Notice2023-21938
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change Relating to the GSD and MBSD Schedules of Haircuts for Eligible Clearing Fund Securities
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 4, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 191 (Wednesday, October 4, 2023)</title>
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[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68803-68811]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21938]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98592; File No. SR-FICC-2023-014]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change Relating to the GSD and MBSD
Schedules of Haircuts for Eligible Clearing Fund Securities
September 28, 2023
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 68804]]
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on September 22, 2023, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been primarily prepared by the clearing agency. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of modifications to 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\ in
order to modify the GSD and MBSD Schedules of Haircuts for Eligible
Clearing Fund Securities and remove them from the respective Rules, and
make other clarifying changes, as described in greater detail below.
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\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>.
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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 modify the GSD and MBSD Schedules of Haircuts
for Eligible Clearing Fund Securities, and to remove them and the
related concentration limits from the respective Rules, and make other
clarifying changes, as described in greater detail below.
Background
FICC, through GSD and MBSD, serves as a central counterparty and
provider of clearance and settlement services for the U.S. government
securities and mortgage-backed securities markets. A key tool that FICC
uses to manage its credit exposures to its members is the daily
collection of margin from each member. The aggregated amount of all GSD
and MBSD members' margin constitutes the GSD Clearing Fund and MBSD
Clearing Fund (collectively referred to herein as the ``Clearing
Fund'').
The objective of the Clearing Fund 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'').\4\ FICC would access the 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. The Clearing
Fund reduces the risk that FICC would need to mutualize any losses
among non-defaulting members during the liquidation process.
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\4\ The GSD Rules and MBSD Rules each 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) and MBSD Rule 14
(Restrictions on Access to Services), supra note 3.
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Under GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule
4 (Clearing Fund and Loss Allocation), members are required to make
deposits to the GSD and MBSD Clearing Funds, as applicable, with the
amount of each member's required deposit being determined by FICC in
accordance with GSD Rule 4 and MBSD Rule 4, as applicable (the
``Required Fund Deposit'').
A member may satisfy its Required Fund Deposit with cash or an open
account indebtedness secured by Eligible Clearing Fund Securities.\5\
Eligible Clearing Fund Securities, comprised of certain agency,
mortgage-backed, and Treasury securities, are valued based on the prior
Business Day's closing market price, less a haircut, and may be subject
to a concentration limit.\6\ Haircuts are used to protect FICC and its
members from price fluctuations, i.e., if FICC is required to liquidate
collateral of an insolvent member and such collateral is worth less at
the time of liquidation than when it is pledged to FICC. Concentration
limits are intended to reduce FICC's risk by limiting the percentage of
certain types of Eligible Clearing Fund Securities pledged by members
to secure the Clearing Fund deposits. This is because when a member's
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile or in a particular asset
type, such securities could present additional risk to FICC.
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\5\ See GSD Rule 4, Section 3 (Form of Deposit) and MBSD Rule 4,
Section 3 (Form of Deposit), supra note 3.
\6\ See GSD Rule 1 (Definitions) and MBSD Rule 1 (Definitions)
for applicable definitions, including Eligible Clearing Fund
Securities and its components, which are Eligible Clearing Fund
Agency Securities, Eligible Clearing Fund Mortgage-Backed
Securities, and Eligible Clearing Fund Treasury Securities. Supra
note 3.
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Currently, collateral haircuts applicable to relevant security
types and remaining maturity terms are specified as fixed percentages
in the Schedule of Haircuts for Eligible Clearing Fund Securities in
the GSD Rules and MBSD Rules.\7\ The sufficiency of collateral haircuts
is evaluated through use of back-tests, stress-tests and market
observations. To ensure the sufficiency of the collateral haircuts, a
backtesting analysis of members' collateral deposits is conducted
daily, and summary reviews are completed quarterly, each by the FICC
market risk group pursuant to FICC's internal market risk management
policies and procedures. FICC performs daily backtesting of collateral
by comparing the collateral haircut for each member in simulated
liquidations with the member's actual collateral held on deposit at
FICC. Any exceptions noted are escalated to management daily to assess
the root cause and determine whether further analysis and/or review
would be appropriate. Specifically, if FICC determines that a
particular security may present inherent volatility and/or liquidity
risks that could likely result in an erosion in the value of the
security exceeding the applicable collateral haircut, ad hoc reviews
may be conducted by risk management pursuant to FICC's internal market
risk management procedures. On a quarterly basis, FICC reviews and
identifies instances where the simulated losses from available
historical stress testing scenario dates have exceeded the collateral
haircut values. In addition, each quarter, FICC reviews the composition
of the Eligible Clearing Fund Securities that members have
[[Page 68805]]
pledged to secure their Required Fund Deposits in order to assess the
sufficiency of the collateral haircuts applied and whether any haircut
changes would be needed.
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\7\ See Schedule of Haircuts for Eligible Clearing Fund
Securities in the GSD Rules and MBSD Rules, supra note 3. The
Schedule of Haircuts for Eligible Clearing Fund Securities in the
GSD Rules and MBSD Rules was last modified in 2011 in order to
harmonize with the increased haircuts on clearing fund collaterals
at the National Securities Clearing Corporation, an affiliate of
FICC. See Securities Exchange Act Release No. 64488 (May 13, 2011),
76 FR 29018 (May 19, 2011) (SR-FICC-2011-03).
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In addition to collateral haircuts, FICC applies concentration
limits to certain Eligible Clearing Fund Securities. Currently, the
concentration limits applicable to certain Eligible Clearing Fund
Securities are specified in GSD Rule 4, MBSD Rule 4, and the Schedule
of Haircuts for Eligible Clearing Fund Securities in the GSD Rules and
MBSD Rules. Specifically, Section 3b(b) of GSD Rule 4 and Section 3c(b)
of MBSD Rule 4 each provides that no more than 20 percent of a member's
Required Fund Deposit may be in the form of Eligible Clearing Fund
Agency Securities that are of a single issuer and no member may post as
eligible collateral Eligible Clearing Fund Agency Securities of which
it is the issuer. In addition, the Schedule of Haircuts for Eligible
Clearing Fund Securities in the GSD Rules and MBSD Rules provides (i)
any deposits of Eligible Clearing Fund Agency Securities or Eligible
Clearing Fund Mortgage-Backed Securities in excess of 25 percent of a
member's Required Fund Deposit will be subject to a haircut that is
twice the amount of the percentage noted in the haircut schedule and
(ii) a member may deposit Eligible Clearing Fund Mortgage-Backed
Securities of which it is the issuer, however such securities will be
subject to a premium haircut, with the initial haircut being 14
percent, and if a member also exceeds the 25 percent concentration
limit, the haircut shall be 21 percent.
Changes to the collateral haircuts and concentration limits are
currently subject to FICC's internal governance process and would
remain so with respect to the haircut schedule changes made in
accordance with this proposal. If FICC determines that, based on the
analyses that it performs, there is insufficient/excessive collateral
haircut/concentration due to an identifiable cause that affected
multiple members and such cause would likely persist based on FICC's
assessment of market conditions, such outcome or result could cause
FICC to amend the haircuts/concentration limits in the haircut
schedule. If FICC determines that a change to the haircut schedule is
warranted, its market risk group would document the recommendation and
rationale for the change at the time of such determination and obtain
approval from an executive director or above with a notice to the risk
management committee, in accordance with FICC's internal market risk
management policies and procedures. Before making adjustments to the
haircut schedule, FICC measures the potential impact of such
adjustments to ensure any impact is both necessary and appropriate.
Through its review, FICC has observed that under volatile market
conditions with elevated frequency and magnitude of securities price
movements, the collateral value of Eligible Clearing Fund Securities
may shift in a relatively short period of time and the current haircuts
may not sufficiently account for the change in value. When the erosion
in the value of the Eligible Clearing Fund Securities exceeds the
relevant haircuts, FICC is exposed to increased risk of potential
losses associated with liquidating a member's portfolio in the event of
a member default when the defaulting member's own margin is
insufficient to satisfy losses to FICC caused by the liquidation of
that member's portfolio. Similarly, when a member's portfolio contains
large net unsettled positions in a particular group of securities with
a similar risk profile or in a particular asset type, such securities
could present additional risk to FICC. The additional risk exposures
associated with liquidating a member's portfolio in the event of a
member default could lead to an increase in the likelihood that FICC
would need to mutualize losses among non-defaulting members during the
liquidation process. However, any changes to the haircuts and/or
concentration limits currently requires a proposed rule change to be
filed with the Commission. In order to provide FICC with more
flexibility in adjusting the haircuts and concentration limits so FICC
can respond to changing market conditions more promptly in order to
mitigate the additional risk exposure, FICC is proposing to remove the
GSD and MBSD Schedules of Haircuts for Eligible Clearing Fund
Securities and concentration limits from the respective Rules, and to
publish the haircuts and concentration limits in a haircut schedule on
FICC's website.
Specifically, FICC is proposing to delete subsections (a), (b) and
(c) of Section 3b (Special Provisions Relating to Deposits of Eligible
Clearing Fund Securities) in GSD Rule 4 and Section 3c (Special
Provisions Relating to Deposits of Eligible Clearing Fund Securities)
in MBSD Rule 4, respectively.
Currently, subsections (a) and (c) of Section 3b in GSD Rule 4 and
Section 3c in MBSD Rule 4, respectively, set out certain concentration
limits for Eligible Clearing Fund Agency Securities and Eligible
Clearing Fund Mortgage-Backed Securities. Subsection (a) provides that
any deposits of Eligible Clearing Fund Agency Securities or Eligible
Clearing Fund Mortgage-Backed Securities, respectively, in excess of 25
percent of a member's Required Fund Deposit will be subject to an
additional haircut equal to twice the percentage as specified in the
haircut schedule. Subsection (c) provides that a member may post as
eligible collateral Eligible Clearing Fund Mortgage-Backed Securities
of which it is the issuer; however, such collateral will be subject to
a premium haircut as specified in the haircut schedule. The same
language from subsections (a) and (c) is also currently in the
respective GSD and MBSD haircut schedules. Having this language in both
the Rules and the proposed haircut schedules is unnecessary and could
potentially create confusion for members. As such, FICC is proposing to
eliminate this duplication by deleting subsections (a) and (c) from
Section 3b in GSD Rule 4 and Section 3c in MBSD Rule 4, respectively,
and including this language in the proposed haircut schedule.
Subsection (b) of Section 3b in GSD Rule 4 and Section 3c in MBSD
Rule 4, respectively, currently sets out an additional concentration
limit with respect to Eligible Clearing Fund Agency Securities.
Specifically, subsection (b) provides that no more than 20 percent of
the Required Fund Deposit may be in the form of Eligible Clearing Fund
Agency Securities that are of a single issuer and no member may post as
eligible collateral Eligible Clearing Fund Agency Securities of which
it is the issuer. FICC is proposing to delete the language in
subsection (b) and move it to the proposed haircut schedule. For
clarity, FICC is also proposing to revise the language in the proposed
haircut schedule to provide that no more than 20 percent of a member's
Required Fund Deposit may be secured by pledged Eligible Clearing Fund
Agency Securities of a single issuer, and no member may pledge Eligible
Clearing Fund Agency Securities of which it is the issuer to secure its
Required Fund Deposit.
Furthermore, FICC is proposing to add language in Section 3b in GSD
Rule 4 and Section 3c in MBSD Rule 4, respectively, that makes it clear
that all Eligible Clearing Fund Securities pledged to secure Clearing
Fund deposits shall, for collateral valuation purposes, be subject to a
haircut and may be subject to a concentration limit. The proposed
language would provide that FICC shall determine the applicable
haircuts and any concentration limits from time to time in accordance
with its internal policy and governance process,
[[Page 68806]]
based on factors determined to be relevant by FICC, which may include,
for example, backtesting results and FICC's assessment of market
conditions, in order to set appropriately conservative haircuts and/or
concentration limits for the Eligible Clearing Fund Securities and
minimize backtesting deficiency occurrences. The proposed language
would also provide that the haircuts and any concentration limits
prescribed by FICC shall be set forth in a haircut schedule that is
published on FICC's website. Furthermore, the proposed language would
make it clear that it shall be the member's responsibility to retrieve
the haircut schedule, and FICC would provide members with at a minimum
one Business Day's advance notice of any change in the haircut
schedule.
Lastly, FICC is proposing to delete a sentence from Section 3b in
GSD Rule 4 and Section 3c in MBSD Rule 4, respectively, that references
haircuts set forth in the Rules, and add a general reference to
applicable haircuts so that it is clear to members that the valuation
of Eligible Clearing Fund Securities is subject to applicable haircuts.
FICC believes that the proposed change to move the haircuts and
concentration limits from the Rules to the website would enable FICC to
adjust the haircuts and concentration limits without undergoing a rule
filing process.\8\ By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, FICC would have
the flexibility to respond to changing market conditions more promptly.
Having the flexibility to respond to changing market conditions more
promptly would in turn help better ensure that FICC collects sufficient
margin from members as well as risk manages its credit exposures to its
members. The proposed change would also align FICC with the manner in
which its affiliate, The Depository Trust Company (``DTC''), provides
haircut schedules to participants.\9\
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\8\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature
or level of risks presented by FICC, then FICC is required to file
an advance notice. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
\9\ DTC also allows its participants to pledge eligible
collateral as a portion of the participant fund; however, instead of
being in the DTC rulebook, the collateral haircut schedules are
published periodically by Important Notice to DTC participants.
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Concurrent with moving the haircuts and concentration limits from
the Rules to the website, FICC is also proposing to reconfigure the
categories relating to Treasury securities haircuts by moving the
Treasury Inflation-Protected Securities (``TIPS'') to a separate
category and increasing the haircut levels for TIPS. The proposed
change to TIPS is reflected in Exhibit 3c to this filing. TIPS are a
type of Treasury security issued by the U.S. government that are
indexed to inflation such that the principal value of the security
rises as inflation rises.
In connection with FICC's assessments of its collateral haircuts,
FICC employs daily backtesting to determine the adequacy of each
member's collateral haircuts. FICC compares the collateral haircuts for
each member with the simulated liquidation gains/losses using the
actual positions in the member's portfolio, and the actual historical
security returns. A backtesting deficiency occurs when a member's
collateral haircuts would not have been adequate to cover the simulated
liquidation losses.
In connection with such assessments, FICC has determined that in
periods where the inflation rate fluctuates, the current haircut levels
for TIPS have been inadequate to address the fluctuations from time to
time. This is because TIPS are indexed to the inflation rate, and
prices on TIPS move inversely to their yields, e.g., when the inflation
rate increases, prices on TIPS decrease. When the decline in market
value of TIPS exceeds the haircut for TIPS, FICC would be exposed to
potential liquidation losses. Specifically, during the period from
September 1, 2021 to August 31, 2022, with TIPS comprising less than 10
percent of the total collateral value across the GSD and MBSD divisions
at FICC, FICC has observed 29 backtesting deficiencies at FICC,\10\ 26
at GSD and 3 at MBSD, where the collateral value that FICC attributed
to the TIPS that were posted by members as margin (inclusive of the
applicable current haircuts) was insufficient to cover the liquidation
of such securities by FICC without incurring a loss. Accordingly, FICC
is proposing to reconfigure and modify the haircut information that
would be posted on FICC's website to ensure that the haircut levels
would be commensurate with the particular risk attributes of TIPS.
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\10\ The 29 backtesting deficiencies represent a sum total of
approximately $9.4 million across four days during the impact study
period, less than 0.1% of the total collateral value at FICC on each
of those days.
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Specifically, FICC would list TIPS of various maturity groupings in
a separate category from Treasury bills, notes and bonds. In addition,
FICC would change the haircut level applicable for TIPS as follows:
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Maturity Current % Proposed %
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TIPS.......................................... Zero to 1 year.................. 2.0 2.0
1 year to 2 years............... 2.0 3.0
2 years to 5 years.............. 3.0 5.0
5 years to 10 years............. 4.0 7.0
10 years to 15 years............ 6.0 7.0
15 years or greater............. 6.0 10.0
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In determining the appropriate haircut levels for TIPS, FICC
conducted a review of TIPS haircuts at other registered clearing
agencies and foreign central counterparty clearing houses (``CCPs'') to
compare FICC's current TIPS haircuts with that required by registered
clearing agencies and foreign CCPs when TIPS are deposited to their
clearing funds, or the equivalent thereof. The results of the review
and comparison indicated that FICC's current haircut levels for TIPS
are generally lower than the TIPS haircuts required by other clearing
agencies and foreign CCPs, particularly with respect to maturity ranges
of 10 years or longer. While the TIPS haircut requirement at such other
entities is not dispositive as to the risk borne by FICC or the proper
TIPS haircut levels to offset such risk, it is indicative of the TIPS
haircuts being applied to users of other similarly situated entities in
order to use the services of the clearing agencies and foreign CCPs and
the impact to such users. The chart below shows the haircut that
participants of other clearing agencies and foreign CCPs are currently
subject to when using TIPS to
[[Page 68807]]
meet their margin requirements, as compared with the existing TIPS
haircut required at FICC.
[GRAPHIC] [TIFF OMITTED] TN04OC23.014
FICC is not proposing any changes to the concentration limits at
this time.
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\11\ See ICE Clear U.S. Acceptable Collateral and Haircuts,
available at <a href="http://www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf">www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf</a>.
\12\ See LCH LTD-Margin Collateral Haircut Schedule, available
at <a href="http://www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf">www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf</a>.
\13\ See CME Group Acceptable Performance Bond Collateral for
Base Guaranty Fund Products, available at <a href="http://www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf">www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf</a>.
\14\ See OCC Collateral Haircut Schedule, available at
<a href="http://www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts">www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts</a>.
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Impact Study
FICC conducted an impact study for the period from September 1,
2021 through August 31, 2022 (``Impact Study''). The results of the
Impact Study indicate that, if the haircut changes for TIPS had been in
place, all 29 backtesting deficiencies would have been eliminated.
If the proposed haircut adjustments had been in place during the
Impact Study period, the changes would have resulted in an aggregate
average daily increase for all members of $40.75 million (approximately
0.15%) in the Clearing Fund for GSD and an aggregate average daily
increase of $16.60 million (approximately 0.14%) in the Clearing Fund
for MBSD. The three largest daily average dollar increases to GSD
Members would be $11.1 million (approximately 0.91%), $8.3 million
(approximately 1.07%) and $4.3 million (approximately 1.26%). The three
largest daily average percentage increases for GSD Members would be
1.78%, 1.76% and 1.29%. The three largest daily average dollar
increases to MBSD would be $4.08 million (approximately 0.30%), $4.04
million (approximately 0.46%) and $3.99 million (approximately 0.51%).
The three largest daily average percentage increases for MBSD Members
would be 1.35%, 0.71% and 0.51%. During the Impact Study period, 33 of
132 GSD Members and 11 of 80 MBSD Members would have experienced an
increase in their respective Clearing Fund deposits had the proposed
changes been in place.
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 changes by an
Important Notice posted to FICC's website.
2. Statutory Basis
FICC believes this proposal is consistent with the requirements of
the Act, and the rules and regulations thereunder applicable to a
registered clearing agency. Specifically, FICC believes that the
proposed changes described above are consistent with Section
17A(b)(3)(F) of the Act,\15\ and Rules 17Ad-22(e)(4)(i), (e)(5),
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\16\ for the
reasons described below.
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(5), (e)(6)(i), and
(e)(6)(v).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed to 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.\17\ As
described above, FICC believes the proposed changes to move the
collateral haircuts and concentration limits from the Rules to the
website would provide FICC with more flexibility to respond to changing
market conditions because adjustments to the haircuts and concentration
limits would no longer require a rule change. By being able to make
appropriate and timely adjustments to the haircuts and concentration
limits, FICC would have the flexibility to respond to changing market
conditions more promptly. FICC believes that having this additional
flexibility to respond to changing market conditions more promptly
would help better ensure that FICC (i) collects sufficient margin from
members to cover the risk exposures that FICC may face in liquidating
members' portfolios and (ii) minimizes exposures from members with
large collateral positions in a particular group of securities with a
similar risk profile or in a particular asset type, such that, in the
event of a member default, FICC's
[[Page 68808]]
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 rule change to move the collateral haircuts and
concentration limits from the Rules to the website would assure the
safeguarding of securities and funds which are in the custody and
control of FICC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ Id.
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FICC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. FICC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to
time, and more conservative haircuts for TIPS are warranted. Having
haircut levels for TIPS that are commensurate with the particular risk
attributes of TIPS would enable FICC to collect sufficient margin from
members to cover the risk exposures that FICC may face in liquidating
members' portfolios such that, in the event of a 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 rule change to move TIPS haircuts into a separate category
and raise the haircut levels for TIPS would assure the safeguarding of
securities and funds which are in the custody and control of FICC or
for which it is responsible, consistent with Section 17A(b)(3)(F) of
the Act.\19\
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\19\ Id.
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FICC believes that the proposed clarifying changes would help to
ensure that the Rules are clear to members. When members better
understand their rights and obligations regarding the Rules, members
are more likely to act in accordance with the Rules, which FICC
believes would promote the prompt and accurate clearance and settlement
of securities transactions. As such, FICC believes that the proposed
clarifying changes would be 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 \21\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those exposures arising from its payment, clearing, and settlement
processes by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. As described above, FICC believes the proposed changes to
move the collateral haircuts and concentration limits from the Rules to
the website would provide FICC with more flexibility to respond to
changing market conditions because adjustments to the haircuts and
concentration limits would no longer require a rule change. By being
able to make appropriate and timely adjustments to the haircuts and
concentration limits, FICC would have the flexibility to respond to
changing market conditions more promptly. FICC believes that having
this additional flexibility to respond to changing market conditions
more promptly would help ensure that FICC (i) collects sufficient
margin from members to cover the risk exposures that FICC may face in
liquidating members' portfolios and (ii) minimizes exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
such that, in the event of a 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
rule change to move the collateral haircuts and concentration limits
from the Rules to the website would help ensure that FICC maintains
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\22\
---------------------------------------------------------------------------
\21\ 17 CFR 240.17Ad-22(e)(4)(i).
\22\ Id.
---------------------------------------------------------------------------
FICC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. FICC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to time
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would in turn help ensure that FICC requires members
to maintain sufficient margin to cover the credit exposures that FICC
may face related to its ability to liquidate members' portfolios in the
event of a member default. In this way, the proposed rule change to
move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help ensure that FICC maintains sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence, consistent with the
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\23\
---------------------------------------------------------------------------
\23\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(5) under the Act \24\ requires, in part, a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to set and enforce
appropriately conservative haircuts and concentration limits if the
covered clearing agency requires collateral to manage its or its
participants' credit exposure. As described above, FICC believes the
proposed changes to move the collateral haircuts and concentration
limits from the Rules to the website would provide FICC with more
flexibility to respond to changing market conditions because
adjustments to the haircuts and concentration limits would no longer
require a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, FICC would have
the flexibility to respond to changing market conditions more promptly.
FICC believes that having this additional flexibility to respond to
changing market conditions more promptly would help better ensure that
FICC (i) collects sufficient margin from members to cover the risk
exposures that FICC may face in liquidating members' portfolios and
(ii) minimizes exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
FICC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control.
Specifically, FICC would have the ability to promptly set and enforce
conservative collateral haircuts and concentration limits that are
reflective of the current market conditions. In this way, the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would help FICC set and enforce appropriately
conservative collateral haircuts and concentration limits, consistent
with the requirements of Rule 17Ad-22(e)(5) under the Act.\25\
---------------------------------------------------------------------------
\24\ 17 CFR 240.17Ad-22(e)(5).
\25\ Id.
---------------------------------------------------------------------------
FICC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut
[[Page 68809]]
levels for TIPS would help ensure that the haircut levels for TIPS
would be commensurate with the particular risk attributes of TIPS. FICC
has determined that in periods where the inflation rate fluctuates, the
current haircut levels for TIPS have been inadequate to address the
fluctuations from time to time and more conservative haircuts for TIPS
are warranted. Specifically, FICC would have the ability to set and
enforce conservative collateral haircuts that are commensurate with the
particular risk attributes of TIPS. In this way, the proposed changes
to move TIPS haircuts into a separate category and raise the haircut
levels for TIPS would help FICC set and enforce appropriately
conservative collateral haircuts, consistent with the requirements of
Rule 17Ad-22(e)(5) under the Act.\26\
---------------------------------------------------------------------------
\26\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(i) under the Act \27\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market. FICC believes that the proposed changes
to move the collateral haircuts and concentration limits from the Rules
to the website would provide FICC with more flexibility to respond to
changing market conditions because FICC would be able to make
appropriate adjustments to the haircuts and concentration limits
without a rule change. By being able to make appropriate and timely
adjustments to the haircuts and concentration limits, FICC would have
the flexibility to respond to changing market conditions more promptly.
FICC believes that having this additional flexibility to respond to
changing market conditions more promptly would enable FICC to better
risk manage its credit exposure to its members by (i) collecting
sufficient margin from members to cover the risk exposures that FICC
may face in liquidating members' portfolios and (ii) minimizing
exposures from members with large collateral positions in a particular
group of securities with a similar risk profile or in a particular
asset type, thus allowing FICC to produce margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market. Therefore, FICC believes this proposed change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\28\
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(e)(6)(i).
\28\ Id.
---------------------------------------------------------------------------
FICC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. FICC has determined that in periods
where the inflation rate fluctuates, the current haircut levels for
TIPS have been inadequate to address the fluctuations from time to time
and more conservative haircuts for TIPS are warranted. Ensuring that
the haircut levels for TIPS are commensurate with the particular risk
attributes of TIPS would allow FICC to produce margin levels
commensurate with the risks and particular attributes of each relevant
product, portfolio, and market. Therefore, FICC believes this proposed
change is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\29\
---------------------------------------------------------------------------
\29\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(6)(v) under the Act \30\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to cover, if the covered
clearing agency provides central counterparty services, its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, uses an appropriate method for measuring
credit exposure that accounts for relevant product risk factors and
portfolio effects across products. FICC believes that the proposed
changes to move the collateral haircuts and concentration limits from
the Rules to the website would provide FICC with more flexibility to
respond to changing market conditions more promptly because FICC would
be able to make appropriate adjustments to the haircuts and
concentration limits without a rule change. Having this additional
flexibility would enable FICC to better risk manage its credit exposure
to its members because FICC would then be able to make appropriate and
timely adjustments to the haircuts and concentration limits, as
described above. Being able to adjust the haircuts and concentration
limits appropriately and timely would allow FICC to better risk manage
its credit exposure to its members by (i) collecting sufficient margin
from members to cover the risk exposures that FICC may face in
liquidating members' portfolios and (ii) minimizing exposures from
members with large collateral positions in a particular group of
securities with a similar risk profile or in a particular asset type,
thus producing margin levels commensurate with relevant product risk
factors and portfolio effects across products. Therefore, FICC believes
this proposed change is consistent with Rule 17Ad-22(e)(6)(v) under the
Act.\31\
---------------------------------------------------------------------------
\30\ 17 CFR 240.17Ad-22(e)(6)(v).
\31\ Id.
---------------------------------------------------------------------------
FICC also believes the proposed changes to move TIPS haircuts into
a separate category and raise the haircut levels for TIPS would help
ensure that the haircut levels for TIPS would be commensurate with the
particular risk attributes of TIPS. Specifically, as proposed, FICC
would have collateral haircuts that are commensurate with the
particular risk attributes of TIPS. Ensuring that the haircut levels
for TIPS are commensurate with the particular risk attributes of TIPS
would allow FICC to produce margin levels commensurate with relevant
product risk factors and portfolio effects across products. Therefore,
FICC believes this proposed change is consistent with Rule 17Ad-
22(e)(6)(v) under the Act.\32\
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act requires that the rules of FICC do
not impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\33\ FICC does not believe the
proposed rule changes to move the haircuts and concentration limits
from the Rules to the website would impose a burden on competition.
These proposed changes are designed to enable FICC to timely respond to
increases in market volatility with haircut requirements and
concentration limits that are more reflective of the current credit
exposures to FICC. As discussed above, these proposed changes would
allow FICC to better risk manage its credit exposure to its members by
(i) collecting sufficient margin from members to cover the risk
exposures that FICC may face in liquidating members' portfolios and
(ii) minimizing exposures from members with large collateral positions
in a particular group of securities with a similar risk profile or in a
particular asset type, such that, in the event of a member default,
FICC's operations would not be disrupted, and non-defaulting members
would not be exposed to losses they cannot anticipate or control. These
proposed changes would not unfairly inhibit access to FICC's services,
or disadvantage or favor any particular member in relationship to
another member. The proposed changes would allow FICC to adjust the
haircuts
[[Page 68810]]
and concentration limits more promptly and would not otherwise affect
members' access to FICC's services. In addition, any changes to the
haircuts or concentration limits would be directly related to the
perceived risk related to members' collateral based on back-tests,
stress-tests and market observations, and would be applied uniformly to
all members. Accordingly, FICC believes that these proposed changes
would not impose any burden or have any impact on competition.
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
Similarly, FICC does not believe the proposed rule changes to move
TIPS haircuts into a separate category would impose a burden on
competition. These proposed changes are designed to improve the clarity
and presentation of the haircut information. These proposed changes
would not unfairly inhibit access to FICC's services or disadvantage or
favor any particular member in relationship to another member, and the
changes would be applied uniformly to all members. Accordingly, FICC
believes that these proposed changes would not impose any burden or
have any impact on competition.
FICC believes the proposed changes to raise certain TIPS haircut
levels may have an impact on competition because these changes could
result in members' Eligible Clearing Fund Securities being subject to
higher haircuts than they would have been under the current GSD and
MBSD Schedules of Haircuts for Eligible Clearing Fund Securities. FICC
believes that the proposed change could burden competition by
potentially increasing these members' operating costs by requiring
members who are using TIPS as collateral to pledge additional
collateral. Nonetheless, FICC believes any burden on competition
imposed by the proposed changes would not be significant and,
regardless of whether such burden on competition could be deemed
significant, would be necessary and appropriate, as permitted by
Section 17A(b)(3)(I) of the Act for the reasons described in this
filing and further below.\34\
---------------------------------------------------------------------------
\34\ Id.
---------------------------------------------------------------------------
FICC believes any burden on competition presented by the proposed
changes to the TIPS haircut levels would not be significant. As
discussed above, if the proposed changes to the TIPS haircut levels had
been in place during the Impact Study period, the three largest daily
average dollar increases to GSD Members would have been $11.1 million
(approximately 0.91%), $8.3 million (approximately 1.07%), and $4.3
million (approximately 1.26%); and the three largest daily average
dollar increases to MBSD Members would have been $4.08 million
(approximately 0.30%), $4.04 million (approximately 0.46%), and $3.99
million (approximately 0.51%). In addition, FICC believes that the
proposed changes to the TIPS haircut levels are comparable with what is
being required of users of other similar registered clearing agencies
and foreign CCPs when posting TIPS as collateral.
FICC believes any burden on competition that may be imposed by the
proposed changes to the TIPS haircut levels would be necessary because,
as described above, the proposed changes would help ensure that the
collateral values attributed to TIPS would be commensurate with the
particular risk attributes of TIPS. Making sure proper collateral
values are attributed to TIPS that are used as margin would thus help
better ensure that FICC collects sufficient margin from members and
thereby assure the safeguarding of securities and funds which are in
the custody and control of FICC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In addition, FICC believes the proposed changes to the TIPS haircut
levels are necessary to support FICC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(5), (e)(6)(i), and (e)(6)(v) under the Act.
Specifically, as described above, FICC believes these proposed changes
would ensure that the haircut levels for TIPS are commensurate with the
particular risk attributes of TIPS. Having haircut levels for TIPS that
are commensurate with the particular risk attributes of TIPS would
ensure proper collateral valuation for TIPS used as margin. Ensuring
proper collateral valuation for TIPS used as margin would help FICC
better measure, monitor, and manage its credit exposures to
participants and those exposures arising from its payment, clearing,
and settlement processes, consistent with the requirements of Rule
17Ad-22(e)(4)(i) under the Act.\36\ Ensuring proper collateral
valuation for TIPS used as margin would also allow FICC to set and
enforce appropriately conservative collateral haircuts, consistent with
the requirements of Rule 17Ad-22(e)(5) under the Act.\37\ It would also
help FICC cover its credit exposures to its participants, consistent
with the requirements of Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the
Act.\38\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(e)(4)(i).
\37\ 17 CFR 240.17Ad-22(e)(5).
\38\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------
FICC also believes that any burden on competition that may be
imposed by the proposed changes to the TIPS haircut levels would be
appropriate in furtherance of the Act because these proposed changes
have been specifically designed to assure the safeguarding of
securities and funds which are in the custody and control of FICC or
for which it is responsible, as required by Section 17A(b)(3)(F) of the
Act.\39\ As described above, FICC believes these proposed changes would
help better ensure that FICC collects sufficient margin from members,
thus enabling FICC to produce margin levels more commensurate with the
risks it faces as a central counterparty. Accordingly, FICC believes
these proposed changes are appropriately designed to meet its risk
management goals and regulatory obligations.
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
FICC does not believe the proposed clarifying changes to the Rules
would impact competition. These changes would help to ensure that the
Rules remain clear. In addition, the changes would facilitate members'
understanding of the Rules and their obligations thereunder. These
changes would not affect FICC's operations or the rights and
obligations of the membership. As such, FICC believes the proposed
clarifying changes would not have any impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to
this proposal. If any additional written comments are received, they
will be publicly filed as an Exhibit 2 to this filing, as required by
Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
SEC's Division of Trading and Markets at
[[Page 68811]]
<a href="/cdn-cgi/l/email-protection#83f7f1e2e7eaede4e2ede7eee2f1e8e6f7f0c3f0e6e0ade4ecf5"><span class="__cf_email__" data-cfemail="06727467626f68616768626b67746d6372754675636528616970">[email protected]</span></a> or 202-551-5777.
FICC reserves the right to not 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#2d5f584148004e4240404843595e6d5e484e034a425b"><span class="__cf_email__" data-cfemail="3042455c551d535f5d5d555e4443704355531e575f46">[email protected]</span></a>. Please include
File Number SR-FICC-2023-014 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-2023-014. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(<a href="http://dtcc.com/legal/sec-rule-filings">dtcc.com/legal/sec-rule-filings</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-2023-014 and should be submitted on or before October 25, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
---------------------------------------------------------------------------
\40\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21938 Filed 10-3-23; 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.