Notice2025-19176
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Add Basis Risk Haircut Charge to Certain Models
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Published
October 1, 2025
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 90 Issue 188 (Wednesday, October 1, 2025)</title>
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[Federal Register Volume 90, Number 188 (Wednesday, October 1, 2025)]
[Notices]
[Pages 47437-47441]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-19176]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104116; File No. SR-FICC-2025-018]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Add Basis Risk Haircut Charge
to Certain Models
September 29, 2025.
I. Introduction
On August 15, 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-2025-018 (``Proposed Rule Change'') \3\ to make changes to the GSD
Methodology Document--GSD Initial Market Risk Margin Model (``QRM
Methodology Document'') \4\ in order to incorporate the mortgage-backed
securities (``MBS'') pool/to-be-announced (``TBA'') basis risk haircut
[[Page 47438]]
charge into certain GSD margin models. The Proposed Rule Change was
published for comment in the Federal Register on August 29, 2025.\5\
The Commission has received no comments on the proposed rule change.
For the reasons discussed below, the Commission is approving the
Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms not defined herein are defined in FICC's
Government Securities Division (``GSD'') Rulebook (``Rules''),
available at <a href="http://www.dtcc.com/legal/rules-and-procedures">www.dtcc.com/legal/rules-and-procedures</a>.
\4\ As part of the Proposed Rule Change, FICC filed, as Exhibit
5, changes proposed to the QRM Methodology Document. Pursuant to 17
CFR 240.24b-2, FICC requested confidential treatment of Exhibit 5.
\5\ See Securities Exchange Act Release No. 103780 (Aug. 15,
2025), 90 FR 42284 (Aug. 29, 2025) (File No. SR-FICC-2025-018)
(``Notice of Filing'').
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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.\6\ 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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\6\ 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 the daily collection of the Required Fund Deposit (i.e.,
margin) from each member. A member's margin is designed to mitigate
potential losses associated with liquidation of the member's portfolio
in the event of that member's default. The aggregated amount of all GSD
members' margin 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.
FICC's Rules refer to margin in two ways, depending on the types of
members and accounts involved. First, the Required Fund Deposit is the
sum of each member's proprietary accounts and its indirect participant
accounts not designated as Segregated Indirect Participant Accounts.\7\
Second, the Segregated Customer Margin Requirement is the sum of the
member's Sponsoring Member Omnibus Accounts and Agent Clearing Member
Omnibus Accounts designated as Segregated Indirect Participant
Accounts.\8\
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\7\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 3.
\8\ Id.
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Both the Required Fund Deposit and Segregated Customer Margin
Requirement consist of several components, each of which is calculated
to address specific risks faced by FICC arising out of its members'
trading activity.\9\ For both, the components include, among others, a
VaR charge (``VaR Charge'') designed to capture the potential market
price risk associated with the securities in a member's portfolio.\10\
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\9\ See GSD Rule Book, Margin Component Schedule, Sections 2 and
5, supra note 3.
\10\ Id.
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a. Sensitivity-Based VaR Methodology and Other Margin Methodologies
The VaR Charge uses a sensitivity-based VaR methodology and is
based on the potential price volatility of unsettled positions in a
member's portfolio. It is designed to project the potential losses that
could occur in connection with the liquidation of a defaulting member's
portfolio, assuming the portfolio would take three days to liquidate in
normal market conditions and uses three inputs: (1) confidence level,
(2) a time horizon and (3) historical market volatility.\11\ The
projected liquidation gains or losses are used to determine the amount
of the VaR Charge for each portfolio, which is calculated to capture
the market price risk associated with each portfolio at a 99 percent
confidence level.
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\11\ FICC uses historical simulations to estimate the impact of
market volatilities on the Member's portfolio. See Notice of Filing,
supra note 5, 90 FR at 42285.
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Occasionally, a member's portfolio might contain classes of
securities that reflect market price changes that are not consistently
related to historical price moves. The value of such securities is
often uncertain because the securities' market volume varies widely.
Because the volume and price information for such securities are not
robust, a historical simulation approach would not generate VaR Charge
amounts that adequately reflect the risk profile of such securities.
For securities lacking sufficient data to employ the sensitivity-based
VaR approach, a haircut method is applied.\12\
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\12\ See GSD Rule 1 (Definitions--VaR Charge) supra note 3; See
also Securities Exchange Act Release No. 83362 (June 1, 2018), 83 FR
26514 (June 7, 2018) (SR-FICC-2018-001). Specifically, FICC
calculates the VaR Floor by multiplying the absolute value of the
sum of the portfolio's net long positions and net short positions,
grouped by product and remaining maturity, by a percentage
designated by FICC for such group. For U.S. Treasury and agency
securities, such percentage shall be a fraction, no less than 10
percent, of the historical minimum volatility of a benchmark fixed
income index for such group by product and remaining maturity. For
mortgage-backed securities, such percentage shall be a fixed
percentage that is no less than 0.05 percent.
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VaR Charges (i.e., the sum of the sensitivity-based VaR and any
haircuts applied in lieu thereof) are subject to FICC's Minimum Margin
Amount (``MMA'') model,\13\ which is designed to address the risk that
the VaR model may calculate a VaR Charge that is too low when current
market conditions significantly deviate from historical
observations.\14\ In addition, because the sensitivity-based VaR
methodology relies on sensitivity data and historical risk factor time
series data generated by an external vendor, FICC can utilize Margin
Proxy as a back-up VaR Charge calculation in the event that FICC
experiences a data disruption with its third-party vendor.\15\
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\13\ The MMA model calculates MMA, which is designed to
supplement the sensitivity-based VaR methodology model and improve
its responsiveness and resilience to extreme market volatility. See
GSD Margin Component Schedule (definition of MMA), supra note 3.
\14\ See Notice of Filing, supra note 5, 90 FR at 42285.
\15\ See id. The Margin Proxy model calculates Margin Proxy,
which is designed as an alternative volatility calculation in the
event that the requisite vendor data used for the VaR model is
unavailable for an extended period of time. See GSD Margin Component
Schedule (definition of ``Margin Proxy''), supra note 3; Securities
Exchange Act Release Nos. 80341 (March 30, 2017), 82 FR 16644 (April
5, 2017) (SR-FICC-2017-801); Securities Exchange Act Release No.
83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
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b. MBS Pool/TBA Basis Risk Haircut Charge
The QRM Methodology Document provides the methodology by which FICC
calculates the VaR Charge, MMA, and Margin Proxy.\16\ The QRM
Methodology Document includes specific model inputs, parameters,
assumptions, and other information.
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\16\ See QRM Methodology Document. supra note 3.
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Under the sensitivity-based VaR methodology, each MBS pool position
is mapped to a corresponding TBA position.\17\ FICC then uses the risk
analytics for the TBA as a proxy for estimating the MBS pool position's
risk exposure analytics.\18\ To account for the differences in returns
between an MBS pool position and the corresponding TBA, FICC applies a
basis risk adjustment (i.e., the MBS pool/TBA basis risk haircut
charge).
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\17\ The vast majority of agency MBS trading occurs in a forward
market, on a ``to-be announced'' or ``TBA'' basis. In a TBA trade,
the seller agrees on a sale price, but does not specify which
particular securities will be delivered to the buyer on settlement
day. Instead, only a few basic characteristics of the securities are
agreed upon, such as the MBS program, maturity, coupon rate, and the
face value of the bonds to be delivered.
\18\ See Notice of Filing, supra note 5, 90 FR at 42285.
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For any MBS pool position that cannot be mapped to a TBA,\19\ FICC
[[Page 47439]]
applies a haircut to the MBS pool position (i.e., MBS haircut model).
Unlike the sensitivity-based VaR methodology, the MBS haircut model
does not incorporate differences in returns between an MBS pool
position and the TBA (i.e., it does not reflect the MBS pool/TBA basis
spread risk). FICC is proposing changes to incorporate the MBS pool/TBA
basis risk haircut charge into the MBS haircut model.
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\19\ The majority of fixed-rate mortgage (``FRM'') pools can be
mapped to TBAs; however, all adjustable-rate mortgage (``ARM'')
pools and a small portion of the FRM pools cannot be mapped to TBAs.
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III. Description of the Proposed Rule Change
FICC is proposing to amend the QRM Methodology Document to
incorporate the MBS pool/TBA basis risk haircut charge into the MBS
haircut model, MMA model, and Margin Proxy model. FICC is also
proposing certain technical and clarification changes to the QRM
Methodology Document.
First, FICC is proposing to add new language in several subsections
of the QRM Methodology Document to reflect the addition of the MBS
pool/TBA basis risk haircut charge to the MBS haircut model, MMA model,
and Margin Proxy model. Specifically, FICC would amend the subsection
of the QRM Methodology Document that describes risk between MBS pools
and TBA by adding two new paragraphs that reflect that the basis risk
charge would be included in haircut charges calculated for (1) MBS
haircut model with respect to MBS pools that cannot be mapped to a TBA
and (2) Margin Proxy model with respect to all MBS pools. Additionally,
FICC is proposing to amend the subsection of the QRM Methodology
Document that describes the program of money-ness \20\ of a pool by
adding a new paragraph regarding the applicable basis haircut charge
for ARM pools. FICC is also proposing to amend the subsection of the
QRM Methodology Document that describes the basis risk calculation for
Margin Proxy by adding a new paragraph to note certain similarities and
potential differences between the basis risk charge calculation for
Margin Proxy model as compared to the other models.
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\20\ The changes of spread are parameterized according to the
difference between the underlying weighted average coupon and the
current prevailing mortgage rate. This difference is also referred
to as the ``moneyness.'' See Securities Exchange Act Release No.
88266 (Feb. 24, 2020), 85 FR 11413, 11414 (Feb. 27, 2020) (SR-FICC-
2020-801).
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Second, FICC is proposing to make changes to a table in the MMA
section of the QRM Methodology Document to reflect the addition of the
MBS pool/TBA basis risk haircut charge in the MMA calculation for MBS
pool positions.
Third, FICC is proposing to make changes to update a formula in the
Margin Proxy section of the QRM Methodology Document to incorporate the
MBS pool/TBA basis risk haircut charge.
Finally, FICC is proposing certain clarifying and technical changes
to the QRM Methodology Document. Specifically, FICC would clarify that
the application of the MBS pool/TBA basis risk haircut charge would not
be limited to mapped MBS pool positions in the subsection of the QRM
Methodology Document that describes market risks associated with
products cleared by GSD. Additionally, FICC would clarify that that the
applicability of the money-ness formula would not be limited to mapped
MBS pool positions in the subsection of the QRM Methodology Document
that describes the program and money-ness of a pool. FICC is also
proposing a technical change to replace an outdated section reference
in the list of key parameters section and correct a typographical error
in the haircut formula for unmapped MBS pools in the haircut
methodology section of the QRM Methodology Document.
As part of the Proposed Rule Change, FICC filed an impact study on
the effects the Proposed Rule Change would have had on their members'
VaR Charges and margin portfolios if it had been in place during the
period beginning April 1, 2024 through March 31, 2025 (``Impact
Study'').\21\ Specifically, the Impact Study found that that the
aggregated average daily start-of-day (``SOD'') VaR Charges would have
increased by approximately $56.31 million or 0.12%.\22\ The Impact
Study indicated that the VaR model backtesting coverage would have
remained unchanged at approximately 99.72% while the number of VaR
model backtesting deficiencies would also have remained unchanged at
115. As for the impacts on members' margin portfolios, the Impact Study
found that the Proposed Rule Change would have increased the SOD VaR
Charge by approximately $0.27 million, or 0.31%, with the largest
average percentage increase for any member's margin portfolio of
approximately 35.15%, or $0.34 million. The largest average dollar
increase in SOD VaR Charges for any member margin portfolio would have
been $8.3 million, or 0.19%.
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\21\ FICC has requested confidential treatment of Exhibit 3, the
Impact Study, pursuant to 17 CFR 240.24b-2.
\22\ See Notice of Filing, supra note 5, 90 FR at 42286.
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Additionally, the Impact Study also examined the effects the
Proposed Rule Change would have had on their members' VaR Charges and
margin portfolios if Margin Proxy were deployed during the covered time
period.\23\ Specifically, the Impact Study found that that the
aggregated average daily SOD VaR Charges would have increased by
approximately $2.13 billion or 4.94%.\24\ The Impact Study indicated
that the VaR model backtesting coverage would have increased from
approximately 99.68% to 99.71% and backtesting deficiencies would have
been reduced from 130 to 119, or approximately 8.5%. As for the impacts
on members' margin portfolios if Margin Proxy had been deployed, the
Impact Study found that the Proposed Rule Change would have increased
the SOD VaR Charge by approximately $10.32 million, or 4.04%, with the
largest average percentage increase for any member's margin portfolio
of approximately 110.5%, or $175.30 million. The largest average dollar
increase in SOD VaR Charge for any member margin portfolio would have
been $187.17 million, or 14.97%.
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\23\ Margin Proxy was not actually deployed during the time
period of the Impact Study. See id.
\24\ See id.
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IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \25\ 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 Exchange Act and the rules and regulations
thereunder applicable to such organization. After carefully considering
the Proposed Rule Change, the Commission finds that the Proposed Rule
Change is consistent with the requirements of the Exchange 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,\26\ and Rules 17Ad-22(e)(4)(i) and
(e)(6)(ii) \27\ thereunder, as described in detail below.
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\25\ 15 U.S.C. 78s(b)(2)(C).
\26\ 15 U.S.C. 78q-1(b)(3)(F).
\27\ 17 CFR 240.17ad-22(e)(4)(i); 17 CFR 240.17ad-22(e)(6)(i).
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A. Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act, requires the rules of a clearing
agency to 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
[[Page 47440]]
which it is responsible.\28\ The Proposed Rule Change is consistent
with Section 17A(b)(3)(F) of the Act for the reasons discussed below.
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above in Section III, FICC proposes to amend the QRM
Methodology Document to incorporate the MBS pool/TBA basis risk haircut
charge into the MBS haircut model, MMA model, and Margin Proxy model,
along with other clarifying and technical changes. As discussed above
in more detail in Section III.B, by incorporating the MBS pool/TBA
basis risk haircut charge into these models, the Proposed Rule Change
should help ensure that FICC collects sufficient margin to manage
member-level credit risk exposure and backtesting performance
associated with MBS pool/TBA basis spread risk from MBS pool positions
in member portfolios. By helping FICC to collect sufficient margin, the
Proposed Rule Change should better ensure that, in the event of a
member default, FICC's operation of its critical clearance and
settlement services would not be disrupted because of insufficient
financial resources. Accordingly, the Proposed Rule Change should help
FICC to continue providing prompt and accurate clearance and settlement
of securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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Moreover, as described above in Section II, FICC would access the
mutualized Clearing Fund should a defaulted member's own margin be
insufficient to satisfy losses to FICC caused by the liquidation of
that member's portfolio. Because FICC's proposal to incorporate the MBS
pool/TBA basis risk haircut charge into the MBS haircut model, MMA
model, and Margin Proxy model should help ensure that FICC has
collected sufficient margin from members, the Proposed Rule Change
should also help minimize the likelihood that FICC would have to access
the Clearing Fund, thereby limiting non-defaulting members' exposure to
mutualized losses. 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.\30\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
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For these reasons, the Proposed Rule Change is 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, consistent with Section 17A(b)(3)(F) of the Act.\31\
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Rule 17Ad-22(e)(4)(i)
Rule 17ad-22(e)(4)(i) under the Act requires that a covered
clearing agency, like 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 by maintaining sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence.\32\ The Proposed Rule Change is consistent with Rule
17Ad-22(e)(4)(i) under the Act for the reasons stated below.
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\32\ 17 CFR 240.17ad-22(e)(4)(i).
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FICC's proposal to incorporate the MBS pool/TBA basis risk haircut
charge into the MBS haircut model, MMA model, and Margin Proxy model
should enable FICC to better manage its credit exposures to members by
maintaining sufficient resources to cover their credit exposures more
fully with a high degree of confidence. The Commission has reviewed and
analyzed the materials filed by FICC, including FICC's Impact Study and
backtesting results,\33\ which show the effects of incorporating the
MBS pool/TBA basis risk haircut charge into the MBS haircut model, MMA
model, and Margin Proxy model during the time period of the Impact
Study. Specifcially, the Impact Study shows that this charge would have
increased the aggregated average SOD VaR Charges and increased member
margin portfolio levels, on average, during the coverage period.
Additionally, if Margin Proxy would have been deployed during this
coverage period, the Impact Study shows this charge would have also
increased aggregated average daily SOD VaR Charges and increased member
margin portfolio levels, on average. The Impact Study also shows that
VaR model backtesting coverage would have increased and VaR model
backtesting deficiencies would have been reduced during the covered
period if Margin Proxy had been deployed. By incorporating the MBS
pool/TBA basis risk haircut charge into the MBS haircut model, MMA
model, and Margin Proxy model, FICC should be able to more effectively
identify, measure, monitor, and manage the risk posed to GSD members'
VaR Charges and margin portfolios due to exposure to MBS pool
positions. Accordingly, for the reasons discussed above, the Proposed
Rule Change is reasonably designed to better enable FICC to effectively
identify, measure, monitor, and manage its credit exposure to members,
and those arising from its payment, clearing, and settlement processes,
including by maintaining sufficient financial resources to cover its
credit exposure to each member fully with a high degree of confidence
consistent with Rule 17Ad-22(e)(4)(i).\34\
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\33\ See supra note 21.
\34\ 17 CFR 240.17Ad-22(e)(4)(i).
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C. Rule 17ad-22(e)(6)(i)
Rule 17ad-22(e)(6)(i) under the Act requires that a covered
clearing agency that provides central counterparty services, such as
FICC, establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\35\ The Proposed Rule Change is consistent with Rule 17Ad-
22(e)(6)(i) under the Act for the reason stated below.
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\35\ 17 CFR 240.17ad-22(e)(6)(i).
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FICC's proposal to incorporate the MBS pool/TBA basis risk haircut
charge into the MBS haircut model, MMA model, and Margin Proxy model
should enable FICC to more effectively address the risks posed by the
risk exposure to certain MBS pool positions in members' portfolios. As
discussed above in Section II, FICC applies a haircut to any MBS pool
position that cannot be mapped to a TBA. However, unlike the
sensitivity-based VaR methodology, the MBS haircut model currently does
not incorporate differences in returns between an MBS pool position and
the TBA. The Impact Study reviewed and analyzed by the Commission shows
the effects of incorporating the MBS pool/TBA basis risk haircut charge
into the MBS haircut model, MMA model, and Margin Proxy model during
the time period of the Impact Study.\36\
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\36\ See supra note 21.
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Specifcially, the Impact Study shows that this charge would have
increased the aggregated average SOD VaR Charges and increased member
margin portfolio levels, on average, during the coverage period.
Additionally, if Margin Proxy would have been deployed during this
coverage period, the Impact Study shows this charge would have also
increased aggregated average daily SOD
[[Page 47441]]
VaR Charges and increased member margin portfolio levels, on average.
The Impact Study also shows that VaR model backtesting coverage would
have increased and VaR model backtesting deficiencies would have been
reduced during the covered period if Margin Proxy had been deployed.
Incorporating the MBS pool/TBA basis risk haircut charge into the
MBS haircut model, MMA model, and Margin Proxy model should help FICC
better cover its credit exposures to its participants and produce
margin levels commensurate with, the risks and particular attributes of
each MBS pool position. As a result, implementing the Proposed Rule
Change should better enable FICC to collect margin amounts at levels
commensurate with FICC's credit exposures to its members.
Accordingly, the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(6)(i) under the Act because it is designed to assist FICC in
maintaining a risk-based margin system that considers, and produces
margin levels commensurate with, the risks of credit exposures to
certain MBS pool positions in members' portfolios.\37\
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\37\ 17 CFR 240.17Ad-22(e)(6)(i).
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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 \38\ and
the rules and regulations promulgated thereunder.
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\38\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\39\ that proposed rule change SR-FICC-2025-018, be, and hereby is,
Approved.\40\
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\39\ 15 U.S.C. 78s(b)(2).
\40\ In approving the Proposed Rule Changes, 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.\41\
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\41\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-19176 Filed 9-30-25; 8:45 am]
BILLING CODE 8011-01-P
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