Notice2025-17730
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving of Proposed Rule Change To Revise the Definition of the Backtesting Charge
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Published
September 15, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 176 (Monday, September 15, 2025)</title>
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[Federal Register Volume 90, Number 176 (Monday, September 15, 2025)]
[Notices]
[Pages 44406-44408]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-17730]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103941; File No. SR-FICC-2025-017]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving of Proposed Rule Change To Revise the Definition of the
Backtesting Charge
September 10, 2025.
I. Introduction
On July 23, 2025, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2025-017 (``Proposed Rule Change'') to make changes to FICC's
Government Securities Division (``GSD'') Rule Book to revise the
definition of the Backtesting Charge. The Proposed Rule Change was
published for comment in the Federal Register on August 5, 2025.\3\ The
Commission has received no comments on the Proposed Rule Change. For
the reasons discussed below, the Commission is approving the Proposed
Rule Change.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 103602 (July 31,
2025), 90 FR 37608 (Aug. 5, 2025) (File No. SR-FICC-2025-017)
(``Notice of Filing'').
\4\ Capitalized terms not defined herein shall have the meanings
ascribed to them in the GSD Rules, available at <a href="https://www.dtcc.com/legal/rules-and-procedures.aspx">https://www.dtcc.com/legal/rules-and-procedures.aspx</a>.
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II. Background
FICC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for the
financial transactions it clears. FICC's GSD provides trade comparison,
netting, risk management, settlement, and central counterparty services
for the U.S. Government securities market.\5\ As such, FICC is exposed
to the risk that one or more of its members may fail to make a payment
or to deliver securities.
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\5\ FICC's Mortgage-Backed Securities Division provides similar
services for mortgage-backed securities. For purposes of this Order,
``FICC'' refers to GSD.
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A key tool that FICC uses to manage its credit exposures to its
members is determining the appropriate margin to collect from members
and monitoring its sufficiency. A member's Required Fund Deposit (or
Segregated Customer Margin, when applicable), which serves as margin,
is designed to mitigate potential losses associated with liquidation of
the member's portfolio in the event of that member's default. The
aggregated amount of all GSD members' Required Fund Deposits
constitutes the Clearing Fund, which FICC would be able to access
should a defaulted member's own margin be insufficient to satisfy
losses to FICC caused by the liquidation of that member's portfolio.\6\
Similarly, FICC would be able to access Segregated Customer Margin in
the event of the default of the Segregated Indirect Participant for
which that margin is held.\7\
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\6\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 4.
\7\ See GSD Rule 4, Section 1a, id.
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Each member's Required Fund Deposit or Segregated Customer Margin
amount consists of a number of applicable components, each of which is
calculated to address specific risks faced by FICC.\8\ FICC employs
daily backtesting to determine the adequacy of each member's margin
amount, comparing the Required Fund Deposit or Segregated Customer
Margin with the simulated liquidation gains/losses using the actual
positions in the member's portfolio and the actual historical
returns.\9\ FICC performs this backtesting both for internal reporting
and in connection with the calculation of the Backtesting Charge margin
component, which is discussed further below.\10\ FICC investigates the
cause of any backtesting deficiencies, particularly backtesting
deficiencies that bring the results for that member below its 99
percent confidence target (i.e., greater than two backtesting
deficiency days in a rolling 12-month period), to determine any
identifiable cause of repeat deficiencies or a same underlying reason
for multiple members' backtesting deficiencies.\11\
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\8\ See GSD Rules (Margin Component Schedule), supra note 4.
These components include, as applicable, the VaR Charge, Blackout
Period Exposure Adjustment, Backtesting Charge, Holiday Charge,
Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment
Charge, and Portfolio Differential Charge.
\9\ See Notice of Filing, supra note 3, 90 FR at 37609.
Backtesting is an ex-post comparison of actual outcomes (i.e., the
actual margin collected) with expected outcomes derived from the use
of margin models. See 17 CFR 240.17Ad-22(a)(1).
\10\ Id.
\11\ See Notice of Filing, supra note 3, 90 FR at 37609.
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The Backtesting Charge is an additional charge that may be added to
a Required Fund Deposit or Segregated Customer Margin requirement for
start of day and/or intraday margin collection.\12\ FICC may assess the
Backtesting Charge if the firm has a 12-month trailing backtesting
coverage below the 99 percent backtesting coverage target.\13\ If
assessed, the Backtesting Charge is generally equal to the firm's third
largest deficiency that occurred during the previous 12 months, but
FICC may adjust it to an amount that FICC determines is more
appropriate for maintaining that firm's backtesting results above the
99 percent coverage threshold.\14\ FICC calculates the Backtesting
Charge at least monthly and, based on those calculations, may impose a
new Backtesting Charge, remove an existing Backtesting Charge, or
either increase or decrease an existing Backtesting Charge as necessary
to maintain its target backtesting coverage.\15\
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\12\ GSD Rules (Margin Component Schedule), Section 5, supra
note 4.
\13\ Id.
\14\ Id.
\15\ Id.
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III. Description of the Proposed Rule Change
FICC is proposing to revise the definition of the Backtesting
Charge in the Margin Component Schedule of the GSD Rules to clarify the
current calculation of that charge and adopt a change to the
calculation.
First, FICC is proposing clarifications to the definition of
Backtesting Charge to reflect FICC's current practice. The Proposed
Rule Change would explicitly state that the backtesting coverage
calculated in connection with the Backtesting Charge and the
calculation of that charge do not include amounts already collected
from that member as a Backtesting Charge. FICC states that by excluding
amounts already collected as a Backtesting Charge from this
calculation, FICC is able to more accurately evaluate a firm's
historical backtesting deficiencies to determine any appropriate
Backtesting Charge amount to maintain that firm's backtesting coverage
above the 99 percent confidence threshold.\16\
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\16\ See Notice of Filing, supra note 3, 90 FR at 37609.
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The Proposed Rule Change would also clarify that the backtesting
coverage calculation described in the definition is the coverage
``calculated for purposes of calculating the Backtesting Charge,''
distinguishing it from backtesting that FICC performs for other
purposes which may use a different methodology. FICC states that
because methodologies may differ, this aspect of the Proposed Rule
Change would preclude confusion between the different coverage
calculations.\17\ The Proposed Rule Change would also remove the
defined terms for ``Intraday Backtesting Charge'' and ``Regular
Backtesting Charge'' from
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the definition, but continue to state that the Backtesting Charge may
be calculated on both the start of day and intraday portfolio of
members. FICC states that because the Backtesting Charge that is
calculated and collected at the start of day and intraday are otherwise
identical, the two separate defined terms are not necessary.\18\
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\17\ Id.
\18\ Id.
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Second, the Proposed Rule Change would revise the calculation of
the backtesting coverage calculated in connection with the Backtesting
Charge and the calculation of that charge by excluding from the
calculation other margin amounts already collected intraday from the
member. FICC states that this aspect of the Proposed Rule Change would
remove from these calculations an assumption that FICC would collect
all intraday margin requirements before the member defaults, because
this assumption could underestimate the potential losses that FICC may
experience if the member defaults prior to funding its intraday margin
calls.\19\ FICC states that similar to excluding amounts already
collected as a Backtesting Charge, as is the current practice described
above, excluding other margin collected intraday would make it less
likely for FICC to undercount potential backtesting deficiencies.\20\
The Proposed Rule Change would reflect both the clarification of the
exclusion of the Backtesting Charge and the change to also exclude all
other intraday margin collection from the Backtesting Charge
calculations, in a new paragraph in the definition.
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\19\ Id. at 37610.
\20\ Id.
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FICC conducted an impact study on Backtesting Charges collected for
the period beginning June 3, 2024, through May 30, 2025 (``Impact
Study'').\21\ Overall, the Impact Study shows an increase in margin
collection if the Proposed Rule Change to exclude amounts collected
intraday from the Backtesting Charge calculation methodology had been
in place.\22\ Specifically, the Impact Study shows that the aggregate
average daily Backtesting Charges for the start of day and intraday
margin cycles would have increased by approximately $166.61MM or 121.2%
and $137.41MM or 90.3%, respectively, accounting for a 0.30% increase
in overall margin for the start of day margin cycle and 0.25% increase
for the intraday margin cycle. The Impact Study also shows that 29
Members would have seen increases to the Backtesting Charge applied
during the start of day margin cycle and 19 Members for the intraday
margin cycle.
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\21\ As part of the Proposed Rule Change, FICC filed, as Exhibit
3, the Impact Study. Pursuant to 17 CFR 240.24b-2, FICC requested
confidential treatment of Exhibit 3.
\22\ See Notice of Filing, supra note 3, 90 FR at 37610.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \23\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After careful review of the Proposed Rule Change,
the Commission finds that the Proposed Rule Change is consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to FICC. In particular, the Commission finds that the
Proposed Rule Change is consistent with Section 17A(b)(3)(F) of the Act
\24\ and Rules 17ad-22(e)(4)(i) and (e)(6)(i) thereunder.\25\
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\23\ 15 U.S.C. 78s(b)(2)(C).
\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to, among other things, promote the prompt
and accurate clearance and settlement of securities transactions, and
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\26\ The Proposed Rule Change is consistent with Section
17A(b)(3)(F) of the Act for the reasons stated below.
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed in Part II, FICC determines and monitors the
appropriate margin to collect from members to mitigate potential losses
from liquidation of a member's portfolio in the event of that member's
default. The Backtesting Charge is a component of that margin, added
when the member has a 12-month trailing backtesting coverage below the
99 percent backtesting coverage target. This helps ensure FICC collects
sufficient margin to manage risk exposure to its members. As discussed
in Part III, the Proposed Rule Change would clarify the current
methodology for the calculation of the Backtesting Charge and
incorporate a revision to it by clearly stating the exclusion of both
the Backtesting Charge and other margin collected intraday from these
calculations. Additionally, the Proposed Rule Change would further
clarify the definition of Backtesting Charge by removing unnecessary
defined terms for ``Intraday Backtesting Charge'' and ``Regular
Backtesting Charge,'' which are calculated and collected in the same
way, and by clearly stating that the backtesting coverage referred to
in the definition is the coverage that is calculated for purposes of
calculating the Backtesting Charge. Thus, the Proposed Rule Change
would make the GSD Rules clearer and more transparent regarding
calculation of the Backtesting Charge.
In addition, as discussed in Part III, FICC is proposing to revise
its margin calculation methodology to also exclude from the Backtesting
Charge calculations other margin collected on an intraday basis. This
proposed change would remove the assumption that a member would only
default after it had met those intraday margin requirements, which
could lead to an underestimation of potential losses if that member
defaults prior to funding intraday margin calls. The Impact Study,
which the Commission reviewed and analyzed as part of its consideration
of this Proposed Rule Change, demonstrates that this revision to the
calculations would result in an increase in the margin collected. Such
an increase in FICC's available financial resources would decrease the
likelihood that losses arising out of a member default would exceed
FICC's prefunded resources and in a disruption of FICC's operation of
its critical clearance and settlement services.
Because the clarifications to the margin calculation methodology
should allow members to better anticipate their margin obligations to
FICC and the revisions to the methodology should generally provide FICC
with additional resources to manage potential losses arising out of a
member default, the Proposed Rule Change should support FICC's ability
to provide prompt and accurate clearance and settlement of securities
transactions, consistent with Section 17A(b)(3)(F) of the Act.\27\
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\27\ Id.
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Additionally, the Proposed Rule Change should allow FICC to collect
margin in amounts that would maintain a member's backtesting results
above the 99 percent coverage threshold, thus helping ensure FICC is
collecting sufficient margin to cover potential losses in the event of
that member's default. This should help limit nondefaulting members'
exposure to mutualized losses since FICC would
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access the mutualized Clearing Fund should a defaulted member's own
margin be insufficient to satisfy losses to FICC caused by the
liquidation of that member's portfolio. By helping to limit the
exposure of FICC's non-defaulting members to mutualized losses, the
Proposed Rule Change should help FICC assure the safeguarding of
securities and funds which are in its custody or control, consistent
with Section 17A(b)(3)(F) of the Act.\28\
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\28\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) requires that FICC establish, implement,
maintain and enforce written policies and procedures reasonably
designed to effectively identify, measure, monitor, and manage its
credit exposures to participants and those arising from its payment,
clearing, and settlement processes, including by maintaining sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\29\
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\29\ 17 CFR 240.17ad-22(e)(4)(i).
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As discussed above, the Backtesting Charge is assessed when a
member has a 12-month trailing backtesting coverage below the 99
percent coverage target. The Proposed Rule Change clarifying and
revising the margin calculation methodology for this margin component
should help FICC collect margin that would maintain a member's
backtesting results above the 99 percent coverage threshold. The Impact
Study, which the Commission reviewed and analyzed as part of its
consideration of this Proposed Rule Change, demonstrates that this
revision to the calculations would result in an increase in the margin
collected. These changes should better enable FICC to calculate and
collect sufficient margin to manage and mitigate FICC's credit exposure
to its members. By helping FICC maintain sufficient financial resources
to cover such exposures fully with a high degree of confidence, the
Proposed Rule Change is reasonably designed to enable FICC to
effectively identify, measure, monitor, and manage its credit exposure
to participants, consistent with Rule 17ad-22(e)(4)(i).\30\
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\30\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) requires, among other things, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\31\
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\31\ 17 CFR 240.17ad-22(e)(6)(i).
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As discussed above, the Proposed Rule Change would revise the
margin calculation methodology for the Backtesting Charge to exclude
other margin collected on an intraday basis. The Impact Study, which
the Commission reviewed and analyzed as part of its consideration of
this Proposed Rule Change, demonstrates that this revision to the
calculations would result in an increase in the margin collected. By
removing the assumption that members would only default after they had
met those intraday margin requirements, this change to the calculation
methodology should lessen the likelihood of underestimating potential
losses if a member defaults prior to funding intraday margin calls.
Therefore, the proposed change to the calculation would make it less
likely for FICC to undercount potential backtesting deficiencies and
better cover FICC's credit exposures to its members, consistent with
the requirements of Rule 17ad-22(e)(6)(i).\32\
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\32\ Id.
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A of the Act \33\
and the rules and regulations promulgated thereunder.
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\33\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\34\ that proposed rule change SR-FICC-2025-017, be, and hereby is,
APPROVED.\35\
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\34\ 15 U.S.C. 78s(b)(2).
\35\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\36\
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\36\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-17730 Filed 9-12-25; 8:45 am]
BILLING CODE 8011-01-P
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