Notice2023-21783
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment No. 1, Relating to the Margin Liquidity Adjustment Charge
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
October 3, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 190 (Tuesday, October 3, 2023)</title>
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[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68179-68186]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21783]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98558; File No. SR-FICC-2023-012]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1,
Relating to the Margin Liquidity Adjustment Charge
September 27, 2023.
I. Introduction
On August 3, 2023, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2023-012 to amend FICC's Government Securities Division (``GSD'')
Rulebook (``GSD Rules'') and Mortgage-Backed Securities Division
(``MBSD'') Clearing Rules (``MBSD Rules,'' and collectively with the
GSD Rules, the ``Rules'') \3\ to enhance FICC's margin methodology with
respect to the Margin Liquidity Adjustment Charge (``MLA Charge''). The
proposed rule change was published for public comment in the Federal
Register on August 24, 2023.\4\ The Commission has received no comments
on the proposed rule change. On August 22, 2023, FICC filed Amendment
No. 1 to the proposed rule change, to make clarifications to the
proposed rule change.\5\ The proposed
[[Page 68180]]
rule change, as modified by Amendment No. 1, is hereinafter referred to
as the ``Proposed Rule Change.'' The Commission is publishing this
notice to solicit comments on Amendment No. 1 from interested persons,
and, for the reasons discussed below, the Commission is approving the
Proposed Rule Change on an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Terms not defined herein are defined in the GSD Rules and
MBSD Rules, as applicable, available at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>.
\4\ See Securities Exchange Act Release No. 98163 (Aug. 18,
2023), 88 FR 58004 (Aug. 24, 2023) (File No. SR-FICC-2023-012)
(``Notice of Filing'').
\5\ Amendment No. 1 made clarifications and corrections to
Exhibit 3b of the filing (Proposed Changes to the Depository Trust
and Clearing Corporation (``DTCC'') Model Development
Documentation--FICC Market Liquidity Adjustment Model and Bid-ask
Charge Model) to include a description of a term used in a
calculation and to remove an unnecessary chart. These clarifications
and corrections do not substantively change proposed rule change.
FICC has requested confidential treatment of Exhibit 3b, pursuant to
17 CFR 240.24b-2.
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II. Background
FICC operates two divisions: GSD and MBSD. GSD provides trade
comparison, netting, risk management, settlement, and central
counterparty (``CCP'') 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. As a CCP, FICC interposes itself as the
buyer to every seller and seller to every buyer for the financial
transactions it clears. As such, FICC is exposed to the risk that one
or more of its members may fail to make a payment or to deliver
securities.
A key tool that FICC uses to manage its credit exposures to its
members is the daily collection of the Required Fund Deposit (i.e.,
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, respectively, 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 several components, each of which is
designed to address specific risks faced by FICC arising out of its
members' trading activity. One of these components is the MLA Charge.
As described more fully below, the MLA Charge is designed to address
the risk presented to FICC by member portfolios that contain large net
unsettled positions in a particular group of securities with a similar
risk profile or in a particular transaction type.
In the event of a member default, the Rules \6\ provide FICC with
the authority to close out and manage the positions in a defaulted
member's portfolio. The process of closing out a defaulted member's
portfolio typically involves buying and selling securities that the
defaulted member was obligated to deliver and receive to and from FICC,
or otherwise liquidating the portfolio.\7\ FICC's transaction costs to
liquidate the securities in a defaulted member's portfolio are affected
by, among other things, the marketability of such securities (``market
impact costs''). As a general matter, less marketable securities are
more difficult and costly to liquidate within the three-day assumed
period of risk. One factor that could reduce the marketability of the
securities in a defaulted member's portfolio is if the portfolio were
to contain a large concentration of net unsettled positions in a
particular group of securities with a similar risk profile or in a
particular transaction type. Therefore, such portfolios create the risk
that FICC may face increased transaction costs to liquidate in the
event of a member default. The MLA Charge is the margin component
designed to mitigate the foregoing risk.
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\6\ See GSD Rule 22A (Procedures for When the Corporation Ceases
to Act) and MBSD Rule 17 (Procedures for When the Corporation Ceases
to Act), supra note 3.
\7\ FICC's margin methodology assumes that a defaulted member's
portfolio would take three days to liquidate in normal market
conditions.
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A. Current MLA Charge
To calculate the MLA Charge, FICC categorizes securities into asset
groups that share similar risk profiles. Under the current GSD Rules,
the asset groups include: (a) U.S. Treasury securities, which are
further categorized into subgroups by maturity--those maturing in (i)
less than one year, (ii) equal to or more than one year and less than
two years, (iii) equal to or more than two years and less than five
years, (iv) equal to or more than five years and less than ten years,
and (v) equal to or more than ten years; (b) Treasury-Inflation
Protected Securities (``TIPS''), which are further categorized into
subgroups by maturity--those maturing in (i) less than two years, (ii)
equal to or more than two years and less than six years, (iii) equal to
or more than six years and less than eleven years, and (iv) equal to or
more than eleven years; (c) U.S. agency bonds; and (d) mortgage pools
transactions.\8\ Under the current MBSD Rules, there is currently one
mortgage-backed securities asset group.\9\
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\8\ See GSD Rule 1 (definition of ``Margin Liquidity Adjustment
Charge''), supra note 3. Additional details regarding the
calculation of the MLA Charge are set forth in the DTCC Model
Development Documentation--FICC Market Liquidity Adjustment Model
and Bid-ask Charge Model (``Model Development Documentation''). FICC
would revise the Model Development Document to incorporate the
changes in the Proposed Rule Change and included copies of changes
to the Model Development Document in Exhibit 3b to the Proposed Rule
Change. Pursuant to 17 CFR 240.24b-2, FICC requested confidential
treatment of Exhibit 3b.
\9\ See MBSD Rule 1 (definition of ``Margin Liquidity Adjustment
Charge''), supra note 3.
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FICC designed the MLA Charge calculation to compare the total
market value of a portfolio's net unsettled positions in a particular
asset group to the available trading volume of that asset group (or
subgroup) in the market.\10\ If the market value of the portfolio's net
unsettled positions in an asset group is large in comparison to the
available trading volume of that asset group, then FICC faces the risk
of increased transaction costs to liquidate those positions in the
event of a member default.\11\
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\10\ FICC determines average daily trading volume by reviewing
data that is made publicly available by the Securities Industry and
Financial Markets Association (``SIFMA''), at <a href="https://www.sifma.org/resources/archive/research/statistics">https://www.sifma.org/resources/archive/research/statistics</a>. See Notice of Filing, supra
note 4, at 58006.
\11\ See id.
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Calculation of the MLA Charge involves several steps, which are
generally described as part of the definition of the MLA Charge in Rule
1.\12\ First, FICC calculates the market impact cost with respect to
the member's net unsettled positions in each asset group.\13\ To
determine the market impact cost for net unsettled positions in
Treasuries maturing in less than one year and TIPS at GSD, FICC uses
the directional market impact cost, which is a function of the net
unsettled positions' net directional market value.\14\ To determine the
market impact cost for all other net unsettled positions at GSD and
MBSD, FICC adds together two components: (1) the directional market
impact cost, as described above, and (2) the basis cost, which is based
on the net unsettled positions' gross market value.\15\ The calculation
of market impact cost for net unsettled positions in Treasuries
maturing in less than one year and TIPS does not include basis cost
because basis risk is negligible for
[[Page 68181]]
these types of positions.\16\ For all asset groups, when determining
the market impact cost at GSD and MBSD, the net directional market
value and the gross market value of the net unsettled positions are
divided by the average daily volumes of the securities in that asset
group over a lookback period.\17\
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\12\ See supra notes 8 and 9.
\13\ See id.
\14\ The net directional market value of an asset group within a
portfolio equals the absolute difference between the market value of
the long net unsettled positions in that asset group, and the market
value of the short net unsettled positions in that asset group. For
example, if the market value of the long net unsettled positions is
$100,000, and the market value of the short net unsettled positions
is $150,000, the net directional market value of the asset group is
$50,000. See id.
\15\ To determine the gross market value of the net unsettled
positions in each asset group, FICC sums the absolute value of each
CUISP in the asset group. See id.
\16\ See id.
\17\ See supra note 10.
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Next, FICC compares the calculated market impact cost to a portion
of the Value at Risk (``VaR'') Charge (``VaR Charge'') that is
allocated to the net unsettled positions in those asset groups.\18\ If
the ratio of the calculated market impact cost to a portion of the VaR
Charge is greater than a prescribed threshold,\19\ FICC applies an MLA
Charge to that asset group.\20\ If the ratio of these two amounts is
equal to or less than the threshold, FICC does not apply an MLA Charge
to that asset group.\21\ In addition, FICC may apply a downward
adjusting scaling factor in the calculation of the MLA Charge based on
the ratio of the calculated market impact cost to the 1-day VaR
Charge.\22\
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\18\ The VaR Charge is a margin component designed to mitigate
the risk that market volatility could cause the price of securities
in a member's portfolio to change between trade execution and
settlement. See GSD Rule 1 (definition of ``VaR Charge''); MBSD Rule
1 (definition of ``VaR Charge''), supra note 3. The VaR Charge is
typically the largest component of a member's margin requirement.
For purposes of calculating the MLA Charge, FICC uses a portion of
the VaR Charge that is based on a one-day assumed period of risk and
calculated by applying a simple square-root of time scaling,
referred to herein as the ``1-day VaR Charge.'' See Notice of
Filing, supra note 4, at 58006.
\19\ The threshold is based on an estimate of the market impact
cost that is incorporated into the calculation of the 1-day VaR
Charge, such that FICC only applies an MLA Charge when the
calculated market impact cost exceeds this prescribed threshold.
FICC reviews its method for calculating the thresholds from time to
time. Any changes that FICC deems appropriate would be subject to
FICC's model risk management governance procedures set forth in the
Clearing Agency Model Risk Management Framework (``Model Risk
Management Framework''). See Securities Exchange Act Release Nos.
81485 (Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-
014); 84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-
2018-010); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-
FICC-2020-004); 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021)
(SR-FICC-2021-006); 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24,
2022) (SR-FICC-2022-001); and 97890 (July 13, 2023), 88 FR 46287
(July 19, 2023) (SR-FICC-2023-008).
\20\ Notice of Filing, supra note 4, at 58006.
\21\ See id.
\22\ See id.
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For each member portfolio, FICC adds together the MLA Charges (if
any) for each asset group to determine the total MLA Charge for the
member portfolio.\23\ FICC calculates the final MLA Charge daily, and
if applicable, includes the MLA Charge as a margin component.\24\
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\23\ See id.
\24\ See id.
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B. Current MLA Charge and MLA Excess Amount for Sponsored Members
A Sponsoring Member is permitted to submit to FICC, for comparison,
novation, and netting, certain eligible securities transactions of its
Sponsored Members.\25\ A Sponsored Member may be sponsored by a single
Sponsoring Member or by multiple Sponsoring Members. FICC requires each
Sponsoring Member to establish an omnibus account at FICC (separate
from its regular netting account) for Sponsored Member trading
activity.\26\ Sponsored Members are generally required to meet the
definition of a qualified institutional buyer (``QIB''), as defined in
Rule 144A \27\ under the Securities Act of 1933.\28\
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\25\ Securities Exchange Act Release No. 51896 (June 21, 2005),
70 FR 36981 (June 27, 2005) (SR-FICC-2004-22). See GSD Rule 3A,
supra note 3.
\26\ See GSD Rule 3A, Section 8, supra note 3.
\27\ 17 CFR 230.144A.
\28\ 15 U.S.C. 77a et seq.
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For operational and administrative purposes, FICC interacts solely
with the Sponsoring Member as agent for purposes of the day-to-day
satisfaction of its Sponsored Members' obligations to and from FICC,
including their securities and funds-only settlement obligations.\29\
Sponsoring Members are also responsible for providing FICC with a
Sponsoring Member Guaranty, whereby the Sponsoring Member guarantees to
FICC the payment and performance by its Sponsored Members of their
obligations under the GSD Rules.\30\ Although Sponsored Members are
principally liable to FICC for their own settlement obligations under
the GSD Rules, the Sponsoring Member Guaranty requires the Sponsoring
Member to satisfy those settlement obligations on behalf of a Sponsored
Member if the Sponsored Member defaults and fails to perform its
settlement obligations.\31\
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\29\ See GSD Rule 3A, Section 8, supra note 3.
\30\ See GSD Rule 1 (definition of ``Sponsoring Member
Guaranty'') and GSD Rule 3A, Section 2(c), supra note 3.
\31\ Id.
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FICC's calculation of the MLA Charge for a Sponsored Member that
clears through a single account sponsored by a single Sponsoring Member
is the same as described above in Section II.A.\32\ However, for a
Sponsored Member that clears through multiple accounts sponsored by
multiple Sponsoring Members, in addition to calculating an MLA Charge
for each account as described above, FICC also calculates an MLA Charge
for the combined net unsettled positions of the Sponsored Member across
all of its Sponsoring Members (referred to herein as the ``consolidated
portfolio'').\33\
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\32\ Notice of Filing, supra note 4, at 58006.
\33\ See id.
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Currently, if the MLA Charge of the consolidated portfolio is
greater than the sum of all MLA Charges for each account of the
Sponsored Member, FICC charges the difference (referred to herein and
currently defined in the Rules as the ``MLA Excess Amount'') in
addition to the applicable MLA Charge.\34\ If the MLA Charge of the
consolidated portfolio is not greater than the sum of all MLA Charges
for each account of the Sponsored Member, FICC does not charge the MLA
Excess Amount.\35\ Instead, FICC charges the applicable MLA Charge for
each of the Sponsored Member's accounts.\36\
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\34\ See id.
\35\ See id.
\36\ See id.
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The MLA Excess Amount is designed to capture the additional market
impact cost that could be incurred when a Sponsored Member defaults,
and each of its Sponsoring Members, in its capacity as the Sponsored
Member's guarantor, liquidates net unsettled positions associated with
that defaulted Sponsored Member.\37\ If large net unsettled positions
in the same asset group are being liquidated by multiple Sponsoring
Members, the market impact cost to liquidate those positions could
increase as Sponsoring Members compete for market liquidity in the same
asset group at the same time.\38\ The MLA Excess Amount addresses this
additional market impact cost by capturing any difference between the
calculations of the MLA Charge for each of the Sponsored Member's
accounts on both a stand-alone basis and for the consolidated
portfolio.\39\ The MLA Excess Amount for a Sponsored Member is
allocated pro rata across each of its Sponsoring Members using a market
volatility risk-weighted allocation methodology.\40\
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\37\ See id.
\38\ See id.
\39\ See id.
\40\ Notice of Filing, supra note 4, at 58006-07.
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III. Description of the Proposed Rule Change
A. Amend MLA Charge Calculation and Eliminate MLA Excess Amount
FICC proposes to amend the MLA Charge calculation for Sponsored
Members that clear through multiple accounts sponsored by multiple
Sponsoring Members to better align the amount of the MLA Charge with
the market impact cost arising from position concentration of the
Sponsored Member's respective Sponsored Member
[[Page 68182]]
accounts. Specifically, the revised calculation would apportion a
higher MLA Charge to those Sponsored Member accounts with higher
relative market impact costs (and lower relative VaR Charges) than the
current calculation.
FICC's proposal to amend the MLA Charge calculation for Sponsored
Members that clear through multiple accounts sponsored by multiple
Sponsoring Members is designed to mitigate the risk of incurring
additional market impact costs when a Sponsored Member defaults and
each of its Sponsoring Members (each, as the Sponsored Member's
guarantor) liquidate the defaulted Sponsored Member's large net
unsettled positions in the same asset group.\41\ In light of this
change to the MLA Charge calculation, FICC also proposes to simplify
its margin methodology by eliminating the MLA Excess Amount from the
GSD Rules because the amended MLA Charge calculation would address the
additional market impact cost that the MLA Excess Amount was originally
designed to address.\42\ Specifically, for such Sponsored Members, FICC
proposes to calculate an MLA Charge both (1) for each asset group/
subgroup in the account on a stand-alone basis, as described above in
Section II.C, and (2) for each asset group/subgroup in the account as
part of a consolidated portfolio, as described below, with the greater
amount applied as the MLA Charge for the relevant asset group/subgroup.
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\41\ See Notice of Filing, supra note 4, at 58007.
\42\ See id.
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When calculating the MLA Charge for each asset group/subgroup in
the account as part of a consolidated portfolio, FICC would first
calculate the market impact cost for each asset group/subgroup based on
the aggregate net unsettled positions of that asset group/subgroup in
the consolidated portfolio. FICC would allocate the market impact cost
for each asset group/subgroup to each asset group/subgroup in each
account of the Sponsored Member on a pro rata basis based on the market
impact cost of that asset group/subgroup in the account.
Next, FICC would compare the allocated market impact cost for an
asset group/subgroup to a portion of the VaR Charge that is allocated
to that asset group/subgroup in the account. If the ratio of the
allocated market impact cost to a portion of the VaR Charge is greater
than a prescribed threshold, FICC would apply an MLA Charge for that
asset group/subgroup. If the ratio of the two amounts is equal to or
less than this threshold, FICC would not apply an MLA Charge for that
asset group/subgroup.\43\
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\43\ As described in further detail in Model Development
Documentation submitted in the Proposed Rule Change, FICC determines
the threshold by an optimization process based on the ratio of an
estimate of the market impact cost to the 1-day VaR Charge. See
supra note 8; see Notice of Filing, supra note 4, at 58007.
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When applicable, FICC would calculate the MLA Charge for each asset
group/subgroup in the account as part of the consolidated portfolio as
a proportion of the product of (1) the amount by which the ratio of the
allocated market impact cost for the asset group/subgroup to the
portion of the VaR Charge allocated to that asset group/subgroup
exceeds the prescribed threshold,\44\ and (2) a portion of the VaR
Charge allocated to that asset group/subgroup.
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\44\ The proposed methodology would calculate the MLA Charge for
the consolidated portfolio by applying the threshold to asset
groups/subgroups, as opposed to the current methodology, which
calculates the MLA Charge for the consolidated portfolio by applying
the threshold to the entire portfolio. See supra note 8.
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FICC would then compare the MLA Charge for each asset group/
subgroup in the account on a stand-alone basis against the MLA Charge
for each asset group/subgroup in the account as part of a consolidated
portfolio. FICC would apply the greater of these two amounts as the MLA
Charge for the asset group. FICC would add the applicable MLA Charges
for each asset group/subgroup together to calculate the total MLA
Charge for that Sponsored Member account.
FICC believes that the proposed revisions to the MLA Charge
calculation for Sponsored Members that clear through multiple accounts
sponsored by multiple Sponsoring Members would better allocate MLA
Charges to those Sponsored Member accounts than the current
calculation, so that the MLA Charge would increase for accounts with
higher relative market impact costs.\45\ FICC also believes that the
proposed revisions to the MLA Charge calculation would address the
market impact costs that the MLA Excess Amount was originally designed
to address, thereby enabling FICC to eliminate the MLA Excess Amount
from the GSD Rules.\46\
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\45\ See Notice of Filing, supra note 4, at 58007.
\46\ See id.
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B. Revise Description of Asset Groups and/or Subgroups
As described above in Section II.A, FICC categorizes securities
into asset groups/subgroups that share similar risk profiles for the
purpose of calculating the MLA Charge. The current GSD Rules contain a
list of the asset groups/subgroups.\47\ The current MBSD Rules contain
a statement that there is one mortgage-backed securities asset
group.\48\ FICC states that it may need to set and adjust the asset
groupings from time to time in response to changes in market conditions
that cause the risk profiles of portfolio positions to shift.\49\
However, since the groups/subgroups are currently codified in the GSD
Rules and MBSD Rules, FICC notes that any changes to the groupings
would require the filing of a proposed rule change with the Commission,
which FICC believes does not necessarily provide FICC with the
flexibility to make timely changes in response to market
conditions.\50\ Therefore, FICC proposes to retain the asset groups in
the GSD Rules, but remove the asset subgroups (i.e., the specific
maturities) from the GSD Rules.\51\ FICC proposes to revise the GSD
Rules and the MBSD Rules to provide that FICC would publish the asset
groups and subgroups on FICC's website, and that FICC will provide at
least 5 business days' advance notice of any changes to the schedule
via Important Notice.
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\47\ See GSD Rule 1 (definition of ``Margin Liquidity Adjustment
Charge''), supra note 3.
\48\ See MBSD Rule 1 (definition of ``Margin Liquidity
Adjustment Charge''), supra note 3.
\49\ See Notice of Filing, supra note 4, at 58008.
\50\ See id.
\51\ The revised GSD Rule would contain provisions indicating
that the asset groupings may be further categorized into subgroups.
See id.
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Additionally, to better reflect the different risk profiles of the
mortgage pools/mortgage-backed securities asset groups, FICC proposes
to add language in the GSD Rules and MBSD Rules to indicate that
mortgage pools/mortgage-backed securities asset groups may be further
categorized into subgroups by mortgage pool types. FICC also proposes
to revise the MBSD Rules to provide that for the purpose of calculating
the MLA Charge at MBSD, a member's net unsettled positions in TBA
transactions, Specified Pool Trades, and Stipulated Trades shall be
included in one mortgage-backed securities asset group, which may be
further categorized into subgroups by mortgage pool types.
C. Clarifying and Technical Changes
FICC proposes to modify certain language in the GSD Rules and MBSD
Rules to clarify certain aspects of the MLA Charge, without making
substantive changes to the methodology. Specifically, FICC proposes to
clarify that for the purpose of determining the MLA Charge amount, FICC
first calculates the MLA Charge for each asset group/subgroup, and then
FICC
[[Page 68183]]
adds the MLA Charges together to result in one MLA Charge for each
member portfolio. FICC also proposes to clarify that FICC calculates
the market impact cost for the combined net unsettled positions in each
asset group/subgroup; not for each net unsettled position. Similarly,
FICC proposes to clarify that the associated VaR Charge allocation is
also performed for each asset group/subgroup; not for each net
unsettled position.
Finally, FICC proposes to make several technical changes to the GSD
Rules that reflect the correct usage of terms. Specifically, in GSD
Rule 1, FICC proposes to replace the term ``mortgage pools
transactions'' with ``mortgage pools,'' and the term ``MLA charge''
with ``MLA Charge.''
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \52\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such organization. After carefully considering the
Proposed Rule Change, 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. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) \53\ of the Act and Rules 17Ad-22(e)(4)(i),
(e)(6)(i), and (e)(19) thereunder.\54\
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\52\ 15 U.S.C. 78s(b)(2)(C).
\53\ 15 U.S.C. 78q-1(b)(3)(F).
\54\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(19).
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A. Consistency With Section 17A(b)(3)(F) of the Act
1. Prompt and Accurate Clearance and Settlement
Section 17A(b)(3)(F) of the Act \55\ requires that the rules of a
clearing agency, such as FICC, 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.\56\ The Commission believes that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) of the Act for the reasons
stated below.
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\55\ 15 U.S.C. 78q-1(b)(3)(F).
\56\ Id.
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As described above in Section III.A, FICC proposes to amend the MLA
Charge calculation at GSD for Sponsored Members that clear through
multiple accounts sponsored by multiple Sponsoring Members.
Specifically, the amended calculation would apportion a higher MLA
Charge to those Sponsored Member accounts with higher relative market
impact costs than the current calculation. As a result, the proposal
would better align the MLA Charge with the risk arising from position
concentration in such Sponsored Member portfolios. The Commission
believes that a closer alignment between the MLA Charge and the risks
presented by the concentration of securities in Sponsored Member
portfolios would help facilitate FICC's ability to set margins that
more accurately reflect the risks posed by such portfolios. Setting
margins that accurately reflect the risks posed by its members'
portfolios could reduce the likelihood that FICC would not have
collected sufficient margin to address losses arising out of a member
default. Reducing the likelihood that FICC holds insufficient margin to
address default losses would, in turn, further assure that FICC's
operation of its critical clearance and settlement services would not
be disrupted because of insufficient financial resources.
As part of the Proposed Rule Change, FICC filed Exhibit 3a--Summary
of Impact Study (``Impact Study''), which provided the actual MLA
Charges at the member-level, account-level, and CCP-level, from October
19, 2020 through October 31, 2022, as compared to the MLA Charges that
FICC would have assessed if the proposed enhancement had been in place
during that time period.\57\ The Commission reviewed and analyzed the
Impact Study, which showed, among other things, that had the proposed
enhancement been in place for Sponsored Members that clear through
multiple accounts sponsored by multiple Sponsoring Members, it would
have resulted in an average daily increase of $9.47 million in the
aggregate MLA Charge for the impacted Sponsored Members. Therefore, the
Impact Study demonstrates that the proposed MLA Charge calculation
would enable FICC to set higher margin coverage levels than those using
the current calculation, providing further assurance that FICC's
operation of its critical clearance and settlement services would not
be disrupted because of insufficient financial resources.
---------------------------------------------------------------------------
\57\ FICC has requested confidential treatment of Exhibit 3a,
pursuant to 17 CFR 240.24b-2.
---------------------------------------------------------------------------
Additionally, as described above in Section III.A, the proposed
enhancement to the MLA Charge calculation would enable FICC to simplify
its margin methodology by eliminating the MLA Excess Amount from the
GSD Rules because the enhanced MLA Charge calculation would address the
additional market impact cost that the MLA Excess Amount was originally
designed to address. Thus, the proposed enhancement to the MLA Charge
calculation and removal of the MLA Excess Amount from the GSD Rules
would render FICC's margin methodology more accurate, robust, and
streamlined, further assuring its effectiveness.
As described above in Section III.B, FICC proposes to (1) remove
the enumerated asset subgroups from the GSD Rules, (2) change both the
GSD Rules and MBSD Rules to indicate that FICC may further categorize
asset groups into subgroups, and (3) change both the GSD Rules and MBSD
Rules to indicate that a member's net unsettled positions in TBA
transactions, Specified Pool Trades, and Stipulated Trades shall be
included in one mortgage-backed securities asset group, which may be
further categorized into subgroups by mortgage pool types. FICC states
that the purpose of these changes is to facilitate FICC's ability to
timely set and adjust the asset groupings from time to time in response
to changes in market conditions that cause a shift in the risk profiles
of portfolio positions. FICC would publish the asset groups and
subgroups on FICC's website, and that FICC will provide at least 5
business days' advance notice of any changes to the schedule via
Important Notice.
FICC's ability to promptly respond to changing risk profiles of the
securities in its members' portfolios would better enable FICC to set
margins that more accurately reflect the risks posed by such
portfolios. Setting margins that accurately reflect the risks posed by
its members' portfolios could reduce the likelihood that FICC would not
have collected sufficient margin to address losses arising out of a
member default. Reducing the likelihood that FICC holds insufficient
margin to address default losses would, in turn, further assure that
FICC's operation of its critical clearance and settlement services
would not be disrupted because of insufficient financial resources.
As described above in Section III.C, FICC proposes to make several
technical changes to the GSD Rules that reflect the correct usage of
terms. Enhancing the clarity of the GSD Rules would enable members to
more efficiently and effectively understand and conduct their business
in accordance with the GSD Rules. When members conduct
[[Page 68184]]
their business in accordance with the GSD Rules, FICC is able to focus
more of its resources on providing its clearance and settlement
services.
Accordingly, for the reasons above, the Commission finds that the
Proposed Rule Change should help FICC to continue providing prompt and
accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\58\
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\58\ 15 U.S.C. 78q-1(b)(3)(F).
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2. Safeguarding Securities and Funds
As described above in Section II, FICC would access the mutualized
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. As discussed above in Section IV.A.1, FICC's proposals to
enhance the MLA Charge calculation and eliminate the MLA Excess Amount
should help ensure that FICC collects sufficient margin from its
members. Similarly, FICC's proposals to remove the asset subgroups from
the GSD Rules and otherwise streamline the GSD Rules and MBSD Rules
with respect to the asset groups/subgroups, should help facilitate
FICC's ability to promptly respond to changing risk profiles of its
members' portfolios, and thereby set margins that more accurately
reflect the risks posed by such portfolios. Accordingly, the Proposed
Rule Change should help minimize the likelihood that FICC would have to
access the Clearing Fund, thereby limiting non-defaulting members'
exposure to mutualized losses.
The Commission believes that by helping to limit the exposure of
FICC's non-defaulting members to mutualized losses, the Proposed Rule
Change would 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.\59\
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\59\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
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.\60\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(4)(i) under the Act for the reasons stated below.
---------------------------------------------------------------------------
\60\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As discussed above in Section IV.A, FICC's proposed enhancement to
the MLA Charge calculation and removal of the MLA Excess Amount from
the GSD Rules would render FICC's margin methodology more accurate than
the current methodology by apportioning a higher MLA Charge to those
Sponsored Member accounts with higher relative market impact costs. As
a result, the proposal would better align the MLA Charge with the risk
arising from position concentration in such Sponsored Member
portfolios. The Commission has reviewed and analyzed the filing
materials, including the Impact Study,\61\ and agrees that the proposed
enhancement to the MLA Charge calculation and removal of the MLA Excess
Amount from the GSD Rules would enable FICC to set margins that more
accurately reflect the risks posed by such portfolios than the current
methodology. As a result, implementing the Proposed Rule Change would
better enable FICC to collect sufficient margin in connection with
Sponsored Members that clear through multiple accounts sponsored by
multiple Sponsoring Members.
---------------------------------------------------------------------------
\61\ See supra note 57.
---------------------------------------------------------------------------
Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(4)(i) under the Act because it is
designed to assist FICC in managing its credit exposures to its members
by maintaining sufficient financial resources to cover its credit
exposure to the portfolios of Sponsored Members that clear through
multiple accounts sponsored by multiple Sponsoring Members.\62\
---------------------------------------------------------------------------
\62\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
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.\63\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(6)(i) under the Act for the reasons stated below.
---------------------------------------------------------------------------
\63\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
As discussed above in Section IV.A, FICC's proposed enhancement to
the MLA Charge calculation and removal of the MLA Excess Amount from
the GSD Rules would render FICC's margin methodology more accurate than
the current methodology by apportioning a higher MLA Charge to those
Sponsored Member accounts with higher relative market impact costs. As
a result, the proposal would better align the MLA Charge with the risk
arising from position concentration in such Sponsored Member
portfolios. The Commission has reviewed and analyzed the filing
materials, including the Impact Study,\64\ and agrees that the proposed
enhancement to the MLA Charge calculation and removal of the MLA Excess
Amount from the GSD Rules would enable FICC to set margins that more
accurately reflect the risks posed by such portfolios than the current
methodology. As a result, implementing the Proposed Rule Change would
better enable FICC to set margin amounts at levels commensurate with
the risks associated with the portfolios of Sponsored Members that
clear through multiple accounts sponsored by multiple Sponsoring
Members.
---------------------------------------------------------------------------
\64\ See supra note 57.
---------------------------------------------------------------------------
Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act because it 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 its Sponsored Member portfolios.\65\
---------------------------------------------------------------------------
\65\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
D. Consistency With Rule 17Ad-22(e)(19) Under the Act
Rule 17Ad-22(e)(19) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
FICC, establish, implement, maintain and enforce written policies and
procedures reasonably designed to identify, monitor, and manage the
material risks to the covered clearing agency arising from arrangements
in which firms that are indirect participants in the covered clearing
agency rely on the services provided by direct participants to access
the covered clearing agency's payment, clearing, or settlement
facilities.\66\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(19)
[[Page 68185]]
under the Act for the reasons stated below.
---------------------------------------------------------------------------
\66\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------
As discussed above in Section II.B, FICC's Sponsored Service allows
eligible members to sponsor their clients into a limited form of FICC
membership such that a Sponsoring Member is permitted to submit to
FICC, for comparison, novation, and netting, certain eligible
securities transactions of its Sponsored Members. Sponsored Members are
indirect FICC participants that rely on the services provided by direct
FICC participants (i.e., Sponsoring Members) to access FICC's clearance
and settlement facilities.\67\ Therefore, Rule17Ad-22(e)(19) requires
FICC to identify, monitor, and manage the material risks arising from
the Sponsored Service.\68\
---------------------------------------------------------------------------
\67\ See id.
\68\ See id.
---------------------------------------------------------------------------
FICC's proposals to amend the MLA Charge calculation and eliminate
the MLA Excess Amount are designed to address the risks arising from
Sponsored Members that clear through multiple accounts sponsored by
multiple Sponsoring Members. As described above in Section II.B, for
such Sponsored Members, FICC currently calculates an MLA Charge for
each Sponsored Member account on both a stand-alone and consolidated
portfolio basis, ultimately applying whichever MLA Charge calculation
is greater to the Sponsored Member's margin. FICC has identified an
opportunity to amend the MLA Charge calculation for such Sponsored
Members to better align the amount of the MLA Charge with the market
impact cost arising from position concentration in the Sponsored
Member's respective Sponsored Member accounts. Specifically, the
revised calculation would apportion a higher MLA Charge to those
Sponsored Member accounts with higher relative market impact costs than
the current calculation. The proposed change would also enable FICC to
simplify its margin methodology by eliminating the MLA Excess Amount
from the GSD Rules because the enhancement would address the additional
market impact cost that the MLA Excess Amount was originally designed
to address. As discussed above in Section IV.A, the Commission believes
that implementation of these proposals would help facilitate FICC's
ability to set margins that more accurately and efficiently reflect the
risks posed by the portfolios of Sponsored Members that clear through
multiple Sponsoring Members.
Accordingly, the Commission believes that by improving FICC's
margin methodology with respect to FICC's Sponsored Members, the
Proposed Rule Change would help FICC better manage the material risks
arising from the Sponsored Service, consistent with Rule 17Ad-
22(e)(19).\69\
---------------------------------------------------------------------------
\69\ 17 CFR 240.17Ad-22(e)(19).
---------------------------------------------------------------------------
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning whether Amendment No. 1 is consistent with the
Act. Comments may be submitted by any of the following methods:
Electronic Comments
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
Send an email to <a href="/cdn-cgi/l/email-protection#2d5f584148004e4240404843595e6d5e484e034a425b"><span class="__cf_email__" data-cfemail="fa888f969fd7999597979f948e89ba899f99d49d958c">[email protected]</span></a>. Please include File Number
SR-FICC-2023-012 on the subject line.
Paper Comments
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-2023-012. 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 such filings will also be available for inspection
and copying at the principal office of FICC and FICC's website at
<a href="https://www.dtcc.com/legal">https://www.dtcc.com/legal</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-2023-012 and should
be submitted on or before October 24, 2023.
VI. Accelerated Approval of the Proposed Rule Change, as Modified by
Amendment No. 1
The Commission finds good cause, pursuant to Section
19(b)(2)(C)(iii) of the Act,\70\ to approve the Proposed Rule Change,
as modified by Amendment No. 1, prior to the thirtieth day after the
date of publication of Amendment No. 1 in the Federal Register. As
noted above, in Amendment No. 1, FICC updated the Exhibit 3b \71\ to
the Proposed Rule Change to add a missing description of a term used in
a calculation and to remove an unnecessary chart. Amendment No. 1
neither modifies the Proposed Rule Change as originally published in
any substantive manner, nor does Amendment No. 1 affect any rights or
obligations of FICC or its members. Instead, Amendment No. 1 makes
technical changes to clarify Exhibit 3b. Additionally, since FICC filed
Amendment No. 1 on August 22, 2023, the Commission has had sufficient
time to review and consider Amendment No. 1 as part of its analysis of
the Proposed Rule Change. Accordingly, the Commission finds good cause,
pursuant to Section 19(b)(2)(C)(iii) of the Act,\72\ to approve the
Proposed Rule Change, as modified by Amendment No. 1, prior to the
thirtieth day after the date of publication of notice of Amendment No.
1 in the Federal Register.
---------------------------------------------------------------------------
\70\ 15 U.S.C. 78s(b)(2)(C)(iii).
\71\ See supra note 8.
\72\ Id.
---------------------------------------------------------------------------
VII. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change, as modified by Amendment No. 1, is consistent
with the requirements of the Act and in particular with the
requirements of Section 17A of the Act \73\ and the rules and
regulations promulgated thereunder.
---------------------------------------------------------------------------
\73\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\74\ that proposed rule change SR-FICC-2023-012, be, and hereby is,
approved.\75\
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\74\ 15 U.S.C. 78s(b)(2).
\75\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
[[Page 68186]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
---------------------------------------------------------------------------
\76\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21783 Filed 10-2-23; 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.