Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Increase the Minimum Required Fund Deposit for GSD Netting Members and Sponsoring Members, and Make Other Changes, 57960-57967 [2022-20499]
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Federal Register / Vol. 87, No. 183 / Thursday, September 22, 2022 / Notices
price range in the company’s effective
registration statement is appropriate for
a company conducting an initial public
offering notwithstanding it being
outside of the range stated in an
effective registration statement, and
investors have become familiar with this
approach at least since the Commission
Staff last revised Compliance and
Disclosure Interpretation 227.03 in
January 2009.44 Allowing Direct Listings
with a Capital Raise to similarly price
up to 20% below the lowest price and
at a price above the highest price of the
price range in the company’s effective
registration statement but below the
Upside Limit would be consistent with
Chair Gensler’s recent call to treat ‘‘like
cases alike.’’ 45
Nasdaq believes that the proposed
amendments to Listing Rule IM–5315–2
and Rules 4753(a)(3)(A) and 4753(b)(2)
to conform these rules to the
modification of the Pricing Range
Limitation is consistent with the
protection of investors. These
amendments would simply substitute
Nasdaq’s reliance on the price equal to
the lowest price of the price range
disclosed by the issuer in its effective
registration statement to the price that is
20% below such lowest price, making it
more difficult to meet the requirements.
In the case of Listing Rule IM–5315–2,
a company listing in connection with a
Direct Listing with a Capital Raise
would still need to meet all applicable
initial listing requirements based on the
price that is 20% below the lowest price
of the price range disclosed by the
issuer in its effective registration
statement. In the case of the Rules
4753(a)(3)(A) and 4753(b)(2) such price,
which is the minimum price at which
the Cross will occur, will serve as the
fourth tie-breaker where there are
multiple prices that would satisfy the
conditions for determining the auction
price, as described above. Nasdaq
believes that this proposal to resolve a
potential tie among the prices that
satisfy all other requirements in the
Cross, by choosing the price that is
closest to the price that is 20% below
the range, is consistent with Section
6(b)(5) of the Act because it is designed
to protect investors by providing them
with the most advantageous offering
price among possible alternative prices.
Nasdaq also believes that the
proposal, by eliminating an impediment
to companies using a Direct Listing with
a Capital Raise, will help removing
potential impediments to free and open
44 https://www.sec.gov/divisions/corpfin/
guidance/securitiesactrules-interps.htm.
45 See https://www.sec.gov/news/speech/genslerhealthy-markets-association-conference-120921.
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markets consistent with Section 6(b)(5)
of the Exchange Act while also
supporting capital formation.
Finally, Nasdaq believes that the
proposal to clarify several provisions of
the existing rules without changing
them is designed to remove
impediments to and perfect the
mechanism of a free and open market
because such changes make the rules
easier to understand and apply without
changing their substance.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed amendments would not
impose any burden on competition, but
would rather increase competition.
Nasdaq believes that allowing listing
venues to improve their rules enhances
competition among exchanges. Nasdaq
also believes that this proposed change
will give issuers interested in this
pathway to access the capital markets
additional flexibility in becoming a
public company, and in that way
promote competition among service
providers, such as underwriters and
other advisors, to such companies.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
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 such
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–NASDAQ–2022–027, and
should be submitted on or before
October 13, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.46
J. Matthew DeLesDernier,
Deputy Secretary.
III. 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:
[FR Doc. 2022–20503 Filed 9–21–22; 8:45 am]
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–
NASDAQ–2022–027 on the subject line.
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Proposed Rule Change To
Increase the Minimum Required Fund
Deposit for GSD Netting Members and
Sponsoring Members, and Make Other
Changes
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–NASDAQ–2022–027. This
file number should be included on the
subject line if email is used. To help the
Commission process and review your
September 16, 2022.
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BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–95806; File No. SR–FICC–
2022–006]
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
September 9, 2022, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
46 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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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
modifications to FICC’s Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘GSD Rules’’) and Mortgage-Backed
Securities Division (‘‘MBSD’’) Clearing
Rules (‘‘MBSD Rules,’’ and collectively
with the GSD Rules, the ‘‘Rules’’) 3 in
order to increase the minimum Required
Fund Deposit for GSD Netting Members
and Sponsoring Members (collectively,
‘‘members’’), as well as make certain
clarifying and technical changes, as
described in greater detail below.
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 increase the
minimum Required Fund Deposit for
members, as described in greater detail
below.
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Background
As part of its market risk management
strategy, FICC manages its credit
exposure to members by determining
the appropriate Required Fund Deposit
to the Clearing Fund and monitoring its
sufficiency, as provided for in the
Rules.4 The Required Fund Deposit
3 Terms not defined herein are defined in the GSD
Rules, available at https://www.dtcc.com/∼/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf, and
the MBSD Rules, available at www.dtcc.com/∼/
media/Files/Downloads/legal/rules/ficc_mbsd_
rules.pdf.
4 See GSD Rule 4 (Clearing Fund and Loss
Allocation), supra note 3. FICC’s market risk
management strategy is designed to comply with
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serves as each member’s margin. The
objective of a member’s Required Fund
Deposit is to mitigate potential losses to
FICC associated with liquidation of
member’s portfolio in the event FICC
ceases to act for that member
(hereinafter referred to as a ‘‘default’’).5
The aggregate of all member’s Required
Fund Deposits, together with certain
other deposits required under the Rules,
constitutes the Clearing Fund, which
FICC would access, among other
instances, should a defaulting member’s
own Clearing Fund deposit be
insufficient to satisfy losses to FICC
caused by the liquidation of that
member’s portfolio.
Pursuant to the Rules, each member’s
Required Fund Deposit amount consists
of a number of applicable components,
each of which is designed to address
specific risks faced by FICC, as
identified within GSD Rule 4.6
Currently, FICC requires a minimum
Required Fund Deposit of $100,000 be
made and maintained in cash.7 The
same requirement applies to the GSD
Sponsoring Members; 8 however, for
GSD Repo Brokers, the minimum
Required Fund Deposit amount is $5
million.9
FICC’s margining methodologies are
designed to mitigate market, liquidity
and other risks. FICC regularly assesses
its margining methodologies to evaluate
whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market. In connection
with such reviews, FICC has determined
that there are circumstances where the
current minimum Required Fund
Deposit amount at GSD is insufficient to
manage FICC’s risk in the event of an
abrupt or sudden increase in a member’s
activity.
Rule 17Ad–22(e)(4) under the Act, where these
risks are referred to as ‘‘credit risks.’’ 17 CFR
240.17–Ad–22(e)(4).
5 The Rules identify when FICC may cease to act
for a member and the types of actions FICC may
take. For example, GSD is permitted to cease to act
for (i) a Member pursuant to GSD Rule 22A
(Procedures for When the Corporation Ceases to
Act), (ii) a Sponsoring Member pursuant to Section
14 of GSD Rule 3A (Sponsoring Members and
Sponsored Members), and (iii) a Sponsored Member
pursuant to Section 13 of GSD Rule 3A (Sponsoring
Members and Sponsored Members). Supra note 3.
6 GSD Rule 4. Supra note 3.
7 GSD Rule 4, Section 3. Supra note 3.
8 GSD Rule 3A, Section 10(d). Supra note 3.
9 GSD Rule 4, Section 1b. Supra note 3. Currently,
if a Repo Broker has two Margin Portfolios, with
Broker Account(s) in one Margin Portfolio and
Dealer Account(s) in the other Margin Portfolio, the
total minimum Required Fund Deposit applicable
to the Repo Broker would be $5.1 million, i.e., $5
million minimum Required Fund Deposit for the
Margin Portfolio with Broker Account(s) and
$100,000 minimum Required Fund Deposit for the
Margin Portfolio with Dealer Account(s).
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FICC employs daily backtesting to
determine the adequacy of each
member’s Required Fund Deposit.10
FICC compares the Required Fund
Deposit 11 for each member with the
simulated liquidation gains/losses using
the actual positions in the member’s
portfolio, and the actual historical
security returns. A backtesting
deficiency occurs when a member’s
Required Fund Deposit would not have
been adequate to cover the projected
liquidation losses estimated from a
member’s settlement activity based on
the backtesting results. FICC
investigates the cause(s) of any
backtesting deficiencies. As part of this
investigation, FICC pays particular
attention to members with backtesting
deficiencies that bring the coverage for
that member below the 99% confidence
target (i.e., if the member had more than
two backtesting deficiency days in a
rolling twelve-month period) to
determine if there is an identifiable
cause of repeat backtesting
deficiencies.12 FICC also evaluates
whether multiple members may
experience backtesting deficiencies for
the same underlying reason. Backtesting
deficiencies highlight exposure that
could subject FICC to potential losses in
the event that a member defaults.
While multiple factors may contribute
to a member’s backtesting deficiency, a
position increase by a member after the
calculation of each member’s Required
Fund Deposit may be a factor that leads
to the member incurring backtesting
10 The Model Risk Management Framework
(‘‘Model Risk Management Framework’’) sets forth
the model risk management practices of FICC and
states that Value at Risk (‘‘VaR’’) and Clearing Fund
requirement coverage backtesting would be
performed on a daily basis or more frequently. See
Securities Exchange Act Release Nos. 81485
(August 25, 2017), 82 FR 41433 (August 31, 2017)
(SR–FICC–2017–014), 84458 (October 19, 2018), 83
FR 53925 (October 25, 2018) (SR–FICC–2018–010),
88911 (May 20, 2020), 85 FR 31828 (May 27, 2020)
(SR–FICC–2020–004), 92380 (July 13, 2021), 86 FR
38140 (July 19, 2021) (SR–FICC–2021–006), and
94271 (February 17, 2022), 87 FR 10411 (February
24, 2022) (SR–FICC–2022–001).
11 Members may be required to post additional
collateral to the Clearing Fund in addition to their
Required Fund Deposit amount. See e.g., Section 7
of GSD Rule 3 (Ongoing Membership
Requirements), supra note 3 (providing that
adequate assurances of financial responsibility of a
member may be required, such as increased
Clearing Fund deposits). For backtesting
comparisons, FICC uses the Required Fund Deposit
amount, without regard to the actual, total collateral
posted by the member to the Clearing Fund.
12 The 99% confidence target is consistent with
Rule 17Ad–22(e)(6)(iii) which requires FICC to
calculate margin to cover its ‘‘potential future
exposure’’ which is defined in Rule 17Ad–22(a)(13)
to mean the ‘‘maximum exposure estimated to
occur at a future point in time with an established
single-tailed confidence level of at least 99 percent
with respect to the estimated distribution of future
exposure.’’ 17 CFR 240.17Ad–22(a)(13) and
(e)(6)(iii).
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deficiencies due to the additional
exposure that is not mitigated until the
collection of the Required Fund Deposit
occurs intraday, or on the next Business
Day. This factor is heightened for those
members that have a low or minimum
Required Fund Deposit because there
are less deposits to mitigate any abrupt
change in their portfolio exposure.
Typical examples where a member’s
required Clearing Fund deposit amount
is the same as the current minimum
Required Fund Deposit amount of
$100,000 include (1) when a new
member has activated its clearing
accounts at FICC and is growing its
business, (2) when a member has
limited or infrequent clearing activity,
and (3) when a member is winding
down its business and is in the process
of retiring its FICC membership. In each
of these circumstances, an abrupt
increase in clearing activity following a
period of low or no clearing activity
could cause FICC to be under-margined
with respect to the member and may
result in backtesting deficiencies. This
is because if a member with low or no
clearing activity were to have an abrupt
increase in clearing activity after the
calculation of the member’s Required
Fund Deposit (which would have been
calculated based on a period of low or
no clearing activity), it could lead to the
member incurring backtesting
deficiencies due to the additional
exposure to FICC from the increase in
clearing activity that may not be
mitigated until the collection of the
Required Fund Deposit either intraday
or on the next Business Day. Therefore,
FICC is proposing to increase the GSD
minimum Required Fund Deposit
amount in order to address the risk that
FICC becomes under-margined in
circumstances when a member’s
required Clearing Fund deposit amount
is the same as the current GSD
minimum Required Fund Deposit
amount, i.e., $100,000.
In determining the appropriate
minimum Required Fund Deposit
amount, FICC reviewed different
minimum Required Fund Deposit
amounts to determine the anticipated
effects of increasing the minimum
Required Fund Deposits on Clearing
Fund coverage and on backtesting
results, i.e., $500,000 versus $1 million.
FICC also conducted a review of
minimum deposit requirements of
registered clearing agencies and foreign
central counterparty clearing houses
(‘‘CCPs’’) to compare FICC/GSD’s
minimum Required Fund Deposit
amount with the deposits required by
registered clearing agencies and foreign
CCPs. Based on the results of the
reviews and the comparison of other
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registered clearing agencies and foreign
CCPs, FICC believes that a proposed
minimum Required Fund Deposit
amount of $1 million for GSD would
provide an appropriate balance of
improving member backtesting results
and FICC/GSD’s Clearing Fund coverage
while minimizing the impact to
members.
To assess the impact on GSD
backtesting coverage if the GSD
minimum Required Fund Deposit
amount were increased from $100,000
to $1 million, FICC conducted a
backtesting impact study for the 12month period ended June 30, 2022
(‘‘Backtesting Impact Study’’). The
result of the Backtesting Impact Study
indicates that using $1 million as GSD’s
minimum Required Fund Deposit
amount would have reduced the
number of members with backtesting
coverage below 99%.13 The Backtesting
Impact Study shows 70 members below
99% backtesting coverage as of June 30,
2022 with a collective 396 backtesting
deficiencies in GSD. Approximately
21% (i.e., 85 out of 396) of the
backtesting deficiencies occurred with
members that had a Required Fund
Deposit of less than $1 million on the
relevant deficiency day(s). If the
proposed changes had been in place
during the Backtesting Impact Study
period, approximately 16% (i.e., 65 out
of 396) of the backtesting deficiencies
incurred by the members would have
been eliminated, and the total number
of members that were below the 99%
confidence target as of June 30, 2022
would have been reduced by 8. Overall,
a $1 million minimum requirement
would have increased GSD’s 12-month
backtesting coverage 0.22%, eliminated
65 backtesting deficiencies, and
improved the rolling twelve-month
backtesting coverage for 8 members to
above 99% confidence target. In
contrast, if a $500,000 minimum
Required Fund Deposit had been
applied during the same study period,
GSD’s 12-month backtesting coverage
would have increased by 0.13%, 38
backtesting deficiencies would have
been eliminated, and the rolling twelvemonth backtesting coverage for 3
13 Backtesting percentages indicate the risk that a
minimum Required Fund Deposit would be
insufficient to manage risk in the event of a
member’s default. A backtesting coverage that is
below the 99% confidence target for a member
means that the member has had more than two
backtesting deficiency days in a rolling twelvemonth period, i.e., assuming the member had a full
year of trading history. As indicated above,
consistent with Rule 17Ad–22(e)(6)(iii), FICC pays
particular attention to members with backtesting
deficiencies that bring the results for that member
below the 99% confidence target to determine if
there is an identifiable cause of repeat backtesting
deficiencies. Supra note 12.
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members would have been improved to
above 99% confidence target. In
summary, if the minimum Required
Fund Deposit at GSD during the study
period had been set to $1 million
compared to $500,000, there would
have been 27 more backtesting
deficiencies eliminated (i.e., 65 instead
of 38 or an approximately 71% increase
in the number of backtesting
deficiencies that could have been
eliminated), 5 more members would be
brought back to above 99% confidence
target (i.e., 8 instead of 3 or an
approximately 166% increase in the
number of members brought back to
above 99% confidence target), and the
overall GSD backtesting coverage would
have increased an additional 0.09%.
FICC’s review of the requirements of
other clearing agencies and foreign CCPs
indicated that FICC/GSD’s current
minimum Required Fund Deposit
requirement of $100,000 was
significantly lower than minimum
deposits or equivalent required by such
other entities.14 While the minimum
required fund deposits of such other
entities is not dispositive as to the risk
borne by FICC or the proper fund
deposit amounts to offset such risk, it is
indicative of the amounts that users of
other similarly situated entities can
expect to pay as a minimum required
fund deposit to use the services of the
clearing agencies and foreign CCPs and
the impact to such users. The
comparison shows that entities using
other clearing agencies and foreign CCPs
pay significantly more in minimum
14 For example, the minimum initial contribution
for The Options Clearing Corporation (‘‘OCC’’) is
$500,000. See Rule 1002(d) of the OCC Rules,
available at https://www.theocc.com/getmedia/
9d3854cd-b782-450f-bcf7-33169b0576ce/occ_
rules.pdf. The minimum guaranty fund deposit for
Chicago Mercantile Exchange (‘‘CME’’) is $500,000
or $2.5 million depending on the product types
being cleared. See Rule 816 of the CME Rulebook,
available at https://www.cmegroup.com/content/
dam/cmegroup/rulebook/CME/I/8/8.pdf. The
minimum Required Fund Deposit for National
Securities Clearing Corporation (‘‘NSCC’’) is
$250,000. See Rule 4 of NSCC Rulebook, available
at https://dtcc.com/∼/media/Files/Downloads/legal/
rules/nscc_rules.pdf. The minimum default fund
contribution for LCH Limited is GBP 500,000
(approximately $579,000 based on current foreign
currency exchange rate). See definition of
‘‘Minimum Contribution’’ in the LCH Limited
Default Rules, available at https://www.lch.com/
system/files/media_root/210609_Default%20Rules_
Clean_0.pdf. The minimum RepoClear default fund
contribution for LCH Ltd. is GBP 2,000,000
(approximately $2.3 million based on the current
foreign currency exchange rate). See definition of
‘‘Minimum RepoClear Contribution’’ in the LCH
Limited Default Rules, available at https://
www.lch.com/system/files/media_root/210609_
Default%20Rules_Clean_0.pdf. The minimum
contribution to Ice Clear U.S. Guaranty Fund is $2
million. See Rule 301 of ICE Clear U.S., Inc. Rules,
available at https://www.ice.com/publicdocs/
rulebooks/clear/ICE_Clear_US_Rules.pdf.
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fund deposits to use similar services
than the current minimum Required
Fund Deposit amount at GSD.
FICC also conducted a Clearing Fund
requirement impact study for the period
of July 1, 2021 to June 30, 2022 (‘‘CFR
Impact Study’’). The result of the CFR
Impact Study indicates that if the
proposed changes had been in place
during the CFR Impact Study period,
approximately 47% (81 out of a total of
174) of the current members’ Margin
Portfolios would have been impacted,
with an average and a weighted average
(with weights based on number of
impacted days) additional Required
Fund Deposit of approximately
$686,000 and $792,000, respectively, for
each such Margin Portfolio per
impacted day. However, when
comparing the actual, total Clearing
Fund deposit of the current members’
Margin Portfolios with the proposed
minimum Required Fund Deposit
amount, only approximately 13% (23
out of a total 174) of such members’
Margin Portfolios would have been
impacted, requiring an average and a
weighted average (with weights based
on number of impacted days) additional
cash deposit of approximately $649,000
and $715,000, respectively, for each
such Margin Portfolio per impacted day.
The result of the CFR Impact Study also
shows one Repo Broker that would have
been impacted, requiring additional
Clearing Fund deposit of approximately
$392,000 in either cash or Eligible
Clearing Fund Securities per impacted
day. Overall, the proposed changes
would have resulted in an average
increase in daily Required Fund Deposit
of $31.4 million (or 0.17%) at GSD
during the CFR Impact Study period.
Based on the Backtesting Impact
Study and the CFR Impact Study results
discussed above, FICC believes that $1
million is the appropriate minimum
Required Fund Deposit amount at GSD
that would minimize the financial
impact to its members while improving
member backtesting results and FICC/
GSD’s Clearing Fund coverage.
As is currently provided for in the
Rules, FICC/GSD is proposing to
continue to require that members
deposit in cash an amount not less than
the minimum Required Fund Deposit.15
FICC permits members to satisfy their
Required Fund Deposit obligations
through a combination of cash and open
account indebtedness secured by
Eligible Clearing Fund Securities.16
15 Currently, all members (including Repo
Brokers) are required to have at least $100,000 of
the Required Fund Deposit in cash. See GSD Rule
4, Section 3. Supra note 3.
16 Id.
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Cash deposits are fungible. FICC would
therefore be further strengthening its
liquidity resources by requiring each
member (including Repo Brokers) to
deposit at least $1 million in cash to the
GSD Clearing Fund.
Proposed Rule Changes
In order to implement the proposed
increase in the minimum Required
Fund Deposit amount to $1 million for
the Sponsoring Members, Section 10(c)
of GSD Rule 3A (Sponsoring Members
and Sponsored Members) would be
revised to state that the Sponsoring
Member Omnibus Account Required
Fund Deposit shall be equal to the
greater of: (i) $1 million or (ii) the sum
of the following: (1) the sum of the VaR
Charges for all of the Sponsored
Members whose activity is represented
in the Sponsoring Member Omnibus
Account as derived pursuant to Section
1b(a)(i) of GSD Rule 4 (Clearing Fund
and Loss Allocation), and (2) all
amounts derived pursuant to the
provisions of GSD Rule 4 other than
pursuant to Section 1b(a)(i) of GSD Rule
4 computed at the level of the
Sponsoring Member Omnibus Account.
In addition, Section 10(d) of GSD Rule
3A would be revised to replace the
minimum cash amount from $100,000
to $1 million to match the proposed
increased minimum Required Fund
Deposit amount for the Sponsoring
Members.
In order to implement the proposed
increase in the minimum Required
Fund Deposit amount to $1 million for
the GSD Netting Members, Section 2(a)
of GSD Rule 4 would be revised to state
that each Netting Member shall be
required to make a Required Fund
Deposit to the Clearing Fund equal to
the greater of (i) the Minimum Charge or
(ii) the Total Amount. FICC is also
proposing to add a sentence to Section
2(a) of GSD Rule 4 that makes it clear
that the Minimum Charge applicable to
each Netting Member, other than a Repo
Broker, shall be no less than $1 million.
In addition, for better organization of
the subject matter and clarity, FICC is
proposing to move two sentences in
GSD Rule 4 from Section 1b to Section
2(a) with revisions: one stipulates that
the Minimum Charge applicable to each
Repo Broker shall be no less than $5
million for each Margin Portfolio with
Broker Account(s) and no less than $1
million for each Margin Portfolio with
Dealer Account(s) and the other refers to
additional payments, charges and
premiums being applied by FICC after
application of Minimum Charges, which
replaces ‘‘minimum Clearing Fund
amounts’’. Lastly, Section 3 of GSD Rule
4 would be revised to replace the
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minimum cash amount from $100,000
to $1 million to match the proposed
increased minimum Required Fund
Deposit amount.
Although FICC is not proposing to
increase the minimum Required Fund
Deposit for MBSD at this time, for
clarity and transparency, FICC is
proposing to add a sentence to Section
2 of MBSD Rule 4 (Clearing Fund and
Loss Allocation) that would make it
clear the Minimum Charge for each
margin portfolio of a Clearing Member
shall be no less than $100,000. To
enhance clarity in Section 2 of MBSD
Rule 4, FICC is also proposing to replace
(i) ‘‘Clearing Fund requirement’’ with
‘‘Minimum Charge for each margin
portfolio’’ and (ii) ‘‘minimum Clearing
Fund amounts’’ with ‘‘Minimum
Charges’’. Furthermore, FICC is
proposing a technical change to correct
a reference to the non-Unregistered
Investment Pool Clearing Member in
Section 2 of MBSD Rule 4.
Implementation Timeframe
Subject to approval by the
Commission, FICC would implement
the proposed changes by no later than
60 Business Days after such approval
and would announce the effective date
of the proposed changes by an
Important Notice posted to its website.
2. Statutory Basis
FICC believes that the proposed rule
change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a registered clearing agency.
Specifically, FICC believes that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act 17 and
Rules 17Ad–22(e)(4)(i) and (e)(6)(iii),18
each as promulgated under the Act, for
the reasons described below.
Section 17A(b)(3)(F) of the Act
requires that the Rules be designed to,
among other things, assure the
safeguarding of securities and funds
which are in the custody or control of
FICC or for which it is responsible.19
FICC believes the proposed rule changes
are designed to assure the safeguarding
of securities and funds which are in its
custody or control or for which it is
responsible because they are designed to
enable FICC to require the necessary
margin for members who have a
minimum Required Fund Deposit to
limit its exposure to such members in
the event of a member default. Having
adequate margin for such members
would help ensure that FICC does not
17 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i) and (e)(6)(iii).
19 15 U.S.C. 78q–1(b)(3)(F).
18 17
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need to use its own resources, or the
Eligible Clearing Fund Securities and
funds of non-defaulting members, to
cover losses in the event of a default of
such members. Specifically, the
proposed rule change seeks to remedy
potential situations that are described
above where FICC could be undermargined. By ensuring that members
that have the minimum Required Fund
Deposit amount are adequately covering
FICC’s risk of loss, FICC would be
reducing the risk of losses, which would
need to be addressed by using nondefaulting members’ securities or funds,
or FICC’s funds. In addition, by
requiring that members pay an amount
not less than the minimum Required
Fund Deposit amount in cash, FICC
would be making available additional
collateral that is easier to access upon a
member’s default, further reducing the
risk of losses and using non-defaulting
members’ securities or funds, or FICC’s
funds, for liquidity. Therefore, FICC
believes the proposed rule change
enhances the safeguarding of securities
and funds that are in the custody or
control of FICC, consistent with Section
17(b)(3)(F) of the Act.20
Rule 17Ad–22(e)(4)(i) under the Act
requires that FICC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively identify, measure, monitor,
and manage its credit exposures to
members and those arising from its
payment, clearing, and settlement
processes, including by maintaining
sufficient financial resources to cover its
credit exposure to each member fully
with a high degree of confidence.21 As
described above, FICC believes that the
proposed changes would enable it to
better identify, measure, monitor, and,
through the collection of members’
Required Fund Deposits, manage its
credit exposures to members by
maintaining sufficient resources to
cover those credit exposures fully with
a high degree of confidence. More
specifically, as indicated by the
Backtesting Impact Study results,
raising the minimum Required Fund
Deposit amount to $1 million at GSD
would decrease the number of
backtesting deficiencies and help ensure
that FICC maintains the coverage of
credit exposures for more members at a
confidence level of at least 99%. In
addition, by requiring members pay an
amount not less than the minimum
Required Fund Deposit amount in cash,
FICC would be making available
collateral that is easier to access when
members default, thus further reducing
the potential risk of loss from having to
use non-defaulting members’ securities
or funds, or FICC’s funds, for liquidity.
Therefore, FICC believes that the
proposed changes would enhance
FICC’s ability to effectively identify,
measure, monitor and manage its credit
exposures and would enhance its ability
to maintain sufficient financial
resources to cover its credit exposure to
each member fully with a high degree of
confidence. As such, FICC believes the
proposed changes are consistent with
Rule 17Ad–22(e)(4)(i) under the Act.22
Rule 17Ad–22(e)(6)(iii) under the Act
requires that FICC establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
cover its credit exposures to its
members by establishing a risk-based
margin system that, at a minimum,
calculates margin sufficient to cover its
potential future exposure to members in
the interval between the last margin
collection and the close out of positions
following a member default.23 FICC
employs daily backtesting to determine
the adequacy of each member’s
Required Fund Deposit, paying
particular attention to members that
have backtesting deficiencies below the
99% confidence target. Such backtesting
deficiencies highlight exposure that
could subject FICC to potential losses if
a member defaults. As discussed above,
FICC has determined that approximately
16% (i.e., 65 out of 396) of the
backtesting deficiencies would have
been eliminated during the Backtesting
Impact Study period if the minimum
Required Fund Deposit were $1 million.
By raising the minimum Required Fund
Deposit amount to $1 million at GSD,
FICC believes it can decrease the
backtesting deficiencies by members,
and thus decrease its exposure to such
members in the event of a default. FICC
believes that the increase in margin for
those members that currently have a
Required Fund Deposit of less than $1
million would improve the probabilities
that the margin required of such
members is sufficient to cover FICC’s
potential future exposure to members in
the interval between the last margin
collection and the close out of positions
following a member default. Therefore,
FICC believes the proposed change is
consistent with Rule 17Ad–22(e)(6)(iii)
under the Act.24
Section 17A(b)(3)(F) of the Act
requires, in part, that the Rules be
designed to promote the prompt and
accurate clearance and settlement of
securities transactions.25 FICC believes
the proposed clarifying and technical
changes to the GSD and MBSD Rules
would allow FICC to help promote
prompt and accurate clearance and
settlement of securities transactions.
This is because the proposed changes to
the Rules would clarify and improve the
transparency of the Rules. Enhancing
the clarity and transparency of the Rules
would help members to better
understand their rights and obligations
regarding FICC’s clearance and
settlement services. FICC believes that
when members better understand their
rights and obligations regarding FICC’s
clearance and settlement services, they
can act in accordance with the Rules.
FICC believes that better enabling
members to comply with the Rules
would promote the prompt and accurate
clearance and settlement of securities
transactions by FICC. As such, FICC
believes the proposed clarifying and
technical changes are consistent with
Section 17A(b)(3)(F) of the Act.26
(B) Clearing Agency’s Statement on
Burden on Competition
FICC believes that the proposed
changes to increase the minimum
Required Fund Deposit could have an
impact on competition. Specifically,
FICC believes that the proposed changes
could burden competition because they
would result in larger Required Fund
Deposits for certain members, e.g.,
members that currently have lower
Required Fund Deposits would have to
deposit additional cash and/or Eligible
Clearing Fund Securities, as applicable,
to their Clearing Fund deposits. The
proposed changes could impose more of
a burden on those members that have
lower operating margins, lower cash
reserves or higher costs of capital
compared to other members.
Nonetheless, FICC believes that any
burden on competition imposed by the
proposed changes would not be
significant and would be both necessary
and appropriate in furtherance of FICC’s
efforts to mitigate risks and meet the
requirements of the Act, as described in
this filing and further below.
FICC believes that any burden on
competition presented by the proposed
changes to increase the minimum
Required Fund Deposit amount would
not be significant. As discussed above,
if the minimum Required Fund Deposit
at GSD had been increased to $1 million
during the CFR Impact Study period,
approximately 47% (81 out of a total of
174) of the current members’ Margin
Portfolios would have been impacted,
22 Id.
20 Id.
21 17
23 17
CFR 240.17Ad–22(e)(4)(i).
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24 Id.
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U.S.C. 78q–1(b)(3)(F).
26 Id.
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with an average and a weighted average
additional Required Fund Deposit of
approximately $686,000 and $ 792,000,
respectively, for each such Margin
Portfolio per impacted day. However,
when comparing the actual, total
Clearing Fund deposit of the current
members’ Margin Portfolios with the
proposed minimum Required Fund
Deposit amount, only approximately
13% (23 out of a total of 174) of such
members’ Margin Portfolios would have
to deposit additional cash to the
Clearing Fund, with an average and a
weighted average cash deposit of
approximately $649,000 and $715,000,
respectively, for each such Margin
Portfolio per impacted day.
Furthermore, when comparing the
average additional cash deposit amounts
that members would be required to
make if the minimum Clearing Fund
cash deposit at GSD had been increased
to $1 million with their respective
average Net Capital 27 during the CFR
Impact Study period, the largest average
additional cash deposit amount
represented approximately 0.49% of the
affected member’s average Net Capital.28
Similarly, when comparing the average
additional Clearing Fund deposit that
members would be required to make,
either in cash or Eligible Clearing Fund
Securities, if the minimum Required
Fund Deposit amount at GSD had been
increased as proposed with their
respective average Net Capital during
the CFR Impact Study period, the largest
average additional Clearing Fund
deposit amount represented
approximately 1.46% of the affected
member’s average Net Capital.29
In addition, FICC believes that the
increase to $1 million is comparable
with what users of other similarly
situated registered clearing agencies and
foreign CCPs are expected to pay as a
minimum required deposit for similar
services.30 Furthermore, by limiting the
proposed Required Fund Deposit to $1
million rather than a higher minimum
Required Fund Deposit, FICC would be
minimizing the financial impact to its
members while improving member
backtesting results and FICC/GSD’s
Clearing Fund coverage.
27 As defined in GSD Rule 1 (Definitions), the
term ‘‘Net Capital’’ means, as of a particular date,
the amount equal to the net capital of a broker or
dealer as defined in SEC Rule 15c3–1(c)(2), or any
successor rule or regulation thereto. Supra note 3.
28 The affected member would have had to
deposit an additional $900,000 in cash each
impacted day during the CFR Impact Study period.
29 The affected member would have had to
deposit an additional $392,000 in either cash or
Eligible Clearing Fund Securities each impacted
day during the CFR Impact Study period.
30 Supra note 14.
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While raising the minimum Required
Fund Deposit to $500,000 would also
reduce backtesting deficiencies, it
would not reduce them to the same
extent that raising the minimum
Required Fund Deposit to $1 million
would have. If the minimum Required
Fund Deposit were raised to $1 million
rather than $500,000, FICC would have
observed 27 fewer backtesting
deficiencies at GSD, which represents
an approximately 71% increase (i.e., 65
instead of 38) in the number of
deficiencies that could have been
eliminated. Backtesting deficiencies
highlight exposure that could subject
FICC to potential losses in the event that
a member defaults. FICC believes that
the additional reduction in exposure
that would occur if the minimum
Required Fund Deposit at GSD were
raised to $1 million rather than
$500,000 justifies the potential
additional burden for members who
currently have a Required Fund Deposit
of less than $1 million.
Even if the burden were deemed
significant with respect to certain
members, FICC believes that the abovedescribed burden on competition that
may be created by the proposed changes
would be necessary in furtherance of the
Act, specifically Section 17A(b)(3)(F) of
the Act,31 because, as described above,
the Rules must be designed to assure the
safeguarding of securities and funds that
are in FICC’s custody or control or
which it is responsible.
As described above, FICC believes the
proposed changes are designed to assure
the safeguarding of securities and funds
which are in its custody or control or for
which it is responsible because they are
designed to enable FICC to require the
necessary margin for members who have
a minimum Required Fund Deposit to
limit its exposure to such members in
the event of a member default. Having
adequate margin for such members
would help ensure that FICC does not
need to use its own resources, or the
Eligible Clearing Fund Securities and
funds of non-defaulting members, to
cover losses in the event of a default of
such members. Specifically, the
proposed changes seek to remedy
potential situations where FICC could
be under-margined. By ensuring that
members that have the minimum
Required Fund Deposit amount are
adequately covering FICC’s risk of loss,
FICC would be reducing the risk of
losses, which would need to be
addressed by using non-defaulting
members’ securities or funds, or FICC’s
funds. In addition, by requiring that
members pay an amount equal to the
minimum Required Fund Deposit
amount in cash, FICC would be making
available additional collateral that is
easier to access upon a member’s
default, further reducing the risk of
losses and using non-defaulting
members’ securities or funds, or FICC’s
funds, for liquidity. Therefore, FICC
believes the proposed changes are
necessary in furtherance of Section
17A(b)(3)(F) of the Act.32
In addition, FICC believes these
proposed changes are necessary to
support FICC’s compliance with Rules
17Ad–22(e)(4)(i) and 17Ad–22(e)(6)(iii)
under the Act,33 which require FICC to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to (x) effectively
identify, measure, monitor, and manage
its credit exposures to members and
those arising from its payment, clearing,
and settlement processes, including by
maintaining sufficient financial
resources to cover its credit exposure to
each member fully with a high degree of
confidence; and (y) cover its credit
exposures to its members by
establishing a risk-based margin system
that, at a minimum, calculates margin
sufficient to cover its potential future
exposure to members in the interval
between the last margin collection and
the close out of positions following a
member default.
As described above, FICC believes
increasing the minimum Required Fund
Deposit amount at GSD to $1 million
would decrease the number of
backtesting deficiencies and ensure that
FICC maintains the coverage of credit
exposures for more members at a
confidence level of at least 99%. This
outcome is consistent with Rule 17Ad–
22(e)(4)(i) which requires that FICC
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence.34 This outcome is also
consistent with Rule 17Ad–22(e)(6)(iii)
which requires that FICC calculate
sufficient margin to cover its ‘‘potential
future exposure’’ which is defined as
the ‘‘maximum exposure estimated to
occur at a future point in time with an
established single-tailed confidence
level of at least 99 percent with respect
to the estimated distribution of future
exposure.’’ 35 FICC believes that the
increase in margin for those members
that currently have a Required Fund
Deposit of less than $1 million at GSD
would help ensure that FICC maintain
sufficient financial resources to cover its
32 Id.
33 17
CFR 240.17Ad–22(e)(4)(i) and (e)(6)(iii).
CFR 240.17Ad–22(e)(4)(i).
35 17 CFR 240.17Ad–22(e)(6)(iii).
34 17
31 15
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U.S.C. 78q–1(b)(3)(F).
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credit exposure to each participant fully
with a high degree of confidence and
that the margin deposited by such
members is sufficient to cover FICC’s
potential future exposure in the interval
between the last margin collection and
the close out of positions following a
member default. Therefore, FICC
believes that these proposed changes are
necessary to support FICC’s compliance
with Rules 17Ad–22(e)(4)(i) and 17Ad–
22(e)(6)(iii) under the Act.36
FICC believes that the abovedescribed burden on competition that
could be created by the proposed
changes would be appropriate in
furtherance of the Act because such
changes have been appropriately
designed to assure the safeguarding of
securities and funds which are in the
custody or control of FICC or for which
it is responsible, as described in detail
above. The proposal would enable FICC
to produce margin levels more
commensurate with the risks it faces as
a central counterparty. The proposed
increase in minimum Required Fund
Deposit at GSD would be in relation to
the credit exposure risks presented by
the class of members that currently have
a Required Fund Deposit of less than $1
million, and each member’s Required
Fund Deposit would continue to be
calculated with the same parameters
and at the same confidence level for
each member. Therefore, members that
present similar risk, regardless of the
type of member, would have similar
impact on their Required Fund Deposit
amounts.
In addition, based on the comparison
with other registered clearing agencies
and foreign CCPs, FICC believes that the
increase to $1 million is comparable
with what users of other similarly
situated registered clearing agencies and
foreign CCPs are expected to pay and
would not be a significant burden on
Members.37 Furthermore, based on the
results of the Backtesting Impact Study
and CFR Impact Study, as discussed
above, FICC believes that a proposed
minimum Required Fund Deposit of $1
million at GSD would provide an
appropriate balance of improving
member backtesting results while
minimizing the impact to members by
not raising the minimum Required Fund
Deposit above $1 million. Therefore,
because the proposed changes are
designed to provide FICC with a more
appropriate and balanced method of
managing the risks presented by each
member while minimizing the impact to
members, FICC believes the proposed
changes are appropriately designed to
36 17
CFR 240.17Ad–22(e)(4)(i) and (e)(6)(iii).
note 14.
37 Supra
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17:32 Sep 21, 2022
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meet its risk management goals and
regulatory obligations.
FICC believes that it has designed the
proposed changes in a way that is both
necessary and appropriate to meet
compliance with its obligations under
the Act. Specifically, the proposal to
increase the minimum Required Fund
Deposit amount to $1 million at GSD
would better limit FICC’s credit
exposures to its members. In addition,
by continuing to require that members
pay an amount equal to the minimum
Required Fund Deposit amount in cash,
FICC would be making available
additional collateral that is easier for
FICC to access upon a member’s default,
further limiting its credit exposure to
members. Therefore, as described above,
FICC believes the proposed changes are
necessary and appropriate in
furtherance of FICC’s obligations under
the Act, specifically Section
17A(b)(3)(F) of the Act 38 and Rules
17Ad–22(e)(4)(i) and 17Ad–22(e)(6)(iii)
under the Act.39 For these reasons, the
proposed changes are not designed to be
an artificial barrier to entry but a
necessary and appropriate change to
address specific risks.
(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 additional 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 SEC’s Division of
Trading and Markets at
tradingandmarkets@sec.gov or 202–
551–5777.
38 15
39 17
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U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(i) and (e)(6)(iii).
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FICC reserves the right not to 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 rule-comments@
sec.gov. Please include File Number SR–
FICC–2022–006 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–2022–006. 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
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10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). All comments received
will be posted without change. Persons
submitting comments are cautioned that
we do not redact or edit personal
identifying information from comment
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FICC–
2022–006 and should be submitted on
or before October 13, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022–20499 Filed 9–21–22; 8:45 am]
BILLING CODE 8011–01–P
SUSQUEHANNA RIVER BASIN
COMMISSION
Actions Taken at September 15, 2022
Meeting
Susquehanna River Basin
Commission.
ACTION: Notice.
AGENCY:
As part of its regular business
meeting held on September 15, 2022,
Baltimore, Maryland, the Commission
approved the applications of certain
water resources projects, and took
additional actions, as set forth in the
Supplementary Information below.
DATES: September 15, 2022.
ADDRESSES: Susquehanna River Basin
Commission, 4423 N Front Street,
Harrisburg, PA 17110–1788.
FOR FURTHER INFORMATION CONTACT:
Jason E. Oyler, General Counsel and
Secretary, telephone: (717) 238–0423,
ext. 1312, fax: (717) 238–2436; email:
joyler@srbc.net. Regular mail inquiries
may be sent to the above address. See
also Commission website at
www.srbc.net.
SUMMARY:
In
addition to the actions taken on projects
identified in the summary above these
actions were also taken: (1) adoption of
a revised Civil Penalty Matrix and a
revised Policy and Guidance Statement
for the Settlement of Civil Penalties/
Enforcement Actions; (2) adoption of
the Commission’s Fiscal Year 2024
Budget; (3) adoption of member
jurisdictions allocation for FY2024; (4)
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SUPPLEMENTARY INFORMATION:
40 17
CFR 200.30–3(a)(12).
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17:32 Sep 21, 2022
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and approval of contracts, grants and
agreements.
Project Applications Approved:
1. Project Sponsor: Aqua
Pennsylvania, Inc. Project Facility:
Monroe Manor System, Monroe
Township, Snyder County, Pa.
Application for groundwater
withdrawal of up to 0.482 mgd (30-day
average) from Well 8.
2. Project Sponsor: Brunner Island,
LLC. Project Facility: Brunner Island
Steam Electric Station (Susquehanna
River), East Manchester Township, York
County, Pa. Applications for renewal of
surface water withdrawal of up to
835.000 mgd (peak day) and
consumptive use of up to 23.100 mgd
(peak day) (Docket No. 20070908).
3. Project Sponsor and Facility:
Chesapeake Appalachia, L.L.C.
(Chemung River), Athens Township,
Bradford County, Pa. Application for
renewal of surface water withdrawal of
up to 0.999 mgd (peak day) (Docket No.
20170902).
4. Project Sponsor and Facility:
Chesapeake Appalachia, L.L.C. (Sugar
Creek), Burlington Township, Bradford
County, Pa. Application for renewal of
surface water withdrawal of up to 0.499
mgd (peak day) (Docket No. 20170903).
5. Project Sponsor and Facility:
Chesapeake Appalachia, L.L.C.
(Towanda Creek), Leroy Township,
Bradford County, Pa. Application for
renewal of surface water withdrawal of
up to 1.500 mgd (peak day) (Docket No.
20170905).
6. Project Sponsor and Facility:
Coterra Energy Inc. (Meshoppen Creek),
Springville Township, Susquehanna
County, Pa. Application for renewal of
surface water withdrawal of up to 0.750
mgd (peak day) (Docket No. 20170901).
7. Project Sponsor and Facility:
Edgewood by Sand Springs, LLC, Butler
Township, Luzerne County, Pa.
Modification to extend the approval
term of the surface water withdrawal
and consumptive use approval (Docket
No. 19980102) by 2 years to allow the
project to complete planning and
permitting to redevelop the property
and cease golf course operations.
8. Project Sponsor: Lancaster County
Solid Waste Management Authority.
Project Facility: Frey Farm and Creswell
Landfills, Manor Township, Lancaster
County, Pa. Modification to increase
consumptive use (peak day) by an
additional 0.030 mgd, for a total
consumptive use of up to 0.095 mgd,
addition of approved sources of water
for consumptive use, and General
Permit GP–01 Notice of Intent for
groundwater remediation (Docket No.
20061208).
PO 00000
Frm 00104
Fmt 4703
Sfmt 4703
57967
9. Project Sponsor: Maplemoor, Inc.
Project Facility: Huntsville Golf Club,
Lehman Township, Luzerne County, Pa.
Application for renewal of consumptive
use of up to 0.499 mgd (30-day average)
(Docket No. 19920909).
10. Project Sponsor and Facility:
Pennsylvania Grain Processing LLC
(West Branch Susquehanna River),
Clearfield Borough, Clearfield County,
Pa. Applications for renewal of surface
water withdrawal of up to 2.505 mgd
(peak day) and for consumptive use of
up to 2.000 mgd (peak day) (Docket No.
20070904).
11. Project Sponsor and Facility:
Seneca Resources Company, LLC (Elk
Run), Sullivan Township, Tioga County,
Pa. Application for renewal of surface
water withdrawal of up to 0.646 mgd
(peak day) (Docket No. 20170909).
12. Project Sponsor and Facility:
Shrewsbury Borough, Shrewsbury
Township and Shrewsbury Borough,
York County, Pa. Applications for
renewal of groundwater withdrawals
(30-day averages) of up to 0.099 mgd
from the Meadow Well and 0.180 mgd
from the Village Well (Docket Nos.
19890501 and 19900105).
13. Project Sponsor and Facility:
South Middleton Township Municipal
Authority, Monroe Township,
Cumberland County, Pa. Application for
renewal of groundwater withdrawal
with increase from 0.624 mgd to up to
0.936 mgd (30-day average) from Well 3
(Docket No. 19880404).
14. Project Sponsor and Facility:
Susquehanna Gas Field Services, LLC
(Meshoppen Creek), Meshoppen
Borough, Wyoming County, Pa.
Application for renewal of surface water
withdrawal of up to 0.145 mgd (peak
day) (Docket No. 20170908).
15. Project Sponsor and Facility: SWN
Production Company, LLC (Wyalusing
Creek), Wyalusing Township, Bradford
County, Pa. Application for renewal of
surface water withdrawal of up to 2.000
mgd (peak day) (Docket No. 20170910).
16. Project Sponsor and Facility:
Town of Conklin, Broome County, N.Y.
Applications for renewal of
groundwater withdrawals (30-day
averages) of up to 0.350 mgd from Well
5 and up to 0.350 mgd from Well 6
(Docket Nos. 20070601 and 20031001,
respectively).
17. Project Sponsor: Town of
Oneonta. Project Facility: Southside
Water System, Town of Oneonta, Otsego
County, N.Y. Applications for
groundwater withdrawals (30-day
averages) of up to 0.720 mgd from Well
PW–1 and up to 0.720 mgd from Well
PW–2.
18. Project Sponsor and Facility:
Village of Horseheads, Town of
E:\FR\FM\22SEN1.SGM
22SEN1
]]>Agencies
[Federal Register Volume 87, Number 183 (Thursday, September 22, 2022)]
[Notices]
[Pages 57960-57967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20499]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95806; File No. SR-FICC-2022-006]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Proposed Rule Change To Increase the Minimum
Required Fund Deposit for GSD Netting Members and Sponsoring Members,
and Make Other Changes
September 16, 2022.
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 September 9, 2022, Fixed Income Clearing Corporation (``FICC'')
filed
[[Page 57961]]
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 modifications to FICC's
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD
Rules,'' and collectively with the GSD Rules, the ``Rules'') \3\ in
order to increase the minimum Required Fund Deposit for GSD Netting
Members and Sponsoring Members (collectively, ``members''), as well as
make certain clarifying and technical changes, as described in greater
detail below.
---------------------------------------------------------------------------
\3\ Terms not defined herein are defined in the GSD Rules,
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf, and the MBSD Rules, available at
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
---------------------------------------------------------------------------
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 increase the minimum Required Fund Deposit for
members, as described in greater detail below.
Background
As part of its market risk management strategy, FICC manages its
credit exposure to members by determining the appropriate Required Fund
Deposit to the Clearing Fund and monitoring its sufficiency, as
provided for in the Rules.\4\ The Required Fund Deposit serves as each
member's margin. The objective of a member's Required Fund Deposit is
to mitigate potential losses to FICC associated with liquidation of
member's portfolio in the event FICC ceases to act for that member
(hereinafter referred to as a ``default'').\5\ The aggregate of all
member's Required Fund Deposits, together with certain other deposits
required under the Rules, constitutes the Clearing Fund, which FICC
would access, among other instances, should a defaulting member's own
Clearing Fund deposit be insufficient to satisfy losses to FICC caused
by the liquidation of that member's portfolio.
---------------------------------------------------------------------------
\4\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 3. FICC's market risk management strategy is designed to comply
with Rule 17Ad-22(e)(4) under the Act, where these risks are
referred to as ``credit risks.'' 17 CFR 240.17-Ad-22(e)(4).
\5\ The Rules identify when FICC may cease to act for a member
and the types of actions FICC may take. For example, GSD is
permitted to cease to act for (i) a Member pursuant to GSD Rule 22A
(Procedures for When the Corporation Ceases to Act), (ii) a
Sponsoring Member pursuant to Section 14 of GSD Rule 3A (Sponsoring
Members and Sponsored Members), and (iii) a Sponsored Member
pursuant to Section 13 of GSD Rule 3A (Sponsoring Members and
Sponsored Members). Supra note 3.
---------------------------------------------------------------------------
Pursuant to the Rules, each member's Required Fund Deposit amount
consists of a number of applicable components, each of which is
designed to address specific risks faced by FICC, as identified within
GSD Rule 4.\6\ Currently, FICC requires a minimum Required Fund Deposit
of $100,000 be made and maintained in cash.\7\ The same requirement
applies to the GSD Sponsoring Members; \8\ however, for GSD Repo
Brokers, the minimum Required Fund Deposit amount is $5 million.\9\
---------------------------------------------------------------------------
\6\ GSD Rule 4. Supra note 3.
\7\ GSD Rule 4, Section 3. Supra note 3.
\8\ GSD Rule 3A, Section 10(d). Supra note 3.
\9\ GSD Rule 4, Section 1b. Supra note 3. Currently, if a Repo
Broker has two Margin Portfolios, with Broker Account(s) in one
Margin Portfolio and Dealer Account(s) in the other Margin
Portfolio, the total minimum Required Fund Deposit applicable to the
Repo Broker would be $5.1 million, i.e., $5 million minimum Required
Fund Deposit for the Margin Portfolio with Broker Account(s) and
$100,000 minimum Required Fund Deposit for the Margin Portfolio with
Dealer Account(s).
---------------------------------------------------------------------------
FICC's margining methodologies are designed to mitigate market,
liquidity and other risks. FICC regularly assesses its margining
methodologies to evaluate whether margin levels are commensurate with
the particular risk attributes of each relevant product, portfolio, and
market. In connection with such reviews, FICC has determined that there
are circumstances where the current minimum Required Fund Deposit
amount at GSD is insufficient to manage FICC's risk in the event of an
abrupt or sudden increase in a member's activity.
FICC employs daily backtesting to determine the adequacy of each
member's Required Fund Deposit.\10\ FICC compares the Required Fund
Deposit \11\ for each member with the simulated liquidation gains/
losses using the actual positions in the member's portfolio, and the
actual historical security returns. A backtesting deficiency occurs
when a member's Required Fund Deposit would not have been adequate to
cover the projected liquidation losses estimated from a member's
settlement activity based on the backtesting results. FICC investigates
the cause(s) of any backtesting deficiencies. As part of this
investigation, FICC pays particular attention to members with
backtesting deficiencies that bring the coverage for that member below
the 99% confidence target (i.e., if the member had more than two
backtesting deficiency days in a rolling twelve-month period) to
determine if there is an identifiable cause of repeat backtesting
deficiencies.\12\ FICC also evaluates whether multiple members may
experience backtesting deficiencies for the same underlying reason.
Backtesting deficiencies highlight exposure that could subject FICC to
potential losses in the event that a member defaults.
---------------------------------------------------------------------------
\10\ The Model Risk Management Framework (``Model Risk
Management Framework'') sets forth the model risk management
practices of FICC and states that Value at Risk (``VaR'') and
Clearing Fund requirement coverage backtesting would be performed on
a daily basis or more frequently. See Securities Exchange Act
Release Nos. 81485 (August 25, 2017), 82 FR 41433 (August 31, 2017)
(SR-FICC-2017-014), 84458 (October 19, 2018), 83 FR 53925 (October
25, 2018) (SR-FICC-2018-010), 88911 (May 20, 2020), 85 FR 31828 (May
27, 2020) (SR-FICC-2020-004), 92380 (July 13, 2021), 86 FR 38140
(July 19, 2021) (SR-FICC-2021-006), and 94271 (February 17, 2022),
87 FR 10411 (February 24, 2022) (SR-FICC-2022-001).
\11\ Members may be required to post additional collateral to
the Clearing Fund in addition to their Required Fund Deposit amount.
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements),
supra note 3 (providing that adequate assurances of financial
responsibility of a member may be required, such as increased
Clearing Fund deposits). For backtesting comparisons, FICC uses the
Required Fund Deposit amount, without regard to the actual, total
collateral posted by the member to the Clearing Fund.
\12\ The 99% confidence target is consistent with Rule 17Ad-
22(e)(6)(iii) which requires FICC to calculate margin to cover its
``potential future exposure'' which is defined in Rule 17Ad-
22(a)(13) to mean the ``maximum exposure estimated to occur at a
future point in time with an established single-tailed confidence
level of at least 99 percent with respect to the estimated
distribution of future exposure.'' 17 CFR 240.17Ad-22(a)(13) and
(e)(6)(iii).
---------------------------------------------------------------------------
While multiple factors may contribute to a member's backtesting
deficiency, a position increase by a member after the calculation of
each member's Required Fund Deposit may be a factor that leads to the
member incurring backtesting
[[Page 57962]]
deficiencies due to the additional exposure that is not mitigated until
the collection of the Required Fund Deposit occurs intraday, or on the
next Business Day. This factor is heightened for those members that
have a low or minimum Required Fund Deposit because there are less
deposits to mitigate any abrupt change in their portfolio exposure.
Typical examples where a member's required Clearing Fund deposit
amount is the same as the current minimum Required Fund Deposit amount
of $100,000 include (1) when a new member has activated its clearing
accounts at FICC and is growing its business, (2) when a member has
limited or infrequent clearing activity, and (3) when a member is
winding down its business and is in the process of retiring its FICC
membership. In each of these circumstances, an abrupt increase in
clearing activity following a period of low or no clearing activity
could cause FICC to be under-margined with respect to the member and
may result in backtesting deficiencies. This is because if a member
with low or no clearing activity were to have an abrupt increase in
clearing activity after the calculation of the member's Required Fund
Deposit (which would have been calculated based on a period of low or
no clearing activity), it could lead to the member incurring
backtesting deficiencies due to the additional exposure to FICC from
the increase in clearing activity that may not be mitigated until the
collection of the Required Fund Deposit either intraday or on the next
Business Day. Therefore, FICC is proposing to increase the GSD minimum
Required Fund Deposit amount in order to address the risk that FICC
becomes under-margined in circumstances when a member's required
Clearing Fund deposit amount is the same as the current GSD minimum
Required Fund Deposit amount, i.e., $100,000.
In determining the appropriate minimum Required Fund Deposit
amount, FICC reviewed different minimum Required Fund Deposit amounts
to determine the anticipated effects of increasing the minimum Required
Fund Deposits on Clearing Fund coverage and on backtesting results,
i.e., $500,000 versus $1 million. FICC also conducted a review of
minimum deposit requirements of registered clearing agencies and
foreign central counterparty clearing houses (``CCPs'') to compare
FICC/GSD's minimum Required Fund Deposit amount with the deposits
required by registered clearing agencies and foreign CCPs. Based on the
results of the reviews and the comparison of other registered clearing
agencies and foreign CCPs, FICC believes that a proposed minimum
Required Fund Deposit amount of $1 million for GSD would provide an
appropriate balance of improving member backtesting results and FICC/
GSD's Clearing Fund coverage while minimizing the impact to members.
To assess the impact on GSD backtesting coverage if the GSD minimum
Required Fund Deposit amount were increased from $100,000 to $1
million, FICC conducted a backtesting impact study for the 12-month
period ended June 30, 2022 (``Backtesting Impact Study''). The result
of the Backtesting Impact Study indicates that using $1 million as
GSD's minimum Required Fund Deposit amount would have reduced the
number of members with backtesting coverage below 99%.\13\ The
Backtesting Impact Study shows 70 members below 99% backtesting
coverage as of June 30, 2022 with a collective 396 backtesting
deficiencies in GSD. Approximately 21% (i.e., 85 out of 396) of the
backtesting deficiencies occurred with members that had a Required Fund
Deposit of less than $1 million on the relevant deficiency day(s). If
the proposed changes had been in place during the Backtesting Impact
Study period, approximately 16% (i.e., 65 out of 396) of the
backtesting deficiencies incurred by the members would have been
eliminated, and the total number of members that were below the 99%
confidence target as of June 30, 2022 would have been reduced by 8.
Overall, a $1 million minimum requirement would have increased GSD's
12-month backtesting coverage 0.22%, eliminated 65 backtesting
deficiencies, and improved the rolling twelve-month backtesting
coverage for 8 members to above 99% confidence target. In contrast, if
a $500,000 minimum Required Fund Deposit had been applied during the
same study period, GSD's 12-month backtesting coverage would have
increased by 0.13%, 38 backtesting deficiencies would have been
eliminated, and the rolling twelve-month backtesting coverage for 3
members would have been improved to above 99% confidence target. In
summary, if the minimum Required Fund Deposit at GSD during the study
period had been set to $1 million compared to $500,000, there would
have been 27 more backtesting deficiencies eliminated (i.e., 65 instead
of 38 or an approximately 71% increase in the number of backtesting
deficiencies that could have been eliminated), 5 more members would be
brought back to above 99% confidence target (i.e., 8 instead of 3 or an
approximately 166% increase in the number of members brought back to
above 99% confidence target), and the overall GSD backtesting coverage
would have increased an additional 0.09%.
---------------------------------------------------------------------------
\13\ Backtesting percentages indicate the risk that a minimum
Required Fund Deposit would be insufficient to manage risk in the
event of a member's default. A backtesting coverage that is below
the 99% confidence target for a member means that the member has had
more than two backtesting deficiency days in a rolling twelve-month
period, i.e., assuming the member had a full year of trading
history. As indicated above, consistent with Rule 17Ad-
22(e)(6)(iii), FICC pays particular attention to members with
backtesting deficiencies that bring the results for that member
below the 99% confidence target to determine if there is an
identifiable cause of repeat backtesting deficiencies. Supra note
12.
---------------------------------------------------------------------------
FICC's review of the requirements of other clearing agencies and
foreign CCPs indicated that FICC/GSD's current minimum Required Fund
Deposit requirement of $100,000 was significantly lower than minimum
deposits or equivalent required by such other entities.\14\ While the
minimum required fund deposits of such other entities is not
dispositive as to the risk borne by FICC or the proper fund deposit
amounts to offset such risk, it is indicative of the amounts that users
of other similarly situated entities can expect to pay as a minimum
required fund deposit to use the services of the clearing agencies and
foreign CCPs and the impact to such users. The comparison shows that
entities using other clearing agencies and foreign CCPs pay
significantly more in minimum
[[Page 57963]]
fund deposits to use similar services than the current minimum Required
Fund Deposit amount at GSD.
---------------------------------------------------------------------------
\14\ For example, the minimum initial contribution for The
Options Clearing Corporation (``OCC'') is $500,000. See Rule 1002(d)
of the OCC Rules, available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf. The minimum
guaranty fund deposit for Chicago Mercantile Exchange (``CME'') is
$500,000 or $2.5 million depending on the product types being
cleared. See Rule 816 of the CME Rulebook, available at https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/8/8.pdf. The
minimum Required Fund Deposit for National Securities Clearing
Corporation (``NSCC'') is $250,000. See Rule 4 of NSCC Rulebook,
available at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf. The minimum default fund contribution for LCH
Limited is GBP 500,000 (approximately $579,000 based on current
foreign currency exchange rate). See definition of ``Minimum
Contribution'' in the LCH Limited Default Rules, available at
https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf. The minimum RepoClear default
fund contribution for LCH Ltd. is GBP 2,000,000 (approximately $2.3
million based on the current foreign currency exchange rate). See
definition of ``Minimum RepoClear Contribution'' in the LCH Limited
Default Rules, available at https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf. The minimum
contribution to Ice Clear U.S. Guaranty Fund is $2 million. See Rule
301 of ICE Clear U.S., Inc. Rules, available at https://www.ice.com/publicdocs/rulebooks/clear/ICE_Clear_US_Rules.pdf.
---------------------------------------------------------------------------
FICC also conducted a Clearing Fund requirement impact study for
the period of July 1, 2021 to June 30, 2022 (``CFR Impact Study''). The
result of the CFR Impact Study indicates that if the proposed changes
had been in place during the CFR Impact Study period, approximately 47%
(81 out of a total of 174) of the current members' Margin Portfolios
would have been impacted, with an average and a weighted average (with
weights based on number of impacted days) additional Required Fund
Deposit of approximately $686,000 and $792,000, respectively, for each
such Margin Portfolio per impacted day. However, when comparing the
actual, total Clearing Fund deposit of the current members' Margin
Portfolios with the proposed minimum Required Fund Deposit amount, only
approximately 13% (23 out of a total 174) of such members' Margin
Portfolios would have been impacted, requiring an average and a
weighted average (with weights based on number of impacted days)
additional cash deposit of approximately $649,000 and $715,000,
respectively, for each such Margin Portfolio per impacted day. The
result of the CFR Impact Study also shows one Repo Broker that would
have been impacted, requiring additional Clearing Fund deposit of
approximately $392,000 in either cash or Eligible Clearing Fund
Securities per impacted day. Overall, the proposed changes would have
resulted in an average increase in daily Required Fund Deposit of $31.4
million (or 0.17%) at GSD during the CFR Impact Study period.
Based on the Backtesting Impact Study and the CFR Impact Study
results discussed above, FICC believes that $1 million is the
appropriate minimum Required Fund Deposit amount at GSD that would
minimize the financial impact to its members while improving member
backtesting results and FICC/GSD's Clearing Fund coverage.
As is currently provided for in the Rules, FICC/GSD is proposing to
continue to require that members deposit in cash an amount not less
than the minimum Required Fund Deposit.\15\ FICC permits members to
satisfy their Required Fund Deposit obligations through a combination
of cash and open account indebtedness secured by Eligible Clearing Fund
Securities.\16\ Cash deposits are fungible. FICC would therefore be
further strengthening its liquidity resources by requiring each member
(including Repo Brokers) to deposit at least $1 million in cash to the
GSD Clearing Fund.
---------------------------------------------------------------------------
\15\ Currently, all members (including Repo Brokers) are
required to have at least $100,000 of the Required Fund Deposit in
cash. See GSD Rule 4, Section 3. Supra note 3.
\16\ Id.
---------------------------------------------------------------------------
Proposed Rule Changes
In order to implement the proposed increase in the minimum Required
Fund Deposit amount to $1 million for the Sponsoring Members, Section
10(c) of GSD Rule 3A (Sponsoring Members and Sponsored Members) would
be revised to state that the Sponsoring Member Omnibus Account Required
Fund Deposit shall be equal to the greater of: (i) $1 million or (ii)
the sum of the following: (1) the sum of the VaR Charges for all of the
Sponsored Members whose activity is represented in the Sponsoring
Member Omnibus Account as derived pursuant to Section 1b(a)(i) of GSD
Rule 4 (Clearing Fund and Loss Allocation), and (2) all amounts derived
pursuant to the provisions of GSD Rule 4 other than pursuant to Section
1b(a)(i) of GSD Rule 4 computed at the level of the Sponsoring Member
Omnibus Account. In addition, Section 10(d) of GSD Rule 3A would be
revised to replace the minimum cash amount from $100,000 to $1 million
to match the proposed increased minimum Required Fund Deposit amount
for the Sponsoring Members.
In order to implement the proposed increase in the minimum Required
Fund Deposit amount to $1 million for the GSD Netting Members, Section
2(a) of GSD Rule 4 would be revised to state that each Netting Member
shall be required to make a Required Fund Deposit to the Clearing Fund
equal to the greater of (i) the Minimum Charge or (ii) the Total
Amount. FICC is also proposing to add a sentence to Section 2(a) of GSD
Rule 4 that makes it clear that the Minimum Charge applicable to each
Netting Member, other than a Repo Broker, shall be no less than $1
million. In addition, for better organization of the subject matter and
clarity, FICC is proposing to move two sentences in GSD Rule 4 from
Section 1b to Section 2(a) with revisions: one stipulates that the
Minimum Charge applicable to each Repo Broker shall be no less than $5
million for each Margin Portfolio with Broker Account(s) and no less
than $1 million for each Margin Portfolio with Dealer Account(s) and
the other refers to additional payments, charges and premiums being
applied by FICC after application of Minimum Charges, which replaces
``minimum Clearing Fund amounts''. Lastly, Section 3 of GSD Rule 4
would be revised to replace the minimum cash amount from $100,000 to $1
million to match the proposed increased minimum Required Fund Deposit
amount.
Although FICC is not proposing to increase the minimum Required
Fund Deposit for MBSD at this time, for clarity and transparency, FICC
is proposing to add a sentence to Section 2 of MBSD Rule 4 (Clearing
Fund and Loss Allocation) that would make it clear the Minimum Charge
for each margin portfolio of a Clearing Member shall be no less than
$100,000. To enhance clarity in Section 2 of MBSD Rule 4, FICC is also
proposing to replace (i) ``Clearing Fund requirement'' with ``Minimum
Charge for each margin portfolio'' and (ii) ``minimum Clearing Fund
amounts'' with ``Minimum Charges''. Furthermore, FICC is proposing a
technical change to correct a reference to the non-Unregistered
Investment Pool Clearing Member in Section 2 of MBSD Rule 4.
Implementation Timeframe
Subject to approval by the Commission, FICC would implement the
proposed changes by no later than 60 Business Days after such approval
and would announce the effective date of the proposed changes by an
Important Notice posted to its website.
2. Statutory Basis
FICC believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. Specifically, FICC believes
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \17\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(iii),\18\ each as
promulgated under the Act, for the reasons described below.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
---------------------------------------------------------------------------
Section 17A(b)(3)(F) of the Act requires that the Rules be designed
to, among other things, assure the safeguarding of securities and funds
which are in the custody or control of FICC or for which it is
responsible.\19\ FICC believes the proposed rule changes are designed
to assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because they are
designed to enable FICC to require the necessary margin for members who
have a minimum Required Fund Deposit to limit its exposure to such
members in the event of a member default. Having adequate margin for
such members would help ensure that FICC does not
[[Page 57964]]
need to use its own resources, or the Eligible Clearing Fund Securities
and funds of non-defaulting members, to cover losses in the event of a
default of such members. Specifically, the proposed rule change seeks
to remedy potential situations that are described above where FICC
could be under-margined. By ensuring that members that have the minimum
Required Fund Deposit amount are adequately covering FICC's risk of
loss, FICC would be reducing the risk of losses, which would need to be
addressed by using non-defaulting members' securities or funds, or
FICC's funds. In addition, by requiring that members pay an amount not
less than the minimum Required Fund Deposit amount in cash, FICC would
be making available additional collateral that is easier to access upon
a member's default, further reducing the risk of losses and using non-
defaulting members' securities or funds, or FICC's funds, for
liquidity. Therefore, FICC believes the proposed rule change enhances
the safeguarding of securities and funds that are in the custody or
control of FICC, consistent with Section 17(b)(3)(F) of the Act.\20\
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78q-1(b)(3)(F).
\20\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to members and those arising from its
payment, clearing, and settlement processes, including by maintaining
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence.\21\ As described above,
FICC believes that the proposed changes would enable it to better
identify, measure, monitor, and, through the collection of members'
Required Fund Deposits, manage its credit exposures to members by
maintaining sufficient resources to cover those credit exposures fully
with a high degree of confidence. More specifically, as indicated by
the Backtesting Impact Study results, raising the minimum Required Fund
Deposit amount to $1 million at GSD would decrease the number of
backtesting deficiencies and help ensure that FICC maintains the
coverage of credit exposures for more members at a confidence level of
at least 99%. In addition, by requiring members pay an amount not less
than the minimum Required Fund Deposit amount in cash, FICC would be
making available collateral that is easier to access when members
default, thus further reducing the potential risk of loss from having
to use non-defaulting members' securities or funds, or FICC's funds,
for liquidity. Therefore, FICC believes that the proposed changes would
enhance FICC's ability to effectively identify, measure, monitor and
manage its credit exposures and would enhance its ability to maintain
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence. As such, FICC believes
the proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under
the Act.\22\
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\21\ 17 CFR 240.17Ad-22(e)(4)(i).
\22\ Id.
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Rule 17Ad-22(e)(6)(iii) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its members by
establishing a risk-based margin system that, at a minimum, calculates
margin sufficient to cover its potential future exposure to members in
the interval between the last margin collection and the close out of
positions following a member default.\23\ FICC employs daily
backtesting to determine the adequacy of each member's Required Fund
Deposit, paying particular attention to members that have backtesting
deficiencies below the 99% confidence target. Such backtesting
deficiencies highlight exposure that could subject FICC to potential
losses if a member defaults. As discussed above, FICC has determined
that approximately 16% (i.e., 65 out of 396) of the backtesting
deficiencies would have been eliminated during the Backtesting Impact
Study period if the minimum Required Fund Deposit were $1 million. By
raising the minimum Required Fund Deposit amount to $1 million at GSD,
FICC believes it can decrease the backtesting deficiencies by members,
and thus decrease its exposure to such members in the event of a
default. FICC believes that the increase in margin for those members
that currently have a Required Fund Deposit of less than $1 million
would improve the probabilities that the margin required of such
members is sufficient to cover FICC's potential future exposure to
members in the interval between the last margin collection and the
close out of positions following a member default. Therefore, FICC
believes the proposed change is consistent with Rule 17Ad-22(e)(6)(iii)
under the Act.\24\
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\23\ 17 CFR 240.17Ad-22(e)(6)(iii).
\24\ Id.
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Section 17A(b)(3)(F) of the Act requires, in part, that the Rules
be designed to promote the prompt and accurate clearance and settlement
of securities transactions.\25\ FICC believes the proposed clarifying
and technical changes to the GSD and MBSD Rules would allow FICC to
help promote prompt and accurate clearance and settlement of securities
transactions. This is because the proposed changes to the Rules would
clarify and improve the transparency of the Rules. Enhancing the
clarity and transparency of the Rules would help members to better
understand their rights and obligations regarding FICC's clearance and
settlement services. FICC believes that when members better understand
their rights and obligations regarding FICC's clearance and settlement
services, they can act in accordance with the Rules. FICC believes that
better enabling members to comply with the Rules would promote the
prompt and accurate clearance and settlement of securities transactions
by FICC. As such, FICC believes the proposed clarifying and technical
changes are consistent with Section 17A(b)(3)(F) of the Act.\26\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
FICC believes that the proposed changes to increase the minimum
Required Fund Deposit could have an impact on competition.
Specifically, FICC believes that the proposed changes could burden
competition because they would result in larger Required Fund Deposits
for certain members, e.g., members that currently have lower Required
Fund Deposits would have to deposit additional cash and/or Eligible
Clearing Fund Securities, as applicable, to their Clearing Fund
deposits. The proposed changes could impose more of a burden on those
members that have lower operating margins, lower cash reserves or
higher costs of capital compared to other members. Nonetheless, FICC
believes that any burden on competition imposed by the proposed changes
would not be significant and would be both necessary and appropriate in
furtherance of FICC's efforts to mitigate risks and meet the
requirements of the Act, as described in this filing and further below.
FICC believes that any burden on competition presented by the
proposed changes to increase the minimum Required Fund Deposit amount
would not be significant. As discussed above, if the minimum Required
Fund Deposit at GSD had been increased to $1 million during the CFR
Impact Study period, approximately 47% (81 out of a total of 174) of
the current members' Margin Portfolios would have been impacted,
[[Page 57965]]
with an average and a weighted average additional Required Fund Deposit
of approximately $686,000 and $ 792,000, respectively, for each such
Margin Portfolio per impacted day. However, when comparing the actual,
total Clearing Fund deposit of the current members' Margin Portfolios
with the proposed minimum Required Fund Deposit amount, only
approximately 13% (23 out of a total of 174) of such members' Margin
Portfolios would have to deposit additional cash to the Clearing Fund,
with an average and a weighted average cash deposit of approximately
$649,000 and $715,000, respectively, for each such Margin Portfolio per
impacted day. Furthermore, when comparing the average additional cash
deposit amounts that members would be required to make if the minimum
Clearing Fund cash deposit at GSD had been increased to $1 million with
their respective average Net Capital \27\ during the CFR Impact Study
period, the largest average additional cash deposit amount represented
approximately 0.49% of the affected member's average Net Capital.\28\
Similarly, when comparing the average additional Clearing Fund deposit
that members would be required to make, either in cash or Eligible
Clearing Fund Securities, if the minimum Required Fund Deposit amount
at GSD had been increased as proposed with their respective average Net
Capital during the CFR Impact Study period, the largest average
additional Clearing Fund deposit amount represented approximately 1.46%
of the affected member's average Net Capital.\29\
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\27\ As defined in GSD Rule 1 (Definitions), the term ``Net
Capital'' means, as of a particular date, the amount equal to the
net capital of a broker or dealer as defined in SEC Rule 15c3-
1(c)(2), or any successor rule or regulation thereto. Supra note 3.
\28\ The affected member would have had to deposit an additional
$900,000 in cash each impacted day during the CFR Impact Study
period.
\29\ The affected member would have had to deposit an additional
$392,000 in either cash or Eligible Clearing Fund Securities each
impacted day during the CFR Impact Study period.
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In addition, FICC believes that the increase to $1 million is
comparable with what users of other similarly situated registered
clearing agencies and foreign CCPs are expected to pay as a minimum
required deposit for similar services.\30\ Furthermore, by limiting the
proposed Required Fund Deposit to $1 million rather than a higher
minimum Required Fund Deposit, FICC would be minimizing the financial
impact to its members while improving member backtesting results and
FICC/GSD's Clearing Fund coverage.
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\30\ Supra note 14.
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While raising the minimum Required Fund Deposit to $500,000 would
also reduce backtesting deficiencies, it would not reduce them to the
same extent that raising the minimum Required Fund Deposit to $1
million would have. If the minimum Required Fund Deposit were raised to
$1 million rather than $500,000, FICC would have observed 27 fewer
backtesting deficiencies at GSD, which represents an approximately 71%
increase (i.e., 65 instead of 38) in the number of deficiencies that
could have been eliminated. Backtesting deficiencies highlight exposure
that could subject FICC to potential losses in the event that a member
defaults. FICC believes that the additional reduction in exposure that
would occur if the minimum Required Fund Deposit at GSD were raised to
$1 million rather than $500,000 justifies the potential additional
burden for members who currently have a Required Fund Deposit of less
than $1 million.
Even if the burden were deemed significant with respect to certain
members, FICC believes that the above-described burden on competition
that may be created by the proposed changes would be necessary in
furtherance of the Act, specifically Section 17A(b)(3)(F) of the
Act,\31\ because, as described above, the Rules must be designed to
assure the safeguarding of securities and funds that are in FICC's
custody or control or which it is responsible.
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, FICC believes the proposed changes are designed
to assure the safeguarding of securities and funds which are in its
custody or control or for which it is responsible because they are
designed to enable FICC to require the necessary margin for members who
have a minimum Required Fund Deposit to limit its exposure to such
members in the event of a member default. Having adequate margin for
such members would help ensure that FICC does not need to use its own
resources, or the Eligible Clearing Fund Securities and funds of non-
defaulting members, to cover losses in the event of a default of such
members. Specifically, the proposed changes seek to remedy potential
situations where FICC could be under-margined. By ensuring that members
that have the minimum Required Fund Deposit amount are adequately
covering FICC's risk of loss, FICC would be reducing the risk of
losses, which would need to be addressed by using non-defaulting
members' securities or funds, or FICC's funds. In addition, by
requiring that members pay an amount equal to the minimum Required Fund
Deposit amount in cash, FICC would be making available additional
collateral that is easier to access upon a member's default, further
reducing the risk of losses and using non-defaulting members'
securities or funds, or FICC's funds, for liquidity. Therefore, FICC
believes the proposed changes are necessary in furtherance of Section
17A(b)(3)(F) of the Act.\32\
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\32\ Id.
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In addition, FICC believes these proposed changes are necessary to
support FICC's compliance with Rules 17Ad-22(e)(4)(i) and 17Ad-
22(e)(6)(iii) under the Act,\33\ which require FICC to establish,
implement, maintain and enforce written policies and procedures
reasonably designed to (x) effectively identify, measure, monitor, and
manage its credit exposures to members and those arising from its
payment, clearing, and settlement processes, including by maintaining
sufficient financial resources to cover its credit exposure to each
member fully with a high degree of confidence; and (y) cover its credit
exposures to its members by establishing a risk-based margin system
that, at a minimum, calculates margin sufficient to cover its potential
future exposure to members in the interval between the last margin
collection and the close out of positions following a member default.
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\33\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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As described above, FICC believes increasing the minimum Required
Fund Deposit amount at GSD to $1 million would decrease the number of
backtesting deficiencies and ensure that FICC maintains the coverage of
credit exposures for more members at a confidence level of at least
99%. This outcome is consistent with Rule 17Ad-22(e)(4)(i) which
requires that FICC maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\34\ This outcome is also consistent with Rule 17Ad-
22(e)(6)(iii) which requires that FICC calculate sufficient margin to
cover its ``potential future exposure'' which is defined as the
``maximum exposure estimated to occur at a future point in time with an
established single-tailed confidence level of at least 99 percent with
respect to the estimated distribution of future exposure.'' \35\ FICC
believes that the increase in margin for those members that currently
have a Required Fund Deposit of less than $1 million at GSD would help
ensure that FICC maintain sufficient financial resources to cover its
[[Page 57966]]
credit exposure to each participant fully with a high degree of
confidence and that the margin deposited by such members is sufficient
to cover FICC's potential future exposure in the interval between the
last margin collection and the close out of positions following a
member default. Therefore, FICC believes that these proposed changes
are necessary to support FICC's compliance with Rules 17Ad-22(e)(4)(i)
and 17Ad-22(e)(6)(iii) under the Act.\36\
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\34\ 17 CFR 240.17Ad-22(e)(4)(i).
\35\ 17 CFR 240.17Ad-22(e)(6)(iii).
\36\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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FICC believes that the above-described burden on competition that
could be created by the proposed changes would be appropriate in
furtherance of the Act because such changes have been appropriately
designed to assure the safeguarding of securities and funds which are
in the custody or control of FICC or for which it is responsible, as
described in detail above. The proposal would enable FICC to produce
margin levels more commensurate with the risks it faces as a central
counterparty. The proposed increase in minimum Required Fund Deposit at
GSD would be in relation to the credit exposure risks presented by the
class of members that currently have a Required Fund Deposit of less
than $1 million, and each member's Required Fund Deposit would continue
to be calculated with the same parameters and at the same confidence
level for each member. Therefore, members that present similar risk,
regardless of the type of member, would have similar impact on their
Required Fund Deposit amounts.
In addition, based on the comparison with other registered clearing
agencies and foreign CCPs, FICC believes that the increase to $1
million is comparable with what users of other similarly situated
registered clearing agencies and foreign CCPs are expected to pay and
would not be a significant burden on Members.\37\ Furthermore, based on
the results of the Backtesting Impact Study and CFR Impact Study, as
discussed above, FICC believes that a proposed minimum Required Fund
Deposit of $1 million at GSD would provide an appropriate balance of
improving member backtesting results while minimizing the impact to
members by not raising the minimum Required Fund Deposit above $1
million. Therefore, because the proposed changes are designed to
provide FICC with a more appropriate and balanced method of managing
the risks presented by each member while minimizing the impact to
members, FICC believes the proposed changes are appropriately designed
to meet its risk management goals and regulatory obligations.
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\37\ Supra note 14.
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FICC believes that it has designed the proposed changes in a way
that is both necessary and appropriate to meet compliance with its
obligations under the Act. Specifically, the proposal to increase the
minimum Required Fund Deposit amount to $1 million at GSD would better
limit FICC's credit exposures to its members. In addition, by
continuing to require that members pay an amount equal to the minimum
Required Fund Deposit amount in cash, FICC would be making available
additional collateral that is easier for FICC to access upon a member's
default, further limiting its credit exposure to members. Therefore, as
described above, FICC believes the proposed changes are necessary and
appropriate in furtherance of FICC's obligations under the Act,
specifically Section 17A(b)(3)(F) of the Act \38\ and Rules 17Ad-
22(e)(4)(i) and 17Ad-22(e)(6)(iii) under the Act.\39\ For these
reasons, the proposed changes are not designed to be an artificial
barrier to entry but a necessary and appropriate change to address
specific risks.
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
\39\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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(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 additional 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
SEC's Division of Trading and Markets at [email protected] or
202-551-5777.
FICC reserves the right not to 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-2022-006 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-2022-006. 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
[[Page 57967]]
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-2022-006 and should be
submitted on or before October 13, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20499 Filed 9-21-22; 8:45 am]
BILLING CODE 8011-01-P
