICC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\18\
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\17\ Id.
\18\ Id.
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FICC believes that the (i) proposed changes to the floor parameter
language as described in Item II(A)1(2) above and (ii) the proposed
technical changes described in Item II(A)1(3) above would enhance the
clarity of the GSD QRM Methodology Document for FICC. As the GSD QRM
Methodology Document is used by FICC Risk Management personnel
regarding the calculation of margin requirements, it is therefore
important that FICC Risk Management has a clear description of the
calculation of the margin methodology. Having a clear description of
the calculation of the margin methodology would promote an accurate and
smooth functioning of the margining process. Having an accurate and
smooth functioning of the margining process would enable FICC to more
accurately calculate the necessary margin from members and, as
described above, assure the safeguarding of securities and funds which
are in the custody or control of FICC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\19\
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\19\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act \20\ requires a covered
clearing agency 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. FICC believes that the proposed changes in Item II(A)1(1)
above are consistent with the requirements of Rule 17Ad-22(e)(4)(i)
under the Act.\21\ As described above, FICC believes these proposed
changes to revise the description of the stressed period used to
calculate the VaR Charge would provide FICC with more flexibility with
respect to the adjustment of the stressed period. FICC believes that
having more flexibility with respect to the adjustment of the stressed
period would allow FICC to respond to rapidly changing market
conditions more quickly and timely. Having the ability to respond to
rapidly changing market conditions more quickly and timely would in
turn help FICC better measure, monitor, and manage its credit exposures
to participants and those exposures arising from its payment, clearing,
and settlement processes. Moreover, the added flexibility would allow
FICC to collect more accurate margin amounts that would help offset the
risks presented to FICC by the changing market conditions, thus help
ensure that FICC maintains sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. Therefore, FICC believes that the proposed changes
described in Item II(A)1(1) above are consistent with the requirements
of Rule 17Ad-22(e)(4)(i) under the Act.\22\
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\20\ 17 CFR 240.17Ad-22(e)(4)(i).
\21\ Id.
\22\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act \23\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, 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. FICC believes that the proposed changes
in Item II(A)1(1) above are consistent with the requirements of Rule
17Ad-22(e)(6)(i).\24\ Specifically, FICC believes that the proposed
changes to replace the current detailed description of the stressed
period with a more general description, as described above, would
provide FICC with more flexibility to respond to rapidly changing
market conditions more quickly and timely because FICC would be able to
make adjustments to the stressed period without a rule change. Having
this flexibility would enable FICC to better risk manage its credit
exposure to its members because FICC would then be able to make
appropriate and timely adjustments to the stressed period, as described
above. Being able to adjust the stressed period quickly and timely
would allow FICC to continue to produce margin levels commensurate with
the risks and particular attributes of each relevant product,
portfolio, and market. Therefore, FICC believes this proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\25\
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\23\ 17 CFR 240.17Ad-22(e)(6)(i).
\24\ Id.
\25\ Id.
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Rule 17Ad-22(e)(6)(v) under the Act \26\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, uses an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products. FICC believes that the proposed
changes in Item II(A)1(1) above are consistent with the requirements of
Rule 17Ad-22(e)(6)(v).\27\ Specifically, FICC believes that the
proposed changes to replace the current detailed description of the
stressed period with a more general description, as described above,
would provide FICC with more flexibility to respond to rapidly changing
market conditions more quickly and timely because FICC would be able to
make adjustments to the stressed period without a rule change. Having
this flexibility would enable FICC to better risk manage its credit
exposure to its members because FICC would then be able to make
appropriate and timely adjustments to the stressed period, as described
above. Being able to adjust the stressed period quickly and timely
would allow FICC to continue to produce margin levels commensurate with
relevant product risk factors and portfolio effects across products.
Therefore, FICC believes this proposed change is consistent with Rule
17Ad-22(e)(6)(v) under the Act.\28\
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\26\ 17 CFR 240.17Ad-22(e)(6)(v).
\27\ Id.
\28\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
FICC believes proposed changes described in Item II(A)1(1) above
may have an impact on competition because these changes could result in
members being assessed a higher margin than they would have been
assessed under the current description of the stressed period. When
these proposed changes result in a higher VaR Charge, they could burden
competition for members that have lower operating margins or higher
costs of capital compared to other members. However, the increase in
VaR Charge would be in direct relation to the specific risks presented
by each member's portfolio, and each member's margin requirement would
continue to be calculated with the same parameters and at the same
confidence level for each member. Therefore, members that have a
similar portfolio, regardless of the type of member, would have similar
impacts on their margin
[[Page 14193]]
requirement amounts. As such, FICC believes any burden on competition
imposed by the proposed changes described in Item II(A)1(1) would not
be significant and, regardless of whether such burden on competition
could be deemed significant, would be necessary and appropriate, as
permitted by Section 17A(b)(3)(I) of the Act for the reasons described
in this filing and further below.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(I).
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FICC believes any burden on competition imposed by the proposed
changes described in Item II(A)1(1) would not be significant. As the
result of the Impact Study indicates, if a stressed period of 1.5 years
had been in place for GSD, the associated VaR Charge increase at GSD
would be approximately $387 million (or 2.1%) on average.
However, even if the burden on competition imposed by the proposed
changes described in Item II(A)1(1) were deemed significant, FICC
believes that any such burden on competition would be necessary
because, as described above, the proposed changes would provide FICC
with more flexibility with respect to the adjustment of the stressed
period and allow FICC to respond to rapidly changing market conditions
more quickly and timely. Having more flexibility with respect to this
calculation would thus help better ensure that FICC calculates and
collects adequate margin from members and thereby assure the
safeguarding of securities and funds which are in the custody and
control of FICC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\30\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
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In addition, FICC believes the proposed changes described in Item
II(A)1(1) are necessary to support FICC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(6)(i), and (e)(6)(v) under the Act.\31\ Specifically,
as described above, FICC believes these proposed changes would provide
FICC with more flexibility with respect to the adjustment of the
stressed period. Having more flexibility with respect to these
adjustments would allow FICC to respond to rapidly changing market
conditions more quickly and timely. Having the ability to respond to
rapidly changing market conditions more quickly and timely would in
turn help FICC better measure, monitor, and manage its credit exposures
to participants and those exposures arising from its payment, clearing,
and settlement processes, consistent with the requirements of Rule
17ad-22(e)(4)(i) under the Act.\32\
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\31\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(v).
\32\ 17 CFR 240.17Ad-22(e)(4)(i).
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FICC also believes these proposed changes would enable FICC to be
better equipped to respond to rapidly changing market conditions. FICC
believes having this flexibility would help lead to a better risk
management practice because it would enable FICC to adjust the stressed
period in response to fast changing market conditions. Being able to
adjust the stressed period in response to fast changing market
conditions would enable FICC to produce margin levels more commensurate
with the risks it faces as a CCP and help FICC cover its credit
exposures to its participants, consistent with the requirements of
Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the Act.\33\
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\33\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
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FICC also believes that any burden on competition that may be
imposed by the proposed changes described in Item II(A)1(1) would be
appropriate in furtherance of the Act because, as described above,
these proposed changes have been specifically designed to assure the
safeguarding of securities and funds which are in the custody and
control of FICC or for which it is responsible, as required by Section
17A(b)(3)(F) of the Act.\34\ As described above, the proposed changes
to revise the description of the stressed period used to calculate the
VaR Charge would also enable FICC to produce margin levels commensurate
with the risks and particular attributes of each member's portfolio.
Therefore, because the proposed changes are designed to provide FICC
with an appropriate measure of the risks presented by members'
portfolios, FICC believes these proposed changes are appropriately
designed to meet its risk management goals and regulatory obligations.
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\34\ 15 U.S.C. 78q-1(b)(3)(F).
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FICC believes that the proposed changes described in Item II(A)1(1)
above may also promote competition because these changes could also
result in members being assessed a lower margin than they would have
been assessed under the current description of the stressed period, and
thereby could potentially lower operating costs for members.\35\
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\35\ As the result of the Impact Study indicates, if FICC were
to change the stressed period pursuant to the proposed changes
described in Item II(A)1(1), some members would be assessed a lower
margin than they would have been assessed under the current
continuous one-year stressed period.
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With respect to the proposed changes described in Items II(A)1(2)
and II(A)1(3) above to make clarifying and technical changes to the GSD
QRM Methodology Document, FICC does not believe these proposed changes
would have any impact on competition because these proposed changes
would only enhance the clarity of the GSD QRM Methodology Document,
which would promote an accurate and smooth functioning of the margining
process at FICC and would not affect the substantive rights and
obligations of members.
(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#1b6f697a7f72757c7a757f767a69707e6f685b687e78357c746d"><span class="__cf_email__" data-cfemail="a0d4d2c1c4c9cec7c1cec4cdc1d2cbc5d4d3e0d3c5c38ec7cfd6">[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.
[[Page 14194]]
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#0a787f666f27696567676f647e794a796f69246d657c"><span class="__cf_email__" data-cfemail="0371766f662e606c6e6e666d7770437066602d646c75">[email protected]</span></a>. Please include
File Number SR-FICC-2023-003 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-2023-003. 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 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-2023-003 and should be submitted on
or before March 28, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-04580 Filed 3-6-23; 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.