Notice2025-03805
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Adopt a Volatility Event 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
March 11, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 90 Issue 46 (Tuesday, March 11, 2025)</title>
</head>
<body><pre>
[Federal Register Volume 90, Number 46 (Tuesday, March 11, 2025)]
[Notices]
[Pages 11760-11767]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-03805]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102532; File No. SR-FICC-2025-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Adopt a Volatility Event
Charge
March 5, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 27, 2025, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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\ to
adopt a volatility event charge (``Volatility Event Charge''), as
described in greater detail below.
---------------------------------------------------------------------------
\3\ Terms not defined herein are defined in the Rules, available
at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>.
---------------------------------------------------------------------------
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 adopt a Volatility Event Charge in order to
further improve margin resilience under
[[Page 11761]]
scheduled events that may impact market volatility by proactively
managing its member-level credit risk exposure and backtesting
performance.
Background
FICC, through GSD and MBSD, serves as a central counterparty and
provider of clearance and settlement services for fixed income
transactions. GSD provides central counterparty services in U.S.
government securities, as well as repurchase and reverse repurchase
transactions involving U.S. government securities,\4\ and MBSD provides
such services to the U.S. mortgage-backed securities market. As part of
its market risk management strategy, FICC manages its credit exposure
to members by determining the appropriate Required Fund Deposit to the
GSD and MBSD Clearing Funds (collectively, the ``Clearing Fund'') and
by monitoring their sufficiency, as provided for in the Rules.\5\ The
Required Fund Deposit serves as each member's margin.
---------------------------------------------------------------------------
\4\ GSD also clears and settles certain transactions on
securities issued or guaranteed by U.S. government agencies and
government sponsored enterprises.
\5\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 3. FICC's
market risk management strategy is designed to comply with Rule
17ad-22(e)(4) under the Act, where these risks are referred to as
``credit risks.'' 17 CFR 240.17ad-22(e)(4).
---------------------------------------------------------------------------
The objective of a member's Required Fund Deposit 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'').\6\ The aggregate amount of all members'
Required Fund Deposit constitutes the Clearing Fund. FICC would access
the Clearing Fund should a defaulting member's own Required Fund
Deposit be insufficient to satisfy losses to FICC caused by the
liquidation of that member's portfolio.
---------------------------------------------------------------------------
\6\ The Rules identify when FICC may cease to act for a Member
and the types of actions FICC may take. For example, FICC may
suspend a firm's membership with FICC or prohibit or limit a
member's access to FICC's services in the event that Member defaults
on a financial or other obligation to FICC. See GSD Rule 21
(Restrictions on Access to Services) and MBSD Rule 14 (Restrictions
on Access to Services), supra note 3.
---------------------------------------------------------------------------
FICC regularly assesses market and liquidity risks as such risks
relate to its margin methodologies to evaluate whether margin levels
are commensurate with the particular risk attributes of each relevant
product, portfolio, and market. For example, FICC employs daily
backtesting to determine the adequacy of each member's Required Fund
Deposit.\7\ FICC compares the Required Fund Deposit \8\ for each member
with the simulated liquidation gains/losses, using the actual positions
in the member's portfolio(s) and the actual historical security
returns. A backtesting deficiency occurs when a member's Required Fund
Deposit would not have been adequate to cover the projected liquidation
losses and highlights exposure that could subject FICC to potential
losses in the event that a member defaults.
---------------------------------------------------------------------------
\7\ The Model Risk Management Framework (``Model Risk Management
Framework'') sets forth the model risk management practices of FICC
and states that Value at Risk (``VaR'') and Clearing Fund
requirement coverage backtesting would be performed on a daily basis
or more frequently. See Securities Exchange Act Release Nos. 81485
(Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-014);
84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-2018-
010); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-FICC-
2020-004); 92380 (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).
\8\ Members may be required to post additional collateral to the
Clearing Fund in addition to their Required Fund Deposit amount. See
e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements) and
Section 6 of MBSD Rule 3 (Ongoing Membership Requirements), supra
note 3 (providing that adequate assurances of financial
responsibility of a member may be required, such as increased
Clearing Fund deposits). For backtesting comparisons, FICC uses the
Required Fund Deposit amount, without regard to the actual, total
collateral posted by the member to the Clearing Fund.
---------------------------------------------------------------------------
FICC investigates the cause(s) of any backtesting deficiencies and
determines if there is an identifiable cause of repeat backtesting
deficiencies. FICC also evaluates whether multiple members may
experience backtesting deficiencies for the same underlying reason.
Pursuant to the Rules, each member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
calculated to address specific risks faced by FICC, as identified
within the Rules.\9\ At GSD, these components include the VaR Charge,
Blackout Period Exposure Adjustment, Backtesting Charge, Holiday
Charge, Excess Capital Premium, Intraday Supplemental Fund Deposit,
Margin Liquidity Adjustment Charge, Portfolio Differential Charge, and
special charge.\10\ At MBSD, these components include the VaR Charge,
Backtesting Charge, Excess Capital Premium, Holiday Charge, Intraday
Mark-to-Market Charge, Intraday VaR Charge, Margin Liquidity Adjustment
Charge, and special charge.\11\ The VaR Charge generally comprises the
largest portion of a member's Required Fund Deposit amount.
---------------------------------------------------------------------------
\9\ Supra note 3.
\10\ These margin components and the relevant defined terms are
currently located in GSD Rules 1 (Definitions), 3 (Ongoing
Membership Requirements) and 4 (Clearing Fund and Loss Allocation),
supra note 3. FICC recently received regulatory approval to move the
margin calculation methodology, including the margin components and
the relevant defined terms, into a new Margin Component Schedule.
See Securities Exchange Act Release Nos. 101695 (Nov. 21, 2024), 89
FR 93763 (Nov. 27, 2024) (File No. SR-FICC-2024-007) and 101675
(Nov. 21, 2024), 89 FR 93735 (Nov. 27, 2024) (File No. SR-FICC-2024-
802).
\11\ These margin components and the relevant defined terms are
currently located in MBSD Rules 1 (Definitions), 3 (Ongoing
Membership Requirements) and 4 (Clearing Fund and Loss Allocation),
supra note 3.
---------------------------------------------------------------------------
Proposed Volatility Event Charge
<bullet> The VaR Charge is based on the potential price volatility
of unsettled positions using a sensitivity-based Value-at-Risk (VaR)
methodology. The VaR methodology provides an estimate of the possible
losses for a given portfolio based on: (1) confidence level, (2) a time
horizon and (3) historical market volatility. The VaR methodology is
intended to capture the risks related to market price that are
associated with the net unsettled positions in a member's portfolios.
This risk-based margin methodology is designed to project the potential
losses that could occur in connection with the liquidation of a
defaulting member's portfolio, assuming a portfolio would take three
days to liquidate in normal market conditions. The projected
liquidation gains or losses are used to determine the amount of the VaR
Charge to each portfolio, which is calculated to capture the market
price risk \12\ associated with each member's portfolio(s) at a 99%
confidence level.
---------------------------------------------------------------------------
\12\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is
sometimes also referred to as volatility risk.
---------------------------------------------------------------------------
<bullet> FICC's VaR model is designed to provide a margin
calculation that covers the market risk in a member's portfolio. The
VaR model calculates the risk profile of each GSD and MBSD member's
portfolio by applying certain representative risk factors to measure
the degree of responsiveness of the portfolio's value to the changes of
these risk factors over a historical lookback period of at least 10
years that may be supplemented with an additional stressed period.
The VaR model has been shown to perform well in low to moderate
volatility markets; however, the market events during the two arguably
most stressful market periods, i.e., the COVID period during March of
2020 and the successive interest rate hikes that began in March 2022,
have resulted in significant market volatility in the fixed income
market that exceeded the 99-percentile of the observed historical
[[Page 11762]]
data set. As a result, FICC VaR backtesting metrics fell below the
performance target due to unprecedented levels of extreme market
volatility. This highlighted the need for FICC to further enhance its
margin methodology by adopting a more proactive approach to manage its
backtesting performance and member-level market risk exposure arising
from extreme market volatility.\13\
---------------------------------------------------------------------------
\13\ Currently FICC mitigates this risk by assessing a special
charge of 10% of a member's VaR Charge at both GSD and MBSD on the
two days prior to, and on the day of, certain scheduled market
events if one or more stated conditions are triggered. This proposal
would enable FICC to codify this practice in the Rules.
---------------------------------------------------------------------------
FICC considered and evaluated various market risk measures as well
as conducted a comparative impact analysis that included (i) the
correlation between historical backtest breaches and impact volatility
or other market factors during stress, (ii) comparative evaluation of
the relative merits of historical versus implied volatility measures in
forecasting future volatility levels and specific stress events, and
(iii) consideration of alternative preventative mechanisms in adjusting
margin and improving performance. In addition, FICC explored several
forward-looking market indicators, including implied volatility, both
in isolation and in combination with key market or economic event
dates. Based on the assessment, FICC is proposing to adopt the
Volatility Event Charge at GSD and MBSD. FICC believes the Volatility
Event Charge would allow FICC to proactively cope with the potential
outsized adverse market reactions to the outcome of a scheduled event.
The Volatility Event Charge is designed to provide a proactive
measure to complement the GSD and MBSD VaR models by managing FICC's
member-level market risk exposure and backtesting performance. It would
be assessed with respect to each member portfolio at GSD and MBSD, as
well as each Segregated Indirect Participant at GSD, for periods in
which markets are heavily influenced by anticipation and resolution of
a scheduled event, e.g., major elections, Federal Open Market Committee
meetings, and major economic data releases, such as CPI and
unemployment, with the potential for large market moves once the
event's outcome is known in the marketplace.
As proposed, the Volatility Event Charge would be an additional
charge that is collected from members to mitigate FICC's exposures
arising from potential adverse market impact due to a scheduled event
that has the potential to impact market volatility, such as the release
of an economic indicator or a national election. The Volatility Event
Charge would be assessed twice a day at GSD and once a day at MBSD,\14\
beginning on the day of the coverage period when one or more of the
forward-looking market volatility indicators exceed the threshold(s)
specified by FICC and ending on the day of the scheduled event.
---------------------------------------------------------------------------
\14\ FICC currently calculates and assesses a member's margin
requirement at least twice a day for GSD Members (start-of-day and
noon) and once per day (start-of-day) for MBSD Members.
---------------------------------------------------------------------------
The coverage period shall generally include the two Business Days
prior to, as well as the day of, a scheduled event; however, based on
FICC's assessment of the market volatility and/or backtesting coverage,
FICC may elect to either extend or reduce the coverage period by one
Business Day. For example, FICC may extend the coverage by one Business
Day when more than one forward-looking market volatility indicators
exceed the thresholds specified. Similarly, FICC may reduce the
coverage period by one Business Day by including only the two Business
Days prior to a schedule event but not the day of the schedule event
if, based on its assessment, FICC does not anticipate the scheduled
event itself to impact market volatility. If FICC determines that a
change to the coverage period 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, in accordance with FICC's internal market risk management
policies and procedures. As proposed, FICC believes the Volatility
Event Charge would enable FICC's VaR models to incorporate market data
on the day the event occurs such that the application of the Volatility
Event Charge would no longer be required after the day the event
occurs, thus avoiding duplicative charges.
The Volatility Event Charge would be calculated by multiplying the
VaR Charge of the relevant member portfolio at GSD and MBSD or
Segregated Indirect Participant at GSD, as applicable, by no less than
10 percent and no greater than 30 percent, as determined by FICC from
time to time based on factors such as backtesting coverage and/or
backtesting deficiencies. The lower bound of 10% is determined based on
FICC's historical experience with the special charges that were imposed
on members following the regional banking crisis in 2023. The upper
bound of 30% is determined based on FICC's observation from the
magnitude of historical backtesting deficiencies under various stress
events. As an initial matter, FICC would calculate the Volatility Event
Charge by multiplying the VaR Charge of the relevant member portfolio
at GSD and MBSD or Segregated Indirect Participant at GSD,\15\ as
applicable, by 10 percent.
---------------------------------------------------------------------------
\15\ FICC recently received regulatory approval to make changes
to the GSD Rules regarding the separate calculation, collection, and
holding of margin for indirect participant transactions of GSD
members. As proposed, a new defined term ``Segregated Indirect
Participant'' would be added to GSD Rule 1 (Definitions) to refer to
a GSD member's indirect participants whose transactions are recorded
in a Segregated Indirect Participant Account. See Securities
Exchange Act Release Nos. 101695 (Nov. 21, 2024), 89 FR 93763 (Nov.
27, 2024) (File No. SR-FICC-2024-007) and 101675 (Nov. 21, 2024), 89
FR 93735 (Nov. 27, 2024) (File No. SR-FICC-2024-802). Therefore,
FICC is proposing to also assess the Volatility Event Charge with
respect to the Segregated Indirect Participants.
---------------------------------------------------------------------------
FICC would conduct ongoing monitoring of the efficacy of the
proposed Volatility Event Charge and perform a review of the results at
least monthly. If FICC determines that any modifications to the list of
scheduled events, forward-looking market volatility indicators and
associated thresholds, and/or applicable VaR Charge percentage, the
FICC market risk group would document the recommendation and rationale
for the change at the time of such determination and obtain approval
from FICC management committee, in accordance with FICC's internal
market risk management policies and procedures.
FICC would provide members with a list of applicable scheduled
events, forwarding-looking market volatility indicators and associated
thresholds, as well as any changes to the applicable VaR Charge
percentage and coverage period via a quarterly Important Notice to be
issued no less than one Business Day prior to the start of either the
quarter or the coverage period of the first scheduled event in the
quarter, whichever is earlier.
Proposed Rule Change
In connection with adopting the Volatility Event Charge at GSD,
FICC would modify the GSD Rules to:
I. Add a definition of ``Volatility Event Charge'' in GSD Rule 1
(Definitions) and define it in the Margin Component Schedule, Section
5.\16\ As proposed, the term ``Volatility Event Charge'' would mean an
additional charge that is collected from a GSD member or Segregated
Indirect
[[Page 11763]]
Participant \17\ to mitigate FICC's exposures to market volatility that
may arise from a scheduled event, such as the release of an economic
indicator or a national election. The proposed definition would also
provide that the Volatility Event Charge shall be assessed twice a day,
beginning on the day of the coverage period when one or more of the
forward-looking market volatility indicators exceed the threshold(s)
specified by FICC and ending on the day of the scheduled event. The
coverage period shall generally include the two Business Days prior to,
as well as the day of, a scheduled event; however, based on its
assessment of the market volatility and/or backtesting coverage, FICC
may elect to either extend or reduce the coverage period by one
Business Day. In addition, as proposed, the definition would provide
that the Volatility Event Charge, with respect to each Margin Portfolio
or Segregated Indirect Participant, shall be calculated by multiplying
the VaR Charge of the Margin Portfolio or Segregated Indirect
Participant, as applicable, by no less than 10 percent and no greater
than 30 percent, as determined by FICC from time to time based on
factors such as backtesting coverage and/or backtesting deficiencies.
Furthermore, the proposed definition would require FICC to provide GSD
members with a list of applicable scheduled events, forwarding-looking
market volatility indicators and associated thresholds, as well as any
changes to the applicable VaR Charge percentage and coverage period via
a quarterly Important Notice to be issued no less than one Business Day
prior to the start of either the quarter or the coverage period of the
first scheduled event in the quarter, whichever is earlier.
---------------------------------------------------------------------------
\16\ Supra note 10.
\17\ Supra note 15.
---------------------------------------------------------------------------
II. Add the ``Volatility Event Charge'' as an additional charge in
calculating the Required Fund Deposit and the Segregated Customer
Margin Requirement \18\ in the Margin Component Schedule, Sections 2(b)
and 3(b).
---------------------------------------------------------------------------
\18\ FICC recently received regulatory approval to make changes
to the GSD Rules regarding the separate calculation, collection, and
holding of margin for indirect participant transactions of GSD
members. The margin requirement for a GSD member's segregated
indirect participant transactions would be referred to as the
Segregated Customer Margin Requirements. See Securities Exchange Act
Release Nos. 101695 (Nov. 21, 2024), 89 FR 93763 (Nov. 27, 2024)
(File No. SR-FICC-2024-007) and 101675 (Nov. 21, 2024), 89 FR 93735
(Nov. 27, 2024) (File No. SR-FICC-2024-802). Therefore, FICC is
proposing to also include the Volatility Event Charge as an
additional charge in calculating the proposed Segregated Customer
Margin Requirement.
---------------------------------------------------------------------------
III. Correct a typographical error in Section 3(b) of the Margin
Component Schedule.
In connection with adopting the Volatility Event Charge at MBSD,
FICC would modify the MBSD Rules to:
I. Add a definition of ``Volatility Event Charge'' in MBSD Rule 1
(Definitions). As proposed, the term ``Volatility Event Charge'' would
mean an additional charge that is collected from an MBSD member to
mitigate FICC's exposures to market volatility that may arise from a
scheduled event, such as the release of an economic indicator or a
national election. The proposed definition would also provide that the
Volatility Event Charge shall be assessed once a day, beginning on the
day of the coverage period when one or more of the forward-looking
market volatility indicators exceed the threshold(s) specified by FICC
and ending on the day of the scheduled event. The coverage period shall
generally include the two Business Days prior to, as well as the day
of, a scheduled event; however, based on its assessment of the market
volatility and/or backtesting coverage, FICC may elect to either extend
or reduce the coverage period by one Business Day. In addition, as
proposed, the definition would provide that the Volatility Event
Charge, with respect to each margin portfolio, shall be calculated by
multiplying the VaR Charge of the margin portfolio, as applicable, by
no less than 10 percent and no greater than 30 percent, as determined
by FICC from time to time based on factors such as backtesting coverage
and backtesting deficiencies. Furthermore, the proposed definition
would require FICC to provide MBSD members with a list of applicable
scheduled events, forwarding-looking market volatility indicators and
associated thresholds, as well as any changes to the applicable VaR
Charge percentage and coverage period via a quarterly Important Notice
to be issued no less than one Business Day prior to the start of either
the quarter or the coverage period of the first scheduled event in the
quarter, whichever is earlier.
II. Add the ``Volatility Event Charge'' as an additional charge in
calculating the Required Fund Deposit for each Clearing Member in
Section 2(b) of MBSD Rule 4 (Clearing Fund and Loss Allocation).
Impact Study
From April 15, 2024 to August 2, 2024 (the ``Impact Study
Period''), FICC assessed a special charge \19\ on each GSD and MBSD
members in an amount of 10% of the member's VaR Charge with respect to
the scheduled events listed below in Table 1 (Scheduled Economic Events
Table) during the coverage periods listed below in Table 3 (Application
of the Special Charge During the Impact Study Period). As indicated in
Table 3, FICC assessed the special charge beginning on the day when one
or more of the forward-looking market indicators listed below in Table
2 (Forward-Looking Market Indicator and Associated Thresholds) exceeded
the threshold(s), also listed in Table 2, during the coverage period
and ending on the day of the scheduled event. Overall, FICC assessed
the special charge on 19 out of the 77 Business Days during the Impact
Study Period, or approximately 25% (see Table 3).
---------------------------------------------------------------------------
\19\ The proposal would enable FICC to codify this special
charge as the Volatility Event Charge in the Rules.
\20\ On January 30, 2025, based on further analysis, FICC has
updated the Scheduled Economic Events to include only the Non-Farm
Payrolls (NFP) and Unemployment Rate, removing all other scheduled
events, for the application of the special charge.
Table 1--Scheduled Economic Events \20\
------------------------------------------------------------------------
-------------------------------------------------------------------------
[rtarr8] Consumer Price Index (CPI).
[rtarr8] Personal Consumption Expenditures (CPE) Price Index.
[rtarr8] Non-Farm Payrolls (NFP) and Unemployment Rate.
[rtarr8] Federal Funds Target Rate.
[rtarr8] Minutes of the Federal Open Market Committee Meeting.
------------------------------------------------------------------------
[[Page 11764]]
Table 2--Forward-Looking Market Indicator and Associated Thresholds
------------------------------------------------------------------------
Indicator Threshold
------------------------------------------------------------------------
MOVE Index............................. Previous Business Day MOVE
Index closed above 100.
MOVE Index vs. 10-YR Yield EWMA........ Difference between MOVE Index
and 10-Year Treasury EWMA >15
bps.
Fed Funds Implied Rate Change.......... Difference between 3-month Fed
Funds Future and spot >50 bps.
------------------------------------------------------------------------
Table 3--Application of the Special Charge During the Impact Study Period
----------------------------------------------------------------------------------------------------------------
Economic indicator Event date Coverage period Special charges applied *
----------------------------------------------------------------------------------------------------------------
Personal Consumption Expenditures (PCE) 04/26/2024 04/24/2024-04/26/2024 Yes.
Price Index.
Federal Funds Target Rate............... 05/01/2024 04/29/2024-05/01/2024 Yes.
Non-Farm Payrolls (NFP)/Unemployment 05/03/2024 05/01/2024-05/03/2024 Yes.
Rate.
Consumer Price Index (CPI).............. 05/15/2024 05/13/2024-05/15/2024 Yes.
Minutes of the Federal Open Market 05/22/2024 05/20/2024-05/22/2024 No.
Committee Meeting.
Personal Consumption Expenditures (PCE) 05/31/2024 05/29/2024-05/31/2024 No.
Price Index.
Non-Farm Payrolls (NFP)/Unemployment 06/07/2024 06/05/2024-06/07/2024 Yes.
Rate.
Federal Funds Target Rate, Consumer 06/12/2024 06/10/2024-06/12/2024 No.
Price Index (CPI).
Personal Consumption Expenditures (PCE) 06/28/2024 06/26/2024-06/28/2024 No.
Price Index.
Minutes of the Federal Open Market 07/03/2024 07/01/2024-07/03/2024 No.
Committee Meeting.
Non-Farm Payrolls (NFP)/Unemployment 07/05/2024 07/02/2024-07/05/2024 Yes.
Rate.
Consumer Price Index (CPI).............. 07/11/2024 07/09/2024-07/11/2024 No.
Personal Consumption Expenditures (PCE) 07/26/2024 07/24/2024-07/26/2024 No.
Price Index.
Federal Funds Target Rate............... 07/31/2024 07/29/2024-07/31/2024 No.
Non-Farm Payrolls (NFP)/Unemployment 08/02/2024 07/31/2024-08/02/2024 Yes.
Rate.
----------------------------------------------------------------------------------------------------------------
* FICC applied the special charge on at least one day during the coverage period.
The average special charge assessed during the Impact Study Period
is approximately $3.75 billion and $4.00 billion for the start-of-day
and noon margin cycles, respectively, at GSD, and $911.30 million at
MBSD. The number of backtesting deficiencies at GSD was reduced by 4
(from 61 to 57, or approximately 7%) and 7 (from 69 to 62, or
approximately 10%) for the start-of-day and noon margin cycles,
respectively, and the number of backtesting deficiencies at MBSD was
reduced by 3 (from 23 to 20, or approximately 13%). In addition to the
backtesting deficiencies that were eliminated by the special charge,
other deficiencies were reduced such that the magnitude of the observed
deficiency was less than without the special charge.
Based on the above, FICC believes the proposal would enable FICC to
further improve its margin resilience under scheduled events that may
impact market volatility by proactively managing its member-level
credit risk exposure and backtesting performance.
Implementation Timeframe
FICC would implement the proposed rule change by no later than 60
Business Days after the approval of the proposed rule change by the
Commission. FICC would announce the effective date of the proposed
changes by an Important Notice posted to its website.
2. Statutory Basis
FICC believes the proposed change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, FICC
believes the proposed rule change is consistent with Section
17A(b)(3)(F) of the Act,\21\ and Rules 17ad-22(e)(4)(i) and (e)(6)(i),
each promulgated under the Act,\22\ for the reasons described below.
---------------------------------------------------------------------------
\21\ 15 U.S.C. 78q-1(b)(3)(F).
\22\ 17 CFR 240.17ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires that the GSD Rules be
designed to, among other things, assure the safeguarding of securities
and funds which are in the custody or control of the clearing agency or
for which it is responsible and be designed to promote the prompt and
accurate clearance and settlement of securities transactions.\23\ FICC
believes the proposed change to adopt the Volatility Event Charge is
designed to assure the safeguarding of securities and funds which are
in its custody or control or for which it is responsible because it is
designed to mitigate FICC's risk exposure by enabling FICC to adopt a
more proactive approach in managing its backtesting performance and
member-level market risk exposure arising out of potential outsized
adverse market reactions to the outcome of a scheduled event.
Specifically, the proposed Volatility Event Charge would allow FICC to
collect financial resources to cover risk exposures during the periods
leading up to the scheduled event that potentially can adversely impact
the market.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Clearing Fund is a key tool that FICC uses to mitigate
potential losses to FICC associated with liquidating a Member's
portfolio in the event of Member default. Therefore, the proposed
change to include a Volatility Event Charge among the GSD and MBSD
Clearing Fund components would enable FICC to better address
significant adverse market changes in a member's portfolio such that,
in the event of member default, FICC's operations would not be
disrupted, and non-defaulting members would not be exposed to losses
they cannot anticipate or control. In this way, the proposed change to
adopt the Volatility Event Charge is designed to assure the
safeguarding of securities and funds which are in the custody or
control of FICC or for which it is responsible, consistent with Section
17A(b)(3)(F) of the Act.\24\
---------------------------------------------------------------------------
\24\ Id.
---------------------------------------------------------------------------
The proposed change to make a technical correction to the Rules
would ensure that the Rules remain accurate and clear, which in turn
would enable all stakeholders to readily understand their rights and
obligations in connection with FICC's clearance and
[[Page 11765]]
settlement of securities transactions. Therefore, FICC believes that
this proposed change would promote the prompt and accurate clearance
and settlement of securities transactions, consistent with Section
17A(b)(3)(F) of the Act.\25\
---------------------------------------------------------------------------
\25\ Id.
---------------------------------------------------------------------------
The proposed rule change with respect to the adoption of the
Volatility Event Charge has also been designed to be consistent with
Rules 17ad-22(e)(4)(i) and (e)(6)(i) under the Act.\26\ Rule 17ad-
22(e)(4)(i) under the Act \27\ 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, the proposed Volatility Event Charge would help
address the identification, measurement, monitoring and management of
credit exposures that may arise from potential outsized adverse market
reactions to the outcome of a scheduled event. By incorporating the
Volatility Event Charge into the GSD and MBSD Rules, the proposed
change would enable FICC to have rule provisions that are reasonably
designed to effectively identify, measure, monitor, and manage its
credit exposures to members and those exposures arising from its
payment, clearing, and settlement processes, which FICC believes is
consistent with Rule 17ad-22(e)(4)(i). Moreover, the proposed change
would enable it to better identify, measure, monitor, and, through the
collection of members' Required Fund Deposits and proposed Segregated
Customer Margin Requirements, manage its credit exposures to members by
maintaining sufficient resources to cover those credit exposures fully
with a high degree of confidence. Adopting the Volatility Event Charge
would help to ensure that the risk exposure during periods of extreme
market volatility is adequately identified, measured and monitored. It
would help ensure that the margin that FICC collects from members is
sufficient to mitigate the credit exposure presented by the members. As
a result, FICC believes that the proposal would enhance FICC's ability
to effectively identify, measure, and monitor its credit exposures and
would enhance its ability to maintain sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence, consistent with the requirements of Rule 17ad-
22(e)(4)(i) under the Act.\28\
---------------------------------------------------------------------------
\26\ 17 CFR 240.17ad-22(e)(4)(i) and (e)(6)(i).
\27\ 17 CFR 240.17ad-22(e)(4)(i).
\28\ Id.
---------------------------------------------------------------------------
Rule 17ad-22(e)(6)(i) under the Act \29\ requires a covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to cover its credit
exposures to its participants by establishing a risk-based margin
system that, at a minimum, considers, and produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market. FICC believes that the proposed
Volatility Event Charge is consistent with the requirements of Rule
17ad-22(e)(6)(i) cited above. The Required Fund Deposits are made up of
risk-based components (as margin) that are calculated and assessed
daily to limit FICC's credit exposures to members. FICC is proposing a
proactive measure that is designed to complement the GSD and MBSD VaR
models by more effectively measuring and addressing risk
characteristics in situations where the risk factors used in the VaR
method do not adequately predict market price movements. Adopting the
Volatility Event Charge at GSD and MBSD would help to ensure that
margin levels are commensurate with the risk exposure of each member
portfolio due to potential outsized and adverse market reactions to the
outcome of a scheduled event. It would help ensure that the margin that
FICC collects from members is sufficient to mitigate the credit
exposure presented by the members. Overall, the proposed change would
allow FICC to more effectively address the risks presented by members.
In this way, the proposed change to adopt the Volatility Event Charge
would enhance the ability of FICC to produce margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market. As such, FICC believes that the proposed change
is consistent with the requirements of Rule 17ad-22(e)(6)(i) under the
Act.\30\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17ad-22(e)(6)(i).
\30\ Id.
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
FICC believes the proposed rule change to adopt the Volatility
Event Charge could impose a burden on competition. As a result of the
proposed rule change, participants may experience increases in their
Required Fund Deposits and/or Segregated Customer Margin Requirements.
Such increases could burden participants that have lower operating
margins or higher costs of capital than other participants. It is not
clear whether the burden on competition would necessarily be
significant because it would depend on whether the affected
participants were similarly situated in terms of business type and
size. Regardless of whether the burden on competition is significant,
FICC believes that any burden on competition would be necessary and
appropriate in furtherance of the purposes of the Act.
Specifically, FICC believes that the proposed rule change would be
necessary in furtherance of the Act, as described in this filing and
further below. FICC believes that the above-described burden on
competition that may be created by the proposed changes is necessary.
This is because the GSD Rules must be designed to assure the
safeguarding of securities and funds that are in FICC's custody or
control or which it is responsible, consistent with Section
17A(b)(3)(F). As described above, FICC believes that the adoption of
the Volatility Event Charge would enable FICC to further improve margin
resilience under scheduled events that may impact market volatility by
proactively managing its member-level credit risk exposure and
backtesting performance such that, in the event of member default,
FICC's operations would not be disrupted and non-defaulting members
would not be exposed to losses they cannot anticipate or control. As
such, the proposed changes to adopt the Volatility Event Charge are
designed to assure the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible,
consistent with Section 17A(b)(3)(F) of the Act.
FICC also believes these proposed changes to adopt the Volatility
Event Charge are necessary to support FICC's compliance with Rules
17ad-22(e)(4)(i) and (e)(6)(i) under the Act,\31\ which require FICC to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to (x) effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes and (y)
cover its credit exposures to its participants by establishing a risk-
based margin system that, at a minimum, considers, and produces margin
levels commensurate with, the risks and particular attributes
[[Page 11766]]
of each relevant product, portfolio, and market.
---------------------------------------------------------------------------
\31\ 17 CFR 240.17ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------
As described above, FICC believes that adopting the Volatility
Event Charge would allow FICC to better mitigate risk exposure by more
proactively coping with the potential outsized adverse market reactions
to the outcome of a schedule event. Accordingly, FICC believes that
this proposed change to adopt the Volatility Event Charge would allow
FICC to effectively identify, measure, monitor, and manage its credit
exposures to participants and better limit FICC's credit exposures to
participants and cover its credit exposures to its participants by
producing margin levels commensurate with the risks and particular
attributes of each relevant product and portfolio, consistent with the
requirements of Rules 17ad-22(e)(4)(i) and (e)(6)(i) under the Act.\32\
---------------------------------------------------------------------------
\32\ Id.
---------------------------------------------------------------------------
FICC also believes that the above-described burden on competition
that could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible, as
described in detail above. The proposed changes to adopt the Volatility
Event Charge is specifically designed to cover significant risk
exposures that warrant the collection of additional margin, i.e., when
one or more of the forward-looking market volatility indicators exceed
the specified threshold(s). Any increase in Required Fund Deposit and/
or Segregated Customer Margin Requirement as a result of such proposed
change for a particular participant would be in direct relation to the
specific risks presented by such participant's portfolio, and each
participant's Required Fund Deposit and/or Segregated Customer Margin
Requirement would continue to be calculated with the same parameters
and at the same confidence level. Therefore, participants with
portfolios that present similar risks, regardless of the type of
participant, would have similar impacts on their Required Fund Deposit
and/or Segregated Customer Margin Requirement amounts. In addition, the
proposed changes to adopt the Volatility Event Charge would improve the
risk-based margining methodology that FICC employs to set margin
requirements and better limit FICC's credit exposures to its
participants. Impact studies indicate that the proposed Volatility
Event Charge would result in a reduction in backtesting deficiencies,
which in turn would result in backtesting coverage that more
appropriately addresses the risks presented by each participant's
portfolio(s). Therefore, because the proposed changes are designed to
provide FICC with a more appropriate and complete measure of the risks
presented by participants' portfolios, FICC believes the proposals are
appropriately designed to meet its risk management goals and its
regulatory obligations.
Accordingly, FICC does not believe that the proposed changes to
adopt the Volatility Event Charge would impose any burden on
competition that is not necessary or appropriate in furtherance of the
Act.\33\
---------------------------------------------------------------------------
\33\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------
FICC does not believe the proposed change to make a technical
correction to the Rules would present any burden or have a material
impact on competition. The proposed change is to ensure that the Rules
remain accurate. The proposed change would neither change the current
practices of FICC nor affect FICC member's rights or obligations.
Therefore, FICC does not believe that this proposed change would 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="http://www.sec.gov/regulatory-actions/how-to-submit-comments">www.sec.gov/regulatory-actions/how-to-submit-comments</a>. General questions regarding
the rule filing process or logistical questions regarding this filing
should be directed to the Main Office of the SEC's Division of Trading
and Markets at <a href="/cdn-cgi/l/email-protection#8ffbfdeeebe6e1e8eee1ebe2eefde4eafbfccffceaeca1e8e0f9"><span class="__cf_email__" data-cfemail="9ce8eefdf8f5f2fbfdf2f8f1fdeef7f9e8efdceff9ffb2fbf3ea">[email protected]</span></a> or 202-551-5777.
FICC reserves the right not to respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#92e0e7fef7bff1fdfffff7fce6e1d2e1f7f1bcf5fde4"><span class="__cf_email__" data-cfemail="fb898e979ed6989496969e958f88bb889e98d59c948d">[email protected]</span></a>. Please include
File Number SR-FICC-2025-003 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-FICC-2025-003. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</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,
[[Page 11767]]
Washington, DC 20549 on official business days between the hours of 10
a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of FICC and on DTCC's
website (<a href="http://www.dtcc.com/legal/sec-rule-filings">www.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-2025-003 and should be submitted on or
before April 1, 2025.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Vanessa A. Countryman,
Secretary.
[FR Doc. 2025-03805 Filed 3-10-25; 8:45 am]
BILLING CODE 8011-01-P
</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>Indexed from Federal Register on March 11, 2025.
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.