Notice2026-04808
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Enhance the Correlation Calculation for Bond Haircut Models and Make Other Changes
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 12, 2026
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 91 Issue 48 (Thursday, March 12, 2026)</title>
</head>
<body><pre>
[Federal Register Volume 91, Number 48 (Thursday, March 12, 2026)]
[Notices]
[Pages 12248-12251]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-04808]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-104952; File No. SR-FICC-2026-002]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Enhance the Correlation
Calculation for Bond Haircut Models and Make Other Changes
March 9, 2026.
I. Introduction
On January 27, 2026, 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-2026-002 (``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 enhance the correlation
calculation for bond haircut models and make other changes. The
Proposed Rule Change was published for comment in the Federal Register
on February 3, 2026.\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.
---------------------------------------------------------------------------
\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. 104735 (Jan. 29,
2026), 91 FR 4975 (Feb. 3, 2026) (File No. SR-FICC-2026-002)
(``Notice of Filing'').
---------------------------------------------------------------------------
II. Background
FICC's GSD provides trade comparison, netting, risk management,
settlement, and central counterparty (``CCP'') services for the U.S.
Government securities market.\6\ As a CCP, FICC interposes itself as
the buyer to every seller and seller to every buyer for the financial
transactions it clears. As such, FICC is exposed to the risk that one
or more of its members may fail to make a payment or to deliver
securities.
---------------------------------------------------------------------------
\6\ FICC's Mortgage-Backed Securities Division provides similar
services for mortgage-backed securities. For purposes of this Order,
``FICC'' refers to GSD.
---------------------------------------------------------------------------
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 each
member's Sponsoring Member Omnibus Accounts and Agent Clearing Member
Omnibus Accounts designated as Segregated Indirect Participant
Accounts.\8\
---------------------------------------------------------------------------
\7\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 3.
\8\ Id.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\9\ See GSD Rule Book, Margin Component Schedule, Sections 2 and
5, supra note 3.
\10\ Id. The VaR Charge typically comprises the largest portion
of a Member's Required Fund Deposit or Segregated Customer Margin
Requirement amount.
---------------------------------------------------------------------------
a. VaR Charge 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) time horizon, and (3) historical market volatility.\11\ The
projected liquidation gains or losses are used to determine the
[[Page 12249]]
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.\12\
---------------------------------------------------------------------------
\11\ FICC uses historical simulations to estimate the impact of
market volatilities on the Member's portfolio. See Notice of Filing,
supra note 5, 91 FR at 4976.
\12\ See id.
---------------------------------------------------------------------------
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.\13\ 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.\14\
---------------------------------------------------------------------------
\13\ 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.
\14\ 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).
---------------------------------------------------------------------------
b. Bond Haircut Models--Short-Term Bonds
The QRM Methodology Document provides the methodology by which FICC
calculates the VaR Charge.\15\ The QRM Methodology Document includes
specific model inputs, parameters, assumptions, and other information.
---------------------------------------------------------------------------
\15\ See QRM Methodology Document, supra note 3.
---------------------------------------------------------------------------
The QRM Methodology Document provides a haircut model for
securities lacking sufficient data to employ the sensitivity-based VaR
approach.\16\ Specifically, all short-term bonds \17\ and bonds that
lack vendor provided sensitivity analytics data are subject to a
haircut calculation.\18\ FICC calculates haircut charges for short-term
bonds by grouping them into maturity buckets and using correlations to
account for cross-bucket effects.\19\ These correlations are based on
fixed income indices from a designated vendor.\20\ However, FICC's
designated vendor does not currently provide index data for three
specific maturity buckets: Treasury 0-6 months, Treasury 6-12 months,
and TIPS 0-12 months.\21\ As a result, FICC manually sets correlations
involving these three maturity buckets to zero despite historical
evidence that shows short-term maturity buckets are substantially
intercorrelated.\22\
---------------------------------------------------------------------------
\16\ See Notice of Filing, supra note 5, 91 FR at 4976.
\17\ Short-term bonds are generally bonds with maturity of one-
year or less.
\18\ See Notice of Filing, supra note 5, 91 FR at 4976.
\19\ See id.
\20\ See id.
\21\ See id.
\22\ See id.
---------------------------------------------------------------------------
III. Description of the Proposed Rule Change
FICC is proposing to amend the QRM Methodology Document with
respect to the correlation calculation for bond haircut models. FICC is
also proposing a technical change to the QRM Methodology Document. FICC
has requested confidential treatment of the QRM Methodology Document
and has filed that document separately with the Commission. The changes
being made to the confidentially filed QRM Methodology Document are
described below.
First, in the subsection of QRM Methodology Document that describes
the calculation of the haircut of Treasury and agency bonds that lack
sensitivity analytics data, FICC is proposing to delete language
related to correlation parameter alternatives. Next, FICC would replace
the deleted language with new language that enables FICC to use data
from another vendor to calculate the correlation for fixed income
indices not provided by the designated vendor. Additionally, FICC would
delete language that describes the current practice of assuming zero
correlation for certain maturity buckets of short-term bonds. Finally,
FICC is proposing a technical change that corrects a section reference.
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 September 1, 2024 through August 31, 2025 (``Impact
Study'').\23\ The Impact Study specifically considered Treasury 0-6
months, Treasury 6-12 months, and TIPS 0-12 months maturity buckets
with a different correlation number than zero calculated based on index
data provided by an alternate vendor. The Impact Study found that the
average increase to aggregate VaR Charges at FICC would be
approximately $46 million or 0.09%, with the largest increase of
approximately $85 million or 0.15%.\24\ The Impact Study indicated that
the VaR model backtesting coverage would have remained unchanged at
approximately 99.85%.\25\ As for impacts on the member margin portfolio
level, the Impact Study indicated that the Proposed Rule Change would
have increased the start of day (``SOD'') VaR Charge by approximately
$0.22 million, or 0.09%.\26\ The largest average percentage increase in
SOD VaR Charge for any member margin portfolio would have been
approximately 14.52%, or $0.38 million, and the largest average dollar
increase in SOD VaR Charge for any member margin portfolio would have
been approximately $5.91 million, or 0.79%.\27\
---------------------------------------------------------------------------
\23\ FICC has requested confidential treatment of Exhibit 3, the
Impact Study, pursuant to 17 CFR 240.24b-2.
\24\ See Notice of Filing, supra note 5, 91 FR at 4976.
\25\ See id.
\26\ See Notice of Filing, supra note 5, 91 FR at 4977.
\27\ See id.
---------------------------------------------------------------------------
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.\28\ The Impact Study found that that the average increase to
the aggregate VaR Charges would be approximately $88 million or 0.16%,
with the largest increase of approximately $163 million or 0.38%.\29\
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 $0.42 million,
or 0.16%, with the largest average percentage increase for any member's
margin portfolio of approximately 23.18%, or $0.59 million.\30\ The
largest average dollar increase in SOD VaR Charge for any member margin
portfolio would have been approximately $17.35 million, or 0.34%.\31\
---------------------------------------------------------------------------
\28\ Margin Proxy was not actually deployed during the time
period of the Impact Study. See Notice of Filing, supra note 5, 91
FR at 4976.
\29\ See id.
\30\ See Notice of Filing, supra note 5, 91 FR at 4977.
\31\ See id.
---------------------------------------------------------------------------
[[Page 12250]]
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \32\ 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,\33\ and Rules 17Ad-22(e)(4)(i) and
(e)(6)(i) \34\ thereunder, as described in detail below.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78s(b)(2)(C).
\33\ 15 U.S.C. 78q-1(b)(3)(F).
\34\ 17 CFR 240.17ad-22(e)(4)(i); 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------
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 promote the prompt and accurate clearance and
settlement of securities transactions and to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\35\ The Proposed Rule
Change is consistent with Section 17A(b)(3)(F) of the Act for the
reasons discussed below.
---------------------------------------------------------------------------
\35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above in Section III, FICC proposes to amend the QRM
Methodology Document to revise the correlation calculation for bond
haircut models and to make a technical change. As discussed above in
more detail in Section II.B, by using index data from an alternate
vendor when the designated vendor does not provide such data, rather
than defaulting to a zero correlation assumption, FICC should be able
to better capture the actual correlation between short-term maturity
buckets, which historical evidence shows are substantially
intercorrelated.\36\ Relatedly, the Proposed Rule Change should help
ensure that FICC collects sufficient margin to manage member-level
credit risk exposure and backtesting performance associated with short-
term bond positions in member portfolios. By helping FICC to collect
sufficient margin, the Proposed Rule Change should, in turn, 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.\37\
---------------------------------------------------------------------------
\36\ See Notice of Filing, supra note 5, 91 FR at 4976.
\37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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. FICC's proposal to enhance the correlation
calculation for bond haircut models in the QRM Methodology Document,
specifically, as it relates to short-term bonds, should help ensure
that FICC has collected sufficient margin from members. The Proposed
Rule Change should, in turn, 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.\38\
---------------------------------------------------------------------------
\38\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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.\39\
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
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.\40\ The Proposed Rule Change is consistent with Rule
17Ad-22(e)(4)(i) under the Act for the reasons stated below.
---------------------------------------------------------------------------
\40\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------
FICC's proposal to amend the correlation calculation for bond
haircut models 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,\41\ which show the effects of
using a correlation number other than zero calculated based on index
data provided by an alternate vendor for the following maturity buckets
of short-term bonds: Treasury 0-6 months, Treasury 6-12 months, and
TIPS 0-12 months.\42\ Specifically, the Impact Study shows that this
change would have increased the aggregate VaR Charges at GSD 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 aggregate VaR Charges at GSD and increased member
margin portfolio levels, on average.\43\ By enhancing the correlation
of bond haircut models by using fixed income data from an alternate
vendor when none is provided by a designated vendor, specifically for
short-term bond maturity buckets whose correlation calculation was set
to zero, 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 short-term bond positions.
---------------------------------------------------------------------------
\41\ See Impact Study, supra note 23.
\42\ See id.
\43\ See id.
---------------------------------------------------------------------------
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).\44\
---------------------------------------------------------------------------
\44\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
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
[[Page 12251]]
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.\45\ The Proposed Rule Change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act for the reasons
stated below.
---------------------------------------------------------------------------
\45\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------
FICC's proposal to amend the correlation calculation for bond
haircut models should enable FICC to more effectively address the risks
posed by the exposure to short-term bond positions in members'
portfolios. As discussed above in Section II, FICC applies a haircut
calculation to all short-term bonds and bonds with no vendor provided
sensitivity analytics data. The haircut calculation is determined by
placing the bonds into relevant maturity buckets, then using
correlations to account for cross-bucket effects. Currently, although
short-term bonds are substantially intercorrelated, FICC manually set
the correlation calculation of the maturity buckets for short-terms
bonds to zero due to a lack of data from a designated vendor.\46\ The
Impact Study reviewed and analyzed by the Commission shows the effects
of using a correlation number other than zero calculated based on index
data provided by an alternate vendor for the following maturity buckets
of short-term bonds: Treasury 0-6 months, Treasury 6-12 months, and
TIPS 0-12 months.\47\ The Impact Study shows that enhancing the
correlation calculation for bond haircut models would have increased
the aggregate VaR Charges at GSD and increased member margin portfolio
levels, on average, during the coverage period.\48\ Additionally, if
Margin Proxy would have been deployed during this coverage period, the
Impact Study shows this charge would have also increased aggregate VaR
Charges at GSD and increased member margin portfolio levels, on
average.\49\
---------------------------------------------------------------------------
\46\ See Notice of Filing, supra note 5, 91 FR at 4976.
\47\ See Impact Study, supra note 23.
\48\ See Impact Study, supra note 23.
\49\ See Impact Study, supra note 23.
---------------------------------------------------------------------------
By revising the correlation of bond haircut models to use fixed
income data from an alternate vendor when none is provided by a
designated vendor, specifically for short-term bond maturity buckets
whose correlation calculation was set to zero, FICC should be able to
better cover its credit exposures to its participants and produce
margin levels commensurate with the risks and particular attributes of
short-term bond positions held in members' portfolio. 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 short-term bond positions
in members' portfolios.\50\
---------------------------------------------------------------------------
\50\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
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 \51\ and
the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------
\51\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\52\ that proposed rule change SR-FICC-2026-002, be, and hereby is,
approved.<SUP>53</SUP>
---------------------------------------------------------------------------
\52\ 15 U.S.C. 78s(b)(2).
\53\ 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.\54\
---------------------------------------------------------------------------
\54\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2026-04808 Filed 3-11-26; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on March 12, 2026.
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.