Notice2023-08827
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Granting 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
April 27, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 88 Issue 81 (Thursday, April 27, 2023)</title>
</head>
<body><pre>
[Federal Register Volume 88, Number 81 (Thursday, April 27, 2023)]
[Notices]
[Pages 25721-25725]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-08827]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97342; File No. SR-FICC-2023-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Granting Proposed Rule Change To Revise the Description of the
Stressed Period Used To Calculate the Value-at-Risk Charge and Make
Other Changes
April 21, 2023.
On February 17, 2023, the Fixed Income Clearing Corporation
(``FICC'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change SR-FICC-2023-003 pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\
and Rule 19b-4 thereunder.\2\ The proposed rule change was published
for comment in the Federal Register on March 7, 2023.\3\ The Commission
has received no comments regarding the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 97001 (Mar. 1, 2023), 88
FR 14189 (Mar. 7, 2023) (File No. SR-FICC-2023-003) (``Notice'').
---------------------------------------------------------------------------
I. Description of the Proposed Rule Change
FICC operates two divisions: the Government Securities Division
(``GSD'') and the Mortgage Backed Securities Division (``MBSD''). GSD
provides trade comparison, netting, risk management, settlement, and
central counterparty services for the U.S. Government securities
market. 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.
A key tool that FICC uses to manage its credit exposures to its
members is the daily collection of margin from each member. A member's
margin is designed to mitigate potential losses associated with
liquidation of the member's portfolio in the event of that member's
default. The aggregated amount of all GSD and MBSD members' margin
constitutes the GSD Clearing Fund and MBSD 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 the 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 states that it has observed significant volatility in the U.S.
government securities market due to tightening monetary policy,
increasing inflation, and recession fears, and that this volatility has
led to greater risk exposures for FICC.\4\ FICC represents that, in
order to mitigate the increased risk exposures, FICC has to quickly and
timely respond to rapidly changing market conditions.\5\ For example,
in order to respond to rapidly changing market conditions, FICC states
that it may need to quickly 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.\6\
---------------------------------------------------------------------------
\4\ See Notice, supra note 3, 88 FR at 14189.
\5\ Id.
\6\ Id.
---------------------------------------------------------------------------
Accordingly, FICC is proposing to amend the GSD Quantitative Risk
Management (``QRM'') Methodology Document--GSD Initial Market Risk
Margin Model (``GSD QRM Methodology Document'') \7\ and the MBSD
Methodology and Model Operations Document--MBSD Quantitative Risk Model
(``MBSD QRM Methodology Document,'' \8\ and collectively with the GSD
QRM Methodology Document, the ``QRM Methodology Documents'') to revise
the description of the stressed period used to calculate the VaR Charge
in order to help FICC quickly and timely adjust the look-back period
used for calculating the VaR Charge with an appropriate stressed
period, as needed. FICC states that adjustments to the look-back period
could affect the amount of the VaR Charge that members are assessed by
either increasing or decreasing such charge to reflect the level of
risk the activities of the members presented to FICC.\9\ FICC is also
proposing to amend the GSD QRM Methodology Document to clarify the
language describing the parameters used to calculate the VaR Floor.\10\
Finally, FICC is proposing to
[[Page 25722]]
amend the GSD QRM Methodology Document to make certain technical
changes described in greater detail below.
---------------------------------------------------------------------------
\7\ FICC filed an excerpt of the GSD QRM Methodology Document
showing the proposed changes as a confidential exhibit to this
proposed rule change, pursuant to 17 CFR 240.24-b2. FICC originally
filed the GSD QRM Methodology Document confidentially as part of a
previous proposed rule change and advance notice approved by the
Commission regarding FICC's GSD sensitivity VaR. See Securities
Exchange Act Release Nos. 83362 (Jun. 1, 2018), 83 FR 26514 (Jun. 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 Document 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 (Oct. 14, 2020), 85 FR 66630 (Oct. 20, 2020) (SR-FICC-2020-
009), 93234 (Oct. 1, 2021), 86 FR 55891 (Oct. 7, 2021) (SR-FICC-
2021-007), and 95605 (Aug. 25, 2022), 87 FR 53522 (Aug. 31, 2022)
(SR-FICC-2022-005).
\8\ FICC filed an excerpt of the MBSD QRM Methodology Document
showing the proposed changes as a confidential exhibit to this
proposed rule change, pursuant to 17 CFR 240.24-b2. FICC originally
filed the MBSD QRM Methodology Document confidentially as part of a
previous proposed rule change and advance notice approved by the
Commission regarding FICC's MBSD sensitivity VaR. See Securities
Exchange Act Release Nos. 79868 (Jan. 24, 2017), 82 FR 8780 (Jan.
30, 2017) (SR-FICC-2016-007) and 79843 (Jan. 19, 2017), 82 FR 8555
(Jan. 26, 2017) (SR-FICC-2016-801). The MBSD QRM Methodology
Document 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 (Oct. 14, 2020), 85 FR 66630 (Oct. 20, 2020)
(SR-FICC-2020-009), 92303 (Jun. 30, 2021), 86 FR 35854 (Jul. 7,
2021) (SR-FICC-2020-017) and 95070 (Jun. 8, 2022), 87 FR 36014 (Jun.
14, 2022) (SR-FICC-2022-002).
\9\ See Notice, supra note 3, 88 FR at 14189.
\10\ Capitalized terms used herein and not defined shall have
the meaning assigned to such terms in the FICC's GSD Rulebook (``GSD
Rules'') and MBSD Clearing Rules (``MBSD Rules''), available at
<a href="http://www.dtcc.com/legal/rules-and-procedures.aspx">http://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
---------------------------------------------------------------------------
A. Revising the Description of the Stressed Period Used To Calculate
the VaR Charge
FICC calculates VaR Charge by using a methodology referred to as
the sensitivity approach. The sensitivity approach allows FICC 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 \11\ 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 events, FICC will include an additional period of historically
observed stressed market events to the 10-year look-back period.\12\
---------------------------------------------------------------------------
\11\ FICC states that 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 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. See Notice, supra note 3,
88 FR at 14189-90.
\12\ See Notice, supra note 3, 88 FR at 14190.
---------------------------------------------------------------------------
The QRM Methodology Documents currently describe the additional
stressed period as a configurable continuous period (typically one
year). The GSD QRM Methodology Document further specifies the duration
of the stressed period as one-year of stressed market events. FICC
states that it regularly reviews metrics from various assessments to
ensure the GSD and MBSD models are performing as designed.
In order to provide FICC with more flexibility with respect to the
inclusion of sufficient number of stressed market events 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 the GSD QRM Methodology
Document (in Sections 2.10.1 (The list of key parameters) and A4.5.16.1
(Stressed VaR Calculation)), as well as the MBSD QRM Methodology
Document (Section 5.17.1 (Stressed VaR Calculation)), and replace it
with a more general description. Specifically, the proposed new
description of the stressed period would provide in the GSD QRM
Methodology Document (Section A4.5.16.1) and the MBSD QRM Methodology
Document (Section 5.17.1) 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 events
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. FICC states that it
is currently contemplating changing the stressed period at GSD from one
year to 1.5 years while keeping the current one-year stressed period at
MBSD unchanged.\13\
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
In addition, the proposed new description would provide that, when
determining whether it is necessary to add a stressed period to the 10-
year historical look-back period (and the appropriate length of an
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 events in the current
10-year historical look-back period, (2) backtesting coverage ratios,
and (3) market volatility observed by FICC. Further, the proposed new
description would provide that changes to the stressed period shall be
approved through FICC's model governance process set forth in the
Clearing Agency Model Risk Management Framework (``Framework''),\14\
and any current stressed period shall be documented and published to
FICC members at the time such stressed period becomes effective.\15\
---------------------------------------------------------------------------
\14\ The 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
(Aug. 25, 2017), 82 FR 41433 (Aug. 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 (Jul. 13, 2021), 86 FR 38140 (Jul. 19,
2021) (File No. SR-FICC-2021-006), 92381 (Jul. 13, 2021), 86 FR
38163 (Jul. 19, 2021) (File No. SR-NSCC-2021-008), 92379 (Jul. 13,
2021), 86 FR 38143 (Jul. 19, 2021) (File No. SR-DTC-2021-003), 94271
(Feb. 17, 2022), 87 FR 10411 (Feb. 24, 2022) (File No. SR-FICC-2022-
001), 94272 (Feb. 17, 2022) 87 FR 10419 (Feb. 24, 2022) (File No.
SR-NSCC-2022-001), and 94273 (Feb. 17, 2022), 87 FR 10395 (Feb. 24,
2022) (File No. SR-DTC-2022-001).
\15\ See Notice, supra note 3, 88 FR at 14190.
---------------------------------------------------------------------------
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,\16\
would be more streamlined and not require a rule change.\17\ By being
able to quickly and timely make adjustments to the stressed period,
FICC states that it would have the flexibility to respond to rapidly
changing market conditions more quickly and timely, which would, in
turn, help better ensure that FICC calculates and collects adequate
margin from members and risk manages its credit exposures to its
members.\18\ The look-back period would continue to be tracked in the
monthly model parameter report, pursuant to the QRM Methodology
Documents, and any changes to the look-back period \19\ would continue
to be subject to the internal model governance process of the
Depository Trust and Clearing Corporation (``DTCC''), as described in
the Framework.\20\
---------------------------------------------------------------------------
\16\ 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 events. Id.
\17\ 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).
\18\ See Notice, supra note 3, 88 FR at 14190.
\19\ The look-back period includes the stressed period, if any.
Id.
\20\ See supra note 14.
---------------------------------------------------------------------------
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 indicate that, if a stressed period of 1.5 years
had been in place for GSD,\21\ the GSD's rolling 12-month VaR model
backtesting coverage ratio would have improved by 29 bps (from 98.52%
[[Page 25723]]
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.\22\
---------------------------------------------------------------------------
\21\ As noted above, FICC states that it is currently
contemplating changing the stressed period at GSD from one year to
1.5 years while keeping the current one-year stressed period at MBSD
unchanged. See Notice, supra note 3, 88 FR at 14190.
\22\ FICC filed a summary of the Impact Study as confidential
Exhibit 3 to this proposed rule change. Exhibit 3 provides more
granular data concerning these results, including comparisons of the
GSD VaR model backtesting coverage ratios for the current stressed
period against the contemplated 1.5 year stressed period on a
monthly basis, as well as comparisons of member-level VaR Charge
amounts under those two stressed periods. FICC requested
confidential treatment of Exhibit 3 pursuant to 17 CFR 240.24-b2.
---------------------------------------------------------------------------
The Impact Study further indicated that 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.
B. Clarifying the VaR 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 \23\ 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 to protect FICC against such risk in the event that
FICC is required to liquidate a large securities portfolio in stressed
market conditions.\24\
---------------------------------------------------------------------------
\23\ See definition of ``VaR Charge'' in GSD Rule 1
(Definitions), supra note 10.
\24\ See Securities Exchange Act Release Nos. 83362 (Jun. 1,
2018), 83 FR 26514 (Jun. 7, 2018) (SR-FICC-2018-001) and 83223 (May
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
---------------------------------------------------------------------------
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%.\25\ 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.
---------------------------------------------------------------------------
\25\ See definition of ``VaR Charge'' in GSD Rule 1
(Definitions), supra note 10.
---------------------------------------------------------------------------
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
Framework.\26\
---------------------------------------------------------------------------
\26\ See supra note 14.
---------------------------------------------------------------------------
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.
C. 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.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and 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 thereunder applicable to FICC.\27\ In
particular, the Commission finds that the proposed rule change is
consistent with Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,\28\ as
well as Rules 17Ad-22(e)(4) and (e)(6) thereunder.\29\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78s(b)(2)(C).
\28\ 15 U.S.C. 78q-1(b)(3)(F) and (b)(3)(I).
\29\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(v).
---------------------------------------------------------------------------
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 be designed to, among other things, promote the
prompt and accurate clearance and settlement of securities transactions
and assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\30\
---------------------------------------------------------------------------
\30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described in Section I.A above, FICC proposes replacing the
current detailed description of the stressed period in the QRM
Methodology
[[Page 25724]]
Documents with a more general description, so FICC would have the
flexibility to quickly adjust the look-back period 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. Specifically, the proposal would change the
current description of the stressed period in the QRM Methodology
Documents from a configurable continuous period that is typically one
year to a continuous period, or more than one non-continuous period,
that would be no shorter than 6 months and no longer than 36 months.
As described above in Section I.A and in the Notice, FICC has
provided data demonstrating that if FICC had changed 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), GSD's rolling
12-month VaR model backtesting coverage ratio would have increased from
98.52% to 98.81% during the period of January 2021 to October 2022.\31\
The Commission has reviewed FICC's data and agrees that its results
indicate that the proposed changes should help FICC generate margin
amounts that more effectively cover its credit exposures than under the
current rule.
---------------------------------------------------------------------------
\31\ See Notice, supra note 3, 88 FR at 14191.
---------------------------------------------------------------------------
Accordingly, the Commission believes that the proposed change to
the description of the stressed period should provide FICC with more
flexibility to quickly adjust the stressed period, which should enhance
FICC's ability to collect margin that better reflects the risks and
particular attributes of its members' portfolios during periods rapidly
changing market conditions. For these reasons, the Commission believes
that implementing this change should help ensure that, in the event of
a member default, FICC's operation of its critical clearance and
settlement services would not be disrupted because of insufficient
financial resources. Accordingly, the Commission finds that the change
to the description of the stressed period should help FICC to continue
providing prompt and accurate clearance and settlement of securities
transactions in the event of a member default, consistent with Section
17A(b)(3)(F) of the Act.
Moreover, as described above in Section I, in the event of a
clearing member default, FICC would access the mutualized the Clearing
Fund should a defaulted member's own margin be insufficient to satisfy
losses to FICC caused by the liquidation of that member's portfolio.
The proposed change to the description of the stressed period should
help FICC collect sufficient margin from members, thereby limiting non-
defaulting members' exposure to mutualized losses in the event of a
member default. The Commission believes that by helping to limit the
exposure of FICC's non-defaulting members to mutualized losses, the
proposed changes should help FICC assure the safeguarding of securities
and funds which are in its custody or control, consistent with Section
17A(b)(3)(F) of the Act.
In addition to the proposed changes to the stressed period, FICC
proposes several technical and conforming changes, described above in
Sections I.B and I.C, to enhance the clarity of the GSD QRM Methodology
Document. For example, for consistency with the GSD Rules, FICC would
clarify in the GSD QRM Methodology Document that the floor parameters
used for the calculation of the VaR Floor would be specified in the GSD
Rules, that those floor parameters would be 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. The Commission believes that greater clarity of the GSD QRM
Methodology Document should better enable FICC to effectively implement
the document's provisions. Accordingly, the Commission believes that
these proposed changes should better enable FICC to assess and collect
sufficient margin from its members, thereby assuring the safeguarding
of securities and funds that are in FICC's custody or control,
consistent with Section 17A(b)(3)(F) of the Act.
B. Consistency With Rule 17Ad-22(e)(4) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires a covered clearing
agency \32\ 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.\33\
---------------------------------------------------------------------------
\32\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Act (15 U.S.C. 78q-1 et seq.) that is designated systemically
important by Financial Stability Oversight Council (``FSOC'')
pursuant to the Clearing Supervision Act (12 U.S.C. 5461 et seq.).
See 17 CFR 240.17Ad-22(a)(5) and (a)(6). Because FICC is a
registered clearing agency with the Commission that has been
designated systemically important by FSOC, FICC is a covered
clearing agency.
\33\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described in Section I.A above, FICC's proposal to change the
description of the stressed period in the QRM Methodology Documents
should enhance FICC's ability to calculate and collect sufficient
margin from its members. For example, the results of FICC's Impact
Study demonstrate that during the period of January 2021 to October
2022, GSD's rolling 12-month VaR model backtesting coverage ratio would
have improved by 29 bps (from 98.52% to 98.81%) by increasing the look-
back period to 1.5 years.\34\ The added flexibility from the more
general description of the stressed period under the proposal should
also provide FICC with the ability to quickly adjust the stress period
in response to rapidly changing market conditions, which in turn,
should better enable FICC to risk manage its members' positions and
collect sufficient margin to effectively cover FICC's credit exposures.
---------------------------------------------------------------------------
\34\ See supra note 22.
---------------------------------------------------------------------------
Because the foregoing proposed changes should better enable FICC to
collect sufficient margin from members, the Commission believes that
the proposed changes should enhance FICC's ability to maintain
sufficient financial resources to cover its credit exposures to
applicable member portfolios fully with a high degree of confidence,
consistent with Rule 17Ad-22(e)(4)(i) under the Act.
C. Consistency With Rule 17Ad-22(e)(6) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires a covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\35\ Rule 17Ad-22(e)(6)(v) under the Act requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, uses an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products.\36\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17Ad-22(e)(6)(i).
\36\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------
[[Page 25725]]
As described in Section I.A above, FICC's proposal to replace the
current detailed description of the stressed period with a more general
description should give FICC more flexibility to respond to rapidly
changing market conditions more quickly because FICC would be able to
make adjustments to the stressed period without a rule change. As a
result, this flexibility should enable FICC to better risk manage its
credit exposure by enhancing FICC's ability to calculate and collect
margin commensurate with the risks and particular attributes of each
member's portfolio.
For these reasons, the Commission believes that the proposed
changes should help ensure that FICC produces margin levels
commensurate with the risks and particular attributes of its members'
portfolios by adding flexibility to parameters for the stressed period
to help ensure that the look-back period captures a sufficient number
of stressed market events, and allowing FICC to make timely adjustments
to the stressed period in response to rapidly changing market
conditions. Accordingly, the Commission believes that the proposed
changes would enhance FICC's risk-based margin system to better enable
FICC to cover its credit exposures to its members because the proposed
changes consider the risks and particular attributes of the relevant
products, portfolios, and markets, consistent with the requirements of
Rule 17Ad-22(e)(6)(i).\37\ Similarly, the Commission believes that the
proposed changes are reasonably designed to cover FICC's credit
exposures to its members because the proposed changes would enhance
FICC's risk-based margin system using appropriate methods for measuring
credit exposures that account for relevant product risk factors and
portfolio effects, consistent with the requirements of Rule 17Ad-
22(e)(6)(v).\38\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(6)(i).
\38\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------
III. 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 \39\ and
the rules and regulations promulgated thereunder. It is therefore
ordered, pursuant to Section 19(b)(2) of the Act \40\ that proposed
rule change SR-FICC-2023-003, be, and hereby are, approved.\41\
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78q-1.
\40\ 15 U.S.C. 78s(b)(2).
\41\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\42\
---------------------------------------------------------------------------
\42\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-08827 Filed 4-26-23; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on April 27, 2023.
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.