Notice2023-18106
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a Portfolio Differential Charge as an Additional Component to the Government Securities Division Required Fund Deposit
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
August 23, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 162 (Wednesday, August 23, 2023)</title>
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[Federal Register Volume 88, Number 162 (Wednesday, August 23, 2023)]
[Notices]
[Pages 57485-57490]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-18106]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98160; File No. SR-FICC-2023-011]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change, as Modified by Amendment No.
1, To Adopt a Portfolio Differential Charge as an Additional Component
to the Government Securities Division Required Fund Deposit
August 17, 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 August 3, 2023, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-FICC-2023-011. On August 16, 2023, FICC filed Amendment
No. 1 to the proposed rule change, to make clarifications and
corrections to the proposed rule change.\3\ The proposed rule change,
as modified by Amendment No. 1, is 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.
\3\ Amendment No. 1 made clarifications and corrections to the
description of the proposed rule change and Exhibit 3a of the filing
(Summary of Impact Study) to incorporate a longer impact analysis.
As originally filed, the time-period of the impact analysis was
November 2021 to October 2022. As amended by Amendment No. 1, the
time-period of the impact analysis is November 2021 to March 2023.
These clarifications and corrections have been incorporated, as
appropriate, into the description of the proposed rule change in
Item II below. FICC has requested confidential treatment of Exhibit
3a, pursuant to 17 CFR 240.24b-2.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to FICC's
Government Securities Division (``GSD'') Rulebook (``Rules'') in order
to adopt a Portfolio Differential Charge (``PD Charge'') as an
additional component to the GSD Required Fund Deposit, as described in
greater detail below.\4\
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\4\ Terms not defined herein are defined in the GSD Rules,
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
FICC is proposing to enhance the methodology for calculating
Required Fund Deposit to the GSD Clearing Fund by adopting a new
component, the PD Charge, which would be calculated to mitigate the
risk presented to FICC by period-over-period fluctuations in a Member's
Margin Portfolio(s) that may occur between the collections of Member's
Required Fund Deposits.
Background
FICC, through GSD, serves as a central counterparty and provider of
clearance and settlement services for the U.S. Treasury securities, as
well as repurchase and reverse repurchase transactions involving U.S.
Treasury securities.\5\ As part of its market risk management strategy,
FICC manages its credit exposure to Members by determining the
appropriate Required Fund Deposit to the GSD Clearing Fund and
monitoring its sufficiency, as provided for in the GSD Rules.\6\ The
Required Fund Deposit serves as each Member's margin.
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\5\ GSD also clears and settles certain transactions on
securities issued or guaranteed by U.S. government agencies and
government sponsored enterprises.
\6\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 4. FICC's market risk management strategy is designed to comply
with Rule 17Ad-22(e)(4) under the Act, where these risks are
referred to as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
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The objective of a Member's margin is to mitigate potential losses
to FICC associated with liquidating a Member's portfolio in the event
FICC ceases to act for that Member (hereinafter referred to as a
``default'').\7\ The aggregate amount of all Members' margin
constitutes the GSD Clearing Fund. FICC would access the GSD Clearing
Fund should a defaulting Member's own margin be insufficient to satisfy
losses to FICC caused by the liquidation of that Member's portfolio.
Each Member's Required Fund Deposit is calculated at least twice daily
at the start-of-day and noon on each Business Day.
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\7\ The GSD Rules identify when FICC may cease to act for a
Member and the types of actions FICC may take. For example, FICC may
suspend a firm's membership with FICC or prohibit or limit a
Member's access to FICC's services in the event that Member defaults
on a financial or other obligation to FICC. See GSD Rule 21
(Restrictions on Access to Services) of the GSD Rules, supra note 4.
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FICC regularly assesses market and liquidity risks as such risks
relate to its margin methodologies to evaluate whether margin levels
are commensurate with the particular risk attributes of each relevant
product, portfolio, and market. For example, FICC employs daily
backtesting to determine the adequacy of each Member's Required Fund
Deposit.\8\ FICC compares the Required Fund Deposit \9\ for each Member
with the simulated liquidation gains/losses, using the actual positions
in the Member's portfolio(s) and the actual historical security
returns. A backtesting deficiency occurs when a Member's Required Fund
Deposit would not have been adequate to cover the projected liquidation
losses estimated from a Member's settlement activity based on
[[Page 57486]]
the backtesting results. Backtesting deficiencies highlight exposure
that could subject FICC to potential losses in the event that a Member
defaults.
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\8\ The Model Risk Management Framework (``Model Risk Management
Framework'') sets forth the model risk management practices of FICC
and states that Value at Risk (``VaR'') and Clearing Fund
requirement coverage backtesting would be performed on a daily basis
or more frequently. See Securities Exchange Act Release Nos. 81485
(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 (Jul. 13, 2021), 86 FR 38140 (Jul. 19, 2021) (SR-
FICC-2021-006), 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24, 2022)
(SR-FICC-2022-001), and 97890 (Jul. 13, 2023), 88 FR 46287 (Jul. 19,
2023) (SR-FICC-2023-008).
\9\ Members may be required to post additional collateral to the
GSD Clearing Fund in addition to their Required Fund Deposit amount.
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements),
supra note 4 (providing that adequate assurances of financial
responsibility of a member may be required, such as increased
Clearing Fund deposits). For backtesting comparisons, FICC uses the
Required Fund Deposit amount, without regard to the actual, total
collateral posted by the member to the GSD Clearing Fund.
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FICC investigates the cause(s) of any backtesting deficiencies and
determines if there is an identifiable cause of repeat backtesting
deficiencies. FICC also evaluates whether multiple Members may
experience backtesting deficiencies for the same underlying reason.
Pursuant to the GSD Rules, each Member's Required Fund Deposit
amount consists of a number of applicable components, each of which is
calculated to address specific risks faced by FICC, as identified
within the GSD Rules.\10\ These components include the VaR Charge,
Blackout Period Exposure Adjustment, Backtesting Charge, Holiday
Charge, Margin Liquidity Adjustment Charge, and special charge.\11\ The
VaR Charge generally comprises the largest portion of a Member's
Required Fund Deposit amount.
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\10\ Supra note 4.
\11\ See GSD Rule 4 (Clearing Fund and Loss Allocation), Section
1b. Supra note 4.
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The VaR Charge is based on the potential price volatility of
unsettled positions using a sensitivity-based Value-at-Risk (VaR)
methodology. The VaR methodology provides an estimate of the possible
losses for a given portfolio based on: (1) confidence level, (2) a time
horizon and (3) historical market volatility. The VaR methodology is
intended to capture the risks related to market price that is
associated with the Net Unsettled Positions in a Member's Margin
Portfolios. This risk-based margin methodology is designed to project
the potential losses that could occur in connection with the
liquidation of a defaulting Member's Margin Portfolio, assuming a
Margin Portfolio would take three days to liquidate in normal market
conditions. The projected liquidation gains or losses are used to
determine the amount of the VaR Charge to each Margin Portfolio, which
is calculated to capture the market price risk \12\ associated with
each Member's Margin Portfolio(s) at a 99% confidence level. The start-
of-day VaR component of the Required Fund Deposit addresses the risk
presented by a Member's start-of-day positions. GSD also calculates VaR
for intraday collection, which reflects the changes in a Member's
positions and risk profile due to the submission of new trades and
completed settlement activity from the start-of-day to noon.
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\12\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is
sometimes also referred to as volatility risk.
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The proposed change to include the PD Charge in the calculation of
Required Fund Deposit to the GSD Clearing Fund is the result of FICC's
regular review of the effectiveness of its margin methodology.
Proposed Change
The PD Charge is designed to capture variability in the VaR Charge
collected from the Member over the look back period. FICC believes the
proposed PD Charge would help mitigate the risks posed to FICC by the
variability of clearing activity submitted to GSD throughout the day by
measuring the historical period-over-period increases in the VaR Charge
of a Member over a given time period.
A Member's Margin Portfolio(s) may fluctuate significantly intraday
as the Member executes trades throughout the day. Given that the trades
are generally novated and guaranteed by FICC upon comparison,\13\ they
may result in a coverage gap due to large un-margined intraday
portfolio fluctuations that may not be mitigated until the collection
of the Required Fund Deposit occurs intraday, or on the next Business
Day. This exposure may result in backtesting deficiencies, and the PD
Charge is designed to mitigate such exposure.
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\13\ With respect to trades submitted in FICC's Sponsored GC
service, novation of a trade occurs when all of the requirements set
forth in GSD Rule 3A (Sponsoring Members and Sponsored Members),
Section 7(b)(ii) are met. Supra note 4.
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The proposed PD Charge would increase Members' Required Fund
Deposits by an amount designed to address the variability of clearing
activity submitted to GSD throughout the day, based upon the Member's
historical trading activity. The PD Charge would be calculated twice a
day and, if applicable, charged as a part of each Member's Required
Fund Deposit. Specifically, the PD Charge would look at historical
period-over-period increases between the (i) start-of-day and the
intraday VaR components and (ii) the intraday and the end-of-day VaR
components, respectively, of a Member's Required Fund Deposit over a
look-back period of no less than 100 days \14\ with a decay factor of
no greater than 1 and would be calculated to equal the exponentially
weighted moving average (``EWMA'') of such changes to the Member's VaR
Charge during the look-back period, times a multiplier that is no less
than 1 and no greater than 3, as determined by FICC from time to time
based on backtesting results.\15\ The array of VaR Charge increases
would be exponentially weighted to emphasize more recent observations
in determining the PD Charge. By addressing the period-over-period
changes to each Member's VaR Charge, the PD Charge would help mitigate
the risks posed to FICC by un-margined period-over-period fluctuations
to a Member's portfolio resulting from trading activity that would be
guaranteed during the coverage gap.
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\14\ Upon implementation, FICC would use a 100-day look-back
period in conjunction with a decay factor of 0.97. FICC has
determined that a 100-day look-back period with a decay factor of
0.97 would provide it with a sufficient time series to reflect the
current market conditions. As market conditions shifts, FICC may
modify the look-back period and/or the decay factor from time to
time; however, any change in the look-back period and/or the decay
factor would be subject to FICC's model governance process and
announced by FICC via an Important Notice posted to its website.
\15\ The uncertainty of the market condition and/or changes in
Members' business model may lead to changes in Member activity
pattern that would require a multiplier greater than 1 be invoked
from time to time. FICC would determine whether to modify the
multiplier based on the backtesting results to evaluate the
effectiveness of PD Charge as a mitigant of the position change risk
and may change the multiplier from time to time to maintain the
effectiveness of the PD Charge in generating sufficient backtest
coverage. Changes to the multiplier shall be approved through FICC's
model governance process and would be announced by FICC via an
Important Notice posted to its website.
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Accordingly, FICC is proposing to add a definition of ``Portfolio
Differential Charge'' to GSD Rule 1 (Definitions) that would provide
that the terms ``Portfolio Differential Charge'' or ``PD Charge'' mean,
with respect to each Margin Portfolio, an additional charge to be
included in each Member's Required Fund Deposit. The proposed
definition would also provide that the PD Charge shall be calculated
twice each Business Day as the exponentially weighted moving average
(``EWMA'') of the historical increases in the Member's VaR Charge that
occur between collections of Required Fund Deposits over a lookback
period of no less than 100 days with a decay factor of no greater than
1, times a multiplier that is no less than 1 and no greater than 3, as
determined by FICC from time to time based on backtesting results.
Furthermore, the proposed definition would provide that FICC will
provide Members with at a minimum 10 Business Days advance notice of
any change to the lookback period, the decay factor, and/or the
multiplier via an Important Notice.
In addition, FICC is proposing to amend Section 1b of GSD Rule 4
(Clearing Fund and Loss Allocation) to include the PD Charge as an
additional component in the calculation of each Member's Required Fund
Deposit.
[[Page 57487]]
Impact Study
FICC has conducted an impact study for the period from November
2021 to March 2023 (``Impact Study'').\16\ The results of the Impact
Study indicate that, if the proposed PD Charge had been in place during
the Impact Study period, the change would have resulted in an average
daily PD Charge of approximately $660 million for the start-of-day
margin calculation (approximately 2.2% of the start-of-day average
daily Clearing Fund deposit) and approximately $839 million for the
noon margin calculation (approximately 2.9% of the noon average daily
Clearing Fund deposit).
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\16\ GSD increased the minimum Required Fund Deposit for Members
to $1 million on Dec. 5, 2022 (see Securities Exchange Act Release
No. 96136 (Oct. 24, 2022) 87 FR 65268 (Oct. 28, 2022) (SR-FICC-2022-
006)); however, for the purpose of this Impact Study, the $1 million
minimum Requirement Fund Deposit is assumed to be in effect for the
entirety of the Impact Study period.
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The rolling 12-month Clearing Fund requirement backtesting coverage
ratio (from April 2022 through March 2023) would have improved by
approximately 25 bps (from 98.37% to 98.62%). Specifically, if the
proposed PD Charge had been in place during this 12-month period, the
number of backtesting deficiencies would have been reduced by 77 (from
498 to 421 or approximately 15%) and the backtesting coverage for 44
Members (approximately 34% of the GSD membership) would have improved,
with 14 Members who were below 99% coverage brought back to above 99%.
The average daily PD Charge in dollars per Member would be
approximately $5.4 million (approximately 2.2% of the average daily
Clearing Fund deposit per Member) for the start-of-day margin
calculation and approximately $6.9 million (approximately 2.9% of the
average daily Clearing Fund deposit per Member) for the noon margin
calculation.
The three largest average daily PD Charge in dollars for Members
would be $41.09 million (approximately 3.22% of its average daily
Clearing Fund deposit), $31.50 million (approximately 8.14% of its
average daily Clearing Fund deposit), and $26.40 million (approximately
5.90% of its average daily Clearing Fund deposit) for the start-of-day
margin calculation and $104.06 million (approximately 4.55% of its
average daily Clearing Fund deposit), $62.47 million (approximately
7.46% of its average daily Clearing Fund deposit), and $52.15 million
(approximately 6.38% of its average daily Clearing Fund deposit) for
the noon margin calculation.
The three largest average daily PD Charge for Members as
percentages of the relevant Member's average daily Clearing Fund
deposit would be 16.74% (PD Charge of $1.42 million), 15.76% (PD Charge
of $3.64 million), and 13.87% (PD Charge of $7.74 million) for the
start-of-day margin calculation and 39.76% (PD Charge $15.55 million),
26.16% (PD Charge of $0.43 million), and 22.47% (PD Charge of $21.42
million) for the noon margin calculation.
Implementation Timeframe
Subject to approval by the Commission, FICC expects to implement
this proposal by no later than 60 Business Days after such approval and
would announce the effective date of the proposed change by an
Important Notice posted to FICC's website.
2. Statutory Basis
FICC believes the proposed change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, FICC
believes the proposed rule change is consistent with section
17A(b)(3)(F) of the Act,\17\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i),
(e)(6)(iii), and (e)(23)(ii), each promulgated under the Act,\18\ for
the reasons described below.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(iii), and
(e)(23)(ii).
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Section 17A(b)(3)(F) of the Act requires that the rules of FICC be
designed to, among other things, assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible and be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\19\ FICC
believes the proposed change to implement a PD Charge is designed to
assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because it is
designed to mitigate risks to FICC by un-margined period-over-period
fluctuations to a Member's portfolio that could increase the risks to
FICC related to liquidating a Member's portfolio following that
Member's default. Specifically, the proposed PD Charge would allow FICC
to collect financial resources to cover exposures that it may face due
to fluctuations in a Member's portfolio that occur between collections
of Required Fund Deposits.
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\19\ 15 U.S.C. 78q-1(b)(3)(F).
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The Clearing Fund is a key tool that FICC uses to mitigate
potential losses to FICC associated with liquidating a Member's
portfolio in the event of Member default. Therefore, the proposed
change to include a PD Charge among the GSD Clearing Fund components
would enable FICC to better address period-over-period changes in a
Member's portfolio that occur between collections of Required Fund
Deposits, such that, in the event of Member default, FICC's operations
would not be disrupted and non-defaulting Members would not be exposed
to losses they cannot anticipate or control. In this way, the proposed
change to implement the PD Charge is 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.\20\
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\20\ Id.
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Rule 17Ad-22(e)(4)(i) under the Act requires, in part, 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.\21\ As described above, FICC believes the proposed change
to adopt a PD Charge would enable it to better identify, measure,
monitor, and, through the collection of Members' Required Fund
Deposits, manage its credit exposures to Members by maintaining
sufficient resources to cover those credit exposures fully with a high
degree of confidence. Specifically, FICC believes that the proposed PD
Charge would effectively mitigate the risks to FICC by un-margined
period-over-period fluctuations to a Member's portfolio and would
address the increased risks FICC may face related to liquidating a
Member's portfolio following that Member's default. Therefore, FICC
believes the proposal would enhance FICC's ability to effectively
identify, measure and monitor its credit exposures and would enhance
its ability to maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. As such, FICC believes the proposed change to adopt a PD
[[Page 57488]]
Charge is consistent with Rule 17Ad-22(e)(4)(i) under the Act.\22\
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\21\ 17 CFR 240.17Ad-22(e)(4)(i).
\22\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that FICC
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.\23\ The Required Fund Deposits are made up of risk-based
components (as margin) that are calculated and assessed daily to limit
FICC's credit exposures to Members. FICC's proposed change to introduce
a PD Charge is designed to more effectively address the risks presented
by un-margined period-over-period fluctuations to a Member's portfolio.
FICC believes the addition of the PD Charge would enable FICC to assess
a more appropriate level of margin that accounts for increases in these
risks that may occur between collections of Required Fund Deposits.
This proposed change is designed to assist FICC in maintaining a risk-
based margin system that considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
portfolio. Therefore, FICC believes the proposed change to adopt a PD
Charge is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\24\
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\23\ 17 CFR 240.17Ad-22(e)(6)(i).
\24\ Id.
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Rule 17Ad-22(e)(6)(iii) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, calculates margin sufficient to cover its potential future
exposure to participants in the interval between the last margin
collection and the close out of positions following a participant
default.\25\ The Required Fund Deposits are made up of risk-based
components (as margin) that are calculated and assessed daily to limit
FICC's credit exposures to Members. FICC's proposed change to introduce
a PD Charge is designed to more effectively address the risks presented
by un-margined period-over-period fluctuations to a Member's portfolio.
FICC believes the addition of the PD Charge would enable FICC to assess
a more appropriate level of margin that accounts for increases in these
risks that may occur between collections of Required Fund Deposits.
This proposed change is designed to assist FICC in maintaining a risk-
based margin system that produces margin levels sufficient to cover its
potential future exposure to participants in the interval between the
last margin collection and the close out of positions following a
participant default. Therefore, FICC believes the proposed change to
adopt a PD Charge is consistent with Rule 17Ad-22(e)(6)(iii) under the
Act.\26\
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\25\ 17 CFR 240.17Ad-22(e)(6)(iii).
\26\ Id.
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Rule 17Ad-22(e)(23)(ii) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for providing sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in FICC.\27\ FICC is
proposing to amend the GSD Rules to include a description of the PD
Charge, including the method by which FICC would calculate that charge.
Through these proposed amendments to the GSD Rules, the proposal would
assist FICC in providing its Members with sufficient information to
identify and evaluate the risks and costs, in the form of Required Fund
Deposits to the GSD Clearing Fund, that they incur by participating in
FICC. In this way, FICC believes the proposed change is consistent with
Rule 17Ad-22(e)(23)(ii) under the Act.\28\
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\27\ 17 CFR 240.17Ad-22(e)(23)(ii).
\28\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed change to adopt a PD Charge could
have an impact on competition. Specifically, FICC believes the proposed
charge could burden competition because it could result in Members
being assessed a higher Required Fund Deposit than they would have been
assessed under the current GSD Clearing Fund formula.
The impact of this proposal on a particular Member would depend on
the period-over-period change in the size and composition of the
Member's portfolio. The proposed change is not designed in a way that
is intended to or expected to impact Members of a certain legal entity
type or size or who employ a particular business model. FICC expects
that Members that present similar pattern in portfolio changes,
regardless of the type or size of the Member or a Member's particular
business practices, would have similar impact on their Required Fund
Deposit amounts as a result of the proposal.
When the proposal results in a larger Required Fund Deposit, the
proposed change could burden competition for Members that have lower
operating margins or higher costs of capital compared to other Members.
However, the increase in Required Fund Deposit would be in direct
relation to the specific risks presented by each Member's portfolio,
and each Member's Required Fund Deposit would continue to be calculated
with the same parameters and at the same confidence level for each
Member. Therefore, because the impact of the proposal on a Member is
relative to the specific risks presented by that Member's clearing
activity and not on the type or size of a Member, FICC believes that
any burden on competition imposed by the proposed change would be both
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 the above described burden on competition that may be
created by the proposed PD Charge would be necessary in furtherance of
the Act, specifically section 17A(b)(3)(F) of the Act.\30\ As stated
above, the proposed PD Charge is designed to address the risks to FICC
by un-margined period-over-period fluctuations to a Member's portfolio
that could increase the costs to FICC of liquidating a Member portfolio
in the event of the Member's default. Specifically, the proposed PD
Charge would allow FICC to collect sufficient financial resources to
cover exposure that it may face due to fluctuations in Members'
portfolios that occur between collections of margin. Therefore, FICC
believes this proposed change is necessary and appropriate in
furtherance of the requirements of section 17A(b)(3)(F) of the Act,
which requires that the GSD Rules be designed to assure the
safeguarding of securities and funds that are in FICC's custody or
control or which it is responsible.\31\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
\31\ Id.
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[[Page 57489]]
FICC believes the proposed change would also support FICC's
compliance with Rules 17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iii)
under the Act, which require FICC to establish, implement, maintain and
enforce written policies and procedures reasonably designed to (x)
effectively identify, measure, monitor, and manage its credit exposures
to 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; (y) 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; and (z) cover its credit exposures to its participants by
establishing a risk based margin system that, at a minimum, calculates
margin sufficient to cover its potential future exposure to
participants in the interval between the last margin collection and the
close out of positions following a participant default.\32\
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\32\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iii).
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As described above, FICC believes the introduction of the PD Charge
would allow FICC to employ a risk-based methodology that would address
the increased risks to FICC by period-over-period fluctuations to a
Member's portfolio that may occur between collections of the Required
Fund Deposits. Therefore, the proposed change would better limit FICC's
credit exposures to Members, necessary in furtherance of the
requirements of Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(6)(iii) under
the Act. \33\
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\33\ Id.
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FICC believes that the above-described burden on competition that
could be created by the proposed change would be appropriate in
furtherance of the Act because, as described above, such change has
been appropriately designed to assure the safeguarding of securities
and funds which are in the custody or control of FICC or for which it
is responsible, as required by section 17A(b)(3)(F) of the Act.\34\
Specifically, the proposed change would improve the risk-based
margining methodology that FICC employs to set margin requirements and
better limit FICC's credit exposures to its Members. As described
above, the proposed PD Charge would enable FICC to produce margin
levels more commensurate with the risks and particular attributes of
each Member's portfolio. The proposed PD Charge would do this by
measuring the historical period-over-period increases in the VaR Charge
of the Member. Therefore, because the proposed PD Charge is designed to
provide FICC with an appropriate measure of the risk presented by
Members' portfolios, FICC believes the proposed change is 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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(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 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="http://www.sec.gov/regulatory-actions/how-to-submit-comments">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#394d4b585d50575e58575d54584b525c4d4a794a5c5a175e564f"><span class="__cf_email__" data-cfemail="4c383e2d2825222b2d2228212d3e2729383f0c3f292f622b233a">[email protected]</span></a> or 202-551-5777.
FICC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6012150c054d030f0d0d050e1413201305034e070f16"><span class="__cf_email__" data-cfemail="5d2f283138703e3230303833292e1d2e383e733a322b">[email protected]</span></a>. Please include
File Number SR-FICC-2023-011 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-2023-011. 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://www.dtcc.com/legal/sec-rule-filings.aspx">http://www.dtcc.com/legal/sec-rule-filings.aspx</a>). Do not include
personal identifiable information in submissions; you should submit
only information that you wish to make available publicly. We may
redact in part or withhold entirely from publication submitted material
that is obscene or subject to copyright protection. All submissions
should refer to File Number SR-FICC-2023-011 and should be submitted on
or before September 13, 2023.
[[Page 57490]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\35\
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\35\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18106 Filed 8-22-23; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on August 23, 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.