Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Remove the Early Unwind Intraday Charge, Change the Treatment of Short-Term Treasuries, and Make Other Changes, 48770-48775 [2021-18678]

Download as PDF 48770 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices Application Details khammond on DSKJM1Z7X2PROD with NOTICES Permit Application: 2022–007 1. Applicant: Dr. Robert Sanders, Dept. of Biology, Temple University, 1900 N. 12th St., Philadelphia PA 19122 Activity for Which Permit Is Requested: Importation of nonindigenous species. The applicant requests an Antarctic Conservation Act permit for use of bacterial cultures as a food source during a study of Antarctic mixotrophic phytoplankton aboard U.S. Antarctic Program vessels. The bacterial culture is a non-pathogenic marine species (Photobacterium angustum) obtained from American Type Culture Collection. Bacterial cultures will be fed to natural phytoplankton communities in a sealed, controlled setting aboard the vessel and isolated from the environment. At the conclusion of the experiments, any sample or culture remaining, including filtered seawater, would be destroyed by autoclaving on the ship. Supplies and equipment would be sterilized at the end of each experiment by autoclaving or using ethanol. The applicant and permit agents are experienced in using sterile techniques and in maintaining safe practices with microbial cultures. Location: Western Antarctic Peninsula Region. Dates of Permitted Activities: April 15–July 11, 2022. Permit Application: 2022–009 2. Applicant: Steven D. Emslie, Dept. of Biology and Marine Biology, University of North Carolina, Wilmington, N.C. 28403 Activity for Which Permit Is Requested: Import into the U.S.A. The applicant seeks an Antarctic Conservation Act permit for the importation of tissue samples collected in the Ross Sea Region, Antarctica. Samples to be imported include avian bones and feathers collected from salvaged remains as well as fish, squid, krill, and marine algae samples collected opportunistically. Samples will be collected by Dr. Xiadong Liu, a collaborator of the applicant authorized under the Chinese Antarctic Program and shipped to the United States. Importation of these samples will allow for increased data collection and help to mitigate impacts to field research caused by the Covid-19 pandemic. Location: Ross Sea Region, Antarctica. Dates of Permitted Activities: February 1, 2022–January 31, 2023. Erika N. Davis, Program Specialist, Office of Polar Programs. [FR Doc. 2021–18747 Filed 8–30–21; 8:45 am] BILLING CODE 7555–01–P VerDate Sep<11>2014 20:08 Aug 30, 2021 Jkt 253001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92748; File No. SR–DTC– 2021–011] Self-Regulatory Organizations; Depository Trust Company; Notice of Designation of Longer Period for Commission Action on Proposed Rule Change Relating to Confidential Information, Market Disruption Events, Systems Disconnect, and Other Changes August 25, 2021. Accordingly, pursuant to Section 19(b)(2) of the Act 6 and for the reasons stated above, the Commission designates Friday, October 8, 2021, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove the Proposed Rule Change (File No. SR–DTC–2021–011). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.7 Jill M. Peterson, Assistant Secretary. [FR Doc. 2021–18670 Filed 8–30–21; 8:45 am] I. Introduction On June 25, 2021, Depository Trust Company (‘‘DTC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–DTC–2021–011 (the ‘‘Proposed Rule Change’’) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to amend DTC’s rules relating to confidentiality requirements, market disruption events, systems disconnect, and other changes. The Proposed Rule Change was published for comment in the Federal Register on July 13, 2021,3 and the Commission received one comment on Proposed Rule Change.4 Section 19(b)(2) of the Act 5 provides that within 45 days of the publication of notice of the filing of a proposed rule change, or within such longer period up to 90 days as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or as to which the self-regulatory organization consents, the Commission shall either approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. The 45th day after publication of the notice for the Proposed Rule Change is effectively Friday, August 27, 2021. The Commission is extending the 45day review period for Commission action on the Proposed Rule Change. In order to provide the Commission with sufficient time to consider the Proposed Rule Change, the Commission finds that it is appropriate to designate a longer period within which to take action on the Proposed Rule Change. BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92756; File No. SR–FICC– 2021–007] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Remove the Early Unwind Intraday Charge, Change the Treatment of Short-Term Treasuries, and Make Other Changes August 25, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 13, 2021, Fixed Income Clearing Corporation (‘‘FICC’’) 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 clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The proposed rule change consists of amendments to (i) the FICC Government Securities Division (‘‘GSD’’) Rulebook (‘‘Rules’’) 3 in order to remove the Early Unwind Intraday Charge (‘‘EUIC’’), (ii) the GSD Methodology Document—GSD Initial Market Risk Margin Model (‘‘QRM Methodology Document’’) 4 to 6 Id. 7 17 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Securities Exchange Act Release No. 92342 (June 25, 2021), 86 FR 36833 (July 13, 2021) (File No. SR–DTC–2021–011). 4 The comment letter is available on the Commission’s website at https://www.sec.gov/ comments/sr-dtc-2021-011/srdtc2021011.htm. 5 15 U.S.C. 78s(b)(2). PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 CFR 200.30–3(a)(31). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 3 Capitalized terms used herein and not defined shall have the meaning assigned to such terms in the Rules, available at https://www.dtcc.com/legal/ rules-and-procedures.aspx. 4 The QRM Methodology Document was filed as a confidential exhibit in the rule filing and advance notice for GSD sensitivity VaR. See Securities 1 15 E:\FR\FM\31AUN1.SGM 31AUN1 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices change the treatment of U.S. Treasury (‘‘Treasury’’) securities with remaining time-to-maturities equal to or less than a year (‘‘Short-Term Treasuries’’), and (iii) the Rules and the QRM Methodology Document to make certain technical changes, as described in greater detail below. FICC is requesting confidential treatment of the QRM Methodology Document and has filed it separately with the Secretary of the Commission.5 II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose FICC is proposing to amend (i) the Rules in order to eliminate the EUIC, (ii) the QRM Methodology Document to change the treatment of Short-Term Treasuries, and (iii) the Rules and the QRM Methodology Document to make certain technical changes, as described in greater detail below. khammond on DSKJM1Z7X2PROD with NOTICES (1) Eliminate the EUIC In 2014, FICC received Commission approval to add the EUIC 6 as a component of the intraday GSD Required Fund Deposit. FICC established the EUIC to address two situations in the GCF Repo® Service 7 at the time, where the substitution of securities with cash (‘‘Cash Substitution’’) created a potential for under-margining. The first Cash Substitution situation occurred in certain instances where, on Exchange Act Release Nos. 83362 (June 1, 2018), 83 FR 26514 (June 7, 2018) (SR–FICC–2018–001) and 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR–FICC–2018–801). 5 See 17 CFR 240.24b–2. 6 See Securities Exchange Act Release Nos. 73389 (October 17, 2014), 79 FR 63456 (October 23, 2014) (SR–FICC–2014–01) and 73388 (October 17, 2014), 79 FR 63458 (October 23, 2014) (SR–FICC–2014– 801). 7 The GCF Repo® Service enables dealers to trade general collateral repos, based on rate, term, and underlying product, throughout the day without requiring intraday, trade-for-trade settlement on a Deliver-versus-Payment (‘‘DVP’’) basis. The GCF Repo Service is governed primarily by Rule 20. VerDate Sep<11>2014 20:08 Aug 30, 2021 Jkt 253001 an intraday basis, a GCF Repo participant substituted cash for the securities that were used as collateral for a GCF Repo position the prior day. The second Cash Substitution situation occurred when the GCF Clearing Agent Bank unwound the cash lending side of a GCF Repo Transaction that occurred on an inter-clearing bank basis 8 at approximately 7:30 a.m.9 Both of these Cash Substitution situations had the potential to result in higher cash balances in the underlying collateral of GCF Repo positions at noon when FICC was calculating the intraday GSD Required Fund Deposit requirement. Because there is no VaR Charge associated with cash collateral, and because the GCF Repo participant is likely to replace the cash with securities (which would be subject to the VaR Charge) by end of day, the potential for an under-margined condition at the noon calculation can occur. As stated above, the EUIC is meant to address this potential under-margined situation. FICC believes that there is a more accurate approach than the EUIC that addresses the under-margined situation that can occur in certain instances with respect to the first Cash Substitution situation described above. Specifically, FICC can and does calculate and assess an Intraday Supplemental Fund Deposit amount, if necessary.10 In 2018, FICC amended its calculation of the VaR Charge by, among other things, replacing its full revaluation approach with the sensitivity approach.11 FICC also provided transparency with respect to FICC’s existing authority to calculate and assess Intraday Supplemental Fund Deposit amounts in the 2018 Filing.12 Because of these changes, FICC now believes that calculating and assessing an Intraday Supplemental Deposit amount, if necessary, rather than the EUIC is a more accurate approach to addressing the under-margined situation described above. 8 At the time of the EUIC approval, the GCF Repo Service was operating on an inter-clearing bank basis, meaning that GCF Repo participants who cleared at different GCF Clearing Agent Banks could enter into GCF Repo Transactions. The GCF Repo Service now operates on an intra-clearing bank basis. See Securities Exchange Act Release No. 78206 (June 30, 2016), 81 FR 44388 (July 7, 2016) (SR–FICC–2016–002). 9 All times herein are Eastern Time. 10 See Securities Exchange Act Release Nos. 83362 (June 1, 2018), 83 FR 26514 (June 7, 2018) (SR–FICC–2018–001) and 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR–FICC–2018–801) (‘‘2018 Filing’’). 11 Id. 12 Id. PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 48771 FICC receives hourly intraday GCF Repo lockup files 13 from 8:00 a.m. to 3:00 p.m. from The Bank of New York Mellon. These hourly intraday GCF Repo lockup files provide FICC with information with respect to the GCF Repo participants’ positions throughout the day that FICC can use to calculate an intraday VaR Charge. As such, throughout the day, FICC can use the information in these files to assess the exposure that arises from collateral substitution (in addition to any other position changes) and can charge an Intraday Supplemental Fund Deposit amount to the GCF Repo participant, if necessary, to address this exposure. The current EUIC is only applied based on a Netting Member’s 12:00 p.m. (noon) GCF Repo positions, as the lesser of (i) the net reduction in the VaR Charge attributable to either cash substitutions or (ii) the prior end of day VaR Charge minus the intraday VaR Charge. With the Intraday Supplemental Fund Deposit (which FICC is able to charge throughout the day) and the hourly information that it receives from The Bank of New York Mellon, FICC is able to more accurately address any potential under-margining from collateral substitutions that occur after 12:00 p.m. Because FICC mitigates any exposure that occurs from collateral substitutions throughout the day by charging the Intraday Supplemental Fund Deposit, FICC is proposing to eliminate the EUIC. Regarding the second Cash Substitution situation described above, the EUIC is no longer applicable because the morning unwind of cash and securities has been eliminated. The morning unwind of cash and securities has been eliminated because the GCF Repo Service now operates on an intraclearing bank basis. In 2016, interbank services were suspended.14 As such, because there is no longer any potential for under-margining due to the unwind of the cash lending side of a GCF Repo Transaction that occurred on an interclearing bank basis at 7:30 a.m., FICC is proposing to eliminate the EUIC. To effectuate this proposed change, FICC would revise Rule 1 to remove the defined term, Early Unwind Intraday Charge. In addition, FICC proposes to revise Section 1b of Rule 4 by deleting paragraph (iii), which references the EUIC. Section 1b describes the calculation of the Unadjusted GSD Margin Portfolio Amount. 13 Lockup files refers to the collateral that GCF Repo participants have allocated to satisfy their Collateral Allocation Obligations. 14 See supra note 8. E:\FR\FM\31AUN1.SGM 31AUN1 khammond on DSKJM1Z7X2PROD with NOTICES 48772 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices (2) Change the Treatment of Short-Term Treasuries The QRM Methodology Document describes the current GSD margin methodology with respect to Short-Term Treasuries. The current GSD margin methodology does not have any special treatment for Short-Term Treasuries. Short-Term Treasuries are margined as part of the entire portfolio using the sensitivity VaR Charge methodology, and a haircut-based methodology is used as a backup for Short-Term Treasuries where sensitivity analytics data 15 is not available. Specifically, Short-Term Treasuries that do not have sensitivity analytics data are subject to a single haircut rate calibrated to the volatility of the Bloomberg/Barclays Index of Treasury securities with remaining time-to-maturities equal to or less than a year. Currently, the onemonth Treasury bills and the ninemonth Treasury bills would be margined using the same haircut rate because, as described above, there is one haircut rate that is calibrated to the volatility of the Bloomberg/Barclays Index of Treasury securities with remaining time-to-maturities equal to or less than a year. FICC has noted two model performance monitoring concerns with the approach in the current model used to calculate the VaR Charge when it is evaluated at a product level and could manifest in VaR Charge underperformance when the current VaR Charge model is applied to portfolios with a high concentration of Short-Term Treasuries. One concern with the current approach is related to the potentially large impact that market events, such as Federal Reserve policy announcements, supply/demand imbalances in Short-Term Treasuries, inflation shocks, and changes in shortterm borrowing rates, can have on the yields of Short-Term Treasuries. The ‘‘short-end’’ of the Treasury yield curve is not usually volatile (i.e., there usually are not large day-to-day changes in short-term interest rates). However, these market events may have a large impact on the yields of Short-Term Treasuries. Using this current approach, the VaR Charge calculated for portfolios with a high concentration of Short-Term Treasuries may not adequately cover this above-described potentially large impact on the ‘‘short-end’’ of the Treasury yield curve. Another concern with the current approach when it is applied to portfolios with a high concentration of 15 Sensitivity analytics data refers to data that FICC receives from its data vendor, such as the duration and convexity of Treasury securities. VerDate Sep<11>2014 20:08 Aug 30, 2021 Jkt 253001 Short-Term Treasuries is that it may not adequately address the volatility of certain portfolios of Short-Term Treasuries if the composition of those portfolios differs greatly from the composition of the Bloomberg/Barclays Index of Treasury securities described above. This is because the volatility of the yields may differ greatly between different types of Short-Term Treasuries. For example, the volatility of the yields of a three-month Treasury bill differs greatly from that of a one-year Treasury bill. Using one haircut based on the volatility of the Bloomberg/ Barclays index may not adequately cover the risk of securities with longer duration maturities in the equal to or less than one-year bucket. The same yield change has a larger impact on those securities with longer remaining maturities. As such, the composition of the Bloomberg/Barclays Index of Treasury securities may not be comparable to the composition of certain portfolios of Short-Term Treasuries. Therefore, using a single haircut rate calibrated to the volatility of one index may not adequately address certain portfolios of Short-Term Treasuries that have a very different composition from the index. The backtesting results of the current approach, as applied at a product level, for Short-Term Treasuries does not meet FICC’s 99 percent confidence level standard. As described above, Short-Term Treasuries are margined as part of the entire portfolio using the sensitivity VaR Charge methodology, and a haircutbased methodology is used as a backup for Short-Term Treasuries where sensitivity analytics data is not available. Specifically, Short-Term Treasuries that do not have sensitivity analytics data are subject to a single haircut rate calibrated to the volatility of the Bloomberg/Barclay Index of Treasury securities with remaining time-to-maturities equal to or less than a year. The current approach does not have a floor assigned to this single haircut rate. To mitigate the vulnerabilities described above with respect to the current approach, FICC is proposing to use the haircut methodology to margin all Short-Term Treasuries (not just for the Short-Term Treasuries without sensitivity analytics data, as is the current case). Furthermore, instead of one haircut bucket for Short-Term Treasuries, FICC would use two different haircut buckets depending on the time to maturity of the Short-Term Treasury security. FICC believes that using two different haircut buckets depending on the time to maturity of the Short-Term Treasury PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 security would be more targeted and accurate. The first bucket is Treasury securities with remaining time to maturity equal to or less than six months with a haircut floor set at 12.5 basis points. The second bucket is Treasury securities with remaining time to maturity greater than six months but equal to or less than one year with a haircut floor set at 25 basis points. The haircut charges will be applied to the absolute value of the net market value of the Treasury securities in the respective buckets, with no correlation offset against all other Treasury maturity buckets. FICC is proposing to use one haircut rate for the absolute value of the net market value of Treasury securities with remaining time to maturity equal to or less than six months (with a floor of 12.5 basis points), and another haircut rate for the absolute value of the net market value of Treasury securities with remaining time to maturity greater than six months but equal to or less than one year (with a floor of 25 basis points). With respect to the proposed change, the haircut charges will be applied to the absolute value of the net market value of the Treasury securities in the respective buckets, which is consistent with the current haircut methodology. However, in contrast to the current haircut methodology where correlation offsets are applied against other Treasury maturity buckets, the correlation offset will not be applied in the proposed approach for the two buckets for Short-Term Treasuries. FICC believes that having these two haircut buckets with the floors would ensure coverage of the risk of at least 25 basis points in yield change for any Short-Term Treasuries that fall within these two buckets and help mitigate the potential exposure arising from market events such as Federal Reserve policy announcements, supply/demand imbalances in Short-Term Treasuries, inflation shocks, and changes in shortterm borrowing rates. FICC also believes having the two haircut buckets with floors would help FICC achieve its backtesting standards, which is 99 percent coverage target with 3-days of margin period of risk. As described below, FICC performed an impact study for the period between January 2020 to December 2020, which indicated that if the proposed changes to the treatment of Short-Term Treasuries had been in place, the backtesting coverage ratio for portfolios of Short-Term Treasuries would have increased from approximately 94.9% to 99.4%. To effectuate these changes, FICC proposes to revise the QRM Methodology Document to describe the E:\FR\FM\31AUN1.SGM 31AUN1 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices proposed revised GSD margin methodology with respect to Short-Term Treasuries. (3) Technical Changes FICC proposes to make technical changes to the Rules. Specifically, because paragraph (iii) in Section 1b of Rule 4 would be deleted, as described above, FICC is proposing to make conforming technical changes to renumber the subsequent paragraphs. FICC is also proposing to make technical changes to the QRM Methodology Document. Specifically, FICC is proposing to make clarifying and grammatical changes to a sentence that describes the indices in a haircut used for short TIPS bonds. Impact Study khammond on DSKJM1Z7X2PROD with NOTICES FICC performed an impact study on Members’ portfolios for the period beginning January 2, 2020 to December 31, 2020 that showed that the proposed change to eliminate the EUIC would impact a small number of Members, and the total impact to the Clearing Fund would be small. Over the study period, eliminating the EUIC would have affected, on average, nine Members per day, and the average daily margin decrease to GSD’s Clearing Fund would have been approximately $53.3 million per day (0.3% of the average daily Required Fund Deposit requirement of $21.3 billion). FICC performed an impact study on Members’ portfolios for the period beginning January 2020 through December 2020. At the clearing corporation level, the impact study indicates that if the proposed changes to the treatment of Short-Term Treasuries had been in place, the backtesting coverage ratio for portfolios of ShortTerm Treasuries would have increased from approximately 94.9% to 99.4%. Over the study period, the proposed changes to the treatment of Short-Term Treasuries would have affected 93 Members per day on average, and the mean daily margin increases of the VaR Charge for GSD would have been approximately $160 million per day (0.8% of the average daily VaR Charge of $19.5 billion). Implementation Timeframe Subject to approval by the Commission, FICC would implement the proposed rule change within 30 days following such approval, and the implementation date would be announced by an Important Notice posted to FICC’s website. VerDate Sep<11>2014 20:08 Aug 30, 2021 Jkt 253001 2. Statutory Basis FICC believes that this proposal is consistent with the requirements of the Act, and the rules and regulations thereunder applicable to a registered clearing agency. Specifically, FICC believes the proposed changes to the Rules and the QRM Methodology Document described above are consistent with Section 17A(b)(3)(F) of the Act, for the reasons described below.16 Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a clearing agency be designed to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible.17 The proposed change to eliminate the EUIC as described in Item II(A)1(1) above is designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.18 The EUIC was established to reduce the risk of potential undermargining due to the two Cash Substitution situations described above. With the suspension of interbank services in 2016, the risk of potential under-margining due to the second Cash Substitution described above had been eliminated. While the potential for under-margining due to the first Cash Substitution situation described above still exists, FICC now addresses the exposure through the calculation and assessment of an Intraday Supplemental Fund Deposit amount, if necessary, as described above. FICC believes the Intraday Supplemental Fund Deposit is a more accurate way to margin the exposure presented, and therefore FICC believes that the proposed changes described in Item II(A)1(1) above would help better ensure that FICC calculates and collects adequate margin from Members and thereby assure the safeguarding of securities and funds which are in the custody and control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.19 The proposed changes to the QRM Methodology Document, described in Item II(A)1(2) above to revise the current GSD margin methodology with respect to Short-Term Treasuries, are designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.20 FICC believes the proposed changes to the current GSD margin methodology with respect to Short-Term Treasuries would help mitigate the vulnerabilities of the current approach when they are applied to portfolios with a high concentration of Short-Term Treasuries. As such, FICC believes that the proposed changes described in Item II(A)1(2) above would help better ensure that FICC calculates and collects adequate margin from Members and thereby assure the safeguarding of securities and funds which are in the custody and control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.21 FICC believes that the proposed technical changes to the QRM Methodology Document described in Item II(A)1(3) above would enhance the clarity of the document for FICC. As the QRM Methodology Document is used by FICC’s risk management personnel (‘‘Risk Management’’) regarding the calculation of margin requirements, it is important for the accurate and smooth functioning of the margining process that Risk Management has a clear description of the calculation of the GSD margin methodology. The proposed changes would promote such understanding by enhancing the clarity of the description. As such, FICC believes that enhancing the clarity of the QRM Methodology Document would assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.22 Rule 17Ad–22(e)(4)(i) under the Act 23 requires a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those exposures arising from its payment, clearing, and settlement processes by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. FICC believes that the proposed changes in Items II(A)1(1) and II(A)1(2) above are consistent with the requirements of Rule 17Ad–22(e)(4)(i) under the Act.24 FICC believes the proposed changes described in Item II(A)1(1) above to eliminate the EUIC are consistent with the requirements of Rule 17Ad– 20 Id. 16 15 U.S.C. 78q–1(b)(3)(F). 21 Id. 17 Id. 22 Id. 18 Id. 23 17 19 Id. 24 Id. PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 48773 E:\FR\FM\31AUN1.SGM CFR 240.17Ad–22(e)(4)(i). 31AUN1 khammond on DSKJM1Z7X2PROD with NOTICES 48774 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices 22(e)(4)(i) under the Act.25 This is because FICC believes assessing and charging an Intraday Supplemental Fund Deposit amount, if necessary, is a better and more accurate way to address the potential under-margining due to the first Cash Substitution situation described above than charging the EUIC. The EUIC is charged once a day at 12 p.m., while FICC may charge an Intraday Supplemental Fund Deposit amount, if necessary, throughout the day, based on the hourly information that FICC receives regarding GCF Repo participants’ positions. As such, because FICC can continuously assess its exposure and charge additional margin throughout the day with the Intraday Supplemental Fund Deposit rather than at one point in time, the proposed changes described in Item II(A)1(1) would help FICC better measure and monitor its credit exposures to participants. Therefore, FICC believes that the proposed changes described in Item II(A)1(1) above are consistent with the requirements of Rule 17Ad– 22(e)(4)(i) under the Act.26 The proposed changes described in Item II(A)1(2) above would allow FICC to use the haircut methodology to margin all Short-Term Treasuries (not just for the Short-Term Treasuries without sensitivity analytics data, as is the current case). As described above, FICC would have two haircuts depending on the time to maturity of the Short-Term Treasuries. This proposed approach would address the two vulnerabilities with the current approach when it is applied to portfolios with a high concentration of Short-Term Treasuries as described above and thereby better enable FICC to limit its credit exposures to Members. Therefore, FICC believes the proposed changes described in Item II(A)1(2) above are consistent with the requirements of Rule 17Ad–22(e)(4)(i) under the Act.27 Rule 17Ad–22(e)(6)(i) under the Act 28 requires a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to cover, if the covered clearing agency provides central counterparty services, its credit exposures to its participants by establishing a risk-based margin system that, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market. FICC believes that the proposed changes in Items II(A)1(1) and II(A)1(2) above are consistent with the requirements of Rule 17Ad–22(e)(6)(i) under the Act.29 Specifically, FICC believes that the proposed changes described in Item II(A)1(1) above to eliminate the EUIC and rely instead on the assessment of an Intraday Supplemental Fund Deposit amount, if necessary, are reasonably designed to cover FICC’s credit exposures to its participants because they would better enable FICC to consider and produce margin levels commensurate with the risk and particular attributes of a GCF Repo participant’s portfolio. This is because the Intraday Supplemental Fund Deposit amount could be charged throughout the day and would be based on hourly information about such GCF Repo participant’s portfolio that FICC receives from The Bank of New York Mellon (unlike the EUIC, which is charged at 12 p.m.). Therefore, FICC believes the proposed changes would allow FICC to continue to produce margin levels commensurate with the risks and particular attributes of each relevant product, portfolio, and market and are consistent with the requirements of Rule 17Ad–22(e)(6)(i) under the Act.30 FICC believes the proposed changes described in Item II(A)1(2) above to allow FICC to use the haircut methodology to margin all Short-Term Treasuries are consistent with the requirements of Rule 17Ad–22(e)(6)(i) cited above. FICC believes these proposed changes are reasonably designed to cover FICC’s credit exposures to its participants, especially those participants who have a high concentration of Short-Term Treasuries in their portfolios because, as described above, this proposed approach would address two vulnerabilities associated with the current approach when it is applied to portfolios with a high concentration of Short-Term Treasuries. Therefore, FICC believes the proposed changes would better ensure that FICC produces margin levels commensurate with the risk and particular attributes of each relevant product, portfolio, and market, and are consistent with the requirements of Rule 17Ad–22(e)(6)(i) under the Act.31 (B) Clearing Agency’s Statement on Burden on Competition FICC believes that the proposed changes described in Item II(A)1(1) above would not have an impact on 32 15 25 Id. 26 Id. 27 Id. 28 17 competition. This is because Members are currently being assessed an Intraday Supplemental Fund Deposit regardless of the EUIC. The assessment of the Intraday Supplemental Fund Deposit is independent of the EUIC. As such, FICC believes the proposed change to eliminate the EUIC would result in a margin reduction; FICC believes the amount of the margin reduction would be nominal. FICC believes that the proposed changes described in Item II(A)1(2) above may have an impact on competition because these changes could result in certain Members being assessed a higher margin than they would have been assessed with the current GSD margin methodology for Short-Term Treasuries. Specifically, Members that have a high concentration of directional Short-Term Treasuries in their portfolios would be assessed a higher margin than they would have been assessed with the current GSD margin methodology for Short-Term Treasuries. FICC believes the proposed change could burden competition by potentially increasing these Members’ operating costs. Regardless of whether such burden on competition could be deemed significant, FICC believes that any related burden on competition would be necessary and appropriate, as permitted by Section 17A(b)(3)(I) of the Act, for the reasons described below.32 FICC believes any burden on competition that may be created would be necessary in furtherance of the purposes of the Act 33 because the proposed changes would mitigate vulnerabilities that have been identified with respect to the current GSD margin methodology for Short-Term Treasuries. In addition, FICC believes that with these proposed changes, the margining would better reflect the risk presented by the Members’ specific portfolios. FICC believes any burden on competition that may be created would be appropriate in furtherance of the purposes of the Act 34 because they have been designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible, consistent with Section 17A(b)(3)(F) of the Act.35 As described above, these proposed changes would help ensure that FICC calculates and collects adequate margin from Members, and all Short-Term Treasuries would continue CFR 240.17Ad–22(e)(6)(i). VerDate Sep<11>2014 20:08 Aug 30, 2021 Jkt 253001 29 Id. 33 Id. 30 Id. 34 Id. 31 Id. 35 15 PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 E:\FR\FM\31AUN1.SGM U.S.C. 78q–1(b)(3)(I). U.S.C. 78q–1(b)(3)(F). 31AUN1 Federal Register / Vol. 86, No. 166 / Tuesday, August 31, 2021 / Notices to be subject to the GSD margin methodology. FICC does not believe that the proposed changes described in Item II(A)1(3) above to make technical changes to the Rules would have any impact on competition because these proposed changes would better ensure that the Rules remain clear and accurate, and would facilitate Members’ understanding of the Rules and their obligations thereunder. Having transparent, accessible, clear, and accurate provisions in the Rules would improve the readability and clarity of the Rules regarding fees that Members would incur by participating in GSD. These proposed changes would apply equally to all Members and would not affect Members’ rights and obligations. In addition, FICC does not believe that the proposed changes described in Item II(A)1(3) above to make technical changes to the QRM Methodology Document would have any impact on competition because these proposed changes would enhance the clarity and accuracy of the QRM Methodology Document and would not affect the substantive rights of Members. khammond on DSKJM1Z7X2PROD with NOTICES (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others 20:08 Aug 30, 2021 Jkt 253001 Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– FICC–2021–007 on the subject line. Paper Comments FICC has not received or solicited any written comments relating to this proposal. If any written comments are received, they will be publicly filed as an Exhibit 2 to this filing, as required by Form 19b–4 and the General Instructions thereto. Persons submitting comments are cautioned that, according to Section IV (Solicitation of Comments) of the Exhibit 1A in the General Instructions to Form 19b–4, the Commission does not edit personal identifying information from comment submissions. Commenters should submit only information that they wish to make available publicly, including their name, email address, and any other identifying information. All prospective commenters should follow the Commission’s instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/ how-to-submit-comments. General questions regarding the rule filing process or logistical questions regarding this filing should be directed to the Main Office of the Commission’s Division of Trading and Markets at tradingandmarkets@sec.gov or 202– 551–5777. FICC reserves the right to not respond to any comments received. VerDate Sep<11>2014 III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action • 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–2021–007. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and 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 PO 00000 Frm 00117 Fmt 4703 Sfmt 4703 48775 filing also will be available for inspection and copying at the principal office of FICC and on DTCC’s website (https://dtcc.com/legal/sec-rulefilings.aspx). All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FICC– 2021–007 and should be submitted on or before September 21, 2021. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 Jill M. Peterson, Assistant Secretary. [FR Doc. 2021–18678 Filed 8–30–21; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–92755; File No. SR–BOX– 2021–18] Self-Regulatory Organizations; BOX Exchange LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend IM–7240–1 August 25, 2021. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on August 13, 2021, BOX Exchange LLC (the ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend IM– 7240–1. The text of the proposed rule change is available from the principal office of the Exchange, at the Commission’s Public Reference Room and also on the Exchange’s internet website at https://boxoptions.com. 36 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\31AUN1.SGM 31AUN1

Agencies

[Federal Register Volume 86, Number 166 (Tuesday, August 31, 2021)]
[Notices]
[Pages 48770-48775]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-18678]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92756; File No. SR-FICC-2021-007]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Remove the Early Unwind 
Intraday Charge, Change the Treatment of Short-Term Treasuries, and 
Make Other Changes

August 25, 2021.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 13, 2021, Fixed Income Clearing Corporation (``FICC'') 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 clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to (i) the FICC 
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ in 
order to remove the Early Unwind Intraday Charge (``EUIC''), (ii) the 
GSD Methodology Document--GSD Initial Market Risk Margin Model (``QRM 
Methodology Document'') \4\ to

[[Page 48771]]

change the treatment of U.S. Treasury (``Treasury'') securities with 
remaining time-to-maturities equal to or less than a year (``Short-Term 
Treasuries''), and (iii) the Rules and the QRM Methodology Document to 
make certain technical changes, as described in greater detail below.
---------------------------------------------------------------------------

    \3\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the Rules, available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ The QRM Methodology Document was filed as a confidential 
exhibit in the rule filing and advance notice for GSD sensitivity 
VaR. See Securities Exchange Act Release Nos. 83362 (June 1, 2018), 
83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 11, 
2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
---------------------------------------------------------------------------

    FICC is requesting confidential treatment of the QRM Methodology 
Document and has filed it separately with the Secretary of the 
Commission.\5\
---------------------------------------------------------------------------

    \5\ See 17 CFR 240.24b-2.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    FICC is proposing to amend (i) the Rules in order to eliminate the 
EUIC, (ii) the QRM Methodology Document to change the treatment of 
Short-Term Treasuries, and (iii) the Rules and the QRM Methodology 
Document to make certain technical changes, as described in greater 
detail below.
(1) Eliminate the EUIC
    In 2014, FICC received Commission approval to add the EUIC \6\ as a 
component of the intraday GSD Required Fund Deposit. FICC established 
the EUIC to address two situations in the GCF Repo[supreg] Service \7\ 
at the time, where the substitution of securities with cash (``Cash 
Substitution'') created a potential for under-margining.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release Nos. 73389 (October 17, 
2014), 79 FR 63456 (October 23, 2014) (SR-FICC-2014-01) and 73388 
(October 17, 2014), 79 FR 63458 (October 23, 2014) (SR-FICC-2014-
801).
    \7\ The GCF Repo[supreg] Service enables dealers to trade 
general collateral repos, based on rate, term, and underlying 
product, throughout the day without requiring intraday, trade-for-
trade settlement on a Deliver-versus-Payment (``DVP'') basis. The 
GCF Repo Service is governed primarily by Rule 20.
---------------------------------------------------------------------------

    The first Cash Substitution situation occurred in certain instances 
where, on an intraday basis, a GCF Repo participant substituted cash 
for the securities that were used as collateral for a GCF Repo position 
the prior day. The second Cash Substitution situation occurred when the 
GCF Clearing Agent Bank unwound the cash lending side of a GCF Repo 
Transaction that occurred on an inter-clearing bank basis \8\ at 
approximately 7:30 a.m.\9\ Both of these Cash Substitution situations 
had the potential to result in higher cash balances in the underlying 
collateral of GCF Repo positions at noon when FICC was calculating the 
intraday GSD Required Fund Deposit requirement. Because there is no VaR 
Charge associated with cash collateral, and because the GCF Repo 
participant is likely to replace the cash with securities (which would 
be subject to the VaR Charge) by end of day, the potential for an 
under-margined condition at the noon calculation can occur. As stated 
above, the EUIC is meant to address this potential under-margined 
situation.
---------------------------------------------------------------------------

    \8\ At the time of the EUIC approval, the GCF Repo Service was 
operating on an inter-clearing bank basis, meaning that GCF Repo 
participants who cleared at different GCF Clearing Agent Banks could 
enter into GCF Repo Transactions. The GCF Repo Service now operates 
on an intra-clearing bank basis. See Securities Exchange Act Release 
No. 78206 (June 30, 2016), 81 FR 44388 (July 7, 2016) (SR-FICC-2016-
002).
    \9\ All times herein are Eastern Time.
---------------------------------------------------------------------------

    FICC believes that there is a more accurate approach than the EUIC 
that addresses the under-margined situation that can occur in certain 
instances with respect to the first Cash Substitution situation 
described above. Specifically, FICC can and does calculate and assess 
an Intraday Supplemental Fund Deposit amount, if necessary.\10\ In 
2018, FICC amended its calculation of the VaR Charge by, among other 
things, replacing its full revaluation approach with the sensitivity 
approach.\11\ FICC also provided transparency with respect to FICC's 
existing authority to calculate and assess Intraday Supplemental Fund 
Deposit amounts in the 2018 Filing.\12\ Because of these changes, FICC 
now believes that calculating and assessing an Intraday Supplemental 
Deposit amount, if necessary, rather than the EUIC is a more accurate 
approach to addressing the under-margined situation described above.
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release Nos. 83362 (June 1, 
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801) (``2018 
Filing'').
    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

    FICC receives hourly intraday GCF Repo lockup files \13\ from 8:00 
a.m. to 3:00 p.m. from The Bank of New York Mellon. These hourly 
intraday GCF Repo lockup files provide FICC with information with 
respect to the GCF Repo participants' positions throughout the day that 
FICC can use to calculate an intraday VaR Charge. As such, throughout 
the day, FICC can use the information in these files to assess the 
exposure that arises from collateral substitution (in addition to any 
other position changes) and can charge an Intraday Supplemental Fund 
Deposit amount to the GCF Repo participant, if necessary, to address 
this exposure. The current EUIC is only applied based on a Netting 
Member's 12:00 p.m. (noon) GCF Repo positions, as the lesser of (i) the 
net reduction in the VaR Charge attributable to either cash 
substitutions or (ii) the prior end of day VaR Charge minus the 
intraday VaR Charge. With the Intraday Supplemental Fund Deposit (which 
FICC is able to charge throughout the day) and the hourly information 
that it receives from The Bank of New York Mellon, FICC is able to more 
accurately address any potential under-margining from collateral 
substitutions that occur after 12:00 p.m. Because FICC mitigates any 
exposure that occurs from collateral substitutions throughout the day 
by charging the Intraday Supplemental Fund Deposit, FICC is proposing 
to eliminate the EUIC.
---------------------------------------------------------------------------

    \13\ Lockup files refers to the collateral that GCF Repo 
participants have allocated to satisfy their Collateral Allocation 
Obligations.
---------------------------------------------------------------------------

    Regarding the second Cash Substitution situation described above, 
the EUIC is no longer applicable because the morning unwind of cash and 
securities has been eliminated. The morning unwind of cash and 
securities has been eliminated because the GCF Repo Service now 
operates on an intra-clearing bank basis. In 2016, interbank services 
were suspended.\14\ As such, because there is no longer any potential 
for under-margining due to the unwind of the cash lending side of a GCF 
Repo Transaction that occurred on an inter-clearing bank basis at 7:30 
a.m., FICC is proposing to eliminate the EUIC.
---------------------------------------------------------------------------

    \14\ See supra note 8.
---------------------------------------------------------------------------

    To effectuate this proposed change, FICC would revise Rule 1 to 
remove the defined term, Early Unwind Intraday Charge. In addition, 
FICC proposes to revise Section 1b of Rule 4 by deleting paragraph 
(iii), which references the EUIC. Section 1b describes the calculation 
of the Unadjusted GSD Margin Portfolio Amount.

[[Page 48772]]

(2) Change the Treatment of Short-Term Treasuries
    The QRM Methodology Document describes the current GSD margin 
methodology with respect to Short-Term Treasuries. The current GSD 
margin methodology does not have any special treatment for Short-Term 
Treasuries. Short-Term Treasuries are margined as part of the entire 
portfolio using the sensitivity VaR Charge methodology, and a haircut-
based methodology is used as a backup for Short-Term Treasuries where 
sensitivity analytics data \15\ is not available. Specifically, Short-
Term Treasuries that do not have sensitivity analytics data are subject 
to a single haircut rate calibrated to the volatility of the Bloomberg/
Barclays Index of Treasury securities with remaining time-to-maturities 
equal to or less than a year. Currently, the one-month Treasury bills 
and the nine-month Treasury bills would be margined using the same 
haircut rate because, as described above, there is one haircut rate 
that is calibrated to the volatility of the Bloomberg/Barclays Index of 
Treasury securities with remaining time-to-maturities equal to or less 
than a year.
---------------------------------------------------------------------------

    \15\ Sensitivity analytics data refers to data that FICC 
receives from its data vendor, such as the duration and convexity of 
Treasury securities.
---------------------------------------------------------------------------

    FICC has noted two model performance monitoring concerns with the 
approach in the current model used to calculate the VaR Charge when it 
is evaluated at a product level and could manifest in VaR Charge 
underperformance when the current VaR Charge model is applied to 
portfolios with a high concentration of Short-Term Treasuries. One 
concern with the current approach is related to the potentially large 
impact that market events, such as Federal Reserve policy 
announcements, supply/demand imbalances in Short-Term Treasuries, 
inflation shocks, and changes in short-term borrowing rates, can have 
on the yields of Short-Term Treasuries. The ``short-end'' of the 
Treasury yield curve is not usually volatile (i.e., there usually are 
not large day-to-day changes in short-term interest rates). However, 
these market events may have a large impact on the yields of Short-Term 
Treasuries. Using this current approach, the VaR Charge calculated for 
portfolios with a high concentration of Short-Term Treasuries may not 
adequately cover this above-described potentially large impact on the 
``short-end'' of the Treasury yield curve.
    Another concern with the current approach when it is applied to 
portfolios with a high concentration of Short-Term Treasuries is that 
it may not adequately address the volatility of certain portfolios of 
Short-Term Treasuries if the composition of those portfolios differs 
greatly from the composition of the Bloomberg/Barclays Index of 
Treasury securities described above. This is because the volatility of 
the yields may differ greatly between different types of Short-Term 
Treasuries. For example, the volatility of the yields of a three-month 
Treasury bill differs greatly from that of a one-year Treasury bill. 
Using one haircut based on the volatility of the Bloomberg/Barclays 
index may not adequately cover the risk of securities with longer 
duration maturities in the equal to or less than one-year bucket. The 
same yield change has a larger impact on those securities with longer 
remaining maturities. As such, the composition of the Bloomberg/
Barclays Index of Treasury securities may not be comparable to the 
composition of certain portfolios of Short-Term Treasuries. Therefore, 
using a single haircut rate calibrated to the volatility of one index 
may not adequately address certain portfolios of Short-Term Treasuries 
that have a very different composition from the index.
    The backtesting results of the current approach, as applied at a 
product level, for Short-Term Treasuries does not meet FICC's 99 
percent confidence level standard.
    As described above, Short-Term Treasuries are margined as part of 
the entire portfolio using the sensitivity VaR Charge methodology, and 
a haircut-based methodology is used as a backup for Short-Term 
Treasuries where sensitivity analytics data is not available. 
Specifically, Short-Term Treasuries that do not have sensitivity 
analytics data are subject to a single haircut rate calibrated to the 
volatility of the Bloomberg/Barclay Index of Treasury securities with 
remaining time-to-maturities equal to or less than a year. The current 
approach does not have a floor assigned to this single haircut rate. To 
mitigate the vulnerabilities described above with respect to the 
current approach, FICC is proposing to use the haircut methodology to 
margin all Short-Term Treasuries (not just for the Short-Term 
Treasuries without sensitivity analytics data, as is the current case). 
Furthermore, instead of one haircut bucket for Short-Term Treasuries, 
FICC would use two different haircut buckets depending on the time to 
maturity of the Short-Term Treasury security. FICC believes that using 
two different haircut buckets depending on the time to maturity of the 
Short-Term Treasury security would be more targeted and accurate. The 
first bucket is Treasury securities with remaining time to maturity 
equal to or less than six months with a haircut floor set at 12.5 basis 
points. The second bucket is Treasury securities with remaining time to 
maturity greater than six months but equal to or less than one year 
with a haircut floor set at 25 basis points. The haircut charges will 
be applied to the absolute value of the net market value of the 
Treasury securities in the respective buckets, with no correlation 
offset against all other Treasury maturity buckets.
    FICC is proposing to use one haircut rate for the absolute value of 
the net market value of Treasury securities with remaining time to 
maturity equal to or less than six months (with a floor of 12.5 basis 
points), and another haircut rate for the absolute value of the net 
market value of Treasury securities with remaining time to maturity 
greater than six months but equal to or less than one year (with a 
floor of 25 basis points). With respect to the proposed change, the 
haircut charges will be applied to the absolute value of the net market 
value of the Treasury securities in the respective buckets, which is 
consistent with the current haircut methodology. However, in contrast 
to the current haircut methodology where correlation offsets are 
applied against other Treasury maturity buckets, the correlation offset 
will not be applied in the proposed approach for the two buckets for 
Short-Term Treasuries.
    FICC believes that having these two haircut buckets with the floors 
would ensure coverage of the risk of at least 25 basis points in yield 
change for any Short-Term Treasuries that fall within these two buckets 
and help mitigate the potential exposure arising from market events 
such as Federal Reserve policy announcements, supply/demand imbalances 
in Short-Term Treasuries, inflation shocks, and changes in short-term 
borrowing rates. FICC also believes having the two haircut buckets with 
floors would help FICC achieve its backtesting standards, which is 99 
percent coverage target with 3-days of margin period of risk. As 
described below, FICC performed an impact study for the period between 
January 2020 to December 2020, which indicated that if the proposed 
changes to the treatment of Short-Term Treasuries had been in place, 
the backtesting coverage ratio for portfolios of Short-Term Treasuries 
would have increased from approximately 94.9% to 99.4%.
    To effectuate these changes, FICC proposes to revise the QRM 
Methodology Document to describe the

[[Page 48773]]

proposed revised GSD margin methodology with respect to Short-Term 
Treasuries.
(3) Technical Changes
    FICC proposes to make technical changes to the Rules. Specifically, 
because paragraph (iii) in Section 1b of Rule 4 would be deleted, as 
described above, FICC is proposing to make conforming technical changes 
to renumber the subsequent paragraphs.
    FICC is also proposing to make technical changes to the QRM 
Methodology Document. Specifically, FICC is proposing to make 
clarifying and grammatical changes to a sentence that describes the 
indices in a haircut used for short TIPS bonds.
Impact Study
    FICC performed an impact study on Members' portfolios for the 
period beginning January 2, 2020 to December 31, 2020 that showed that 
the proposed change to eliminate the EUIC would impact a small number 
of Members, and the total impact to the Clearing Fund would be small. 
Over the study period, eliminating the EUIC would have affected, on 
average, nine Members per day, and the average daily margin decrease to 
GSD's Clearing Fund would have been approximately $53.3 million per day 
(0.3% of the average daily Required Fund Deposit requirement of $21.3 
billion).
    FICC performed an impact study on Members' portfolios for the 
period beginning January 2020 through December 2020. At the clearing 
corporation level, the impact study indicates that if the proposed 
changes to the treatment of Short-Term Treasuries had been in place, 
the backtesting coverage ratio for portfolios of Short-Term Treasuries 
would have increased from approximately 94.9% to 99.4%. Over the study 
period, the proposed changes to the treatment of Short-Term Treasuries 
would have affected 93 Members per day on average, and the mean daily 
margin increases of the VaR Charge for GSD would have been 
approximately $160 million per day (0.8% of the average daily VaR 
Charge of $19.5 billion).
Implementation Timeframe
    Subject to approval by the Commission, FICC would implement the 
proposed rule change within 30 days following such approval, and the 
implementation date would be announced by an Important Notice posted to 
FICC's website.
2. Statutory Basis
    FICC believes that this proposal is consistent with the 
requirements of the Act, and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
the proposed changes to the Rules and the QRM Methodology Document 
described above are consistent with Section 17A(b)(3)(F) of the Act, 
for the reasons described below.\16\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\17\
---------------------------------------------------------------------------

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

    The proposed change to eliminate the EUIC as described in Item 
II(A)1(1) above is designed to assure the safeguarding of securities 
and funds which are in the custody or control of FICC or for which it 
is responsible, consistent with Section 17A(b)(3)(F) of the Act.\18\ 
The EUIC was established to reduce the risk of potential under-
margining due to the two Cash Substitution situations described above. 
With the suspension of interbank services in 2016, the risk of 
potential under-margining due to the second Cash Substitution described 
above had been eliminated. While the potential for under-margining due 
to the first Cash Substitution situation described above still exists, 
FICC now addresses the exposure through the calculation and assessment 
of an Intraday Supplemental Fund Deposit amount, if necessary, as 
described above. FICC believes the Intraday Supplemental Fund Deposit 
is a more accurate way to margin the exposure presented, and therefore 
FICC believes that the proposed changes described in Item II(A)1(1) 
above would help better ensure that FICC calculates and collects 
adequate margin from Members and thereby assure the safeguarding of 
securities and funds which are in the custody and control of FICC or 
for which it is responsible, consistent with Section 17A(b)(3)(F) of 
the Act.\19\
---------------------------------------------------------------------------

    \18\ Id.
    \19\ Id.
---------------------------------------------------------------------------

    The proposed changes to the QRM Methodology Document, described in 
Item II(A)1(2) above to revise the current GSD margin methodology with 
respect to Short-Term Treasuries, are designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\20\ FICC believes the proposed changes to the 
current GSD margin methodology with respect to Short-Term Treasuries 
would help mitigate the vulnerabilities of the current approach when 
they are applied to portfolios with a high concentration of Short-Term 
Treasuries. As such, FICC believes that the proposed changes described 
in Item II(A)1(2) above would help better ensure that FICC calculates 
and collects adequate margin from Members and thereby assure the 
safeguarding of securities and funds which are in the custody and 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\21\
---------------------------------------------------------------------------

    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

    FICC believes that the proposed technical changes to the QRM 
Methodology Document described in Item II(A)1(3) above would enhance 
the clarity of the document for FICC. As the QRM Methodology Document 
is used by FICC's risk management personnel (``Risk Management'') 
regarding the calculation of margin requirements, it is important for 
the accurate and smooth functioning of the margining process that Risk 
Management has a clear description of the calculation of the GSD margin 
methodology. The proposed changes would promote such understanding by 
enhancing the clarity of the description. As such, FICC believes that 
enhancing the clarity of the QRM Methodology Document would assure the 
safeguarding of securities and funds which are in the custody or 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\22\
---------------------------------------------------------------------------

    \22\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act \23\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those exposures arising from its payment, clearing, and settlement 
processes by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence. FICC believes that the proposed changes in Items II(A)1(1) 
and II(A)1(2) above are consistent with the requirements of Rule 17Ad-
22(e)(4)(i) under the Act.\24\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.17Ad-22(e)(4)(i).
    \24\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed changes described in Item II(A)1(1) 
above to eliminate the EUIC are consistent with the requirements of 
Rule 17Ad-

[[Page 48774]]

22(e)(4)(i) under the Act.\25\ This is because FICC believes assessing 
and charging an Intraday Supplemental Fund Deposit amount, if 
necessary, is a better and more accurate way to address the potential 
under-margining due to the first Cash Substitution situation described 
above than charging the EUIC. The EUIC is charged once a day at 12 
p.m., while FICC may charge an Intraday Supplemental Fund Deposit 
amount, if necessary, throughout the day, based on the hourly 
information that FICC receives regarding GCF Repo participants' 
positions. As such, because FICC can continuously assess its exposure 
and charge additional margin throughout the day with the Intraday 
Supplemental Fund Deposit rather than at one point in time, the 
proposed changes described in Item II(A)1(1) would help FICC better 
measure and monitor its credit exposures to participants. Therefore, 
FICC believes that the proposed changes described in Item II(A)1(1) 
above are consistent with the requirements of Rule 17Ad-22(e)(4)(i) 
under the Act.\26\
---------------------------------------------------------------------------

    \25\ Id.
    \26\ Id.
---------------------------------------------------------------------------

    The proposed changes described in Item II(A)1(2) above would allow 
FICC to use the haircut methodology to margin all Short-Term Treasuries 
(not just for the Short-Term Treasuries without sensitivity analytics 
data, as is the current case). As described above, FICC would have two 
haircuts depending on the time to maturity of the Short-Term 
Treasuries. This proposed approach would address the two 
vulnerabilities with the current approach when it is applied to 
portfolios with a high concentration of Short-Term Treasuries as 
described above and thereby better enable FICC to limit its credit 
exposures to Members. Therefore, FICC believes the proposed changes 
described in Item II(A)1(2) above are consistent with the requirements 
of Rule 17Ad-22(e)(4)(i) under the Act.\27\
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act \28\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market. FICC believes that the proposed changes 
in Items II(A)1(1) and II(A)1(2) above are consistent with the 
requirements of Rule 17Ad-22(e)(6)(i) under the Act.\29\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(e)(6)(i).
    \29\ Id.
---------------------------------------------------------------------------

    Specifically, FICC believes that the proposed changes described in 
Item II(A)1(1) above to eliminate the EUIC and rely instead on the 
assessment of an Intraday Supplemental Fund Deposit amount, if 
necessary, are reasonably designed to cover FICC's credit exposures to 
its participants because they would better enable FICC to consider and 
produce margin levels commensurate with the risk and particular 
attributes of a GCF Repo participant's portfolio. This is because the 
Intraday Supplemental Fund Deposit amount could be charged throughout 
the day and would be based on hourly information about such GCF Repo 
participant's portfolio that FICC receives from The Bank of New York 
Mellon (unlike the EUIC, which is charged at 12 p.m.). Therefore, FICC 
believes the proposed changes would allow FICC to continue to produce 
margin levels commensurate with the risks and particular attributes of 
each relevant product, portfolio, and market and are consistent with 
the requirements of Rule 17Ad-22(e)(6)(i) under the Act.\30\
---------------------------------------------------------------------------

    \30\ Id.
---------------------------------------------------------------------------

    FICC believes the proposed changes described in Item II(A)1(2) 
above to allow FICC to use the haircut methodology to margin all Short-
Term Treasuries are consistent with the requirements of Rule 17Ad-
22(e)(6)(i) cited above. FICC believes these proposed changes are 
reasonably designed to cover FICC's credit exposures to its 
participants, especially those participants who have a high 
concentration of Short-Term Treasuries in their portfolios because, as 
described above, this proposed approach would address two 
vulnerabilities associated with the current approach when it is applied 
to portfolios with a high concentration of Short-Term Treasuries. 
Therefore, FICC believes the proposed changes would better ensure that 
FICC produces margin levels commensurate with the risk and particular 
attributes of each relevant product, portfolio, and market, and are 
consistent with the requirements of Rule 17Ad-22(e)(6)(i) under the 
Act.\31\
---------------------------------------------------------------------------

    \31\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes described in Item II(A)1(1) 
above would not have an impact on competition. This is because Members 
are currently being assessed an Intraday Supplemental Fund Deposit 
regardless of the EUIC. The assessment of the Intraday Supplemental 
Fund Deposit is independent of the EUIC. As such, FICC believes the 
proposed change to eliminate the EUIC would result in a margin 
reduction; FICC believes the amount of the margin reduction would be 
nominal.
    FICC believes that the proposed changes described in Item II(A)1(2) 
above may have an impact on competition because these changes could 
result in certain Members being assessed a higher margin than they 
would have been assessed with the current GSD margin methodology for 
Short-Term Treasuries. Specifically, Members that have a high 
concentration of directional Short-Term Treasuries in their portfolios 
would be assessed a higher margin than they would have been assessed 
with the current GSD margin methodology for Short-Term Treasuries. FICC 
believes the proposed change could burden competition by potentially 
increasing these Members' operating costs. Regardless of whether such 
burden on competition could be deemed significant, FICC believes that 
any related burden on competition would be necessary and appropriate, 
as permitted by Section 17A(b)(3)(I) of the Act, for the reasons 
described below.\32\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes any burden on competition that may be created would 
be necessary in furtherance of the purposes of the Act \33\ because the 
proposed changes would mitigate vulnerabilities that have been 
identified with respect to the current GSD margin methodology for 
Short-Term Treasuries. In addition, FICC believes that with these 
proposed changes, the margining would better reflect the risk presented 
by the Members' specific portfolios. FICC believes any burden on 
competition that may be created would be appropriate in furtherance of 
the purposes of the Act \34\ because they have been designed to assure 
the safeguarding of securities and funds which are in the custody or 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\35\ As described above, these proposed changes 
would help ensure that FICC calculates and collects adequate margin 
from Members, and all Short-Term Treasuries would continue

[[Page 48775]]

to be subject to the GSD margin methodology.
---------------------------------------------------------------------------

    \33\ Id.
    \34\ Id.
    \35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC does not believe that the proposed changes described in Item 
II(A)1(3) above to make technical changes to the Rules would have any 
impact on competition because these proposed changes would better 
ensure that the Rules remain clear and accurate, and would facilitate 
Members' understanding of the Rules and their obligations thereunder. 
Having transparent, accessible, clear, and accurate provisions in the 
Rules would improve the readability and clarity of the Rules regarding 
fees that Members would incur by participating in GSD. These proposed 
changes would apply equally to all Members and would not affect 
Members' rights and obligations.
    In addition, FICC does not believe that the proposed changes 
described in Item II(A)1(3) above to make technical changes to the QRM 
Methodology Document would have any impact on competition because these 
proposed changes would enhance the clarity and accuracy of the QRM 
Methodology Document and would not affect the substantive rights of 
Members.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto. Persons submitting comments are 
cautioned that, according to Section IV (Solicitation of Comments) of 
the Exhibit 1A in the General Instructions to Form 19b-4, the 
Commission does not edit personal identifying information from comment 
submissions. Commenters should submit only information that they wish 
to make available publicly, including their name, email address, and 
any other identifying information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777. FICC reserves the right to 
not respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form
    (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2021-007 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-2021-007. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (https://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street, NE, Washington, 
DC 20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(https://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2021-007 and should be submitted on 
or before September 21, 2021.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2021-18678 Filed 8-30-21; 8:45 am]
BILLING CODE 8011-01-P
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