Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Describe the Intraday Mark-to-Market Charge, 14581-14586 [2017-05502]

Download as PDF Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission’s Secretary and serving applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on April 10, 2017 and should be accompanied by proof of service on the applicants, in the form of an affidavit, or, for lawyers, a certificate of service. Pursuant to Rule 0–5 under the Act, hearing requests should state the nature of the writer’s interest, any facts bearing upon the desirability of a hearing on the matter, the reason for the request, and the issues contested. Persons who wish to be notified of a hearing may request notification by writing to the Commission’s Secretary. ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. Applicants: Allianz Funds MultiStrategy Trust and Allianz Global Investors U.S. LLC, 1633 Broadway, New York, New York 10019; and George B. Raine, Ropes & Gray LLP, Prudential Tower, 800 Boylston St., Boston, MA 02148. FOR FURTHER INFORMATION CONTACT: Mark N. Zaruba, Senior Counsel, at (202) 551–6878, or Robert Shapiro, Branch Chief, at (202) 551–6821 (Division of Investment Management, Chief Counsel’s Office). SUPPLEMENTARY INFORMATION: The following is a summary of the application. The complete application may be obtained via the Commission’s Web site by searching for the file number, or for an applicant using the Company name box, at http:// www.sec.gov/search/search.htm, or by calling (202) 551–8090. Funds 2 in excess of the limits in sections 12(d)(1)(A) and (C) of the Act and (b) the Underlying Funds that are registered open-end investment companies or series thereof, their principal underwriters and any broker or dealer registered under the Securities Exchange Act of 1934 to sell shares of the Underlying Fund to the Fund of Funds in excess of the limits in section 12(d)(1)(B) of the Act.3 Applicants also request an order of exemption under sections 6(c) and 17(b) of the Act from the prohibition on certain affiliated transactions in section 17(a) of the Act to the extent necessary to permit the Underlying Funds to sell their shares to, and redeem their shares from, the Funds of Funds.4 Applicants state that such transactions will be consistent with the policies of each Fund of Funds and each Underlying Fund and with the general purposes of the Act and will be based on the net asset values of the Underlying Funds. 2. Applicants agree that any order granting the requested relief will be subject to the terms and conditions stated in the application. Such terms and conditions are designed to, among other things, help prevent any potential (i) undue influence over an Underlying Fund that is not in the same ‘‘group of investment companies’’ as the Fund of Funds through control or voting power, or in connection with certain services, transactions, and underwritings, (ii) excessive layering of fees, and (iii) overly complex fund structures, which are the concerns underlying the limits in sections 12(d)(1)(A), (B), and (C) of the Act. 3. Section 12(d)(1)(J) of the Act provides that the Commission may exempt any person, security, or transaction, or any class or classes of persons, securities, or transactions, from Summary of the Application mstockstill on DSK3G9T082PROD with NOTICES 1. Applicants request an order to permit (a) a Fund 1 (each a ‘‘Fund of Funds’’) to acquire shares of Underlying 1 Applicants request that the order apply to each existing and future series of the Trust and to each existing and future registered open-end investment company or series thereof that is advised by the Applying Manager or its successor or by any other investment adviser controlling, controlled by or under common control with the Applying Manager or its successor and is part of the same ‘‘group of investment companies’’ as the Trust (each, a ‘‘Fund’’). For purposes of the requested order, ‘‘successor’’ is limited to an entity that results from a reorganization into another jurisdiction or a change in the type of business organization. For purposes of the request for relief, the term ‘‘group of investment companies’’ means any two or more registered investment companies, including closedend investment companies and business development companies, that hold themselves out to investors as related companies for purposes of investment and investor services. VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 2 Certain of the Underlying Funds have obtained exemptions from the Commission necessary to permit their shares to be listed and traded on a national securities exchange at negotiated prices and, accordingly, to operate as an exchange-traded fund (‘‘ETF’’). 3 Applicants do not request relief for Funds of Funds to invest in reliance on the order in business development companies and registered closed-end investment companies that are not listed and traded on a national securities exchange. 4 A Fund of Funds generally would purchase and sell shares of an Underlying Fund that operates as an ETF through secondary market transactions rather than through principal transactions with the Underlying Fund. Applicants nevertheless request relief from section 17(a) to permit a Fund of Funds to purchase or redeem shares from the ETF. A Fund of Funds will purchase and sell shares of an Underlying Fund that is a closed-end fund through secondary market transactions at market prices rather than through principal transactions with the closed-end fund. Accordingly, applicants are not requesting section 17(a) relief with respect to transactions in shares of closed-end funds (including business development companies). PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 14581 any provision of section 12(d)(1) if the exemption is consistent with the public interest and the protection of investors. Section 17(b) of the Act authorizes the Commission to grant an order permitting a transaction otherwise prohibited by section 17(a) if it finds that (a) the terms of the proposed transaction are fair and reasonable and do not involve overreaching on the part of any person concerned; (b) the proposed transaction is consistent with the policies of each registered investment company involved; and (c) the proposed transaction is consistent with the general purposes of the Act. Section 6(c) of the Act permits the Commission to exempt any persons or transactions from any provision of the Act if such exemption is necessary or appropriate in the public interest and consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–05507 Filed 3–20–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80253; File No. SR–FICC– 2017–004] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Describe the Intraday Mark-to-Market Charge March 15, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 7, 2017, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to the Mortgage-Backed 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. E:\FR\FM\21MRN1.SGM 21MRN1 14582 Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices Securities Division (‘‘MBSD’’) Clearing Rules (‘‘MBSD Rules’’) 3 in order to provide transparency in the MBSD Rules with respect to the existing intraday Mark-to-Market charge by codifying FICC’s current practices with respect to the assessment and collection of the intraday Mark-to-Market charge.4 This charge is imposed on certain Clearing Members that experience an adverse intraday Mark-to-Market change that meets certain criteria described below. The charge is designed to mitigate FICC’s exposure resulting from large intraday Mark-to-Market fluctuations to Clearing Members’ portfolios that are not otherwise covered by Clearing Members’ Required Fund Deposits. In order to provide transparency with respect to the existing intraday Mark-toMarket charge by codifying FICC’s existing practices with respect to the charge, FICC is proposing to amend MBSD Rule 1 (Definitions) to add the defined term ‘‘Intraday Mark-to-Market Charge’’ and to amend Section 2(c) of MBSD Rule 4 (Clearing Fund and Loss Allocation) to include the Intraday Mark-to-Market Charge. In addition, the proposed rule change would delete the term ‘‘End of Day Charge’’ from the MBSD Rules because it is no longer used, as further discussed below. To effectuate this change, the proposed rule change would delete the definition of End of Day Charge from Rule 1 (Definitions) and would amend Section 2 of MBSD Rule 4 (Clearing Fund and Loss Allocation) to delete the reference to the End of Day Charge. II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK3G9T082PROD with NOTICES In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. 3 The MBSD Rules are available at http:// www.dtcc.com/legal/rules-and-procedures. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to such terms in the MBSD Rules. 4 The intraday Mark-to-Market charge is currently described in Section 2(a) of Rule 4 of the MBSD Rules. VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The proposed rule change would provide transparency in the MBSD Rules with respect to the assessment and collection of the existing Intraday Mark-to-Market Charge, which FICC currently may impose on a Clearing Member on an intraday basis under certain circumstances described below. Once imposed, payment of this charge is due within one hour after notice from FICC to an affected Clearing Member.5 The proposed rule change would also eliminate references to the End of Day Charge from the MBSD Rules. (i) Background—The Required Fund Deposit and Mark-to-Market The Required Fund Deposit serves as each Clearing Member’s margin. The objective of the Required Fund Deposit is to mitigate potential losses to FICC associated with liquidation of the Clearing Member’s portfolio in the event that FICC ceases to act for a Clearing Member (hereinafter referred to as a ‘‘default’’). FICC determines Required Fund Deposit amounts using a number of component charges calculated and assessed daily, the largest of which is the VaR Charge that is a risk-based margin methodology intended to capture market price risk. The methodology uses historical market moves to project or forecast the potential gains or losses on the liquidation of a defaulting Clearing Member’s portfolio, assuming that a portfolio would take three days to liquidate or hedge in normal market conditions. The projected liquidation gains or losses are used to determine the Clearing Member’s VaR Charge, which is calculated to cover projected liquidation losses at a 99 percent confidence level. The aggregate of all Clearing Members’ Required Fund Deposits constitutes the Clearing Fund of MBSD, which FICC would be able to access in the event a defaulting Clearing Member’s own Required Fund Deposit is insufficient to satisfy losses to FICC caused by the liquidation of that Clearing Member’s portfolio. MBSD calculates the full suite of components that comprise the Required Fund Deposit and imposes the Required Fund Deposit once per day, at the start of the day, based on a Clearing Member’s prior end-of-day positions. Generally, the second largest component of the daily Required Fund Deposit is a start-of-day Mark-to-Market amount, 5 MBSD PO 00000 Rule 4, Section 2. Frm 00082 Fmt 4703 Sfmt 4703 which is designed to mitigate the risk arising out of the value change between the contract/settlement value of a Clearing Member’s open positions and the market value at the end of the prior day. (ii) Overview—The Intraday Mark-toMarket Charge During each trading day, a Clearing Member’s exposure may change due to the settlement of existing transactions and new trade activities. In addition, the value of the Clearing Member’s portfolio may change due to market influences. Normally, the start-of-day Mark-toMarket component of the daily Required Fund Deposit covers FICC’s exposure to a Clearing Member due to market moves and/or trading and settlement activity because it brings the portfolio of outstanding positions up to the market value at the end of the prior day. However, because the start-of-day Markto-Market component of the Required Fund Deposit is calculated only once daily using the prior end-of-day positions and prices, it does not cover a Clearing Member’s exposure arising out of intraday changes to position and market value in the Clearing Member’s portfolio that result in an adverse change to the Clearing Member’s Markto-Market (‘‘MTM Exposure’’). FICC manages this intraday risk exposure by observing snapshots of Clearing Members’ portfolios and monitoring intraday changes to each Clearing Member’s Mark-to-Market versus the Mark-to-Market that was part of the Required Fund Deposit at the start of the day or, if applicable, any subsequently collected Mark-to-Market amount. FICC then collects an Intraday Mark-toMarket Charge from Clearing Members to cover significant risk exposures that warrant the collection of intraday margin, as further described below. (iii) The Parameter Breaks FICC’s current practice with respect to the assessment of the Intraday Mark-toMarket Charge entails tracking three criteria (each, a ‘‘Parameter Break’’) for each Clearing Member. The Parameter Breaks help FICC determine whether a Clearing Member’s MTM Exposure poses a risk to FICC that is significant enough to warrant an Intraday Mark-toMarket Charge. The objective of the Parameter Breaks is to ensure that FICC is able to limit exposure to intraday Mark-to-Market fluctuations that (a) are of a large dollar amount (the ‘‘Dollar Threshold’’), (b) exhaust a significant portion of a Clearing Member’s VaR Charge (the ‘‘Percentage Threshold’’) and (c) are experienced by Clearing Members with backtesting deficiencies E:\FR\FM\21MRN1.SGM 21MRN1 Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices that bring backtesting results for that Clearing Member below the 99 percent confidence target (the ‘‘Coverage Target’’), indicating that a Clearing Member’s activity was not sufficiently covered by margin. mstockstill on DSK3G9T082PROD with NOTICES 1. The Dollar Threshold The purpose of the Dollar Threshold is to identify those Clearing Members whose MTM Exposures represent a large portion of the Clearing Fund. FICC believes that such Clearing Members pose an increased risk of loss to FICC because the coverage provided by the Clearing Fund, which is designed to cover the aggregate losses of all Clearing Members’ portfolios, would be substantially impacted by large MTM Exposures. More specifically, if a Clearing Member were to default and the Clearing Member’s Required Fund Deposit was not sufficient to satisfy losses to FICC caused by the liquidation of the Clearing Member’s portfolio, FICC would be able to access the funds held by it in the Clearing Fund to satisfy such losses. However, because the Clearing Fund must be available to satisfy potential losses to FICC that may arise from any Clearing Member defaults, FICC would be exposed to a significant risk of loss if Clearing Members’ MTM Exposures accounted for a substantial portion of the Clearing Fund. The Dollar Threshold is set to an amount that would ensure that the aggregate MTM Exposures of all of its Clearing Members at such threshold would not exceed 5 percent of the Clearing Fund. FICC believes that the availability of 95 percent of the Clearing Fund to satisfy all other liquidation losses arising out of a Clearing Member’s default is sufficient to mitigate the risks posed to FICC by such losses. FICC assesses the sufficiency of the Dollar Threshold on an annual basis and may adjust the Dollar Threshold if it determines that such an adjustment is necessary to provide reasonable coverage. Currently, the Dollar Threshold is an adverse intraday Mark-to-Market change in a Clearing Member’s portfolio that equals or exceeds $1,000,000 when compared to the Clearing Member’s start-of-day Mark-to-Market requirement including, if applicable, any subsequently collected Mark-to-Market amount. 2. The Percentage Threshold The purpose of the Percentage Threshold is to identify those Clearing Members whose MTM Exposures deplete a significant portion of such Clearing Members’ daily VaR Charge. FICC believes that Clearing Members that experience such MTM Exposures pose an increased risk of loss to FICC VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 because the coverage provided by the VaR Charge, which is designed to cover estimated losses to a portfolio over a specified time period at least 99 percent of the time, would be depleted by a significant MTM Exposure that could cause the Clearing Member’s Required Fund Deposit to be unable to absorb further intraday losses to the Clearing Member’s portfolio. The Percentage Threshold is designed to provide FICC with a reasonable cushion to allow the VaR Charge collected at the start of day to function as expected. More specifically, the VaR Charge is designed to cover potential losses over a threeday time period for a Clearing Member at least 99 percent of the time, assuming normal market conditions. When a Clearing Member’s MTM Exposure meets or exceeds a certain percentage as compared to its daily VaR Charge, the value of the Clearing Member’s portfolio is trending towards a loss outside of the expected value as determined by such VaR Charge. The Percentage Threshold is calculated to equal a percentage of the daily VaR Charge that FICC has determined would leave it with a sufficient amount of a Clearing Member’s remaining VaR Charge after accounting for potential losses arising from the Clearing Member’s MTM Exposure. FICC assesses the sufficiency of the Percentage Threshold on an annual basis and may adjust the Percentage Threshold if it determines that such an adjustment is necessary to provide reasonable coverage.6 Currently, the Percentage Threshold is an adverse intraday Mark-to-Market change in a Clearing Member’s portfolio that equals or exceeds 30 percent of the VaR Charge collected as part of the Clearing Member’s daily Required Fund Deposit. 3. The Coverage Target The purpose of the Coverage Target is to identify those Clearing Members that have experienced backtesting deficiencies that bring the results for that Clearing Member below the 99 percent confidence target (i.e., greater than two deficiency days in a rolling 12month period) as reported in the most current month. FICC believes that such Clearing Members pose an increased risk of loss to FICC because such backtesting deficiencies demonstrate that FICC’s risk-based margin model did not perform as expected for the Clearing Member. More specifically, FICC employs daily backtesting to determine the adequacy of each Clearing Member’s 6 In 2014, FICC lowered the Percentage Threshold from 40 percent to 30 percent of the VaR Charge after conducting a study that determined that a Percentage Threshold of 40 percent did not provide a sufficient cushion against potential losses. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 14583 Required Fund Deposit. FICC compares the Required Fund Deposit for each Clearing Member with the simulated liquidation gains/losses using the actual positions in the Clearing Member’s portfolio and the actual historical security returns. FICC investigates the cause(s) of any deficiencies. As a part of this process, FICC pays particular attention to deficiencies that cause a Clearing Member’s backtesting coverage to fall below the Coverage Target. Such deficiencies are evidence that the model used to calculate the Clearing Member’s Required Fund Deposit did not calculate an amount sufficient to cover the Clearing Member’s risk to FICC, as would otherwise be expected of the Required Fund Deposit. The Coverage Target is designed to provide coverage to FICC for intraday Mark-to-Market fluctuations in the portfolio of a Clearing Member for whom the Required Fund Deposit model is not performing as expected. FICC believes that a MTM Exposure for Clearing Members that fall below the Coverage Target may expose FICC to heightened risk, requiring an Intraday Mark-toMarket Charge to cover that risk. (iv) Assessment and Collection of the Intraday Mark-to-Market Charge FICC’s current practice is to review intraday snapshots of each Clearing Member’s portfolios to determine whether the Clearing Member has experienced a MTM Exposure that warrants FICC assessing an Intraday Mark-to-Market Charge. More specifically, if a Clearing Member’s MTM Exposure breaches all three Parameter Breaks, the Clearing Member will be subject to the Intraday Mark-toMarket Charge and FICC will collect the charge subject to waivers or changes to the amount of the calculated charge, as described below. However, where FICC determines that certain market conditions exist, including but not limited to (i) sudden swings in an equity index in either direction that exceed certain threshold amounts determined by FICC and (ii) moves in U.S. Treasury yields and mortgage-backed security spreads outside of historically observed market moves, FICC does not require that the Coverage Target be breached; rather, FICC imposes the Intraday Markto-Market Charge if only the Dollar Threshold and Percentage Threshold are breached,7 subject to waivers and 7 FICC has determined that, because a Clearing Member’s backtesting coverage may not accurately reflect the risks posed by a Clearing Member under certain market conditions, Clearing Members with backtesting coverage that meets or exceeds the Coverage Target may nonetheless pose increased E:\FR\FM\21MRN1.SGM Continued 21MRN1 mstockstill on DSK3G9T082PROD with NOTICES 14584 Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices changes to the amount of the calculated charge, as described below. Moreover, during such market conditions, the Dollar Threshold and Percentage Threshold may be reduced if FICC determines that such reduction is appropriate in order to accelerate collection of anticipated additional margin from Clearing Members whose portfolios may present relatively greater risks to FICC on an overnight basis. Any such reduction would not cause the Dollar Threshold to be less than $250,000 and the Percentage Threshold to be less than 5 percent. Irrespective of market conditions, FICC may impose the Intraday Mark-toMarket Charge on Clearing Members that (i) are approaching but have not yet breached the Percentage Threshold (but are at 20 percent or greater of the daily VaR Charge) and (ii) have a MTM Exposure that exceeds a certain dollar amount (‘‘Surveillance Threshold’’) that is set by FICC per Clearing Member based on the Clearing Member’s internal Credit Risk Rating Matrix (‘‘CRRM’’) rating and/or the Clearing Member’s Watch List status, if the Corporation determines that the size of such Clearing Member’s Mark-to-Market change exposes the Corporation to increased risk. FICC links the Surveillance Thresholds to a Clearing Member’s CRRM rating and Watch List status because a Clearing Member with a weaker internal rating is likely to pose a greater risk of default. Clearing Members with weaker internal credit ratings are assigned lower Surveillance Thresholds than Clearing Members with stronger internal credit ratings. The Surveillance Thresholds are intended as a tool to aid FICC in identifying Clearing Members whose MTM Exposures may necessitate the collection of an Intraday Mark-to-Market Charge. The current Surveillance Thresholds are: (a) $50 million for Clearing Members with a CRRM rating of ‘‘1’’ or ‘‘2’’ and for nonrated Clearing Members that are not on the Watch List; (b) $25 million for Clearing Members with a CRRM rating of ‘‘3’’; (c) $15 million for Clearing Members with a CRRM rating of ‘‘4’’; (d) $10 million for Clearing Members with a CRRM rating of ‘‘5’’ or ‘‘6’’ and for non-rated Clearing Members that are on the Watch List; and (e) $5 million for Clearing Members with a CRRM rating of ‘‘7.’’ Although FICC generally collects the Intraday Mark-to-Market Charge under the conditions described above, FICC retains the discretion to waive or alter such Intraday Mark-to-Market Charge in circumstances where it determines that the MTM Exposure and/or the breaches of the Parameter Breaks do not accurately reflect FICC’s risk exposure to the Clearing Member’s intraday Markto-Market fluctuation (e.g., a Clearing Member’s breach of the Coverage Target Parameter Break is based on a shortened backtesting look-back period and large Mark-to-Market fluctuations arising out of trade errors). Based on FICC’s assessment of the impact of these circumstances and FICC’s actual risk exposure to a Clearing Member, FICC may, in its discretion, waive or alter (decrease or increase) an Intraday Markto-Market Charge for a Clearing Member. Given the variability of the factors that result in breaches of the Parameter Breaks, FICC believes that it is important to maintain such discretion in order to limit the imposition of the Intraday Mark-to-Market Charge to those Clearing Members with MTM Exposures that pose a significant level of risk to FICC. Such Intraday Mark-to-Market Charge would not reduce a Clearing Member’s Required Fund Deposit below the amount reported at the start of day. Any increase to the Intraday Mark-toMarket Charge would not cause the Intraday Mark-to-Market Charge to be greater than two times its calculated amount. risk to FICC. Therefore, FICC imposes the Intraday Mark-to-Market Charge on Clearing Members that breach the Dollar Threshold and Percentage Threshold, despite the fact that such Members may not have breached the Coverage Target during certain market conditions. 8 The ‘‘End of Day Charge’’ means with respect to each Clearing Member, the calculation equaling: (i) The VaR Charge; plus (ii) the Mark-to-Market Debit; minus (iii) the Mark-to-Market Credit; plus (iv) a cash obligation item debit; minus (v) a cash obligation item credit; plus or minus (vi) accrued VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 (v) Communication With Clearing Members and Imposition of the Intraday Mark-to-Market Charge If FICC determines that FICC should collect an Intraday Mark-to-Market Charge from a Clearing Member, FICC notifies the Clearing Member during the trading day of its requirement to pay the Intraday Mark-to-Market Charge and the amount due. Affected Clearing Members are required to pay the amount due within one hour after FICC has provided the Clearing Member with notification that such payment is due (as long as notification is provided at least one hour prior to the close of the cash Fedwire operated by the Federal Reserve Bank of New York). (vi) Proposal To Delete the End of Day Charge Currently, MBSD Rule 4 states that the Required Fund Deposit is equal to the greater of: (i) The Minimum Charge, or (ii) the End of Day Charge,8 plus the PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 VaR Charge, the Deterministic Risk Component,9 and the special charge, if applicable. The End of Day Charge is comprised of the VaR Charge plus components that are identical to the components in the Deterministic Risk Component and is therefore duplicative and unnecessary. Therefore, FICC is proposing to delete the term and the reference to the End of Day Charge in order to help ensure that the MBSD Rules are accurate and clear. 2. Statutory Basis Section 17A(b)(3)(F) of the Securities Exchange Act of 1934, as amended (the ‘‘Act’’), requires, in part, that the MBSD Rules promote the prompt and accurate clearance and settlement of securities transactions.10 The proposed rule changes with respect to the Intraday Mark-to-Market Charge would provide transparency in the MBSD Rules regarding the existing Intraday Mark-toMarket Charge by codifying FICC’s current practices with respect to the assessment and collection of the charge. In addition, the proposed rule change associated with the deletion of the End of Day Charge would delete provisions that are not used to ensure that the MBSD Rules remain accurate and clear. Collectively, the proposed changes would ensure that the MBSD Rules remain transparent, accurate and clear, which would enable all stakeholders to readily understand their rights and obligations in connection with MBSD’s clearance and settlement of securities transactions. Therefore, FICC believes that the proposed rule changes would promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. Rule 17Ad–22(b)(1) under the Act requires a clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once a day and limit its exposures to potential losses from defaults by its participants under normal market conditions, so that the operations of the clearing agency would not be disrupted and non-defaulting participants would not be exposed to losses that they principal and interest. See MBSD Rule 1, supra note 3. 9 The ‘‘Deterministic Risk Component’’ means with respect to the margin portfolio of a Clearing Member, the calculation equaling: (i) The Mark-toMarket Debit; minus (ii) the Mark-to-Market Credit; plus (iii) a cash obligation item debit; minus (iv) a cash obligation item credit; plus or minus (v) accrued principal and interest. See MBSD Rule 1, supra note 3. 10 15 U.S.C. 78q–1(b)(3)(F). E:\FR\FM\21MRN1.SGM 21MRN1 Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices cannot anticipate or control.11 FICC’s Intraday Mark-to-Market Charge is calculated and imposed to cover credit exposures estimated by FICC based on significant intraday Mark-to-Market changes to a Clearing Member’s portfolio, as well as the Clearing Member’s trailing 12-month backtesting results, with the goal of ensuring that FICC is not exposed to increased risk from large intraday Mark-to-Market changes to the Clearing Member’s portfolio. Therefore, FICC believes that management of its credit exposures to Clearing Members through this charge is consistent with Rule 17Ad–22(b)(1) under the Act. Rule 17Ad–22(b)(2) under the Act requires a clearing agency to maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions.12 When applicable, the Intraday Mark-to-Market Charge is a component of a Clearing Member’s Required Fund Deposit, or margin, and is intended to maintain coverage of FICC’s credit exposures to such Clearing Member at a confidence level of at least 99 percent. The Intraday Mark-toMarket Charge therefore limits FICC’s exposures to Clearing Members under normal market conditions. Moreover, by incorporating the Intraday Mark-toMarket Charge into the MBSD Rules more clearly, the proposed change demonstrates that FICC has rule provisions that are reasonably designed to use margin requirements to limit its credit exposures to its Clearing Members under normal market conditions. Therefore, FICC believes that the proposed rule change is also consistent with Rule 17Ad–22(b)(2) under the Act. The proposed rule changes with respect to the Intraday Mark-to-Market Charge have also been designed to be consistent with Rules 17Ad–22(e)(4) and (e)(6) under the Act, which were recently adopted by the U.S. Securities and Exchange Commission (‘‘Commission’’).13 Rule 17Ad–22(e)(4) will require FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage mstockstill on DSK3G9T082PROD with NOTICES 11 17 CFR 240.17Ad–22(b)(1). CFR 240.17Ad–22(b)(2). 13 17 CFR 240.17Ad–22(e)(4) and (6). The Commission adopted amendments to Rule 17Ad– 22, including the addition of new section 17Ad– 22(e), on September 28, 2016. See Exchange Act Release No. 34–78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14). FICC is a ‘‘covered clearing agency’’ as defined in Rule 17Ad–22(a)(5) and must comply with new section (e) of Rule 17Ad–22 by April 11, 2017. Id. 12 17 VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 its credit exposures to participants and those exposures arising from its payment, clearing, and settlement processes.14 The proposed rule change codifies MBSD’s practices associated with the Intraday Mark-to-Market Charge, which address the identification, measurement, monitoring and management of credit exposures that may arise from intraday changes that occur to a Clearing Member’s portfolio because of settlement of existing transactions and new trade activities. Moreover, by incorporating the Intraday Mark-to-Market Charge into the MBSD Rules more clearly, the proposed change would enable FICC to have rule provisions that are reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to Clearing Members and those exposures arising from its payment, clearing, and settlement processes, which FICC believes is consistent with Rule 17Ad–22(e)(4). Rule 17Ad–22(e)(6) will require FICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that is monitored by management on an ongoing basis and regularly reviewed, tested, and verified.15 The Intraday Mark-to-Market Charge is a risk-based margining system with parameters that are regularly reviewed by FICC. Therefore, FICC believes the proposed rule change is consistent with Rule 17Ad–22(e)(6). (B) Clearing Agency’s Statement on Burden on Competition FICC does not believe that the proposed rule change associated with the Intraday Mark-to-Market Charge would impact competition.16 The proposed rule change would increase the transparency of the MBSD Rules with respect to this existing charge by codifying FICC’s current practices with respect to the assessment and imposition of the charge. As such, FICC believes that the proposed rule change will not impact Clearing Members or have any impact on competition. FICC does not believe that the proposed rule change to delete the End of Day Charge would impact competition. Changes to the applicable provisions would not impact Clearing Members because the End of Day Charge is not used by MBSD in the calculation of a Clearing Member’s Required Fund Deposit. As such, FICC believes that the 14 17 CFR 240.17Ad–22(e)(4). CFR 240.17Ad–22(e)(6). 16 15 U.S.C. 78q–1(b)(3)(I). 15 17 PO 00000 Frm 00085 Fmt 4703 Sfmt 4703 14585 deletion of these provisions will not impact competition. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others FICC has not received any written comments relating to this proposal. FICC will notify the Commission of any written comments received. III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and paragraph (f) of Rule 19b–4 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2017–004 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. All submissions should refer to File Number SR–FICC–2017–004. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the E:\FR\FM\21MRN1.SGM 21MRN1 14586 Federal Register / Vol. 82, No. 53 / Tuesday, March 21, 2017 / Notices public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of FICC and on DTCC’s Web site (http://dtcc.com/legal/sec-rulefilings.aspx). 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–FICC– 2017–004 and should be submitted on or before April 11, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–05502 Filed 3–20–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Self-Regulatory Organizations; International Securities Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Exchange’s Schedule of Fees March 15, 2017. mstockstill on DSK3G9T082PROD with NOTICES Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on March 10, 2017, the International Securities Exchange, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II, below, which Items have been prepared by the Exchange. 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 Exchange proposes to amend the Schedule of Fees to: (i) Eliminate the CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 16:47 Mar 20, 2017 Jkt 241001 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 Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change [Release No. 34–80249; File No. SR–ISE– 2017–23] 17 17 Priority Customer complex order rebate for orders in the NASDAQ 100 Index option (‘‘NDX’’) and in the Mini Nasdaq 100 Index option (‘‘MNX’’); (ii) increase the Non-Priority Customer License Surcharge for Index Options for NDX and MNX options, and (iii) waive the Marketing Fees for NDX and MNX, as described further below. The text of the proposed rule change is available on the Exchange’s Web site at www.ise.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. 1. Purpose The purpose of the proposed rule change is to: (i) Eliminate the Priority Customer complex order rebate for orders in NDX and MNX; (ii) increase the Non-Priority Customer License Surcharge for Index Options for NDX and MNX, and (iii) waive marketing fees for NDX and MNX.3 The Exchange notes that both NDX and MNX are transitioning to be exclusively listed on the Exchange and its affiliated markets in 2017.4 Eliminate Rebate for Priority Customer Complex Orders in Non-Select Symbols for Orders in NDX and MNX Currently, the Exchange provides rebates to Priority Customer 5 complex orders that trade with non-Priority 3 The Exchange initially filed the proposed pricing change on March 1, 2017 (SR–ISE–2017– 21). On March 10, 2017, the Exchange withdrew that filing and submitted this filing. 4 The Exchange and its affiliates will exclusively list NDX and MNX in the near future upon expiration of open expiries in these products on other markets. 5 A ‘‘Priority Customer’’ is a person or entity that is not a broker/dealer in securities, and does not place more than 390 orders in listed options per day on average during a calendar month for its own beneficial account(s), as defined in ISE Rule 100(a)(37A). PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 Customer complex orders in the complex order book or trade with quotes and orders on the regular order book.6 Rebates are tiered based on a member’s ADV executed during a given month as follows: 0 to 14,999 contracts (‘‘Tier 1’’), 15,000 to 44,999 contracts (‘‘Tier 2’’), 45,000 to 59,999 contracts (‘‘Tier 3’’), 60,000 to 74,999 contracts (‘‘Tier 4’’), 75,000 to 99,999 contracts (‘‘Tier 5’’), 100,000 to 124,999 contracts (‘‘Tier 6’’), 125,000 to 224,999 contracts (‘‘Tier 7’’), and 225,000 or more contracts (‘‘Tier 8’’). In Non-Select Symbols,7 including NDX and MNX, the rebate is $0.40 per contract for Tier 1, $0.60 per contract for Tier 2, $0.70 per contract for Tier 3, $0.75 per contract for Tier 4, $0.75 per contract for Tier 5, $0.80 per contract for Tier 6, $0.81 per contract for Tier 7, and $0.85 per contract for Tier 8. The Exchange now proposes to add note 4 to Section II of the Schedule of Fees to provide that no Priority Customer complex order rebates will be paid for orders in NDX or MNX. Increase Non-Priority Customer License Surcharge for Index Options for NDX and MNX The purpose of the second proposed change is to raise revenue for the Exchange by increasing the Non-Priority Customer License Surcharge for options on NDX and MNX. Currently, a number of Non-Select Symbols are index options that are traded on the Exchange pursuant to license agreements for which the Exchange charges license surcharges. The Exchange charges the following license surcharges for all orders other than Priority Customer orders: $ 0.10 per contract for options on BKX, and $ 0.22 per contract for options on NDX and MNX. The license surcharge fees, which are charged by the Exchange to defray the licensing costs, are charged in addition to transaction fees. The Exchange is now proposing to amend Section IV.B of the Schedule of Fees to increase the Non-Priority Customer License Surcharge for Index Options for NDX and MNX from $ 0.22 per contract to $ 0.25 per contract. Waive the Marketing Fee for NDX and MNX Options Currently, the Exchange administers a Marketing Fee program that helps Market Makers establish Marketing Fee 6 These rebates are provided per contract per leg if the order trades with non-Priority Customer orders in the complex order book, or trades with quotes and orders on the regular order book. 7 ‘‘Select Symbols’’ are options overlying all symbols listed on the ISE that are in the Penny Pilot Program. ‘‘Non-Select Symbols’’ are options overlying all symbols, excluding Select Symbols. NDX and MNX are Non-Select Symbols. E:\FR\FM\21MRN1.SGM 21MRN1

Agencies

[Federal Register Volume 82, Number 53 (Tuesday, March 21, 2017)]
[Notices]
[Pages 14581-14586]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-05502]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80253; File No. SR-FICC-2017-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Describe the Intraday Mark-to-Market Charge

March 15, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 7, 2017, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the Mortgage-
Backed

[[Page 14582]]

Securities Division (``MBSD'') Clearing Rules (``MBSD Rules'') \3\ in 
order to provide transparency in the MBSD Rules with respect to the 
existing intraday Mark-to-Market charge by codifying FICC's current 
practices with respect to the assessment and collection of the intraday 
Mark-to-Market charge.\4\ This charge is imposed on certain Clearing 
Members that experience an adverse intraday Mark-to-Market change that 
meets certain criteria described below. The charge is designed to 
mitigate FICC's exposure resulting from large intraday Mark-to-Market 
fluctuations to Clearing Members' portfolios that are not otherwise 
covered by Clearing Members' Required Fund Deposits.
---------------------------------------------------------------------------

    \3\ The MBSD Rules are available at http://www.dtcc.com/legal/rules-and-procedures. Capitalized terms used herein and not 
otherwise defined shall have the meaning assigned to such terms in 
the MBSD Rules.
    \4\ The intraday Mark-to-Market charge is currently described in 
Section 2(a) of Rule 4 of the MBSD Rules.
---------------------------------------------------------------------------

    In order to provide transparency with respect to the existing 
intraday Mark-to-Market charge by codifying FICC's existing practices 
with respect to the charge, FICC is proposing to amend MBSD Rule 1 
(Definitions) to add the defined term ``Intraday Mark-to-Market 
Charge'' and to amend Section 2(c) of MBSD Rule 4 (Clearing Fund and 
Loss Allocation) to include the Intraday Mark-to-Market Charge.
    In addition, the proposed rule change would delete the term ``End 
of Day Charge'' from the MBSD Rules because it is no longer used, as 
further discussed below. To effectuate this change, the proposed rule 
change would delete the definition of End of Day Charge from Rule 1 
(Definitions) and would amend Section 2 of MBSD Rule 4 (Clearing Fund 
and Loss Allocation) to delete the reference to the End of Day Charge.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The proposed rule change would provide transparency in the MBSD 
Rules with respect to the assessment and collection of the existing 
Intraday Mark-to-Market Charge, which FICC currently may impose on a 
Clearing Member on an intraday basis under certain circumstances 
described below. Once imposed, payment of this charge is due within one 
hour after notice from FICC to an affected Clearing Member.\5\ The 
proposed rule change would also eliminate references to the End of Day 
Charge from the MBSD Rules.
---------------------------------------------------------------------------

    \5\ MBSD Rule 4, Section 2.
---------------------------------------------------------------------------

(i) Background--The Required Fund Deposit and Mark-to-Market
    The Required Fund Deposit serves as each Clearing Member's margin. 
The objective of the Required Fund Deposit is to mitigate potential 
losses to FICC associated with liquidation of the Clearing Member's 
portfolio in the event that FICC ceases to act for a Clearing Member 
(hereinafter referred to as a ``default''). FICC determines Required 
Fund Deposit amounts using a number of component charges calculated and 
assessed daily, the largest of which is the VaR Charge that is a risk-
based margin methodology intended to capture market price risk. The 
methodology uses historical market moves to project or forecast the 
potential gains or losses on the liquidation of a defaulting Clearing 
Member's portfolio, assuming that a portfolio would take three days to 
liquidate or hedge in normal market conditions. The projected 
liquidation gains or losses are used to determine the Clearing Member's 
VaR Charge, which is calculated to cover projected liquidation losses 
at a 99 percent confidence level. The aggregate of all Clearing 
Members' Required Fund Deposits constitutes the Clearing Fund of MBSD, 
which FICC would be able to access in the event a defaulting Clearing 
Member's own Required Fund Deposit is insufficient to satisfy losses to 
FICC caused by the liquidation of that Clearing Member's portfolio.
    MBSD calculates the full suite of components that comprise the 
Required Fund Deposit and imposes the Required Fund Deposit once per 
day, at the start of the day, based on a Clearing Member's prior end-
of-day positions. Generally, the second largest component of the daily 
Required Fund Deposit is a start-of-day Mark-to-Market amount, which is 
designed to mitigate the risk arising out of the value change between 
the contract/settlement value of a Clearing Member's open positions and 
the market value at the end of the prior day.
(ii) Overview--The Intraday Mark-to-Market Charge
    During each trading day, a Clearing Member's exposure may change 
due to the settlement of existing transactions and new trade 
activities. In addition, the value of the Clearing Member's portfolio 
may change due to market influences. Normally, the start-of-day Mark-
to-Market component of the daily Required Fund Deposit covers FICC's 
exposure to a Clearing Member due to market moves and/or trading and 
settlement activity because it brings the portfolio of outstanding 
positions up to the market value at the end of the prior day. However, 
because the start-of-day Mark-to-Market component of the Required Fund 
Deposit is calculated only once daily using the prior end-of-day 
positions and prices, it does not cover a Clearing Member's exposure 
arising out of intraday changes to position and market value in the 
Clearing Member's portfolio that result in an adverse change to the 
Clearing Member's Mark-to-Market (``MTM Exposure''). FICC manages this 
intraday risk exposure by observing snapshots of Clearing Members' 
portfolios and monitoring intraday changes to each Clearing Member's 
Mark-to-Market versus the Mark-to-Market that was part of the Required 
Fund Deposit at the start of the day or, if applicable, any 
subsequently collected Mark-to-Market amount. FICC then collects an 
Intraday Mark-to-Market Charge from Clearing Members to cover 
significant risk exposures that warrant the collection of intraday 
margin, as further described below.
(iii) The Parameter Breaks
    FICC's current practice with respect to the assessment of the 
Intraday Mark-to-Market Charge entails tracking three criteria (each, a 
``Parameter Break'') for each Clearing Member. The Parameter Breaks 
help FICC determine whether a Clearing Member's MTM Exposure poses a 
risk to FICC that is significant enough to warrant an Intraday Mark-to-
Market Charge. The objective of the Parameter Breaks is to ensure that 
FICC is able to limit exposure to intraday Mark-to-Market fluctuations 
that (a) are of a large dollar amount (the ``Dollar Threshold''), (b) 
exhaust a significant portion of a Clearing Member's VaR Charge (the 
``Percentage Threshold'') and (c) are experienced by Clearing Members 
with backtesting deficiencies

[[Page 14583]]

that bring backtesting results for that Clearing Member below the 99 
percent confidence target (the ``Coverage Target''), indicating that a 
Clearing Member's activity was not sufficiently covered by margin.
1. The Dollar Threshold
    The purpose of the Dollar Threshold is to identify those Clearing 
Members whose MTM Exposures represent a large portion of the Clearing 
Fund. FICC believes that such Clearing Members pose an increased risk 
of loss to FICC because the coverage provided by the Clearing Fund, 
which is designed to cover the aggregate losses of all Clearing 
Members' portfolios, would be substantially impacted by large MTM 
Exposures. More specifically, if a Clearing Member were to default and 
the Clearing Member's Required Fund Deposit was not sufficient to 
satisfy losses to FICC caused by the liquidation of the Clearing 
Member's portfolio, FICC would be able to access the funds held by it 
in the Clearing Fund to satisfy such losses. However, because the 
Clearing Fund must be available to satisfy potential losses to FICC 
that may arise from any Clearing Member defaults, FICC would be exposed 
to a significant risk of loss if Clearing Members' MTM Exposures 
accounted for a substantial portion of the Clearing Fund. The Dollar 
Threshold is set to an amount that would ensure that the aggregate MTM 
Exposures of all of its Clearing Members at such threshold would not 
exceed 5 percent of the Clearing Fund. FICC believes that the 
availability of 95 percent of the Clearing Fund to satisfy all other 
liquidation losses arising out of a Clearing Member's default is 
sufficient to mitigate the risks posed to FICC by such losses. FICC 
assesses the sufficiency of the Dollar Threshold on an annual basis and 
may adjust the Dollar Threshold if it determines that such an 
adjustment is necessary to provide reasonable coverage. Currently, the 
Dollar Threshold is an adverse intraday Mark-to-Market change in a 
Clearing Member's portfolio that equals or exceeds $1,000,000 when 
compared to the Clearing Member's start-of-day Mark-to-Market 
requirement including, if applicable, any subsequently collected Mark-
to-Market amount.
2. The Percentage Threshold
    The purpose of the Percentage Threshold is to identify those 
Clearing Members whose MTM Exposures deplete a significant portion of 
such Clearing Members' daily VaR Charge. FICC believes that Clearing 
Members that experience such MTM Exposures pose an increased risk of 
loss to FICC because the coverage provided by the VaR Charge, which is 
designed to cover estimated losses to a portfolio over a specified time 
period at least 99 percent of the time, would be depleted by a 
significant MTM Exposure that could cause the Clearing Member's 
Required Fund Deposit to be unable to absorb further intraday losses to 
the Clearing Member's portfolio. The Percentage Threshold is designed 
to provide FICC with a reasonable cushion to allow the VaR Charge 
collected at the start of day to function as expected. More 
specifically, the VaR Charge is designed to cover potential losses over 
a three-day time period for a Clearing Member at least 99 percent of 
the time, assuming normal market conditions. When a Clearing Member's 
MTM Exposure meets or exceeds a certain percentage as compared to its 
daily VaR Charge, the value of the Clearing Member's portfolio is 
trending towards a loss outside of the expected value as determined by 
such VaR Charge. The Percentage Threshold is calculated to equal a 
percentage of the daily VaR Charge that FICC has determined would leave 
it with a sufficient amount of a Clearing Member's remaining VaR Charge 
after accounting for potential losses arising from the Clearing 
Member's MTM Exposure. FICC assesses the sufficiency of the Percentage 
Threshold on an annual basis and may adjust the Percentage Threshold if 
it determines that such an adjustment is necessary to provide 
reasonable coverage.\6\ Currently, the Percentage Threshold is an 
adverse intraday Mark-to-Market change in a Clearing Member's portfolio 
that equals or exceeds 30 percent of the VaR Charge collected as part 
of the Clearing Member's daily Required Fund Deposit.
---------------------------------------------------------------------------

    \6\ In 2014, FICC lowered the Percentage Threshold from 40 
percent to 30 percent of the VaR Charge after conducting a study 
that determined that a Percentage Threshold of 40 percent did not 
provide a sufficient cushion against potential losses.
---------------------------------------------------------------------------

3. The Coverage Target
    The purpose of the Coverage Target is to identify those Clearing 
Members that have experienced backtesting deficiencies that bring the 
results for that Clearing Member below the 99 percent confidence target 
(i.e., greater than two deficiency days in a rolling 12-month period) 
as reported in the most current month. FICC believes that such Clearing 
Members pose an increased risk of loss to FICC because such backtesting 
deficiencies demonstrate that FICC's risk-based margin model did not 
perform as expected for the Clearing Member. More specifically, FICC 
employs daily backtesting to determine the adequacy of each Clearing 
Member's Required Fund Deposit. FICC compares the Required Fund Deposit 
for each Clearing Member with the simulated liquidation gains/losses 
using the actual positions in the Clearing Member's portfolio and the 
actual historical security returns. FICC investigates the cause(s) of 
any deficiencies. As a part of this process, FICC pays particular 
attention to deficiencies that cause a Clearing Member's backtesting 
coverage to fall below the Coverage Target. Such deficiencies are 
evidence that the model used to calculate the Clearing Member's 
Required Fund Deposit did not calculate an amount sufficient to cover 
the Clearing Member's risk to FICC, as would otherwise be expected of 
the Required Fund Deposit. The Coverage Target is designed to provide 
coverage to FICC for intraday Mark-to-Market fluctuations in the 
portfolio of a Clearing Member for whom the Required Fund Deposit model 
is not performing as expected. FICC believes that a MTM Exposure for 
Clearing Members that fall below the Coverage Target may expose FICC to 
heightened risk, requiring an Intraday Mark-to-Market Charge to cover 
that risk.
(iv) Assessment and Collection of the Intraday Mark-to-Market Charge
    FICC's current practice is to review intraday snapshots of each 
Clearing Member's portfolios to determine whether the Clearing Member 
has experienced a MTM Exposure that warrants FICC assessing an Intraday 
Mark-to-Market Charge. More specifically, if a Clearing Member's MTM 
Exposure breaches all three Parameter Breaks, the Clearing Member will 
be subject to the Intraday Mark-to-Market Charge and FICC will collect 
the charge subject to waivers or changes to the amount of the 
calculated charge, as described below. However, where FICC determines 
that certain market conditions exist, including but not limited to (i) 
sudden swings in an equity index in either direction that exceed 
certain threshold amounts determined by FICC and (ii) moves in U.S. 
Treasury yields and mortgage-backed security spreads outside of 
historically observed market moves, FICC does not require that the 
Coverage Target be breached; rather, FICC imposes the Intraday Mark-to-
Market Charge if only the Dollar Threshold and Percentage Threshold are 
breached,\7\ subject to waivers and

[[Page 14584]]

changes to the amount of the calculated charge, as described below. 
Moreover, during such market conditions, the Dollar Threshold and 
Percentage Threshold may be reduced if FICC determines that such 
reduction is appropriate in order to accelerate collection of 
anticipated additional margin from Clearing Members whose portfolios 
may present relatively greater risks to FICC on an overnight basis. Any 
such reduction would not cause the Dollar Threshold to be less than 
$250,000 and the Percentage Threshold to be less than 5 percent.
---------------------------------------------------------------------------

    \7\ FICC has determined that, because a Clearing Member's 
backtesting coverage may not accurately reflect the risks posed by a 
Clearing Member under certain market conditions, Clearing Members 
with backtesting coverage that meets or exceeds the Coverage Target 
may nonetheless pose increased risk to FICC. Therefore, FICC imposes 
the Intraday Mark-to-Market Charge on Clearing Members that breach 
the Dollar Threshold and Percentage Threshold, despite the fact that 
such Members may not have breached the Coverage Target during 
certain market conditions.
---------------------------------------------------------------------------

    Irrespective of market conditions, FICC may impose the Intraday 
Mark-to-Market Charge on Clearing Members that (i) are approaching but 
have not yet breached the Percentage Threshold (but are at 20 percent 
or greater of the daily VaR Charge) and (ii) have a MTM Exposure that 
exceeds a certain dollar amount (``Surveillance Threshold'') that is 
set by FICC per Clearing Member based on the Clearing Member's internal 
Credit Risk Rating Matrix (``CRRM'') rating and/or the Clearing 
Member's Watch List status, if the Corporation determines that the size 
of such Clearing Member's Mark-to-Market change exposes the Corporation 
to increased risk. FICC links the Surveillance Thresholds to a Clearing 
Member's CRRM rating and Watch List status because a Clearing Member 
with a weaker internal rating is likely to pose a greater risk of 
default. Clearing Members with weaker internal credit ratings are 
assigned lower Surveillance Thresholds than Clearing Members with 
stronger internal credit ratings. The Surveillance Thresholds are 
intended as a tool to aid FICC in identifying Clearing Members whose 
MTM Exposures may necessitate the collection of an Intraday Mark-to-
Market Charge. The current Surveillance Thresholds are: (a) $50 million 
for Clearing Members with a CRRM rating of ``1'' or ``2'' and for non-
rated Clearing Members that are not on the Watch List; (b) $25 million 
for Clearing Members with a CRRM rating of ``3''; (c) $15 million for 
Clearing Members with a CRRM rating of ``4''; (d) $10 million for 
Clearing Members with a CRRM rating of ``5'' or ``6'' and for non-rated 
Clearing Members that are on the Watch List; and (e) $5 million for 
Clearing Members with a CRRM rating of ``7.''
    Although FICC generally collects the Intraday Mark-to-Market Charge 
under the conditions described above, FICC retains the discretion to 
waive or alter such Intraday Mark-to-Market Charge in circumstances 
where it determines that the MTM Exposure and/or the breaches of the 
Parameter Breaks do not accurately reflect FICC's risk exposure to the 
Clearing Member's intraday Mark-to-Market fluctuation (e.g., a Clearing 
Member's breach of the Coverage Target Parameter Break is based on a 
shortened backtesting look-back period and large Mark-to-Market 
fluctuations arising out of trade errors). Based on FICC's assessment 
of the impact of these circumstances and FICC's actual risk exposure to 
a Clearing Member, FICC may, in its discretion, waive or alter 
(decrease or increase) an Intraday Mark-to-Market Charge for a Clearing 
Member. Given the variability of the factors that result in breaches of 
the Parameter Breaks, FICC believes that it is important to maintain 
such discretion in order to limit the imposition of the Intraday Mark-
to-Market Charge to those Clearing Members with MTM Exposures that pose 
a significant level of risk to FICC. Such Intraday Mark-to-Market 
Charge would not reduce a Clearing Member's Required Fund Deposit below 
the amount reported at the start of day. Any increase to the Intraday 
Mark-to-Market Charge would not cause the Intraday Mark-to-Market 
Charge to be greater than two times its calculated amount.
(v) Communication With Clearing Members and Imposition of the Intraday 
Mark-to-Market Charge
    If FICC determines that FICC should collect an Intraday Mark-to-
Market Charge from a Clearing Member, FICC notifies the Clearing Member 
during the trading day of its requirement to pay the Intraday Mark-to-
Market Charge and the amount due. Affected Clearing Members are 
required to pay the amount due within one hour after FICC has provided 
the Clearing Member with notification that such payment is due (as long 
as notification is provided at least one hour prior to the close of the 
cash Fedwire operated by the Federal Reserve Bank of New York).
(vi) Proposal To Delete the End of Day Charge
    Currently, MBSD Rule 4 states that the Required Fund Deposit is 
equal to the greater of: (i) The Minimum Charge, or (ii) the End of Day 
Charge,\8\ plus the VaR Charge, the Deterministic Risk Component,\9\ 
and the special charge, if applicable. The End of Day Charge is 
comprised of the VaR Charge plus components that are identical to the 
components in the Deterministic Risk Component and is therefore 
duplicative and unnecessary. Therefore, FICC is proposing to delete the 
term and the reference to the End of Day Charge in order to help ensure 
that the MBSD Rules are accurate and clear.
---------------------------------------------------------------------------

    \8\ The ``End of Day Charge'' means with respect to each 
Clearing Member, the calculation equaling: (i) The VaR Charge; plus 
(ii) the Mark-to-Market Debit; minus (iii) the Mark-to-Market 
Credit; plus (iv) a cash obligation item debit; minus (v) a cash 
obligation item credit; plus or minus (vi) accrued principal and 
interest. See MBSD Rule 1, supra note 3.
    \9\ The ``Deterministic Risk Component'' means with respect to 
the margin portfolio of a Clearing Member, the calculation equaling: 
(i) The Mark-to-Market Debit; minus (ii) the Mark-to-Market Credit; 
plus (iii) a cash obligation item debit; minus (iv) a cash 
obligation item credit; plus or minus (v) accrued principal and 
interest. See MBSD Rule 1, supra note 3.
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2. Statutory Basis
    Section 17A(b)(3)(F) of the Securities Exchange Act of 1934, as 
amended (the ``Act''), requires, in part, that the MBSD Rules promote 
the prompt and accurate clearance and settlement of securities 
transactions.\10\ The proposed rule changes with respect to the 
Intraday Mark-to-Market Charge would provide transparency in the MBSD 
Rules regarding the existing Intraday Mark-to-Market Charge by 
codifying FICC's current practices with respect to the assessment and 
collection of the charge. In addition, the proposed rule change 
associated with the deletion of the End of Day Charge would delete 
provisions that are not used to ensure that the MBSD Rules remain 
accurate and clear. Collectively, the proposed changes would ensure 
that the MBSD Rules remain transparent, accurate and clear, which would 
enable all stakeholders to readily understand their rights and 
obligations in connection with MBSD's clearance and settlement of 
securities transactions. Therefore, FICC believes that the proposed 
rule changes would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    Rule 17Ad-22(b)(1) under the Act requires a clearing agency to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to measure its credit exposures to its 
participants at least once a day and limit its exposures to potential 
losses from defaults by its participants under normal market 
conditions, so that the operations of the clearing agency would not be 
disrupted and non-defaulting participants would not be exposed to 
losses that they

[[Page 14585]]

cannot anticipate or control.\11\ FICC's Intraday Mark-to-Market Charge 
is calculated and imposed to cover credit exposures estimated by FICC 
based on significant intraday Mark-to-Market changes to a Clearing 
Member's portfolio, as well as the Clearing Member's trailing 12-month 
backtesting results, with the goal of ensuring that FICC is not exposed 
to increased risk from large intraday Mark-to-Market changes to the 
Clearing Member's portfolio. Therefore, FICC believes that management 
of its credit exposures to Clearing Members through this charge is 
consistent with Rule 17Ad-22(b)(1) under the Act.
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    \11\ 17 CFR 240.17Ad-22(b)(1).
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    Rule 17Ad-22(b)(2) under the Act requires a clearing agency to 
maintain and enforce written policies and procedures reasonably 
designed to use margin requirements to limit its credit exposures to 
participants under normal market conditions.\12\ When applicable, the 
Intraday Mark-to-Market Charge is a component of a Clearing Member's 
Required Fund Deposit, or margin, and is intended to maintain coverage 
of FICC's credit exposures to such Clearing Member at a confidence 
level of at least 99 percent. The Intraday Mark-to-Market Charge 
therefore limits FICC's exposures to Clearing Members under normal 
market conditions. Moreover, by incorporating the Intraday Mark-to-
Market Charge into the MBSD Rules more clearly, the proposed change 
demonstrates that FICC has rule provisions that are reasonably designed 
to use margin requirements to limit its credit exposures to its 
Clearing Members under normal market conditions. Therefore, FICC 
believes that the proposed rule change is also consistent with Rule 
17Ad-22(b)(2) under the Act.
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    \12\ 17 CFR 240.17Ad-22(b)(2).
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    The proposed rule changes with respect to the Intraday Mark-to-
Market Charge have also been designed to be consistent with Rules 17Ad-
22(e)(4) and (e)(6) under the Act, which were recently adopted by the 
U.S. Securities and Exchange Commission (``Commission'').\13\ Rule 
17Ad-22(e)(4) will require FICC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those exposures arising from its payment, clearing, 
and settlement processes.\14\ The proposed rule change codifies MBSD's 
practices associated with the Intraday Mark-to-Market Charge, which 
address the identification, measurement, monitoring and management of 
credit exposures that may arise from intraday changes that occur to a 
Clearing Member's portfolio because of settlement of existing 
transactions and new trade activities. Moreover, by incorporating the 
Intraday Mark-to-Market Charge into the MBSD Rules more clearly, the 
proposed change would enable FICC to have rule provisions that are 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to Clearing Members and those exposures 
arising from its payment, clearing, and settlement processes, which 
FICC believes is consistent with Rule 17Ad-22(e)(4).
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    \13\ 17 CFR 240.17Ad-22(e)(4) and (6). The Commission adopted 
amendments to Rule 17Ad-22, including the addition of new section 
17Ad-22(e), on September 28, 2016. See Exchange Act Release No. 34-
78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-
14). FICC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5) and must comply with new section (e) of Rule 17Ad-22 by 
April 11, 2017. Id.
    \14\ 17 CFR 240.17Ad-22(e)(4).
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    Rule 17Ad-22(e)(6) will require FICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that is monitored by management 
on an ongoing basis and regularly reviewed, tested, and verified.\15\ 
The Intraday Mark-to-Market Charge is a risk-based margining system 
with parameters that are regularly reviewed by FICC. Therefore, FICC 
believes the proposed rule change is consistent with Rule 17Ad-
22(e)(6).
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    \15\ 17 CFR 240.17Ad-22(e)(6).
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(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule change associated with 
the Intraday Mark-to-Market Charge would impact competition.\16\ The 
proposed rule change would increase the transparency of the MBSD Rules 
with respect to this existing charge by codifying FICC's current 
practices with respect to the assessment and imposition of the charge. 
As such, FICC believes that the proposed rule change will not impact 
Clearing Members or have any impact on competition.
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    \16\ 15 U.S.C. 78q-1(b)(3)(I).
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    FICC does not believe that the proposed rule change to delete the 
End of Day Charge would impact competition. Changes to the applicable 
provisions would not impact Clearing Members because the End of Day 
Charge is not used by MBSD in the calculation of a Clearing Member's 
Required Fund Deposit. As such, FICC believes that the deletion of 
these provisions will not impact competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC has not received any written comments relating to this 
proposal. FICC will notify the Commission of any written comments 
received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission summarily may temporarily suspend such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2017-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-FICC-2017-004. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the

[[Page 14586]]

public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street NE., Washington, DC 20549 on official 
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
the filing also will be available for inspection and copying at the 
principal office of FICC and on DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-FICC-2017-004 and should be submitted on or before April 11, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-05502 Filed 3-20-17; 8:45 am]
BILLING CODE 8011-01-P