Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To (1) Implement the Margin Proxy, (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies, and (3) Make Certain Technical Corrections, 16638-16642 [2017-06685]

Download as PDF jstallworth on DSK7TPTVN1PROD with NOTICES 16638 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices Exchange Act of 1934 (15 U.S.C. 78a et seq.). The Commission plans to submit this existing collection of information to the Office of Management and Budget (‘‘OMB’’) for extension and approval. Rule 17a–5 is the basic financial reporting rule for brokers and dealers.1 The rule requires the filing of Form X– 17A–5, the Financial and Operational Combined Uniform Single Report (‘‘FOCUS Report’’), which was the result of years of study and comments by representatives of the securities industry through advisory committees and through the normal rule proposal methods. The FOCUS Report was designed to eliminate the overlapping regulatory reports required by various self-regulatory organizations and the Commission and to reduce reporting burdens as much as possible. The rule also requires the filing of an annual audited report of financial statements. The FOCUS Report consists of: (1) Part I, which is a monthly report that must be filed by brokers or dealers that clear transactions or carry customer securities; (2) one of three alternative quarterly reports: Part II, which must be filed by brokers or dealers that clear transactions or carry customer securities; Part IIA, which must be filed by brokers or dealers that do not clear transactions or carry customer securities; and Part IIB, which must be filed by specialized broker-dealers registered with the Commission as OTC derivatives dealers; 2 (3) supplemental schedules, which must be filed annually; and (4) a facing page, which must be filed with the annual audited report of financial statements. Under the rule, a broker or dealer that computes certain of its capital charges in accordance with Appendix E to Exchange Act Rule 15c3–1 must file additional monthly, quarterly, and annual reports with the Commission. The Commission estimates that the total hours burden under Rule 17a–5 is approximately 356,020 hours per year when annualized, and the total cost burden under Rule 17a–5 is approximately $45,133,148 per year. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information shall have practical utility; (b) the accuracy of the Commission’s 1 Rule 17a–5(c) requires a broker or dealer to furnish certain of its financial information to customers and is subject to a separate PRA filing (OMB Control Number 3235–0199). 2 Part IIB of Form X–17A–5 must be filed by OTC derivatives dealers under Exchange Act Rule 17a– 12 and is subject to a separate PRA filing (OMB control number 3235–0498). VerDate Sep<11>2014 15:11 Apr 04, 2017 Jkt 241001 estimate of the burden of the proposed collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information under the PRA unless it displays a currently valid OMB control number. Please direct your written comments to: Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, c/o Remi PavlikSimon, 100 F Street NE., Washington, DC 20549, or send an email to PRA_ Mailbox@sec.gov. Dated: March 30, 2017. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–06695 Filed 4–4–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–80349; File No. SR–FICC– 2017–001] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To (1) Implement the Margin Proxy, (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies, and (3) Make Certain Technical Corrections March 30, 2017. I. Introduction Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) on February 2, 2017 the proposed rule change SR–FICC–2017–001 (‘‘Proposed Rule Change’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The Proposed Rule Change 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. FICC also filed this proposal as an advance notice pursuant to Section 802(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b–4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b–4(n)(1). The advance notice was published for comment in the Federal Register on March 2, 2017. See Securities Exchange Act Release No. 80139 (March 2, 2017), 82 FR 80139 (March 8, 2017) (SR–FICC–2017–801) (‘‘Advance Notice’’). 2 17 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 was published for comment in the Federal Register on February 9, 2017.3 The Commission received three comment letters 4 to the Proposed Rule Change, including a response letter from FICC. II. Description of the Proposed Rule Change The Proposed Rule Change proposes several amendments to the FICC Government Securities Division (‘‘GSD’’) Rulebook (‘‘GSD Rules’’) 5 designed to provide FICC with a supplemental means to calculate the VaR Charge component of its GSD Netting Members’ (‘‘Netting Members’’) daily margin requirement, known as the ‘‘Required Fund Deposit.’’ Specifically, under the proposal, FICC would include a minimum volatility calculation for a Netting Member’s VaR Charge called the ‘‘Margin Proxy.’’ FICC represents that the Margin Proxy would enhance the risk-based model and parameters that FICC uses to establish Netting Members’ Required Fund Deposits by enabling FICC to better identify the risk posed by a Netting Member’s unsettled portfolio. A. Overview of the Required Fund Deposit According to FICC, a key tool it uses to manage market risk is the daily calculation and collection of Required Fund Deposits from its Netting Members. The Required Fund Deposit is intended to mitigate potential losses to FICC associated with liquidation of such Netting Member’s accounts at GSD that are used for margining purposes (‘‘Margin Portfolio’’) in the event that FICC ceases to act for such Netting Member (referred to as a Netting Member ‘‘Default’’). A Netting Member’s Required Fund Deposit consists of several components, including the VaR Charge and the Coverage Charge. The VaR Charge comprises the largest portion of a Netting Member’s Required Fund The Commission did not receive any comments on the Advance Notice. 3 Securities Exchange Act Release No. 79958 (February 3, 2017), 82 FR 10117 (February 9, 2017) (SR–FICC–2017–001)(‘‘Notice’’). 4 See letter from Robert E. Pooler, Chief Financial Officer, Ronin Capital LLC (‘‘Ronin’’), dated February 24, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (‘‘Ronin Letter’’); letter from Alan Levy, Managing Director, Industrial and Commercial Bank of China Financial Services LLC (‘‘ICBCFS’’), dated February 24, 2017, to Commission (‘‘ICBCFS Letter’’); and Timothy J. Cuddihy, Managing Director, FICC, dated March 8, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (‘‘FICC Letter’’) available at https:// www.sec.gov/comments/sr-ficc-2017–001/ ficc2017001.htm. 5 Available at https://www.dtcc.com/en/legal/ rules-and-procedures. E:\FR\FM\05APN1.SGM 05APN1 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices jstallworth on DSK7TPTVN1PROD with NOTICES Deposit amount and is calculated using a risk-based margin methodology model that is intended to cover the market price risk associated with the securities in a Netting Member’s Margin Portfolio. That risk-based margin methodology model, which FICC refers to as the ‘‘Current Volatility Calculation,’’ uses historical market moves to project the potential gains or losses that could occur in connection with the liquidation of a defaulting Netting Member’s Margin Portfolio. The Coverage Charge is calculated based on the Netting Member’s daily backtesting results conducted by FICC. Backtesting is used to determine the adequacy of each Netting Member’s Required Fund Deposit and involves comparing the Required Fund Deposit for each Netting Member with actual price changes in the Netting Member’s Margin Portfolio. The Coverage Charge is incorporated in the Required Fund Deposit for each Netting Member, and is equal to the amount necessary to increase that Netting Member’s Required Fund Deposit so that the Netting Member’s backtesting coverage may achieve the 99 percent confidence level required by FICC (i.e., two or fewer backtesting deficiency days in a rolling twelve-month period). B. Proposed Change to the Existing VaR Charge Calculation Under the proposal, FICC would create the Margin Proxy, a new, benchmarked volatility calculation of the VaR Charge. The Margin Proxy would act as an alternative to the Current Volatility Calculation of the VaR Charge to provide a minimum volatility calculation for each Netting Member’s VaR Charge. FICC proposes to use the Margin Proxy as the VaR Charge if doing so would result in a higher Required Fund Deposit for a Netting Member than using the Current Volatility Calculation as the VaR Charge. In addition, as described in more detail below, because FICC’s testing shows that the Margin Proxy would, by itself, achieve a 99 percent confidence level for Netting Members’ backtesting coverage when used in lieu of the Current Volatility Charge, in the event that FICC uses the Margin Proxy as the VaR Charge for a Netting Member, it would reduce the Coverage Charge for that Netting Member by a commensurate amount, as long as the Coverage Charge does not go below zero. According to FICC, during the fourth quarter of 2016, its Current Volatility Calculation did not respond effectively to the level of market volatility at that time, and its VaR Charge amounts (calculated using the profit and loss VerDate Sep<11>2014 15:11 Apr 04, 2017 Jkt 241001 scenarios generated by the Current Volatility Calculation) did not achieve backtesting coverage at a 99 percent confidence level,6 which resulted in backtesting deficiencies for the Required Fund Deposit beyond FICC’s risk tolerance.7 FICC’s calculation of the Margin Proxy is designed to avoid such deficiencies. The Margin Proxy provides FICC with an alternative calculation of the VaR Charge to the Current Volatility Calculation of the VaR Charge. In particular, the Margin Proxy is likely to be used when the Current Volatility Calculation is lower than volatility from certain benchmarks (i.e., market price volatility from corresponding U.S. Treasury and to-be-announced (‘‘TBA’’) 8 securities benchmarks.9 The Margin Proxy separately calculates U.S. Treasury securities and agency passthrough mortgage backed securities (‘‘MBS’’). According to FICC, the historical price changes of these two asset classes are different due to market factors such as credit spreads and prepayment risk.10 This would allow FICC to monitor the performance of each of those asset classes individually.11 By using separate calculations for the two asset classes, the Margin Proxy would cover the historical market prices of each of those asset classes, on a standalone basis, to a 99 percent confidence level. The Margin Proxy would be calculated per Netting Member, and each security in a Netting Member’s Margin Portfolio would be mapped to a respective benchmark based on the security’s asset class and maturity.12 All securities within each benchmark would be aggregated into a net exposure.13 Once the net exposure is determined, FICC would apply an applicable haircut 14 to each benchmark’s net exposure to determine the net price risk for each benchmark (‘‘Net Price Risk’’). Finally, FICC would separately determine the asset class price risk (‘‘Asset Class Price Risk’’) for 6 Notice, 82 FR at 10118. 7 Id. 8 FICC states that specified pool trades are mapped to the corresponding positions in TBA securities for determining the VaR Charge. 9 Notice, 82 FR at 10118. 10 Id. 11 Id. 12 According to FICC, U.S. Treasury and agency securities would be mapped to a U.S. Treasury benchmark security/index, while MBS would be mapped to a TBA security/index. 13 Net exposure is the aggregate market value of securities to be purchased by the Netting Member minus the aggregate market value of securities to be sold by the Netting Member. 14 The haircut is calculated using historical market price changes of the respective benchmark to cover the expected market price volatility at 99 percent confidence level. PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 16639 U.S. Treasury and MBS benchmarks by aggregating the respective Net Price Risk for each benchmark. To provide risk diversification across tenor buckets for the U.S. Treasury benchmarks, the Asset Class Price Risk calculation includes a correlation adjustment that has been historically observed across the U.S. Treasury benchmarks. According to FICC, the Margin Proxy would thereby represent the sum of the U.S. Treasury and MBS Asset Class Price Risk.15 FICC would compare the Margin Proxy to the Current Volatility Calculation for each asset class and then apply whichever is greater as the VaR Charge for each Netting Member’s Margin Portfolio. FICC expresses confidence that this proposal would provide the adequate VaR Charge for each Netting Member because its calculations show that including the Margin Proxy results in backtesting coverage above the 99 percent confidence level for the past four years.16 Additionally, FICC asserts that, by using industry-standard benchmarks that can be observed by Netting Members, the Margin Proxy would be transparent to Netting Members.17 FICC further asserts that the Margin Proxy methodology would be subject to performance reviews by FICC. Specifically, FICC would monitor each Netting Member’s Required Fund Deposit and the aggregate FICC GSD clearing fund (‘‘Clearing Fund’’) requirements and compare them to the requirements calculated by the Margin Proxy. Consistent with the current GSD Rules,18 FICC would review the robustness of the Margin Proxy by comparing the results versus the threeday profit and loss of each Netting Member’s Margin Portfolio based on actual market price moves. If the Margin Proxy’s backtesting results do not meet FICC’s 99 percent confidence level, FICC states that it would consider adjustments to the Margin Proxy, including increasing the look-back period and/or applying a historical stressed period to the Margin Proxy calibration, as appropriate.19 C. Proposed Modification to the Coverage Charge When the Margin Proxy Is Applied FICC also proposes to modify the calculation of the Coverage Charge when the Margin Proxy is applied as the VaR Charge. Specifically, FICC would 15 Notice, 82 FR at 10119. 16 Id. 17 Id. 18 See definition of VaR Charge in GSD Rule 1, Definitions, supra note 5. 19 Notice, 82 FR at 10119. E:\FR\FM\05APN1.SGM 05APN1 16640 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices reduce the Coverage Charge by the amount that the Margin Proxy exceeds the sum of the Current Volatility Calculation and Coverage Charge, but not by an amount greater than the total Coverage Charge. FICC states that its backtesting analysis demonstrates that the Margin Proxy, on its own, achieves the 99 percent confidence level without the inclusion of the Coverage Charge.20 FICC would not modify the Coverage Charge if the Margin Proxy is not applied as the VaR Charge. D. Technical Corrections FICC also proposes technical corrections to the GSD Rules. Specifically, FICC proposes to: (1) Capitalize certain words in the definition of VaR Charge in Rule 1 in order to reflect existing defined terms; (2) add ‘‘Netting’’ before ‘‘Member’’ in the definition of VaR Charge to reflect the application of the VaR Charge on Netting Members; and (3) correct typographical errors in Section 1b(a) of Rule 4. III. Summary of Comments Received jstallworth on DSK7TPTVN1PROD with NOTICES The Commission received three comment letters in response to the proposal. Two comment letters—the Ronin Letter and the ICBCFS Letter— raise concerns with respect to the proposal’s design and transparency,21 while the Ronin Letter also criticizes the proposal for a potential anti-competitive impact.22 Additionally, both the Ronin Letter and ICBCFS Letter raise a concern that falls outside the scope of the Commission’s review of the Proposed Rule Change.23 The third comment letter is FICC’s response to those concerns. The Commission has reviewed and taken into consideration each of the comments received and addresses the comments below insofar 20 Id. at 10119. Future adjustments to the Margin Proxy could require the filing of a new proposed rule change. 21 See Ronin Letter at 1–10; ICBCFS Letter at 1– 3. 22 See Ronin Letter at 2, 9. 23 See Ronin Letter at 3; ICBCFS Letter at 1–2. Specifically, Ronin and ICBCFS disapprove of FICC’s request for an accelerated regulatory review process. FICC responds that it sought accelerated review to rectify deficiencies with its margin calculations as quickly as possible to avoid exposing its Netting Members to the risk that a defaulting Netting Member will not be sufficiently covered by margin. The Commission notes that neither Ronin nor ICBCFS suggest how this concern relates to the Proposed Rule Change’s consistency with the Act—the standard by which the Commission must evaluate a proposed rule change. See 15 U.S.C. 78s(b)(2)(C). The Commission also notes, as a matter of fact, that neither the Proposed Rule Change nor the related Advance Notice were approved on an accelerated basis. VerDate Sep<11>2014 15:11 Apr 04, 2017 Jkt 241001 as they relate to the standard of review for a proposed rule change. A. Comments Regarding the Proposal’s Design Ronin questions the justification for imposing the Margin Proxy, particularly: (i) The need for the VaR Charge to address idiosyncratic risk (referencing the 2016 U.S. presidential election), and (ii) if the volatility around the 2016 U.S. presidential election was sufficiently extreme to warrant the creation of the Margin Proxy.24 In response, FICC reiterates that the Margin Proxy’s primary goal is to achieve a 99 percent backtesting confidence level for all members.25 FICC observes that, while recent dates from the fourth quarter of 2016 (including the 2016 U.S. Presidential election) indicate that the VaR Charge, on its own, is not always sufficient to ensure that the 99 percent coverage threshold is met,26 inclusion of the Margin Proxy results in a backtesting confidence level above 99 percent for the past four years, demonstrating that the Margin Proxy accomplishes its primary goal.27 ICBCFS disagrees with certain technical aspects of the proposal. In particular, it: (i) Questions the inclusion of ten years of pricing data in the proposed Margin Proxy calculation, including the 2007–2009 period; (ii) disagrees with the Margin Proxy’s netting of both sides of a repurchase transaction; and (iii) raises concerns on how the proposed Margin Proxy groups securities in a Netting Member’s Margin Portfolio in a way that could increase its margin.28 In response to the questions regarding the inclusion of ten years of pricing data, FICC states that using the proposed look-back period would help to ensure that the Margin Proxy, and as a result, the VaR Charge, does not either (i) decrease as quickly during intervals of low volatility, or (ii) increase as sharply in crisis periods, resulting in more stable VaR estimates that adequately reflect extreme market moves.29 With respect to ICBCFS’s concerns with offsetting positions in transaction, FICC notes that the Margin Proxy uses a similar approach for offsetting positions as in the Current Volatility Calculation.30 In response to ICBCFS’ concerns about increased Letter at 1, 6. FICC Letter at 4. 26 See id. at 2. 27 Id. at 4. 28 ICBCFS Letter at 2. 29 FICC Letter at 4. 30 Id. margin due to the Margin Proxy’s benchmarking, FICC responds that the circumstance that ICBCFS cited would not result in a higher margin, as the Margin Proxy would benchmark securities within the same asset class and maturity (and long and short positions within such benchmarks would be offset).31 B. Comments Regarding the Proposal’s Transparency Ronin and ICBCFS argue that the proposal is not sufficiently transparent because it does not include sufficient information for them to determine the proposal’s impact on their margin calculations.32 In response, FICC states that it (i) provided all GSD Netting Members with a two-month impact study reflecting the impact of the Margin Proxy on the VaR Charge and Coverage Charge (before and after the U.S. presidential election), and (ii) responded to individual Netting Member requests for additional data and information.33 FICC also notes that it will continue to engage in ongoing dialogue with Netting Members in order to help Netting Members gauge the individual impact of the proposed margin methodology changes.34 C. Comments Regarding the Proposal’s Burden on Competition Finally, Ronin argues that the proposal imposes a burden on competition because it may cause Ronin to pay more margin. Ronin notes that the Margin Proxy creates an ‘‘unfair competitive burden’’ among Netting Members with different access to capital.35 In response, FICC posits that, given the Netting Members’ different costs of capital, the Margin Proxy’s potential increase of additional margin could be anti-competitive.36 However, FICC does not believe that the Margin Proxy would impose a significant burden on competition. Specifically, FICC notes that any increase in a Netting Member’s Required Fund Deposit would (i) be in direct relation to that Netting Member’s portfolio market risk, and (ii) be calculated with the same parameters and confidence level for all Netting Members.37 Further, FICC states that any increase in a Netting Member’s Required Fund Deposit because of the Margin Proxy would be ‘‘necessary to assure the safeguarding of the securities and funds that are in FICC’s possession 24 Ronin 31 Id. 25 See 32 See PO 00000 Frm 00071 Fmt 4703 Ronin Letter at 3; ICBCFS Letter at 1–3. Letter at 2–3. 34 Id. at 3–4. 35 Ronin Letter at 2. 36 Id. at 9. 37 FICC Letter at 5. 33 FICC Sfmt 4703 E:\FR\FM\05APN1.SGM 05APN1 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices and cover FICC’s risk exposure to its [Netting] Members.’’ 38 jstallworth on DSK7TPTVN1PROD with NOTICES IV. Discussion and Commission Findings Section 19(b)(2)(C) of the Act 39 directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. The Commission finds that the Proposed Rule Change described above is consistent with the Act, in particular Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,40 and Rules 17Ad–22(b)(1),41 (b)(2),42 and (d)(1) 43 under the Act. Section 17A(b)(3)(F) of the Act requires that the rules of the clearing agency must be designed to, among other things, assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.44 As described above, the proposal would enhance the risk-based model and parameters that establish daily margin requirements for Netting Members by enabling FICC to better identify the risk posed by a Netting Member’s unsettled portfolio and to increase FICC’s collection of margin when the Margin Proxy calculation exceeds the Current Volatility Calculation. As such, the proposal would help ensure that the Required Fund Deposit that FICC collects from Netting Members is sufficient to mitigate FICC’s credit exposure to potential losses arising from the default of a Netting Member. Therefore, the Commission believes that the proposed rule changes associated with the Margin Proxy and Coverage Charge would help safeguard securities and funds that are in the custody or control of FICC, consistent with Section 17A(b)(3)(F) of the Act. Section 17A(b)(3)(F) of the Act also requires that the rules of a registered clearing agency promote the prompt and accurate clearance and settlement of securities transactions.45 As described above, the proposal includes technical corrections to address typographical errors and capitalize terms so that existing defined terms are accurately referenced and used in the applicable rule provisions. As such, the proposal would help ensure that the GSD Rules 38 Id. at 5. U.S.C. 78s(b)(2)(C). 40 15 U.S.C. 78q–1(b)(3)(F). 41 17 CFR 240.17Ad–22(b)(1). 42 17 CFR 240.17Ad–22(b)(2). 43 17 CFR 240.17Ad–22(d)(1). 44 15 U.S.C. 78q–1(b)(3)(F). 45 15 U.S.C. 78q–1(b)(3)(F). 39 15 VerDate Sep<11>2014 15:11 Apr 04, 2017 remain accurate and clear, which would help to avoid potential interpretation differences and possible disputes between FICC and its Netting Members. Thus, Commission believes that the proposed rule changes associated with the technical corrections would promote the prompt and accurate clearance and settlement of securities transactions, consistent with Section 17A(b)(3)(F) of the Act. Section 17A(b)(3)(I) of the Act requires that the rules of a registered clearing agency do not impose any burden on competition not necessary or appropriate in furtherance of the Act.46 As stated above, the Proposed Rule Change could increase the amount of margin that FICC collects in certain circumstances, which would help ensure that the Required Fund Deposit that FICC collects from Netting Members is sufficient to mitigate the credit risk presented by the Netting Members. While Ronin argues that such an increase in its margin may be anticompetitive (because Netting Members have different costs of capital),47 the Commission believes that the potential increase in a Netting Member’s Required Fund Deposit as a result of this proposal would be necessary and appropriate in furtherance of the Act because it would be (i) commensurate with that Netting Member’s risk profile, (ii) calculated using the same parameters for all Netting Members, and (iii) designed to ensure that FICC has sufficient margin to limit its exposure to potential losses resulting from the default of a Netting Member. Thus, Commission believes that the proposed rule change would not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act, consistent with Section 17A(b)(3)(I) of the Act. Rule 17Ad–22(b)(1) under the Act requires a registered clearing agency that performs central counterparty services 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 cannot anticipate or control.48 The proposed Margin Proxy would be used daily to help measure FICC’s credit exposure to Netting U.S.C. 78q–1(b)(3)(I). Letter at 9. 48 17 CFR 240.17Ad–22(b)(1). Members. While ICBCFS raises concerns about including the 2007–2009 period, as noted above, the Commission agrees that this look back period should help FICC better monitor the credit exposures presented by its Netting Members by including volatile periods. It should also enhance FICC’s overall risk-based margining framework by helping to ensure that the calculation of each GSD Netting Member’s Required Fund Deposit would be sufficient to allow FICC to use the defaulting member’s own Required Fund Deposit to limit its exposures to potential losses associated with the liquidation of such member’s portfolio in the event of a GSD Netting Member default under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad– 22(b)(1).49 Rule 17Ad–22(b)(2) under the Act requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use riskbased models and parameters to set margin requirements and review such margin requirements and the related risk-based models and parameters at least monthly.50 The proposed changes would enhance the risk-based model and parameters that establish daily margin requirements for Netting Members by enabling FICC to better identify the risk posed by a Netting Member’s unsettled portfolio and to quickly adjust and collect additional deposits as needed to cover those risks. Because the proposed changes are designed to calculate each Netting Member’s Required Fund Deposit at a 99 percent confidence level, the proposal also should help mitigate losses to FICC and its members, in the event that such Netting Member defaults under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad–22(b)(2).51 Rule 17Ad–22(d)(1) under the Act requires a registered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to, among other things, provide for a well-founded, transparent, and enforceable legal framework for each aspect of its 46 15 49 Id. 47 Ronin Jkt 241001 50 17 PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 16641 CFR 240.17Ad–22(b)(2). 51 Id. E:\FR\FM\05APN1.SGM 05APN1 16642 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices activities in all relevant jurisdictions.52 While Ronin and ICBCFS argue that the proposal is not sufficiently transparent because it does not include sufficient information for them to determine the proposal’s impact on their margin calculations,53 the Commission understands that FICC has provided Netting Members with information to allow them to understand the impact of the Margin Proxy on their VaR Charge and Coverage Charge, and that FICC responded to individual Netting Member requests for additional data and information.54 Moreover, the Commission understands that FICC will continue to engage in ongoing dialogue with Netting Members in order to help Netting Members gauge the individual impact of the proposed margin methodology changes.55 Therefore, the Commission believes that the proposal is reasonably designed to provide for a well-founded, transparent, and enforceable legal framework, consistent with Rule 17Ad–22(d)(1).56 V. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,57 that proposed rule change SR–FICC–2017– 001 be, and it hereby is, approved as of the date of this order or the date of a notice by the Commission authorizing FICC to implement FICC’s advance notice proposal SR–FICC–2017–801 that is consistent with this proposed rule change, whichever is later.58 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.59 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017–06685 Filed 4–4–17; 8:45 am] BILLING CODE 8011–01–P 52 17 CFR 240.17Ad–22(d)(1). Ronin Letter at 3; ICBCFS Letter at 1–3. 54 See FICC Letter at 2–3. 55 See id. at 3–4. 56 17 CFR 240.17Ad–22(d)(1). 57 15 U.S.C. 78s(b)(2). 58 In approving this proposed rule change, the Commission has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 59 17 CFR 200.30–3(a)(12). jstallworth on DSK7TPTVN1PROD with NOTICES 53 See VerDate Sep<11>2014 15:11 Apr 04, 2017 Jkt 241001 SECURITIES AND EXCHANGE COMMISSION [Investment Company Act Release No. 32584; File No. 812–14636] Angel Oak Funds Trust and Angel Oak Capital Advisors, LLC March 30, 2017. Securities and Exchange Commission (‘‘Commission’’). ACTION: Notice. AGENCY: Notice of an application for an order pursuant to: (a) Section 6(c) of the Investment Company Act of 1940 (‘‘Act’’) granting an exemption from sections 18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of the Act; (c) sections 6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Act; and (d) section 17(d) of the Act and rule 17d–1 under the Act to permit certain joint arrangements and transactions. Applicants request an order that would permit certain registered open-end management investment companies to participate in a joint lending and borrowing facility. APPLICANTS: Angel Oak Funds Trust, a Delaware statutory trust registered under the Act as an open-end management series investment company, and Angel Oak Capital Advisors, LLC (the ‘‘Adviser’’), a Delaware limited liability company registered as an investment adviser under the Investment Advisers Act of 1940. FILING DATES: The application was filed on April 1, 2016, and amended on September 30, 2016 and February 6, 2017. HEARING OR NOTIFICATION OF HEARING: An order granting the requested relief will 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 24, 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. PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 Secretary, U.S. Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090; Applicants: Dory S. Black, Esq., President, c/o Angel Oak Capital Advisors, LLC, One Buckhead Plaza, 3060 Peachtree Rd. NW., Suite 500, Atlanta, Georgia 30305. FOR FURTHER INFORMATION CONTACT: Steven I. Amchan, Senior Counsel, at (202) 551–6826 or David J. Marcinkus, 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 an applicant using the Company name box, at https:// www.sec.gov/search/search.htm or by calling (202) 551–8090. SUMMARY OF THE APPLICATION: 1. Applicants request an order that would permit the applicants to participate in an interfund lending facility where each Fund could lend money directly to and borrow money directly from other Funds to cover unanticipated cash shortfalls, such as unanticipated redemptions or trade fails.1 The Funds will not borrow under the facility for leverage purposes and the loans’ duration will be no more than 7 days.2 2. Applicants anticipate that the proposed facility would provide a borrowing Fund with a source of liquidity at a rate lower than the bank borrowing rate at times when the cash position of the Fund is insufficient to meet temporary cash requirements. In addition, Funds making short-term cash loans directly to other Funds would earn interest at a rate higher than they otherwise could obtain from investing their cash in repurchase agreements or certain other short term money market instruments. Thus, applicants assert that the facility would benefit both borrowing and lending Funds. 3. Applicants agree that any order granting the requested relief will be ADDRESSES: 1 Applicants request that the order apply to the applicants and to any existing or future registered open-end management investment company or series thereof for which the Adviser or any successor thereto or an investment adviser controlling, controlled by, or under common control with the Adviser or any successor thereto serves as investment adviser (each a ‘‘Fund’’ and collectively the ‘‘Funds’’ and each such investment adviser an ‘‘Adviser’’). For purposes of the requested order, ‘‘successor’’ is limited to any entity that results from a reorganization into another jurisdiction or a change in the type of a business organization. 2 Any Fund, however, will be able to call a loan on one business day’s notice. E:\FR\FM\05APN1.SGM 05APN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 64 (Wednesday, April 5, 2017)]
[Notices]
[Pages 16638-16642]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-06685]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80349; File No. SR-FICC-2017-001]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To (1) Implement the Margin 
Proxy, (2) Modify the Calculation of the Coverage Charge in 
Circumstances Where the Margin Proxy Applies, and (3) Make Certain 
Technical Corrections

March 30, 2017.

I. Introduction

    Fixed Income Clearing Corporation (``FICC'') filed with the 
Securities and Exchange Commission (``Commission'') on February 2, 2017 
the proposed rule change SR-FICC-2017-001 (``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change 
was published for comment in the Federal Register on February 9, 
2017.\3\ The Commission received three comment letters \4\ to the 
Proposed Rule Change, including a response letter from FICC.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. FICC also filed this proposal as an 
advance notice pursuant to Section 802(e)(1) of the Payment, 
Clearing, and Settlement Supervision Act of 2010 and Rule 19b-
4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1). The advance notice was published for comment in the Federal 
Register on March 2, 2017. See Securities Exchange Act Release No. 
80139 (March 2, 2017), 82 FR 80139 (March 8, 2017) (SR-FICC-2017-
801) (``Advance Notice''). The Commission did not receive any 
comments on the Advance Notice.
    \3\ Securities Exchange Act Release No. 79958 (February 3, 
2017), 82 FR 10117 (February 9, 2017) (SR-FICC-2017-
001)(``Notice'').
    \4\ See letter from Robert E. Pooler, Chief Financial Officer, 
Ronin Capital LLC (``Ronin''), dated February 24, 2017, to Eduardo 
A. Aleman, Assistant Secretary, Commission (``Ronin Letter''); 
letter from Alan Levy, Managing Director, Industrial and Commercial 
Bank of China Financial Services LLC (``ICBCFS''), dated February 
24, 2017, to Commission (``ICBCFS Letter''); and Timothy J. Cuddihy, 
Managing Director, FICC, dated March 8, 2017, to Eduardo A. Aleman, 
Assistant Secretary, Commission (``FICC Letter'') available at 
https://www.sec.gov/comments/sr-ficc-2017-001/ficc2017001.htm.
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The Proposed Rule Change proposes several amendments to the FICC 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') \5\ 
designed to provide FICC with a supplemental means to calculate the VaR 
Charge component of its GSD Netting Members' (``Netting Members'') 
daily margin requirement, known as the ``Required Fund Deposit.'' 
Specifically, under the proposal, FICC would include a minimum 
volatility calculation for a Netting Member's VaR Charge called the 
``Margin Proxy.'' FICC represents that the Margin Proxy would enhance 
the risk-based model and parameters that FICC uses to establish Netting 
Members' Required Fund Deposits by enabling FICC to better identify the 
risk posed by a Netting Member's unsettled portfolio.
---------------------------------------------------------------------------

    \5\ Available at https://www.dtcc.com/en/legal/rules-and-procedures.
---------------------------------------------------------------------------

A. Overview of the Required Fund Deposit

    According to FICC, a key tool it uses to manage market risk is the 
daily calculation and collection of Required Fund Deposits from its 
Netting Members. The Required Fund Deposit is intended to mitigate 
potential losses to FICC associated with liquidation of such Netting 
Member's accounts at GSD that are used for margining purposes (``Margin 
Portfolio'') in the event that FICC ceases to act for such Netting 
Member (referred to as a Netting Member ``Default'').
    A Netting Member's Required Fund Deposit consists of several 
components, including the VaR Charge and the Coverage Charge. The VaR 
Charge comprises the largest portion of a Netting Member's Required 
Fund

[[Page 16639]]

Deposit amount and is calculated using a risk-based margin methodology 
model that is intended to cover the market price risk associated with 
the securities in a Netting Member's Margin Portfolio. That risk-based 
margin methodology model, which FICC refers to as the ``Current 
Volatility Calculation,'' uses historical market moves to project the 
potential gains or losses that could occur in connection with the 
liquidation of a defaulting Netting Member's Margin Portfolio.
    The Coverage Charge is calculated based on the Netting Member's 
daily backtesting results conducted by FICC. Backtesting is used to 
determine the adequacy of each Netting Member's Required Fund Deposit 
and involves comparing the Required Fund Deposit for each Netting 
Member with actual price changes in the Netting Member's Margin 
Portfolio. The Coverage Charge is incorporated in the Required Fund 
Deposit for each Netting Member, and is equal to the amount necessary 
to increase that Netting Member's Required Fund Deposit so that the 
Netting Member's backtesting coverage may achieve the 99 percent 
confidence level required by FICC (i.e., two or fewer backtesting 
deficiency days in a rolling twelve-month period).

B. Proposed Change to the Existing VaR Charge Calculation

    Under the proposal, FICC would create the Margin Proxy, a new, 
benchmarked volatility calculation of the VaR Charge. The Margin Proxy 
would act as an alternative to the Current Volatility Calculation of 
the VaR Charge to provide a minimum volatility calculation for each 
Netting Member's VaR Charge. FICC proposes to use the Margin Proxy as 
the VaR Charge if doing so would result in a higher Required Fund 
Deposit for a Netting Member than using the Current Volatility 
Calculation as the VaR Charge. In addition, as described in more detail 
below, because FICC's testing shows that the Margin Proxy would, by 
itself, achieve a 99 percent confidence level for Netting Members' 
backtesting coverage when used in lieu of the Current Volatility 
Charge, in the event that FICC uses the Margin Proxy as the VaR Charge 
for a Netting Member, it would reduce the Coverage Charge for that 
Netting Member by a commensurate amount, as long as the Coverage Charge 
does not go below zero.
    According to FICC, during the fourth quarter of 2016, its Current 
Volatility Calculation did not respond effectively to the level of 
market volatility at that time, and its VaR Charge amounts (calculated 
using the profit and loss scenarios generated by the Current Volatility 
Calculation) did not achieve backtesting coverage at a 99 percent 
confidence level,\6\ which resulted in backtesting deficiencies for the 
Required Fund Deposit beyond FICC's risk tolerance.\7\ FICC's 
calculation of the Margin Proxy is designed to avoid such deficiencies. 
The Margin Proxy provides FICC with an alternative calculation of the 
VaR Charge to the Current Volatility Calculation of the VaR Charge. In 
particular, the Margin Proxy is likely to be used when the Current 
Volatility Calculation is lower than volatility from certain benchmarks 
(i.e., market price volatility from corresponding U.S. Treasury and to-
be-announced (``TBA'') \8\ securities benchmarks.\9\ The Margin Proxy 
separately calculates U.S. Treasury securities and agency pass-through 
mortgage backed securities (``MBS''). According to FICC, the historical 
price changes of these two asset classes are different due to market 
factors such as credit spreads and prepayment risk.\10\ This would 
allow FICC to monitor the performance of each of those asset classes 
individually.\11\ By using separate calculations for the two asset 
classes, the Margin Proxy would cover the historical market prices of 
each of those asset classes, on a standalone basis, to a 99 percent 
confidence level.
---------------------------------------------------------------------------

    \6\ Notice, 82 FR at 10118.
    \7\ Id.
    \8\ FICC states that specified pool trades are mapped to the 
corresponding positions in TBA securities for determining the VaR 
Charge.
    \9\ Notice, 82 FR at 10118.
    \10\ Id.
    \11\ Id.
---------------------------------------------------------------------------

    The Margin Proxy would be calculated per Netting Member, and each 
security in a Netting Member's Margin Portfolio would be mapped to a 
respective benchmark based on the security's asset class and 
maturity.\12\ All securities within each benchmark would be aggregated 
into a net exposure.\13\ Once the net exposure is determined, FICC 
would apply an applicable haircut \14\ to each benchmark's net exposure 
to determine the net price risk for each benchmark (``Net Price 
Risk''). Finally, FICC would separately determine the asset class price 
risk (``Asset Class Price Risk'') for U.S. Treasury and MBS benchmarks 
by aggregating the respective Net Price Risk for each benchmark. To 
provide risk diversification across tenor buckets for the U.S. Treasury 
benchmarks, the Asset Class Price Risk calculation includes a 
correlation adjustment that has been historically observed across the 
U.S. Treasury benchmarks. According to FICC, the Margin Proxy would 
thereby represent the sum of the U.S. Treasury and MBS Asset Class 
Price Risk.\15\ FICC would compare the Margin Proxy to the Current 
Volatility Calculation for each asset class and then apply whichever is 
greater as the VaR Charge for each Netting Member's Margin Portfolio.
---------------------------------------------------------------------------

    \12\ According to FICC, U.S. Treasury and agency securities 
would be mapped to a U.S. Treasury benchmark security/index, while 
MBS would be mapped to a TBA security/index.
    \13\ Net exposure is the aggregate market value of securities to 
be purchased by the Netting Member minus the aggregate market value 
of securities to be sold by the Netting Member.
    \14\ The haircut is calculated using historical market price 
changes of the respective benchmark to cover the expected market 
price volatility at 99 percent confidence level.
    \15\ Notice, 82 FR at 10119.
---------------------------------------------------------------------------

    FICC expresses confidence that this proposal would provide the 
adequate VaR Charge for each Netting Member because its calculations 
show that including the Margin Proxy results in backtesting coverage 
above the 99 percent confidence level for the past four years.\16\ 
Additionally, FICC asserts that, by using industry-standard benchmarks 
that can be observed by Netting Members, the Margin Proxy would be 
transparent to Netting Members.\17\
---------------------------------------------------------------------------

    \16\ Id.
    \17\ Id.
---------------------------------------------------------------------------

    FICC further asserts that the Margin Proxy methodology would be 
subject to performance reviews by FICC. Specifically, FICC would 
monitor each Netting Member's Required Fund Deposit and the aggregate 
FICC GSD clearing fund (``Clearing Fund'') requirements and compare 
them to the requirements calculated by the Margin Proxy. Consistent 
with the current GSD Rules,\18\ FICC would review the robustness of the 
Margin Proxy by comparing the results versus the three-day profit and 
loss of each Netting Member's Margin Portfolio based on actual market 
price moves. If the Margin Proxy's backtesting results do not meet 
FICC's 99 percent confidence level, FICC states that it would consider 
adjustments to the Margin Proxy, including increasing the look-back 
period and/or applying a historical stressed period to the Margin Proxy 
calibration, as appropriate.\19\
---------------------------------------------------------------------------

    \18\ See definition of VaR Charge in GSD Rule 1, Definitions, 
supra note 5.
    \19\ Notice, 82 FR at 10119.
---------------------------------------------------------------------------

C. Proposed Modification to the Coverage Charge When the Margin Proxy 
Is Applied

    FICC also proposes to modify the calculation of the Coverage Charge 
when the Margin Proxy is applied as the VaR Charge. Specifically, FICC 
would

[[Page 16640]]

reduce the Coverage Charge by the amount that the Margin Proxy exceeds 
the sum of the Current Volatility Calculation and Coverage Charge, but 
not by an amount greater than the total Coverage Charge. FICC states 
that its backtesting analysis demonstrates that the Margin Proxy, on 
its own, achieves the 99 percent confidence level without the inclusion 
of the Coverage Charge.\20\ FICC would not modify the Coverage Charge 
if the Margin Proxy is not applied as the VaR Charge.
---------------------------------------------------------------------------

    \20\ Id. at 10119. Future adjustments to the Margin Proxy could 
require the filing of a new proposed rule change.
---------------------------------------------------------------------------

D. Technical Corrections

    FICC also proposes technical corrections to the GSD Rules. 
Specifically, FICC proposes to: (1) Capitalize certain words in the 
definition of VaR Charge in Rule 1 in order to reflect existing defined 
terms; (2) add ``Netting'' before ``Member'' in the definition of VaR 
Charge to reflect the application of the VaR Charge on Netting Members; 
and (3) correct typographical errors in Section 1b(a) of Rule 4.

III. Summary of Comments Received

    The Commission received three comment letters in response to the 
proposal. Two comment letters--the Ronin Letter and the ICBCFS Letter--
raise concerns with respect to the proposal's design and 
transparency,\21\ while the Ronin Letter also criticizes the proposal 
for a potential anti-competitive impact.\22\ Additionally, both the 
Ronin Letter and ICBCFS Letter raise a concern that falls outside the 
scope of the Commission's review of the Proposed Rule Change.\23\ The 
third comment letter is FICC's response to those concerns. The 
Commission has reviewed and taken into consideration each of the 
comments received and addresses the comments below insofar as they 
relate to the standard of review for a proposed rule change.
---------------------------------------------------------------------------

    \21\ See Ronin Letter at 1-10; ICBCFS Letter at 1-3.
    \22\ See Ronin Letter at 2, 9.
    \23\ See Ronin Letter at 3; ICBCFS Letter at 1-2. Specifically, 
Ronin and ICBCFS disapprove of FICC's request for an accelerated 
regulatory review process. FICC responds that it sought accelerated 
review to rectify deficiencies with its margin calculations as 
quickly as possible to avoid exposing its Netting Members to the 
risk that a defaulting Netting Member will not be sufficiently 
covered by margin. The Commission notes that neither Ronin nor 
ICBCFS suggest how this concern relates to the Proposed Rule 
Change's consistency with the Act--the standard by which the 
Commission must evaluate a proposed rule change. See 15 U.S.C. 
78s(b)(2)(C). The Commission also notes, as a matter of fact, that 
neither the Proposed Rule Change nor the related Advance Notice were 
approved on an accelerated basis.
---------------------------------------------------------------------------

A. Comments Regarding the Proposal's Design

    Ronin questions the justification for imposing the Margin Proxy, 
particularly: (i) The need for the VaR Charge to address idiosyncratic 
risk (referencing the 2016 U.S. presidential election), and (ii) if the 
volatility around the 2016 U.S. presidential election was sufficiently 
extreme to warrant the creation of the Margin Proxy.\24\ In response, 
FICC reiterates that the Margin Proxy's primary goal is to achieve a 99 
percent backtesting confidence level for all members.\25\ FICC observes 
that, while recent dates from the fourth quarter of 2016 (including the 
2016 U.S. Presidential election) indicate that the VaR Charge, on its 
own, is not always sufficient to ensure that the 99 percent coverage 
threshold is met,\26\ inclusion of the Margin Proxy results in a 
backtesting confidence level above 99 percent for the past four years, 
demonstrating that the Margin Proxy accomplishes its primary goal.\27\
---------------------------------------------------------------------------

    \24\ Ronin Letter at 1, 6.
    \25\ See FICC Letter at 4.
    \26\ See id. at 2.
    \27\ Id. at 4.
---------------------------------------------------------------------------

    ICBCFS disagrees with certain technical aspects of the proposal. In 
particular, it: (i) Questions the inclusion of ten years of pricing 
data in the proposed Margin Proxy calculation, including the 2007-2009 
period; (ii) disagrees with the Margin Proxy's netting of both sides of 
a repurchase transaction; and (iii) raises concerns on how the proposed 
Margin Proxy groups securities in a Netting Member's Margin Portfolio 
in a way that could increase its margin.\28\
---------------------------------------------------------------------------

    \28\ ICBCFS Letter at 2.
---------------------------------------------------------------------------

    In response to the questions regarding the inclusion of ten years 
of pricing data, FICC states that using the proposed look-back period 
would help to ensure that the Margin Proxy, and as a result, the VaR 
Charge, does not either (i) decrease as quickly during intervals of low 
volatility, or (ii) increase as sharply in crisis periods, resulting in 
more stable VaR estimates that adequately reflect extreme market 
moves.\29\ With respect to ICBCFS's concerns with offsetting positions 
in transaction, FICC notes that the Margin Proxy uses a similar 
approach for offsetting positions as in the Current Volatility 
Calculation.\30\ In response to ICBCFS' concerns about increased margin 
due to the Margin Proxy's benchmarking, FICC responds that the 
circumstance that ICBCFS cited would not result in a higher margin, as 
the Margin Proxy would benchmark securities within the same asset class 
and maturity (and long and short positions within such benchmarks would 
be offset).\31\
---------------------------------------------------------------------------

    \29\ FICC Letter at 4.
    \30\ Id.
    \31\ Id.
---------------------------------------------------------------------------

B. Comments Regarding the Proposal's Transparency

    Ronin and ICBCFS argue that the proposal is not sufficiently 
transparent because it does not include sufficient information for them 
to determine the proposal's impact on their margin calculations.\32\ In 
response, FICC states that it (i) provided all GSD Netting Members with 
a two-month impact study reflecting the impact of the Margin Proxy on 
the VaR Charge and Coverage Charge (before and after the U.S. 
presidential election), and (ii) responded to individual Netting Member 
requests for additional data and information.\33\ FICC also notes that 
it will continue to engage in ongoing dialogue with Netting Members in 
order to help Netting Members gauge the individual impact of the 
proposed margin methodology changes.\34\
---------------------------------------------------------------------------

    \32\ See Ronin Letter at 3; ICBCFS Letter at 1-3.
    \33\ FICC Letter at 2-3.
    \34\ Id. at 3-4.
---------------------------------------------------------------------------

C. Comments Regarding the Proposal's Burden on Competition

    Finally, Ronin argues that the proposal imposes a burden on 
competition because it may cause Ronin to pay more margin. Ronin notes 
that the Margin Proxy creates an ``unfair competitive burden'' among 
Netting Members with different access to capital.\35\ In response, FICC 
posits that, given the Netting Members' different costs of capital, the 
Margin Proxy's potential increase of additional margin could be anti-
competitive.\36\ However, FICC does not believe that the Margin Proxy 
would impose a significant burden on competition. Specifically, FICC 
notes that any increase in a Netting Member's Required Fund Deposit 
would (i) be in direct relation to that Netting Member's portfolio 
market risk, and (ii) be calculated with the same parameters and 
confidence level for all Netting Members.\37\ Further, FICC states that 
any increase in a Netting Member's Required Fund Deposit because of the 
Margin Proxy would be ``necessary to assure the safeguarding of the 
securities and funds that are in FICC's possession

[[Page 16641]]

and cover FICC's risk exposure to its [Netting] Members.'' \38\
---------------------------------------------------------------------------

    \35\ Ronin Letter at 2.
    \36\ Id. at 9.
    \37\ FICC Letter at 5.
    \38\ Id. at 5.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \39\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    The Commission finds that the Proposed Rule Change described above 
is consistent with the Act, in particular Sections 17A(b)(3)(F) and 
(b)(3)(I) of the Act,\40\ and Rules 17Ad-22(b)(1),\41\ (b)(2),\42\ and 
(d)(1) \43\ under the Act.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ 17 CFR 240.17Ad-22(b)(1).
    \42\ 17 CFR 240.17Ad-22(b)(2).
    \43\ 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the rules of the 
clearing agency must be designed to, among other things, assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\44\ As 
described above, the proposal would enhance the risk-based model and 
parameters that establish daily margin requirements for Netting Members 
by enabling FICC to better identify the risk posed by a Netting 
Member's unsettled portfolio and to increase FICC's collection of 
margin when the Margin Proxy calculation exceeds the Current Volatility 
Calculation. As such, the proposal would help ensure that the Required 
Fund Deposit that FICC collects from Netting Members is sufficient to 
mitigate FICC's credit exposure to potential losses arising from the 
default of a Netting Member. Therefore, the Commission believes that 
the proposed rule changes associated with the Margin Proxy and Coverage 
Charge would help safeguard securities and funds that are in the 
custody or control of FICC, consistent with Section 17A(b)(3)(F) of the 
Act.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act also requires that the rules of a 
registered clearing agency promote the prompt and accurate clearance 
and settlement of securities transactions.\45\ As described above, the 
proposal includes technical corrections to address typographical errors 
and capitalize terms so that existing defined terms are accurately 
referenced and used in the applicable rule provisions. As such, the 
proposal would help ensure that the GSD Rules remain accurate and 
clear, which would help to avoid potential interpretation differences 
and possible disputes between FICC and its Netting Members. Thus, 
Commission believes that the proposed rule changes associated with the 
technical corrections would promote the prompt and accurate clearance 
and settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
registered clearing agency do not impose any burden on competition not 
necessary or appropriate in furtherance of the Act.\46\ As stated 
above, the Proposed Rule Change could increase the amount of margin 
that FICC collects in certain circumstances, which would help ensure 
that the Required Fund Deposit that FICC collects from Netting Members 
is sufficient to mitigate the credit risk presented by the Netting 
Members. While Ronin argues that such an increase in its margin may be 
anticompetitive (because Netting Members have different costs of 
capital),\47\ the Commission believes that the potential increase in a 
Netting Member's Required Fund Deposit as a result of this proposal 
would be necessary and appropriate in furtherance of the Act because it 
would be (i) commensurate with that Netting Member's risk profile, (ii) 
calculated using the same parameters for all Netting Members, and (iii) 
designed to ensure that FICC has sufficient margin to limit its 
exposure to potential losses resulting from the default of a Netting 
Member. Thus, Commission believes that the proposed rule change would 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, consistent with Section 
17A(b)(3)(I) of the Act.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(I).
    \47\ Ronin Letter at 9.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(1) under the Act requires a registered clearing 
agency that performs central counterparty services 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 cannot 
anticipate or control.\48\ The proposed Margin Proxy would be used 
daily to help measure FICC's credit exposure to Netting Members. While 
ICBCFS raises concerns about including the 2007-2009 period, as noted 
above, the Commission agrees that this look back period should help 
FICC better monitor the credit exposures presented by its Netting 
Members by including volatile periods. It should also enhance FICC's 
overall risk-based margining framework by helping to ensure that the 
calculation of each GSD Netting Member's Required Fund Deposit would be 
sufficient to allow FICC to use the defaulting member's own Required 
Fund Deposit to limit its exposures to potential losses associated with 
the liquidation of such member's portfolio in the event of a GSD 
Netting Member default under normal market conditions. Therefore, the 
Commission believes that the proposal is consistent with the 
requirements of Rule 17Ad-22(b)(1).\49\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(b)(1).
    \49\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) under the Act requires a registered clearing 
agency that performs central counterparty services to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements and review such 
margin requirements and the related risk-based models and parameters at 
least monthly.\50\ The proposed changes would enhance the risk-based 
model and parameters that establish daily margin requirements for 
Netting Members by enabling FICC to better identify the risk posed by a 
Netting Member's unsettled portfolio and to quickly adjust and collect 
additional deposits as needed to cover those risks. Because the 
proposed changes are designed to calculate each Netting Member's 
Required Fund Deposit at a 99 percent confidence level, the proposal 
also should help mitigate losses to FICC and its members, in the event 
that such Netting Member defaults under normal market conditions. 
Therefore, the Commission believes that the proposal is consistent with 
the requirements of Rule 17Ad-22(b)(2).\51\
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17Ad-22(b)(2).
    \51\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(d)(1) under the Act requires a registered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, among other things, provide for 
a well-founded, transparent, and enforceable legal framework for each 
aspect of its

[[Page 16642]]

activities in all relevant jurisdictions.\52\ While Ronin and ICBCFS 
argue that the proposal is not sufficiently transparent because it does 
not include sufficient information for them to determine the proposal's 
impact on their margin calculations,\53\ the Commission understands 
that FICC has provided Netting Members with information to allow them 
to understand the impact of the Margin Proxy on their VaR Charge and 
Coverage Charge, and that FICC responded to individual Netting Member 
requests for additional data and information.\54\ Moreover, the 
Commission understands that FICC will continue to engage in ongoing 
dialogue with Netting Members in order to help Netting Members gauge 
the individual impact of the proposed margin methodology changes.\55\ 
Therefore, the Commission believes that the proposal is reasonably 
designed to provide for a well-founded, transparent, and enforceable 
legal framework, consistent with Rule 17Ad-22(d)(1).\56\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(d)(1).
    \53\ See Ronin Letter at 3; ICBCFS Letter at 1-3.
    \54\ See FICC Letter at 2-3.
    \55\ See id. at 3-4.
    \56\ 17 CFR 240.17Ad-22(d)(1).
---------------------------------------------------------------------------

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\57\ that proposed rule change SR-FICC-2017-001 be, and it hereby 
is, approved as of the date of this order or the date of a notice by 
the Commission authorizing FICC to implement FICC's advance notice 
proposal SR-FICC-2017-801 that is consistent with this proposed rule 
change, whichever is later.\58\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b)(2).
    \58\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-06685 Filed 4-4-17; 8:45 am]
 BILLING CODE 8011-01-P

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.