Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Extension of Review Period of Advance Notice To Adopt a Minimum Margin Amount at GSD, 18981-18990 [2024-05487]
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Federal Register / Vol. 89, No. 52 / Friday, March 15, 2024 / Notices
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• Send an email to rule-comments@
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NYSEARCA–2024–21 on the subject
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SR–SR–NYSEARCA–2024–21 and
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5, 2024.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–05485 Filed 3–14–24; 8:45 am]
BILLING CODE 8011–01–P
16 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–563, OMB Control No.
3235–0694]
Proposed Collection; Comment
Request; Extension: Rule 17g–10 and
Form ABS Due Diligence–15E
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities
and Exchange Commission
(‘‘Commission’’) is soliciting comments
on the existing collection of information
provided for in Rule 17g–10 and Form
ABS Due Diligence–15E (17 CFR
240.17g–10 and 17 CFR 249b.500) under
the Securities Exchange Act of 1934
(‘‘Exchange Act’’) (15 U.S.C. 78a et seq.).
The Commission plans to submit this
existing collection of information to the
Office of Management and Budget for
extension and approval.
Rule 17g–10 requires a provider of
third-party due diligence services to
provide the written certification
required by Section 15E(s)(4) of the
Exchange Act on Form ABS Due
Diligence–15E. Based on Commission
staff’s experience, it is estimated that
third-party due diligence service
providers would be required to spend,
on average, 0.20 hours to complete and
transmit Form ABS Due Diligence–15E,
for a total annual burden of 470 hours.1
The cost for a compliance manager to
complete and submit Form ABS Due
Diligence–15E pursuant to Rule 17g–10
is estimated at $372 per hour,2 resulting
in an industry-wide annual internal cost
to third-party service providers of
$175,000 per year.
Written comments are invited on: (a)
whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Commission, including whether the
information shall have practical utility;
1 This figure is calculated by multiplying the per
year average number of offerings of asset-backed
securities, as the term is defined in Section 3(a)(79)
of the Exchange Act, which was estimated at 1,410
offerings, by the hour burden to complete and
transmit Form ABS Due Diligence–15E, estimated at
0.20 hours (1,410 offerings × 0.20 hours = 470
hours).
2 The $372 figure for a compliance manager is
based on SIFMA’s Management & Professional
Earnings in the Securities Industry 2013, modified
by Commission staff to account for an 1,800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead,
as adjusted for inflation using the Bureau of Labor
Statistics’ CPI Inflation Calculator.
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(b) the accuracy of the Commission’s
estimates of the burden of the proposed
collection of information; (c) ways to
enhance the quality, utility, and clarity
of the information on respondents; and
(d) ways to minimize the burden of the
collection of information on
respondents, including through the use
of automated collection techniques or
other forms of information technology.
Consideration will be given to
comments and suggestions submitted by
May 14, 2024.
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. Please direct your
written comments to: Dave Bottom,
Director/Chief Information Officer,
Securities and Exchange Commission, c/
o John Pezzullo, 100 F St. NE,
Washington, DC 20549 or send an email
to: PRA_Mailbox@sec.gov.
Dated: March 12, 2024.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–05542 Filed 3–14–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–99712; File No. SR–FICC–
2024–801]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing and Extension of Review Period
of Advance Notice To Adopt a
Minimum Margin Amount at GSD
March 11, 2024.
Pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’) 1 and Rule
19b–4(n)(1)(i) under the Securities
Exchange Act of 1934 (‘‘Act’’),2 notice is
hereby given that on February 27, 2024,
Fixed Income Clearing Corporation
(‘‘FICC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the advance notice SR–FICC–2024–801
(‘‘Advance Notice’’) as described in
Items I, II and III below, which Items
have been prepared primarily by the
clearing agency.3 The Commission is
1 12
U.S.C. 5465(e)(1).
CFR 240.19b–4(n)(1)(i).
3 On February 27, 2024, FICC filed this Advance
Notice as a proposed rule change (SR–FICC–2024–
003) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule
19b–4 thereunder, 17 CFR 240.19b–4. A copy of the
2 17
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Federal Register / Vol. 89, No. 52 / Friday, March 15, 2024 / Notices
publishing this notice to solicit
comments on the Advance Notice from
interested persons and to extend the
review period of the Advance Notice.
I. Clearing Agency’s Statement of the
Terms of Substance of the Advance
Notice
This Advance Notice consists of
amendments to FICC’s Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘GSD Rules’’) 4 in order to (1) enhance
the VaR Floor by incorporating a
‘‘Minimum Margin Amount’’ and (2)
expand the application of the enhanced
VaR Floor to include Margin Proxy, as
described in greater detail below.
The proposed rule change would
necessitate changes to the Methodology
Document—GSD Initial Market Risk
Margin Model (the ‘‘QRM
Methodology’’), which is filed as Exhibit
5b.5 FICC is requesting confidential
treatment of the QRM Methodology and
has filed it separately with the
Commission.6
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II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Advance Notice
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the Advance Notice and discussed any
comments it received on the Advance
Notice. 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 and B below, of the most
significant aspects of such statements.
proposed rule change is available at www.dtcc.com/
legal/sec-rule-filings.
4 Terms not defined herein are defined in the GSD
Rules, available at www.dtcc.com/legal/rules-andprocedures.
5 The QRM Methodology was filed as a
confidential exhibit as part of proposed rule change
SR–FICC–2018–001 (the ‘‘VaR Filing’’). See
Securities Exchange Act Release No. 83362 (June 1,
2018), 83 FR 26514 (June 7, 2018) (SR–FICC–2018–
001) (‘‘VaR Filing Approval Order’’). FICC also filed
the VaR Filing proposal as an advance notice
pursuant to Section 806(e)(1) of the Payment,
Clearing, and Settlement Supervision Act of 2010
(12 U.S.C. 5465(e)(1) and Rule 19b–4(n)(1)(i) under
the Act (17 CFR 240.19b–4(n)(1)(i)), with respect to
which the Commission issued a Notice of No
Objection. See Securities Exchange Act Release No.
83223 (May 11, 2018), 83 FR 23020 (May 17, 2018)
(SR–FICC–2018–801). The QRM Methodology has
been subsequently amended following the VaR
Filing Approval Order. See Securities Exchange Act
Release Nos. 85944 (May 24, 2019), 84 FR 25315
(May 31, 2019) (SR–FICC–2019–001), 90182 (Oct.
14, 2020), 85 FR 66630 (Oct. 20, 2020) (SR–FICC–
2020–009), 93234 (Oct. 1, 2021), 86 FR 55891 (Oct.
7, 2021) (SR–FICC–2021–007), 95605 (Aug. 25,
2022), 87 FR 53522 (Aug. 31, 2022) (SR–FICC–
2022–005), 97342 (Apr. 21, 2023), 88 FR 25721
(Apr. 27, 2023) (SR–FICC–2023–003), and 99447
(Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR–
FICC–2024–001).
6 17 CFR 240.24b–2.
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(A) Clearing Agency’s Statement on
Comments on the Advance Notice
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. FICC
reserves the right not to respond to any
comments received.
(B) Advance Notice Filed Pursuant to
Section 806(e) of the Clearing
Supervision Act
Nature of the Proposed Change
FICC is proposing to enhance the VaR
Floor by incorporating a Minimum
Margin Amount in order to supplement
the VaR model and improve its
responsiveness and resilience to
extreme market volatility. Specifically,
FICC is proposing to modify the VaR
Floor and the corresponding description
in the GSD Rules to incorporate a
Minimum Margin Amount. In addition,
FICC is proposing to expand the
application of the enhanced VaR Floor
to include Margin Proxy. The proposed
change would necessitate changes to the
QRM Methodology.
FICC has observed extreme market
volatility in the fixed income market
due to monetary policy changes,
inflation, and recession fears. The
extreme market volatility has led to
greater risk exposures for FICC.
Specifically, the extreme market
volatilities during the two arguably most
stressful market periods, i.e., the COVID
period during March of 2020 and the
successive interest rate hikes that began
in March 2022, have led to market price
changes that exceeded the VaR model’s
projections, which yielded insufficient
VaR Charges. As a result, FICC’s VaR
backtesting metrics fell below the
performance target due to
unprecedented levels of extreme market
volatility. This highlighted the need for
FICC to enhance its VaR model so that
it can better respond to extreme market
volatility.
In order to better manage its risk
exposures during extreme market
volatility events, FICC is proposing to
adopt a Minimum Margin Amount that
would be applied as a minimum
volatility calculation to ensure that FICC
calculates sufficient margin to cover its
risk exposures, particularly during
extreme market volatility. The proposed
Minimum Margin Amount would be
incorporated into the VaR Floor to
supplement the VaR model and enhance
its responsiveness to extreme market
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volatility. As proposed, the Minimum
Margin Amount is designed to improve
the margin backtesting performance
during periods of heightened market
volatility by maintaining a VaR Charge
that is appropriately calibrated to reflect
the current market volatility. The
proposed Minimum Margin Amount
aims to enhance backtesting coverage
when there are potential VaR model
performance challenges, particularly
when securities price changes
significantly exceed those implied by
the VaR model risk factors, as observed
during the recent periods of extreme
market volatility. FICC believes the
proposed Minimum Margin Amount
would provide a more reliable estimate
for the portfolio risk level when current
market conditions significantly deviate
from historical observations.
The proposed Minimum Margin
Amount would be determined using
historical price returns to represent risk
along with amounts calculated (i) using
a filtered historical simulation
approach, (ii) using a haircut method,
and (iii) to incorporate other risk factors.
By using a filtered historical simulation
approach in which historical returns are
scaled to current market volatility, the
proposed Minimum Margin Amount
would operate as a floor to the VaR
Charge to improve the responsiveness of
the VaR model to extreme volatility.
Because the use of historical price
return-based risk representation is not
dependent on any sensitivity data
vendor, it would allow the proposed
Minimum Margin Amount to also
operate as a floor to the Margin Proxy
and improve the responsiveness of
Margin Proxy to extreme volatility.
As a result of this proposal, Members
may experience increases in their
Required Fund Deposits to the Clearing
Fund. Based on an impact study
conducted by FICC, on average, at the
Member level, the proposed Minimum
Margin Amount would have increased
the SOD VaR Charge by approximately
$22.45 million, or 17.69%, and the noon
VaR Charge by approximately $23.22
million, or 17.44%, over a 2-year impact
study period.
Background
FICC, through GSD, serves as a central
counterparty and provider of clearance
and settlement services for transactions
in the U.S. government securities, as
well as repurchase and reverse
repurchase transactions involving U.S.
government securities.7 As part of its
7 GSD also clears and settles certain transactions
on securities issued or guaranteed by U.S.
government agencies and government sponsored
enterprises.
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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 GSD Rules.8 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
liquidating a Member’s portfolio in the
event FICC ceases to act for that Member
(hereinafter referred to as a ‘‘default’’).9
The aggregate amount of all Members’
Required Fund Deposit constitutes the
Clearing Fund. FICC would access the
Clearing Fund should a defaulting
Member’s own Required Fund Deposit
be insufficient to satisfy losses to FICC
caused by the liquidation of that
Member’s portfolio.
FICC 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. For example,
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,
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8 See
GSD Rule 4 (Clearing Fund and Loss
Allocation), supra note 4. 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
240.17Ad–22(e)(4).
9 The GSD Rules identify when FICC may cease
to act for a Member and the types of actions FICC
may take. For example, FICC may suspend a firm’s
membership with FICC or prohibit or limit a
Member’s access to FICC’s services in the event that
Member defaults on a financial or other obligation
to FICC. See GSD Rule 21 (Restrictions on Access
to Services) of the GSD Rules, supra note 4.
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 (Aug.
25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR–FICC–
2017–014), 84458 (Oct. 19, 2018), 83 FR 53925 (Oct.
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), 94271 (Feb. 17, 2022),
87 FR 10411 (Feb. 24, 2022) (SR–FICC–2022–001),
and 97890 (July 13, 2023), 88 FR 46287 (July 19,
2023) (SR–FICC–2023–008).
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 4 (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 GSD Clearing Fund.
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using the actual positions in the
Member’s portfolio(s) 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 and highlights
exposure that could subject FICC to
potential losses in the event that a
Member defaults.
FICC investigates the cause(s) of any
backtesting deficiencies and determines
if there is an identifiable cause of repeat
backtesting deficiencies. FICC also
evaluates whether multiple Members
may experience backtesting deficiencies
for the same underlying reason.
Pursuant to the GSD Rules, each
Member’s Required Fund Deposit
amount consists of a number of
applicable components, each of which
is calculated to address specific risks
faced by FICC, as identified within the
GSD Rules.12 These components
include the VaR Charge, Blackout
Period Exposure Adjustment,
Backtesting Charge, Holiday Charge,
Margin Liquidity Adjustment Charge,
special charge, and Portfolio Differential
Charge.13 The VaR Charge generally
comprises the largest portion of a
Member’s Required Fund Deposit
amount.
VaR Charge
The VaR Charge is based on the
potential price volatility of unsettled
positions using a sensitivity-based
Value-at-Risk (VaR) methodology. The
VaR methodology provides an estimate
of the possible losses for a given
portfolio based on: (1) confidence level,
(2) a time horizon and (3) historical
market volatility. The VaR methodology
is intended to capture the risks related
to market price that are associated with
the Net Unsettled Positions in a
Member’s Margin Portfolios. This riskbased margin methodology is designed
to project the potential losses that could
occur in connection with the liquidation
of a defaulting Member’s Margin
Portfolio, assuming a Margin Portfolio
would take three days to liquidate in
normal market conditions. The
projected liquidation gains or losses are
used to determine the amount of the
VaR Charge to each Margin Portfolio,
which is calculated to capture the
market price risk 14 associated with each
12 Supra
note 4.
GSD Rule 4 (Clearing Fund and Loss
Allocation), Section 1b. Supra note 4.
14 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.
13 See
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Member’s Margin Portfolio(s) at a 99%
confidence level.
FICC’s VaR model is designed to
provide a margin calculation that covers
the market risk in a Member’s Margin
Portfolio. The VaR model calculates the
risk profile of each Member’s Margin
Portfolio by applying certain
representative risk factors to measure
the degree of responsiveness of the
Margin Portfolio’s value to the changes
of these risk factors over a historical
lookback period of at least 10 years that
may be supplemented with an
additional stressed period.
The VaR model has been shown to
perform well in low to moderate
volatility markets. From January 2013 to
March 2020, the VaR model has
generally performed above the 99%
performance target, with deterioration
in backtesting coverage only during the
two arguably most stressful market
periods, i.e., the COVID period during
March of 2020 and the successive
interest rate hikes that began in March
2022. The market events during these
two stressful periods, including
monetary policy changes, inflation and
recession fears, have resulted in
significant market volatility in the fixed
income market that exceeded the 99percentile of the observed historical
data set. Specifically, the extreme
market volatilities during these two
periods have led to market price
changes that exceeded the VaR model’s
projections, which yielded insufficient
VaR Charges. As a result, FICC’s VaR
backtesting metrics fell below the
performance target due to
unprecedented levels of extreme market
volatility. This highlighted the need for
FICC to enhance its VaR model so that
it can better respond to extreme market
volatility. Accordingly, FICC is
proposing changes to the VaR Floor that
FICC believes would mitigate the risk of
potential underperformance of its VaR
model under extreme market volatility.
Current VaR Floor
On June 1, 2018, the Commission
approved FICC’s VaR Filing to make
changes to GSD’s method of calculating
a Member’s Required Fund Deposit
amount, including the VaR Charge.15
The VaR Filing amended the definition
of VaR Charge to, among other things,
incorporate the VaR Floor.16 FICC
established the VaR Floor to address the
risk that in a long/short portfolio the
VaR model could calculate a VaR
Charge that is erroneously low where
15 See
VaR Filing Approval Order, supra note 5.
term ‘‘VaR Floor’’ is currently defined
within the definition of VaR Charge. See GSD Rule
1 (Definitions), supra note 4.
16 The
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the gross market value of unsettled
positions in a Member’s portfolio is high
and the cost of liquidation in the event
of the Member default is also high. This
is likely to occur when the VaR model
applies substantial risk offsets among
long and short unsettled positions in
different classes of securities that have
a high degree of historical price
correlation.17 When this high degree of
historical price correlations does not
apply as a result of changing market
conditions, the VaR Charge derived
from the VaR model can be inadequate,
and the VaR Floor would then be
applied by FICC to mitigate such risk.
Currently, the VaR Floor is based
upon the market value of the gross
unsettled positions in the Member’s
portfolio. The VaR Floor is determined
by multiplying the absolute value of the
sum of Net Long Positions and Net
Short Positions of Eligible Securities,
grouped by product and remaining
maturity, by a percentage designated by
FICC from time to time for such group.
For U.S. Treasury and agency securities,
such percentage shall be a fraction, no
less than 10%, of the historical
minimum volatility of a benchmark
fixed income index for such group by
product and remaining maturity. For
mortgage-backed securities, such
percentage shall be a fixed percentage
that is no less than 0.05%.18
The current VaR Floor is not designed
to address the risk of potential
underperformance of the VaR model
under extreme market volatility.
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Incorporate a Minimum Margin Amount
Into the VaR Floor
In order to mitigate the risk of
potential underperformance of its VaR
model under extreme market volatility,
FICC proposes to incorporate a
Minimum Margin Amount into the VaR
Floor to supplement the VaR model and
enhance its responsiveness to extreme
market volatility. FICC believes this
proposal would complement and
improve the VaR model performance
during stressed market conditions.
Specifically, FICC believes this proposal
would improve the margin backtesting
performance during periods of
heightened market volatility by
maintaining a VaR Charge that is
appropriately calibrated to reflect the
current market volatility.
17 As an example, certain securities may have
highly correlated historical price returns, but if
market conditions were to substantially change,
these historical correlations could break down,
leading to model-generated offsets that could not
adequately capture a portfolio’s risk.
18 See ‘‘VaR Charge’’ definition in GSD Rule 1
(Definitions). Supra note 4.
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FICC is proposing to introduce a new
calculation called the ‘‘Minimum
Margin Amount’’ to complement the
existing VaR Floor in the GSD Rules.
The Minimum Margin Amount would
enhance backtesting coverage when
there are potential VaR model
performance challenges, particularly
when securities price changes
significantly exceed those implied by
the VaR model risk factors, as observed
during the recent periods of extreme
market volatility. FICC believes the
proposed Minimum Margin Amount
would provide a more reliable estimate
for the portfolio risk level when current
market conditions significantly deviate
from historical observations.
The Minimum Margin Amount would
be defined in the GSD Rules as, with
respect to each Margin Portfolio, a
minimum volatility calculation for
specified Net Unsettled Positions of a
Netting Member as of the time of such
calculation. The proposed definition
would provide that the Minimum
Margin Amount shall use historical
price returns to represent risk 19 and be
calculated as the sum of the following:
(a) amounts calculated using a filtered
historical simulation (‘‘FHS’’)
approach 20 to assess volatility by
scaling historical market price returns to
current market volatility, with market
volatility being measured by applying
exponentially weighted moving average
to the historical market price returns
with a decay factor between 0.93 and
0.99, as determined by FICC from time
to time based on sensitivity analysis,
macroeconomic conditions, and/or
backtesting performance, (b) amounts
calculated using a haircut method to
measure the risk exposure of those
securities that lack sufficient historical
price return data, (c) amounts calculated
to incorporate risks related to (i) repo
interest volatility (‘‘repo interest
19 This proposed approach is referred to as the
‘‘price return-based risk representation’’ in the QRM
Methodology. Given the availability and
accessibility of historical price returns data, FICC
believes the proposed approach would help
minimize and diversify FICC’s risk exposure from
external data vendors.
20 The FHS method differs from the historical
simulation method by incorporating the volatilities
of historical price returns as a crucial element. In
particular, the FHS method constructs the filtered
historical price returns in two steps: first,
‘‘devolatilizing’’ the historical price returns by
dividing them by a volatility estimate for the day
of the price return, and second, ‘‘revolatilizing’’ the
devolatilized price returns by multiplying them by
a volatility estimate based on the current market.
For additional background on the FHS method, see
Filtered historical simulation Value-at-Risk models
and their competitors, Pedro Gurrola-Perez and
David Murphy, Bank of England, March 2015, at
www.bankofengland.co.uk/working-paper/2015/
filtered-historical-simulation-value-at-risk-modelsand-their-competitors.
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volatility charge’’) 21 and (ii) transaction
costs related to bid-ask spread in the
market that could be incurred when
liquidating a portfolio (‘‘bid-ask spread
risk charge’’).22 In addition, the
proposed definition would require FICC
to provide Members with at a minimum
one Business Day advance notice of any
change to the decay factor via an
Important Notice.23
FICC is proposing to revise the
definition of the VaR Floor to
incorporate the Minimum Margin
Amount, such that the VaR Floor would
be the greater of (i) the VaR Floor
Percentage Amount and (ii) the
Minimum Margin Amount.
The ‘‘VaR Floor Percentage Amount’’
would be the new defined term used to
describe the current VaR Floor
percentage calculation in the GSD
Rules. This rule change is not proposing
to change the VaR Floor percentage or
the manner in which this component is
calculated.
As proposed, the Minimum Margin
Amount would be utilized as the VaR
Charge for a Member’s Margin Portfolio
when it is greater than the current VaR
Charge of the Margin Portfolio and the
VaR Floor Percentage Amount.
Under the proposed changes to the
QRM Methodology, the Minimum
Margin Amount would use a price
return-based risk representation (i.e.,
use historical price returns to represent
risk) 24 and be calculated as the sum of
(i) amounts calculated using a FHS
method that scales historical market
price returns to current market
volatility, (ii) amounts calculated using
a haircut method for securities that lack
sufficient historical price return data,
21 The ‘‘repo interest volatility charge’’ is a
component of the VaR Charge that is designed to
address repo interest volatility. The repo interest
volatility charge is calculated based on internally
constructed repo interest rate indices. This rule
change is proposing to also include the repo interest
volatility charge as a component of the Minimum
Margin Amount; however, it is not proposing to
change the repo interest volatility charge or the
manner in which this component is calculated.
22 The ‘‘bid-ask spread risk charge’’ is a
component of the VaR Charge that is designed to
address transaction costs related to bid-ask spread
in the market that could be incurred when
liquidating a portfolio. This rule change is
proposing to also include the bid-ask spread risk
charge as a component of the Minimum Margin
Amount; however, it is not proposing to change the
bid-ask spread risk charge or the manner in which
this component is calculated.
23 Although the QRM Methodology is being
submitted as a confidential Exhibit 5b to this
proposal due to its proprietary content, FICC makes
available to Members a Value-at-Risk (VaR)
calculator that can be used to estimate their
Clearing Fund requirements based on their
portfolios.
24 Supra note 19.
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FHS Method
Following the FHS method, FICC
would first construct historical price
returns using certain mapped fixed
income securities benchmarks. As
proposed, the mapped fixed income
securities benchmarks to be used with
the FHS method when calculating the
Minimum Margin Amount in the QRM
Methodology would be Bloomberg
Treasury indexes for U.S. Treasury and
agency securities, Bloomberg TIPS
indexes for Treasury Inflation-Protected
Securities (‘‘TIPS’’), and to-beannounced (‘‘TBA’’) securities for
mortgage-backed securities (‘‘MBS’’)
pools. These benchmarks were selected
because their price movements
generally closely track those of the
securities mapped to them and that their
price history is generally readily
available and accessible.
After constructing historical price
returns, FICC would estimate a market
volatility associated with each historical
price return by applying exponentially
weighted moving average (‘‘EWMA’’) to
the historical price returns. The
historical price returns are then
‘‘devolatilized’’ by dividing them by the
corresponding EWMA volatilities to
obtain the residual returns. The residual
returns are then ‘‘revolatilized’’ by
multiplying them by the current EWMA
volatility to obtain the filtered returns.
The filtered return time series are
then used to simulate the profits and
losses of a Member’s Margin Portfolio
and derive the volatility of the Margin
Portfolio using the standard historical
simulation approach. In particular, each
security that is in a Member’s Margin
Portfolio would be mapped to a
respective fixed income securities
benchmark, as applicable, based on the
security’s asset class and remaining
maturity. The filtered returns of the
benchmark are used as the simulated
returns of the mapped security to
calculate the simulated profits and
losses of a Member’s Margin Portfolio.
The Minimum Margin Amount is then
calculated as the 99-percentile of the
simulated portfolio loss.
Haircut Method
Occasionally, a Member’s Margin
Portfolio(s) contain classes of securities
that reflect market price changes that are
not consistently related to historical
price moves. The value of these
securities is often uncertain because the
securities’ market volume varies widely,
thus the price histories are limited.
Because the volume and price
information for such securities are not
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robust, the FHS method would not
generate Minimum Margin Amounts
that adequately reflect the risk profile of
such securities. Accordingly, the
proposed changes to the QRM
Methodology would provide that the
Minimum Margin Amount would use a
haircut method to assess the market risk
of those securities that are more difficult
to simulate, for example, because of thin
trading history.
Specifically, the proposed haircut
method would be used for MBS pools
that are not TBA securities eligible,
floating rate notes and U.S. Treasury/
agency securities with remaining time to
maturities of less than or equal to one
year.
A haircut method would also be used
to size up the basis risk between an
agency security and the mapped U.S.
Treasury index to supplement the
historical market price moves generated
by the FHS method for agency securities
to reflect any residual risks between
agency securities and the mapped fixed
income securities benchmarks, i.e.,
Bloomberg Treasury indexes. Similarly,
a haircut method would be used to size
up the MBS pool/TBA basis risk to
address the residual risk for using TBA
price returns as proxies for MBS pool
returns used in the FHS method.
Minimum Margin Amount Calculation
FICC is proposing to modify the QRM
Methodology to specify that the
Minimum Margin Amount would use a
price return-based risk representation
and be calculated per Member Margin
Portfolio as the sum of (i), (ii), and (iii):
(i) FHS Method
(a) the amount calculated using
historical market price returns of
mapped fixed income securities
benchmarks derived based on the FHS
method.
(ii) Haircut Method
(a) the haircut charge for MBS pools
that are not TBA securities eligible,
(b) the supplemental haircut charge
for agency securities,
(c) the haircut charge for floating rate
notes and U.S. Treasury/agency
securities with remaining time to
maturities of less than or equal to one
year, and
(d) the supplemental basis haircut
charge for mortgage pool securities.
(iii) Additional Risk Factors
(a) the repo interest volatility
charge,25 and
(b) the bid-ask spread risk charge.26
25 Supra
26 Supra
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note 22.
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The mapped fixed income securities
benchmarks, historical market price
returns, parameters and volatility
assessments to be used to calculate the
Minimum Margin Amount would be
determined by FICC from time to time
in accordance with FICC’s model risk
management practices and governance
set forth in the Clearing Agency Model
Risk Management Framework.27
Minimum Margin Amount Parameters
The proposed Minimum Margin
Amount uses a lookback period for the
filtered historical simulation and a
decay factor for calculating the EWMA
volatility of the historical prices returns.
In particular, the lookback period of
the proposed Minimum Margin Amount
is the same as the lookback period used
for the VaR model, which is 10 years,
plus, to the extent applicable, a stressed
period. Consistent with the VaR
methodology outlined in the QRM
Methodology and pursuant to the model
performance monitoring required under
the Model Risk Management
Framework,28 the lookback period
would be analyzed to evaluate its
sensitivity and impact to the model
performance.
The decay factor in general affects (i)
whether and how the Minimum Margin
Amount would be invoked, (ii) the peak
level of margin increase or the degree of
procyclicality, and (iii) how quickly the
margin would fall back to pre-stress
levels. Similar to the lookback period,
the decay factor of the proposed
Minimum Margin Amount would also
be analyzed to evaluate its sensitivity
and impact to the model performance
pursuant to the model performance
monitoring required under the Model
Risk Management Framework.29 The
decay factor would be, as proposed,
between 0.93 and 0.99, and any update
thereto is expected to be an infrequent
event and would typically happen only
when there is an unprecedented market
volatility event which resulted in risk
exposures to FICC that cannot be
adequately mitigated by the then
calibrated decay factor. The decision to
update the decay factor would be based
on the above-mentioned sensitivity
analysis with considerations to factors,
such as the impact to the VaR Charges,
27 See Model Risk Management Framework, supra
note 10.
28 The Model Risk Management Framework
provides that all models undergo ongoing model
performance monitoring and backtesting which is
the process of (i) evaluating an active model’s
ongoing performance based on theoretical tests, (ii)
monitoring the model’s parameters through the use
of threshold indicators, and/or (iii) backtesting
using actual historical data/realizations to test a
VaR model’s predictive power. Supra note 10.
29 Supra note 28.
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macroeconomic conditions, and/or
backtesting performance. The initial
decay factor for the Minimum Margin
Amount calculation would be 0.97 but
may be adjusted as set forth above in
accordance with FICC’s model risk
management practices and governance
set forth in the Model Risk Management
Framework.30
The Model Risk Management
Framework would also require FICC to
conduct ongoing model performance
monitoring of the Minimum Margin
Amount methodology.31 FICC’s current
model performance monitoring
practices would provide for sensitivity
analysis of relevant model parameters
and assumptions to be conducted
monthly, or more frequently when
markets display high volatility. In
addition, FICC would monitor each
Member’s Required Fund Deposit and
the aggregate Clearing Fund
requirements versus the requirements
calculated by the Minimum Margin
Amount. Specifically, FICC would
review and assess the robustness of the
Required Fund Deposit inclusive of the
Minimum Margin Amount by
comparing the results versus the threeday profit and loss of each Member’s
Margin Portfolio based on actual market
price moves. Based on the results of the
sensitivity analysis and/or backtesting,
FICC could consider adjustments to the
Minimum Margin Amount, including
changing the decay factor as
appropriate. Any adjustment to the
Minimum Margin Amount calculation
would be subject to the model risk
management practices and governance
process set forth in the Model Risk
Management Framework.32
Expand Application of VaR Floor To
Include Margin Proxy
The GSD Margin Proxy methodology
is currently deployed as an alternative
volatility calculation in the event that
the requisite vendor data used for the
VaR model is unavailable for an
extended period of time.33 In
circumstances where the Margin Proxy
is applied by FICC, FICC is proposing to
have the VaR Floor operate as a floor for
the Margin Proxy. Specifically, FICC is
proposing to expand the application of
the VaR Floor to include Margin Proxy
so that if the Margin Proxy, when
deployed, is lower than the VaR Floor,
then the VaR Floor would be utilized as
30 See Model Risk Management Framework, supra
note 10.
31 See note 28.
32 See Model Risk Management Framework, supra
note 10.
33 FICC may deem such data to be unavailable
and deploy Margin Proxy when there are concerns
with the quality of data provided by the vendor.
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the VaR Charge with respect to a
Member’s Margin Portfolio. FICC
believes this proposed change would
enable Margin Proxy to be a more
effective risk mitigant under extreme
market volatility and heightened market
stress, thereby enhancing the overall
resilience of the FICC risk management.
Proposed GSD Rule Changes
In connection with incorporating the
Minimum Margin Amount into the VaR
Floor, FICC would modify the GSD
Rules to:
I. Add a definition of ‘‘Minimum
Margin Amount’’ and define it as, with
respect to each Margin Portfolio, a
minimum volatility calculation for
specified Net Unsettled Positions of a
Member as of the time of such
calculation. The definition would
provide that the Minimum Margin
Amount shall use historical price
returns to represent risk and be
calculated as the sum of the following:
(a) amounts calculated using a filtered
historical simulation approach to assess
volatility by scaling historical market
price returns to current market
volatility, with market volatility being
measured by applying exponentially
weighted moving average to the
historical market price returns with a
decay factor between 0.93 and 0.99, as
determined by FICC from time to time
based on sensitivity analysis,
macroeconomic conditions, and/or
backtesting performance, (b) amounts
calculated using a haircut method to
measure the risk exposure of those
securities that lack sufficient historical
price return data, and (c) amounts
calculated to incorporate risks related to
(i) repo interest volatility (‘‘repo interest
volatility charge’’) and (ii) transaction
costs related to bid-ask spread in the
market that could be incurred when
liquidating a portfolio (‘‘bid-ask spread
risk charge’’). In addition, the proposed
definition would require FICC to
provide Members with at a minimum
one Business Day advance notice of any
change to the decay factor via an
Important Notice;
II. Add a definition of ‘‘VaR Floor
Percentage Amount’’ which would be
defined the same as the current
calculation for the VaR Floor percentage
with non-substantive modifications to
reflect that the calculated amount is a
separate defined term; and
III. Move the defined term VaR Floor
out of the definition of VaR Charge and
define it as the greater of (i) the VaR
Floor Percentage Amount and (ii) the
Minimum Margin Amount.
In connection with applying the VaR
Floor to include Margin Proxy, FICC
would modify the GSD Rules to revise
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the definition of ‘‘VaR Charge’’ by
adding a reference to the Margin Proxy
with respect to the VaR Floor
application and clarifying that VaR
Charge is calculated at the Margin
Portfolio-level.
Proposed QRM Methodology Changes
In connection with incorporating the
Minimum Margin Amount into the VaR
Floor, FICC would modify the QRM
Methodology to:
I. Describe how the Minimum Margin
Amount, as defined in the GSD Rules,
would be calculated, including:
(i) Establishing mapped fixed income
securities benchmarks for purposes of
the calculation using historical market
price returns of such securities with the
FHS method;
(ii) Using a haircut method to assess
the market risk of certain securities that
are more difficult to simulate due to
thin trading history; and
(iii) Detailing other risk factors that
would be incorporated in the
calculation.
II. Describe the developmental
evidence and impacts to backtesting
performance and margin charges
relating to Minimum Margin Amount.
In connection with applying the VaR
Floor to include Margin Proxy, FICC
would modify the QRM Methodology to
reflect that the Minimum Margin
Amount would serve as a floor for the
Margin Proxy.
In addition, FICC would modify the
QRM Methodology to:
I. Make certain clarifying changes to
the QRM Methodology to delete an outof-date description of the Margin Proxy
being used as an adjustment factor to
the VaR,34 enhance the description of
the VaR Floor Percentage Amount, and
update the list of key model parameters
to reflect the Margin Proxy lookback
period; and
II. Make certain technical changes to
the QRM Methodology to renumber
sections and tables, correct grammatical
and typographical errors, delete out-ofdate index names, and update certain
formula notations and section titles as
necessary.
Impact Study
FICC performed an impact study on
Members’ Margin Portfolios for the
period beginning July 1, 2021 through
June 30, 2023 (‘‘Impact Study
Period’).35 36 If the proposed rule
34 FICC currently does not use Margin Proxy as
an adjustment factor to the VaR and does not intend
to use it as such in the future.
35 GSD increased the minimum Required Fund
Deposit for Members to $1 million on Dec. 5, 2022
(see Securities Exchange Act Release No. 96136
(Oct. 24, 2022), 87 FR 65268 (Oct. 28, 2022) (SR–
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changes 37 had been in place during the
Impact Study Period compared to the
existing GSD Rules, the aggregate
average daily start-of-day (‘‘SOD’’) VaR
Charges would have increased by
approximately $2.9 billion or 13.89%,
the aggregate average daily noon VaR
Charges would have increased by
approximately $3.03 billion or 14.05%,
and the aggregate average daily
Backtesting Charges would have
decreased by approximately $622
million or 64.46%.
The impact study indicated that if the
proposed rule changes had been in
place, the VaR model backtesting
coverage would have increased from
approximately 98.86% to 99.46%
during the Impact Study Period.
Specifically, if the proposed rule
changes had been in place during the
Impact Study Period, the number of VaR
model backtesting deficiencies would
have been reduced by 443 (from 843 to
400, or approximately 53%).
The impact study also indicated that
if the proposed rule changes had been
in place, overall margin backtesting
coverage would have increased from
approximately 98.87% to 99.33%
during the Impact Study Period.
Specifically, if the proposed rule
changes had been in place during the
Impact Study Period, the number of
overall margin backtesting deficiencies
would have been reduced by 280 (from
685 to 405, or approximately 41%) and
the overall margin backtesting coverage
for 94 Members (approximately 72% of
the GSD membership) would have
improved with 36 Members who were
below 99% coverage would be brought
back to above 99%.
FICC–2022–006)); however, for the purpose of this
Impact Study, the $1 million minimum
Requirement Fund Deposit is assumed to be in
effect for the entirety of the Impact Study period.
36 GSD adopted a Portfolio Differential Charge
(‘‘PD Charge’’) as an additional component to the
GSD Required Fund Deposit on Oct. 30, 2023 (see
Securities Exchange Act Release No. 98494 (Sep.
25, 2023), 88 FR 67394 (Sep. 29, 2023) (SR–FICC–
2023–011)); however, for the purpose of this Impact
Study, the PD Charge is assumed to be in effect for
the entirety of the Impact Study period.
37 Margin Proxy was not deployed during the
Impact Study Period; however, if the proposed rule
changes had been in place and the Margin Proxy
were deployed during the Impact Study Period, the
aggregate average daily SOD VaR Charges would
have increased by approximately $4.2 billion or
20.98%. The impact study also indicated that if the
proposed rule changes had been in place and the
Margin Proxy were deployed, the VaR model
backtesting coverage would have increased from
approximately 98.17% to 99.38% during the Impact
Study Period. Specifically, if the proposed rule
changes had been in place and the Margin Proxy
were deployed during the Impact Study Period, the
number of the VaR model backtesting deficiencies
would have been reduced by 901 (from 1358 to 457,
or approximately 66.3%).
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Impacts to Members Over the Impact
Study Period
Anticipated Effect on and Management
of Risk
On average, at the Member level, the
proposed Minimum Margin Amount
would have increased the SOD VaR
Charge by approximately $22.45
million, or 17.69%, and the noon VaR
Charge by approximately $23.22
million, or 17.44%, over the Impact
Study Period. The largest average
percentage increase in SOD VaR Charge
for any Member would have been
approximately 66.88%, or $97,051
(0.21% of the Member’s average Net
Capital),38 and the largest average
percentage increase in noon VaR Charge
for any Member would have been
approximately 64.79%, or $61,613
(0.13% of the Member’s average Net
Capital). The largest average dollar
increase in SOD VaR Charge for any
Member would have been
approximately $268.35 million (0.34%
of the Member’s average Net Capital), or
19.05%, and the largest dollar increase
in noon VaR Charge for any Member
would have been approximately $288.57
million (1.07% of the Member’s average
Net Capital), or 13.65%. The top 10
Members based on the size of their
average SOD VaR Charges and average
noon VaR Charges would have
contributed approximately 51.84% and
53.63% of the aggregated SOD VaR
Charges and aggregated noon VaR
Charges, respectively, during the Impact
Study Period had the proposed
Minimum Margin Amount been in
place. The same Members would have
contributed to 49.86% and 51.48% of
the increase in aggregated SOD VaR
Charges and aggregated noon VaR
Charges, respectively, had the proposed
Minimum Margin Amount been in place
during the Impact Study Period.
FICC believes that the proposed
change, which consists of a proposal to
(i) modify the calculation of the VaR
Floor and the corresponding description
in the GSD Rules and QRM
Methodology to incorporate a Minimum
Margin Amount and (ii) expand the
application of the VaR Floor to include
Margin Proxy, would enable FICC to
better limit its exposure to Members
arising out of the activity in their
portfolios. As stated above, the
proposed change is designed to enhance
the GSD VaR model performance and
improve the backtesting coverage during
periods of extreme market volatility.
The proposed charge would help ensure
that FICC maintains an appropriate level
of margin to address its risk
management needs.
Specifically, the proposed rule change
seeks to remedy potential situations that
are described above where FICC’s VaR
model and/or Margin Proxy, including
the existing VaR Floor, does not respond
effectively to increased market volatility
and the VaR Charge amounts do not
achieve a 99% confidence level.
Therefore, by enabling FICC to collect
margin that more accurately reflects the
risk characteristics of its Members, the
proposal would enhance FICC’s risk
management capabilities.
By providing FICC with a more
effective limit on its exposures, the
proposed change would also mitigate
risk for Members because lowering the
risk profile for FICC would in turn
lower the risk exposure that Members
may have with respect to FICC in its
role as a central counterparty. Further,
the proposal is designed to meet FICC’s
risk management goals and its
regulatory obligations, as described
below.
Implementation Timeframe
FICC would implement the proposed
rule changes by no later than 60
Business Days after the later of the
approval of the related proposed rule
change filing 39 and no objection to the
advance notice by the Commission.
FICC would announce the effective date
of the proposed changes by an
Important Notice posted to its website.
38 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.
See GSD Rule 1 (Definitions), supra note 4.
39 FICC filed this advance notice as a proposed
rule change (File No. SR–FICC–2024–003) with the
Commission pursuant to Section 19(b)(1) of the Act,
15 U.S.C. 78s(b)(1), and Rule 19b–4 thereunder, 17
CFR 240.19b–4. A copy of the proposed rule change
is available at www.dtcc.com/legal/sec-rule-filings.
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Consistency With the Clearing
Supervision Act
Although Title VIII of the Dodd-Frank
Wall Street Reform and Consumer
Protection Act entitled the Payment,
Clearing, and Settlement Supervision
Act of 2010 (‘‘Clearing Supervision
Act’’) does not specify a standard of
review for an advance notice, its stated
purpose is instructive: to mitigate
systemic risk in the financial system
and promote financial stability by,
among other things, promoting uniform
risk management standards for
systemically important financial market
utilities and strengthening the liquidity
of systemically important financial
market utilities.40
40 12
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FICC believes that the proposal is
consistent with the Clearing
Supervision Act, specifically with the
risk management objectives and
principles of Section 805(b), and with
certain of the risk management
standards adopted by the Commission
pursuant to Section 805(a)(2), for the
reasons described below.
(i) Consistency With Section 805(b) of
the Clearing Supervision Act
Section 805(b) of the Clearing
Supervision Act 41 states that the
objectives and principles for the risk
management standards prescribed under
Section 805(a) shall be to, among other
things, promote robust risk
management, promote safety and
soundness, reduce systemic risks, and
support the stability of the broader
financial system. For the reasons
described below, FICC believes that the
proposed changes in this advance notice
are consistent with the objectives and
principles of the risk management
standards as described in Section 805(b)
of the Clearing Supervision Act.
FICC is proposing to (i) modify the
calculation of the VaR Floor and the
corresponding description in the GSD
Rules and QRM Methodology to
incorporate a Minimum Margin Amount
and (ii) expand the application of the
VaR Floor to include Margin Proxy, both
of which would enable FICC to better
limit its exposure to Members arising
out of the activity in their portfolios.
FICC believes these proposed changes
are consistent with promoting robust
risk management because the changes
would better enable FICC to limit its
exposure to Members in the event of a
Member default by collecting adequate
prefunded financial resources to cover
its potential losses resulting from the
default of a Member and the liquidation
of a defaulting Member’s portfolio.
Specifically, the proposed Minimum
Margin Amount would modify the VaR
Floor to cover circumstances, such as
extreme market volatility, where the
current VaR Charge calculation and the
VaR Floor are both lower than market
price volatility from corresponding
securities benchmarks. The proposed
changes are designed to more effectively
measure and address risk characteristics
in situations where the risk factors used
in the VaR method do not adequately
predict market price movements and
associated credit risk exposure. As
reflected in backtesting studies, FICC
believes the proposed changes would
appropriately limit FICC’s credit
exposure to Members in the event that
the VaR model yields too low a VaR
41 12
U.S.C. 5464(b).
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Charge in such situations. Such
backtesting studies indicate that the
aggregate average daily Backtesting
Charges would have decreased by
approximately $622 million or 64.46%
during the Impact Study Period, and the
overall margin backtesting coverage
(based on 12-month trailing backtesting)
would have improved from
approximately 98.87% to 99.33%
during the Impact Study Period if the
Minimum Margin Amount calculation
had been in place. Improving the overall
backtesting coverage level would help
FICC ensure that it maintains an
appropriate level of margin to address
its risk management needs.
The use of the Minimum Margin
Amount would reduce risk by allowing
FICC to calculate the exposure in each
portfolio using historical price returns
to represent risk along with amounts
calculated (i) using a FHS method that
scales historical market price returns to
current market volatility, (ii) using a
haircut method for those securities that
lack sufficient historical price return
data, and (iii) to incorporate other risk
factors. As reflected by backtesting
studies during the Impact Study Period,
using the FHS method would provide a
more reliable estimate than the FICC
VaR historical data set for the portfolio
risk level when current market
conditions deviate from historical
observations. Adding the Minimum
Margin Amount to the VaR Floor and
applying the VaR Floor to include
Margin Proxy would help to ensure that
the risk exposure during periods of
extreme market volatility is adequately
captured in the VaR Charges. FICC
believes that would help to ensure that
FICC continues to accurately calculate
and assess margin and in turn, collect
sufficient margin from its Members and
better enable FICC to limit its exposures
that could be incurred when liquidating
a portfolio.
The proposed change to expand the
application of VaR Floor to include
Margin Proxy would enable Margin
Proxy to be a more effective risk
mitigant under extreme market volatility
and heightened market stress. By
improving the effectiveness of Margin
Proxy as a risk mitigant under extreme
market volatility and heightened market
stress would help ensure that the
margin that FICC collects from Members
is sufficient to mitigate the credit
exposure presented by the Members.
For these reasons, FICC believes the
proposed changes would help to
promote GSD’s robust risk management,
which, in turn, is consistent with
reducing systemic risks and supporting
the stability of the broader financial
PO 00000
Frm 00101
Fmt 4703
Sfmt 4703
system, consistent with Section 805(b)
of the Clearing Supervision Act.42
FICC also believes the changes
proposed in this advance notice are
consistent with promoting safety and
soundness, which, in turn, is consistent
with reducing systemic risks and
supporting the stability of the broader
financial system, consistent with
Section 805(b) of the Clearing
Supervision Act.43 As described above,
the proposed changes are designed to
help ensure that FICC is collecting
adequate prefunded financial resources
to cover its potential losses resulting
from the default of a Member and the
liquidation of a defaulting Member’s
portfolio in times of extreme market
volatility. Because the proposed changes
would better position FICC to limit its
exposures to Members in the event of a
Member default, FICC believes the
proposed changes are consistent with
promoting safety and soundness, which,
in turn, is consistent with reducing
systemic risks and supporting the
stability of the broader financial system.
(ii) Consistency With 805(a)(2) of the
Clearing Supervision Act
Section 805(a)(2) of the Clearing
Supervision Act 44 authorizes the
Commission to prescribe risk
management standards for the payment,
clearing and settlement activities of
designated clearing entities, like FICC,
and financial institutions engaged in
designated activities for which the
Commission is the supervisory agency
or the appropriate financial regulator.
The Commission has adopted risk
management standards under Section
805(a)(2) of the Clearing Supervision
Act 45 and Section 17A of the Act 46 (the
risk management standards are referred
to as the ‘‘Covered Clearing Agency
Standards’’).47
The Covered Clearing Agency
Standards require registered clearing
agencies to establish, implement,
maintain, and enforce written policies
and procedures that are reasonably
designed to be consistent with the
minimum requirements for their
operations and risk management
practices on an ongoing basis.48 FICC
believes that this proposal is consistent
with Rules 17Ad–22(e)(4)(i) and
(e)(6)(i), each promulgated under the
Act,49 for the reasons described below.
42 Id.
43 Id.
44 12
U.S.C. 5464(a)(2).
45 Id.
46 15
47 17
U.S.C. 78q–1.
CFR 240.17Ad–22.
48 Id.
49 17
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Federal Register / Vol. 89, No. 52 / Friday, March 15, 2024 / Notices
Rule 17Ad–22(e)(4)(i) under the Act 50
requires a covered clearing agency to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to effectively
identify, measure, monitor, and manage
its credit exposures to participants and
those exposures arising from its
payment, clearing, and settlement
processes by maintaining sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence. 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 backtesting
studies, implementation of a Minimum
Margin Amount by changing the GSD
Rules and QRM Methodology as
described herein would allow FICC to
limit its credit exposures to Members in
the event that the current VaR model
yields too low a VaR Charge for such
portfolios and improve backtesting
performance. As indicated by the
backtesting studies, the aggregate
average daily SOD VaR Charges would
have increased by approximately $2.90
billion or 13.89%, the aggregate average
daily noon VaR Charges would have
increased by approximately $3.03
billion or 14.05%, the aggregate average
daily Backtesting Charges would have
decreased by approximately $622
million or 64.46% during the Impact
Study Period, and the overall margin
backtesting coverage (based on 12month trailing backtesting) would have
improved from approximately 98.87%
to 99.33% during the Impact Study
Period if the Minimum Margin Amount
calculation had been in place. By
identifying and providing for
appropriate VaR Charges, adding the
Minimum Margin Amount to the VaR
Floor would help to ensure that the risk
exposure during periods of extreme
market volatility is adequately
identified, measured and monitored.
Similarly, the proposed change to
expand the application of VaR Floor to
include Margin Proxy would enable
Margin Proxy to be a more effective risk
mitigant under extreme market volatility
and heightened market stress. By
improving the effectiveness of Margin
Proxy as a risk mitigant under extreme
market volatility and heightened market
stress would help ensure that the
margin that FICC collects from Members
is sufficient to mitigate the credit
exposure presented by the Members. As
a result, FICC believes that the proposal
would enhance FICC’s ability to
effectively identify, measure and
monitor its credit exposures and would
enhance its ability to maintain sufficient
financial resources to cover its credit
exposure to each participant fully with
a high degree of confidence, consistent
with the requirements of Rule 17Ad–
22(e)(4)(i) of the Act.51
Rule 17Ad–22(e)(6)(i) under the Act 52
requires a covered clearing agency to
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. FICC believes that the proposed
changes to adjust the VaR Floor to
include the Minimum Margin Amount
by changing the GSD Rules and QRM
Methodology as described herein are
consistent with the requirements of Rule
17Ad–22(e)(6)(i) cited above. The
Required Fund Deposits are made up of
risk-based components (as margin) that
are calculated and assessed daily to
limit FICC’s credit exposures to
Members. FICC is proposing changes
that are designed to more effectively
measure and address risk characteristics
in situations where the risk factors used
in the VaR method do not adequately
predict market price movements. As
reflected in backtesting studies, FICC
believes the proposed changes would
appropriately limit FICC’s credit
exposure to Members in the event that
the VaR model yields too low a VaR
Charge in such situations. Such
backtesting studies indicate that the
aggregate average daily SOD VaR
Charges would have increased by
approximately $2.90 billion or 13.89%,
the aggregate average daily noon VaR
Charges would have increased by
approximately $3.03 billion or 14.05%,
the aggregate average daily Backtesting
Charges would have decreased by
approximately $622 million or 64.46%
during the Impact Study Period, and the
overall margin backtesting coverage
(based on 12-month trailing backtesting)
would have improved from
approximately 98.87% to 99.33%
during the Impact Study Period if the
Minimum Margin Amount calculation
had been in place. By identifying and
providing for appropriate VaR Charges,
adding the Minimum Margin Amount to
the VaR Floor would help to ensure that
margin levels are commensurate with
the risk exposure of each portfolio
during periods of extreme market
volatility. Similarly, the proposed
change to expand the application of VaR
Floor to include Margin Proxy would
enable Margin Proxy to be a more
effective risk mitigant under extreme
market volatility and heightened market
stress. By improving the effectiveness of
Margin Proxy as a risk mitigant under
extreme market volatility and
heightened market stress would help
ensure that the margin that FICC
collects from Members is sufficient to
mitigate the credit exposure presented
by the Members. Overall, the proposed
changes would allow FICC to more
effectively address the risks presented
by Members. In this way, the proposed
changes enhance the ability of FICC to
produce margin levels commensurate
with the risks and particular attributes
of each relevant product, portfolio, and
market. As such, FICC believes that the
proposed changes are consistent with
the requirements of Rule 17Ad–
22(e)(6)(i) under the Act.53
III. Date of Effectiveness of the Advance
Notice, and Timing for Commission
Action
The proposed change may be
implemented if the Commission does
not object to the proposed change
within 60 days of the later of (i) the date
that the proposed change was filed with
the Commission or (ii) the date that any
additional information requested by the
Commission is received. The clearing
agency shall not implement the
proposed change if the Commission has
any objection to the proposed change.
The Commission may extend the
period for review by an additional 60
days if the proposed change raises novel
or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension. A proposed change may
be implemented in less than 60 days
from the date the advance notice is
filed, or the date further information
requested by the Commission is
received, if the Commission notifies the
clearing agency in writing that it does
not object to the proposed change and
authorizes the clearing agency to
implement the proposed change on an
earlier date, subject to any conditions
imposed by the Commission.
The clearing agency shall post notice
on its website of proposed changes that
are implemented.
The proposal shall not take effect
until all regulatory actions required
51 Id.
50 17
CFR 240.17Ad–22(e)(4)(i).
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53 Id.
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Federal Register / Vol. 89, No. 52 / Friday, March 15, 2024 / Notices
with respect to the proposal are
completed.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the Advance Notice
is consistent with the Clearing
Supervision Act. Comments may be
submitted by any of the following
methods:
Electronic Comments
• Use the Commission’s internet
comment form (www.sec.gov/rules/
sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FICC–2024–801 on the subject line.
Paper Comments
khammond on DSKJM1Z7X2PROD with NOTICES
• 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–2024–801. 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 (www.sec.gov/rules/
sro.shtml). Copies of the submission, all
subsequent amendments, all written
statements with respect to the Advance
Notice that are filed with the
Commission, and all written
communications relating to the Advance
Notice between the Commission and
any person, other than those that may be
withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will
be available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s website
(www.dtcc.com/legal/sec-rule-filings).
Do not include personal identifiable
information in submissions; you should
submit only information that you wish
to make available publicly. We may
redact in part or withhold entirely from
publication submitted material that is
obscene or subject to copyright
protection. All submissions should refer
to File Number SR–FICC–2024–801 and
should be submitted on or before April
5, 2024.
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V. Date and Timing for Commission
Action
Section 806(e)(1)(G) of the Clearing
Supervision Act provides that FICC may
implement the changes if it has not
received an objection to the proposed
changes within 60 days of the later of (i)
the date that the Commission receives
an advance notice or (ii) the date that
any additional information requested by
the Commission is received,54 unless
extended as described below.
Pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act, the
Commission may extend the review
period of an advance notice for an
additional 60 days, if the changes
proposed in the advance notice raise
novel or complex issues, subject to the
Commission providing the clearing
agency with prompt written notice of
the extension.55
Here, as the Commission has not
requested any additional information,
the date that is 60 days after OCC filed
the advance notice with the
Commission is April 27, 2024. However,
the Commission is extending the review
period of the Advance Notice for an
additional 60 days under Section
806(e)(1)(H) of the Clearing Supervision
Act 56 because the Commission finds the
Advance Notice is both novel and
complex, as discussed below.
The Commission believes that the
changes proposed in the Advance
Notice raise novel and complex issues.
Specifically, FICC developed this
proposal in response to extreme market
volatility experienced during the two
arguably most stressed market periods,
i.e., the pandemic-related volatility in
March 2020 and the successive interest
rate hikes that began in March 2022. As
noted above, these extreme market
volatility events led to market price
changes that exceeded the VaR model’s
projections, resulting in insufficient VaR
Charges and poor backtesting metrics.
Therefore, FICC has developed the
proposal described in the Advance
Notice to better manage its risk
exposures during extreme market
volatility events. Determining the
appropriate method to address this
particular set of circumstances in the
context of FICC’s margin model presents
novel and complex issues.
Accordingly, the Commission,
pursuant to Section 806(e)(1)(H) of the
Clearing Supervision Act,57 extends the
review period for an additional 60 days
so that the Commission shall have until
June 26, 2024 to issue an objection or
54 12
55 12
U.S.C. 5465(e)(1)(G).
U.S.C. 5465(e)(1)(H).
56 Id.
Frm 00103
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.58
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024–05487 Filed 3–14–24; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–399, OMB Control No.
3235–0456]
Submission for OMB Review;
Comment Request; Extension: Form
24F–2
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE, Washington, DC
20549–2736.
Notice is hereby given that pursuant
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520), the Securities
and Exchange Commission (the
‘‘Commission’’) has submitted to the
Office of Management and Budget a
request for extension of the previously
approved collection of information
discussed below.
Rule 24f–2 (17 CFR 270.24f–2) under
the Investment Company Act of 1940
(15 U.S.C. 80a) requires any open-end
management companies (‘‘mutual
funds’’), unit investment trusts
(‘‘UITs’’), registered closed-end
investment companies that make
periodic repurchase offers under rule
23c–3 under the Investment Company
Act [17 CFR 270.23c–3] (‘‘interval
funds’’), or face-amount certificate
companies (collectively, ‘‘funds’’)
deemed to have registered an indefinite
amount of securities to file, not later
than 90 days after the end of any fiscal
year in which it has publicly offered
such securities, Form 24F–2 (17 CFR
274.24) with the Commission. Form
24F–2 is the annual notice of securities
sold by funds that accompanies the
payment of registration fees with respect
to the securities sold during the fiscal
year.
The Commission estimates that 2,074
funds file Form 24F–2 on the required
annual basis. The average annual
burden per respondent for Form 24F–2
is estimated to be four hours. The total
annual burden for all respondents to
58 17 CFR 200.30–3(a)(91) and 17 CFR 200.30–
3(a)(94).
57 Id.
PO 00000
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FICC–2024–801.
All submissions should refer to File
Number SR–FICC–2024–801 and should
be submitted on or before April 5, 2024.
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]]>Agencies
[Federal Register Volume 89, Number 52 (Friday, March 15, 2024)]
[Notices]
[Pages 18981-18990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-05487]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99712; File No. SR-FICC-2024-801]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing and Extension of Review Period of Advance Notice To
Adopt a Minimum Margin Amount at GSD
March 11, 2024.
Pursuant to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on
February 27, 2024, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice SR-FICC-2024-801 (``Advance Notice'') as described in
Items I, II and III below, which Items have been prepared primarily by
the clearing agency.\3\ The Commission is
[[Page 18982]]
publishing this notice to solicit comments on the Advance Notice from
interested persons and to extend the review period of the Advance
Notice.
---------------------------------------------------------------------------
\1\ 12 U.S.C. 5465(e)(1).
\2\ 17 CFR 240.19b-4(n)(1)(i).
\3\ On February 27, 2024, FICC filed this Advance Notice as a
proposed rule change (SR-FICC-2024-003) with the Commission pursuant
to Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4. A copy of the proposed rule change is
available at www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice
This Advance Notice consists of amendments to FICC's Government
Securities Division (``GSD'') Rulebook (``GSD Rules'') \4\ in order to
(1) enhance the VaR Floor by incorporating a ``Minimum Margin Amount''
and (2) expand the application of the enhanced VaR Floor to include
Margin Proxy, as described in greater detail below.
---------------------------------------------------------------------------
\4\ Terms not defined herein are defined in the GSD Rules,
available at www.dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------
The proposed rule change would necessitate changes to the
Methodology Document--GSD Initial Market Risk Margin Model (the ``QRM
Methodology''), which is filed as Exhibit 5b.\5\ FICC is requesting
confidential treatment of the QRM Methodology and has filed it
separately with the Commission.\6\
---------------------------------------------------------------------------
\5\ The QRM Methodology was filed as a confidential exhibit as
part of proposed rule change SR-FICC-2018-001 (the ``VaR Filing'').
See Securities Exchange Act Release No. 83362 (June 1, 2018), 83 FR
26514 (June 7, 2018) (SR-FICC-2018-001) (``VaR Filing Approval
Order''). FICC also filed the VaR Filing proposal as an advance
notice pursuant to Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010 (12 U.S.C. 5465(e)(1) and Rule
19b-4(n)(1)(i) under the Act (17 CFR 240.19b-4(n)(1)(i)), with
respect to which the Commission issued a Notice of No Objection. See
Securities Exchange Act Release No. 83223 (May 11, 2018), 83 FR
23020 (May 17, 2018) (SR-FICC-2018-801). The QRM Methodology has
been subsequently amended following the VaR Filing Approval Order.
See Securities Exchange Act Release Nos. 85944 (May 24, 2019), 84 FR
25315 (May 31, 2019) (SR-FICC-2019-001), 90182 (Oct. 14, 2020), 85
FR 66630 (Oct. 20, 2020) (SR-FICC-2020-009), 93234 (Oct. 1, 2021),
86 FR 55891 (Oct. 7, 2021) (SR-FICC-2021-007), 95605 (Aug. 25,
2022), 87 FR 53522 (Aug. 31, 2022) (SR-FICC-2022-005), 97342 (Apr.
21, 2023), 88 FR 25721 (Apr. 27, 2023) (SR-FICC-2023-003), and 99447
(Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR-FICC-2024-001).
\6\ 17 CFR 240.24b-2.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the Advance Notice
and discussed any comments it received on the Advance Notice. 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 and B below, of the most significant aspects of such
statements.
(A) Clearing Agency's Statement on Comments on the Advance Notice
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. FICC reserves the
right not to respond to any comments received.
(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing
Supervision Act
Nature of the Proposed Change
FICC is proposing to enhance the VaR Floor by incorporating a
Minimum Margin Amount in order to supplement the VaR model and improve
its responsiveness and resilience to extreme market volatility.
Specifically, FICC is proposing to modify the VaR Floor and the
corresponding description in the GSD Rules to incorporate a Minimum
Margin Amount. In addition, FICC is proposing to expand the application
of the enhanced VaR Floor to include Margin Proxy. The proposed change
would necessitate changes to the QRM Methodology.
FICC has observed extreme market volatility in the fixed income
market due to monetary policy changes, inflation, and recession fears.
The extreme market volatility has led to greater risk exposures for
FICC. Specifically, the extreme market volatilities during the two
arguably most stressful market periods, i.e., the COVID period during
March of 2020 and the successive interest rate hikes that began in
March 2022, have led to market price changes that exceeded the VaR
model's projections, which yielded insufficient VaR Charges. As a
result, FICC's VaR backtesting metrics fell below the performance
target due to unprecedented levels of extreme market volatility. This
highlighted the need for FICC to enhance its VaR model so that it can
better respond to extreme market volatility.
In order to better manage its risk exposures during extreme market
volatility events, FICC is proposing to adopt a Minimum Margin Amount
that would be applied as a minimum volatility calculation to ensure
that FICC calculates sufficient margin to cover its risk exposures,
particularly during extreme market volatility. The proposed Minimum
Margin Amount would be incorporated into the VaR Floor to supplement
the VaR model and enhance its responsiveness to extreme market
volatility. As proposed, the Minimum Margin Amount is designed to
improve the margin backtesting performance during periods of heightened
market volatility by maintaining a VaR Charge that is appropriately
calibrated to reflect the current market volatility. The proposed
Minimum Margin Amount aims to enhance backtesting coverage when there
are potential VaR model performance challenges, particularly when
securities price changes significantly exceed those implied by the VaR
model risk factors, as observed during the recent periods of extreme
market volatility. FICC believes the proposed Minimum Margin Amount
would provide a more reliable estimate for the portfolio risk level
when current market conditions significantly deviate from historical
observations.
The proposed Minimum Margin Amount would be determined using
historical price returns to represent risk along with amounts
calculated (i) using a filtered historical simulation approach, (ii)
using a haircut method, and (iii) to incorporate other risk factors. By
using a filtered historical simulation approach in which historical
returns are scaled to current market volatility, the proposed Minimum
Margin Amount would operate as a floor to the VaR Charge to improve the
responsiveness of the VaR model to extreme volatility. Because the use
of historical price return-based risk representation is not dependent
on any sensitivity data vendor, it would allow the proposed Minimum
Margin Amount to also operate as a floor to the Margin Proxy and
improve the responsiveness of Margin Proxy to extreme volatility.
As a result of this proposal, Members may experience increases in
their Required Fund Deposits to the Clearing Fund. Based on an impact
study conducted by FICC, on average, at the Member level, the proposed
Minimum Margin Amount would have increased the SOD VaR Charge by
approximately $22.45 million, or 17.69%, and the noon VaR Charge by
approximately $23.22 million, or 17.44%, over a 2-year impact study
period.
Background
FICC, through GSD, serves as a central counterparty and provider of
clearance and settlement services for transactions in the U.S.
government securities, as well as repurchase and reverse repurchase
transactions involving U.S. government securities.\7\ As part of its
[[Page 18983]]
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
GSD Rules.\8\ The Required Fund Deposit serves as each Member's margin.
---------------------------------------------------------------------------
\7\ GSD also clears and settles certain transactions on
securities issued or guaranteed by U.S. government agencies and
government sponsored enterprises.
\8\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra
note 4. 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 240.17Ad-22(e)(4).
---------------------------------------------------------------------------
The objective of a Member's Required Fund Deposit is to mitigate
potential losses to FICC associated with liquidating a Member's
portfolio in the event FICC ceases to act for that Member (hereinafter
referred to as a ``default'').\9\ The aggregate amount of all Members'
Required Fund Deposit constitutes the Clearing Fund. FICC would access
the Clearing Fund should a defaulting Member's own Required Fund
Deposit be insufficient to satisfy losses to FICC caused by the
liquidation of that Member's portfolio.
---------------------------------------------------------------------------
\9\ The GSD Rules identify when FICC may cease to act for a
Member and the types of actions FICC may take. For example, FICC may
suspend a firm's membership with FICC or prohibit or limit a
Member's access to FICC's services in the event that Member defaults
on a financial or other obligation to FICC. See GSD Rule 21
(Restrictions on Access to Services) of the GSD Rules, supra note 4.
---------------------------------------------------------------------------
FICC 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. For example, 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(s) 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 and highlights exposure that could subject
FICC to potential losses in the event that a Member defaults.
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\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 (Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-
FICC-2017-014), 84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 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), 94271 (Feb. 17, 2022), 87 FR 10411 (Feb.
24, 2022) (SR-FICC-2022-001), and 97890 (July 13, 2023), 88 FR 46287
(July 19, 2023) (SR-FICC-2023-008).
\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 4 (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 GSD Clearing Fund.
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FICC investigates the cause(s) of any backtesting deficiencies and
determines if there is an identifiable cause of repeat backtesting
deficiencies. FICC also evaluates whether multiple Members may
experience backtesting deficiencies for the same underlying reason.
Pursuant to the GSD Rules, each Member's Required Fund Deposit
amount consists of a number of applicable components, each of which is
calculated to address specific risks faced by FICC, as identified
within the GSD Rules.\12\ These components include the VaR Charge,
Blackout Period Exposure Adjustment, Backtesting Charge, Holiday
Charge, Margin Liquidity Adjustment Charge, special charge, and
Portfolio Differential Charge.\13\ The VaR Charge generally comprises
the largest portion of a Member's Required Fund Deposit amount.
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\12\ Supra note 4.
\13\ See GSD Rule 4 (Clearing Fund and Loss Allocation), Section
1b. Supra note 4.
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VaR Charge
The VaR Charge is based on the potential price volatility of
unsettled positions using a sensitivity-based Value-at-Risk (VaR)
methodology. The VaR methodology provides an estimate of the possible
losses for a given portfolio based on: (1) confidence level, (2) a time
horizon and (3) historical market volatility. The VaR methodology is
intended to capture the risks related to market price that are
associated with the Net Unsettled Positions in a Member's Margin
Portfolios. This risk-based margin methodology is designed to project
the potential losses that could occur in connection with the
liquidation of a defaulting Member's Margin Portfolio, assuming a
Margin Portfolio would take three days to liquidate in normal market
conditions. The projected liquidation gains or losses are used to
determine the amount of the VaR Charge to each Margin Portfolio, which
is calculated to capture the market price risk \14\ associated with
each Member's Margin Portfolio(s) at a 99% confidence level.
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\14\ 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.
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FICC's VaR model is designed to provide a margin calculation that
covers the market risk in a Member's Margin Portfolio. The VaR model
calculates the risk profile of each Member's Margin Portfolio by
applying certain representative risk factors to measure the degree of
responsiveness of the Margin Portfolio's value to the changes of these
risk factors over a historical lookback period of at least 10 years
that may be supplemented with an additional stressed period.
The VaR model has been shown to perform well in low to moderate
volatility markets. From January 2013 to March 2020, the VaR model has
generally performed above the 99% performance target, with
deterioration in backtesting coverage only during the two arguably most
stressful market periods, i.e., the COVID period during March of 2020
and the successive interest rate hikes that began in March 2022. The
market events during these two stressful periods, including monetary
policy changes, inflation and recession fears, have resulted in
significant market volatility in the fixed income market that exceeded
the 99-percentile of the observed historical data set. Specifically,
the extreme market volatilities during these two periods have led to
market price changes that exceeded the VaR model's projections, which
yielded insufficient VaR Charges. As a result, FICC's VaR backtesting
metrics fell below the performance target due to unprecedented levels
of extreme market volatility. This highlighted the need for FICC to
enhance its VaR model so that it can better respond to extreme market
volatility. Accordingly, FICC is proposing changes to the VaR Floor
that FICC believes would mitigate the risk of potential
underperformance of its VaR model under extreme market volatility.
Current VaR Floor
On June 1, 2018, the Commission approved FICC's VaR Filing to make
changes to GSD's method of calculating a Member's Required Fund Deposit
amount, including the VaR Charge.\15\ The VaR Filing amended the
definition of VaR Charge to, among other things, incorporate the VaR
Floor.\16\ FICC established the VaR Floor to address the risk that in a
long/short portfolio the VaR model could calculate a VaR Charge that is
erroneously low where
[[Page 18984]]
the gross market value of unsettled positions in a Member's portfolio
is high and the cost of liquidation in the event of the Member default
is also high. This is likely to occur when the VaR model applies
substantial risk offsets among long and short unsettled positions in
different classes of securities that have a high degree of historical
price correlation.\17\ When this high degree of historical price
correlations does not apply as a result of changing market conditions,
the VaR Charge derived from the VaR model can be inadequate, and the
VaR Floor would then be applied by FICC to mitigate such risk.
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\15\ See VaR Filing Approval Order, supra note 5.
\16\ The term ``VaR Floor'' is currently defined within the
definition of VaR Charge. See GSD Rule 1 (Definitions), supra note
4.
\17\ As an example, certain securities may have highly
correlated historical price returns, but if market conditions were
to substantially change, these historical correlations could break
down, leading to model-generated offsets that could not adequately
capture a portfolio's risk.
---------------------------------------------------------------------------
Currently, the VaR Floor is based upon the market value of the
gross unsettled positions in the Member's portfolio. The VaR Floor is
determined by multiplying the absolute value of the sum of Net Long
Positions and Net Short Positions of Eligible Securities, grouped by
product and remaining maturity, by a percentage designated by FICC from
time to time for such group. For U.S. Treasury and agency securities,
such percentage shall be a fraction, no less than 10%, of the
historical minimum volatility of a benchmark fixed income index for
such group by product and remaining maturity. For mortgage-backed
securities, such percentage shall be a fixed percentage that is no less
than 0.05%.\18\
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\18\ See ``VaR Charge'' definition in GSD Rule 1 (Definitions).
Supra note 4.
---------------------------------------------------------------------------
The current VaR Floor is not designed to address the risk of
potential underperformance of the VaR model under extreme market
volatility.
Incorporate a Minimum Margin Amount Into the VaR Floor
In order to mitigate the risk of potential underperformance of its
VaR model under extreme market volatility, FICC proposes to incorporate
a Minimum Margin Amount into the VaR Floor to supplement the VaR model
and enhance its responsiveness to extreme market volatility. FICC
believes this proposal would complement and improve the VaR model
performance during stressed market conditions. Specifically, FICC
believes this proposal would improve the margin backtesting performance
during periods of heightened market volatility by maintaining a VaR
Charge that is appropriately calibrated to reflect the current market
volatility.
FICC is proposing to introduce a new calculation called the
``Minimum Margin Amount'' to complement the existing VaR Floor in the
GSD Rules. The Minimum Margin Amount would enhance backtesting coverage
when there are potential VaR model performance challenges, particularly
when securities price changes significantly exceed those implied by the
VaR model risk factors, as observed during the recent periods of
extreme market volatility. FICC believes the proposed Minimum Margin
Amount would provide a more reliable estimate for the portfolio risk
level when current market conditions significantly deviate from
historical observations.
The Minimum Margin Amount would be defined in the GSD Rules as,
with respect to each Margin Portfolio, a minimum volatility calculation
for specified Net Unsettled Positions of a Netting Member as of the
time of such calculation. The proposed definition would provide that
the Minimum Margin Amount shall use historical price returns to
represent risk \19\ and be calculated as the sum of the following: (a)
amounts calculated using a filtered historical simulation (``FHS'')
approach \20\ to assess volatility by scaling historical market price
returns to current market volatility, with market volatility being
measured by applying exponentially weighted moving average to the
historical market price returns with a decay factor between 0.93 and
0.99, as determined by FICC from time to time based on sensitivity
analysis, macroeconomic conditions, and/or backtesting performance, (b)
amounts calculated using a haircut method to measure the risk exposure
of those securities that lack sufficient historical price return data,
(c) amounts calculated to incorporate risks related to (i) repo
interest volatility (``repo interest volatility charge'') \21\ and (ii)
transaction costs related to bid-ask spread in the market that could be
incurred when liquidating a portfolio (``bid-ask spread risk
charge'').\22\ In addition, the proposed definition would require FICC
to provide Members with at a minimum one Business Day advance notice of
any change to the decay factor via an Important Notice.\23\
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\19\ This proposed approach is referred to as the ``price
return-based risk representation'' in the QRM Methodology. Given the
availability and accessibility of historical price returns data,
FICC believes the proposed approach would help minimize and
diversify FICC's risk exposure from external data vendors.
\20\ The FHS method differs from the historical simulation
method by incorporating the volatilities of historical price returns
as a crucial element. In particular, the FHS method constructs the
filtered historical price returns in two steps: first,
``devolatilizing'' the historical price returns by dividing them by
a volatility estimate for the day of the price return, and second,
``revolatilizing'' the devolatilized price returns by multiplying
them by a volatility estimate based on the current market. For
additional background on the FHS method, see Filtered historical
simulation Value-at-Risk models and their competitors, Pedro
Gurrola-Perez and David Murphy, Bank of England, March 2015, at
www.bankofengland.co.uk/working-paper/2015/filtered-historical-simulation-value-at-risk-models-and-their-competitors.
\21\ The ``repo interest volatility charge'' is a component of
the VaR Charge that is designed to address repo interest volatility.
The repo interest volatility charge is calculated based on
internally constructed repo interest rate indices. This rule change
is proposing to also include the repo interest volatility charge as
a component of the Minimum Margin Amount; however, it is not
proposing to change the repo interest volatility charge or the
manner in which this component is calculated.
\22\ The ``bid-ask spread risk charge'' is a component of the
VaR Charge that is designed to address transaction costs related to
bid-ask spread in the market that could be incurred when liquidating
a portfolio. This rule change is proposing to also include the bid-
ask spread risk charge as a component of the Minimum Margin Amount;
however, it is not proposing to change the bid-ask spread risk
charge or the manner in which this component is calculated.
\23\ Although the QRM Methodology is being submitted as a
confidential Exhibit 5b to this proposal due to its proprietary
content, FICC makes available to Members a Value-at-Risk (VaR)
calculator that can be used to estimate their Clearing Fund
requirements based on their portfolios.
---------------------------------------------------------------------------
FICC is proposing to revise the definition of the VaR Floor to
incorporate the Minimum Margin Amount, such that the VaR Floor would be
the greater of (i) the VaR Floor Percentage Amount and (ii) the Minimum
Margin Amount.
The ``VaR Floor Percentage Amount'' would be the new defined term
used to describe the current VaR Floor percentage calculation in the
GSD Rules. This rule change is not proposing to change the VaR Floor
percentage or the manner in which this component is calculated.
As proposed, the Minimum Margin Amount would be utilized as the VaR
Charge for a Member's Margin Portfolio when it is greater than the
current VaR Charge of the Margin Portfolio and the VaR Floor Percentage
Amount.
Under the proposed changes to the QRM Methodology, the Minimum
Margin Amount would use a price return-based risk representation (i.e.,
use historical price returns to represent risk) \24\ and be calculated
as the sum of (i) amounts calculated using a FHS method that scales
historical market price returns to current market volatility, (ii)
amounts calculated using a haircut method for securities that lack
sufficient historical price return data,
[[Page 18985]]
and (iii) amounts calculated to incorporate additional risk factors.
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\24\ Supra note 19.
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FHS Method
Following the FHS method, FICC would first construct historical
price returns using certain mapped fixed income securities benchmarks.
As proposed, the mapped fixed income securities benchmarks to be used
with the FHS method when calculating the Minimum Margin Amount in the
QRM Methodology would be Bloomberg Treasury indexes for U.S. Treasury
and agency securities, Bloomberg TIPS indexes for Treasury Inflation-
Protected Securities (``TIPS''), and to-be-announced (``TBA'')
securities for mortgage-backed securities (``MBS'') pools. These
benchmarks were selected because their price movements generally
closely track those of the securities mapped to them and that their
price history is generally readily available and accessible.
After constructing historical price returns, FICC would estimate a
market volatility associated with each historical price return by
applying exponentially weighted moving average (``EWMA'') to the
historical price returns. The historical price returns are then
``devolatilized'' by dividing them by the corresponding EWMA
volatilities to obtain the residual returns. The residual returns are
then ``revolatilized'' by multiplying them by the current EWMA
volatility to obtain the filtered returns.
The filtered return time series are then used to simulate the
profits and losses of a Member's Margin Portfolio and derive the
volatility of the Margin Portfolio using the standard historical
simulation approach. In particular, each security that is in a Member's
Margin Portfolio would be mapped to a respective fixed income
securities benchmark, as applicable, based on the security's asset
class and remaining maturity. The filtered returns of the benchmark are
used as the simulated returns of the mapped security to calculate the
simulated profits and losses of a Member's Margin Portfolio. The
Minimum Margin Amount is then calculated as the 99-percentile of the
simulated portfolio loss.
Haircut Method
Occasionally, a Member's Margin Portfolio(s) contain classes of
securities that reflect market price changes that are not consistently
related to historical price moves. The value of these securities is
often uncertain because the securities' market volume varies widely,
thus the price histories are limited. Because the volume and price
information for such securities are not robust, the FHS method would
not generate Minimum Margin Amounts that adequately reflect the risk
profile of such securities. Accordingly, the proposed changes to the
QRM Methodology would provide that the Minimum Margin Amount would use
a haircut method to assess the market risk of those securities that are
more difficult to simulate, for example, because of thin trading
history.
Specifically, the proposed haircut method would be used for MBS
pools that are not TBA securities eligible, floating rate notes and
U.S. Treasury/agency securities with remaining time to maturities of
less than or equal to one year.
A haircut method would also be used to size up the basis risk
between an agency security and the mapped U.S. Treasury index to
supplement the historical market price moves generated by the FHS
method for agency securities to reflect any residual risks between
agency securities and the mapped fixed income securities benchmarks,
i.e., Bloomberg Treasury indexes. Similarly, a haircut method would be
used to size up the MBS pool/TBA basis risk to address the residual
risk for using TBA price returns as proxies for MBS pool returns used
in the FHS method.
Minimum Margin Amount Calculation
FICC is proposing to modify the QRM Methodology to specify that the
Minimum Margin Amount would use a price return-based risk
representation and be calculated per Member Margin Portfolio as the sum
of (i), (ii), and (iii):
(i) FHS Method
(a) the amount calculated using historical market price returns of
mapped fixed income securities benchmarks derived based on the FHS
method.
(ii) Haircut Method
(a) the haircut charge for MBS pools that are not TBA securities
eligible,
(b) the supplemental haircut charge for agency securities,
(c) the haircut charge for floating rate notes and U.S. Treasury/
agency securities with remaining time to maturities of less than or
equal to one year, and
(d) the supplemental basis haircut charge for mortgage pool
securities.
(iii) Additional Risk Factors
(a) the repo interest volatility charge,\25\ and
---------------------------------------------------------------------------
\25\ Supra note 21.
---------------------------------------------------------------------------
(b) the bid-ask spread risk charge.\26\
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\26\ Supra note 22.
---------------------------------------------------------------------------
The mapped fixed income securities benchmarks, historical market
price returns, parameters and volatility assessments to be used to
calculate the Minimum Margin Amount would be determined by FICC from
time to time in accordance with FICC's model risk management practices
and governance set forth in the Clearing Agency Model Risk Management
Framework.\27\
---------------------------------------------------------------------------
\27\ See Model Risk Management Framework, supra note 10.
---------------------------------------------------------------------------
Minimum Margin Amount Parameters
The proposed Minimum Margin Amount uses a lookback period for the
filtered historical simulation and a decay factor for calculating the
EWMA volatility of the historical prices returns.
In particular, the lookback period of the proposed Minimum Margin
Amount is the same as the lookback period used for the VaR model, which
is 10 years, plus, to the extent applicable, a stressed period.
Consistent with the VaR methodology outlined in the QRM Methodology and
pursuant to the model performance monitoring required under the Model
Risk Management Framework,\28\ the lookback period would be analyzed to
evaluate its sensitivity and impact to the model performance.
---------------------------------------------------------------------------
\28\ The Model Risk Management Framework provides that all
models undergo ongoing model performance monitoring and backtesting
which is the process of (i) evaluating an active model's ongoing
performance based on theoretical tests, (ii) monitoring the model's
parameters through the use of threshold indicators, and/or (iii)
backtesting using actual historical data/realizations to test a VaR
model's predictive power. Supra note 10.
---------------------------------------------------------------------------
The decay factor in general affects (i) whether and how the Minimum
Margin Amount would be invoked, (ii) the peak level of margin increase
or the degree of procyclicality, and (iii) how quickly the margin would
fall back to pre-stress levels. Similar to the lookback period, the
decay factor of the proposed Minimum Margin Amount would also be
analyzed to evaluate its sensitivity and impact to the model
performance pursuant to the model performance monitoring required under
the Model Risk Management Framework.\29\ The decay factor would be, as
proposed, between 0.93 and 0.99, and any update thereto is expected to
be an infrequent event and would typically happen only when there is an
unprecedented market volatility event which resulted in risk exposures
to FICC that cannot be adequately mitigated by the then calibrated
decay factor. The decision to update the decay factor would be based on
the above-mentioned sensitivity analysis with considerations to
factors, such as the impact to the VaR Charges,
[[Page 18986]]
macroeconomic conditions, and/or backtesting performance. The initial
decay factor for the Minimum Margin Amount calculation would be 0.97
but may be adjusted as set forth above in accordance with FICC's model
risk management practices and governance set forth in the Model Risk
Management Framework.\30\
---------------------------------------------------------------------------
\29\ Supra note 28.
\30\ See Model Risk Management Framework, supra note 10.
---------------------------------------------------------------------------
The Model Risk Management Framework would also require FICC to
conduct ongoing model performance monitoring of the Minimum Margin
Amount methodology.\31\ FICC's current model performance monitoring
practices would provide for sensitivity analysis of relevant model
parameters and assumptions to be conducted monthly, or more frequently
when markets display high volatility. In addition, FICC would monitor
each Member's Required Fund Deposit and the aggregate Clearing Fund
requirements versus the requirements calculated by the Minimum Margin
Amount. Specifically, FICC would review and assess the robustness of
the Required Fund Deposit inclusive of the Minimum Margin Amount by
comparing the results versus the three-day profit and loss of each
Member's Margin Portfolio based on actual market price moves. Based on
the results of the sensitivity analysis and/or backtesting, FICC could
consider adjustments to the Minimum Margin Amount, including changing
the decay factor as appropriate. Any adjustment to the Minimum Margin
Amount calculation would be subject to the model risk management
practices and governance process set forth in the Model Risk Management
Framework.\32\
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\31\ See note 28.
\32\ See Model Risk Management Framework, supra note 10.
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Expand Application of VaR Floor To Include Margin Proxy
The GSD Margin Proxy methodology is currently deployed as an
alternative volatility calculation in the event that the requisite
vendor data used for the VaR model is unavailable for an extended
period of time.\33\ In circumstances where the Margin Proxy is applied
by FICC, FICC is proposing to have the VaR Floor operate as a floor for
the Margin Proxy. Specifically, FICC is proposing to expand the
application of the VaR Floor to include Margin Proxy so that if the
Margin Proxy, when deployed, is lower than the VaR Floor, then the VaR
Floor would be utilized as the VaR Charge with respect to a Member's
Margin Portfolio. FICC believes this proposed change would enable
Margin Proxy to be a more effective risk mitigant under extreme market
volatility and heightened market stress, thereby enhancing the overall
resilience of the FICC risk management.
---------------------------------------------------------------------------
\33\ FICC may deem such data to be unavailable and deploy Margin
Proxy when there are concerns with the quality of data provided by
the vendor.
---------------------------------------------------------------------------
Proposed GSD Rule Changes
In connection with incorporating the Minimum Margin Amount into the
VaR Floor, FICC would modify the GSD Rules to:
I. Add a definition of ``Minimum Margin Amount'' and define it as,
with respect to each Margin Portfolio, a minimum volatility calculation
for specified Net Unsettled Positions of a Member as of the time of
such calculation. The definition would provide that the Minimum Margin
Amount shall use historical price returns to represent risk and be
calculated as the sum of the following: (a) amounts calculated using a
filtered historical simulation approach to assess volatility by scaling
historical market price returns to current market volatility, with
market volatility being measured by applying exponentially weighted
moving average to the historical market price returns with a decay
factor between 0.93 and 0.99, as determined by FICC from time to time
based on sensitivity analysis, macroeconomic conditions, and/or
backtesting performance, (b) amounts calculated using a haircut method
to measure the risk exposure of those securities that lack sufficient
historical price return data, and (c) amounts calculated to incorporate
risks related to (i) repo interest volatility (``repo interest
volatility charge'') and (ii) transaction costs related to bid-ask
spread in the market that could be incurred when liquidating a
portfolio (``bid-ask spread risk charge''). In addition, the proposed
definition would require FICC to provide Members with at a minimum one
Business Day advance notice of any change to the decay factor via an
Important Notice;
II. Add a definition of ``VaR Floor Percentage Amount'' which would
be defined the same as the current calculation for the VaR Floor
percentage with non-substantive modifications to reflect that the
calculated amount is a separate defined term; and
III. Move the defined term VaR Floor out of the definition of VaR
Charge and define it as the greater of (i) the VaR Floor Percentage
Amount and (ii) the Minimum Margin Amount.
In connection with applying the VaR Floor to include Margin Proxy,
FICC would modify the GSD Rules to revise the definition of ``VaR
Charge'' by adding a reference to the Margin Proxy with respect to the
VaR Floor application and clarifying that VaR Charge is calculated at
the Margin Portfolio-level.
Proposed QRM Methodology Changes
In connection with incorporating the Minimum Margin Amount into the
VaR Floor, FICC would modify the QRM Methodology to:
I. Describe how the Minimum Margin Amount, as defined in the GSD
Rules, would be calculated, including:
(i) Establishing mapped fixed income securities benchmarks for
purposes of the calculation using historical market price returns of
such securities with the FHS method;
(ii) Using a haircut method to assess the market risk of certain
securities that are more difficult to simulate due to thin trading
history; and
(iii) Detailing other risk factors that would be incorporated in
the calculation.
II. Describe the developmental evidence and impacts to backtesting
performance and margin charges relating to Minimum Margin Amount.
In connection with applying the VaR Floor to include Margin Proxy,
FICC would modify the QRM Methodology to reflect that the Minimum
Margin Amount would serve as a floor for the Margin Proxy.
In addition, FICC would modify the QRM Methodology to:
I. Make certain clarifying changes to the QRM Methodology to delete
an out-of-date description of the Margin Proxy being used as an
adjustment factor to the VaR,\34\ enhance the description of the VaR
Floor Percentage Amount, and update the list of key model parameters to
reflect the Margin Proxy lookback period; and
---------------------------------------------------------------------------
\34\ FICC currently does not use Margin Proxy as an adjustment
factor to the VaR and does not intend to use it as such in the
future.
---------------------------------------------------------------------------
II. Make certain technical changes to the QRM Methodology to
renumber sections and tables, correct grammatical and typographical
errors, delete out-of-date index names, and update certain formula
notations and section titles as necessary.
Impact Study
FICC performed an impact study on Members' Margin Portfolios for
the period beginning July 1, 2021 through June 30, 2023 (``Impact Study
Period').35 36 If the proposed rule
[[Page 18987]]
changes \37\ had been in place during the Impact Study Period compared
to the existing GSD Rules, the aggregate average daily start-of-day
(``SOD'') VaR Charges would have increased by approximately $2.9
billion or 13.89%, the aggregate average daily noon VaR Charges would
have increased by approximately $3.03 billion or 14.05%, and the
aggregate average daily Backtesting Charges would have decreased by
approximately $622 million or 64.46%.
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\35\ GSD increased the minimum Required Fund Deposit for Members
to $1 million on Dec. 5, 2022 (see Securities Exchange Act Release
No. 96136 (Oct. 24, 2022), 87 FR 65268 (Oct. 28, 2022) (SR-FICC-
2022-006)); however, for the purpose of this Impact Study, the $1
million minimum Requirement Fund Deposit is assumed to be in effect
for the entirety of the Impact Study period.
\36\ GSD adopted a Portfolio Differential Charge (``PD Charge'')
as an additional component to the GSD Required Fund Deposit on Oct.
30, 2023 (see Securities Exchange Act Release No. 98494 (Sep. 25,
2023), 88 FR 67394 (Sep. 29, 2023) (SR-FICC-2023-011)); however, for
the purpose of this Impact Study, the PD Charge is assumed to be in
effect for the entirety of the Impact Study period.
\37\ Margin Proxy was not deployed during the Impact Study
Period; however, if the proposed rule changes had been in place and
the Margin Proxy were deployed during the Impact Study Period, the
aggregate average daily SOD VaR Charges would have increased by
approximately $4.2 billion or 20.98%. The impact study also
indicated that if the proposed rule changes had been in place and
the Margin Proxy were deployed, the VaR model backtesting coverage
would have increased from approximately 98.17% to 99.38% during the
Impact Study Period. Specifically, if the proposed rule changes had
been in place and the Margin Proxy were deployed during the Impact
Study Period, the number of the VaR model backtesting deficiencies
would have been reduced by 901 (from 1358 to 457, or approximately
66.3%).
---------------------------------------------------------------------------
The impact study indicated that if the proposed rule changes had
been in place, the VaR model backtesting coverage would have increased
from approximately 98.86% to 99.46% during the Impact Study Period.
Specifically, if the proposed rule changes had been in place during the
Impact Study Period, the number of VaR model backtesting deficiencies
would have been reduced by 443 (from 843 to 400, or approximately 53%).
The impact study also indicated that if the proposed rule changes
had been in place, overall margin backtesting coverage would have
increased from approximately 98.87% to 99.33% during the Impact Study
Period. Specifically, if the proposed rule changes had been in place
during the Impact Study Period, the number of overall margin
backtesting deficiencies would have been reduced by 280 (from 685 to
405, or approximately 41%) and the overall margin backtesting coverage
for 94 Members (approximately 72% of the GSD membership) would have
improved with 36 Members who were below 99% coverage would be brought
back to above 99%.
Impacts to Members Over the Impact Study Period
On average, at the Member level, the proposed Minimum Margin Amount
would have increased the SOD VaR Charge by approximately $22.45
million, or 17.69%, and the noon VaR Charge by approximately $23.22
million, or 17.44%, over the Impact Study Period. The largest average
percentage increase in SOD VaR Charge for any Member would have been
approximately 66.88%, or $97,051 (0.21% of the Member's average Net
Capital),\38\ and the largest average percentage increase in noon VaR
Charge for any Member would have been approximately 64.79%, or $61,613
(0.13% of the Member's average Net Capital). The largest average dollar
increase in SOD VaR Charge for any Member would have been approximately
$268.35 million (0.34% of the Member's average Net Capital), or 19.05%,
and the largest dollar increase in noon VaR Charge for any Member would
have been approximately $288.57 million (1.07% of the Member's average
Net Capital), or 13.65%. The top 10 Members based on the size of their
average SOD VaR Charges and average noon VaR Charges would have
contributed approximately 51.84% and 53.63% of the aggregated SOD VaR
Charges and aggregated noon VaR Charges, respectively, during the
Impact Study Period had the proposed Minimum Margin Amount been in
place. The same Members would have contributed to 49.86% and 51.48% of
the increase in aggregated SOD VaR Charges and aggregated noon VaR
Charges, respectively, had the proposed Minimum Margin Amount been in
place during the Impact Study Period.
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\38\ 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. See GSD Rule 1 (Definitions), supra note 4.
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Implementation Timeframe
FICC would implement the proposed rule changes by no later than 60
Business Days after the later of the approval of the related proposed
rule change filing \39\ and no objection to the advance notice by the
Commission. FICC would announce the effective date of the proposed
changes by an Important Notice posted to its website.
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\39\ FICC filed this advance notice as a proposed rule change
(File No. SR-FICC-2024-003) with the Commission pursuant to Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder,
17 CFR 240.19b-4. A copy of the proposed rule change is available at
www.dtcc.com/legal/sec-rule-filings.
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Anticipated Effect on and Management of Risk
FICC believes that the proposed change, which consists of a
proposal to (i) modify the calculation of the VaR Floor and the
corresponding description in the GSD Rules and QRM Methodology to
incorporate a Minimum Margin Amount and (ii) expand the application of
the VaR Floor to include Margin Proxy, would enable FICC to better
limit its exposure to Members arising out of the activity in their
portfolios. As stated above, the proposed change is designed to enhance
the GSD VaR model performance and improve the backtesting coverage
during periods of extreme market volatility. The proposed charge would
help ensure that FICC maintains an appropriate level of margin to
address its risk management needs.
Specifically, the proposed rule change seeks to remedy potential
situations that are described above where FICC's VaR model and/or
Margin Proxy, including the existing VaR Floor, does not respond
effectively to increased market volatility and the VaR Charge amounts
do not achieve a 99% confidence level. Therefore, by enabling FICC to
collect margin that more accurately reflects the risk characteristics
of its Members, the proposal would enhance FICC's risk management
capabilities.
By providing FICC with a more effective limit on its exposures, the
proposed change would also mitigate risk for Members because lowering
the risk profile for FICC would in turn lower the risk exposure that
Members may have with respect to FICC in its role as a central
counterparty. Further, the proposal is designed to meet FICC's risk
management goals and its regulatory obligations, as described below.
Consistency With the Clearing Supervision Act
Although Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment, Clearing, and Settlement
Supervision Act of 2010 (``Clearing Supervision Act'') does not specify
a standard of review for an advance notice, its stated purpose is
instructive: to mitigate systemic risk in the financial system and
promote financial stability by, among other things, promoting uniform
risk management standards for systemically important financial market
utilities and strengthening the liquidity of systemically important
financial market utilities.\40\
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\40\ 12 U.S.C. 5461(b).
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[[Page 18988]]
FICC believes that the proposal is consistent with the Clearing
Supervision Act, specifically with the risk management objectives and
principles of Section 805(b), and with certain of the risk management
standards adopted by the Commission pursuant to Section 805(a)(2), for
the reasons described below.
(i) Consistency With Section 805(b) of the Clearing Supervision Act
Section 805(b) of the Clearing Supervision Act \41\ states that the
objectives and principles for the risk management standards prescribed
under Section 805(a) shall be to, among other things, promote robust
risk management, promote safety and soundness, reduce systemic risks,
and support the stability of the broader financial system. For the
reasons described below, FICC believes that the proposed changes in
this advance notice are consistent with the objectives and principles
of the risk management standards as described in Section 805(b) of the
Clearing Supervision Act.
---------------------------------------------------------------------------
\41\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------
FICC is proposing to (i) modify the calculation of the VaR Floor
and the corresponding description in the GSD Rules and QRM Methodology
to incorporate a Minimum Margin Amount and (ii) expand the application
of the VaR Floor to include Margin Proxy, both of which would enable
FICC to better limit its exposure to Members arising out of the
activity in their portfolios. FICC believes these proposed changes are
consistent with promoting robust risk management because the changes
would better enable FICC to limit its exposure to Members in the event
of a Member default by collecting adequate prefunded financial
resources to cover its potential losses resulting from the default of a
Member and the liquidation of a defaulting Member's portfolio.
Specifically, the proposed Minimum Margin Amount would modify the
VaR Floor to cover circumstances, such as extreme market volatility,
where the current VaR Charge calculation and the VaR Floor are both
lower than market price volatility from corresponding securities
benchmarks. The proposed changes are designed to more effectively
measure and address risk characteristics in situations where the risk
factors used in the VaR method do not adequately predict market price
movements and associated credit risk exposure. As reflected in
backtesting studies, FICC believes the proposed changes would
appropriately limit FICC's credit exposure to Members in the event that
the VaR model yields too low a VaR Charge in such situations. Such
backtesting studies indicate that the aggregate average daily
Backtesting Charges would have decreased by approximately $622 million
or 64.46% during the Impact Study Period, and the overall margin
backtesting coverage (based on 12-month trailing backtesting) would
have improved from approximately 98.87% to 99.33% during the Impact
Study Period if the Minimum Margin Amount calculation had been in
place. Improving the overall backtesting coverage level would help FICC
ensure that it maintains an appropriate level of margin to address its
risk management needs.
The use of the Minimum Margin Amount would reduce risk by allowing
FICC to calculate the exposure in each portfolio using historical price
returns to represent risk along with amounts calculated (i) using a FHS
method that scales historical market price returns to current market
volatility, (ii) using a haircut method for those securities that lack
sufficient historical price return data, and (iii) to incorporate other
risk factors. As reflected by backtesting studies during the Impact
Study Period, using the FHS method would provide a more reliable
estimate than the FICC VaR historical data set for the portfolio risk
level when current market conditions deviate from historical
observations. Adding the Minimum Margin Amount to the VaR Floor and
applying the VaR Floor to include Margin Proxy would help to ensure
that the risk exposure during periods of extreme market volatility is
adequately captured in the VaR Charges. FICC believes that would help
to ensure that FICC continues to accurately calculate and assess margin
and in turn, collect sufficient margin from its Members and better
enable FICC to limit its exposures that could be incurred when
liquidating a portfolio.
The proposed change to expand the application of VaR Floor to
include Margin Proxy would enable Margin Proxy to be a more effective
risk mitigant under extreme market volatility and heightened market
stress. By improving the effectiveness of Margin Proxy as a risk
mitigant under extreme market volatility and heightened market stress
would help ensure that the margin that FICC collects from Members is
sufficient to mitigate the credit exposure presented by the Members.
For these reasons, FICC believes the proposed changes would help to
promote GSD's robust risk management, which, in turn, is consistent
with reducing systemic risks and supporting the stability of the
broader financial system, consistent with Section 805(b) of the
Clearing Supervision Act.\42\
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\42\ Id.
---------------------------------------------------------------------------
FICC also believes the changes proposed in this advance notice are
consistent with promoting safety and soundness, which, in turn, is
consistent with reducing systemic risks and supporting the stability of
the broader financial system, consistent with Section 805(b) of the
Clearing Supervision Act.\43\ As described above, the proposed changes
are designed to help ensure that FICC is collecting adequate prefunded
financial resources to cover its potential losses resulting from the
default of a Member and the liquidation of a defaulting Member's
portfolio in times of extreme market volatility. Because the proposed
changes would better position FICC to limit its exposures to Members in
the event of a Member default, FICC believes the proposed changes are
consistent with promoting safety and soundness, which, in turn, is
consistent with reducing systemic risks and supporting the stability of
the broader financial system.
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\43\ Id.
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(ii) Consistency With 805(a)(2) of the Clearing Supervision Act
Section 805(a)(2) of the Clearing Supervision Act \44\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like FICC, and financial institutions engaged in designated activities
for which the Commission is the supervisory agency or the appropriate
financial regulator. The Commission has adopted risk management
standards under Section 805(a)(2) of the Clearing Supervision Act \45\
and Section 17A of the Act \46\ (the risk management standards are
referred to as the ``Covered Clearing Agency Standards'').\47\
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\44\ 12 U.S.C. 5464(a)(2).
\45\ Id.
\46\ 15 U.S.C. 78q-1.
\47\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------
The Covered Clearing Agency Standards require registered clearing
agencies to establish, implement, maintain, and enforce written
policies and procedures that are reasonably designed to be consistent
with the minimum requirements for their operations and risk management
practices on an ongoing basis.\48\ FICC believes that this proposal is
consistent with Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated
under the Act,\49\ for the reasons described below.
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\48\ Id.
\49\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
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[[Page 18989]]
Rule 17Ad-22(e)(4)(i) under the Act \50\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those exposures arising from its payment, clearing, and settlement
processes by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence. 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 backtesting studies, implementation of a
Minimum Margin Amount by changing the GSD Rules and QRM Methodology as
described herein would allow FICC to limit its credit exposures to
Members in the event that the current VaR model yields too low a VaR
Charge for such portfolios and improve backtesting performance. As
indicated by the backtesting studies, the aggregate average daily SOD
VaR Charges would have increased by approximately $2.90 billion or
13.89%, the aggregate average daily noon VaR Charges would have
increased by approximately $3.03 billion or 14.05%, the aggregate
average daily Backtesting Charges would have decreased by approximately
$622 million or 64.46% during the Impact Study Period, and the overall
margin backtesting coverage (based on 12-month trailing backtesting)
would have improved from approximately 98.87% to 99.33% during the
Impact Study Period if the Minimum Margin Amount calculation had been
in place. By identifying and providing for appropriate VaR Charges,
adding the Minimum Margin Amount to the VaR Floor would help to ensure
that the risk exposure during periods of extreme market volatility is
adequately identified, measured and monitored. Similarly, the proposed
change to expand the application of VaR Floor to include Margin Proxy
would enable Margin Proxy to be a more effective risk mitigant under
extreme market volatility and heightened market stress. By improving
the effectiveness of Margin Proxy as a risk mitigant under extreme
market volatility and heightened market stress would help ensure that
the margin that FICC collects from Members is sufficient to mitigate
the credit exposure presented by the Members. As a result, FICC
believes that the proposal would enhance FICC's ability to effectively
identify, measure and monitor its credit exposures and would enhance
its ability to maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence, consistent with the requirements of Rule 17Ad-22(e)(4)(i)
of the Act.\51\
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\50\ 17 CFR 240.17Ad-22(e)(4)(i).
\51\ Id.
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Rule 17Ad-22(e)(6)(i) under the Act \52\ requires a covered
clearing agency to 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. FICC believes that the proposed changes
to adjust the VaR Floor to include the Minimum Margin Amount by
changing the GSD Rules and QRM Methodology as described herein are
consistent with the requirements of Rule 17Ad-22(e)(6)(i) cited above.
The Required Fund Deposits are made up of risk-based components (as
margin) that are calculated and assessed daily to limit FICC's credit
exposures to Members. FICC is proposing changes that are designed to
more effectively measure and address risk characteristics in situations
where the risk factors used in the VaR method do not adequately predict
market price movements. As reflected in backtesting studies, FICC
believes the proposed changes would appropriately limit FICC's credit
exposure to Members in the event that the VaR model yields too low a
VaR Charge in such situations. Such backtesting studies indicate that
the aggregate average daily SOD VaR Charges would have increased by
approximately $2.90 billion or 13.89%, the aggregate average daily noon
VaR Charges would have increased by approximately $3.03 billion or
14.05%, the aggregate average daily Backtesting Charges would have
decreased by approximately $622 million or 64.46% during the Impact
Study Period, and the overall margin backtesting coverage (based on 12-
month trailing backtesting) would have improved from approximately
98.87% to 99.33% during the Impact Study Period if the Minimum Margin
Amount calculation had been in place. By identifying and providing for
appropriate VaR Charges, adding the Minimum Margin Amount to the VaR
Floor would help to ensure that margin levels are commensurate with the
risk exposure of each portfolio during periods of extreme market
volatility. Similarly, the proposed change to expand the application of
VaR Floor to include Margin Proxy would enable Margin Proxy to be a
more effective risk mitigant under extreme market volatility and
heightened market stress. By improving the effectiveness of Margin
Proxy as a risk mitigant under extreme market volatility and heightened
market stress would help ensure that the margin that FICC collects from
Members is sufficient to mitigate the credit exposure presented by the
Members. Overall, the proposed changes would allow FICC to more
effectively address the risks presented by Members. In this way, the
proposed changes enhance the ability of FICC to produce margin levels
commensurate with the risks and particular attributes of each relevant
product, portfolio, and market. As such, FICC believes that the
proposed changes are consistent with the requirements of Rule 17Ad-
22(e)(6)(i) under the Act.\53\
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\52\ 17 CFR 240.17Ad-22(e)(6)(i).
\53\ Id.
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III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action
The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
The clearing agency shall post notice on its website of proposed
changes that are implemented.
The proposal shall not take effect until all regulatory actions
required
[[Page 18990]]
with respect to the proposal are completed.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the Advance
Notice is consistent with the Clearing Supervision Act. Comments may be
submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment form (www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-FICC-2024-801 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-2024-801. 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 (www.sec.gov/rules/sro.shtml). Copies
of the submission, all subsequent amendments, all written statements
with respect to the Advance Notice that are filed with the Commission,
and all written communications relating to the Advance Notice between
the Commission and any person, other than those that may be withheld
from the public in accordance with the provisions of 5 U.S.C. 552, will
be available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549 on
official business days between the hours of 10:00 a.m. and 3:00 p.m.
Copies of the filing also will be available for inspection and copying
at the principal office of FICC and on DTCC's website (www.dtcc.com/legal/sec-rule-filings). Do not include personal identifiable
information in submissions; you should submit only information that you
wish to make available publicly. We may redact in part or withhold
entirely from publication submitted material that is obscene or subject
to copyright protection. All submissions should refer to File Number
SR-FICC-2024-801 and should be submitted on or before April 5, 2024.
V. Date and Timing for Commission Action
Section 806(e)(1)(G) of the Clearing Supervision Act provides that
FICC may implement the changes if it has not received an objection to
the proposed changes within 60 days of the later of (i) the date that
the Commission receives an advance notice or (ii) the date that any
additional information requested by the Commission is received,\54\
unless extended as described below.
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\54\ 12 U.S.C. 5465(e)(1)(G).
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Pursuant to Section 806(e)(1)(H) of the Clearing Supervision Act,
the Commission may extend the review period of an advance notice for an
additional 60 days, if the changes proposed in the advance notice raise
novel or complex issues, subject to the Commission providing the
clearing agency with prompt written notice of the extension.\55\
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\55\ 12 U.S.C. 5465(e)(1)(H).
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Here, as the Commission has not requested any additional
information, the date that is 60 days after OCC filed the advance
notice with the Commission is April 27, 2024. However, the Commission
is extending the review period of the Advance Notice for an additional
60 days under Section 806(e)(1)(H) of the Clearing Supervision Act \56\
because the Commission finds the Advance Notice is both novel and
complex, as discussed below.
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\56\ Id.
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The Commission believes that the changes proposed in the Advance
Notice raise novel and complex issues. Specifically, FICC developed
this proposal in response to extreme market volatility experienced
during the two arguably most stressed market periods, i.e., the
pandemic-related volatility in March 2020 and the successive interest
rate hikes that began in March 2022. As noted above, these extreme
market volatility events led to market price changes that exceeded the
VaR model's projections, resulting in insufficient VaR Charges and poor
backtesting metrics. Therefore, FICC has developed the proposal
described in the Advance Notice to better manage its risk exposures
during extreme market volatility events. Determining the appropriate
method to address this particular set of circumstances in the context
of FICC's margin model presents novel and complex issues.
Accordingly, the Commission, pursuant to Section 806(e)(1)(H) of
the Clearing Supervision Act,\57\ extends the review period for an
additional 60 days so that the Commission shall have until June 26,
2024 to issue an objection or non-objection to advance notice SR-FICC-
2024-801.
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\57\ Id.
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All submissions should refer to File Number SR-FICC-2024-801 and
should be submitted on or before April 5, 2024.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\58\
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\58\ 17 CFR 200.30-3(a)(91) and 17 CFR 200.30-3(a)(94).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-05487 Filed 3-14-24; 8:45 am]
BILLING CODE 8011-01-P
