Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Advance Notice, as Modified by Amendment No. 1, To Introduce the Margin Liquidity Adjustment Charge and Include a Bid-Ask Risk Charge in the VaR Charges, 55341-55347 [2020-19658]
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Federal Register / Vol. 85, No. 173 / Friday, September 4, 2020 / Notices
The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
PLACE:
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89718; File No. SR–FICC–
2020–802]
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the public.
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and (10) and 17 CFR 200.402(a)(3),
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Dated: September 2, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–19787 Filed 9–2–20; 4:15 pm]
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Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Advance Notice, as Modified
by Amendment No. 1, To Introduce the
Margin Liquidity Adjustment Charge
and Include a Bid-Ask Risk Charge in
the VaR Charges
September 1, 2020.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that on July 30, 2020,
Fixed Income Clearing Corporation
(‘‘FICC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the advance notice SR–FICC–2020–802.
On August 13, 2020, FICC filed
Amendment No. 1 to the advance
notice, to make clarifications and
corrections to the advance notice.3 The
advance notice, as modified by
Amendment No. 1 (hereinafter, the
‘‘Advance Notice’’), is described in
Items I, II and III below, which Items
have been prepared by the clearing
agency.4 The Commission is publishing
this notice to solicit comments on the
Advance Notice from interested
persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This Advance Notice consists of
modifications to the FICC Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘GSD Rules’’) and the FICC MortgageBacked Securities Division (‘‘MBSD’’)
Clearing Rules (‘‘MBSD Rules,’’ and
together with the GSD Rules, ‘‘Rules’’)
to introduce the Margin Liquidity
1 12
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 Amendment No. 1 made clarifications and
corrections to the description of the advance notice
and Exhibits 3 and 5 of the filing, and these
clarifications and corrections have been
incorporated, as appropriate, into the description of
the advance notice in Item I below.
4 On July 30, 2020, FICC filed this Advance
Notice as a proposed rule change (SR–FICC–2020–
009) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4 thereunder, 17 CFR 240.19b–4. On August
13, 2020, FICC filed Amendment No. 1 to the
proposed rule change to make similar clarifications
and corrections to the proposed rule change. A copy
of the proposed rule change, as modified by
Amendment No. 1, is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
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55341
Adjustment (‘‘MLA’’) charge as an
additional component of GSD and
MBSD’s respective Clearing Funds, as
described in greater detail below.5
The advance notice also consists of
modifications to the GSD Rules, the
MBSD Rules, the GSD Methodology
Document—GSD Initial Market Risk
Margin Model (‘‘GSD QRM
Methodology Document’’) and the
MBSD Methodology and Model
Operations Document—MBSD
Quantitative Risk Model (‘‘MBSD QRM
Methodology Document,’’ and together
with the GSD QRM Methodology
Document, the ‘‘QRM Methodology
Documents’’) in order to (i) enhance the
calculation of the VaR Charges of GSD
and MBSD to include a bid-ask spread
risk charge, and (ii) make necessary
technical changes to the QRM
Methodology Documents in order to
implement this proposed change.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the Advance Notice and discussed any
comments it received on the Advance
Notice. The text of these statements may
be examined at the places specified in
Item IV below. The clearing agency has
prepared summaries, set forth in
sections A and B below, of the most
significant aspects of such statements.
(A) Clearing Agency’s Statement on
Comments on the Advance Notice
Received From Members, Participants,
or Others
FICC has not received or solicited any
written comments relating to this
proposal. FICC will notify the
Commission of any written comments
received by FICC.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
FICC is proposing to enhance the
methodology for calculating Required
Fund Deposits to the respective Clearing
Funds of GSD and MBSD by (1)
introducing a new component, the MLA
charge, which would be calculated to
address the risk presented to FICC when
a Member’s portfolio contains large net
unsettled positions in a particular group
of securities with a similar risk profile
5 Capitalized terms not defined herein are defined
in the GSD Rules, available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf, and the MBSD Rules,
available at www.dtcc.com/∼/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf.
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or in a particular transaction type
(referred to as ‘‘asset groups’’),6 and (2)
enhancing the calculation of the VaR
Charges of GSD and MBSD by including
a bid-ask spread risk charge, as
described in more detail below.7
FICC is also proposing to make certain
technical changes to the QRM
Methodology Documents, as described
in below, in order to implement the
proposed enhancement to the VaR
Charges.
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(i) Overview of the Required Fund
Deposits and the Clearing Funds
As part of its market risk management
strategy, FICC manages its credit
exposure to Members by determining
the appropriate Required Fund Deposits
to the GSD and MBSD Clearing Fund
and monitoring their sufficiency, as
provided for in the Rules.8 The
Required Fund Deposits serve as each
Member’s margin. The objective of a
Member’s Required Fund Deposit is to
mitigate potential losses to FICC
associated with liquidating a Member’s
portfolio in the event FICC ceases to act
for that Member (hereinafter referred to
as a ‘‘default’’).9 The aggregate of all
Members’ Required Fund Deposits
constitutes the respective GSD and
MBSD Clearing Funds. FICC would
access the GSD and MBSD Clearing
Funds should a defaulting Member’s
own Required Fund Deposit be
insufficient to satisfy losses to FICC
caused by the liquidation of that
Member’s portfolio.
Pursuant to the Rules, each Member’s
Required Fund Deposit amount consists
of a number of applicable components,
each of which is calculated to address
specific risks faced by FICC, as
identified within the Rules.10 The VaR
6 References herein to ‘‘Members’’ refer to GSD
Netting Members and MBSD Clearing Members, as
such terms are defined in the Rules. References
herein to ‘‘net unsettled positions’’ refer to, with
respect to GSD, Net Unsettled Positions, as such
term is defined in GSD Rule 1 (Definitions) and,
with respect to MBSD, refers to the net positions
that have not yet settled. Supra note 4.
7 The results of a study of the potential impact of
adopting the proposed changes have been provided
to the Commission.
8 See GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund
Formula and Loss Allocation), supra note 4. FICC’s
market risk management strategy is designed to
comply with Rule 17Ad–22(e)(4) under the Act,
where these risks are referred to as ‘‘credit risks.’’
17 CFR 240.17Ad–22(e)(4).
9 The Rules identify when FICC may cease to act
for a Member and the types of actions FICC may
take. For example, FICC may suspend a firm’s
membership with FICC or prohibit or limit a
Member’s access to FICC’s services in the event that
Member defaults on a financial or other obligation
to FICC. See GSD Rule 21 (Restrictions on Access
to Services), and MBSD Rule 14 (Restrictions on
Access to Services), of the Rules, supra note 4.
10 Supra note 4.
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Charge comprises the largest portion of
a Member’s Required Fund Deposit
amount. Currently, the GSD QRM
Methodology Document states that the
total VaR Charge for each portfolio is the
sum of the sensitivity VaR of the
portfolio plus the haircut charges plus
the repo interest volatility charges plus
the pool/TBA basis charge. In the MBSD
QRM Methodology Document, the
current description of the total VaR
Charge states that it is the sum of the
designated VaR Charge and the haircut
charge.
The VaR Charge is calculated using a
risk-based margin methodology that is
intended to capture the risks related to
market price that is associated with the
securities in a Member’s portfolio. This
risk-based margin methodology is
designed to project the potential losses
that could occur in connection with the
liquidation of a defaulting Member’s
portfolio, assuming a portfolio would
take three days to liquidate in normal
market conditions. The projected
liquidation gains or losses are used to
determine the amount of the VaR
Charge, which is calculated to cover
projected liquidation losses at 99
percent confidence level for Members.11
FICC regularly assesses market and
liquidity risks as such risks relate to its
margining methodologies to evaluate
whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market. The proposed
changes to include the MLA charge to
its Clearing Fund methodology and to
enhance the VaR Charges by including
a bid-ask spread risk charge, as
described below, are the result of FICC’s
regular review of the effectiveness of its
margining methodology.
(ii) Overview of Liquidation Transaction
Costs and Proposed Changes
Each of the proposed changes
addresses a similar, but separate, risk
that FICC faces increased transaction
costs when it liquidates the net
unsettled positions of a defaulted
Member due to the unique
characteristics of that Member’s
portfolio. The transaction costs to FICC
to liquidate a defaulted Member’s
portfolio include both market impact
costs and fixed costs. Market impact
costs are the costs due to the
marketability of a security, and
generally increase when a portfolio
contains large net unsettled positions in
a particular group of securities with a
11 Unregistered Investment Pool Clearing
Members are subject to a VaR Charge with a
minimum target confidence level assumption of
99.5 percent. See MBSD Rule 4, Section 2(c), supra
note 4.
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similar risk profile or in a particular
transaction type, as described more
below. Fixed costs are the costs that
generally do not fluctuate and may be
caused by the bid-ask spread of a
particular security. The bid-ask spread
of a security accounts for the difference
between the observed market price that
a buyer is willing to pay for that security
and the observed market price that a
seller is willing to sell that security.
The transaction cost to liquidate a
defaulted Member’s portfolio is
currently captured by the measurement
of market risk through the calculation of
the VaR Charge.12 The proposed
changes would supplement and
enhance the current measurement of
this market risk to address situations
where the characteristics of the
defaulted Member’s portfolio could
cause these costs to be higher than the
amount collected for the VaR Charge.
First, as described in more detail
below, the MLA charge is designed to
address the market impact costs of
liquidating a defaulted Member’s
portfolio that may increase when that
portfolio includes large net unsettled
positions in a particular group of
securities with a similar risk profile or
in a particular transaction type. These
positions may be more difficult to
liquidate because a large number of
securities with similar risk profiles
could reduce the marketability of those
large net unsettled positions, increasing
the market impact costs to FICC. As
described below, the MLA charge would
supplement the VaR Charge.
Second, as described in more detail
below, the bid-ask spread risk charge
would address the risk that the
transaction costs of liquidating a
defaulted Member’s net unsettled
positions may increase due to the fixed
costs related to the bid-ask spread. As
described below, this proposed change
would be incorporated into, and,
thereby, enhance the current measure of
transaction costs through, the VaR
Charge.
(iii) Proposed Margin Liquidity
Adjustment Charge
In order to address the risks of an
increased market impact cost presented
by portfolios that contain large net
unsettled positions in the same asset
group, FICC is proposing to introduce a
new component to the GSD and MBSD
Clearing Fund formulas, the MLA
charge.
As noted above, a Member portfolio
with large net unsettled positions in a
12 The calculation of the VaR Charge is described
in GSD Rule 1 (Definitions) and MBSD Rules 1
(Definitions). Supra note 4.
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particular group of securities with a
similar risk profile or in a particular
transaction type may be more difficult
to liquidate in the market in the event
the Member defaults because a
concentration in that group of securities
or in a transaction type could reduce the
marketability of those large net
unsettled positions. Therefore, such
portfolios create a risk that FICC may
face increased market impact cost to
liquidate that portfolio in the assumed
margin period of risk of three business
days at market prices.
The proposed MLA charge would be
calculated to address this increased
market impact cost by assessing
sufficient margin to mitigate this risk.
As described below, the proposed MLA
charge would be calculated for different
asset groups. Essentially, the calculation
is designed to compare the total market
value of a net unsettled position in a
particular asset group, which FICC
would be required to liquidate in the
event of a Member default, to the
available trading volume of that asset
group or equities subgroup in the
market.13 If the market value of the net
unsettled position is large, as compared
to the available trading volume of that
asset group, then there is an increased
risk that FICC would face additional
market impact costs in liquidating that
position in the event of a Member
default. Therefore, the proposed
calculation would provide FICC with a
measurement of the possible increased
market impact cost that FICC could face
when it liquidates a large net unsettled
position in a particular asset group.
To calculate the MLA charge, FICC
would categorize securities into separate
asset groups. For GSD, asset groups
would include the following, each of
which have similar risk profiles: (a) U.S.
Treasury securities, which would be
further categorized by maturity—those
maturing in (i) less than one year, (ii)
equal to or more than one year and less
than two years, (iii) equal to or more
than two years and less than five years,
(iv) equal to or more than five years and
less than ten years, and (v) equal to or
more than ten years; (b) TreasuryInflation Protected Securities (‘‘TIPS’’),
which would be further categorized by
maturity—those maturing in (i) less than
two years, (ii) equal to or more than two
years and less than six years, (iii) equal
to or more than six years and less than
eleven years, and (iv) equal to or more
than eleven years; (c) U.S. agency
13 FICC would determine average daily trading
volume by reviewing data that is made publicly
available by the Securities Industry and Financial
Markets Association (‘‘SIFMA’’), at https://
www.sifma.org/resources/archive/research/
statistics.
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bonds; and (d) mortgage pools
transactions. For MBSD, to-beannounced (‘‘TBA’’) transactions,
Specified Pool Trades and Stipulated
Trades would be included in one
mortgage-backed securities asset group.
FICC would first calculate a
measurement of market impact cost
with respect to the net unsettled
positions of a Member in each of these
asset groups. As described above, the
calculation of an MLA charge is
designed to measure the potential
additional market impact cost to FICC of
closing out a large net unsettled position
in that particular asset group.
To determine the market impact cost
for each net unsettled position in
Treasuries maturing less than one year
and TIPS for GSD and in the mortgagebacked securities asset group for MBSD,
FICC would use the directional market
impact cost, which is a function of the
net unsettled position’s net directional
market value.14 To determine the
market impact cost for all other net
unsettled positions, FICC would add
together two components: (1) The
directional market impact cost, as
described above, and (2) the basis cost,
which is based on the net unsettled
position’s gross market value.15
The calculation of market impact cost
for net unsettled positions in Treasuries
maturing less than one year and TIPS
for GSD and in the mortgage-backed
securities asset group for MBSD would
not include basis cost because basis risk
is negligible for these types of positions.
For all asset groups, when
determining the market impact costs,
the net directional market value and the
gross market value of the net unsettled
positions would be divided by the
average daily volumes of the securities
in that asset group over a lookback
period.16
FICC would then compare the
calculated market impact cost to a
portion of the VaR Charge that is
allocated to net unsettled positions in
those asset groups.17 If the ratio of the
14 The
net directional market value of an asset
group within a portfolio is calculated as the
absolute difference between the market value of the
long net unsettled positions in that asset group, and
the market value of the short net unsettled positions
in that asset group. For example, if the market value
of the long net unsettled positions is $100,000, and
the market value of the short net unsettled positions
is $150,000, the net directional market value of the
asset group is $50,000.
15 To determine the gross market value of the net
unsettled positions in each asset group, FICC would
sum the absolute value of each CUSIP in the asset
group.
16 Supra note 12.
17 FICC’s margining methodology uses a three-day
assumed period of risk. For purposes of this
calculation, FICC would use a portion of the VaR
Charge that is based on one-day assumed period of
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55343
calculated market impact cost to the 1day VaR Charge is greater than a
threshold, an MLA charge would be
applied to that asset group.18 If the ratio
of these two amounts is equal to or less
than this threshold, an MLA charge
would not be applied to that asset
group. The threshold would be based on
an estimate of the market impact cost
that is incorporated into the calculation
of the 1-day VaR charge, such that an
MLA charge would apply only when the
calculated market impact cost exceeds
this threshold.
When applicable, an MLA charge for
each asset group would be calculated as
a proportion of the product of (1) the
amount by which the ratio of the
calculated market impact cost to the
applicable 1-day VaR charge exceeds the
threshold, and (2) the 1-day VaR charge
allocated to that asset group.
For each Member portfolio, FICC
would add the MLA charges for net
unsettled positions in each asset group
to determine a total MLA charge for a
Member.
The ratio of the calculated market
impact cost to the 1-day VaR Charge
would also determine if FICC would
apply a downward adjustment, based on
a scaling factor, to the total MLA charge,
and the size of any adjustment. For net
unsettled positions that have a higher
ratio of calculated market impact cost to
the 1-day VaR Charge, FICC would
apply a larger adjustment to the MLA
charge by assuming that it would
liquidate that position on a different
timeframe than the assumed margin
period of risk of three business days. For
example, FICC may be able to mitigate
potential losses associated with
liquidating a Member’s portfolio by
liquidating a net unsettled position with
a larger VaR Charge over a longer
timeframe. Therefore, when applicable,
FICC would apply a multiplier to the
calculated MLA charge. When the ratio
of calculated market impact cost to the
1-day VaR Charge is lower, the
risk and calculated by applying a simple squareroot of time scaling, referred to in this proposed
rule change as ‘‘1-day VaR Charge.’’ Any changes
that FICC deems appropriate to this assumed period
of risk would be subject to FICC’s model risk
management governance procedures set forth in the
Clearing Agency Model Risk Management
Framework (‘‘Model Risk Management
Framework’’). See Securities Exchange Act Release
Nos. 81485 (August 25, 2017), 82 FR 41433 (August
31, 2017) (File No. SR–FICC–2017–014); 84458
(October 19, 2018), 83 FR 53925 (October 25, 2018)
(File No. SR–FICC–2018–010); 88911 (May 20,
2020), 85 FR 31828 (May 27, 2020) (File No. SR–
FICC–2020–004).
18 FICC would review the method for calculating
the thresholds from time to time and any changes
that FICC deems appropriate would be subject to
FICC’s model risk management governance
procedures set forth in the Model Risk Management
Framework. See id.
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multiplier would be one, and no
adjustment would be applied; as the
ratio gets higher the multiplier
decreases and the MLA charge is
adjusted downward.
The final MLA charge would be
calculated daily and, when the charge is
applicable, as described above, would
be included as a component of
Members’ Required Fund Deposit.
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MLA Excess Amount for GSD
Sponsored Members
For GSD, the calculation of the MLA
charge for a Sponsored Member that
clears through single account sponsored
by a Sponsoring Member would be the
same as described above. For a GSD
Sponsored Member that clears through
multiple accounts sponsored by
multiple Sponsoring Members, in
addition to calculating an MLA charge
for each account (as described above),
FICC would also calculate an MLA
charge for the consolidated portfolio.
If the MLA charge of the consolidated
portfolio is higher than the sum of all
MLA charges for each account of the
Sponsored Member, the Sponsored
Member would be charged the amount
of such difference, to be referred to as
the ‘‘MLA Excess Amount,’’ in addition
to the applicable MLA charge. If the
MLA charge of the consolidated
portfolio is not higher than the sum of
all MLA charges for each account of the
Sponsored Member, then the Sponsored
Member will only be charged an MLA
charge for each sponsored account, as
applicable.
The MLA Excess Amount is designed
to capture the additional market impact
cost that could be incurred when a
Sponsored Member defaults, and each
of the Sponsoring Members liquidates
net unsettled positions associated with
that defaulted Sponsored Member. If
large net unsettled positions in the same
asset group are being liquidated by
multiple Sponsoring Members, the
market impact cost to liquidate those
positions could increase. The MLA
Excess Amount would address this
additional market impact cost by
capturing any difference between the
calculations of the MLA charge for each
sponsored account and for the
consolidated portfolio.
Proposed Changes to GSD and MBSD
Rules
The proposal described above would
be implemented into the GSD Rules and
MBSD Rules. Specifically, FICC would
amend GSD Rule 1 (Definitions) and
MBSD Rule 1 (Definitions) to include a
description of the MLA charge.
The proposed change to GSD Rule 1
(Definitions) would first identify each of
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the asset groups and would then
separately describe the two calculations
of market impact cost by these asset
groups by identifying the components of
these calculations. The proposed
definition would state that GSD would
compare the calculated market impact
cost to a portion of that Member’s VaR
Charge, to determine if an MLA charge
would be applied to an asset group. The
proposed definition would then state
that GSD would add each of the
applicable MLA charges calculated for
each asset group together. Finally, the
proposed definition would state that
GSD may apply a downward adjusting
scaling factor to result in a final MLA
charge. The proposed change to GSD
Rule 1 (Definitions) would also include
a definition of the ‘‘MLA Excess
Amount.’’ The proposed definition
would state that it would be an
additional charge applicable to
Sponsored Members that clear through
multiple accounts sponsored by
multiple Sponsoring Members and
would describe how the additional
charge would be determined.
The proposed change to MBSD Rule
1 (Definitions) would define the MBS
asset group, for purposes of calculating
this charge, and would then describe the
calculation of market impact cost for
that asst group by identifying the
components of this calculation. The
proposed definition would state that
MBSD would compare the calculated
market impact cost to a portion of the
Member’s VaR Charge, to determine if
an MLA charge would be applied to a
net unsettled position. Finally, the
proposed definition would state that
MBSD may apply a downward adjusting
scaling factor to result in a final MLA
charge.
FICC would also amend GSD Rule 4
(Clearing Fund and Loss Allocation) and
MBSD Rule 4 (Clearing Fund and Loss
Allocation) to include the MLA charge
as a component of the Clearing Fund
formula.
(iv) Proposed Bid-Ask Spread Risk
Charge
FICC has identified potential risk that
its margining methodologies do not
account for the transaction costs related
to bid-ask spread in the market that
could be incurred when liquidating a
portfolio. Bid-ask spreads account for
the difference between the observed
market price that a buyer is willing to
pay for a security and the observed
market price that a seller is willing to
sell that security. Therefore, FICC is
proposing to amend the VaR models of
GSD and MBSD to include a bid-ask
spread risk charge in the VaR Charges of
GSD and MBSD to address this risk.
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In order to calculate this charge, GSD
would segment Members’ portfolios into
separate bid-ask spread risk classes by
product type and maturity. The bid-ask
spread risk classes would be separated
into the following types: (a) Mortgage
pools (‘‘MBS’’); (b) TIPS; (c) U.S. agency
bonds; and (d) U.S. Treasury securities,
which would be further segmented into
separate classes based on maturities as
follows: (i) Less than five years, (ii)
equal to or more than five years and less
than ten years, and (iii) equal to or more
than ten years. FICC would further
segment the U.S. Treasury securities
into separate classes based on
maturities.
Only the MBS asset group is
applicable to MBSD Member portfolios.
FICC would exclude Option Contracts
in to-be-announced (‘‘TBA’’)
transactions from the bid-ask spread risk
charge because, in the event of a
Member default, FICC would liquidate
any Option Contracts in TBAs in a
Member’s portfolio at the intrinsic value
of the Option Contract and, therefore,
does not face a transaction cost related
to the bid-ask spread.
Each product type and maturity risk
class would be assigned a specific bidask spread haircut rate in the form of a
basis point charge that would be applied
to the gross market value in that
particular risk class. The applicable bidask spread risk charge would be the
product of the gross market value in a
particular risk class in the Member’s
portfolio and the applicable basis point
charge. The bid-ask spread risk charge
would be calculated at the portfolio
level, such that FICC would aggregate
the bid-ask spread risk charges of the
applicable risk classes for the Member’s
portfolio.
FICC proposes to review the haircut
rates annually based on either the
analysis of liquidation transaction costs
related to the bid-ask spread that is
conducted in connection with its annual
simulation of a Member default or
market data that is sourced from a thirdparty data vendor. Based on the
analyses from recent years’ simulation
exercises, FICC does not anticipate that
these haircut rates would change
significantly year over year. FICC may
also adjust the haircut rates following its
annual model validation review, to the
extent the results of that review indicate
the current haircut rates are not
adequate to address the risk presented
by transaction costs from a bid-ask
spread.19
19 All proposed changes to the haircuts would be
subject to FICC’s model risk management
governance procedures set forth in the Model Risk
Management Framework. See id.
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The proposed initial haircuts are
based on the analysis from the most
recent annual default simulation and
market data sourced from a third-party
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data vendor, and are listed in the table
below:
Class
Asset class
Maturity
MBS .........................................................
TIPS .........................................................
Agency .....................................................
Treasury 5– .............................................
Treasury 5–10 .........................................
Treasury 10+ ...........................................
MBS .........................................................
TIPS .........................................................
Agency bonds ..........................................
Treasury ..................................................
Treasury ..................................................
Treasury ..................................................
All .............................................................
All .............................................................
All .............................................................
< 5 years .................................................
5–10 years ...............................................
>10 years .................................................
Proposed Changes to GSD and MBSD
Rules
The proposal described above would
be implemented into the GSD Rules and
MBSD Rules. Specifically, FICC would
include a description of the bid-ask
spread risk charge in the current
definitions of the VaR Charge in GSD
Rule 1 (Definitions) and MBSD Rule 1
(Definitions). The proposed change
would state that the calculations the
VaR Charge shall include an additional
bid-ask spread risk charge measured by
multiplying the gross market value of
each net unsettled position by a basis
point charge. The proposed change
would also state that the basis point
charge would be based on six risk
classes and would identify those risk
classes.
Proposed Changes to QRM Methodology
Documents
To implement this proposal, FICC is
proposing to amend the QRM
Methodology Documents to describe the
bid-ask spread risk charge. Specifically,
FICC would describe (i) that the bid-ask
spread risk charge is designed to
mitigate the risk related to transaction
costs in liquidating a portfolio in the
event of a Member default; (ii) how the
bid-ask spread risk charge would be
calculated; and (ii) the impact analysis
that was conducted in each of the QRM
Methodology Documents. The GSD
QRM Methodology Document would
describe the proposed six classes (listed
in the table above). The MBSD QRM
Methodology Document would state
that the only class for MBSD portfolios
is the MBS asset class, and that the
Option Contracts in TBAs would be
excluded from the proposed charge.
Finally, FICC would update the
descriptions of the total VaR Charge in
the QRM Methodology Documents to
include the bid-ask spread risk charge as
a component of this charge.
(v) Proposed Technical Changes
Finally, FICC would amend the QRM
Methodology Documents to re-number
the sections and tables, and update
certain section titles, as necessary, to
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add a new section that describes the
proposed bid-ask spread risk charge.
(vi) Implementation Timeframe
FICC would implement the proposed
changes no later than 10 Business Days
after the later of the no objection to the
Advance Notice and approval of the
related proposed rule change 20 by the
Commission. FICC would announce the
effective date of the proposed changes
by Important Notice posted to its
website.
Anticipated Effect on and Management
of Risk
FICC believes that the proposed
changes to enhance the margining
methodology as described above would
enable FICC to better limit its risk
exposures to Members arising out of
their net unsettled positions.
As stated above, the proposed MLA
charge is designed to help limit FICC’s
exposures to the risks presented by a
Member portfolio that contains large net
unsettled positions in securities of the
same asset group and would enhance
FICC’s ability to address risks related to
liquidating such positions in the event
of a Member default. The proposed
MLA charge would allow FICC to
collect sufficient financial resources to
cover its exposure that it may face an
increased market impact cost in
liquidating net unsettled positions that
is not captured by the VaR Charge.
As described above, the proposed
MLA Excess Amount is designed to
capture any additional market impact
cost that could be incurred when each
of the Sponsoring Members liquidates
large net unsettled positions in
securities of the same asset group that
are all associated with one defaulted
Sponsored Member.
The proposal to enhance the VaR
Charges by including a bid-ask spread
risk charge is also designed to help limit
FICC’s exposures to the risks related to
increased transaction costs due to the
bid-ask spread in the market that could
be incurred when liquidating a
portfolio. Therefore, this proposed
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2.1
3.8
0.6
0.7
0.7
Consistency With Clearing Supervision
Act
FICC believes that the proposals are
consistent with the Clearing
Supervision Act, specifically with the
risk management objectives and
principles of Section 802(b), and with
certain of the risk management
standards adopted by the Commission
pursuant to Section 805(a)(2), for the
reasons described below.21
(i) Consistency With Section 805(b) of
the Clearing Supervision Act
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, its stated
purpose is instructive: To mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.22
FICC believes the proposals are
consistent with the objectives and
principles of these risk management
standards as described in Section 805(b)
of the Clearing Supervision Act and in
the Covered Clearing Agency Standards.
First, the proposal would include the
MLA charge as an additional component
to the Clearing Fund. As described
above, this new margin charge is
designed to address the market impact
costs of liquidating a defaulted
Member’s portfolio that may increase
when that portfolio includes large net
22 12
Sfmt 4703
Haircut
(bps)
change would also help address FICC’s
risks related to its ability to liquidate
such positions in the event of a Member
default.
By providing FICC with a more
effective measurement of its exposures,
the proposed changes would also
mitigate risk for Members because
lowering the risk profile for FICC would
in turn lower the risk exposure that
Members may have with respect to FICC
in its role as a central counterparty.
21 12
20 Supra
55345
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U.S.C. 5464(b)(1).
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unsettled positions in a particular group
of securities with a similar risk profile
or in a particular transaction type. These
positions may be more difficult to
liquidate in the market because a
concentration in that group of securities
or in a transaction type could reduce the
marketability of those large net
unsettled positions, increasing the
market impact costs to FICC. The
proposed MLA charge would allow
FICC to collect sufficient financial
resources to cover its exposure that it
may face increased market impact costs
in liquidating net unsettled positions
that is not captured by the VaR Charge.
Additionally, the proposed MLA
Excess Amount would capture
additional market impact cost that could
be incurred when each of the
Sponsoring Members liquidates large
net unsettled positions in securities of
the same asset group that are all
associated with one defaulted
Sponsored Member.
Second, the proposed bid-ask spread
risk charge is designed to help limit
FICC’s exposures to the risks related to
increased transaction costs due to the
bid-ask spread in the market that could
be incurred when liquidating a
portfolio. As stated above, this proposal
would also help address FICC’s risks
related to its ability to liquidate such
positions in the event of a Member
default.
Therefore, because the proposals are
designed to enable FICC to better limit
its exposure to Members in the event of
a Member default, FICC believes they
are consistent with promoting robust
risk management. The proposals would
also strengthen the liquidity of FICC by
requiring deposits to the Clearing Fund
that are calculated to address the
potential risks FICC may face, which is
one of FICC’s default liquidity
resources.
As a result, FICC believes the
proposals would be consistent with the
objectives and principles of Section
805(b) of the Clearing Supervision Act,
which specify the promotion of robust
risk management, promotion of safety
and soundness, reduction of systemic
risks and support of the stability of the
broader financial system by, among
other things, strengthening the liquidity
of systemically important financial
market utilities, such as FICC.
(ii) Consistency With Rule 17Ad–
22(e)(4)(i) and (6)(i) Under the Act
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe risk
management standards for the payment,
clearing and settlement activities of
designated clearing entities, like FICC,
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16:42 Sep 03, 2020
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and financial institutions engaged in
designated activities for which the
Commission is the supervisory agency
or the appropriate financial regulator.23
The Commission has accordingly
adopted risk management standards
under Section 805(a)(2) of the Clearing
Supervision Act 24 and Section 17A of
the Act (‘‘Covered Clearing Agency
Standards’’).25 The Covered Clearing
Agency Standards require covered
clearing agencies to establish,
implement, maintain, and enforce
written policies and procedures that are
reasonably designed to meet certain
minimum requirements for their
operations and risk management
practices on an ongoing basis.26
FICC believes that the proposed
changes are consistent with Rules
17Ad–22(e)(4)(i) and (e)(6)(i) of the
Covered Clearing Agency Standards 27
for the reasons described below.
Rule 17Ad–22(e)(4)(i) under the Act
requires, in part, that FICC 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 arising from its payment, clearing,
and settlement processes, including by
maintaining sufficient financial
resources to cover its credit exposure to
each participant fully with a high degree
of confidence.28
As described above, FICC believes
that both of the proposed changes
would enable it to better identify,
measure, monitor, and, through the
collection of Members’ Required Fund
Deposits, manage its credit exposures to
Members by maintaining sufficient
resources to cover those credit
exposures fully with a high degree of
confidence.
Specifically, FICC believes that the
proposed MLA charge would effectively
mitigate the risks related to large net
unsettled positions of securities in the
same asset group within a portfolio and
would address the potential increased
risks FICC may face related to its ability
to liquidate such positions in the event
of a Member default. The proposed
MLA Excess Amount would supplement
this proposed charge to capture any
additional market impact cost related to
Sponsored Members that clear through
multiple accounts with multiple
Sponsoring Members.
23 12
U.S.C. 5464(a)(2).
24 Id.
25 17
CFR 240.17Ad–22(e).
Therefore, FICC believes that the
proposal would enhance FICC’s ability
to effectively identify, measure and
monitor its credit exposures and would
enhance its ability to maintain sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence. As such,
FICC believes the proposed changes are
consistent with Rule 17Ad–22(e)(4)(i)
under the Act.29
Additionally, FICC believes that the
proposed bid-ask spread risk charge
would enhance FICC’s ability to
identify, measure, monitor and manage
its credit exposures to Members and
those exposures arising from its
payment, clearing, and settlement
processes because the proposed changes
would better ensure that FICC maintains
sufficient financial resources to cover its
credit exposure to each Member with a
high degree of confidence. FICC believes
that the proposed change would enable
FICC to more effectively identify,
measure, monitor and manage its
exposures to risks related to market
price, and enable it to better limit its
exposure to potential losses from
Member defaults by providing a more
effective measure of the risks related to
market price. As described above, due to
the bid-ask spread in the market, there
is an observable transaction cost to
liquidate a portfolio. The proposed bidask spread risk charge is designed to
manage the risk related to this
transaction cost in the event a Member’s
portfolio is liquidated. As such, FICC
believes that the proposed change
would better address the potential risks
that FICC may face that are related to its
ability liquidate a Member’s net
unsettled positions in the event of that
firm’s default, and thereby enhance
FICC’s ability to effectively identify,
measure and monitor its credit
exposures and would enhance its ability
to maintain sufficient financial
resources to cover its credit exposure to
each participant fully with a high degree
of confidence. In this way, FICC
believes this proposed change is also
consistent with Rule 17Ad–22(e)(4)(i)
under the Act.30
Rule 17Ad–22(e)(6)(i) under the Act
requires, in part, that FICC establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
26 Id.
27 17
28 17
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CFR 240.17Ad–22(e)(4)(i).
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29 Id.
30 Id.
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of each relevant product, portfolio, and
market.31
The Required Fund Deposits are made
up of risk-based components (as margin)
that are calculated and assessed daily to
limit FICC’s credit exposures to
Members, including the VaR Charges.
FICC’s proposed change to introduce an
MLA charge is designed to more
effectively address the risks presented
by large net unsettled positions in the
same asset group. FICC believes the
addition of the MLA charge would
enable FICC to assess a more
appropriate level of margin that
accounts for these risks. This proposed
change is designed to assist FICC in
maintaining a risk-based margin system
that considers, and produces margin
levels commensurate with, the risks and
particular attributes of portfolios that
contain large net unsettled positions in
the same asset group and may be more
difficult to liquidate in the event of a
Member default. The proposed MLA
Excess Amount would further this goal
by measuring any additional risks that
could be presented by a Sponsored
Member that clears through multiple
accounts at multiple Sponsoring
Members. Therefore, FICC believes the
proposed change is consistent with Rule
17Ad–22(e)(6)(i) under the Act.32
Furthermore, FICC believes that
including the bid-ask spread risk charge
within the calculation of the final VaR
Charges of GSD and MBSD would
provide FICC with a better assessment
of its risks related to market price. This
proposed change would enable FICC to
assess a more appropriate level of
margin that accounts for this risk at the
portfolio level. As such, each Member
portfolio would be subject to a riskbased margining system that, at
minimum, considers, and produces
margin levels commensurate with, the
risks and particular attributes of each
relevant product, portfolio, and market,
consistent with Rule 17Ad–22(e)(6)(i)
under the Act.33
jbell on DSKJLSW7X2PROD with NOTICES
III. Date of Effectiveness of the Advance
Notice, and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received. The clearing
agency shall not implement the
31 17
CFR 240.17Ad–22(e)(6)(i).
32 Id.
33 Id.
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16:42 Sep 03, 2020
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proposed change if the Commission has
any objection to the proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
The clearing agency shall post notice
on its website of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the Advance Notice
is consistent with the Clearing
Supervision Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FICC–2020–802 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–FICC–2020–802. 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 Advance Notice that
are filed with the Commission, and all
written communications relating to the
Advance Notice between the
Commission and any person, other than
those that may be withheld from the
PO 00000
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55347
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). 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–FICC–
2020–802 and should be submitted on
or before September 21, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–19658 Filed 9–3–20; 8:45 am]
BILLING CODE 8011–01–P
DEPARTMENT OF STATE
[Public Notice 11181]
60-Day Notice of Proposed Information
Collection: Request for Approval of
Special Validation for Travel to a
Restricted Country or Area
Notice of request for public
comment.
ACTION:
The Department of State is
seeking Office of Management and
Budget (OMB) approval for the
information collection described below.
In accordance with the Paperwork
Reduction Act of 1995, we are
requesting comments on this collection
from all interested individuals and
organizations. The purpose of this
notice is to allow 60 days for public
comment preceding submission of the
collection to OMB.
DATES: The Department will accept
comments from the public up to
November 3, 2020.
ADDRESSES: You may submit comments
by any of the following methods:
• Web: Persons with access to the
internet may comment on this notice by
going to www.Regulations.gov. You can
search for the document by entering
‘‘Docket Number: DOS–2020–0035’’ in
the Search field. Then click the
‘‘Comment Now’’ button and complete
the comment form.
• Email: PPTSpecialValidations@
state.gov.
SUMMARY:
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]]>Agencies
[Federal Register Volume 85, Number 173 (Friday, September 4, 2020)]
[Notices]
[Pages 55341-55347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19658]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89718; File No. SR-FICC-2020-802]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Advance Notice, as Modified by Amendment No. 1, To
Introduce the Margin Liquidity Adjustment Charge and Include a Bid-Ask
Risk Charge in the VaR Charges
September 1, 2020.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on July
30, 2020, Fixed Income Clearing Corporation (``FICC'') filed with the
Securities and Exchange Commission (``Commission'') the advance notice
SR-FICC-2020-802. On August 13, 2020, FICC filed Amendment No. 1 to the
advance notice, to make clarifications and corrections to the advance
notice.\3\ The advance notice, as modified by Amendment No. 1
(hereinafter, the ``Advance Notice''), is described in Items I, II and
III below, which Items have been prepared by the clearing agency.\4\
The Commission is publishing this notice to solicit comments on the
Advance Notice from interested persons.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ Amendment No. 1 made clarifications and corrections to the
description of the advance notice and Exhibits 3 and 5 of the
filing, and these clarifications and corrections have been
incorporated, as appropriate, into the description of the advance
notice in Item I below.
\4\ On July 30, 2020, FICC filed this Advance Notice as a
proposed rule change (SR-FICC-2020-009) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. On August 13, 2020, FICC filed
Amendment No. 1 to the proposed rule change to make similar
clarifications and corrections to the proposed rule change. A copy
of the proposed rule change, as modified by Amendment No. 1, is
available at https://www.dtcc.com/legal/sec-rule-filings.aspx.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice consists of modifications to the FICC
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and
the FICC Mortgage-Backed Securities Division (``MBSD'') Clearing Rules
(``MBSD Rules,'' and together with the GSD Rules, ``Rules'') to
introduce the Margin Liquidity Adjustment (``MLA'') charge as an
additional component of GSD and MBSD's respective Clearing Funds, as
described in greater detail below.\5\
---------------------------------------------------------------------------
\5\ Capitalized terms not defined herein are defined in the GSD
Rules, available at https://www.dtcc.com/~/media/Files/Downloads/
legal/rules/ficc_gov_rules.pdf, and the MBSD Rules, available at
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
---------------------------------------------------------------------------
The advance notice also consists of modifications to the GSD Rules,
the MBSD Rules, the GSD Methodology Document--GSD Initial Market Risk
Margin Model (``GSD QRM Methodology Document'') and the MBSD
Methodology and Model Operations Document--MBSD Quantitative Risk Model
(``MBSD QRM Methodology Document,'' and together with the GSD QRM
Methodology Document, the ``QRM Methodology Documents'') in order to
(i) enhance the calculation of the VaR Charges of GSD and MBSD to
include a bid-ask spread risk charge, and (ii) make necessary technical
changes to the QRM Methodology Documents in order to implement this
proposed change.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the Advance Notice
and discussed any comments it received on the Advance Notice. The text
of these statements may be examined at the places specified in Item IV
below. The clearing agency has prepared summaries, set forth in
sections A and B below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to
this proposal. FICC will notify the Commission of any written comments
received by FICC.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Description of Proposed Change
FICC is proposing to enhance the methodology for calculating
Required Fund Deposits to the respective Clearing Funds of GSD and MBSD
by (1) introducing a new component, the MLA charge, which would be
calculated to address the risk presented to FICC when a Member's
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile
[[Page 55342]]
or in a particular transaction type (referred to as ``asset
groups''),\6\ and (2) enhancing the calculation of the VaR Charges of
GSD and MBSD by including a bid-ask spread risk charge, as described in
more detail below.\7\
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\6\ References herein to ``Members'' refer to GSD Netting
Members and MBSD Clearing Members, as such terms are defined in the
Rules. References herein to ``net unsettled positions'' refer to,
with respect to GSD, Net Unsettled Positions, as such term is
defined in GSD Rule 1 (Definitions) and, with respect to MBSD,
refers to the net positions that have not yet settled. Supra note 4.
\7\ The results of a study of the potential impact of adopting
the proposed changes have been provided to the Commission.
---------------------------------------------------------------------------
FICC is also proposing to make certain technical changes to the QRM
Methodology Documents, as described in below, in order to implement the
proposed enhancement to the VaR Charges.
(i) Overview of the Required Fund Deposits and the Clearing Funds
As part of its market risk management strategy, FICC manages its
credit exposure to Members by determining the appropriate Required Fund
Deposits to the GSD and MBSD Clearing Fund and monitoring their
sufficiency, as provided for in the Rules.\8\ The Required Fund
Deposits serve as each Member's margin. The objective of a Member's
Required Fund Deposit is to mitigate potential losses to FICC
associated with liquidating a Member's portfolio in the event FICC
ceases to act for that Member (hereinafter referred to as a
``default'').\9\ The aggregate of all Members' Required Fund Deposits
constitutes the respective GSD and MBSD Clearing Funds. FICC would
access the GSD and MBSD Clearing Funds should a defaulting Member's own
Required Fund Deposit be insufficient to satisfy losses to FICC caused
by the liquidation of that Member's portfolio.
---------------------------------------------------------------------------
\8\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund Formula and Loss Allocation), supra note 4.
FICC's market risk management strategy is designed to comply with
Rule 17Ad-22(e)(4) under the Act, where these risks are referred to
as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
\9\ The Rules identify when FICC may cease to act for a Member
and the types of actions FICC may take. For example, FICC may
suspend a firm's membership with FICC or prohibit or limit a
Member's access to FICC's services in the event that Member defaults
on a financial or other obligation to FICC. See GSD Rule 21
(Restrictions on Access to Services), and MBSD Rule 14 (Restrictions
on Access to Services), of the Rules, supra note 4.
---------------------------------------------------------------------------
Pursuant to the Rules, each Member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
calculated to address specific risks faced by FICC, as identified
within the Rules.\10\ The VaR Charge comprises the largest portion of a
Member's Required Fund Deposit amount. Currently, the GSD QRM
Methodology Document states that the total VaR Charge for each
portfolio is the sum of the sensitivity VaR of the portfolio plus the
haircut charges plus the repo interest volatility charges plus the
pool/TBA basis charge. In the MBSD QRM Methodology Document, the
current description of the total VaR Charge states that it is the sum
of the designated VaR Charge and the haircut charge.
---------------------------------------------------------------------------
\10\ Supra note 4.
---------------------------------------------------------------------------
The VaR Charge is calculated using a risk-based margin methodology
that is intended to capture the risks related to market price that is
associated with the securities in a Member's portfolio. This risk-based
margin methodology is designed to project the potential losses that
could occur in connection with the liquidation of a defaulting Member's
portfolio, assuming a portfolio would take three days to liquidate in
normal market conditions. The projected liquidation gains or losses are
used to determine the amount of the VaR Charge, which is calculated to
cover projected liquidation losses at 99 percent confidence level for
Members.\11\
---------------------------------------------------------------------------
\11\ Unregistered Investment Pool Clearing Members are subject
to a VaR Charge with a minimum target confidence level assumption of
99.5 percent. See MBSD Rule 4, Section 2(c), supra note 4.
---------------------------------------------------------------------------
FICC regularly assesses market and liquidity risks as such risks
relate to its margining methodologies to evaluate whether margin levels
are commensurate with the particular risk attributes of each relevant
product, portfolio, and market. The proposed changes to include the MLA
charge to its Clearing Fund methodology and to enhance the VaR Charges
by including a bid-ask spread risk charge, as described below, are the
result of FICC's regular review of the effectiveness of its margining
methodology.
(ii) Overview of Liquidation Transaction Costs and Proposed Changes
Each of the proposed changes addresses a similar, but separate,
risk that FICC faces increased transaction costs when it liquidates the
net unsettled positions of a defaulted Member due to the unique
characteristics of that Member's portfolio. The transaction costs to
FICC to liquidate a defaulted Member's portfolio include both market
impact costs and fixed costs. Market impact costs are the costs due to
the marketability of a security, and generally increase when a
portfolio contains large net unsettled positions in a particular group
of securities with a similar risk profile or in a particular
transaction type, as described more below. Fixed costs are the costs
that generally do not fluctuate and may be caused by the bid-ask spread
of a particular security. The bid-ask spread of a security accounts for
the difference between the observed market price that a buyer is
willing to pay for that security and the observed market price that a
seller is willing to sell that security.
The transaction cost to liquidate a defaulted Member's portfolio is
currently captured by the measurement of market risk through the
calculation of the VaR Charge.\12\ The proposed changes would
supplement and enhance the current measurement of this market risk to
address situations where the characteristics of the defaulted Member's
portfolio could cause these costs to be higher than the amount
collected for the VaR Charge.
---------------------------------------------------------------------------
\12\ The calculation of the VaR Charge is described in GSD Rule
1 (Definitions) and MBSD Rules 1 (Definitions). Supra note 4.
---------------------------------------------------------------------------
First, as described in more detail below, the MLA charge is
designed to address the market impact costs of liquidating a defaulted
Member's portfolio that may increase when that portfolio includes large
net unsettled positions in a particular group of securities with a
similar risk profile or in a particular transaction type. These
positions may be more difficult to liquidate because a large number of
securities with similar risk profiles could reduce the marketability of
those large net unsettled positions, increasing the market impact costs
to FICC. As described below, the MLA charge would supplement the VaR
Charge.
Second, as described in more detail below, the bid-ask spread risk
charge would address the risk that the transaction costs of liquidating
a defaulted Member's net unsettled positions may increase due to the
fixed costs related to the bid-ask spread. As described below, this
proposed change would be incorporated into, and, thereby, enhance the
current measure of transaction costs through, the VaR Charge.
(iii) Proposed Margin Liquidity Adjustment Charge
In order to address the risks of an increased market impact cost
presented by portfolios that contain large net unsettled positions in
the same asset group, FICC is proposing to introduce a new component to
the GSD and MBSD Clearing Fund formulas, the MLA charge.
As noted above, a Member portfolio with large net unsettled
positions in a
[[Page 55343]]
particular group of securities with a similar risk profile or in a
particular transaction type may be more difficult to liquidate in the
market in the event the Member defaults because a concentration in that
group of securities or in a transaction type could reduce the
marketability of those large net unsettled positions. Therefore, such
portfolios create a risk that FICC may face increased market impact
cost to liquidate that portfolio in the assumed margin period of risk
of three business days at market prices.
The proposed MLA charge would be calculated to address this
increased market impact cost by assessing sufficient margin to mitigate
this risk. As described below, the proposed MLA charge would be
calculated for different asset groups. Essentially, the calculation is
designed to compare the total market value of a net unsettled position
in a particular asset group, which FICC would be required to liquidate
in the event of a Member default, to the available trading volume of
that asset group or equities subgroup in the market.\13\ If the market
value of the net unsettled position is large, as compared to the
available trading volume of that asset group, then there is an
increased risk that FICC would face additional market impact costs in
liquidating that position in the event of a Member default. Therefore,
the proposed calculation would provide FICC with a measurement of the
possible increased market impact cost that FICC could face when it
liquidates a large net unsettled position in a particular asset group.
---------------------------------------------------------------------------
\13\ FICC would determine average daily trading volume by
reviewing data that is made publicly available by the Securities
Industry and Financial Markets Association (``SIFMA''), at https://www.sifma.org/resources/archive/research/statistics.
---------------------------------------------------------------------------
To calculate the MLA charge, FICC would categorize securities into
separate asset groups. For GSD, asset groups would include the
following, each of which have similar risk profiles: (a) U.S. Treasury
securities, which would be further categorized by maturity--those
maturing in (i) less than one year, (ii) equal to or more than one year
and less than two years, (iii) equal to or more than two years and less
than five years, (iv) equal to or more than five years and less than
ten years, and (v) equal to or more than ten years; (b) Treasury-
Inflation Protected Securities (``TIPS''), which would be further
categorized by maturity--those maturing in (i) less than two years,
(ii) equal to or more than two years and less than six years, (iii)
equal to or more than six years and less than eleven years, and (iv)
equal to or more than eleven years; (c) U.S. agency bonds; and (d)
mortgage pools transactions. For MBSD, to-be-announced (``TBA'')
transactions, Specified Pool Trades and Stipulated Trades would be
included in one mortgage-backed securities asset group.
FICC would first calculate a measurement of market impact cost with
respect to the net unsettled positions of a Member in each of these
asset groups. As described above, the calculation of an MLA charge is
designed to measure the potential additional market impact cost to FICC
of closing out a large net unsettled position in that particular asset
group.
To determine the market impact cost for each net unsettled position
in Treasuries maturing less than one year and TIPS for GSD and in the
mortgage-backed securities asset group for MBSD, FICC would use the
directional market impact cost, which is a function of the net
unsettled position's net directional market value.\14\ To determine the
market impact cost for all other net unsettled positions, FICC would
add together two components: (1) The directional market impact cost, as
described above, and (2) the basis cost, which is based on the net
unsettled position's gross market value.\15\
---------------------------------------------------------------------------
\14\ The net directional market value of an asset group within a
portfolio is calculated as the absolute difference between the
market value of the long net unsettled positions in that asset
group, and the market value of the short net unsettled positions in
that asset group. For example, if the market value of the long net
unsettled positions is $100,000, and the market value of the short
net unsettled positions is $150,000, the net directional market
value of the asset group is $50,000.
\15\ To determine the gross market value of the net unsettled
positions in each asset group, FICC would sum the absolute value of
each CUSIP in the asset group.
---------------------------------------------------------------------------
The calculation of market impact cost for net unsettled positions
in Treasuries maturing less than one year and TIPS for GSD and in the
mortgage-backed securities asset group for MBSD would not include basis
cost because basis risk is negligible for these types of positions.
For all asset groups, when determining the market impact costs, the
net directional market value and the gross market value of the net
unsettled positions would be divided by the average daily volumes of
the securities in that asset group over a lookback period.\16\
---------------------------------------------------------------------------
\16\ Supra note 12.
---------------------------------------------------------------------------
FICC would then compare the calculated market impact cost to a
portion of the VaR Charge that is allocated to net unsettled positions
in those asset groups.\17\ If the ratio of the calculated market impact
cost to the 1-day VaR Charge is greater than a threshold, an MLA charge
would be applied to that asset group.\18\ If the ratio of these two
amounts is equal to or less than this threshold, an MLA charge would
not be applied to that asset group. The threshold would be based on an
estimate of the market impact cost that is incorporated into the
calculation of the 1-day VaR charge, such that an MLA charge would
apply only when the calculated market impact cost exceeds this
threshold.
---------------------------------------------------------------------------
\17\ FICC's margining methodology uses a three-day assumed
period of risk. For purposes of this calculation, FICC would use a
portion of the VaR Charge that is based on one-day assumed period of
risk and calculated by applying a simple square-root of time
scaling, referred to in this proposed rule change as ``1-day VaR
Charge.'' Any changes that FICC deems appropriate to this assumed
period of risk would be subject to FICC's model risk management
governance procedures set forth in the Clearing Agency Model Risk
Management Framework (``Model Risk Management Framework''). See
Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 FR
41433 (August 31, 2017) (File No. SR-FICC-2017-014); 84458 (October
19, 2018), 83 FR 53925 (October 25, 2018) (File No. SR-FICC-2018-
010); 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (File No. SR-
FICC-2020-004).
\18\ FICC would review the method for calculating the thresholds
from time to time and any changes that FICC deems appropriate would
be subject to FICC's model risk management governance procedures set
forth in the Model Risk Management Framework. See id.
---------------------------------------------------------------------------
When applicable, an MLA charge for each asset group would be
calculated as a proportion of the product of (1) the amount by which
the ratio of the calculated market impact cost to the applicable 1-day
VaR charge exceeds the threshold, and (2) the 1-day VaR charge
allocated to that asset group.
For each Member portfolio, FICC would add the MLA charges for net
unsettled positions in each asset group to determine a total MLA charge
for a Member.
The ratio of the calculated market impact cost to the 1-day VaR
Charge would also determine if FICC would apply a downward adjustment,
based on a scaling factor, to the total MLA charge, and the size of any
adjustment. For net unsettled positions that have a higher ratio of
calculated market impact cost to the 1-day VaR Charge, FICC would apply
a larger adjustment to the MLA charge by assuming that it would
liquidate that position on a different timeframe than the assumed
margin period of risk of three business days. For example, FICC may be
able to mitigate potential losses associated with liquidating a
Member's portfolio by liquidating a net unsettled position with a
larger VaR Charge over a longer timeframe. Therefore, when applicable,
FICC would apply a multiplier to the calculated MLA charge. When the
ratio of calculated market impact cost to the 1-day VaR Charge is
lower, the
[[Page 55344]]
multiplier would be one, and no adjustment would be applied; as the
ratio gets higher the multiplier decreases and the MLA charge is
adjusted downward.
The final MLA charge would be calculated daily and, when the charge
is applicable, as described above, would be included as a component of
Members' Required Fund Deposit.
MLA Excess Amount for GSD Sponsored Members
For GSD, the calculation of the MLA charge for a Sponsored Member
that clears through single account sponsored by a Sponsoring Member
would be the same as described above. For a GSD Sponsored Member that
clears through multiple accounts sponsored by multiple Sponsoring
Members, in addition to calculating an MLA charge for each account (as
described above), FICC would also calculate an MLA charge for the
consolidated portfolio.
If the MLA charge of the consolidated portfolio is higher than the
sum of all MLA charges for each account of the Sponsored Member, the
Sponsored Member would be charged the amount of such difference, to be
referred to as the ``MLA Excess Amount,'' in addition to the applicable
MLA charge. If the MLA charge of the consolidated portfolio is not
higher than the sum of all MLA charges for each account of the
Sponsored Member, then the Sponsored Member will only be charged an MLA
charge for each sponsored account, as applicable.
The MLA Excess Amount is designed to capture the additional market
impact cost that could be incurred when a Sponsored Member defaults,
and each of the Sponsoring Members liquidates net unsettled positions
associated with that defaulted Sponsored Member. If large net unsettled
positions in the same asset group are being liquidated by multiple
Sponsoring Members, the market impact cost to liquidate those positions
could increase. The MLA Excess Amount would address this additional
market impact cost by capturing any difference between the calculations
of the MLA charge for each sponsored account and for the consolidated
portfolio.
Proposed Changes to GSD and MBSD Rules
The proposal described above would be implemented into the GSD
Rules and MBSD Rules. Specifically, FICC would amend GSD Rule 1
(Definitions) and MBSD Rule 1 (Definitions) to include a description of
the MLA charge.
The proposed change to GSD Rule 1 (Definitions) would first
identify each of the asset groups and would then separately describe
the two calculations of market impact cost by these asset groups by
identifying the components of these calculations. The proposed
definition would state that GSD would compare the calculated market
impact cost to a portion of that Member's VaR Charge, to determine if
an MLA charge would be applied to an asset group. The proposed
definition would then state that GSD would add each of the applicable
MLA charges calculated for each asset group together. Finally, the
proposed definition would state that GSD may apply a downward adjusting
scaling factor to result in a final MLA charge. The proposed change to
GSD Rule 1 (Definitions) would also include a definition of the ``MLA
Excess Amount.'' The proposed definition would state that it would be
an additional charge applicable to Sponsored Members that clear through
multiple accounts sponsored by multiple Sponsoring Members and would
describe how the additional charge would be determined.
The proposed change to MBSD Rule 1 (Definitions) would define the
MBS asset group, for purposes of calculating this charge, and would
then describe the calculation of market impact cost for that asst group
by identifying the components of this calculation. The proposed
definition would state that MBSD would compare the calculated market
impact cost to a portion of the Member's VaR Charge, to determine if an
MLA charge would be applied to a net unsettled position. Finally, the
proposed definition would state that MBSD may apply a downward
adjusting scaling factor to result in a final MLA charge.
FICC would also amend GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and Loss Allocation) to
include the MLA charge as a component of the Clearing Fund formula.
(iv) Proposed Bid-Ask Spread Risk Charge
FICC has identified potential risk that its margining methodologies
do not account for the transaction costs related to bid-ask spread in
the market that could be incurred when liquidating a portfolio. Bid-ask
spreads account for the difference between the observed market price
that a buyer is willing to pay for a security and the observed market
price that a seller is willing to sell that security. Therefore, FICC
is proposing to amend the VaR models of GSD and MBSD to include a bid-
ask spread risk charge in the VaR Charges of GSD and MBSD to address
this risk.
In order to calculate this charge, GSD would segment Members'
portfolios into separate bid-ask spread risk classes by product type
and maturity. The bid-ask spread risk classes would be separated into
the following types: (a) Mortgage pools (``MBS''); (b) TIPS; (c) U.S.
agency bonds; and (d) U.S. Treasury securities, which would be further
segmented into separate classes based on maturities as follows: (i)
Less than five years, (ii) equal to or more than five years and less
than ten years, and (iii) equal to or more than ten years. FICC would
further segment the U.S. Treasury securities into separate classes
based on maturities.
Only the MBS asset group is applicable to MBSD Member portfolios.
FICC would exclude Option Contracts in to-be-announced (``TBA'')
transactions from the bid-ask spread risk charge because, in the event
of a Member default, FICC would liquidate any Option Contracts in TBAs
in a Member's portfolio at the intrinsic value of the Option Contract
and, therefore, does not face a transaction cost related to the bid-ask
spread.
Each product type and maturity risk class would be assigned a
specific bid-ask spread haircut rate in the form of a basis point
charge that would be applied to the gross market value in that
particular risk class. The applicable bid-ask spread risk charge would
be the product of the gross market value in a particular risk class in
the Member's portfolio and the applicable basis point charge. The bid-
ask spread risk charge would be calculated at the portfolio level, such
that FICC would aggregate the bid-ask spread risk charges of the
applicable risk classes for the Member's portfolio.
FICC proposes to review the haircut rates annually based on either
the analysis of liquidation transaction costs related to the bid-ask
spread that is conducted in connection with its annual simulation of a
Member default or market data that is sourced from a third-party data
vendor. Based on the analyses from recent years' simulation exercises,
FICC does not anticipate that these haircut rates would change
significantly year over year. FICC may also adjust the haircut rates
following its annual model validation review, to the extent the results
of that review indicate the current haircut rates are not adequate to
address the risk presented by transaction costs from a bid-ask
spread.\19\
---------------------------------------------------------------------------
\19\ All proposed changes to the haircuts would be subject to
FICC's model risk management governance procedures set forth in the
Model Risk Management Framework. See id.
---------------------------------------------------------------------------
[[Page 55345]]
The proposed initial haircuts are based on the analysis from the
most recent annual default simulation and market data sourced from a
third-party data vendor, and are listed in the table below:
----------------------------------------------------------------------------------------------------------------
Class Asset class Maturity Haircut (bps)
----------------------------------------------------------------------------------------------------------------
MBS..................................... MBS....................... All....................... 0.8
TIPS.................................... TIPS...................... All....................... 2.1
Agency.................................. Agency bonds.............. All....................... 3.8
Treasury 5-............................. Treasury.................. < 5 years................. 0.6
Treasury 5-10........................... Treasury.................. 5-10 years................ 0.7
Treasury 10+............................ Treasury.................. >10 years................. 0.7
----------------------------------------------------------------------------------------------------------------
Proposed Changes to GSD and MBSD Rules
The proposal described above would be implemented into the GSD
Rules and MBSD Rules. Specifically, FICC would include a description of
the bid-ask spread risk charge in the current definitions of the VaR
Charge in GSD Rule 1 (Definitions) and MBSD Rule 1 (Definitions). The
proposed change would state that the calculations the VaR Charge shall
include an additional bid-ask spread risk charge measured by
multiplying the gross market value of each net unsettled position by a
basis point charge. The proposed change would also state that the basis
point charge would be based on six risk classes and would identify
those risk classes.
Proposed Changes to QRM Methodology Documents
To implement this proposal, FICC is proposing to amend the QRM
Methodology Documents to describe the bid-ask spread risk charge.
Specifically, FICC would describe (i) that the bid-ask spread risk
charge is designed to mitigate the risk related to transaction costs in
liquidating a portfolio in the event of a Member default; (ii) how the
bid-ask spread risk charge would be calculated; and (ii) the impact
analysis that was conducted in each of the QRM Methodology Documents.
The GSD QRM Methodology Document would describe the proposed six
classes (listed in the table above). The MBSD QRM Methodology Document
would state that the only class for MBSD portfolios is the MBS asset
class, and that the Option Contracts in TBAs would be excluded from the
proposed charge. Finally, FICC would update the descriptions of the
total VaR Charge in the QRM Methodology Documents to include the bid-
ask spread risk charge as a component of this charge.
(v) Proposed Technical Changes
Finally, FICC would amend the QRM Methodology Documents to re-
number the sections and tables, and update certain section titles, as
necessary, to add a new section that describes the proposed bid-ask
spread risk charge.
(vi) Implementation Timeframe
FICC would implement the proposed changes no later than 10 Business
Days after the later of the no objection to the Advance Notice and
approval of the related proposed rule change \20\ by the Commission.
FICC would announce the effective date of the proposed changes by
Important Notice posted to its website.
---------------------------------------------------------------------------
\20\ Supra note 3.
---------------------------------------------------------------------------
Anticipated Effect on and Management of Risk
FICC believes that the proposed changes to enhance the margining
methodology as described above would enable FICC to better limit its
risk exposures to Members arising out of their net unsettled positions.
As stated above, the proposed MLA charge is designed to help limit
FICC's exposures to the risks presented by a Member portfolio that
contains large net unsettled positions in securities of the same asset
group and would enhance FICC's ability to address risks related to
liquidating such positions in the event of a Member default. The
proposed MLA charge would allow FICC to collect sufficient financial
resources to cover its exposure that it may face an increased market
impact cost in liquidating net unsettled positions that is not captured
by the VaR Charge.
As described above, the proposed MLA Excess Amount is designed to
capture any additional market impact cost that could be incurred when
each of the Sponsoring Members liquidates large net unsettled positions
in securities of the same asset group that are all associated with one
defaulted Sponsored Member.
The proposal to enhance the VaR Charges by including a bid-ask
spread risk charge is also designed to help limit FICC's exposures to
the risks related to increased transaction costs due to the bid-ask
spread in the market that could be incurred when liquidating a
portfolio. Therefore, this proposed change would also help address
FICC's risks related to its ability to liquidate such positions in the
event of a Member default.
By providing FICC with a more effective measurement of its
exposures, the proposed changes would also mitigate risk for Members
because lowering the risk profile for FICC would in turn lower the risk
exposure that Members may have with respect to FICC in its role as a
central counterparty.
Consistency With Clearing Supervision Act
FICC believes that the proposals are consistent with the Clearing
Supervision Act, specifically with the risk management objectives and
principles of Section 802(b), and with certain of the risk management
standards adopted by the Commission pursuant to Section 805(a)(2), for
the reasons described below.\21\
---------------------------------------------------------------------------
\21\ 12 U.S.C. 5464(a)(2) and (b)(1).
---------------------------------------------------------------------------
(i) Consistency With Section 805(b) of the Clearing Supervision Act
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: To
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\22\
---------------------------------------------------------------------------
\22\ 12 U.S.C. 5464(b)(1).
---------------------------------------------------------------------------
FICC believes the proposals are consistent with the objectives and
principles of these risk management standards as described in Section
805(b) of the Clearing Supervision Act and in the Covered Clearing
Agency Standards.
First, the proposal would include the MLA charge as an additional
component to the Clearing Fund. As described above, this new margin
charge is designed to address the market impact costs of liquidating a
defaulted Member's portfolio that may increase when that portfolio
includes large net
[[Page 55346]]
unsettled positions in a particular group of securities with a similar
risk profile or in a particular transaction type. These positions may
be more difficult to liquidate in the market because a concentration in
that group of securities or in a transaction type could reduce the
marketability of those large net unsettled positions, increasing the
market impact costs to FICC. The proposed MLA charge would allow FICC
to collect sufficient financial resources to cover its exposure that it
may face increased market impact costs in liquidating net unsettled
positions that is not captured by the VaR Charge.
Additionally, the proposed MLA Excess Amount would capture
additional market impact cost that could be incurred when each of the
Sponsoring Members liquidates large net unsettled positions in
securities of the same asset group that are all associated with one
defaulted Sponsored Member.
Second, the proposed bid-ask spread risk charge is designed to help
limit FICC's exposures to the risks related to increased transaction
costs due to the bid-ask spread in the market that could be incurred
when liquidating a portfolio. As stated above, this proposal would also
help address FICC's risks related to its ability to liquidate such
positions in the event of a Member default.
Therefore, because the proposals are designed to enable FICC to
better limit its exposure to Members in the event of a Member default,
FICC believes they are consistent with promoting robust risk
management. The proposals would also strengthen the liquidity of FICC
by requiring deposits to the Clearing Fund that are calculated to
address the potential risks FICC may face, which is one of FICC's
default liquidity resources.
As a result, FICC believes the proposals would be consistent with
the objectives and principles of Section 805(b) of the Clearing
Supervision Act, which specify the promotion of robust risk management,
promotion of safety and soundness, reduction of systemic risks and
support of the stability of the broader financial system by, among
other things, strengthening the liquidity of systemically important
financial market utilities, such as FICC.
(ii) Consistency With Rule 17Ad-22(e)(4)(i) and (6)(i) Under the Act
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like FICC, and financial institutions engaged in designated activities
for which the Commission is the supervisory agency or the appropriate
financial regulator.\23\ The Commission has accordingly adopted risk
management standards under Section 805(a)(2) of the Clearing
Supervision Act \24\ and Section 17A of the Act (``Covered Clearing
Agency Standards'').\25\ The Covered Clearing Agency Standards require
covered clearing agencies to establish, implement, maintain, and
enforce written policies and procedures that are reasonably designed to
meet certain minimum requirements for their operations and risk
management practices on an ongoing basis.\26\
---------------------------------------------------------------------------
\23\ 12 U.S.C. 5464(a)(2).
\24\ Id.
\25\ 17 CFR 240.17Ad-22(e).
\26\ Id.
---------------------------------------------------------------------------
FICC believes that the proposed changes are consistent with Rules
17Ad-22(e)(4)(i) and (e)(6)(i) of the Covered Clearing Agency Standards
\27\ for the reasons described below.
---------------------------------------------------------------------------
\27\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that FICC
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
arising from its payment, clearing, and settlement processes, including
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of
confidence.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above, FICC believes that both of the proposed changes
would enable it to better identify, measure, monitor, and, through the
collection of Members' Required Fund Deposits, manage its credit
exposures to Members by maintaining sufficient resources to cover those
credit exposures fully with a high degree of confidence.
Specifically, FICC believes that the proposed MLA charge would
effectively mitigate the risks related to large net unsettled positions
of securities in the same asset group within a portfolio and would
address the potential increased risks FICC may face related to its
ability to liquidate such positions in the event of a Member default.
The proposed MLA Excess Amount would supplement this proposed charge to
capture any additional market impact cost related to Sponsored Members
that clear through multiple accounts with multiple Sponsoring Members.
Therefore, FICC believes that the proposal would enhance FICC's
ability to effectively identify, measure and monitor its credit
exposures and would enhance its ability to maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence. As such, FICC believes the
proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under the
Act.\29\
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\29\ Id.
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Additionally, FICC believes that the proposed bid-ask spread risk
charge would enhance FICC's ability to identify, measure, monitor and
manage its credit exposures to Members and those exposures arising from
its payment, clearing, and settlement processes because the proposed
changes would better ensure that FICC maintains sufficient financial
resources to cover its credit exposure to each Member with a high
degree of confidence. FICC believes that the proposed change would
enable FICC to more effectively identify, measure, monitor and manage
its exposures to risks related to market price, and enable it to better
limit its exposure to potential losses from Member defaults by
providing a more effective measure of the risks related to market
price. As described above, due to the bid-ask spread in the market,
there is an observable transaction cost to liquidate a portfolio. The
proposed bid-ask spread risk charge is designed to manage the risk
related to this transaction cost in the event a Member's portfolio is
liquidated. As such, FICC believes that the proposed change would
better address the potential risks that FICC may face that are related
to its ability liquidate a Member's net unsettled positions in the
event of that firm's default, and thereby enhance FICC's ability to
effectively identify, measure and monitor its credit exposures and
would enhance its ability to maintain sufficient financial resources to
cover its credit exposure to each participant fully with a high degree
of confidence. In this way, FICC believes this proposed change is also
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\30\
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\30\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that FICC
establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes
[[Page 55347]]
of each relevant product, portfolio, and market.\31\
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\31\ 17 CFR 240.17Ad-22(e)(6)(i).
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The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit FICC's credit
exposures to Members, including the VaR Charges. FICC's proposed change
to introduce an MLA charge is designed to more effectively address the
risks presented by large net unsettled positions in the same asset
group. FICC believes the addition of the MLA charge would enable FICC
to assess a more appropriate level of margin that accounts for these
risks. This proposed change is designed to assist FICC in maintaining a
risk-based margin system that considers, and produces margin levels
commensurate with, the risks and particular attributes of portfolios
that contain large net unsettled positions in the same asset group and
may be more difficult to liquidate in the event of a Member default.
The proposed MLA Excess Amount would further this goal by measuring any
additional risks that could be presented by a Sponsored Member that
clears through multiple accounts at multiple Sponsoring Members.
Therefore, FICC believes the proposed change is consistent with Rule
17Ad-22(e)(6)(i) under the Act.\32\
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\32\ Id.
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Furthermore, FICC believes that including the bid-ask spread risk
charge within the calculation of the final VaR Charges of GSD and MBSD
would provide FICC with a better assessment of its risks related to
market price. This proposed change would enable FICC to assess a more
appropriate level of margin that accounts for this risk at the
portfolio level. As such, each Member portfolio would be subject to a
risk-based margining system that, at minimum, considers, and produces
margin levels commensurate with, the risks and particular attributes of
each relevant product, portfolio, and market, consistent with Rule
17Ad-22(e)(6)(i) under the Act.\33\
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\33\ Id.
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III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its website of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the Advance
Notice is consistent with the Clearing Supervision 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 [email protected]. Please include
File Number SR-FICC-2020-802 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-FICC-2020-802. 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 Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice 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 printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). 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-FICC-2020-802 and should be submitted on
or before September 21, 2020.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-19658 Filed 9-3-20; 8:45 am]
BILLING CODE 8011-01-P
