Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Amendment No. 2 and Notice of No Objection to Advance Notice, as Modified by Amendment Nos. 1 and 2, to Introduce the Margin Liquidity Adjustment Charge and Include a Bid-Ask Charge in the VaR Charges, 62348-62353 [2020-21784]
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similar risk profiles. NSCC proposes to
address this risk by adding the MLA
Charge to its margin methodologies. To
avoid excessive MLA Charges and
ensure margin requirements are
commensurate with the relevant risks,
NSCC also contemplates reducing a
member’s MLA Charge when NSCC
could otherwise partially mitigate the
relevant risks by extending the time
period for liquidating a defaulted
member’s portfolio beyond the three day
period.
Additionally, as described above in
Section I.A and B, NSCC’s current
margin methodology does not account
for the risk of incurring bid-ask spread
transaction costs when liquidating the
securities in a defaulted member’s
portfolio. NSCC proposes to address this
risk by adding the Bid-Ask Spread
Charge to its margin methodology.
Adding the MLA Charge and Bid-Ask
Spread Charge to NSCC’s margin
methodology should better enable NSCC
to collect margin amounts
commensurate with the risk attributes of
its members’ portfolios than NSCC’s
current margin methodology.
Specifically, the MLA Charge should
better enable NSCC to manage the risk
of increased costs to NSCC associated
with the decreased marketability of a
defaulted member’s portfolio where the
portfolio contains a large position in
securities sharing similar risk profiles.
Moreover, the proposal to reduce the
MLA Charge when NSCC could
otherwise partially mitigate the relevant
risks demonstrates how the proposal
provides an appropriate method for
measuring credit exposure, in that it
seeks to take into account the particular
circumstances related to a particular
portfolio when determining the MLA
Charge. Additionally, since NSCC’s
current margin methodology does not
account for bid-ask spread transaction
costs associated with liquidating a
defaulted member’s portfolio, the BidAsk Spread Charge should enable NSCC
to manage such risks.
Accordingly, the Commission believes
that adding the MLA Charge and BidAsk Spread Charge to NSCC’s margin
methodology would be consistent with
Rules 17Ad–22(e)(6)(i) and (v) because
these new margin charges should better
enable NSCC to establish a risk-based
margin system that (1) considers and
produces relevant margin levels
commensurate with the risks associated
with liquidating member portfolios in a
default scenario, including decreased
marketability of a portfolio’s securities
due to large positions in securities
sharing similar risk profiles and bid-ask
transaction costs, and (2) uses an
appropriate method for measuring credit
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exposure that accounts for such risk
factors and portfolio effects.54
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
NSCC–2020–804) and that NSCC is
authorized to implement the proposed
change as of the date of this notice or
the date of an order by the Commission
approving Proposed Rule Change SR–
NSCC–2020–016, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–21785 Filed 10–1–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90033; File No. SR–FICC–
2020–802]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Amendment No. 2 and Notice
of No Objection to Advance Notice, as
Modified by Amendment Nos. 1 and 2,
to Introduce the Margin Liquidity
Adjustment Charge and Include a BidAsk Charge in the VaR Charges
September 28, 2020.
On July 30, 2020, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) advance
notice SR–FICC–2020–802 pursuant to
Section 806(e)(1) of Title VIII of the
Dodd-Frank Wall Street Reform and
Consumer Protection Act, entitled
Payment, Clearing and Settlement
Supervision Act of 2010 (‘‘Clearing
Supervision Act’’),1 and Rule 19b–
4(n)(1)(i) 2 under the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’) 3 to add two new charges to FICC’s
margin methodologies. On August 13,
2020, FICC filed Amendment No. 1 to
the advance notice, to make
clarifications and corrections to the
advance notice.4 The advance notice, as
modified by Amendment No. 1, was
published for public comment in the
Federal Register on September 4, 2020,5
54 17
CFR 240.17Ad–22(e)(6)(i) and (v).
U.S.C. 5465(e)(1).
2 17 CFR 240.19b–4(n)(1)(i).
3 15 U.S.C. 78a et seq.
4 Amendment No. 1 made clarifications and
corrections to the description of the advance notice
and Exhibits 3 and 5 of the filing.
5 Securities Exchange Act Release No. 89718
(September 1, 2020), 85 FR 55341 (September 4,
2020) (File No. SR–FICC–2020–802) (‘‘Notice of
Filing’’). On July 30, 2020, FICC also filed a related
1 12
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and the Commission has received no
comments regarding the changes
proposed in the advance notice as
modified by Amendment No. 1.6 On
August 27, 2020, FICC filed Amendment
No. 2 to the advance notice to provide
additional data for the Commission to
consider in analyzing the advance
notice.7 The advance notice, as
modified by Amendment Nos. 1 and 2,
is hereinafter referred to as the
‘‘Advance Notice.’’ The Commission is
publishing this notice to solicit
comments on Amendment No. 2 from
interested persons and, for the reasons
discussed below, is hereby providing
notice of no objection to the Advance
Notice.
I. The Advance Notice
First, the proposals in the Advance
Notice would revise the FICC
Government Securities Division
(‘‘GSD’’) Rulebook (‘‘GSD Rules’’) and
FICC Mortgage-Backed Securities
Division (‘‘MBSD’’) Clearing Rules
(‘‘MBSD Rules,’’ and together with the
GSD Rules, the ‘‘Rules’’) 8 to introduce
the Margin Liquidity Adjustment Charge
(‘‘MLA Charge’’) as an additional margin
component. Second, the proposals in
the Advance Notice would revise the
Rules, GSD Methodology Document—
GSD Initial Market Risk Margin Model
(‘‘GSD QRM Methodology Document’’),
and MBSD Methodology and Model
proposed rule change (SR–FICC–2020–009) with
the Commission pursuant to Section 19(b)(1) of the
Exchange Act and Rule 19b–4 thereunder. 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. See 15 U.S.C. 78s(b)(1) and 17 CFR
240.19b–4 respectively. The proposed rule change,
as amended by Amendment No. 1, was published
in the Federal Register on August 20, 2020.
Securities Exchange Act Release No. 89560 (August
14, 2020), 85 FR 51503 (August 20, 2020). On
August 27, 2020, FICC filed Amendment No. 2 to
the proposed rule change to provide similar
additional data for the Commission’s consideration.
The proposed rule change, as amended by
Amendment Nos. 1 and 2, is hereinafter referred to
as the ‘‘Proposed Rule Change.’’ In the Proposed
Rule Change, FICC seeks approval of proposed
changes to its rules necessary to implement the
Advance Notice. The comment period for the
related Proposed Rule Change filing closed on
September 10, 2020, and the Commission received
no comments.
6 As the proposals contained in the Advance
Notice were also filed as a proposed rule change,
all public comments received on the proposal are
considered regardless of whether the comments are
submitted on the Proposed Rule Change or the
Advance Notice.
7 In Amendment No. 2, FICC updated Exhibit 3
to the advance notice to include impact analysis
data with respect to the proposals in the advance
notice. FICC filed Exhibit 3 as a confidential exhibit
to the advance notice pursuant to 17 CFR 240.24b–
2.
8 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/
legal/rules-and-procedures.aspx.
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Operations Document—MBSD
Quantitative Risk Model (‘‘MBSD QRM
Methodology Document,’’ and together
with the GSD QRM Methodology
Document, the ‘‘QRM Methodology
Documents’’) 9 to add a bid-ask spread
risk charge (‘‘Bid-Ask Spread Charge’’)
to the margin calculations of GSD and
MBSD.
A. Background
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FICC serves as a central counterparty
(‘‘CCP’’) and provider of significant
clearance and settlement services for
cash-settled U.S. Treasury and agency
securities and the non-private label
mortgage-backed securities markets.10
FICC is comprised of two divisions,
GSD and MBSD. GSD provides real-time
trade matching, clearing, risk
management, and netting for trades in
U.S. government debt issues, including
repurchase agreements. MBSD provides
real-time automated trade matching,
trade confirmation, risk management,
netting, and electronic pool notification
to the mortgage-backed securities
market. GSD and MBSD maintain
separate Rulebooks, margin
methodologies, and members.
In its role as a CCP, a key tool that
FICC uses to manage its credit exposure
to its respective GSD and MBSD
members is by determining and
collecting an appropriate Required Fund
Deposit (i.e., margin) for each member.11
The aggregate of all members’ Required
Fund Deposits constitutes the respective
GSD and MBSD Clearing Funds. FICC
would access the GSD or MBSD
Clearing Fund should a defaulted
member’s own Required Fund Deposit
be insufficient to satisfy losses to FICC
caused by the liquidation of that
member’s portfolio.12
Each member’s Required Fund
Deposit consists of a number of
applicable components, which are
calculated to address specific risks that
the member’s portfolio presents to
FICC.13 Generally, the largest
component of a member’s Required
Fund Deposit is the value-at-risk
(‘‘VaR’’) Charge, which is calculated
using a risk-based margin methodology
that is intended to capture the risks
related to the movement of market
prices associated with the securities in
9 FICC filed the proposed changes to the QRM
Methodology Documents as confidential exhibits to
the Advance Notice pursuant to 17 CFR 240.24b–
2.
10 See Securities Exchange Act Release No. 69838
(June 24, 2013), 78 FR 39027 (June 28, 2013).
11 See GSD Rule 4 (Clearing Fund and Loss
Allocation) and MBSD Rule 4 (Clearing Fund and
Loss Allocation), supra note 8.
12 See id.
13 See id.
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a member’s portfolio.14 The VaR Charge
is designed to calculate the potential
losses on a portfolio over a three-day
period of risk assumed necessary to
liquidate the portfolio, within a 99
percent confidence level.15
FICC states that it regularly assesses
market and liquidity risks as such risks
relate to its margin methodologies to
evaluate whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market.16 FICC states that
the proposed MLA Charge and Bid-Ask
Spread Charge are necessary for FICC’s
margin methodologies to effectively
account for risks associated with certain
types and attributes of member
portfolios.17
B. Margin Liquidity Adjustment Charge
FICC’s current margin methodologies
do not account for the risk of a potential
increase in market impact costs that
FICC could incur when liquidating a
defaulted member’s portfolio that
contains a concentration of large
positions, as compared to the overall
market, in either (i) a particular security
or group of securities sharing a similar
risk profile, or (ii) in a particular
transaction type (e.g., mortgage pool
transactions).18 In a member default,
liquidating such large positions within
a potentially compressed timeframe 19
(i.e., in a fire sale) could have an impact
on the underlying market, resulting in
price moves that increases FICC’s risk of
incurring additional liquidation costs.
Therefore, FICC designed the MLA
Charge to address this specific risk.20
The MLA Charge would be based on
comparing the market value of member
portfolio positions in specified asset
groups 21 to the available trading
14 See GSD Rule 1 (Definitions), MBSD Rule 1
(Definitions), GSD Rule 4 (Clearing Fund and Loss
Allocation), and MBSD Rule 4 (Clearing Fund and
Loss Allocation), supra note 8.
15 See Notice of Filing, supra note 5 at 55342.
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 8.
16 See Notice of Filing, supra note 5 at 55342.
17 See id.
18 See id.
19 FICC’s risk models assume the liquidation
occurs over a period of three business days. See
Notice of Filing, supra note 5 at 55342–43.
20 See id.
21 For GSD, the asset groups would include the
following, each of which share 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
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62349
volume of those asset groups in the
market. If the market value of a
member’s positions in a certain asset
group is large in comparison to the
available trading volume of that asset
group,22 then it is more likely that FICC
would have to manage reduced
marketability and increased liquidation
costs for those positions during a
member default scenario. Specifically,
FICC’s margin methodology assumes for
each asset group that a certain share of
the market can be liquidated without
price impact.23 Aggregate positions in
an asset group which exceed this share
are generally considered as large and
would therefore incur application of the
MLA Charge to anticipate and address
those increased costs.
To determine the market impact cost
for each portfolio position in certain
asset groups (i.e., Treasuries maturing in
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 position’s net
directional market value.24 To
determine the market impact cost for all
other positions in a portfolio, 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 position’s gross
market value.25 FICC states that the
calculation of market impact cost for
positions in Treasuries maturing in less
than one year, TIPS for GSD, and in the
mortgage-backed securities asset group
for MBSD would not include basis cost
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. Notice of Filing, supra note
5 at 55343.
22 FICC determines average daily trading volume
by reviewing publicly available data from the
Securities Industry and Financial Markets
Association (‘‘SIFMA’’), at https://www.sifma.org/
resources/archive/research/statistics.
23 FICC would establish the particular share for
each asset group or subgroup based on empirical
research which includes the simulation of asset
liquidation over different time horizons. See Notice
of Filing, supra note 5 at 55343.
24 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 positions in that asset group, and the market
value of the short positions in that asset group. For
example, if the market value of the long positions
is $100,000, and the market value of the short
positions is $150,000, the net directional market
value of the asset group is $50,000. See id.
25 To determine the gross market value of the
positions in each asset group, FICC would sum the
absolute value of each CUSIP in the asset group. See
id.
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because basis risk is negligible for these
types of positions.26 For all asset groups,
when determining the market impact
costs, the net directional market value
and the gross market value of the
positions would be divided by the
average daily volumes of the securities
in each asset group over a lookback
period.27
FICC would then compare the
calculated market impact cost to a
portion of the VaR Charge that is
allocated to positions in each asset
group.28 If the ratio of the calculated
market impact cost to the one-day VaR
Charge is greater than a determined
threshold, an MLA Charge, as described
below, would be applied to that asset
group. Correspondingly, 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 one-day VaR charge.29
When applicable, an MLA Charge
would be calculated as a proportion of
the product of (1) the amount by which
the ratio of the calculated market impact
cost to a portion of the VaR Charge
allocated to that position exceeds the
threshold, and (2) a portion of the VaR
Charge allocated to that asset group. For
each portfolio, FICC would total the
MLA Charges for the positions in each
asset group to determine a total MLA
Charge for the member. On a daily basis,
FICC would calculate the final MLA
Charge for each member (if applicable),
to be included as a component of each
member’s Required Fund Deposit.
In certain circumstances, FICC may be
able to partially mitigate the risks that
the MLA Charge is designed to address
by extending the time period for
26 See
id.
note 22; see Notice of Filing, supra note
5 at 55343.
28 As noted earlier, FICC’s margin 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 a oneday assumed period of risk (the ‘‘one-day VaR
Charge’’). Any changes to what FICC determines
would be the appropriate portion of the VaR Charge
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).
29 FICC states that it would review the method for
calculating the thresholds from time to time, and
any changes 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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27 Supra
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liquidating a defaulted member’s
portfolio beyond the three day period.
Accordingly, the Advance Notice also
describes a method that FICC would use
to reduce a member’s total MLA Charge
when the volatility charge component of
the member’s margin increases beyond
a specified point. Specifically, FICC
would reduce the member’s MLA
Charge where the market impact cost of
a particular portfolio, calculated as part
of determining the MLA Charge, would
be large relative to the one-day volatility
charge for that portfolio (i.e., a portion
of the three-day assumed margin period
of risk). When the ratio of calculated
market impact cost to the one-day
volatility charge is lower, FICC would
not adjust the MLA Charge. However, as
the ratio gets higher, FICC would reduce
the MLA Charge. FICC designed this
reduction mechanism to avoid assessing
unnecessarily large MLA Charges.30
MLA Excess Amount for GSD
Sponsored Members 31
For GSD, the calculation of the MLA
Charge for a Sponsored Member that
clears through a 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
Sponsored Member’s consolidated
portfolio.
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 would only be charged an MLA
Charge for each sponsored account, as
applicable. However, 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
(referred to as the ‘‘MLA Excess
Amount’’), in addition to the applicable
MLA Charge.
30 See
Notice of Filing, supra note 5 at 55343–44.
GSD Rule 3A, supra note 8. Sponsored
Membership at GSD is a program that allows wellcapitalized members to sponsor their eligible clients
into GSD membership. Sponsored membership at
GSD offers eligible clients the ability to lend cash
or eligible collateral via FICC-cleared deliveryversus-payment sale and repurchase transactions.
Sponsoring Members facilitate their clients’ GSD
trading activity and act as processing agents on
their behalf for all operational functions including
trade submission and settlement with FICC. A
Sponsored Member may be sponsored by one or
more Sponsoring Members.
31 See
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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
positions associated with that defaulted
Sponsored Member. If large 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.
C. Bid-Ask Spread Charge
The bid-ask spread refers to the
difference between the observed market
price that a buyer is willing to pay for
a security and the observed market price
at which a seller is willing to sell that
security. FICC faces the risk of potential
bid-ask spread transaction costs when
liquidating the securities in a defaulted
member’s portfolio. However, FICC’s
current margin methodologies do not
account for this risk of potential bid-ask
spread transaction costs to FICC in
connection with liquidating a defaulted
member’s portfolio. Therefore, FICC
designed the Bid-Ask Spread Charge to
address this deficiency in its current
margin methodologies.
The Bid-Ask Spread Charge would be
haircut-based and tailored to different
groups of assets that share similar bidask spread characteristics.32 FICC would
assign each asset group a specified bidask spread haircut rate (measured in
basis points (‘‘bps’’)) that would be
applied to the gross market value of the
portfolio’s positions in that particular
asset group. FICC would calculate the
product of the gross market value of the
portfolio’s positions in a particular asset
group and the applicable basis point
charge to obtain the bid-ask spread risk
charge for these positions. FICC would
total the applicable bid-ask spread risk
32 For GSD, the asset groups would include the
following, each of which share similar bid-ask
spread risk profiles: (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. Only the MBS asset group is
applicable to MBSD member portfolios.
FICC would exclude Option Contracts in to-beannounced (‘‘TBA’’) transactions from the Bid-Ask
Spread Charge because, FICC states that 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. Notice of Filing, supra note 5
at 55344.
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charges for each asset class in a
member’s portfolio to calculate the
member’s total Bid-Ask Spread Charge.
FICC determined the proposed initial
haircut rates on an analysis of bid-ask
spread transaction costs using (1) the
results of FICC’s annual member default
simulation and (2) market data sourced
from a third-party data vendor. FICC’s
proposed initial haircut rates are listed
in the table below:
Haircut
(bps)
Asset group
MBS ..............................................
TIPS ..............................................
U.S. Agency bonds .......................
U.S. Treasuries (maturing < 5
years) ........................................
U.S. Treasuries (maturing 5–10
years) ........................................
U.S. Treasuries (maturing 10+
years) ........................................
0.8
2.1
3.8
0.6
0.7
0.7
FICC proposes to review the haircut
rates annually. Based on analyses of
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.33
Finally, FICC would make technical
changes to the QRM Methodology
Documents to re-number the sections
and tables, and update certain section
titles, as necessary to incorporate the
MLA Charge and Bid-Ask Spread
Charge into those documents.
II. 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:
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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.
33 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 supra note 28.
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19:38 Oct 01, 2020
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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 such
filings will also be available for
inspection and copying at the principal
office of FICC and FICC’s website at
https://www.dtcc.com/legal.
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
October 19, 2020.
III. Discussion and Commission
Findings
Although the Clearing Supervision
Act does not specify a standard of
review for an advance notice, the stated
purpose of the Clearing Supervision Act
is instructive: to mitigate systemic risk
in the financial system and promote
financial stability by, among other
things, promoting uniform risk
management standards for SIFMUs and
strengthening the liquidity of SIFMUs.34
Section 805(a)(2) of the Clearing
Supervision Act authorizes the
Commission to prescribe regulations
containing risk management standards
for the payment, clearing, and
settlement activities of designated
clearing entities engaged in designated
34 See
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Frm 00078
Fmt 4703
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62351
activities for which the Commission is
the supervisory agency.35 Section 805(b)
of the Clearing Supervision Act
provides the following objectives and
principles for the Commission’s risk
management standards prescribed under
Section 805(a):36
• to promote robust risk management;
• to promote safety and soundness;
• to reduce systemic risks; and
• to support the stability of the
broader financial system.
Section 805(c) provides, in addition,
that the Commission’s risk management
standards may address such areas as
risk management and default policies
and procedures, among others areas.37
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act and Section 17A of the Exchange
Act (the ‘‘Clearing Agency Rules’’).38
The Clearing Agency Rules require,
among other things, each covered
clearing agency to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to meet certain minimum
requirements for its operations and risk
management practices on an ongoing
basis.39 As such, it is appropriate for the
Commission to review advance notices
against the Clearing Agency Rules and
the objectives and principles of these
risk management standards as described
in Section 805(b) of the Clearing
Supervision Act. As discussed below,
the Commission believes the proposal in
the Advance Notice is consistent with
the objectives and principles described
in Section 805(b) of the Clearing
Supervision Act,40 and in the Clearing
Agency Rules, in particular Rules
17Ad–22(e)(4) and (e)(6).41
A. Consistency With Section 805(b) of
the Clearing Supervision Act
The Commission believes that the
Advance Notice is consistent with the
stated objectives and principles of
Section 805(b) of the Clearing
Supervision Act.
The Commission believes that
adopting FICC’s proposed MLA Charge
and Bid-Ask Spread Charge would be
consistent with the promotion of robust
35 12
U.S.C. 5464(a)(2).
U.S.C. 5464(b).
37 12 U.S.C. 5464(c).
38 17 CFR 240.17Ad–22. See Securities Exchange
Act Release No. 68080 (October 22, 2012), 77 FR
66220 (November 2, 2012) (S7–08–11). See also
Securities Exchange Act Release No. 78961
(September 28, 2016), 81 FR 70786 (October 13,
2016) (S7–03–14) (‘‘Covered Clearing Agency
Standards’’). FICC is a ‘‘covered clearing agency’’ as
defined in Rule 17Ad–22(a)(5).
39 17 CFR 240.17Ad–22.
40 12 U.S.C. 5464(b).
41 17 CFR 240.17Ad–22(e)(4) and (e)(6).
36 12
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risk management at FICC. As described
above in Section I.B., FICC’s current
margin methodologies do not account
for the potential increase in market
impact costs that FICC could incur
when liquidating a defaulted member’s
portfolio where the portfolio contains a
concentration of large positions in a
particular security or group of securities
sharing a similar risk profile or in a
particular transaction type.
Additionally, as described above in
Section I.C., FICC’s current margin
methodologies do not account for the
risk of potential bid-ask spread
transaction costs when liquidating the
securities in a defaulted member’s
portfolio. FICC proposes to address
these respective risks by adding the
MLA Charge and Bid-Ask Spread
Charge to its margin methodologies.42
Specifically, the MLA Charge should
better enable FICC to manage the risk of
incurring costs associated with the
decreased marketability of a defaulted
member’s portfolio where the portfolio
contains a large position in securities
sharing similar risk profiles, resulting in
potentially higher liquidation costs. To
avoid excessive MLA Charges, FICC has
identified circumstances that would
warrant reducing a member’s MLA
Charge when FICC could otherwise
partially mitigate the relevant risks by
extending the time period for
liquidating a defaulted member’s
portfolio beyond the three day period.
The Commission views this targeted
reduction in the MLA Charge as a
feature of the proposal that
demonstrates a robust approach towards
managing the relevant risks through
appropriate (i.e., not simply ‘‘larger’’)
margin requirements. Additionally,
since FICC’s current margin
methodologies do not account for bidask spread transaction costs when
liquidating a defaulted member’s
portfolio, the Bid-Ask Spread Charge
should enable FICC to manage such
risks. Accordingly, the Commission
believes that adopting the proposed
MLA Charge and Bid-Ask Spread
Charge would allow for measurement
and targeted mitigation of risks and
costs not captured elsewhere in FICC’s
current margin methodologies, and
would therefore provide for more
comprehensive management of risks in
a member default scenario, consistent
with the promotion of robust risk
management.
Further, the Commission believes that
adopting FICC’s proposed MLA Charge
42 The Commission notes that the other clearing
agencies it regulates have charges to account for
these types of risks in their margin methodologies,
and that addressing these types of risks has received
a great deal of industry focus in recent years.
VerDate Sep<11>2014
19:38 Oct 01, 2020
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and Bid-Ask Spread Charge would be
consistent with promoting safety and
soundness at FICC. FICC designed the
MLA Charge and Bid-Ask Spread
Charge to ensure that FICC collects
margin amounts sufficient to manage
FICC’s risk of incurring costs associated
with liquidating defaulted member
portfolios. The proposed MLA Charge
and Bid-Ask Spread Charge would
generally provide FICC with additional
resources to manage potential losses
arising out of a member default. Such an
increase in available financial resources
would decrease the likelihood that
losses arising out of a member default
would exceed FICC’s resources and
threaten the safety and soundness of
FICC’s ongoing operations. Accordingly,
the Commission believes that adding the
proposed MLA Charge and Bid-Ask
Spread Charge to FICC’s margin
methodologies would be consistent with
promoting safety and soundness at
FICC.
Finally, the Commission believes that
adopting FICC’s proposed MLA Charge
and Bid-Ask Spread Charge would be
consistent with reducing systemic risks
and supporting the stability of the
broader financial system. As discussed
above, in a member default scenario,
FICC would access the GSD or MBSD
Clearing Fund should the defaulted
member’s own Required Fund Deposit
be insufficient to satisfy losses to FICC
caused by the liquidation of that
member’s portfolio. FICC proposes to
add the MLA Charge and Bid-Ask
Spread Charge to its margin
methodologies to better manage the
potential costs of liquidating a defaulted
member’s portfolio. FICC proposes to
collect additional margin from members
to cover such costs. This, in turn, could
reduce the possibility that FICC would
need to mutualize among the nondefaulting members a loss arising out of
the close-out process. Reducing the
potential for loss mutualization could,
in turn, reduce the potential knock-on
effects to non-defaulting members, their
customers, and the broader market
arising out of a member default. Further,
the Commission notes that, to the extent
that the MLA Charge results in any
reduction in members’ large positions in
securities with similar risk profiles, it
could reduce the potential risk of
adverse market impacts that can arise
from liquidating those large positions.
However, the Commission also notes
that the proposal to reduce the MLA
Charge when FICC could otherwise
partially mitigate the relevant risks
would help ensure that FICC would not
impose the MLA Charge without an
appropriate risk management basis.
PO 00000
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Accordingly, the Commission believes
that FICC’s adoption of the proposed
MLA Charge and Bid-Ask Spread
Charge would be consistent with the
reduction of systemic risk and
supporting the stability of the broader
financial system.
For the reasons stated above, the
Commission believes the changes
proposed in the Advance Notice are
consistent with Section 805(b) of the
Clearing Supervision Act.43
B. Consistency With Rule 17Ad–
22(e)(4)(i)
Rule 17Ad–22(e)(4)(i) requires 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.44
As described above in Section I.B.,
FICC’s current margin methodologies do
not account for the risk of a potential
increase in market impact costs that
FICC could incur when liquidating a
defaulted member’s portfolio where the
portfolio contains a large position in
securities sharing similar risk profiles.
Additionally, as described above, FICC’s
current margin methodologies do not
account for the risk of potential bid-ask
spread transaction costs when
liquidating the securities in a defaulted
member’s portfolio. FICC proposes to
address such risks by adding the MLA
Charge and Bid-Ask Spread Charge to its
margin methodologies. Adding these
margin charges to FICC’s margin
methodologies should better enable
FICC to collect margin amounts
commensurate with the risk attributes of
a broader range of its members’
portfolios than FICC’s current margin
methodologies. Specifically, the MLA
Charge should better enable FICC to
manage the risk of increased costs to
FICC associated with the decreased
marketability of a defaulted member’s
portfolio where the portfolio contains a
large position in securities sharing
similar risk profiles. Additionally, since
FICC’s current margin methodologies do
not account for bid-ask spread
transaction costs associated with
liquidating a defaulted member’s
portfolio, the Bid-Ask Spread Charge
should enable FICC to manage such
risks and costs.
43 12
44 17
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The Commission believes that adding
the MLA Charge and Bid-Ask Spread
Charge to its margin methodologies
should enable FICC to more effectively
identify, measure, monitor, and manage
its credit exposures in connection with
liquidating a defaulted member’s
portfolio that may give rise to (1)
decreased marketability due to large
positions of securities sharing similar
risk profiles, and (2) bid-ask spread
transaction costs. Accordingly, the
Commission believes that adding the
MLA Charge and Bid-Ask Spread
Charge to FICC’s margin methodologies
would be consistent with Rule 17Ad22(e)(4)(i) because these new margin
charges should better enable FICC to
maintain sufficient financial resources
to cover FICC’s credit exposure to its
members fully with a high degree of
confidence.45
C. Consistency With Rules 17Ad–
22(e)(6)(i) and (v)
Rule 17Ad–22(e)(6)(i) requires 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
of each relevant product, portfolio, and
market.46 Rule 17Ad–22(e)(6)(v)
requires 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, uses
an appropriate method for measuring
credit exposure that accounts for
relevant product risk factors and
portfolio effects across products.47
As described above in Section I.B,
FICC’s current margin methodologies do
not account for the potential increase in
market impact costs when liquidating a
defaulted member’s portfolio where the
portfolio contains a large position in
securities sharing similar risk profiles.
FICC proposes to address this risk by
adding the MLA Charge to its margin
methodologies. To avoid excessive MLA
Charges and ensure margin
requirements are commensurate with
the relevant risks, FICC also
contemplates reducing a member’s MLA
Charge when FICC could otherwise
partially mitigate the relevant risks by
extending the time period for
liquidating a defaulted member’s
portfolio beyond the three day period.
45 Id.
CFR 240.17Ad–22(e)(6)(i).
47 17 CFR 240.17Ad–22(e)(6)(v).
Additionally, as described above in
Section I.A and C, FICC’s current
margin methodologies do not account
for the risk of incurring bid-ask spread
transaction costs when liquidating the
securities in a defaulted member’s
portfolio. FICC proposes to address this
risk by adding the Bid-Ask Spread
Charge to its margin methodologies.
Adding the MLA Charge and Bid-Ask
Spread Charge to FICC’s margin
methodologies should better enable
FICC to collect margin amounts
commensurate with the risk attributes of
its members’ portfolios than FICC’s
current margin methodologies.
Specifically, the MLA Charge should
better enable FICC to manage the risk of
increased costs to FICC associated with
the decreased marketability of a
defaulted member’s portfolio where the
portfolio contains a large position in
securities sharing similar risk profiles.
Moreover, the proposal to reduce the
MLA Charge when FICC could
otherwise partially mitigate the relevant
risks demonstrates how the proposal
provides an appropriate method for
measuring credit exposure, in that it
seeks to take into account the particular
circumstances related to a particular
portfolio when determining the MLA
Charge. Additionally, since FICC’s
current margin methodologies do not
account for bid-ask spread transaction
costs associated with liquidating a
defaulted member’s portfolio, the BidAsk Spread Charge should enable FICC
to manage such risks.
Accordingly, the Commission believes
that adding the MLA Charge and BidAsk Spread Charge to FICC’s margin
methodologies would be consistent with
Rules 17Ad–22(e)(6)(i) and (v) because
these new margin charges should better
enable FICC to establish a risk-based
margin system that (1) considers and
produces relevant margin levels
commensurate with the risks associated
with liquidating member portfolios in a
default scenario, including decreased
marketability of a portfolio’s securities
due to large positions in securities
sharing similar risk profiles and bid-ask
transaction costs, and (2) uses an
appropriate method for measuring credit
exposure that accounts for such risk
factors and portfolio effects.48
IV. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Clearing
Supervision Act, that the Commission
does not object to Advance Notice (SR–
FICC–2020–802) and that FICC is
authorized to implement the proposed
change as of the date of this notice or
46 17
VerDate Sep<11>2014
19:38 Oct 01, 2020
the date of an order by the Commission
approving Proposed Rule Change SR–
FICC–2020–009, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–21784 Filed 10–1–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90024; File No. SR–NYSE–
2020–76]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change to Harmonize
Rules 9261 and 9830 with Recent
Changes by the Financial Industry
Regulatory Authority, Inc.
September 28, 2020.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that on
September 15, 2020, New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the self-regulatory
organization. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to harmonize
Rules 9261 and 9830 with recent
changes by the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
that temporarily grants the Chief or
Deputy Chief Hearing Officer the
authority to order that hearings be
conducted by video conference if
warranted by public health risks posed
by in-person hearings during the
ongoing novel coronavirus (‘‘COVID–
19’’) pandemic. As proposed, these
temporary amendments would be in
effect through December 31, 2020. The
proposed rule change is available on the
Exchange’s website at www.nyse.com, at
the principal office of the Exchange, and
at the Commission’s Public Reference
Room.
1 15
U.S.C.78s(b)(1).
U.S.C. 78a.
3 17 CFR 240.19b–4.
2 15
48 17
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]]>Agencies
[Federal Register Volume 85, Number 192 (Friday, October 2, 2020)]
[Notices]
[Pages 62348-62353]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21784]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90033; File No. SR-FICC-2020-802]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 2 and Notice of No Objection to
Advance Notice, as Modified by Amendment Nos. 1 and 2, to Introduce the
Margin Liquidity Adjustment Charge and Include a Bid-Ask Charge in the
VaR Charges
September 28, 2020.
On July 30, 2020, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
advance notice SR-FICC-2020-802 pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
entitled Payment, Clearing and Settlement Supervision Act of 2010
(``Clearing Supervision Act''),\1\ and Rule 19b-4(n)(1)(i) \2\ under
the Securities Exchange Act of 1934 (``Exchange Act'') \3\ to add two
new charges to FICC's margin methodologies. On August 13, 2020, FICC
filed Amendment No. 1 to the advance notice, to make clarifications and
corrections to the advance notice.\4\ The advance notice, as modified
by Amendment No. 1, was published for public comment in the Federal
Register on September 4, 2020,\5\ and the Commission has received no
comments regarding the changes proposed in the advance notice as
modified by Amendment No. 1.\6\ On August 27, 2020, FICC filed
Amendment No. 2 to the advance notice to provide additional data for
the Commission to consider in analyzing the advance notice.\7\ The
advance notice, as modified by Amendment Nos. 1 and 2, is hereinafter
referred to as the ``Advance Notice.'' The Commission is publishing
this notice to solicit comments on Amendment No. 2 from interested
persons and, for the reasons discussed below, is hereby providing
notice of no objection to the Advance Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ 15 U.S.C. 78a et seq.
\4\ Amendment No. 1 made clarifications and corrections to the
description of the advance notice and Exhibits 3 and 5 of the
filing.
\5\ Securities Exchange Act Release No. 89718 (September 1,
2020), 85 FR 55341 (September 4, 2020) (File No. SR-FICC-2020-802)
(``Notice of Filing''). On July 30, 2020, FICC also filed a related
proposed rule change (SR-FICC-2020-009) with the Commission pursuant
to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder.
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. See 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4
respectively. The proposed rule change, as amended by Amendment No.
1, was published in the Federal Register on August 20, 2020.
Securities Exchange Act Release No. 89560 (August 14, 2020), 85 FR
51503 (August 20, 2020). On August 27, 2020, FICC filed Amendment
No. 2 to the proposed rule change to provide similar additional data
for the Commission's consideration. The proposed rule change, as
amended by Amendment Nos. 1 and 2, is hereinafter referred to as the
``Proposed Rule Change.'' In the Proposed Rule Change, FICC seeks
approval of proposed changes to its rules necessary to implement the
Advance Notice. The comment period for the related Proposed Rule
Change filing closed on September 10, 2020, and the Commission
received no comments.
\6\ As the proposals contained in the Advance Notice were also
filed as a proposed rule change, all public comments received on the
proposal are considered regardless of whether the comments are
submitted on the Proposed Rule Change or the Advance Notice.
\7\ In Amendment No. 2, FICC updated Exhibit 3 to the advance
notice to include impact analysis data with respect to the proposals
in the advance notice. FICC filed Exhibit 3 as a confidential
exhibit to the advance notice pursuant to 17 CFR 240.24b-2.
---------------------------------------------------------------------------
I. The Advance Notice
First, the proposals in the Advance Notice would revise the FICC
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and
FICC Mortgage-Backed Securities Division (``MBSD'') Clearing Rules
(``MBSD Rules,'' and together with the GSD Rules, the ``Rules'') \8\ to
introduce the Margin Liquidity Adjustment Charge (``MLA Charge'') as an
additional margin component. Second, the proposals in the Advance
Notice would revise the Rules, GSD Methodology Document--GSD Initial
Market Risk Margin Model (``GSD QRM Methodology Document''), and MBSD
Methodology and Model
[[Page 62349]]
Operations Document--MBSD Quantitative Risk Model (``MBSD QRM
Methodology Document,'' and together with the GSD QRM Methodology
Document, the ``QRM Methodology Documents'') \9\ to add a bid-ask
spread risk charge (``Bid-Ask Spread Charge'') to the margin
calculations of GSD and MBSD.
---------------------------------------------------------------------------
\8\ Capitalized terms not defined herein are defined in the
Rules, available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
\9\ FICC filed the proposed changes to the QRM Methodology
Documents as confidential exhibits to the Advance Notice pursuant to
17 CFR 240.24b-2.
---------------------------------------------------------------------------
A. Background
FICC serves as a central counterparty (``CCP'') and provider of
significant clearance and settlement services for cash-settled U.S.
Treasury and agency securities and the non-private label mortgage-
backed securities markets.\10\ FICC is comprised of two divisions, GSD
and MBSD. GSD provides real-time trade matching, clearing, risk
management, and netting for trades in U.S. government debt issues,
including repurchase agreements. MBSD provides real-time automated
trade matching, trade confirmation, risk management, netting, and
electronic pool notification to the mortgage-backed securities market.
GSD and MBSD maintain separate Rulebooks, margin methodologies, and
members.
---------------------------------------------------------------------------
\10\ See Securities Exchange Act Release No. 69838 (June 24,
2013), 78 FR 39027 (June 28, 2013).
---------------------------------------------------------------------------
In its role as a CCP, a key tool that FICC uses to manage its
credit exposure to its respective GSD and MBSD members is by
determining and collecting an appropriate Required Fund Deposit (i.e.,
margin) for each member.\11\ The aggregate of all members' Required
Fund Deposits constitutes the respective GSD and MBSD Clearing Funds.
FICC would access the GSD or MBSD Clearing Fund should a defaulted
member's own Required Fund Deposit be insufficient to satisfy losses to
FICC caused by the liquidation of that member's portfolio.\12\
---------------------------------------------------------------------------
\11\ See GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD
Rule 4 (Clearing Fund and Loss Allocation), supra note 8.
\12\ See id.
---------------------------------------------------------------------------
Each member's Required Fund Deposit consists of a number of
applicable components, which are calculated to address specific risks
that the member's portfolio presents to FICC.\13\ Generally, the
largest component of a member's Required Fund Deposit is the value-at-
risk (``VaR'') Charge, which is calculated using a risk-based margin
methodology that is intended to capture the risks related to the
movement of market prices associated with the securities in a member's
portfolio.\14\ The VaR Charge is designed to calculate the potential
losses on a portfolio over a three-day period of risk assumed necessary
to liquidate the portfolio, within a 99 percent confidence level.\15\
---------------------------------------------------------------------------
\13\ See id.
\14\ See GSD Rule 1 (Definitions), MBSD Rule 1 (Definitions),
GSD Rule 4 (Clearing Fund and Loss Allocation), and MBSD Rule 4
(Clearing Fund and Loss Allocation), supra note 8.
\15\ See Notice of Filing, supra note 5 at 55342. 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 8.
---------------------------------------------------------------------------
FICC states that it regularly assesses market and liquidity risks
as such risks relate to its margin methodologies to evaluate whether
margin levels are commensurate with the particular risk attributes of
each relevant product, portfolio, and market.\16\ FICC states that the
proposed MLA Charge and Bid-Ask Spread Charge are necessary for FICC's
margin methodologies to effectively account for risks associated with
certain types and attributes of member portfolios.\17\
---------------------------------------------------------------------------
\16\ See Notice of Filing, supra note 5 at 55342.
\17\ See id.
---------------------------------------------------------------------------
B. Margin Liquidity Adjustment Charge
FICC's current margin methodologies do not account for the risk of
a potential increase in market impact costs that FICC could incur when
liquidating a defaulted member's portfolio that contains a
concentration of large positions, as compared to the overall market, in
either (i) a particular security or group of securities sharing a
similar risk profile, or (ii) in a particular transaction type (e.g.,
mortgage pool transactions).\18\ In a member default, liquidating such
large positions within a potentially compressed timeframe \19\ (i.e.,
in a fire sale) could have an impact on the underlying market,
resulting in price moves that increases FICC's risk of incurring
additional liquidation costs. Therefore, FICC designed the MLA Charge
to address this specific risk.\20\
---------------------------------------------------------------------------
\18\ See id.
\19\ FICC's risk models assume the liquidation occurs over a
period of three business days. See Notice of Filing, supra note 5 at
55342-43.
\20\ See id.
---------------------------------------------------------------------------
The MLA Charge would be based on comparing the market value of
member portfolio positions in specified asset groups \21\ to the
available trading volume of those asset groups in the market. If the
market value of a member's positions in a certain asset group is large
in comparison to the available trading volume of that asset group,\22\
then it is more likely that FICC would have to manage reduced
marketability and increased liquidation costs for those positions
during a member default scenario. Specifically, FICC's margin
methodology assumes for each asset group that a certain share of the
market can be liquidated without price impact.\23\ Aggregate positions
in an asset group which exceed this share are generally considered as
large and would therefore incur application of the MLA Charge to
anticipate and address those increased costs.
---------------------------------------------------------------------------
\21\ For GSD, the asset groups would include the following, each
of which share 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. Notice of Filing, supra note 5 at
55343.
\22\ FICC determines average daily trading volume by reviewing
publicly available data from the Securities Industry and Financial
Markets Association (``SIFMA''), at https://www.sifma.org/resources/archive/research/statistics.
\23\ FICC would establish the particular share for each asset
group or subgroup based on empirical research which includes the
simulation of asset liquidation over different time horizons. See
Notice of Filing, supra note 5 at 55343.
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To determine the market impact cost for each portfolio position in
certain asset groups (i.e., Treasuries maturing in 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 position's net directional market value.\24\ To
determine the market impact cost for all other positions in a
portfolio, 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 position's gross market value.\25\ FICC states that the
calculation of market impact cost for positions in Treasuries maturing
in less than one year, TIPS for GSD, and in the mortgage-backed
securities asset group for MBSD would not include basis cost
[[Page 62350]]
because basis risk is negligible for these types of positions.\26\ For
all asset groups, when determining the market impact costs, the net
directional market value and the gross market value of the positions
would be divided by the average daily volumes of the securities in each
asset group over a lookback period.\27\
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\24\ 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 positions in that asset group, and the
market value of the short positions in that asset group. For
example, if the market value of the long positions is $100,000, and
the market value of the short positions is $150,000, the net
directional market value of the asset group is $50,000. See id.
\25\ To determine the gross market value of the positions in
each asset group, FICC would sum the absolute value of each CUSIP in
the asset group. See id.
\26\ See id.
\27\ Supra note 22; see Notice of Filing, supra note 5 at 55343.
---------------------------------------------------------------------------
FICC would then compare the calculated market impact cost to a
portion of the VaR Charge that is allocated to positions in each asset
group.\28\ If the ratio of the calculated market impact cost to the
one-day VaR Charge is greater than a determined threshold, an MLA
Charge, as described below, would be applied to that asset group.
Correspondingly, 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 one-day VaR
charge.\29\
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\28\ As noted earlier, FICC's margin 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 a one-day
assumed period of risk (the ``one-day VaR Charge''). Any changes to
what FICC determines would be the appropriate portion of the VaR
Charge 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).
\29\ FICC states that it would review the method for calculating
the thresholds from time to time, and any changes 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 would be calculated as a proportion
of the product of (1) the amount by which the ratio of the calculated
market impact cost to a portion of the VaR Charge allocated to that
position exceeds the threshold, and (2) a portion of the VaR Charge
allocated to that asset group. For each portfolio, FICC would total the
MLA Charges for the positions in each asset group to determine a total
MLA Charge for the member. On a daily basis, FICC would calculate the
final MLA Charge for each member (if applicable), to be included as a
component of each member's Required Fund Deposit.
In certain circumstances, FICC may be able to partially mitigate
the risks that the MLA Charge is designed to address by extending the
time period for liquidating a defaulted member's portfolio beyond the
three day period. Accordingly, the Advance Notice also describes a
method that FICC would use to reduce a member's total MLA Charge when
the volatility charge component of the member's margin increases beyond
a specified point. Specifically, FICC would reduce the member's MLA
Charge where the market impact cost of a particular portfolio,
calculated as part of determining the MLA Charge, would be large
relative to the one-day volatility charge for that portfolio (i.e., a
portion of the three-day assumed margin period of risk). When the ratio
of calculated market impact cost to the one-day volatility charge is
lower, FICC would not adjust the MLA Charge. However, as the ratio gets
higher, FICC would reduce the MLA Charge. FICC designed this reduction
mechanism to avoid assessing unnecessarily large MLA Charges.\30\
---------------------------------------------------------------------------
\30\ See Notice of Filing, supra note 5 at 55343-44.
---------------------------------------------------------------------------
MLA Excess Amount for GSD Sponsored Members \31\
---------------------------------------------------------------------------
\31\ See GSD Rule 3A, supra note 8. Sponsored Membership at GSD
is a program that allows well-capitalized members to sponsor their
eligible clients into GSD membership. Sponsored membership at GSD
offers eligible clients the ability to lend cash or eligible
collateral via FICC-cleared delivery-versus-payment sale and
repurchase transactions. Sponsoring Members facilitate their
clients' GSD trading activity and act as processing agents on their
behalf for all operational functions including trade submission and
settlement with FICC. A Sponsored Member may be sponsored by one or
more Sponsoring Members.
---------------------------------------------------------------------------
For GSD, the calculation of the MLA Charge for a Sponsored Member
that clears through a 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
Sponsored Member's consolidated portfolio.
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 would only be charged an MLA Charge for each
sponsored account, as applicable. However, 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 (referred to as the ``MLA Excess
Amount''), in addition to the applicable MLA Charge.
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 positions associated with
that defaulted Sponsored Member. If large 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.
C. Bid-Ask Spread Charge
The bid-ask spread refers to the difference between the observed
market price that a buyer is willing to pay for a security and the
observed market price at which a seller is willing to sell that
security. FICC faces the risk of potential bid-ask spread transaction
costs when liquidating the securities in a defaulted member's
portfolio. However, FICC's current margin methodologies do not account
for this risk of potential bid-ask spread transaction costs to FICC in
connection with liquidating a defaulted member's portfolio. Therefore,
FICC designed the Bid-Ask Spread Charge to address this deficiency in
its current margin methodologies.
The Bid-Ask Spread Charge would be haircut-based and tailored to
different groups of assets that share similar bid-ask spread
characteristics.\32\ FICC would assign each asset group a specified
bid-ask spread haircut rate (measured in basis points (``bps'')) that
would be applied to the gross market value of the portfolio's positions
in that particular asset group. FICC would calculate the product of the
gross market value of the portfolio's positions in a particular asset
group and the applicable basis point charge to obtain the bid-ask
spread risk charge for these positions. FICC would total the applicable
bid-ask spread risk
[[Page 62351]]
charges for each asset class in a member's portfolio to calculate the
member's total Bid-Ask Spread Charge.
---------------------------------------------------------------------------
\32\ For GSD, the asset groups would include the following, each
of which share similar bid-ask spread risk profiles: (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. 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 Charge because, FICC states
that 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. Notice of Filing,
supra note 5 at 55344.
---------------------------------------------------------------------------
FICC determined the proposed initial haircut rates on an analysis
of bid-ask spread transaction costs using (1) the results of FICC's
annual member default simulation and (2) market data sourced from a
third-party data vendor. FICC's proposed initial haircut rates are
listed in the table below:
------------------------------------------------------------------------
Haircut
Asset group (bps)
------------------------------------------------------------------------
MBS.......................................................... 0.8
TIPS......................................................... 2.1
U.S. Agency bonds............................................ 3.8
U.S. Treasuries (maturing < 5 years)......................... 0.6
U.S. Treasuries (maturing 5-10 years)........................ 0.7
U.S. Treasuries (maturing 10+ years)......................... 0.7
------------------------------------------------------------------------
FICC proposes to review the haircut rates annually. Based on
analyses of 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.\33\
---------------------------------------------------------------------------
\33\ 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 supra note 28.
---------------------------------------------------------------------------
Finally, FICC would make technical changes to the QRM Methodology
Documents to re-number the sections and tables, and update certain
section titles, as necessary to incorporate the MLA Charge and Bid-Ask
Spread Charge into those documents.
II. 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 such filings will also be available for inspection
and copying at the principal office of FICC and FICC's website at
https://www.dtcc.com/legal.
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 October 19, 2020.
III. Discussion and Commission Findings
Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, the stated purpose of the Clearing
Supervision Act is instructive: to mitigate systemic risk in the
financial system and promote financial stability by, among other
things, promoting uniform risk management standards for SIFMUs and
strengthening the liquidity of SIFMUs.\34\
---------------------------------------------------------------------------
\34\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------
Section 805(a)(2) of the Clearing Supervision Act authorizes the
Commission to prescribe regulations containing risk management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency.\35\ Section 805(b) of the
Clearing Supervision Act provides the following objectives and
principles for the Commission's risk management standards prescribed
under Section 805(a):\36\
---------------------------------------------------------------------------
\35\ 12 U.S.C. 5464(a)(2).
\36\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
to promote robust risk management;
to promote safety and soundness;
to reduce systemic risks; and
to support the stability of the broader financial system.
Section 805(c) provides, in addition, that the Commission's risk
management standards may address such areas as risk management and
default policies and procedures, among others areas.\37\
---------------------------------------------------------------------------
\37\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------
The Commission has adopted risk management standards under Section
805(a)(2) of the Clearing Supervision Act and Section 17A of the
Exchange Act (the ``Clearing Agency Rules'').\38\ The Clearing Agency
Rules require, among other things, each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures that are reasonably designed to meet certain minimum
requirements for its operations and risk management practices on an
ongoing basis.\39\ As such, it is appropriate for the Commission to
review advance notices against the Clearing Agency Rules and the
objectives and principles of these risk management standards as
described in Section 805(b) of the Clearing Supervision Act. As
discussed below, the Commission believes the proposal in the Advance
Notice is consistent with the objectives and principles described in
Section 805(b) of the Clearing Supervision Act,\40\ and in the Clearing
Agency Rules, in particular Rules 17Ad-22(e)(4) and (e)(6).\41\
---------------------------------------------------------------------------
\38\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No.
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11).
See also Securities Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing
Agency Standards''). FICC is a ``covered clearing agency'' as
defined in Rule 17Ad-22(a)(5).
\39\ 17 CFR 240.17Ad-22.
\40\ 12 U.S.C. 5464(b).
\41\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
---------------------------------------------------------------------------
A. Consistency With Section 805(b) of the Clearing Supervision Act
The Commission believes that the Advance Notice is consistent with
the stated objectives and principles of Section 805(b) of the Clearing
Supervision Act.
The Commission believes that adopting FICC's proposed MLA Charge
and Bid-Ask Spread Charge would be consistent with the promotion of
robust
[[Page 62352]]
risk management at FICC. As described above in Section I.B., FICC's
current margin methodologies do not account for the potential increase
in market impact costs that FICC could incur when liquidating a
defaulted member's portfolio where the portfolio contains a
concentration of large positions in a particular security or group of
securities sharing a similar risk profile or in a particular
transaction type. Additionally, as described above in Section I.C.,
FICC's current margin methodologies do not account for the risk of
potential bid-ask spread transaction costs when liquidating the
securities in a defaulted member's portfolio. FICC proposes to address
these respective risks by adding the MLA Charge and Bid-Ask Spread
Charge to its margin methodologies.\42\
---------------------------------------------------------------------------
\42\ The Commission notes that the other clearing agencies it
regulates have charges to account for these types of risks in their
margin methodologies, and that addressing these types of risks has
received a great deal of industry focus in recent years.
---------------------------------------------------------------------------
Specifically, the MLA Charge should better enable FICC to manage
the risk of incurring costs associated with the decreased marketability
of a defaulted member's portfolio where the portfolio contains a large
position in securities sharing similar risk profiles, resulting in
potentially higher liquidation costs. To avoid excessive MLA Charges,
FICC has identified circumstances that would warrant reducing a
member's MLA Charge when FICC could otherwise partially mitigate the
relevant risks by extending the time period for liquidating a defaulted
member's portfolio beyond the three day period. The Commission views
this targeted reduction in the MLA Charge as a feature of the proposal
that demonstrates a robust approach towards managing the relevant risks
through appropriate (i.e., not simply ``larger'') margin requirements.
Additionally, since FICC's current margin methodologies do not account
for bid-ask spread transaction costs when liquidating a defaulted
member's portfolio, the Bid-Ask Spread Charge should enable FICC to
manage such risks. Accordingly, the Commission believes that adopting
the proposed MLA Charge and Bid-Ask Spread Charge would allow for
measurement and targeted mitigation of risks and costs not captured
elsewhere in FICC's current margin methodologies, and would therefore
provide for more comprehensive management of risks in a member default
scenario, consistent with the promotion of robust risk management.
Further, the Commission believes that adopting FICC's proposed MLA
Charge and Bid-Ask Spread Charge would be consistent with promoting
safety and soundness at FICC. FICC designed the MLA Charge and Bid-Ask
Spread Charge to ensure that FICC collects margin amounts sufficient to
manage FICC's risk of incurring costs associated with liquidating
defaulted member portfolios. The proposed MLA Charge and Bid-Ask Spread
Charge would generally provide FICC with additional resources to manage
potential losses arising out of a member default. Such an increase in
available financial resources would decrease the likelihood that losses
arising out of a member default would exceed FICC's resources and
threaten the safety and soundness of FICC's ongoing operations.
Accordingly, the Commission believes that adding the proposed MLA
Charge and Bid-Ask Spread Charge to FICC's margin methodologies would
be consistent with promoting safety and soundness at FICC.
Finally, the Commission believes that adopting FICC's proposed MLA
Charge and Bid-Ask Spread Charge would be consistent with reducing
systemic risks and supporting the stability of the broader financial
system. As discussed above, in a member default scenario, FICC would
access the GSD or MBSD Clearing Fund should the defaulted member's own
Required Fund Deposit be insufficient to satisfy losses to FICC caused
by the liquidation of that member's portfolio. FICC proposes to add the
MLA Charge and Bid-Ask Spread Charge to its margin methodologies to
better manage the potential costs of liquidating a defaulted member's
portfolio. FICC proposes to collect additional margin from members to
cover such costs. This, in turn, could reduce the possibility that FICC
would need to mutualize among the non-defaulting members a loss arising
out of the close-out process. Reducing the potential for loss
mutualization could, in turn, reduce the potential knock-on effects to
non-defaulting members, their customers, and the broader market arising
out of a member default. Further, the Commission notes that, to the
extent that the MLA Charge results in any reduction in members' large
positions in securities with similar risk profiles, it could reduce the
potential risk of adverse market impacts that can arise from
liquidating those large positions. However, the Commission also notes
that the proposal to reduce the MLA Charge when FICC could otherwise
partially mitigate the relevant risks would help ensure that FICC would
not impose the MLA Charge without an appropriate risk management basis.
Accordingly, the Commission believes that FICC's adoption of the
proposed MLA Charge and Bid-Ask Spread Charge would be consistent with
the reduction of systemic risk and supporting the stability of the
broader financial system.
For the reasons stated above, the Commission believes the changes
proposed in the Advance Notice are consistent with Section 805(b) of
the Clearing Supervision Act.\43\
---------------------------------------------------------------------------
\43\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) requires 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.\44\
---------------------------------------------------------------------------
\44\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
As described above in Section I.B., FICC's current margin
methodologies do not account for the risk of a potential increase in
market impact costs that FICC could incur when liquidating a defaulted
member's portfolio where the portfolio contains a large position in
securities sharing similar risk profiles. Additionally, as described
above, FICC's current margin methodologies do not account for the risk
of potential bid-ask spread transaction costs when liquidating the
securities in a defaulted member's portfolio. FICC proposes to address
such risks by adding the MLA Charge and Bid-Ask Spread Charge to its
margin methodologies. Adding these margin charges to FICC's margin
methodologies should better enable FICC to collect margin amounts
commensurate with the risk attributes of a broader range of its
members' portfolios than FICC's current margin methodologies.
Specifically, the MLA Charge should better enable FICC to manage the
risk of increased costs to FICC associated with the decreased
marketability of a defaulted member's portfolio where the portfolio
contains a large position in securities sharing similar risk profiles.
Additionally, since FICC's current margin methodologies do not account
for bid-ask spread transaction costs associated with liquidating a
defaulted member's portfolio, the Bid-Ask Spread Charge should enable
FICC to manage such risks and costs.
[[Page 62353]]
The Commission believes that adding the MLA Charge and Bid-Ask
Spread Charge to its margin methodologies should enable FICC to more
effectively identify, measure, monitor, and manage its credit exposures
in connection with liquidating a defaulted member's portfolio that may
give rise to (1) decreased marketability due to large positions of
securities sharing similar risk profiles, and (2) bid-ask spread
transaction costs. Accordingly, the Commission believes that adding the
MLA Charge and Bid-Ask Spread Charge to FICC's margin methodologies
would be consistent with Rule 17Ad-22(e)(4)(i) because these new margin
charges should better enable FICC to maintain sufficient financial
resources to cover FICC's credit exposure to its members fully with a
high degree of confidence.\45\
---------------------------------------------------------------------------
\45\ Id.
---------------------------------------------------------------------------
C. Consistency With Rules 17Ad-22(e)(6)(i) and (v)
Rule 17Ad-22(e)(6)(i) requires 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 of each relevant product, portfolio, and market.\46\ Rule
17Ad-22(e)(6)(v) requires 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, uses an appropriate method for
measuring credit exposure that accounts for relevant product risk
factors and portfolio effects across products.\47\
---------------------------------------------------------------------------
\46\ 17 CFR 240.17Ad-22(e)(6)(i).
\47\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------
As described above in Section I.B, FICC's current margin
methodologies do not account for the potential increase in market
impact costs when liquidating a defaulted member's portfolio where the
portfolio contains a large position in securities sharing similar risk
profiles. FICC proposes to address this risk by adding the MLA Charge
to its margin methodologies. To avoid excessive MLA Charges and ensure
margin requirements are commensurate with the relevant risks, FICC also
contemplates reducing a member's MLA Charge when FICC could otherwise
partially mitigate the relevant risks by extending the time period for
liquidating a defaulted member's portfolio beyond the three day period.
Additionally, as described above in Section I.A and C, FICC's
current margin methodologies do not account for the risk of incurring
bid-ask spread transaction costs when liquidating the securities in a
defaulted member's portfolio. FICC proposes to address this risk by
adding the Bid-Ask Spread Charge to its margin methodologies. Adding
the MLA Charge and Bid-Ask Spread Charge to FICC's margin methodologies
should better enable FICC to collect margin amounts commensurate with
the risk attributes of its members' portfolios than FICC's current
margin methodologies. Specifically, the MLA Charge should better enable
FICC to manage the risk of increased costs to FICC associated with the
decreased marketability of a defaulted member's portfolio where the
portfolio contains a large position in securities sharing similar risk
profiles. Moreover, the proposal to reduce the MLA Charge when FICC
could otherwise partially mitigate the relevant risks demonstrates how
the proposal provides an appropriate method for measuring credit
exposure, in that it seeks to take into account the particular
circumstances related to a particular portfolio when determining the
MLA Charge. Additionally, since FICC's current margin methodologies do
not account for bid-ask spread transaction costs associated with
liquidating a defaulted member's portfolio, the Bid-Ask Spread Charge
should enable FICC to manage such risks.
Accordingly, the Commission believes that adding the MLA Charge and
Bid-Ask Spread Charge to FICC's margin methodologies would be
consistent with Rules 17Ad-22(e)(6)(i) and (v) because these new margin
charges should better enable FICC to establish a risk-based margin
system that (1) considers and produces relevant margin levels
commensurate with the risks associated with liquidating member
portfolios in a default scenario, including decreased marketability of
a portfolio's securities due to large positions in securities sharing
similar risk profiles and bid-ask transaction costs, and (2) uses an
appropriate method for measuring credit exposure that accounts for such
risk factors and portfolio effects.\48\
---------------------------------------------------------------------------
\48\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act, that the Commission does not object to
Advance Notice (SR-FICC-2020-802) and that FICC is authorized to
implement the proposed change as of the date of this notice or the date
of an order by the Commission approving Proposed Rule Change SR-FICC-
2020-009, whichever is later.
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-21784 Filed 10-1-20; 8:45 am]
BILLING CODE 8011-01-P
