Self-Regulatory Organizations; The Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Replace the Government Securities Division Clearing Fund Calculation Methodology With a Yield-Driven Value-at-Risk Methodology, 5774-5775 [E7-1948]

Download as PDF 5774 Federal Register / Vol. 72, No. 25 / Wednesday, February 7, 2007 / Notices 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 inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the principal office of the BSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-BSE–2007–02 and should be submitted on or before February 28, 2007. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.13 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–1944 Filed 2–6–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55217; File No. SR–FICC– 2006–16] Self-Regulatory Organizations; The Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Replace the Government Securities Division Clearing Fund Calculation Methodology With a YieldDriven Value-at-Risk Methodology January 31, 2007. I. Introduction On October 4, 2006, the Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) and on November 14, 2006, amended proposed rule change SR–FICC–2006–16 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’).1 Notice of the proposal was published in the Federal Register on December 27, 2006.2 The Commission received no comment letters in response to the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description FICC seeks to replace the Government Securities Division (‘‘GSD’’) margin calculation methodology with a valueat-risk (‘‘VaR’’) methodology. Netting members of FICC’s GSD are required to maintain clearing fund deposits. Each member’s required clearing fund deposit is calculated daily to ensure that enough funds are available to cover the risks associated with that member’s activities. The purposes served by the clearing fund are to: (i) Have on deposit at FICC funds from each member sufficient to satisfy any losses that may be incurred by FICC or its members resulting from the default by a member and the resultant close out of that member’s settlement positions and (ii) ensure that FICC has sufficient liquidity at all times to meet its payment and delivery obligations. FICC proposes to replace the current clearing fund methodology used at GSD, which uses haircuts and offsets, with a yield-driven VaR methodology that is expected to better reflect market volatility and more thoroughly distinguish the levels of risk presented by individual securities. VaR is defined to be the maximum amount of money that may be lost on a portfolio over a given period of time within a given level of confidence. With respect to the GSD, FICC will use a 99 percent three-day VaR.3 The changes to the components that comprise the current clearing fund methodology compared to the proposed VaR methodology in relation to the risks addressed by the components are summarized below. Existing methodology Risk addressed Proposed methodology 4 Receive/Deliver component using margin factors. Repo Volatility component ................................. Funds Adjustment Deposit component (based on the average size of the member’s 20 highest funds-only settlement amounts over the most recent 75 business days). Average Post Offset Margin Amount component (based on the 20 highest margin amounts derived from all outstanding net settlement positions over the most recent 75 business days). Not specifically covered ..................................... Fluctuation in security prices ........................... Interest rate or index-driven model, as appropriate.5 Repo index-driven model.6 Margin Requirement Differential (‘‘MRD’’) (a portion of which is based on the historical size of a member’s funds-only settlement obligation). MRD (a portion of which is based on the historical variability of a member’s clearing fund requirement). 13 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 54964 (December 19, 2006), 71 FR 77835 (SR–FICC–2006– 16). 3 Category 2 Dealers and Category 2 Futures Commission Merchants will be subject to higher confidence levels than other Netting Members. 4 Under the current GSD rules, Category 1 InterDealer Brokers are subject to a flat $5 million sroberts on PROD1PC70 with NOTICES 1 15 VerDate Aug<31>2005 21:36 Feb 06, 2007 Jkt 211001 Fluctuation in repo interest rates ..................... Uncertainty of whether a member will satisfy its funds-only settlement obligation. Uncertainty of whether a member will satisfy its next clearing fund call. Intraday risk and additional exposure due to portfolio variation and potential loss in unlikely situations beyond the model’s effective range. clearing fund requirement. This proposed rule change does not alter that requirement. 5 FICC will have the discretion to not apply the interest rate model to classes of securities whose volatility is less amenable to statistical analysis, which is usually due to a lack of pricing history. In lieu of such a calculation, the required charge with respect to such positions will be determined based on a historic index volatility model. 6 FICC is adopting a new definition for ‘‘Term Repo Transaction’’ to clarify the types of PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 Coverage Component (if necessary, applies additional minimum charge to bring coverage to the applicable confidence level). transactions covered by this component. As proposed, Term Repo Transaction will mean, on any particular Business Day, a Repo Transaction for which settlement of the Close Leg ‘‘is scheduled to occur two or more Business Days after the scheduled settlement of the Start Leg.’’ In addition, the existing definition for ‘‘Term GCF Repo Transaction’’ is being revised to conform to the language for ‘‘Term Repo Transaction’’ as the new definition provides greater clarity as to transactions covered. E:\FR\FM\07FEN1.SGM 07FEN1 Federal Register / Vol. 72, No. 25 / Wednesday, February 7, 2007 / Notices sroberts on PROD1PC70 with NOTICES In addition, FICC will be able to include in a member’s clearing fund requirement a ‘‘special charge’’ based on such factors as FICC determines to be appropriate from time to time. Such factors may include, but are not limited to, such things as price fluctuation, volatility, or lack of liquidity. The proposed VaR methodology will necessitate a change to FICC’s risk management consequences of the late allocation of repo substitution collateral. Because offset classes and margin rates will no longer be present in the revised GSD rules, FICC will base the margining for such a generic CUSIP on the same calculation as that used for securities whose volatility is less amenable to statistical analysis.7 The VaR methodology will not include calculations that are incorporated in the GSD’s current crossmargining programs with The Clearing Corporation (‘‘TCC’’) and with the Chicago Mercantile Exchange (‘‘CME’’). In order to provide for continuity of cross-margining following the implementation of the VaR methodology and because certain key calculations required for cross-margining are unique to cross-margining, FICC will continue to perform the applicable crossmargining calculations outside of the VaR model. FICC will then adjust the cross-margining clearing fund calculation using a scaling ratio of the VaR clearing fund calculation to the cross-margining clearing fund calculation so that the clearing fund amount available for cross-margining is appropriately aligned with the VaR model. The proposed changes described herein will necessitate amendments to FICC’s cross-margining agreements with TCC and with CME as follows: 1. The definition of FICC’s ‘‘Margin Rate’’ in each of the agreements will be amended to reflect that the margin rate will no longer be based on margin factors published in the current rules (as these will no longer be applied under the VaR methodology). Instead, they will be determined based on a percentage that will be determined using the same parameters and data (e.g., confidence level and historic indices) as those used to generate margin factors in the current rules. 2. Section 5(a) of each crossmargining agreement will be amended to state that FICC’s residual margin amount will be calculated as specified in the agreement and will be adjusted, 7 Securities Exchange Act Release No. 53534 (March 21, 2006), 71 FR 15781 (March 29, 2006) (File No. SR–FICC–2005–18). This rule change created a generic CUSIP offset and applicable margin rate for determining clearing fund consequences for such late allocations. VerDate Aug<31>2005 21:36 Feb 06, 2007 Jkt 211001 if necessary, to correct for differences between the methodology of calculating the residual margin amount as described in the agreement and the VaR methodology. This change will be necessary to account for the deletion of relevant margin factors and disallowance schedules (which, like the margin factors, are incorporated into the agreements by reference) from GSD rules and to adjust for the possibility that the new VaR methodology could generate a charge that would otherwise allow for a cross-margining reduction that is greater than the margin requirement. III. Discussion Section 19(b) of the Act 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 the rules and regulations thereunder applicable to such organization. Section 17A(b)(3)(F) of the Act requires that the rules of a clearing agency be designed to assure the safeguarding of securities and funds in FICC’s custody or control or for which it is responsible.8 Because FICC’s proposed rule change implements a VaR methodology that should better reflect market volatility and should more thoroughly distinguish the levels of risk presented by individual securities, FICC should be able to more accurately calculate the risk presented by each of its member’s activity and to collect clearing fund to protect against that risk. As a result, FICC should be in a better position to assure the safeguarding of securities and funds in its custody or control or for which it is responsible. IV. 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 Section 17A of the Act and the rules and regulations thereunder. In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition and capital formation.9 It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR– FICC–2006–16) be and hereby is approved. 8 15 U.S.C. 78q–1(b)(3)(F). U.S.C. 78c(f). 10 17 CFR 200.30–3(a)(12). 9 15 PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 5775 For the Commission by the Division of Market Regulation, pursuant to delegated authority.10 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–1948 Filed 2–6–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55221; File No. SR–ISE– 2007–06] Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Fee Changes February 1, 2007. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 22, 2007, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) 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 substantially prepared by the ISE. The ISE has designated this proposal as one establishing or changing a due, fee, or other charge applicable only to a member under Section 19(b)(3)(A)(ii) of the Act,3 and Rule 19b–4(f)(2) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The ISE is proposing to amend its Schedule of Fees to establish fees for transactions in options on one Premium Product.5 The text of the proposed rule change is available on the ISE’s Web site (http://www.iseoptions.com/legal/ proposed_rule_changes.asp), at the ISE, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the ISE included statements concerning the 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(ii). 4 17 CFR 240.19b–4(f)(2). 5 ‘‘Premium Products’’ is defined in the Schedule of Fees as the products enumerated therein. 2 17 E:\FR\FM\07FEN1.SGM 07FEN1

Agencies

[Federal Register Volume 72, Number 25 (Wednesday, February 7, 2007)]
[Notices]
[Pages 5774-5775]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-1948]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55217; File No. SR-FICC-2006-16]


Self-Regulatory Organizations; The Fixed Income Clearing 
Corporation; Order Approving Proposed Rule Change To Replace the 
Government Securities Division Clearing Fund Calculation Methodology 
With a Yield-Driven Value-at-Risk Methodology

January 31, 2007.

I. Introduction

    On October 4, 2006, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on November 14, 2006, amended proposed rule change 
SR-FICC-2006-16 pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on December 27, 2006.\2\ The Commission received no 
comment letters in response to 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\ Securities Exchange Act Release No. 54964 (December 19, 
2006), 71 FR 77835 (SR-FICC-2006-16).
---------------------------------------------------------------------------

II. Description

    FICC seeks to replace the Government Securities Division (``GSD'') 
margin calculation methodology with a value-at-risk (``VaR'') 
methodology.
    Netting members of FICC's GSD are required to maintain clearing 
fund deposits. Each member's required clearing fund deposit is 
calculated daily to ensure that enough funds are available to cover the 
risks associated with that member's activities. The purposes served by 
the clearing fund are to: (i) Have on deposit at FICC funds from each 
member sufficient to satisfy any losses that may be incurred by FICC or 
its members resulting from the default by a member and the resultant 
close out of that member's settlement positions and (ii) ensure that 
FICC has sufficient liquidity at all times to meet its payment and 
delivery obligations.
    FICC proposes to replace the current clearing fund methodology used 
at GSD, which uses haircuts and offsets, with a yield-driven VaR 
methodology that is expected to better reflect market volatility and 
more thoroughly distinguish the levels of risk presented by individual 
securities. VaR is defined to be the maximum amount of money that may 
be lost on a portfolio over a given period of time within a given level 
of confidence. With respect to the GSD, FICC will use a 99 percent 
three-day VaR.\3\
---------------------------------------------------------------------------

    \3\ Category 2 Dealers and Category 2 Futures Commission 
Merchants will be subject to higher confidence levels than other 
Netting Members.
---------------------------------------------------------------------------

    The changes to the components that comprise the current clearing 
fund methodology compared to the proposed VaR methodology in relation 
to the risks addressed by the components are summarized below.
---------------------------------------------------------------------------

    \4\ Under the current GSD rules, Category 1 Inter-Dealer Brokers 
are subject to a flat $5 million clearing fund requirement. This 
proposed rule change does not alter that requirement.
    \5\ FICC will have the discretion to not apply the interest rate 
model to classes of securities whose volatility is less amenable to 
statistical analysis, which is usually due to a lack of pricing 
history. In lieu of such a calculation, the required charge with 
respect to such positions will be determined based on a historic 
index volatility model.
    \6\ FICC is adopting a new definition for ``Term Repo 
Transaction'' to clarify the types of transactions covered by this 
component. As proposed, Term Repo Transaction will mean, on any 
particular Business Day, a Repo Transaction for which settlement of 
the Close Leg ``is scheduled to occur two or more Business Days 
after the scheduled settlement of the Start Leg.'' In addition, the 
existing definition for ``Term GCF Repo Transaction'' is being 
revised to conform to the language for ``Term Repo Transaction'' as 
the new definition provides greater clarity as to transactions 
covered.

------------------------------------------------------------------------
                                                    Proposed methodology
    Existing methodology         Risk addressed              \4\
------------------------------------------------------------------------
Receive/Deliver component     Fluctuation in        Interest rate or
 using margin factors.         security prices.      index-driven model,
                                                     as appropriate.\5\
Repo Volatility component...  Fluctuation in repo   Repo index-driven
                               interest rates.       model.\6\
Funds Adjustment Deposit      Uncertainty of        Margin Requirement
 component (based on the       whether a member      Differential
 average size of the           will satisfy its      (``MRD'') (a
 member's 20 highest funds-    funds-only            portion of which is
 only settlement amounts       settlement            based on the
 over the most recent 75       obligation.           historical size of
 business days).                                     a member's funds-
                                                     only settlement
                                                     obligation).
Average Post Offset Margin    Uncertainty of        MRD (a portion of
 Amount component (based on    whether a member      which is based on
 the 20 highest margin         will satisfy its      the historical
 amounts derived from all      next clearing fund    variability of a
 outstanding net settlement    call.                 member's clearing
 positions over the most                             fund requirement).
 recent 75 business days).
Not specifically covered....  Intraday risk and     Coverage Component
                               additional exposure   (if necessary,
                               due to portfolio      applies additional
                               variation and         minimum charge to
                               potential loss in     bring coverage to
                               unlikely situations   the applicable
                               beyond the model's    confidence level).
                               effective range.
------------------------------------------------------------------------


[[Page 5775]]

    In addition, FICC will be able to include in a member's clearing 
fund requirement a ``special charge'' based on such factors as FICC 
determines to be appropriate from time to time. Such factors may 
include, but are not limited to, such things as price fluctuation, 
volatility, or lack of liquidity.
    The proposed VaR methodology will necessitate a change to FICC's 
risk management consequences of the late allocation of repo 
substitution collateral. Because offset classes and margin rates will 
no longer be present in the revised GSD rules, FICC will base the 
margining for such a generic CUSIP on the same calculation as that used 
for securities whose volatility is less amenable to statistical 
analysis.\7\
---------------------------------------------------------------------------

    \7\ Securities Exchange Act Release No. 53534 (March 21, 2006), 
71 FR 15781 (March 29, 2006) (File No. SR-FICC-2005-18). This rule 
change created a generic CUSIP offset and applicable margin rate for 
determining clearing fund consequences for such late allocations.
---------------------------------------------------------------------------

    The VaR methodology will not include calculations that are 
incorporated in the GSD's current cross-margining programs with The 
Clearing Corporation (``TCC'') and with the Chicago Mercantile Exchange 
(``CME''). In order to provide for continuity of cross-margining 
following the implementation of the VaR methodology and because certain 
key calculations required for cross-margining are unique to cross-
margining, FICC will continue to perform the applicable cross-margining 
calculations outside of the VaR model. FICC will then adjust the cross-
margining clearing fund calculation using a scaling ratio of the VaR 
clearing fund calculation to the cross-margining clearing fund 
calculation so that the clearing fund amount available for cross-
margining is appropriately aligned with the VaR model. The proposed 
changes described herein will necessitate amendments to FICC's cross-
margining agreements with TCC and with CME as follows:
    1. The definition of FICC's ``Margin Rate'' in each of the 
agreements will be amended to reflect that the margin rate will no 
longer be based on margin factors published in the current rules (as 
these will no longer be applied under the VaR methodology). Instead, 
they will be determined based on a percentage that will be determined 
using the same parameters and data (e.g., confidence level and historic 
indices) as those used to generate margin factors in the current rules.
    2. Section 5(a) of each cross-margining agreement will be amended 
to state that FICC's residual margin amount will be calculated as 
specified in the agreement and will be adjusted, if necessary, to 
correct for differences between the methodology of calculating the 
residual margin amount as described in the agreement and the VaR 
methodology. This change will be necessary to account for the deletion 
of relevant margin factors and disallowance schedules (which, like the 
margin factors, are incorporated into the agreements by reference) from 
GSD rules and to adjust for the possibility that the new VaR 
methodology could generate a charge that would otherwise allow for a 
cross-margining reduction that is greater than the margin requirement.

III. Discussion

    Section 19(b) of the Act 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 the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds in FICC's custody or control or for which it is 
responsible.\8\ Because FICC's proposed rule change implements a VaR 
methodology that should better reflect market volatility and should 
more thoroughly distinguish the levels of risk presented by individual 
securities, FICC should be able to more accurately calculate the risk 
presented by each of its member's activity and to collect clearing fund 
to protect against that risk. As a result, FICC should be in a better 
position to assure the safeguarding of securities and funds in its 
custody or control or for which it is responsible.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

IV. 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 Section 17A of the Act and the rules and regulations 
thereunder. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and capital 
formation.\9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2006-16) be and hereby 
is approved.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-1948 Filed 2-6-07; 8:45 am]
BILLING CODE 8010-01-P