Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change, as Modified by Amendment No. 1, To Adopt a Portfolio Differential Charge as an Additional Component to the Government Securities Division Required Fund Deposit, 67394-67397 [2023-21338]
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67394
Federal Register / Vol. 88, No. 188 / Friday, September 29, 2023 / Notices
burden of 15 hours for each of the next
three years;
(c) for smaller private fund advisers,
an estimated average annual burden of
5 hours for event reporting for smaller
private equity fund advisers for each of
the next three years;
(d) for large hedge fund advisers
making their first Form PF filing, an
estimated amortized average annual
burden of 108 hours for each of the first
three years;
(e) for large hedge fund advisers that
already make Form PF filings, an
estimated amortized average annual
burden of 600 hours for each of the next
three years;
(f) for large hedge fund advisers, an
estimated average annual burden of 10
hours for current reporting for each of
the next three years;
(g) for large liquidity fund advisers
making their first Form PF filing, an
estimated amortized average annual
burden of 67 hours for each of the first
three years;
(h) for large liquidity fund advisers
that already make Form PF filings, an
estimated amortized average annual
burden of 280 hours for each of the next
three years;
(i) for large private equity fund
advisers making their first Form PF
filing, an estimated amortized average
annual burden of 84 hours for each of
the first three years;
(j) for large private equity fund
advisers that already make Form PF
filings, an estimated amortized average
annual burden of 100 hours for each of
the next three years; and
(k) for large private equity fund
advisers, an estimated average annual
burden of 5 hours for event reporting for
each of the next three years.
With respect to annual internal costs,
the Commission estimates the collection
of information will result in
122.86burden hours per year on average
for each respondent. With respect to
external cost burdens, the Commission
estimates a range from $0 to $50,000 per
adviser. Estimates of average burden
hours and costs are made solely for the
purposes of the Paperwork Reduction
Act and are not derived from a
comprehensive or even representative
survey or study of the costs of
Commission rules and forms. The
changes in burden hours are due to the
staff’s estimates of the time costs and
external costs that result from the
adopted amendments, the use of
updated data, and the use of different
methodologies to calculate certain
estimates. Compliance with the
collection of information requirements
of Form PF is mandatory for advisers
that satisfy the criteria described in
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Instruction 1 to the Form. Responses to
the collection of information will be
kept confidential to the extent permitted
by law. The Commission does not
intend to make public information
reported on Form PF that is identifiable
to any particular adviser or private fund,
although the Commission may use Form
PF information in an enforcement
action. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a currently valid OMB
control number.
The public may view background
documentation for this information
collection at the following website:
www.reginfo.gov. Find this particular
information collection by selecting
‘‘Currently under 30-day Review—Open
for Public Comments’’ or by using the
search function. Written comments and
recommendations for the proposed
information collection should be sent
within 30 days of publication of this
notice by October 30, 2023 to (i)
MBX.OMB.OIRA.SEC_desk_officer@
omb.eop.gov and (ii) David Bottom,
Director/Chief Information Officer,
Securities and Exchange Commission,
c/o John Pezzullo, 100 F Street NE,
Washington, DC 20549, or by sending an
email to: PRA_Mailbox@sec.gov .
Dated: September 26, 2023.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–21430 Filed 9–28–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98494; File No. SR–FICC–
2023–011]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Order
Approving Proposed Rule Change, as
Modified by Amendment No. 1, To
Adopt a Portfolio Differential Charge
as an Additional Component to the
Government Securities Division
Required Fund Deposit
September 25, 2023.
I. Introduction
On August 3, 2023, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–FICC–2023–011
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder.2
On August 16, 2023, FICC filed
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00170
Fmt 4703
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Amendment No. 1 to the proposed rule
change, to make clarifications to the
proposed rule change.3 The proposed
rule change, as modified by Amendment
No. 1, is hereinafter referred to as the
‘‘Proposed Rule Change.’’ The Proposed
Rule Change was published for
comment in the Federal Register on
August 23, 2023.4 The Commission has
received no comments on the Proposed
Rule Change. For the reasons discussed
below, the Commission is approving the
Proposed Rule Change.5
II. Background
FICC is a central counterparty
(‘‘CCP’’), which means it interposes
itself as the buyer to every seller and
seller to every buyer for the financial
transactions it clears. FICC’s
Government Securities Division
(‘‘GSD’’) 6 provides trade comparison,
netting, risk management, settlement,
and CCP services for the U.S.
Government securities market. As such,
FICC is exposed to the risk that one or
more of its members may fail to make
a payment or to deliver securities.
A key tool that FICC uses to manage
its credit exposures to its members is
the daily collection of the Required
Fund Deposit (i.e., margin) from each
member. A member’s margin is
designed to mitigate potential losses
associated with liquidation of the
member’s portfolio in the event of that
member’s default. The aggregated
amount of all members’ margin
constitutes the Clearing Fund, which
FICC would be able to access should a
defaulted member’s own margin be
insufficient to satisfy losses to FICC
caused by the liquidation of that
member’s portfolio. Each member’s
margin consists of a number of
3 Amendment No. 1 made clarifications and
corrections to the description of the proposed rule
change and Exhibit 3a of the filing (Summary of
Impact Study) to incorporate a longer impact
analysis. As originally filed, the time-period of the
impact analysis was November 2021 to October
2022. As amended by Amendment No. 1, the timeperiod of the impact analysis is November 2021 to
March 2023. These clarifications and corrections
have been incorporated, as appropriate, into the
proposed rule change. FICC has requested
confidential treatment of Exhibit 3a, pursuant to 17
CFR 240.24b–2.
4 See Securities Exchange Act Release No. 98160
(Aug. 17, 2023), 88 FR 57485 (Aug. 23, 2023) (File
No. SR–FICC–2023–011) (‘‘Notice of Filing’’).
5 Capitalized terms not defined herein are defined
in the GSD Rulebook (‘‘Rules’’), available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf.
6 FICC operates two divisions: GSD and the
Mortgage-Backed Securities Division (‘‘MBSD’’).
GSD provides CCP services for the U.S. Government
securities market; MBSD provides CCP services for
the U.S. mortgage-backed securities market. GSD
and MBSD maintain separate sets of rules, margin
models, and clearing funds. The Proposed Rule
Change relates solely to GSD.
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components, each of which is calculated
to address specific risks faced by FICC
arising out of its members’ trading
activity. Each member’s margin includes
a value-at-risk (‘‘VaR’’) charge (‘‘VaR
Charge’’) designed to capture the
potential market price risk 7 associated
with the securities in a member’s
portfolio. The VaR Charge is typically
the largest component of a member’s
margin requirement.
The VaR Charge uses a sensitivitybased VaR methodology and is based on
the potential price volatility of unsettled
positions in a member’s portfolio. It is
designed to project the potential losses
that could occur in connection with the
liquidation of a defaulting member’s
portfolio, assuming the portfolio would
take three days to liquidate in normal
market conditions and uses three
inputs: (1) confidence level, (2) a time
horizon and (3) historical market
volatility. The projected liquidation
gains or losses are used to determine the
amount of the VaR Charge for each
portfolio, which is calculated to capture
the market price risk associated with
each portfolio at a 99 percent
confidence level.
FICC calculates and collects a start-ofday VaR component, which is designed
to address the risk presented by a
member’s start-of-day positions. FICC
also calculates and collects an intraday
VaR component, which reflects the
changes in a member’s positions and
risk profile due to the submission of
new trades and completed settlement
activity from the start-of-day to noon.
Additionally, FICC re-calculates the
amount of the intraday VaR Charge
applicable to each member portfolio,
based on the open positions therein, to
determine whether FICC will collect an
additional margin amount (the
‘‘Intraday Supplemental Fund Deposit’’
or ‘‘ISFD’’). FICC calculates the ISFD by
evaluating certain criteria with respect
to a member’s intraday VaR Charge and
backtesting results.8 FICC may assess
7 Market price risk refers to the risk that volatility
in the market causes the price of a security to
change between the execution of a trade and
settlement of that trade. This risk is sometimes also
referred to as volatility risk.
8 The first criterion, the ‘‘Dollar Threshold,’’
evaluates whether a member’s intraday VaR Charge
equals or exceeds a set threshold dollar amount
when compared to the VaR Charge that was
included in the most recent margin collection. The
second criterion, the ‘‘Percentage Threshold,’’
evaluates whether the intraday VaR Charge equals
or exceeds a percentage increase of the VaR Charge
that was included in the most recent margin
collection. The third criterion, the ‘‘Coverage
Target,’’ evaluates whether a member’s backtesting
results are below the 99 percent confidence level.
Securities Exchange Act Release No. 83362 (June 1,
2018), 83 FR 26514 (June 7, 2018) (File No. SR–
FICC–2018–001); Securities Exchange Act Release
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the ISFD in the event that a member’s
risk exposure breaches certain criteria.9
FICC states that it regularly assesses
market and liquidity risks as such risks
relate to its margin methodologies to
evaluate whether margin levels are
commensurate with the particular risk
attributes of each relevant product,
portfolio, and market.10 For example,
FICC employs daily backtesting 11 to
determine the adequacy of each
member’s margin. FICC compares each
member’s margin with the simulated
liquidation gains/losses, using the
actual positions in the member’s
portfolio(s) and the actual historical
security returns. A backtesting
deficiency occurs when a member’s
margin would not have been adequate to
cover the projected liquidation losses
estimated from the member’s settlement
activity based on the backtesting results.
Backtesting deficiencies highlight
exposure that could subject FICC to
potential losses in the event of a
member default. FICC states that it
investigates the cause(s) of any
backtesting deficiencies to determine
whether there is an identifiable cause of
repeat backtesting deficiencies and/or
whether multiple members may
experience backtesting deficiencies for
the same underlying reason.12
FICC states that based on its regular
review of the effectiveness of its margin
methodology, FICC has identified
backtesting deficiencies attributable to
intraday margin fluctuations in certain
member portfolios as those members
execute trades throughout the day.13
Specifically, since FICC generally
novates and guarantees trades upon
comparison,14 a member’s trading
activity may result in coverage gaps due
to large un-margined intraday portfolio
fluctuations that remain unmitigated
from the time of novation until the next
scheduled margin collection.15 FICC
No. 83223 (May 11, 2018), 83 FR 23020 (May 17,
2018) (File No. SR–FICC–2018–801).
9 FICC assesses an ISFD if a member’s risk
exposure breaches all three of the Dollar Threshold,
Percentage Threshold, and Coverage Target. FICC
also assesses an ISFD if, under certain market
conditions, a member’s intraday VaR Charge
breaches both the Dollar Threshold and the
Percentage Threshold. Id.
10 See Notice of Filing, supra note 4, at 57485.
11 Backtesting is an ex-post comparison of actual
outcomes with expected outcomes derived from the
use of margin models. See 17 CFR 240.17Ad–
22(a)(1).
12 See id. at 57486.
13 See id. at 57487.
14 Trade comparison consists of the reporting,
validating, and in some cases, matching by FICC of
the long and short sides of a securities trade to
ensure that the details of such trade are in
agreement between the parties. See GSD Rule 5,
supra note 5.
15 See Notice of Filing, supra note 4, at 57486.
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67395
designed the Proposed Rule Change to
mitigate such exposure.
III. Description of the Proposed Rule
Change
FICC proposes to add a new margin
component, the Portfolio Differential
Charge (‘‘PD Charge’’), to its
methodology for calculating members’
margin. FICC designed the PD Charge to
help mitigate the risks posed to FICC by
the variability of clearing activity
submitted by members to GSD
throughout the day, by measuring the
historical period-over-period increases
in the VaR Charge of a member over a
given time-period.16 FICC would
calculate the PD Charge twice a day, and
if applicable, add the PD Charge to the
calculation of the member’s margin.
Specifically, in determining the PD
Charge, FICC would take into account
the historical period-over-period
increases between the (1) start-of-day
and intraday VaR components, and (2)
intraday and end-of-day VaR
components, respectively, of a member’s
margin over a look-back period of no
less than 100 days, with a decay factor
of no greater than 1.17 FICC would
calculate the PD Charge to equal the
exponentially weighted moving average
of such changes to the member’s VaR
Charge during the look-back period,
times a multiplier that is no less than
one and no greater than three, as
determined by FICC from time to time
based on backtesting results.18 The use
of this type of average means that FICC
would use an exponentially weighted
16 See id. The proposed PD Charge is different
from the ISFD because the PD Charge is meant to
capture the risks presented by the unpredictability
of a member’s historical trading activity, as
measured, in part, by the variability in a member’s
VaR Charge over the look-back period; by contrast,
the ISFD is meant to capture the intraday volatility
risks presented by the existing net unsettled
positions in a member’s portfolio. See id.
17 Upon implementation of the Proposed Rule
Change, FICC would use a 100-day look-back period
in conjunction with a decay factor of 0.97, which
FICC believes would provide a sufficient amount of
time to reflect the current market conditions. As
market conditions shift, FICC may modify the lookback period and/or the decay factor from time to
time, subject to FICC’s model governance process
and announced by FICC via an Important Notice
posted on its website. See id. at note 14.
18 FICC states that the uncertainty of the market
condition and/or changes in members’ business
models may lead to changes in member activity
patterns that would require a multiplier greater than
1 be invoked from time to time. See id. at note 15.
FICC would determine whether to modify the
multiplier based on the backtesting results to
evaluate the effectiveness of PD Charge as a
mitigant of the position change risk and may change
the multiplier from time to time to maintain the
effectiveness of the PD Charge in generating
sufficient backtesting coverage. Changes to the
multiplier would be subject to FICC’s model
governance process and be announced by FICC via
an Important Notice posted to its website.
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array of VaR Charges, the result of
which is to emphasize more recent
observations in determining the PD
Charge (that is, it places more weight
and significance on more recent data
points).
FICC believes the PD Charge would
address the period-over-period changes
to members’ VaR Charges, and thereby
help mitigate the risks posed to FICC by
un-margined period-over-period
fluctuations to member portfolios
resulting from trades that FICC novates
and guarantees during the coverage gap
between margin collections.19 In
support, FICC cites an impact study it
conducted that covers the period from
November 2021 to March 2023 (the
‘‘Impact Study’’).20 The Impact Study
shows, among other things, that if the
PD Charge had been in place from April
2022 through March 2023, the number
of backtesting deficiencies would have
been reduced by 77 (from 498 to 421, or
approximately 15 percent) and the
backtesting coverage for 44 members
(approximately 34 percent of the GSD
membership) would have improved,
with 14 members who were below 99
percent coverage brought back to above
99 percent.21
IV. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act 22
directs the Commission to approve a
proposed rule change of a selfregulatory organization if it finds that
such proposed rule change is consistent
with the requirements of the Act and
rules and regulations thereunder
applicable to such organization. After
carefully considering the Proposed Rule
Change, the Commission finds that the
Proposed Rule Change is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to FICC. In particular, the
Commission finds that the Proposed
Rule Change is consistent with Section
17A(b)(3)(F) 23 of the Act and Rules
19 See
id. at 57486.
part of the Proposed Rule Change, FICC
filed Exhibit 3a—Summary of Impact Analysis (i.e.,
the Impact Study), comparing, on a member by
member basis, the actual margin collections during
the period of the Impact Study to the hypothetical
margin collections FICC would have collected had
the PD Charge been in place during that period. The
Impact Study shows that the rolling 12-month
Clearing Fund requirement backtesting coverage
ratio (from April 2022 through March 2023) would
have improved from 98.37 percent to 98.62 percent.
The Impact Study also shows what the average
daily PD Charge would be on a per member basis.
Pursuant to 17 CFR 240.24b–2, FICC requested
confidential treatment of Exhibit 3b. For further
discussion of the Impact Study, see the Notice of
Filing. See id. at 57487.
21 See id.
22 15 U.S.C. 78s(b)(2)(C).
23 15 U.S.C. 78q–1(b)(3)(F).
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20 As
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17Ad–22(e)(4)(i), (e)(6)(i), and (e)(6)(iii)
thereunder.24
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act 25
requires that the rules of a clearing
agency, such as FICC, be designed to,
among other things, promote the prompt
and accurate clearance and settlement of
securities transactions and assure the
safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible.26 The Commission believes
that the Proposed Rule Change is
consistent with Section 17A(b)(3)(F) of
the Act for the reasons stated below.
As described above in Section III,
FICC proposes to add the PD Charge to
the margin requirements that FICC may
collect. As discussed in more detail in
Section IV.B infra, the Commission
believes adding the PD Charge to FICC’s
margin methodology would help ensure
that FICC collects sufficient margin to
cover its credit exposure associated with
the variability of clearing activity
submitted by members to GSD
throughout the day by measuring the
historical period-over-period increases
in the VaR Charges of members over the
look-back period. By helping FICC to
collect sufficient margin, the Proposed
Rule Change would better ensure that,
in the event of a member default, FICC’s
operation of its critical clearance and
settlement services would not be
disrupted because of insufficient
financial resources. Accordingly, the
Commission finds that the Proposed
Rule Change should help FICC to
continue providing prompt and accurate
clearance and settlement of securities
transactions, consistent with Section
17A(b)(3)(F) of the Act.27
Moreover, as described above in
Section II, FICC would access the
mutualized Clearing Fund should a
defaulted member’s own margin be
insufficient to satisfy losses to FICC
caused by the liquidation of that
member’s portfolio. Because FICC’s
proposal to adopt the PD Charge should
help ensure that FICC has collected
sufficient margin from members, the
Proposed Rule Change should also help
minimize the likelihood that FICC
would have to access the Clearing Fund,
thereby limiting non-defaulting
members’ exposure to mutualized
losses. The Commission believes that by
helping to limit the exposure of FICC’s
24 17 CFR 240.17Ad–22(e)(4)(i), (e)(6)(i), and
(e)(6)(iii).
25 15 U.S.C. 78q–1(b)(3)(F).
26 Id.
27 15 U.S.C. 78q–1(b)(3)(F).
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Fmt 4703
Sfmt 4703
non-defaulting members to mutualized
losses, the Proposed Rule Change would
help FICC assure the safeguarding of
securities and funds which are in its
custody or control, consistent with
Section 17A(b)(3)(F) of the Act.28
B. Consistency With Rule 17Ad–
22(e)(4)(i) Under the Act
Rule 17Ad–22(e)(4)(i) under the Act
requires that each covered clearing
agency, such as FICC, establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those arising from its payment, clearing,
and settlement processes, including by
maintaining sufficient financial
resources to cover its credit exposure to
each participant fully with a high degree
of confidence.29 The Commission
believes that the Proposed Rule Change
is consistent with Rule 17Ad–22(e)(4)(i)
under the Act for the reasons stated
below.30
The Commission agrees that FICC’s
proposal to add the PD Charge to its
margin methodology would enable FICC
to better manage its credit exposures to
members by maintaining sufficient
resources to cover those credit
exposures fully with a high degree of
confidence. Specifically, the proposed
PD Charge would allow FICC to collect
additional margin on an intraday basis
to help FICC effectively mitigate the
risks attributable to intraday margin
fluctuations in certain member
portfolios as those members execute
trades throughout the day between
margin collections. As discussed above
in Section II, since FICC generally
novates and guarantees trades upon
comparison, a member’s trading activity
may result in coverage gaps due to large
un-margined intraday portfolio
fluctuations that remain unmitigated
from the time of novation until the next
scheduled margin collection. The PD
Charge would help FICC mitigate such
exposure.
The Commission has reviewed and
analyzed the materials filed by FICC,
including FICC’s Impact Study and
backtesting results submitted
confidentially,31 which show that had
the PD Charge been in place from April
2022 through March 2023, it would
have reduced number of backtesting
deficiencies and thereby better enabled
FICC to collect margin sufficient to meet
its coverage requirements. Accordingly,
28 Id.
29 17
CFR 240.17Ad–22(e)(4)(i).
30 Id.
31 See
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for the reasons discussed above, the
Commission finds that the Proposed
Rule Change is reasonably designed to
better enable FICC to effectively
identify, measure, monitor, and manage
its credit exposure 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 consistent with Rule 17Ad–
22(e)(4)(i).32
C. Consistency With Rule 17Ad–
22(e)(6)(i) Under the Act
Rule 17Ad–22(e)(6)(i) under the Act
requires that each covered clearing
agency that provides central
counterparty services, such as FICC,
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market.33 The Commission believes that
the proposal is consistent with Rule
17Ad–22(e)(6)(i) under the Act for the
reason stated below.
The Commission agrees that FICC’s
proposal to add the PD Charge to its
margin methodology would enable FICC
to more effectively address the risks
posed to FICC by un-margined periodover-period fluctuations to member
portfolios resulting from trades that
FICC novates and guarantees during the
coverage gap between margin
collections. In its filing materials, FICC
provided information regarding the
impacts of the proposed PD Charge on
its margin collection.34 Specifically, the
Impact Study shows that if the PD
Charge had been in place from April
2022 through March 2023, the number
of backtesting deficiencies would have
been reduced by 77 (from 498 to 421, or
approximately 15 percent) and the
backtesting coverage for 44 members
(approximately 34 percent of the GSD
membership) would have improved,
with 14 members who were below 99
percent coverage brought back to above
99 percent.35 The Commission has
reviewed and analyzed FICC’s analysis
and agrees that adding the PD Charge to
FICC’s margin methodology would
enable FICC to more effectively mitigate
the risks attributable to intraday margin
fluctuations arising out of member
CFR 240.17Ad–22(e)(4)(i).
CFR 240.17Ad–22(e)(6)(i).
34 See supra note 20.
35 See id.
trading activity between margin
collections. As a result, implementing
the Proposed Rule Change would better
enable FICC to collect margin amounts
at levels commensurate with FICC’s
intraday credit exposures to its
members.
Accordingly, the Commission finds
the Proposed Rule Change is consistent
with Rule 17Ad–22(e)(6)(i) under the
Act because it is designed to assist FICC
in maintaining a risk-based margin
system that considers, and produces
margin levels commensurate with, the
risks of portfolios that experience
significant volatility on an intraday
basis.36
D. Consistency With Rule 17Ad–
22(e)(6)(iii) Under the Act
Rule17Ad–22(e)(6)(iii) under the Act
requires that each covered clearing
agency, such as FICC, establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, calculates margin
sufficient to cover its potential future
exposure to participants in the interval
between the last margin collection and
the close out of positions following a
participant default.37 The Commission
believes that the proposal is consistent
with Rule 17Ad–22(e)(6)(iii) under the
Act for the reason stated below.
As stated above in Section II, FICC’s
proposal to add the PD Charge is
designed to address FICC’s exposure to
its members attributable to trading
activity that takes place in the interval
between margin collections.
Specifically, since FICC generally
novates and guarantees trades upon
comparison, a member’s trading activity
may result in coverage gaps due to large
un-margined intraday portfolio
fluctuations that remain unmitigated
between margin collections.38 As
discussed above in Section IV.C, based
on the Commission’s review of the filing
materials, the Commission agrees that
that FICC’s proposal to add the PD
Charge to its margin methodology
should enable FICC to more effectively
address the risks posed to FICC by unmargined period-over-period
fluctuations to member portfolios
resulting from trades that FICC novates
and guarantees during the coverage gap
between margin collections.
Accordingly, the Commission finds
the Proposed Rule Change is consistent
with Rule 17Ad–22(e)(6)(iii) under the
32 17
33 17
VerDate Sep<11>2014
21:46 Sep 28, 2023
36 17
CFR 240.17Ad–22(e)(6)(i).
CFR 240.17Ad–22(e)(6)(iii).
38 See Notice of Filing, supra note 4, at 57486.
37 17
Jkt 259001
PO 00000
Frm 00173
Fmt 4703
Sfmt 4703
67397
Act because it is designed to better
enable FICC to cover its credit
exposures to its members by
establishing a risk-based margin system
that specifically 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.39
IV. Conclusion
On the basis of the foregoing, the
Commission finds that the Proposed
Rule Change, as modified by
Amendment No. 1, is consistent with
the requirements of the Act and in
particular with the requirements of
Section 17A of the Act 40 and the rules
and regulations promulgated
thereunder.
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act 41 that
proposed rule change SR–FICC–2023–
011, be, and hereby is, approved.42
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.43
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023–21338 Filed 9–28–23; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–98497; File No. SR–
CboeBZX–2023–062]
Self-Regulatory Organizations; Cboe
BZX Exchange, Inc.; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Rule Change To Amend the Initial
Period After Commencement of
Trading of a Series of ETF Shares on
the Exchange as It Relates to the
Holders of Record and/or Beneficial
Holders, as Provided in Exchange Rule
14.11(l)
September 25, 2023.
On August 14, 2023, Cboe BZX
Exchange, Inc. (‘‘BZX’’ or ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 a proposed rule
39 17
CFR 240.17Ad–22(e)(6)(iii).
U.S.C. 78q–1.
41 15 U.S.C. 78s(b)(2).
42 In approving the Proposed Rule Change, the
Commission considered its impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
43 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
40 15
E:\FR\FM\29SEN1.SGM
29SEN1
]]>Agencies
[Federal Register Volume 88, Number 188 (Friday, September 29, 2023)]
[Notices]
[Pages 67394-67397]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21338]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98494; File No. SR-FICC-2023-011]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change, as Modified by Amendment No. 1,
To Adopt a Portfolio Differential Charge as an Additional Component to
the Government Securities Division Required Fund Deposit
September 25, 2023.
I. Introduction
On August 3, 2023, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2023-011 pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder.\2\ On August 16, 2023, FICC filed Amendment No. 1 to the
proposed rule change, to make clarifications to the proposed rule
change.\3\ The proposed rule change, as modified by Amendment No. 1, is
hereinafter referred to as the ``Proposed Rule Change.'' The Proposed
Rule Change was published for comment in the Federal Register on August
23, 2023.\4\ The Commission has received no comments on the Proposed
Rule Change. For the reasons discussed below, the Commission is
approving the Proposed Rule Change.\5\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 made clarifications and corrections to the
description of the proposed rule change and Exhibit 3a of the filing
(Summary of Impact Study) to incorporate a longer impact analysis.
As originally filed, the time-period of the impact analysis was
November 2021 to October 2022. As amended by Amendment No. 1, the
time-period of the impact analysis is November 2021 to March 2023.
These clarifications and corrections have been incorporated, as
appropriate, into the proposed rule change. FICC has requested
confidential treatment of Exhibit 3a, pursuant to 17 CFR 240.24b-2.
\4\ See Securities Exchange Act Release No. 98160 (Aug. 17,
2023), 88 FR 57485 (Aug. 23, 2023) (File No. SR-FICC-2023-011)
(``Notice of Filing'').
\5\ Capitalized terms not defined herein are defined in the GSD
Rulebook (``Rules''), available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf.
---------------------------------------------------------------------------
II. Background
FICC is a central counterparty (``CCP''), which means it interposes
itself as the buyer to every seller and seller to every buyer for the
financial transactions it clears. FICC's Government Securities Division
(``GSD'') \6\ provides trade comparison, netting, risk management,
settlement, and CCP services for the U.S. Government securities market.
As such, FICC is exposed to the risk that one or more of its members
may fail to make a payment or to deliver securities.
---------------------------------------------------------------------------
\6\ FICC operates two divisions: GSD and the Mortgage-Backed
Securities Division (``MBSD''). GSD provides CCP services for the
U.S. Government securities market; MBSD provides CCP services for
the U.S. mortgage-backed securities market. GSD and MBSD maintain
separate sets of rules, margin models, and clearing funds. The
Proposed Rule Change relates solely to GSD.
---------------------------------------------------------------------------
A key tool that FICC uses to manage its credit exposures to its
members is the daily collection of the Required Fund Deposit (i.e.,
margin) from each member. A member's margin is designed to mitigate
potential losses associated with liquidation of the member's portfolio
in the event of that member's default. The aggregated amount of all
members' margin constitutes the Clearing Fund, which FICC would be able
to access should a defaulted member's own margin be insufficient to
satisfy losses to FICC caused by the liquidation of that member's
portfolio. Each member's margin consists of a number of
[[Page 67395]]
components, each of which is calculated to address specific risks faced
by FICC arising out of its members' trading activity. Each member's
margin includes a value-at-risk (``VaR'') charge (``VaR Charge'')
designed to capture the potential market price risk \7\ associated with
the securities in a member's portfolio. The VaR Charge is typically the
largest component of a member's margin requirement.
---------------------------------------------------------------------------
\7\ Market price risk refers to the risk that volatility in the
market causes the price of a security to change between the
execution of a trade and settlement of that trade. This risk is
sometimes also referred to as volatility risk.
---------------------------------------------------------------------------
The VaR Charge uses a sensitivity-based VaR methodology and is
based on the potential price volatility of unsettled positions in a
member's portfolio. It is designed to project the potential losses that
could occur in connection with the liquidation of a defaulting member's
portfolio, assuming the portfolio would take three days to liquidate in
normal market conditions and uses three inputs: (1) confidence level,
(2) a time horizon and (3) historical market volatility. The projected
liquidation gains or losses are used to determine the amount of the VaR
Charge for each portfolio, which is calculated to capture the market
price risk associated with each portfolio at a 99 percent confidence
level.
FICC calculates and collects a start-of-day VaR component, which is
designed to address the risk presented by a member's start-of-day
positions. FICC also calculates and collects an intraday VaR component,
which reflects the changes in a member's positions and risk profile due
to the submission of new trades and completed settlement activity from
the start-of-day to noon. Additionally, FICC re-calculates the amount
of the intraday VaR Charge applicable to each member portfolio, based
on the open positions therein, to determine whether FICC will collect
an additional margin amount (the ``Intraday Supplemental Fund Deposit''
or ``ISFD''). FICC calculates the ISFD by evaluating certain criteria
with respect to a member's intraday VaR Charge and backtesting
results.\8\ FICC may assess the ISFD in the event that a member's risk
exposure breaches certain criteria.\9\
---------------------------------------------------------------------------
\8\ The first criterion, the ``Dollar Threshold,'' evaluates
whether a member's intraday VaR Charge equals or exceeds a set
threshold dollar amount when compared to the VaR Charge that was
included in the most recent margin collection. The second criterion,
the ``Percentage Threshold,'' evaluates whether the intraday VaR
Charge equals or exceeds a percentage increase of the VaR Charge
that was included in the most recent margin collection. The third
criterion, the ``Coverage Target,'' evaluates whether a member's
backtesting results are below the 99 percent confidence level.
Securities Exchange Act Release No. 83362 (June 1, 2018), 83 FR
26514 (June 7, 2018) (File No. SR-FICC-2018-001); Securities
Exchange Act Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17,
2018) (File No. SR-FICC-2018-801).
\9\ FICC assesses an ISFD if a member's risk exposure breaches
all three of the Dollar Threshold, Percentage Threshold, and
Coverage Target. FICC also assesses an ISFD if, under certain market
conditions, a member's intraday VaR Charge breaches both the Dollar
Threshold and the Percentage Threshold. Id.
---------------------------------------------------------------------------
FICC states that it regularly assesses market and liquidity risks
as such risks relate to its margin methodologies to evaluate whether
margin levels are commensurate with the particular risk attributes of
each relevant product, portfolio, and market.\10\ For example, FICC
employs daily backtesting \11\ to determine the adequacy of each
member's margin. FICC compares each member's margin with the simulated
liquidation gains/losses, using the actual positions in the member's
portfolio(s) and the actual historical security returns. A backtesting
deficiency occurs when a member's margin would not have been adequate
to cover the projected liquidation losses estimated from the member's
settlement activity based on the backtesting results. Backtesting
deficiencies highlight exposure that could subject FICC to potential
losses in the event of a member default. FICC states that it
investigates the cause(s) of any backtesting deficiencies to determine
whether there is an identifiable cause of repeat backtesting
deficiencies and/or whether multiple members may experience backtesting
deficiencies for the same underlying reason.\12\
---------------------------------------------------------------------------
\10\ See Notice of Filing, supra note 4, at 57485.
\11\ Backtesting is an ex-post comparison of actual outcomes
with expected outcomes derived from the use of margin models. See 17
CFR 240.17Ad-22(a)(1).
\12\ See id. at 57486.
---------------------------------------------------------------------------
FICC states that based on its regular review of the effectiveness
of its margin methodology, FICC has identified backtesting deficiencies
attributable to intraday margin fluctuations in certain member
portfolios as those members execute trades throughout the day.\13\
Specifically, since FICC generally novates and guarantees trades upon
comparison,\14\ a member's trading activity may result in coverage gaps
due to large un-margined intraday portfolio fluctuations that remain
unmitigated from the time of novation until the next scheduled margin
collection.\15\ FICC designed the Proposed Rule Change to mitigate such
exposure.
---------------------------------------------------------------------------
\13\ See id. at 57487.
\14\ Trade comparison consists of the reporting, validating, and
in some cases, matching by FICC of the long and short sides of a
securities trade to ensure that the details of such trade are in
agreement between the parties. See GSD Rule 5, supra note 5.
\15\ See Notice of Filing, supra note 4, at 57486.
---------------------------------------------------------------------------
III. Description of the Proposed Rule Change
FICC proposes to add a new margin component, the Portfolio
Differential Charge (``PD Charge''), to its methodology for calculating
members' margin. FICC designed the PD Charge to help mitigate the risks
posed to FICC by the variability of clearing activity submitted by
members to GSD throughout the day, by measuring the historical period-
over-period increases in the VaR Charge of a member over a given time-
period.\16\ FICC would calculate the PD Charge twice a day, and if
applicable, add the PD Charge to the calculation of the member's
margin.
---------------------------------------------------------------------------
\16\ See id. The proposed PD Charge is different from the ISFD
because the PD Charge is meant to capture the risks presented by the
unpredictability of a member's historical trading activity, as
measured, in part, by the variability in a member's VaR Charge over
the look-back period; by contrast, the ISFD is meant to capture the
intraday volatility risks presented by the existing net unsettled
positions in a member's portfolio. See id.
---------------------------------------------------------------------------
Specifically, in determining the PD Charge, FICC would take into
account the historical period-over-period increases between the (1)
start-of-day and intraday VaR components, and (2) intraday and end-of-
day VaR components, respectively, of a member's margin over a look-back
period of no less than 100 days, with a decay factor of no greater than
1.\17\ FICC would calculate the PD Charge to equal the exponentially
weighted moving average of such changes to the member's VaR Charge
during the look-back period, times a multiplier that is no less than
one and no greater than three, as determined by FICC from time to time
based on backtesting results.\18\ The use of this type of average means
that FICC would use an exponentially weighted
[[Page 67396]]
array of VaR Charges, the result of which is to emphasize more recent
observations in determining the PD Charge (that is, it places more
weight and significance on more recent data points).
---------------------------------------------------------------------------
\17\ Upon implementation of the Proposed Rule Change, FICC would
use a 100-day look-back period in conjunction with a decay factor of
0.97, which FICC believes would provide a sufficient amount of time
to reflect the current market conditions. As market conditions
shift, FICC may modify the look-back period and/or the decay factor
from time to time, subject to FICC's model governance process and
announced by FICC via an Important Notice posted on its website. See
id. at note 14.
\18\ FICC states that the uncertainty of the market condition
and/or changes in members' business models may lead to changes in
member activity patterns that would require a multiplier greater
than 1 be invoked from time to time. See id. at note 15. FICC would
determine whether to modify the multiplier based on the backtesting
results to evaluate the effectiveness of PD Charge as a mitigant of
the position change risk and may change the multiplier from time to
time to maintain the effectiveness of the PD Charge in generating
sufficient backtesting coverage. Changes to the multiplier would be
subject to FICC's model governance process and be announced by FICC
via an Important Notice posted to its website.
---------------------------------------------------------------------------
FICC believes the PD Charge would address the period-over-period
changes to members' VaR Charges, and thereby help mitigate the risks
posed to FICC by un-margined period-over-period fluctuations to member
portfolios resulting from trades that FICC novates and guarantees
during the coverage gap between margin collections.\19\ In support,
FICC cites an impact study it conducted that covers the period from
November 2021 to March 2023 (the ``Impact Study'').\20\ The Impact
Study shows, among other things, that if the PD Charge had been in
place from April 2022 through March 2023, the number of backtesting
deficiencies would have been reduced by 77 (from 498 to 421, or
approximately 15 percent) and the backtesting coverage for 44 members
(approximately 34 percent of the GSD membership) would have improved,
with 14 members who were below 99 percent coverage brought back to
above 99 percent.\21\
---------------------------------------------------------------------------
\19\ See id. at 57486.
\20\ As part of the Proposed Rule Change, FICC filed Exhibit
3a--Summary of Impact Analysis (i.e., the Impact Study), comparing,
on a member by member basis, the actual margin collections during
the period of the Impact Study to the hypothetical margin
collections FICC would have collected had the PD Charge been in
place during that period. The Impact Study shows that the rolling
12-month Clearing Fund requirement backtesting coverage ratio (from
April 2022 through March 2023) would have improved from 98.37
percent to 98.62 percent. The Impact Study also shows what the
average daily PD Charge would be on a per member basis. Pursuant to
17 CFR 240.24b-2, FICC requested confidential treatment of Exhibit
3b. For further discussion of the Impact Study, see the Notice of
Filing. See id. at 57487.
\21\ See id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \22\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) \23\ of the Act and Rules 17Ad-22(e)(4)(i),
(e)(6)(i), and (e)(6)(iii) thereunder.\24\
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78s(b)(2)(C).
\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \25\ requires that the rules of a
clearing agency, such as FICC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\26\ The Commission believes that the Proposed Rule Change
is consistent with Section 17A(b)(3)(F) of the Act for the reasons
stated below.
---------------------------------------------------------------------------
\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
---------------------------------------------------------------------------
As described above in Section III, FICC proposes to add the PD
Charge to the margin requirements that FICC may collect. As discussed
in more detail in Section IV.B infra, the Commission believes adding
the PD Charge to FICC's margin methodology would help ensure that FICC
collects sufficient margin to cover its credit exposure associated with
the variability of clearing activity submitted by members to GSD
throughout the day by measuring the historical period-over-period
increases in the VaR Charges of members over the look-back period. By
helping FICC to collect sufficient margin, the Proposed Rule Change
would better ensure that, in the event of a member default, FICC's
operation of its critical clearance and settlement services would not
be disrupted because of insufficient financial resources. Accordingly,
the Commission finds that the Proposed Rule Change should help FICC to
continue providing prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\27\
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
Moreover, as described above in Section II, FICC would access the
mutualized Clearing Fund should a defaulted member's own margin be
insufficient to satisfy losses to FICC caused by the liquidation of
that member's portfolio. Because FICC's proposal to adopt the PD Charge
should help ensure that FICC has collected sufficient margin from
members, the Proposed Rule Change should also help minimize the
likelihood that FICC would have to access the Clearing Fund, thereby
limiting non-defaulting members' exposure to mutualized losses. The
Commission believes that by helping to limit the exposure of FICC's
non-defaulting members to mutualized losses, the Proposed Rule Change
would help FICC assure the safeguarding of securities and funds which
are in its custody or control, consistent with Section 17A(b)(3)(F) of
the Act.\28\
---------------------------------------------------------------------------
\28\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency, such as FICC, establish, implement, maintain and
enforce written policies and procedures reasonably designed to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each participant fully with a
high degree of confidence.\29\ The Commission believes that the
Proposed Rule Change is consistent with Rule 17Ad-22(e)(4)(i) under the
Act for the reasons stated below.\30\
---------------------------------------------------------------------------
\29\ 17 CFR 240.17Ad-22(e)(4)(i).
\30\ Id.
---------------------------------------------------------------------------
The Commission agrees that FICC's proposal to add the PD Charge to
its margin methodology would enable FICC to better manage its credit
exposures to members by maintaining sufficient resources to cover those
credit exposures fully with a high degree of confidence. Specifically,
the proposed PD Charge would allow FICC to collect additional margin on
an intraday basis to help FICC effectively mitigate the risks
attributable to intraday margin fluctuations in certain member
portfolios as those members execute trades throughout the day between
margin collections. As discussed above in Section II, since FICC
generally novates and guarantees trades upon comparison, a member's
trading activity may result in coverage gaps due to large un-margined
intraday portfolio fluctuations that remain unmitigated from the time
of novation until the next scheduled margin collection. The PD Charge
would help FICC mitigate such exposure.
The Commission has reviewed and analyzed the materials filed by
FICC, including FICC's Impact Study and backtesting results submitted
confidentially,\31\ which show that had the PD Charge been in place
from April 2022 through March 2023, it would have reduced number of
backtesting deficiencies and thereby better enabled FICC to collect
margin sufficient to meet its coverage requirements. Accordingly,
[[Page 67397]]
for the reasons discussed above, the Commission finds that the Proposed
Rule Change is reasonably designed to better enable FICC to effectively
identify, measure, monitor, and manage its credit exposure 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
consistent with Rule 17Ad-22(e)(4)(i).\32\
---------------------------------------------------------------------------
\31\ See supra note 20.
\32\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
FICC, establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\33\ The Commission believes that the proposal is consistent
with Rule 17Ad-22(e)(6)(i) under the Act for the reason stated below.
---------------------------------------------------------------------------
\33\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
The Commission agrees that FICC's proposal to add the PD Charge to
its margin methodology would enable FICC to more effectively address
the risks posed to FICC by un-margined period-over-period fluctuations
to member portfolios resulting from trades that FICC novates and
guarantees during the coverage gap between margin collections. In its
filing materials, FICC provided information regarding the impacts of
the proposed PD Charge on its margin collection.\34\ Specifically, the
Impact Study shows that if the PD Charge had been in place from April
2022 through March 2023, the number of backtesting deficiencies would
have been reduced by 77 (from 498 to 421, or approximately 15 percent)
and the backtesting coverage for 44 members (approximately 34 percent
of the GSD membership) would have improved, with 14 members who were
below 99 percent coverage brought back to above 99 percent.\35\ The
Commission has reviewed and analyzed FICC's analysis and agrees that
adding the PD Charge to FICC's margin methodology would enable FICC to
more effectively mitigate the risks attributable to intraday margin
fluctuations arising out of member trading activity between margin
collections. As a result, implementing the Proposed Rule Change would
better enable FICC to collect margin amounts at levels commensurate
with FICC's intraday credit exposures to its members.
---------------------------------------------------------------------------
\34\ See supra note 20.
\35\ See id.
---------------------------------------------------------------------------
Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(6)(i) under the Act because it is
designed to assist FICC in maintaining a risk-based margin system that
considers, and produces margin levels commensurate with, the risks of
portfolios that experience significant volatility on an intraday
basis.\36\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------
D. Consistency With Rule 17Ad-22(e)(6)(iii) Under the Act
Rule17Ad-22(e)(6)(iii) under the Act requires that each covered
clearing agency, such as FICC, establish, implement, maintain and
enforce written policies and procedures reasonably designed to cover
its credit exposures to its participants by establishing a risk-based
margin system that, at a minimum, calculates margin sufficient to cover
its potential future exposure to participants in the interval between
the last margin collection and the close out of positions following a
participant default.\37\ The Commission believes that the proposal is
consistent with Rule 17Ad-22(e)(6)(iii) under the Act for the reason
stated below.
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(6)(iii).
---------------------------------------------------------------------------
As stated above in Section II, FICC's proposal to add the PD Charge
is designed to address FICC's exposure to its members attributable to
trading activity that takes place in the interval between margin
collections. Specifically, since FICC generally novates and guarantees
trades upon comparison, a member's trading activity may result in
coverage gaps due to large un-margined intraday portfolio fluctuations
that remain unmitigated between margin collections.\38\ As discussed
above in Section IV.C, based on the Commission's review of the filing
materials, the Commission agrees that that FICC's proposal to add the
PD Charge to its margin methodology should enable FICC to more
effectively address the risks posed to FICC by un-margined period-over-
period fluctuations to member portfolios resulting from trades that
FICC novates and guarantees during the coverage gap between margin
collections.
---------------------------------------------------------------------------
\38\ See Notice of Filing, supra note 4, at 57486.
---------------------------------------------------------------------------
Accordingly, the Commission finds the Proposed Rule Change is
consistent with Rule 17Ad-22(e)(6)(iii) under the Act because it is
designed to better enable FICC to cover its credit exposures to its
members by establishing a risk-based margin system that specifically
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.\39\
---------------------------------------------------------------------------
\39\ 17 CFR 240.17Ad-22(e)(6)(iii).
---------------------------------------------------------------------------
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change, as modified by Amendment No. 1, is consistent
with the requirements of the Act and in particular with the
requirements of Section 17A of the Act \40\ and the rules and
regulations promulgated thereunder.
---------------------------------------------------------------------------
\40\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\41\ that proposed rule change SR-FICC-2023-011, be, and hereby is,
approved.\42\
---------------------------------------------------------------------------
\41\ 15 U.S.C. 78s(b)(2).
\42\ In approving the Proposed Rule Change, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\43\
---------------------------------------------------------------------------
\43\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21338 Filed 9-28-23; 8:45 am]
BILLING CODE 8011-01-P
