Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To Revise the MBSD VaR Floor, 48974-48978 [2019-20011]
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Federal Register / Vol. 84, No. 180 / Tuesday, September 17, 2019 / Notices
options exchanges.13 The Exchange
made Open-Close Data available for
EDGX Options in order to keep pace
with changes in the industry and
evolving customer needs, and believes
the data product will contribute to
robust competition among national
securities exchanges. Furthermore, the
Exchange operates in a highly
competitive environment, and its ability
to price the proposed data product is
constrained by competition among
exchanges that offer similar data
products to their customers. As
discussed, there are currently a number
of alternative products available to
market participants and investors. At
least three other U.S. options exchanges
offer a market data product that is
substantially similar to the Open-Close
Data, which the Exchange must consider
in its pricing discipline in order to
compete for the market data.14 In this
competitive environment, potential
purchasers are free to choose which, if
any, competing product to purchase to
satisfy their need for market
information. As a result, the Exchange
believes this proposed rule change
permits fair competition among national
securities exchanges.
The Exchange also does not believe
the proposed fees would cause any
unnecessary or in appropriate burden
on intermarket competition as other
exchanges are free to introduce their
own alternative and comparable data
product and lower their prices to better
compete with the Exchange’s offering.
The Exchange does not believe the
proposed rule change would cause any
unnecessary or inappropriate burden on
intramarket competition. Particularly,
the proposed product and fees apply
uniformly to any purchaser, in that it
does not differentiate between
subscribers that purchase Open-Close
Data. The proposed fees are set at a
modest level that would allow any
interested Member or non-Member to
purchase such data based on their
business needs.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange has neither solicited
nor received written comments on the
proposed rule change.
13 Id.
14 See
e.g., Cboe Options Fees Schedule, Livevol
Fees, Open-Close Data. See also Nasdaq ISE Options
7 Pricing Schedule, Section 10.A and Nasdaq PHLX
Options 7 Pricing Schedule, Section 10, PHLX
Options Trade Outline (‘‘PHOTO’’).
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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 15 and paragraph (f) of Rule
19b–4 16 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. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
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–
CboeEDGX–2019–055 on the subject
line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CboeEDGX–2019–055. 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 website (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
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
15 15
16 17
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U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f).
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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 the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–CboeEDGX–2019–055 and
should be submitted on or before
October 8, 2019.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–20014 Filed 9–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86927; File No. SR–FICC–
2019–003]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving a Proposed Rule Change To
Revise the MBSD VaR Floor
September 11, 2019.
I. Introduction
On July 18, 2019, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 proposed rule
change SR–FICC–2019–003. The
proposed rule change was published for
comment in the Federal Register on
August 8, 2019.3 The Commission did
not receive any comment letters on the
proposed rule change. For the reasons
discussed below, the Commission is
approving the proposed rule change.
II. Description of the Proposed Rule
Change
FICC proposes to amend its MortgageBacked Securities Division (‘‘MBSD’’)
17 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 86553
(August 2, 2019), 84 FR 39041 (August 8, 2019)
(SR–FICC–2019–003) (‘‘Notice’’).
1 15
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Clearing Rules (‘‘MBSD Rules’’) 4 and
the Methodology and Model Operations
Document MBSD Quantitative Risk
Model (‘‘QRM Methodology
Document’’) 5 to change one of FICC’s
margin calculations to: (1) Allow FICC
to adjust the margin calculation within
a specified range if necessary to cover
FICC’s credit exposures to each Clearing
Member fully with a high degree of
confidence; (2) provide that FICC would
notify Clearing Members in advance of
any such change to the margin
calculation; (3) provide that FICC would
perform model performance monitoring
of the margin calculation on at least a
monthly basis; and (4) make certain
non-substantive technical changes.
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A. Background
A key tool that FICC uses to manage
the credit risk presented by Clearing
Members is the daily calculation and
collection of Required Fund Deposits
from Clearing Members.6 The Required
Fund Deposit serves as each Clearing
Member’s margin, and the aggregate of
all Clearing Members’ Required Fund
Deposits constitutes the MBSD Clearing
Fund, which FICC would access should
a defaulting Clearing Member’s own
Required Fund Deposit be insufficient
to satisfy losses to FICC caused by the
liquidation of that Clearing Member’s
portfolio.7 Each Clearing Member’s
Required Fund Deposit amount consists
of multiple components, the largest of
which is based on the volatility of
specified net unsettled positions in the
Clearing Member’s portfolio, known as
the value-at-risk (‘‘VaR’’) Charge.8 This
model-based volatility calculation is
designed to capture the market price
risk associated with the securities in the
Clearing Member’s portfolio.9
Specifically, the methodology
underlying this calculation projects the
potential gains or losses that could
occur in connection with the liquidation
of a defaulting Clearing Member’s
portfolio, assuming that a portfolio
would take three days to hedge or
liquidate in normal market conditions.
The model-based volatility calculation
uses the projected liquidation gains or
losses to arrive at a VaR Charge amount
that would cover the projected
4 Capitalized terms used herein and not defined
shall have the meaning assigned to such terms in
the MBSD Rules, available at https://www.dtcc.com/
legal/rules-and-procedures.aspx.
5 FICC requested confidential treatment of the
QRM Methodology Document and has filed it
separately with the Secretary of the Commission in
connection with this proposed rule change. See 17
CFR 240–24b–2.
6 MBSD Rule 4, supra note 4.
7 Id.
8 Id.
9 MBSD Rule 1, supra note 4.
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liquidation losses at a 99 percent
confidence level.10
The MBSD Rules currently provide
for two scenarios in which alternatives
to the model-based volatility calculation
of the VaR Charge would be necessary.11
First, FICC would base the VaR Charge
on an alternative volatility calculation
using historical market price changes of
certain benchmark securities (the
‘‘Margin Proxy’’) for scenarios in which
the primary source of data required to
perform the model-based volatility
calculation becomes unavailable for an
extended period of time.12 Second, FICC
would set the VaR Charge at 5 basis
points of the market value of a Clearing
Member’s gross unsettled positions (the
‘‘VaR Floor’’) for scenarios in which the
model-based volatility calculation (or
Margin Proxy, if used) results in an
amount that is less than the VaR Floor.13
The VaR Floor addresses the risk that
the model-based volatility calculation
(or Margin Proxy, if used) may result in
little or no VaR Charge for certain
portfolios where the calculation
methodology applies substantial risk
offsets among long and short positions
in different classes of mortgage-backed
securities that have a high degree of
historical price correlation.14 Due to the
risk that historical price correlation may
not persist in future market
conditions,15 FICC would employ the
VaR Floor, which is based on the market
value of the gross unsettled positions in
the Clearing Member’s portfolio, in
order to protect FICC against such risk
in the event that FICC is required to
liquidate a mortgage-backed securities
portfolio in stressed market conditions.
B. VaR Floor Percentage Adjustments
The MBSD Rules currently define the
VaR Floor as ‘‘5 basis points of the
market value of a Clearing Member’s
gross unsettled positions.’’ 16 Therefore,
the VaR Floor is used as the Clearing
Member’s VaR Charge when the model10 Unregistered Investment Pool Clearing
Members are subject to a VaR Charge with a
minimum targeted confidence level assumption of
99.5 percent. See MBSD Rule 4, Section 2(c), supra
note 4.
11 MBSD Rule 1, supra note 4.
12 Id.
13 Id.
14 Such portfolios can represent large gross
positions, but net down to a relatively low VaR
Charge amount.
15 For example, certain TBAs may have highly
correlated historical price returns despite having
different coupons and, although the net risk
exposure may be adequately modeled under current
market conditions, future market conditions could
cause the risk relationship to change in a way that
may not be adequately captured by the model. TBA
is defined in MBSD Rule 1. See MBSD Rule 1, supra
note 4.
16 MBSD Rule 1, supra note 4.
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48975
based volatility calculation yields an
amount that is lower than 5 basis points
(referred to herein as the ‘‘VaR Floor
Percentage’’) of the market value of the
Clearing Member’s gross unsettled
positions.17
After conducting a review of the VaR
Floor Percentage in June 2017, FICC
found that a VaR Floor Percentage of 5
basis points resulted in VaR Charges
that did not adequately cover the market
risk of certain portfolios during periods
of market volatility.18 FICC noted that
an increase in the VaR Floor Percentage
to 10 basis points would improve the
backtesting coverage of those portfolios
to 99.8%.19 The 2017 review also
revealed that when applying the Margin
Proxy, a VaR Floor Percentage of 5 basis
points resulted in VaR Charges that did
not adequately cover certain portfolios
with offsetting long and short positions
within the same agency program.20 FICC
further noted that an increase in the VaR
Floor Percentage to 20 basis points
would better cover the risks of such
portfolios.21
Accordingly, FICC proposes to revise
the VaR Floor definition to allow FICC
to adjust the VaR Floor Percentage
within a specified range in order to
cover FICC’s credit exposure to each
Clearing Member fully with a high
degree of confidence.22 FICC proposes
to set the range within which it would
be allowed to adjust the VaR Floor
Percentage at no less than 5 basis points
and no more than 30 basis points of a
Clearing Member’s gross unsettled
positions.23 According to FICC, the
discretionary range for the VaR Floor
Percentage up to 30 basis points is
17 Id.
18 The 2017 review revealed that during periods
of market volatility, a VaR Floor Percentage of 5
basis points resulted in VaR Charges that did not
adequately cover portfolios containing long-short
positions (e.g., a portfolio that was long the GNMA
II/FNMA basis at a higher coupon and short the
GNMA II/FNMA basis at a lower coupon). Notice,
supra note 3 at 39043.
19 Id.
20 The Margin Proxy allows for further netting
among positions within the same agency program
than would occur using the model-based volatility
calculation. Notice, supra note 3 at 39043.
21 FICC conducted an impact study for the twelve
months ending February 2019, and found that in
the Margin Proxy scenario, a VaR Floor Percentage
of 20 basis points would improve backtesting
coverage to 99% for 11 of the 14 portfolios that
would have been below 99% based on a VaR Floor
Percentage of 5 basis points. Additionally, FICC
found that increasing the VaR Floor Percentage to
20 basis points would reduce the number of
backtesting deficiencies associated with the 3 small
portfolios that would have remained below the 99%
confidence level (from 45 deficiencies to 11). FICC
states that it would utilize another margin charge
(the Backtesting Charge) to further mitigate any
remaining exposure. Notice, supra note 3 at 39043.
22 Id.
23 Id.
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appropriate because it will enable FICC
to make timely adjustments that would
ensure the VaR Charge remains
adequate if market conditions change.24
FICC’s discretion to adjust the VaR
Floor Percentage would be subject to the
governance process set forth in the
Clearing Agency Model Risk
Management Framework
(‘‘Framework’’) 25 applicable to model
performance concerns. Specifically, the
Model Validation and Control Group
(‘‘MVC’’) would escalate any proposed
VaR Floor Percentage adjustment to the
Model Risk Governance Committee
(‘‘MRGC’’), which, in turn, would
escalate the proposed adjustment to the
Management Risk Committee and/or
Risk Committee of the Board for
approval.26 Additionally, FICC proposes
to review, on at least an annual basis,
the impact of alternative VaR Floor
Percentages within the proposed range
of 5 to 30 basis points to the backtesting
performance and to Clearing Members’
margin charges.27
Upon Commission approval of the
proposed rule change, FICC proposes to
initially set the VaR Floor at 10 basis
points when there is sufficient data to
generate the model-based volatility
calculation, and 20 basis points when
there is insufficient data for the modelbased volatility calculation (i.e., when
the Margin Proxy is used).28
C. Notifications to Clearing Members of
Changes to VaR Floor Percentage
For any adjustment to the VaR Floor
Percentage that would fall within the
proposed range, FICC would issue an
Important Notice no later than 10
Business Days prior to the
implementation of the adjustment. FICC
states that providing notice in advance
of the implementation of an adjustment
is designed to provide Clearing
Members with time to adjust to any new
VaR Charge amounts that would result
from an adjustment to the VaR Floor
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24 Id.
25 See Securities Exchange Act Release No. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017)
(SR–DTC–2017–008; SR–FICC–2017–014; SR–
NSCC–2017–008) (‘‘Framework Approval Order’’).
The Framework sets forth the model risk
management practices adopted by FICC, National
Securities Clearing Corporation, and The
Depository Trust Company. The Framework is
designed to help identify, measure, monitor, and
manage the risks associated with the design,
development, implementation, use, and validation
of quantitative models. The Framework describes:
(i) Governance of the Framework; (ii) key terms; (iii)
model inventory procedures; (iv) model validation
procedures; (v) model approval process; and (vi)
model performance procedures.
26 Framework Approval Order, supra note 25 at
41436; Notice, supra note 3 at 39042.
27 Notice, supra note 3 at 39042.
28 Notice, supra note 3 at 39042–43.
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Percentage.29 FICC believes that 10
Business Days’ prior notice would
provide Clearing Members with
sufficient time to prepare for any new
VaR Charge amounts and thereby ensure
that the Clearing Members have the
funds to satisfy their new VaR Charge
amounts.30
For adjustments that would fall
outside of the proposed range, FICC has
represented that it would submit a rule
filing to the Commission.31 As
proposed, FICC would not apply a VaR
Floor Percentage that is less than 5 basis
points (which is the current VaR Floor
Percentage); however, the proposed
change would allow FICC to adjust the
VaR Floor Percentage above 5 basis
points (up to 30 basis points).
D. Model Performance Monitoring of
VaR Floor Percentage
The Framework provides that, as part
of model performance monitoring, on at
least a monthly basis, FICC: (1) Performs
a sensitivity analysis on its margin
model; (2) reviews the key parameters
and assumptions for backtesting; and (3)
considers modifications to ensure its
backtesting practices are appropriate for
determining the adequacy of applicable
margin resources.32 The Framework also
states that MVC performs a model
validation for each FICC model
approved for use in production not less
than annually, including, among other
things, on its margin systems and
related models. 33
The VaR Floor Percentage is currently
subject to periodic model validations as
part of FICC’s margin model validation
on at least an annual basis to determine
if the VaR Floor Percentage would
remain adequate to cover FICC’s credit
exposure to Clearing Members with
certain types of portfolios fully with a
high degree of confidence.34 FICC
proposes to designate the VaR Floor
Percentage as a parameter of its VaR
model that will be reviewed on at least
a monthly basis per the Framework. As
such, FICC proposes to amend the QRM
Methodology Document to state that
FICC would conduct model
performance monitoring of the VaR
Floor Percentage on at least a monthly
basis.
E. Technical Changes
FICC proposes several technical
changes to the MBSD Rules to restate
29 Notice,
supra note 3 at 39044.
30 Id.
31 Notice,
supra note 3 at 39042.
Approval Order, supra note 25 at
41437; Notice, supra note 3 at 39042.
33 Framework Approval Order, supra note 25 at
41434; Notice, supra note 3 at 39042.
34 See id.
32 Framework
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the calculation of the VaR Floor to
provide more detail than the current
provision and to use the defined terms
‘‘Long Positions’’ 35 and ‘‘Short
Positions.’’ 36 Specifically, FICC would
add a new sentence stating: ‘‘Such VaR
Floor will be determined by multiplying
the sum of the absolute values of Long
Positions and Short Positions, at market
value, by a percentage designated by the
Corporation that is no less than 0.05%
and no greater than 0.30%. [FICC] shall
determine the percentage within this
range to be applied based on factors
including but not limited to a review
performed at least annually of the
impact of the VaR Floor parameter at
different levels within the range to the
backtesting performance and to Clearing
Members’ margin charges. [FICC] shall
inform Clearing Members of the
applicable percentage utilized by the
VaR Floor by an Important Notice
issued no later than 10 Business Days
prior to the implementation of such
percentage.’’
Finally, FICC proposes a technical
change to the QRM Methodology
Document to reference that there will be
at least annual model validation of the
VaR Floor Percentage.37 FICC states that
the purpose of the proposed technical
changes is to enhance the clarity and
accuracy of the MBSD Rules and the
QRM Methodology Document.38
III. 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
such proposed rule change is consistent
with the requirements of the Act and
rules and regulations thereunder
applicable to such organization. After
carefully considering the proposed rule
change, the Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to FICC. In particular, the
Commission finds that the proposed
rule change is consistent with Sections
35 The term ‘‘Long Position’’ means a Member’s
obligations with respect to the purchase of an
Eligible Security or an Option Contract, as
determined pursuant to the MBSD Rules. MBSD
Rule 1, supra note 4.
36 The term ‘‘Short Position’’ means a Member’s
obligation with respect to the sale of an Eligible
Security or an Option Contract, as determined
pursuant to the MBSD Rules. MBSD Rule 1, supra
note 4.
37 The QRM methodology Document currently
provides that the VaR Floor Percentage is reviewed
annually and updated. Notice, supra note 3 at
39043.
38 Notice, supra note 3 at 39044.
39 15 U.S.C. 78s(b)(2)(C).
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17A(b)(3)(F) 40 of the Act and Rules
17Ad–22(e)(4)(i),41 (e)(6)(i),42 and
(e)(23)(ii),43 each promulgated under the
Act, for the reasons described below.
A. Consistency With Section
17A(b)(3)(F) of the Act
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Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
clearing agency be designed to promote
the prompt and accurate clearance and
settlement of securities transactions and
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible.44
First, as described above in Section
II.B., FICC states that the current VaR
Floor Percentage of 5 basis points has
resulted in VaR Charges that do not
adequately cover FICC’s exposure to
certain Clearing Member portfolios.
FICC’s proposal for the ability to adjust
the VaR Floor Percentage from 5 basis
points up to 30 basis points would
better enable FICC to collect margin
amounts commensurate with its credit
exposure to the types of Clearing
Member portfolios not adequately
covered using a VaR Floor Percentage of
5 basis points. FICC’s collection of
margin amounts commensurate with its
credit exposures would help ensure that
FICC maintains adequate funds
necessary to manage the risks associated
with performing its clearance and
settlement functions. Accordingly, the
Commission finds the proposal to allow
FICC to adjust the VaR Floor Percentage
from 5 basis points up to 30 basis points
would promote the prompt and accurate
clearance and settlement of securities
transactions, consistent with Section
17A(b)(3)(F) of the Act.45 Moreover,
FICC’s collection of margin amounts
commensurate with the credit exposure
presented by each Clearing Member
portfolio should help ensure that, in the
event of a Clearing Member default,
FICC’s operations would not be
disrupted and non-defaulting Clearing
Members would not be exposed to
losses that they cannot anticipate or
control. Accordingly, the Commission
finds the proposal to allow FICC to
adjust the VaR Floor Percentage from 5
basis points up to 30 basis points should
safeguard the securities and funds that
are in FICC’s custody or control or for
which FICC is responsible, consistent
with Section 17A(b)(3)(F) of the Act.46
40 15
U.S.C. 78q–1(b)(3)(F)
CFR 240.17Ad–22(e)(4)(i).
42 17 CFR 240.17Ad–22(e)(6)(i).
43 17 CFR 240.17Ad–22(e)(23)(ii).
44 15 U.S.C. 78q–1(b)(3)(F).
45 Id.
46 Id.
41 17
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Second, as described above in Section
II.C., FICC states that it designed the
proposal to provide 10 Business Days’
notice to Clearing Members prior to
implementing any adjustment to the
VaR Floor Percentage in order to
provide Clearing Members with
sufficient time prepare for any new VaR
Charge amounts and thereby ensure that
Clearing Members are able to satisfy
their Required Fund Deposit amounts.
Providing such notice in advance of
implementing any adjustment to the
VaR Floor Percentage would help
Clearing Members prepare to meet their
margin obligations, and thereby
facilitate FICC’s collection of adequate
margin amounts necessary to manage
the risks associated with performing its
clearance and settlement functions, as
well as help ensure that, in the event of
a Clearing Member default, FICC’s
operations would not be disrupted and
non-defaulting Clearing Members would
not be exposed to losses that they
cannot anticipate or control.
Accordingly, the Commission finds the
proposal to provide 10 Business Days’
notice to Clearing Members prior to
implementing any adjustment to the
VaR Floor Percentage should: (1)
Promote the prompt and accurate
clearance and settlement of securities
transactions; and (2) safeguard the
securities and funds that are in FICC’s
custody or control or for which FICC is
responsible, consistent with Section
17A(b)(3)(F) of the Act.47
Third, as described above in Section
II.D., the VaR Floor Percentage is
currently subject to periodic model
validations as part of FICC’s margin
model validation on at least an annual
basis. FICC proposes to increase the
frequency of this review by designating
the VaR Floor Percentage as a parameter
of its VaR model to be reviewed on at
least a monthly basis. More frequent
reviews would alert FICC of the need to
adjust the VaR Floor Percentage and
would enable FICC to make such
adjustments in a more timely manner.
Thus, more frequent reviews of the VaR
Floor Percentage would help FICC
ensure that it collects margin amounts
commensurate with the credit risks
presented by each Clearing Member
portfolio. FICC’s collection of margin
amounts commensurate with the credit
exposure presented by each Clearing
Member portfolio should help ensure
that, in the event of a Clearing Member
default, FICC’s operations would not be
disrupted and non-defaulting Clearing
Members would not be exposed to
losses that they cannot anticipate or
control. Accordingly, the Commission
finds the proposal for FICC to review
the VaR Floor Percentage on at least a
monthly basis would safeguard the
securities and funds that are in FICC’s
custody or control or for which FICC is
responsible, consistent with Section
17A(b)(3)(F) of the Act.48
Fourth, as described above in Section
II.E., FICC designed the proposed
technical changes to enhance the clarity
and accuracy of the MBSD Rules and
the QRM Methodology Document.
Enhancing the clarity and accuracy of
the MBSD Rules helps to provide
Clearing Members with a better
understanding of their rights and
obligations thereunder. A better
understanding of Clearing Member
rights and obligations would reasonably
help to increase the predictability and
certainty of Clearing Member
interactions with FICC, which, in turn,
would better enable FICC to perform its
clearance and settlement functions.
Additionally, since the QRM
Methodology Document is used by FICC
Risk Management personnel, enhanced
clarity regarding the frequency of model
validation of the VaR Floor Percentage
would better enable FICC personnel to
perform the related risk management
functions that support FICC’s clearance
and settlement activities. Accordingly,
the Commission finds the proposed
technical changes would promote the
prompt and accurate clearance and
settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of
the Act.49
B. Consistency With Rule 17Ad–
22(e)(4)(i) Under the Act
Rule 17Ad–22(e)(4)(i) under the Act
requires a covered clearing agency 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 by maintaining sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence.50
As described above in Section II.D.,
FICC’s proposal to conduct at least
monthly reviews of the VaR Floor
Percentage is designed to help FICC
more effectively identify, measure,
monitor, and manage its credit exposure
to each Clearing Member portfolio by
increasing the frequency of review from
annually to monthly and thereby
enabling FICC to identify the need for
48 Id.
49 Id.
47 Id.
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Federal Register / Vol. 84, No. 180 / Tuesday, September 17, 2019 / Notices
jbell on DSK3GLQ082PROD with NOTICES
adjustments to the VaR Floor Percentage
in a more timely manner. Additionally,
as described above in Section II.B.,
FICC’s proposed ability to adjust the
VaR Floor Percentage within the range
of 5 to 30 basis points is designed to
better enable FICC to limit its credit
exposure to certain Clearing Member
portfolios in the event that the modelbased volatility calculation (or Margin
Proxy, if used) yield too low a VaR
Charge for such portfolios. As described
above in Sections II.B. and C., FICC’s
proposals for the ability to adjust the
VaR Floor Percentage within the range
of 5 to 30 basis points, as well as the
provision of prior notice of such
adjustments to Clearing Members, are
designed to help FICC better manage its
credit exposure to Clearing Members by
collecting sufficient margin with respect
to each Clearing Member portfolio.
Accordingly, the Commission finds the
proposed changes are consistent with
the requirements of Rule 17Ad–
22(e)(4)(i) under the Act.51
C. Consistency With Rule 17Ad–
22(e)(6)(i) Under the Act
Rule 17Ad–22(e)(6)(i) under the Act
requires a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover, if the
covered clearing agency provides
central counterparty services, its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.52
FICC’s proposals to: (1) Monitor the
VaR Floor Percentage; (2) adjust the VaR
Floor Percentage in the event that other
calculations result in VaR Charges that
do not adequately cover the risks
presented by certain Clearing Member
portfolios; and (3) notify Clearing
Members in advance of any adjustment
to the VaR Floor Percentage, are
designed to cover FICC’s credit
exposure to Clearing Member portfolios
where such exposure has not been
adequately covered in the past.
Specifically, the proposal to allow FICC
to adjust the VaR Floor Percentage from
5 basis points up to 30 basis points
should help FICC to collect margin
amounts commensurate with its credit
exposure to the types of Clearing
Member portfolios not adequately
covered using a VaR Floor Percentage of
5 basis points. FICC’s proposal to
provide Clearing Members with notice
in advance of implementing any
adjustment to the VaR Floor Percentage
should help Clearing Members prepare
to meet their margin obligations, and
thereby facilitate FICC’s collection of
margin amounts commensurate with
affected Clearing Member portfolios.
FICC’s proposal to increase the
frequency with which it reviews the
VaR Floor Percentage from annually to
monthly should alert FICC of the need
to adjust the VaR Floor Percentage and
make such adjustments in a more timely
manner. Thus, the increased frequency
of review would further help FICC
ensure that it collects margin amounts
commensurate with the credit risks
presented by each Clearing Member
portfolio. For these reasons, the
Commission finds the proposed changes
are consistent with the requirements of
Rule 17Ad–22(e)(6)(i) under the Act.53
D. Consistency With Rule 17Ad–
22(e)(23)(ii) Under the Act
Rule 17Ad–22(e)(23)(ii) under the Act
requires a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to provide
sufficient information to enable
participants to identify and evaluate the
risks, fees, and other material costs they
incur by participating in the covered
clearing agency.54
As described above in Section II.E.,
FICC’s proposed technical changes to
the MBSD Rules would provide more
details as to how the VaR Floor is
calculated than is currently set forth in
the MBSD Rules. Providing more
comprehensive written information in
the MBSD Rules regarding the VaR
Floor would enable Clearing Members
to better understand how the VaR Floor
operates, which, in turn, should enable
Clearing Members to better evaluate the
costs of participating in FICC.
Accordingly, the Commission finds the
proposed technical changes to the
MBSD Rules are consistent with Rule
17Ad–22(e)(23)(ii) under the Act.55
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and, in
particular, with the requirements of
Section 17A of the Act 56 and the rules
and regulations promulgated
thereunder.
53 Id.
54 17
51 Id.
52 17
CFR 240.17Ad–22(e)(23)(ii).
55 Id.
CFR 240.17Ad–22(e)(6)(i).
VerDate Sep<11>2014
17:05 Sep 16, 2019
56 15
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It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 57 that
proposed rule change SR–FICC–2019–
003, be, and hereby is, approved.58
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.59
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019–20011 Filed 9–16–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86938; File No. SR–
NASDAQ–2019–048]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing of Amendment Nos. 2 and 3 and
Order Granting Accelerated Approval
of a Proposed Rule Change, as
Modified by Amendment Nos. 2 and 3,
To Establish the ‘‘Midpoint Extended
Life Order + Continuous Book’’ as a
New Order Type
September 11, 2019.
I. Introduction
On May 29, 2019, The Nasdaq Stock
Market LLC (‘‘Exchange’’ or ‘‘Nasdaq’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
change to establish the Midpoint
Extended Life Order + Continuous Book
(‘‘M–ELO+CB’’) as a new order type.
The proposed rule change was
published for comment in the Federal
Register on June 17, 2019.3 On July 1,
2019, the Exchange filed Amendment
No. 1 to the proposed rule change,
which amended and superseded the
proposed rule change as originally filed.
On July 30, 2019, pursuant to Section
19(b)(2) of the Act,4 the Commission
designated a longer period within which
to approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.5 On July 31, 2019, the
57 15
U.S.C. 78s(b)(2).
approving the proposed rule change, the
Commission considered the proposals’ impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
59 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 86083
(June 11, 2019), 84 FR 28107.
4 15 U.S.C. 78s(b)(2).
5 See Securities Exchange Act Release No. 86512,
84 FR 38078 (August 5, 2019). The Commission
58 In
E:\FR\FM\17SEN1.SGM
17SEN1
]]>Agencies
[Federal Register Volume 84, Number 180 (Tuesday, September 17, 2019)]
[Notices]
[Pages 48974-48978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20011]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86927; File No. SR-FICC-2019-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Revise the MBSD VaR Floor
September 11, 2019.
I. Introduction
On July 18, 2019, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2019-003. The proposed rule change was published for comment in
the Federal Register on August 8, 2019.\3\ The Commission did not
receive any comment letters on the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 86553 (August 2, 2019),
84 FR 39041 (August 8, 2019) (SR-FICC-2019-003) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
FICC proposes to amend its Mortgage-Backed Securities Division
(``MBSD'')
[[Page 48975]]
Clearing Rules (``MBSD Rules'') \4\ and the Methodology and Model
Operations Document MBSD Quantitative Risk Model (``QRM Methodology
Document'') \5\ to change one of FICC's margin calculations to: (1)
Allow FICC to adjust the margin calculation within a specified range if
necessary to cover FICC's credit exposures to each Clearing Member
fully with a high degree of confidence; (2) provide that FICC would
notify Clearing Members in advance of any such change to the margin
calculation; (3) provide that FICC would perform model performance
monitoring of the margin calculation on at least a monthly basis; and
(4) make certain non-substantive technical changes.
---------------------------------------------------------------------------
\4\ Capitalized terms used herein and not defined shall have the
meaning assigned to such terms in the MBSD Rules, available at
https://www.dtcc.com/legal/rules-and-procedures.aspx.
\5\ FICC requested confidential treatment of the QRM Methodology
Document and has filed it separately with the Secretary of the
Commission in connection with this proposed rule change. See 17 CFR
240-24b-2.
---------------------------------------------------------------------------
A. Background
A key tool that FICC uses to manage the credit risk presented by
Clearing Members is the daily calculation and collection of Required
Fund Deposits from Clearing Members.\6\ The Required Fund Deposit
serves as each Clearing Member's margin, and the aggregate of all
Clearing Members' Required Fund Deposits constitutes the MBSD Clearing
Fund, which FICC would access should a defaulting Clearing Member's own
Required Fund Deposit be insufficient to satisfy losses to FICC caused
by the liquidation of that Clearing Member's portfolio.\7\ Each
Clearing Member's Required Fund Deposit amount consists of multiple
components, the largest of which is based on the volatility of
specified net unsettled positions in the Clearing Member's portfolio,
known as the value-at-risk (``VaR'') Charge.\8\ This model-based
volatility calculation is designed to capture the market price risk
associated with the securities in the Clearing Member's portfolio.\9\
Specifically, the methodology underlying this calculation projects the
potential gains or losses that could occur in connection with the
liquidation of a defaulting Clearing Member's portfolio, assuming that
a portfolio would take three days to hedge or liquidate in normal
market conditions. The model-based volatility calculation uses the
projected liquidation gains or losses to arrive at a VaR Charge amount
that would cover the projected liquidation losses at a 99 percent
confidence level.\10\
---------------------------------------------------------------------------
\6\ MBSD Rule 4, supra note 4.
\7\ Id.
\8\ Id.
\9\ MBSD Rule 1, supra note 4.
\10\ Unregistered Investment Pool Clearing Members are subject
to a VaR Charge with a minimum targeted confidence level assumption
of 99.5 percent. See MBSD Rule 4, Section 2(c), supra note 4.
---------------------------------------------------------------------------
The MBSD Rules currently provide for two scenarios in which
alternatives to the model-based volatility calculation of the VaR
Charge would be necessary.\11\ First, FICC would base the VaR Charge on
an alternative volatility calculation using historical market price
changes of certain benchmark securities (the ``Margin Proxy'') for
scenarios in which the primary source of data required to perform the
model-based volatility calculation becomes unavailable for an extended
period of time.\12\ Second, FICC would set the VaR Charge at 5 basis
points of the market value of a Clearing Member's gross unsettled
positions (the ``VaR Floor'') for scenarios in which the model-based
volatility calculation (or Margin Proxy, if used) results in an amount
that is less than the VaR Floor.\13\
---------------------------------------------------------------------------
\11\ MBSD Rule 1, supra note 4.
\12\ Id.
\13\ Id.
---------------------------------------------------------------------------
The VaR Floor addresses the risk that the model-based volatility
calculation (or Margin Proxy, if used) may result in little or no VaR
Charge for certain portfolios where the calculation methodology applies
substantial risk offsets among long and short positions in different
classes of mortgage-backed securities that have a high degree of
historical price correlation.\14\ Due to the risk that historical price
correlation may not persist in future market conditions,\15\ FICC would
employ the VaR Floor, which is based on the market value of the gross
unsettled positions in the Clearing Member's portfolio, in order to
protect FICC against such risk in the event that FICC is required to
liquidate a mortgage-backed securities portfolio in stressed market
conditions.
---------------------------------------------------------------------------
\14\ Such portfolios can represent large gross positions, but
net down to a relatively low VaR Charge amount.
\15\ For example, certain TBAs may have highly correlated
historical price returns despite having different coupons and,
although the net risk exposure may be adequately modeled under
current market conditions, future market conditions could cause the
risk relationship to change in a way that may not be adequately
captured by the model. TBA is defined in MBSD Rule 1. See MBSD Rule
1, supra note 4.
---------------------------------------------------------------------------
B. VaR Floor Percentage Adjustments
The MBSD Rules currently define the VaR Floor as ``5 basis points
of the market value of a Clearing Member's gross unsettled positions.''
\16\ Therefore, the VaR Floor is used as the Clearing Member's VaR
Charge when the model-based volatility calculation yields an amount
that is lower than 5 basis points (referred to herein as the ``VaR
Floor Percentage'') of the market value of the Clearing Member's gross
unsettled positions.\17\
---------------------------------------------------------------------------
\16\ MBSD Rule 1, supra note 4.
\17\ Id.
---------------------------------------------------------------------------
After conducting a review of the VaR Floor Percentage in June 2017,
FICC found that a VaR Floor Percentage of 5 basis points resulted in
VaR Charges that did not adequately cover the market risk of certain
portfolios during periods of market volatility.\18\ FICC noted that an
increase in the VaR Floor Percentage to 10 basis points would improve
the backtesting coverage of those portfolios to 99.8%.\19\ The 2017
review also revealed that when applying the Margin Proxy, a VaR Floor
Percentage of 5 basis points resulted in VaR Charges that did not
adequately cover certain portfolios with offsetting long and short
positions within the same agency program.\20\ FICC further noted that
an increase in the VaR Floor Percentage to 20 basis points would better
cover the risks of such portfolios.\21\
---------------------------------------------------------------------------
\18\ The 2017 review revealed that during periods of market
volatility, a VaR Floor Percentage of 5 basis points resulted in VaR
Charges that did not adequately cover portfolios containing long-
short positions (e.g., a portfolio that was long the GNMA II/FNMA
basis at a higher coupon and short the GNMA II/FNMA basis at a lower
coupon). Notice, supra note 3 at 39043.
\19\ Id.
\20\ The Margin Proxy allows for further netting among positions
within the same agency program than would occur using the model-
based volatility calculation. Notice, supra note 3 at 39043.
\21\ FICC conducted an impact study for the twelve months ending
February 2019, and found that in the Margin Proxy scenario, a VaR
Floor Percentage of 20 basis points would improve backtesting
coverage to 99% for 11 of the 14 portfolios that would have been
below 99% based on a VaR Floor Percentage of 5 basis points.
Additionally, FICC found that increasing the VaR Floor Percentage to
20 basis points would reduce the number of backtesting deficiencies
associated with the 3 small portfolios that would have remained
below the 99% confidence level (from 45 deficiencies to 11). FICC
states that it would utilize another margin charge (the Backtesting
Charge) to further mitigate any remaining exposure. Notice, supra
note 3 at 39043.
---------------------------------------------------------------------------
Accordingly, FICC proposes to revise the VaR Floor definition to
allow FICC to adjust the VaR Floor Percentage within a specified range
in order to cover FICC's credit exposure to each Clearing Member fully
with a high degree of confidence.\22\ FICC proposes to set the range
within which it would be allowed to adjust the VaR Floor Percentage at
no less than 5 basis points and no more than 30 basis points of a
Clearing Member's gross unsettled positions.\23\ According to FICC, the
discretionary range for the VaR Floor Percentage up to 30 basis points
is
[[Page 48976]]
appropriate because it will enable FICC to make timely adjustments that
would ensure the VaR Charge remains adequate if market conditions
change.\24\
---------------------------------------------------------------------------
\22\ Id.
\23\ Id.
\24\ Id.
---------------------------------------------------------------------------
FICC's discretion to adjust the VaR Floor Percentage would be
subject to the governance process set forth in the Clearing Agency
Model Risk Management Framework (``Framework'') \25\ applicable to
model performance concerns. Specifically, the Model Validation and
Control Group (``MVC'') would escalate any proposed VaR Floor
Percentage adjustment to the Model Risk Governance Committee
(``MRGC''), which, in turn, would escalate the proposed adjustment to
the Management Risk Committee and/or Risk Committee of the Board for
approval.\26\ Additionally, FICC proposes to review, on at least an
annual basis, the impact of alternative VaR Floor Percentages within
the proposed range of 5 to 30 basis points to the backtesting
performance and to Clearing Members' margin charges.\27\
---------------------------------------------------------------------------
\25\ See Securities Exchange Act Release No. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008) (``Framework Approval Order''). The Framework
sets forth the model risk management practices adopted by FICC,
National Securities Clearing Corporation, and The Depository Trust
Company. The Framework is designed to help identify, measure,
monitor, and manage the risks associated with the design,
development, implementation, use, and validation of quantitative
models. The Framework describes: (i) Governance of the Framework;
(ii) key terms; (iii) model inventory procedures; (iv) model
validation procedures; (v) model approval process; and (vi) model
performance procedures.
\26\ Framework Approval Order, supra note 25 at 41436; Notice,
supra note 3 at 39042.
\27\ Notice, supra note 3 at 39042.
---------------------------------------------------------------------------
Upon Commission approval of the proposed rule change, FICC proposes
to initially set the VaR Floor at 10 basis points when there is
sufficient data to generate the model-based volatility calculation, and
20 basis points when there is insufficient data for the model-based
volatility calculation (i.e., when the Margin Proxy is used).\28\
---------------------------------------------------------------------------
\28\ Notice, supra note 3 at 39042-43.
---------------------------------------------------------------------------
C. Notifications to Clearing Members of Changes to VaR Floor Percentage
For any adjustment to the VaR Floor Percentage that would fall
within the proposed range, FICC would issue an Important Notice no
later than 10 Business Days prior to the implementation of the
adjustment. FICC states that providing notice in advance of the
implementation of an adjustment is designed to provide Clearing Members
with time to adjust to any new VaR Charge amounts that would result
from an adjustment to the VaR Floor Percentage.\29\ FICC believes that
10 Business Days' prior notice would provide Clearing Members with
sufficient time to prepare for any new VaR Charge amounts and thereby
ensure that the Clearing Members have the funds to satisfy their new
VaR Charge amounts.\30\
---------------------------------------------------------------------------
\29\ Notice, supra note 3 at 39044.
\30\ Id.
---------------------------------------------------------------------------
For adjustments that would fall outside of the proposed range, FICC
has represented that it would submit a rule filing to the
Commission.\31\ As proposed, FICC would not apply a VaR Floor
Percentage that is less than 5 basis points (which is the current VaR
Floor Percentage); however, the proposed change would allow FICC to
adjust the VaR Floor Percentage above 5 basis points (up to 30 basis
points).
---------------------------------------------------------------------------
\31\ Notice, supra note 3 at 39042.
---------------------------------------------------------------------------
D. Model Performance Monitoring of VaR Floor Percentage
The Framework provides that, as part of model performance
monitoring, on at least a monthly basis, FICC: (1) Performs a
sensitivity analysis on its margin model; (2) reviews the key
parameters and assumptions for backtesting; and (3) considers
modifications to ensure its backtesting practices are appropriate for
determining the adequacy of applicable margin resources.\32\ The
Framework also states that MVC performs a model validation for each
FICC model approved for use in production not less than annually,
including, among other things, on its margin systems and related
models. \33\
---------------------------------------------------------------------------
\32\ Framework Approval Order, supra note 25 at 41437; Notice,
supra note 3 at 39042.
\33\ Framework Approval Order, supra note 25 at 41434; Notice,
supra note 3 at 39042.
---------------------------------------------------------------------------
The VaR Floor Percentage is currently subject to periodic model
validations as part of FICC's margin model validation on at least an
annual basis to determine if the VaR Floor Percentage would remain
adequate to cover FICC's credit exposure to Clearing Members with
certain types of portfolios fully with a high degree of confidence.\34\
FICC proposes to designate the VaR Floor Percentage as a parameter of
its VaR model that will be reviewed on at least a monthly basis per the
Framework. As such, FICC proposes to amend the QRM Methodology Document
to state that FICC would conduct model performance monitoring of the
VaR Floor Percentage on at least a monthly basis.
---------------------------------------------------------------------------
\34\ See id.
---------------------------------------------------------------------------
E. Technical Changes
FICC proposes several technical changes to the MBSD Rules to
restate the calculation of the VaR Floor to provide more detail than
the current provision and to use the defined terms ``Long Positions''
\35\ and ``Short Positions.'' \36\ Specifically, FICC would add a new
sentence stating: ``Such VaR Floor will be determined by multiplying
the sum of the absolute values of Long Positions and Short Positions,
at market value, by a percentage designated by the Corporation that is
no less than 0.05% and no greater than 0.30%. [FICC] shall determine
the percentage within this range to be applied based on factors
including but not limited to a review performed at least annually of
the impact of the VaR Floor parameter at different levels within the
range to the backtesting performance and to Clearing Members' margin
charges. [FICC] shall inform Clearing Members of the applicable
percentage utilized by the VaR Floor by an Important Notice issued no
later than 10 Business Days prior to the implementation of such
percentage.''
---------------------------------------------------------------------------
\35\ The term ``Long Position'' means a Member's obligations
with respect to the purchase of an Eligible Security or an Option
Contract, as determined pursuant to the MBSD Rules. MBSD Rule 1,
supra note 4.
\36\ The term ``Short Position'' means a Member's obligation
with respect to the sale of an Eligible Security or an Option
Contract, as determined pursuant to the MBSD Rules. MBSD Rule 1,
supra note 4.
---------------------------------------------------------------------------
Finally, FICC proposes a technical change to the QRM Methodology
Document to reference that there will be at least annual model
validation of the VaR Floor Percentage.\37\ FICC states that the
purpose of the proposed technical changes is to enhance the clarity and
accuracy of the MBSD Rules and the QRM Methodology Document.\38\
---------------------------------------------------------------------------
\37\ The QRM methodology Document currently provides that the
VaR Floor Percentage is reviewed annually and updated. Notice, supra
note 3 at 39043.
\38\ Notice, supra note 3 at 39044.
---------------------------------------------------------------------------
III. 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 such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the proposed rule
change, the Commission finds that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the proposed rule change is consistent with
Sections
[[Page 48977]]
17A(b)(3)(F) \40\ of the Act and Rules 17Ad-22(e)(4)(i),\41\
(e)(6)(i),\42\ and (e)(23)(ii),\43\ each promulgated under the Act, for
the reasons described below.
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78s(b)(2)(C).
\40\ 15 U.S.C. 78q-1(b)(3)(F)
\41\ 17 CFR 240.17Ad-22(e)(4)(i).
\42\ 17 CFR 240.17Ad-22(e)(6)(i).
\43\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\44\
---------------------------------------------------------------------------
\44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
First, as described above in Section II.B., FICC states that the
current VaR Floor Percentage of 5 basis points has resulted in VaR
Charges that do not adequately cover FICC's exposure to certain
Clearing Member portfolios. FICC's proposal for the ability to adjust
the VaR Floor Percentage from 5 basis points up to 30 basis points
would better enable FICC to collect margin amounts commensurate with
its credit exposure to the types of Clearing Member portfolios not
adequately covered using a VaR Floor Percentage of 5 basis points.
FICC's collection of margin amounts commensurate with its credit
exposures would help ensure that FICC maintains adequate funds
necessary to manage the risks associated with performing its clearance
and settlement functions. Accordingly, the Commission finds the
proposal to allow FICC to adjust the VaR Floor Percentage from 5 basis
points up to 30 basis points would promote the prompt and accurate
clearance and settlement of securities transactions, consistent with
Section 17A(b)(3)(F) of the Act.\45\ Moreover, FICC's collection of
margin amounts commensurate with the credit exposure presented by each
Clearing Member portfolio should help ensure that, in the event of a
Clearing Member default, FICC's operations would not be disrupted and
non-defaulting Clearing Members would not be exposed to losses that
they cannot anticipate or control. Accordingly, the Commission finds
the proposal to allow FICC to adjust the VaR Floor Percentage from 5
basis points up to 30 basis points should safeguard the securities and
funds that are in FICC's custody or control or for which FICC is
responsible, consistent with Section 17A(b)(3)(F) of the Act.\46\
---------------------------------------------------------------------------
\45\ Id.
\46\ Id.
---------------------------------------------------------------------------
Second, as described above in Section II.C., FICC states that it
designed the proposal to provide 10 Business Days' notice to Clearing
Members prior to implementing any adjustment to the VaR Floor
Percentage in order to provide Clearing Members with sufficient time
prepare for any new VaR Charge amounts and thereby ensure that Clearing
Members are able to satisfy their Required Fund Deposit amounts.
Providing such notice in advance of implementing any adjustment to the
VaR Floor Percentage would help Clearing Members prepare to meet their
margin obligations, and thereby facilitate FICC's collection of
adequate margin amounts necessary to manage the risks associated with
performing its clearance and settlement functions, as well as help
ensure that, in the event of a Clearing Member default, FICC's
operations would not be disrupted and non-defaulting Clearing Members
would not be exposed to losses that they cannot anticipate or control.
Accordingly, the Commission finds the proposal to provide 10 Business
Days' notice to Clearing Members prior to implementing any adjustment
to the VaR Floor Percentage should: (1) Promote the prompt and accurate
clearance and settlement of securities transactions; and (2) safeguard
the securities and funds that are in FICC's custody or control or for
which FICC is responsible, consistent with Section 17A(b)(3)(F) of the
Act.\47\
---------------------------------------------------------------------------
\47\ Id.
---------------------------------------------------------------------------
Third, as described above in Section II.D., the VaR Floor
Percentage is currently subject to periodic model validations as part
of FICC's margin model validation on at least an annual basis. FICC
proposes to increase the frequency of this review by designating the
VaR Floor Percentage as a parameter of its VaR model to be reviewed on
at least a monthly basis. More frequent reviews would alert FICC of the
need to adjust the VaR Floor Percentage and would enable FICC to make
such adjustments in a more timely manner. Thus, more frequent reviews
of the VaR Floor Percentage would help FICC ensure that it collects
margin amounts commensurate with the credit risks presented by each
Clearing Member portfolio. FICC's collection of margin amounts
commensurate with the credit exposure presented by each Clearing Member
portfolio should help ensure that, in the event of a Clearing Member
default, FICC's operations would not be disrupted and non-defaulting
Clearing Members would not be exposed to losses that they cannot
anticipate or control. Accordingly, the Commission finds the proposal
for FICC to review the VaR Floor Percentage on at least a monthly basis
would safeguard the securities and funds that are in FICC's custody or
control or for which FICC is responsible, consistent with Section
17A(b)(3)(F) of the Act.\48\
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\48\ Id.
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Fourth, as described above in Section II.E., FICC designed the
proposed technical changes to enhance the clarity and accuracy of the
MBSD Rules and the QRM Methodology Document. Enhancing the clarity and
accuracy of the MBSD Rules helps to provide Clearing Members with a
better understanding of their rights and obligations thereunder. A
better understanding of Clearing Member rights and obligations would
reasonably help to increase the predictability and certainty of
Clearing Member interactions with FICC, which, in turn, would better
enable FICC to perform its clearance and settlement functions.
Additionally, since the QRM Methodology Document is used by FICC Risk
Management personnel, enhanced clarity regarding the frequency of model
validation of the VaR Floor Percentage would better enable FICC
personnel to perform the related risk management functions that support
FICC's clearance and settlement activities. Accordingly, the Commission
finds the proposed technical changes would promote the prompt and
accurate clearance and settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of the Act.\49\
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\49\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires a covered clearing
agency 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
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of
confidence.\50\
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\50\ 17 CFR 240.17Ad-22(e)(4)(i).
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As described above in Section II.D., FICC's proposal to conduct at
least monthly reviews of the VaR Floor Percentage is designed to help
FICC more effectively identify, measure, monitor, and manage its credit
exposure to each Clearing Member portfolio by increasing the frequency
of review from annually to monthly and thereby enabling FICC to
identify the need for
[[Page 48978]]
adjustments to the VaR Floor Percentage in a more timely manner.
Additionally, as described above in Section II.B., FICC's proposed
ability to adjust the VaR Floor Percentage within the range of 5 to 30
basis points is designed to better enable FICC to limit its credit
exposure to certain Clearing Member portfolios in the event that the
model-based volatility calculation (or Margin Proxy, if used) yield too
low a VaR Charge for such portfolios. As described above in Sections
II.B. and C., FICC's proposals for the ability to adjust the VaR Floor
Percentage within the range of 5 to 30 basis points, as well as the
provision of prior notice of such adjustments to Clearing Members, are
designed to help FICC better manage its credit exposure to Clearing
Members by collecting sufficient margin with respect to each Clearing
Member portfolio. Accordingly, the Commission finds the proposed
changes are consistent with the requirements of Rule 17Ad-22(e)(4)(i)
under the Act.\51\
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\51\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to cover, if the covered clearing
agency provides central counterparty services, its credit exposures to
its participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\52\
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\52\ 17 CFR 240.17Ad-22(e)(6)(i).
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FICC's proposals to: (1) Monitor the VaR Floor Percentage; (2)
adjust the VaR Floor Percentage in the event that other calculations
result in VaR Charges that do not adequately cover the risks presented
by certain Clearing Member portfolios; and (3) notify Clearing Members
in advance of any adjustment to the VaR Floor Percentage, are designed
to cover FICC's credit exposure to Clearing Member portfolios where
such exposure has not been adequately covered in the past.
Specifically, the proposal to allow FICC to adjust the VaR Floor
Percentage from 5 basis points up to 30 basis points should help FICC
to collect margin amounts commensurate with its credit exposure to the
types of Clearing Member portfolios not adequately covered using a VaR
Floor Percentage of 5 basis points. FICC's proposal to provide Clearing
Members with notice in advance of implementing any adjustment to the
VaR Floor Percentage should help Clearing Members prepare to meet their
margin obligations, and thereby facilitate FICC's collection of margin
amounts commensurate with affected Clearing Member portfolios. FICC's
proposal to increase the frequency with which it reviews the VaR Floor
Percentage from annually to monthly should alert FICC of the need to
adjust the VaR Floor Percentage and make such adjustments in a more
timely manner. Thus, the increased frequency of review would further
help FICC ensure that it collects margin amounts commensurate with the
credit risks presented by each Clearing Member portfolio. For these
reasons, the Commission finds the proposed changes are consistent with
the requirements of Rule 17Ad-22(e)(6)(i) under the Act.\53\
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\53\ Id.
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D. Consistency With Rule 17Ad-22(e)(23)(ii) Under the Act
Rule 17Ad-22(e)(23)(ii) under the Act requires a covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to provide sufficient information to
enable participants to identify and evaluate the risks, fees, and other
material costs they incur by participating in the covered clearing
agency.\54\
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\54\ 17 CFR 240.17Ad-22(e)(23)(ii).
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As described above in Section II.E., FICC's proposed technical
changes to the MBSD Rules would provide more details as to how the VaR
Floor is calculated than is currently set forth in the MBSD Rules.
Providing more comprehensive written information in the MBSD Rules
regarding the VaR Floor would enable Clearing Members to better
understand how the VaR Floor operates, which, in turn, should enable
Clearing Members to better evaluate the costs of participating in FICC.
Accordingly, the Commission finds the proposed technical changes to the
MBSD Rules are consistent with Rule 17Ad-22(e)(23)(ii) under the
Act.\55\
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\55\ Id.
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act
and, in particular, with the requirements of Section 17A of the Act
\56\ and the rules and regulations promulgated thereunder.
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\56\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\57\ that proposed rule change SR-FICC-2019-003, be, and hereby is,
approved.\58\
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\57\ 15 U.S.C. 78s(b)(2).
\58\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\59\
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\59\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20011 Filed 9-16-19; 8:45 am]
BILLING CODE 8011-01-P
