Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To Describe Key Components of the Mortgage-Backed Securities Division Stress Testing Program, 64539-64542 [2020-22476]

Download as PDF Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices focus these on the Exchange’s core business and other aspects of the Exchange’s operations, including the Exchange’s regulatory function. The Commission believes that the proposed rule change raises no new or novel issues and that waiver of the operative delay is consistent with the protection of investors and the public interest. Therefore, the Commission hereby waives the operative delay and designates the proposal operative upon filing.27 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings under Section 19(b)(2)(B) 28 of the Act to determine whether the proposed rule change should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: khammond on DSKJM1Z7X2PROD with NOTICES 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– MEMX–2020–11 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–MEMX–2020–11. 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 27 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 28 15 U.S.C. 78s(b)(2)(B). VerDate Sep<11>2014 18:52 Oct 09, 2020 Jkt 253001 with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MEMX–2020–11 and should be submitted on or before November 3, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.29 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–22640 Filed 10–9–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90101; File No. SR–FICC– 2020–010] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To Describe Key Components of the Mortgage-Backed Securities Division Stress Testing Program October 6, 2020. I. Introduction On August 11, 2020, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–FICC–2020–010, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule change was published for comment in the Federal 29 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 PO 00000 Frm 00099 Fmt 4703 Sfmt 4703 64539 Register on August 25, 2020.3 The Commission did not receive any comment letters on the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change.4 II. Description of the Proposed Rule Change The proposed rule change consists of a proposal to amend the FICC MortgageBacked Securities Division (‘‘MBSD’’) Clearing Rules (‘‘MBSD Rules’’) 5 to include a new section that would describe the purpose and the key components of MBSD’s stress testing program. The proposed rule change would also provide that vendorsupplied data would be used in the stress testing program, and that a backup calculation would be used in the event the vendor fails to provide FICC with the vendor-sourced data. The proposed changes are further described below. A. Background MBSD provides trade comparison, netting, risk management, settlement, and central counterparty services for the U.S. mortgage-backed securities market. FICC manages its credit exposures to its Clearing Members by collecting an appropriate amount of margin (referred to in the MBSD Rules as Required Fund Deposit) from each Clearing Member.6 The aggregate of all Clearing Members’ margin amounts (together with certain other deposits required under the MBSD Rules) constitutes MBSD’s Clearing Fund, which FICC would access should a Clearing Member default with insufficient margin to satisfy any FICC losses caused by the liquidation of the defaulting Clearing Member’s portfolio.7 3 Securities Exchange Act Release No. 89616 (August 19, 2020), 85 FR 52387 (August 25, 2020) (SR–FICC–2020–010) (‘‘Notice’’). 4 On January 21, 2020, FICC filed a portion of this proposed rule change that is subject to Section 806(e)(1)(A) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘the Clearing Supervision Act’’) and Rule 19b–4(n)(1)(i) under the Act, as an advance notice with the Commission (the ‘‘Advance Notice Filing’’). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b– 4(n)(1)(i); Release No. 88266 (February 24, 2020), 85 FR 11413 (February 27, 2020) (SR–FICC–2020–801). The Commission issued a notice of no objection to the Advance Notice Filing on March 13, 2020. See Release No. 88382 (March 13, 2020), 85 FR 15830 (March 19, 2020) (SR–FICC–2020–801). A copy of the Advance Notice Filing and the Commission’s notice of no objection are available at: https:// www.dtcc.com/legal/sec-rule-filings.aspx. 5 Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the MBSD Rules, available at: www.dtcc.com/legal/rules-and-procedures.aspx. 6 See MBSD Rule 4, supra note 5. 7 Id. E:\FR\FM\13OCN1.SGM 13OCN1 64540 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices FICC uses stress testing to test the sufficiency of its prefunded financial resources.8 In contrast to FICC’s margin methodologies, which are designed to limit FICC’s credit exposures under normal market conditions,9 FICC’s stress testing methodologies are designed to quantify FICC’s potential losses under extreme but plausible market conditions.10 Therefore, stress testing is designed to help FICC identify credit risks beyond those contemplated by FICC’s margin methodologies, including credit exposures that might result from the realization of potential stress scenarios, such as extreme price changes, multiple defaults, or changes in other valuation inputs and assumptions.11 As a result, stress testing helps FICC identify the amount of financial resources necessary to cover its credit exposure under stress scenarios in extreme but plausible market conditions.12 The purpose and the key components of MBSD’s stress testing program, among others, are provided in the Stress Testing Framework.13 FICC’s stress testing methodologies have three key components: Risk identification, scenario development, and risk measurement and aggregation. The key components generally provide that FICC identifies the principal credit risk drivers, develops sets of extreme but plausible historical and hypothetical stress scenarios for the identified risk drivers, and calculates risk metrics for each Clearing Member’s actual portfolio to estimate the profits and losses in connection with such Clearing Member’s close-out under the chosen stress scenarios.14 khammond on DSKJM1Z7X2PROD with NOTICES 8 On December 19, 2017, the Commission approved FICC’s adoption of the Clearing Agency Stress Testing Framework (Market Risk), which among other things, sets forth the purpose of FICC’s stress testing and describes certain methodologies FICC uses in its stress testing. Securities Exchange Act Release No. 82368 (December 19, 2017), 82 FR 61082 (December 26, 2017) (SR–DTC–2017–005; SR–FICC–2017–009; SR–NSCC–2017–006) (‘‘Stress Testing Framework Order’’). The Stress Testing Framework is an FICC rule, pursuant to Section 3(a)(27) of the Act, although it is not part of the MBSD Rules, and it has been filed confidentially with the Commission. See 15 U.S.C. 78c(a)(27). 9 See e.g., Securities Exchange Act Release No. 80253 (March 15, 2017), 82 FR 14581, 14582 (March 21, 2017) (SR–FICC–2017–004) (notice of filing and immediate effectiveness of a proposed rule change to amend MBSD Rules with respect to the intraday mark-to-market charge). 10 See Stress Testing Framework Order, supra note 8 at 61083; Notice, supra note 3 at 52388. 11 See id.; 17 CFR 240.17Ad–22(a)(17). 12 See Stress Testing Framework Order, supra note 8 at 61083; Notice, supra note 3 at 52388. 13 See Stress Testing Framework Order, supra note 8 at 61082–83. 14 See Stress Testing Framework Order, supra note 8 at 61083; Notice, supra note 3 at 52388. VerDate Sep<11>2014 18:52 Oct 09, 2020 Jkt 253001 B. MBSD’s Stress Testing Program FICC proposes to include a new section in the MBSD Rules to provide the purpose and the key components of FICC’s stress testing program.15 By including such description of the stress testing program in the MBSD Rules, which is a public document, FICC intends to make the current stress testing program transparent to its Clearing Members.16 Specifically, the proposed rule change provides that FICC uses stress testing to (1) test the sufficiency of the Clearing Fund against FICC’s potential losses assuming the default of a Clearing Member with the largest credit exposure and its entire Affiliated Family under extreme but plausible market conditions, and (2) identify both (x) Clearing Members who may pose a greater market risk under certain market conditions, and (y) potential weaknesses in FICC’s margin methodologies. The proposed rule change also provides that FICC’s stress testing program has three key components.17 First, FICC analyzes the securities and risk exposures in its Clearing Members’ portfolios to identify the principal market risk drivers and capture the risk sensitivity of the portfolios under stressed market conditions. Second, FICC develops a comprehensive set of scenarios including historical scenarios and hypothetical stress scenarios. Third, FICC calculates risk metrics for each Clearing Member’s actual portfolio to estimate the profits and losses in connection with such Clearing Member’s close out under the chosen stress scenarios. C. Vendor-Supplied Data in MBSD’s Stress Testing Program In connection with FICC’s stress testing program, FICC proposes to use vendor-supplied data in MBSD’s scenario development process, which is the second component of FICC’s stress testing program, and the risk measurement and aggregation process, which is the third component of FICC’s stress testing program. (1) Historical Data in the Scenario Development Component The scenario development component involves FICC’s construction of comprehensive and relevant sets of extreme but plausible historical and hypothetical stress scenarios for identified risk drivers. In its development of historical stress 15 The changes described in Section II.B. are consistent with the existing Framework. 16 See Notice, supra note 3 at 52388. 17 See id. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 scenarios, FICC proposes to examine vendor-supplied historical risk factor 18 time series data (‘‘Historical Data’’) to identify the largest historical changes of risk factors that influence the pricing of mortgage-backed securities. FICC proposes to use Historical Data because it believes that this data would explain the market price changes of ToBe-Announced (‘‘TBA’’) securities transactions cleared by MBSD.19 In addition, FICC believes that the data would (1) identify stress risk exposures under broad and varied market conditions, and (2) provide MBSD with a capability to design transparent scenarios.20 (2) Historical Data and Security-Level Data in the Risk Measurement and Aggregation Component FICC represents that the risk measurement and aggregation process calculates risk metrics for each Clearing Member’s actual portfolio to estimate the profits and losses in connection with such Clearing Member’s close out under chosen stress scenarios.21 In connection with this calculation, FICC proposes to use a financial profit-andloss calculation that leverages the Historical Data and the vendor-supplied security-level risk sensitivity 22 data (‘‘Security-Level Data’’). The SecurityLevel Data is generated using the vendor’s suite of security valuation models that includes an agency mortgage prepayment model and interest rate term structure model.23 FICC believes that the vendor’s approach generates stable and robust Security-Level Data.24 Because the stress profits and losses calculation would include Security-Level Data, FICC believes that the calculated results would reflect results that are close to actual price changes for TBA securities during larger market moves, which are typical of stress testing scenarios.25 18 Generally, the term ‘‘risk factor’’ (or ‘‘risk driver’’) means an attribute, characteristic, variable or other concrete determinant that influences the risk profile of a system, entity, or financial asset. Risk factors may be causes of risk or merely correlated with risk. 19 See Notice, supra note 3 at 52389. 20 See id. 21 See id. 22 The term ‘‘sensitivity’’ means the percentage value change of a security given each risk factor change. 23 A prepayment model captures cash flow uncertainty as a result of unscheduled payments of principal (prepayments). An interest rate term structure model describes the relationship between interest rates of different maturities. 24 See Notice, supra note 3 at 52389. 25 See id. E:\FR\FM\13OCN1.SGM 13OCN1 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices D. Back-Up Stress Testing Calculation Finally, FICC proposes to implement a back-up calculation that it would use in the event the vendor fails to provide FICC with the vendor-sourced data described above. Specifically, if the vendor fails to provide any data or a significant portion of the data in accordance with the timeframes to which FICC and the vendor agreed, FICC would use the most recently available data on the first day that such disruption occurs. If FICC and the vendor expect that the vendor would resume providing data within five business days, FICC would determine whether to calculate the daily stress testing calculation using the most recently available data or a back-up calculation, described below. If FICC and the vendor expect that the data disruption would extend beyond five days, FICC would utilize the back-up calculation. khammond on DSKJM1Z7X2PROD with NOTICES E. Delayed Implementation of the Proposed Rule Change FICC proposes to implement the proposed rule change within 45 Business Days after the Commission’s approval of this proposed rule change. Prior to the effective date, FICC would add legends to the MBSD Rules to state that the specified changes to the MBSD Rules have been approved but not yet implemented, and to provide the date such approved changes would be implemented. The legends would also include the file number of the approved proposed rule change and state that once implemented, the legends would automatically be removed from the MBSD Rules. III. Discussion and Commission Findings Section 19(b)(2)(C) of the Act 26 directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to FICC. In particular, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) of the Act,27 as well as Rule 17Ad–22(e)(4)(iii) and (iv) thereunder 28 for the reasons described below. 26 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). 28 17 CFR 240.17Ad–22(e)(4)(iii) and (iv). A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a registered clearing agency, such as FICC, be designed to promote the prompt and accurate clearance and settlement of securities transactions, and, in general, to protect investors and the public interest.29 First, as described in Section II.B., the proposed rule change would incorporate a new section explaining the purpose and the three key components of the stress testing program, which is currently included in the Stress Testing Framework. By incorporating the purpose and the key components of the stress testing program in the MBSD Rules, the proposed rule change would provide FICC stakeholders with a better understanding of what the stress testing program is designed to accomplish and how FICC manages its credit exposures. The Commission therefore believes that this aspect of the proposed rule change is consistent with Section 17A(b)(3)(F), in that this increased transparency would protect investors and the public interest. Second, as described in Section II.C., FICC proposes to use vendor-supplied data in MBSD’s scenario development process and the risk measurement and aggregation process. The Commission believes that vendor-supplied data should allow FICC to identify and analyze risk exposures under a broad and varied range of stressed market conditions, which should, in turn, help FICC identify the amount of financial resources necessary to cover its credit exposure under stress scenarios in extreme but plausible market conditions. The Commission further believes that the use of vendor-supplied data should enable FICC to perform a robust assessment of the stress profits and losses calculation, identify and address potential risks with risks with respect to specific Clearing Members and their affiliates, and in turn, should help FICC ensure that it is collecting adequate prefunded financial resources to cover its potential losses resulting from the default of clearing members and their affiliates under extreme but plausible market conditions. Moreover, as described in Section II.D., FICC proposes to use a back-up calculation in the event the vendor fails to provide FICC with the vendorsourced data. The Commission believes that the back-up calculation is designed to provide FICC with a reasonable alternative method for calculating stress 27 15 VerDate Sep<11>2014 18:52 Oct 09, 2020 Jkt 253001 profit-and-loss in the event of an interruption in the vendor-sourced data feed. By providing FICC with a reasonable alternative method for conducting stress testing, the Commission believes that the proposed back-up calculation is designed to help FICC avoid gaps in assessing the sufficiency of its prefunded financial resources due to the inability of particular data. Taken together, the Commission believes that these aspects of the proposed rule change, as described in Sections II.C. and II.D., should better enable FICC to evaluate and manage the credit risk presented by its Clearing Members. The Commission believes that the proposed rule change is designed to improve FICC’s ability to meet its requirement to maintain sufficient prefunded financial resources at a minimum to enable FICC to cover the default of the Clearing Member (including relevant affiliates) that would potentially cause the largest aggregate credit exposure for FICC in extreme but plausible conditions, as required under Rule 17Ad–22(e)(4)(iii).30 Accordingly, the Commission believes that the proposed rule change should help FICC to continue providing prompt and accurate clearance and settlement of securities transactions even in extreme but plausible historical and hypothetical stress scenarios, consistent with Section 17A(b)(3)(F) of the Act.31 B. Consistency With Rule 17Ad– 22(e)(4)(iii) and (vi) Rule 17Ad–22(e)(4)(iii) requires that a covered clearing agency, such as 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, by maintaining additional financial resources at the minimum to enable it to cover a wide range of foreseeable stress scenarios that include, but are not limited to, the default of the participant family that would potentially cause the largest aggregate credit exposure for the covered clearing agency in extreme but plausible market conditions.32 Rule 17Ad–22(e)(4)(vi) requires that a covered clearing agency, such as FICC, effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, by testing the sufficiency of 30 17 CFR 240.17Ad–22(e)(4). 31 Id. 29 Id. PO 00000 Frm 00101 32 17 Fmt 4703 Sfmt 4703 64541 E:\FR\FM\13OCN1.SGM CFR 240.17Ad–22(e)(4)(iii). 13OCN1 64542 Federal Register / Vol. 85, No. 198 / Tuesday, October 13, 2020 / Notices its total financial resources available by conducting stress testing of its total financial resources once each day using standard predetermined parameters and assumptions.33 As described in Section II.C., FICC proposes to use vendor-supplied data, including Historical Data and SecurityLevel Data, in MBSD’s scenario development process and the risk measurement and aggregation process. Historical Data would identify stress risk exposures under broad and varied market conditions and provide FICC with an enhanced capability to design more transparent scenarios.34 SecurityLevel Data would provide stable and robust data that would enable FICC to calculate stress profits and losses that is more accurate.35 In addition, as described in Section II.D., FICC proposes to use a back-up calculation in the event the vendor fails to provide data to FICC. The Commission believes that the proposal is consistent with Rule 17Ad– 22(e)(4)(iii) because it should better enable FICC to assess its ability to maintain sufficient financial resources to cover a wide range of foreseeable stress scenarios that include the default of the member (including relevant affiliates) that would potentially cause FICC’s largest aggregate credit exposure in extreme but plausible conditions.36 Additionally, the Commission believes FICC’s proposed stress testing methodology is consistent with Rule 17Ad–22(e)(4)(vi) because it should enable FICC to test the sufficiency of its minimum financial resources by conducting stress testing using standard predetermined parameters and assumptions.37 IV. Conclusion khammond on DSKJM1Z7X2PROD with NOTICES On the basis of the foregoing, the Commission finds that the proposed rule change is consistent with the requirements of the Act and, in particular, with the requirements of Section 17A of the Act 38 and the rules and regulations promulgated thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 39 that 33 17 CFR 240.17Ad–22(e)(4)(vi). Notice, supra note 3 at 52389. 35 See id. 36 17 CFR 240.17Ad–22(e)(4)(iii). 37 17 CFR 240.17Ad–22(e)(4)(vi). 38 15 U.S.C. 78q–1. 39 15 U.S.C. 78s(b)(2). 34 See VerDate Sep<11>2014 18:52 Oct 09, 2020 Jkt 253001 proposed rule change SR–FICC–2020– 010, be, and it hereby is, approved.40 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.41 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–22476 Filed 10–9–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90112; File No. S7–13–20] Notice of Proposed Exemptive Order Granting Conditional Exemption From the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders Securities and Exchange Commission. ACTION: Notice of proposed exemptive order; request for comment. AGENCY: Pursuant to Sections 15(a)(2) and 36(a)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) is proposing to grant exemptive relief to permit natural persons to engage in certain limited activities on behalf of issuers (‘‘Finders’’), without registering as brokers under Section 15 of the Exchange Act. The proposed exemption provides for two classes of Finders, Tier I Finders and Tier II Finders, with corresponding conditions as described below. DATES: Comments should be received on or before November 12, 2020. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/exorders.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 13–20 on the subject line. Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–13–20. This file number 40 In approving the proposed rule change, the Commission considered the proposals’ impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 41 17 CFR 200.30–3(a)(12). PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 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/exorders.shtml). Comments also are 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. 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. FOR FURTHER INFORMATION CONTACT: Emily Westerberg Russell, Chief Counsel; Joanne Rutkowski, Assistant Chief Counsel; Timothy White, Senior Special Counsel; Geeta Dhingra, Special Counsel; and Darren Vieira, Special Counsel, Office of Chief Counsel, Division of Trading and Markets, at (202) 551–5550, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–8549. SUPPLEMENTARY INFORMATION: I. Introduction The Commission’s mission includes facilitating capital formation—not only for public companies, but also for the small businesses that are active participants in our private markets. Our dynamic markets and economy significantly benefit from a robust pipeline of new small businesses, which create the majority of net new jobs in the United States 1 and greatly contribute to innovation.2 Small and emerging companies—from start-ups seeking their initial seed funding to businesses on a path to become a public reporting company—require capital to grow and scale.3 One of the ways that 1 See U.S. Small Business Administration Office of Advocacy, Frequently Asked Questions (Sept. 2019), available at https://cdn.advocacy.sba.gov/ wp-content/uploads/2019/09/24153946/FrequentlyAsked-Questions-Small-Business-2019-1.pdf. 2 See, e.g., Ufuk Akcigit and William R. Kerr, ‘‘Growth through Heterogeneous Innovations,’’ Journal of Political Economy 126:4 (Aug. 2018), available at https://www.journals.uchicago.edu/ doi/full/10.1086/697901 (demonstrating that the ‘‘relative rate of major inventions is higher in small firms’’ due to the ‘‘outcome of innovation investment choices by firms’’). 3 See Facilitating Capital Formation and Expanding Investment Opportunities by Improving Access to Capital in Private Markets, Release No. 33–10763 (Mar. 4, 2020) [85 FR 17956 (Mar. 31, 2020)] (‘‘Harmonization Proposal’’) (proposing amendments to facilitate capital formation and increase opportunities for investors by expanding E:\FR\FM\13OCN1.SGM 13OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Notices]
[Pages 64539-64542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-22476]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90101; File No. SR-FICC-2020-010]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Describe Key Components of 
the Mortgage-Backed Securities Division Stress Testing Program

October 6, 2020.

I. Introduction

    On August 11, 2020, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2020-010, pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on August 25, 2020.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 89616 (August 19, 2020), 
85 FR 52387 (August 25, 2020) (SR-FICC-2020-010) (``Notice'').
    \4\ On January 21, 2020, FICC filed a portion of this proposed 
rule change that is subject to Section 806(e)(1)(A) of Title VIII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act 
entitled the Payment, Clearing, and Settlement Supervision Act of 
2010 (``the Clearing Supervision Act'') and Rule 19b-4(n)(1)(i) 
under the Act, as an advance notice with the Commission (the 
``Advance Notice Filing''). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-
4(n)(1)(i); Release No. 88266 (February 24, 2020), 85 FR 11413 
(February 27, 2020) (SR-FICC-2020-801). The Commission issued a 
notice of no objection to the Advance Notice Filing on March 13, 
2020. See Release No. 88382 (March 13, 2020), 85 FR 15830 (March 19, 
2020) (SR-FICC-2020-801). A copy of the Advance Notice Filing and 
the Commission's notice of no objection are available at: https://www.dtcc.com/legal/sec-rule-filings.aspx.
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II. Description of the Proposed Rule Change

    The proposed rule change consists of a proposal to amend the FICC 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules'') \5\ to include a new section that would describe the purpose 
and the key components of MBSD's stress testing program. The proposed 
rule change would also provide that vendor-supplied data would be used 
in the stress testing program, and that a back-up calculation would be 
used in the event the vendor fails to provide FICC with the vendor-
sourced data. The proposed changes are further described below.
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    \5\ Capitalized terms used herein and not otherwise defined 
shall have the meanings assigned to such terms in the MBSD Rules, 
available at: www.dtcc.com/legal/rules-and-procedures.aspx.
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A. Background

    MBSD provides trade comparison, netting, risk management, 
settlement, and central counterparty services for the U.S. mortgage-
backed securities market. FICC manages its credit exposures to its 
Clearing Members by collecting an appropriate amount of margin 
(referred to in the MBSD Rules as Required Fund Deposit) from each 
Clearing Member.\6\ The aggregate of all Clearing Members' margin 
amounts (together with certain other deposits required under the MBSD 
Rules) constitutes MBSD's Clearing Fund, which FICC would access should 
a Clearing Member default with insufficient margin to satisfy any FICC 
losses caused by the liquidation of the defaulting Clearing Member's 
portfolio.\7\
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    \6\ See MBSD Rule 4, supra note 5.
    \7\ Id.

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[[Page 64540]]

    FICC uses stress testing to test the sufficiency of its prefunded 
financial resources.\8\ In contrast to FICC's margin methodologies, 
which are designed to limit FICC's credit exposures under normal market 
conditions,\9\ FICC's stress testing methodologies are designed to 
quantify FICC's potential losses under extreme but plausible market 
conditions.\10\ Therefore, stress testing is designed to help FICC 
identify credit risks beyond those contemplated by FICC's margin 
methodologies, including credit exposures that might result from the 
realization of potential stress scenarios, such as extreme price 
changes, multiple defaults, or changes in other valuation inputs and 
assumptions.\11\ As a result, stress testing helps FICC identify the 
amount of financial resources necessary to cover its credit exposure 
under stress scenarios in extreme but plausible market conditions.\12\
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    \8\ On December 19, 2017, the Commission approved FICC's 
adoption of the Clearing Agency Stress Testing Framework (Market 
Risk), which among other things, sets forth the purpose of FICC's 
stress testing and describes certain methodologies FICC uses in its 
stress testing. Securities Exchange Act Release No. 82368 (December 
19, 2017), 82 FR 61082 (December 26, 2017) (SR-DTC-2017-005; SR-
FICC-2017-009; SR-NSCC-2017-006) (``Stress Testing Framework 
Order''). The Stress Testing Framework is an FICC rule, pursuant to 
Section 3(a)(27) of the Act, although it is not part of the MBSD 
Rules, and it has been filed confidentially with the Commission. See 
15 U.S.C. 78c(a)(27).
    \9\ See e.g., Securities Exchange Act Release No. 80253 (March 
15, 2017), 82 FR 14581, 14582 (March 21, 2017) (SR-FICC-2017-004) 
(notice of filing and immediate effectiveness of a proposed rule 
change to amend MBSD Rules with respect to the intraday mark-to-
market charge).
    \10\ See Stress Testing Framework Order, supra note 8 at 61083; 
Notice, supra note 3 at 52388.
    \11\ See id.; 17 CFR 240.17Ad-22(a)(17).
    \12\ See Stress Testing Framework Order, supra note 8 at 61083; 
Notice, supra note 3 at 52388.
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    The purpose and the key components of MBSD's stress testing 
program, among others, are provided in the Stress Testing 
Framework.\13\ FICC's stress testing methodologies have three key 
components: Risk identification, scenario development, and risk 
measurement and aggregation. The key components generally provide that 
FICC identifies the principal credit risk drivers, develops sets of 
extreme but plausible historical and hypothetical stress scenarios for 
the identified risk drivers, and calculates risk metrics for each 
Clearing Member's actual portfolio to estimate the profits and losses 
in connection with such Clearing Member's close-out under the chosen 
stress scenarios.\14\
---------------------------------------------------------------------------

    \13\ See Stress Testing Framework Order, supra note 8 at 61082-
83.
    \14\ See Stress Testing Framework Order, supra note 8 at 61083; 
Notice, supra note 3 at 52388.
---------------------------------------------------------------------------

B. MBSD's Stress Testing Program

    FICC proposes to include a new section in the MBSD Rules to provide 
the purpose and the key components of FICC's stress testing 
program.\15\ By including such description of the stress testing 
program in the MBSD Rules, which is a public document, FICC intends to 
make the current stress testing program transparent to its Clearing 
Members.\16\ Specifically, the proposed rule change provides that FICC 
uses stress testing to (1) test the sufficiency of the Clearing Fund 
against FICC's potential losses assuming the default of a Clearing 
Member with the largest credit exposure and its entire Affiliated 
Family under extreme but plausible market conditions, and (2) identify 
both (x) Clearing Members who may pose a greater market risk under 
certain market conditions, and (y) potential weaknesses in FICC's 
margin methodologies. The proposed rule change also provides that 
FICC's stress testing program has three key components.\17\ First, FICC 
analyzes the securities and risk exposures in its Clearing Members' 
portfolios to identify the principal market risk drivers and capture 
the risk sensitivity of the portfolios under stressed market 
conditions. Second, FICC develops a comprehensive set of scenarios 
including historical scenarios and hypothetical stress scenarios. 
Third, FICC calculates risk metrics for each Clearing Member's actual 
portfolio to estimate the profits and losses in connection with such 
Clearing Member's close out under the chosen stress scenarios.
---------------------------------------------------------------------------

    \15\ The changes described in Section II.B. are consistent with 
the existing Framework.
    \16\ See Notice, supra note 3 at 52388.
    \17\ See id.
---------------------------------------------------------------------------

C. Vendor-Supplied Data in MBSD's Stress Testing Program

    In connection with FICC's stress testing program, FICC proposes to 
use vendor-supplied data in MBSD's scenario development process, which 
is the second component of FICC's stress testing program, and the risk 
measurement and aggregation process, which is the third component of 
FICC's stress testing program.
(1) Historical Data in the Scenario Development Component
    The scenario development component involves FICC's construction of 
comprehensive and relevant sets of extreme but plausible historical and 
hypothetical stress scenarios for identified risk drivers. In its 
development of historical stress scenarios, FICC proposes to examine 
vendor-supplied historical risk factor \18\ time series data 
(``Historical Data'') to identify the largest historical changes of 
risk factors that influence the pricing of mortgage-backed securities.
---------------------------------------------------------------------------

    \18\ Generally, the term ``risk factor'' (or ``risk driver'') 
means an attribute, characteristic, variable or other concrete 
determinant that influences the risk profile of a system, entity, or 
financial asset. Risk factors may be causes of risk or merely 
correlated with risk.
---------------------------------------------------------------------------

    FICC proposes to use Historical Data because it believes that this 
data would explain the market price changes of To-Be-Announced 
(``TBA'') securities transactions cleared by MBSD.\19\ In addition, 
FICC believes that the data would (1) identify stress risk exposures 
under broad and varied market conditions, and (2) provide MBSD with a 
capability to design transparent scenarios.\20\
---------------------------------------------------------------------------

    \19\ See Notice, supra note 3 at 52389.
    \20\ See id.
---------------------------------------------------------------------------

(2) Historical Data and Security-Level Data in the Risk Measurement and 
Aggregation Component
    FICC represents that the risk measurement and aggregation process 
calculates risk metrics for each Clearing Member's actual portfolio to 
estimate the profits and losses in connection with such Clearing 
Member's close out under chosen stress scenarios.\21\ In connection 
with this calculation, FICC proposes to use a financial profit-and-loss 
calculation that leverages the Historical Data and the vendor-supplied 
security-level risk sensitivity \22\ data (``Security-Level Data''). 
The Security-Level Data is generated using the vendor's suite of 
security valuation models that includes an agency mortgage prepayment 
model and interest rate term structure model.\23\ FICC believes that 
the vendor's approach generates stable and robust Security-Level 
Data.\24\ Because the stress profits and losses calculation would 
include Security-Level Data, FICC believes that the calculated results 
would reflect results that are close to actual price changes for TBA 
securities during larger market moves, which are typical of stress 
testing scenarios.\25\
---------------------------------------------------------------------------

    \21\ See id.
    \22\ The term ``sensitivity'' means the percentage value change 
of a security given each risk factor change.
    \23\ A prepayment model captures cash flow uncertainty as a 
result of unscheduled payments of principal (prepayments). An 
interest rate term structure model describes the relationship 
between interest rates of different maturities.
    \24\ See Notice, supra note 3 at 52389.
    \25\ See id.

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[[Page 64541]]

D. Back-Up Stress Testing Calculation

    Finally, FICC proposes to implement a back-up calculation that it 
would use in the event the vendor fails to provide FICC with the 
vendor-sourced data described above. Specifically, if the vendor fails 
to provide any data or a significant portion of the data in accordance 
with the timeframes to which FICC and the vendor agreed, FICC would use 
the most recently available data on the first day that such disruption 
occurs. If FICC and the vendor expect that the vendor would resume 
providing data within five business days, FICC would determine whether 
to calculate the daily stress testing calculation using the most 
recently available data or a back-up calculation, described below. If 
FICC and the vendor expect that the data disruption would extend beyond 
five days, FICC would utilize the back-up calculation.

E. Delayed Implementation of the Proposed Rule Change

    FICC proposes to implement the proposed rule change within 45 
Business Days after the Commission's approval of this proposed rule 
change. Prior to the effective date, FICC would add legends to the MBSD 
Rules to state that the specified changes to the MBSD Rules have been 
approved but not yet implemented, and to provide the date such approved 
changes would be implemented. The legends would also include the file 
number of the approved proposed rule change and state that once 
implemented, the legends would automatically be removed from the MBSD 
Rules.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \26\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to FICC. In particular, the Commission finds that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act,\27\ as well as Rule 17Ad-22(e)(4)(iii) and (iv) thereunder \28\ 
for the reasons described below.
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    \26\ 15 U.S.C. 78s(b)(2)(C).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(4)(iii) and (iv).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency, such as FICC, be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions, and, in general, to protect investors and the public 
interest.\29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

    First, as described in Section II.B., the proposed rule change 
would incorporate a new section explaining the purpose and the three 
key components of the stress testing program, which is currently 
included in the Stress Testing Framework. By incorporating the purpose 
and the key components of the stress testing program in the MBSD Rules, 
the proposed rule change would provide FICC stakeholders with a better 
understanding of what the stress testing program is designed to 
accomplish and how FICC manages its credit exposures. The Commission 
therefore believes that this aspect of the proposed rule change is 
consistent with Section 17A(b)(3)(F), in that this increased 
transparency would protect investors and the public interest.
    Second, as described in Section II.C., FICC proposes to use vendor-
supplied data in MBSD's scenario development process and the risk 
measurement and aggregation process. The Commission believes that 
vendor-supplied data should allow FICC to identify and analyze risk 
exposures under a broad and varied range of stressed market conditions, 
which should, in turn, help FICC identify the amount of financial 
resources necessary to cover its credit exposure under stress scenarios 
in extreme but plausible market conditions. The Commission further 
believes that the use of vendor-supplied data should enable FICC to 
perform a robust assessment of the stress profits and losses 
calculation, identify and address potential risks with risks with 
respect to specific Clearing Members and their affiliates, and in turn, 
should help FICC ensure that it is collecting adequate prefunded 
financial resources to cover its potential losses resulting from the 
default of clearing members and their affiliates under extreme but 
plausible market conditions.
    Moreover, as described in Section II.D., FICC proposes to use a 
back-up calculation in the event the vendor fails to provide FICC with 
the vendor-sourced data. The Commission believes that the back-up 
calculation is designed to provide FICC with a reasonable alternative 
method for calculating stress profit-and-loss in the event of an 
interruption in the vendor-sourced data feed. By providing FICC with a 
reasonable alternative method for conducting stress testing, the 
Commission believes that the proposed back-up calculation is designed 
to help FICC avoid gaps in assessing the sufficiency of its prefunded 
financial resources due to the inability of particular data.
    Taken together, the Commission believes that these aspects of the 
proposed rule change, as described in Sections II.C. and II.D., should 
better enable FICC to evaluate and manage the credit risk presented by 
its Clearing Members. The Commission believes that the proposed rule 
change is designed to improve FICC's ability to meet its requirement to 
maintain sufficient prefunded financial resources at a minimum to 
enable FICC to cover the default of the Clearing Member (including 
relevant affiliates) that would potentially cause the largest aggregate 
credit exposure for FICC in extreme but plausible conditions, as 
required under Rule 17Ad-22(e)(4)(iii).\30\ Accordingly, the Commission 
believes that the proposed rule change should help FICC to continue 
providing prompt and accurate clearance and settlement of securities 
transactions even in extreme but plausible historical and hypothetical 
stress scenarios, consistent with Section 17A(b)(3)(F) of the Act.\31\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(4).
    \31\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)(iii) and (vi)

    Rule 17Ad-22(e)(4)(iii) requires that a covered clearing agency, 
such as 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, by 
maintaining additional financial resources at the minimum to enable it 
to cover a wide range of foreseeable stress scenarios that include, but 
are not limited to, the default of the participant family that would 
potentially cause the largest aggregate credit exposure for the covered 
clearing agency in extreme but plausible market conditions.\32\ Rule 
17Ad-22(e)(4)(vi) requires that a covered clearing agency, such as 
FICC, effectively identify, measure, monitor, and manage its credit 
exposures to participants and those arising from its payment, clearing, 
and settlement processes, by testing the sufficiency of

[[Page 64542]]

its total financial resources available by conducting stress testing of 
its total financial resources once each day using standard 
predetermined parameters and assumptions.\33\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(4)(iii).
    \33\ 17 CFR 240.17Ad-22(e)(4)(vi).
---------------------------------------------------------------------------

    As described in Section II.C., FICC proposes to use vendor-supplied 
data, including Historical Data and Security-Level Data, in MBSD's 
scenario development process and the risk measurement and aggregation 
process. Historical Data would identify stress risk exposures under 
broad and varied market conditions and provide FICC with an enhanced 
capability to design more transparent scenarios.\34\ Security-Level 
Data would provide stable and robust data that would enable FICC to 
calculate stress profits and losses that is more accurate.\35\ In 
addition, as described in Section II.D., FICC proposes to use a back-up 
calculation in the event the vendor fails to provide data to FICC.
---------------------------------------------------------------------------

    \34\ See Notice, supra note 3 at 52389.
    \35\ See id.
---------------------------------------------------------------------------

    The Commission believes that the proposal is consistent with Rule 
17Ad-22(e)(4)(iii) because it should better enable FICC to assess its 
ability to maintain sufficient financial resources to cover a wide 
range of foreseeable stress scenarios that include the default of the 
member (including relevant affiliates) that would potentially cause 
FICC's largest aggregate credit exposure in extreme but plausible 
conditions.\36\ Additionally, the Commission believes FICC's proposed 
stress testing methodology is consistent with Rule 17Ad-22(e)(4)(vi) 
because it should enable FICC to test the sufficiency of its minimum 
financial resources by conducting stress testing using standard 
predetermined parameters and assumptions.\37\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(4)(iii).
    \37\ 17 CFR 240.17Ad-22(e)(4)(vi).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\38\ and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\39\ that proposed rule change SR-FICC-2020-010, be, and it hereby is, 
approved.\40\
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    \39\ 15 U.S.C. 78s(b)(2).
    \40\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \41\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-22476 Filed 10-9-20; 8:45 am]
BILLING CODE 8011-01-P

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