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]
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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 https://
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
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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.
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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).
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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.
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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
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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 https://
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.
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(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
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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
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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.
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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
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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.
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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
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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
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(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
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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).
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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 (https://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 (https://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
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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
(https://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
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]]>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]
-----------------------------------------------------------------------
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 https://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.
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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.
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\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.
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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.
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\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 (https://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 (https://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 (https://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
