Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice, as Modified by Partial Amendment No. 1, To Adopt a Minimum Margin Amount at GSD, 90145-90155 [2024-26519]

Download as PDF Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices should be submitted on or before December 5, 2024. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–26418 Filed 11–13–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–101566; File No. SR–FICC– 2024–801] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice, as Modified by Partial Amendment No. 1, To Adopt a Minimum Margin Amount at GSD November 8, 2024. On February 27, 2024, Fixed Income Clearing Corporation (‘‘FICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) advance notice SR–FICC–2024–801 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 In the advance notice, FICC proposes to add a minimum margin amount calculation to the margin methodology of FICC’s Government Securities Division (‘‘GSD’’) to enhance margin collections during periods of extreme market volatility, as described more fully below. The notice of filing of the advance notice was published for comment in the Federal Register on March 15, 2024.3 4 Upon publication of 9 17 CFR 200.30–3(a)(12). U.S.C. 5465(e)(1). 2 17 CFR 240.19b–4(n)(1)(i). 3 Securities Exchange Act Release No. 99712 (March 11, 2024), 89 FR 18981 (March 15, 2024) (SR–FICC–2024–801). 4 On February 27, 2024, FICC filed the advance notice as a proposed rule change 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. The notice of proposed rule change was published in the Federal Register on March 15, 2024. Securities Exchange Act Release No. 99710 (March 11, 2024), 89 FR 18991 (March 15, 2024) (SR–FICC–2024–003). On March 25, 2024, the Commission extended the review period of the proposed rule change, pursuant to section 19(b)(2) of the Act, 15 U.S.C. 78s(b)(2)(ii), until June 13, 2024, as the date by which the Commission shall either approve, disapprove, or institute proceedings to determine whether to disapprove the proposed rule change. Securities Exchange Act Release No. 99769 (March 19, 2024), 89 FR 20716 (March 25, ddrumheller on DSK120RN23PROD with NOTICES1 1 12 VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 notice of filing of the advance notice, the Commission extended the review period of the advance notice for an additional 60 days because the Commission determined that the advance notice raised novel and complex issues.5 On March 22, 2024, the Commission requested additional information from FICC pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission’s period of review of the advance notice until 120 days from the date the information requested by the Commission was received by the Commission.6 On April 26, 2024, the Commission received FICC’s response to the Commission’s request for additional information.7 On April 5, 2024, FICC filed Partial Amendment No. 1 to the advance notice to correct errors FICC discovered regarding the impact analysis filed as Exhibit 3 and discussed in the filing narrative, as well as correct a typo in the methodology formula in Exhibit 5b.8 Partial Amendment No. 1 corrected percentages and other figures throughout the filing narrative. The corrections in Partial Amendment No. 1 did not change the substance of the advance notice. On May 20, 2024, the 2024) (SR–FICC–2024–003). On May 20, 2024, the Commission published in the Federal Register an Order Instituting Proceedings to determine whether to approve or disapprove the proposed rule change. Securities Exchange Act Release No. 100141 (May 14, 2024), 89 FR 43915 (May 20, 2024) (SR–FICC– 2024–003). On September 12, 2024, the Commission designated a longer period for Commission action on the proceedings to determine whether to disapprove the proposed rule change, until November 10, 2024. Securities Exchange Act Release No. 100958 (Sept. 6, 2024), 89 FR 74309 (Sept. 12, 2024) (SR–FICC–2024–003). 5 Pursuant to Section 806(e)(1)(H) of the 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 financial market utility (‘‘FMU’’) with prompt written notice of the extension.12 U.S.C. 5465(e)(1)(H); see supra note 3 at 18990 (explaining the Commission’s rationale for determining that the proposed changes in the advance notice raise novel and complex issues because the proposed changes to FICC’s margin model are a direct response by FICC to address the unique circumstances that occurred during recent periods of extreme market volatility (i.e., the pandemic-related market volatility in March 2020 and the volatility during the successive interest rate hikes that began in March 2022). 6 See 12 U.S.C. 5465(e)(1)(D). A memo regarding the Request for Additional Information and the tolled period of review is available at https:// www.sec.gov/comments/sr-ficc-2024-801/ srficc2024801-449019-1150022.pdf. 7 See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii). A memo regarding receipt of FICC’s response to the Request for Additional Information is available at https://www.sec.gov/comments/sr-ficc-2024-801/ srficc2024801-471851-1323835.pdf. 8 FICC has requested confidential treatment pursuant to 17 CFR 240.24b–2 with respect to Exhibit 3 and Exhibit 5b. PO 00000 Frm 00199 Fmt 4703 Sfmt 4703 90145 Commission published notice of the advance notice, as modified by Partial Amendment No. 1 (hereinafter, the ‘‘Advance Notice’’), for comment in the Federal Register.9 On August 13, 2024, the Commission made a second request for additional information from FICC pursuant to Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission’s period of review of the advance notice until 120 days from the date the information requested by the Commission was received by the Commission.10 On September 26, 2024, the Commission received FICC’s response to the Commission’s second request for additional information.11 The Commission has received comments regarding the substance of the changes proposed in the Advance Notice.12 In addition, the Commission received a letter from FICC responding to the comments.13 This publication serves as notice of no objection to the Advance Notice. I. The Advance Notice A. Executive Summary FICC proposes to add a new Minimum Margin Amount (‘‘MMA’’) calculation to the GSD margin methodology to ensure that FICC collects sufficient margin amounts from its members during sudden periods of extreme market volatility. Recently, FICC faced increased risk exposure to its members during two periods of extreme market volatility, i.e., the COVID-related volatility in March 2020 and the volatility resulting from the successive interest rate hikes that began in March 2022. Those periods of volatility involved market price changes that 9 Securities Exchange Act Release No. 99712 (May 14, 2024), 89 FR 43941 (May 20, 2024) (SR–FICC– 2024–801) (‘‘Notice of Filing’’). 10 See 12 U.S.C. 5465(e)(1)(D). A memo regarding the second Request for Additional Information and the tolled period of review is available at https:// www.sec.gov/comments/sr-ficc-2024-801/ srficc2024801-506275-1473822.pdf. 11 See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii). A memo regarding receipt of FICC’s response to the second Request for Additional Information is available at https://www.sec.gov/comments/sr-ficc2024-801/srficc2024801-527175-1514362.pdf. 12 Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2024-801/ srficc2024801.htm. Comments on the proposed rule change are available at https://www.sec.gov/ comments/sr-ficc-2024-003/srficc2024003.htm. Because the proposals contained in the Advance Notice and the proposed rule change are the same, the Commission considers all comments received on the proposal, regardless of whether the comments are submitted with respect to the Advance Notice or the proposed rule change. 13 See Letter from Timothy B. Hulse, Managing Director, Financial Risk, Governance & Credit Risk, Depository Trust & Clearing Corporation, (June 24, 2024) (‘‘FICC Letter’’). E:\FR\FM\14NON1.SGM 14NON1 90146 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices exceeded the GSD margin model’s projections, causing FICC to collect margin amounts that were insufficient to cover FICC’s risk exposure to its members. This highlighted the need for FICC to enhance the GSD margin methodology to provide better coverage during periods of extreme market volatility. FICC proposes to add the MMA calculation to the Value-at-Risk charge (‘‘VaR Charge’’) component of the GSD margin methodology. Whereas the current VaR Charge is determined as the greater of two separate calculations, FICC proposes to add the MMA as a third calculation so that the VaR Charge would be the greater of three separate calculations. FICC specifically designed the MMA calculation to be more responsive to volatile market conditions than the two existing VaR Charge calculations. As described more fully below, the MMA calculation uses a filtered historical simulation (‘‘FHS’’) approach, which takes historical price data, removes the historical volatility estimates, and replaces them with volatility estimates that reflect current market conditions. The FHS approach also incorporates parameters that would give more weight to recent market events, such that when market volatility spikes, the MMA calculation would generate higher amounts and be more likely to exceed the other two VaR Charge calculations. Conversely, when market volatility subsides, the MMA calculation would generate lower amounts and be less likely to exceed the other two VaR Charge calculations. FICC conducted a 2-year impact study to analyze, among other things, the actual daily member-level margin amounts and backtesting results in comparison to the margin amounts and backtesting results had the MMA calculation been in place. The impact study indicates that if FICC used the MMA calculation during the 2-year period of analysis, FICC’s margin collections and backtesting coverage would have significantly improved and enabled FICC to meet its 99 percent backtesting performance targets. ddrumheller on DSK120RN23PROD with NOTICES1 B. Background FICC, through its Government Securities Division (‘‘GSD’’),14 serves as a central counterparty (‘‘CCP’’) and provider of clearance and settlement services for transactions in U.S. government securities, as well as repurchase and reverse repurchase 14 The GSD Rules are available at https:// www.dtcc.com/∼/media/Files/Downloads/legal/ rules/ficc_gov_rules.pdf. Terms not otherwise defined herein are defined in the GSD Rules. VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 transactions involving U.S. government securities.15 A key tool that FICC uses to manage its credit exposures to its members is the daily collection of the Required Fund Deposit (i.e., margin) from each member.16 The aggregated amount of all members’ Required Fund Deposits constitutes the Clearing Fund, which FICC would access should a defaulted member’s own Required Fund Deposit be insufficient to satisfy losses to FICC caused by the liquidation of that member’s portfolio.17 A member’s Required Fund Deposit consists of a number of components, each of which is calculated to address specific risks faced by FICC.18 The VaR Charge generally comprises the largest portion of a member’s Required Fund Deposit amount. The VaR Charge is a calculation of the volatility of the unsettled securities positions in a member’s portfolio.19 For each member portfolio, FICC currently uses two separate methods to calculate amounts, the greater of which constitutes the member’s VaR Charge.20 FICC’s first calculation uses a sensitivity-based VaR methodology to estimate the possible losses for a given portfolio based on: (1) confidence level, (2) a time horizon, and (3) historical market volatility. The sensitivity VaR methodology is intended to capture the market price risks that are associated with the securities positions in a member’s margin portfolio,21 at a 99 percent confidence level. This methodology projects the potential losses that could occur in connection with the liquidation of a defaulting member’s portfolio, assuming a portfolio would take three days to liquidate in normal market conditions. The sensitivity VaR methodology relies on sensitivity data and historical risk factor time series data generated by an external vendor to calculate the risk profile of each member’s portfolio. In the event of a vendor data disruption, the GSD Rules provide for an alternative volatility calculation that relies on historical 15 GSD also clears and settles certain transactions on securities issued or guaranteed by U.S. government agencies and government sponsored enterprises. 16 See GSD Rule 4 (Clearing Fund and Loss Allocation), supra note 14. 17 See id. 18 Supra note 16. 19 See GSD Rule 1 (Definitions—VaR Charge), supra note 14. 20 See id. 21 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. PO 00000 Frm 00200 Fmt 4703 Sfmt 4703 market index proxies (the ‘‘Margin Proxy’’ calculation).22 FICC recognizes that the sensitivity VaR methodology might not generate margin amounts sufficient to cover its exposure to its members consistent with its regulatory obligations when applied to certain types of member portfolios.23 Therefore, FICC’s second calculation uses a haircut-based methodology (currently referred to in the GSD Rules as the ‘‘VaR Floor’’),24 in which FICC applies a haircut to the market value of the gross unsettled positions in the member’s portfolio.25 The current VaR Floor is not designed to address the risk of potential underperformance of the sensitivity VaR methodology under extreme market volatility.26 Each member’s VaR Charge is either the sensitivity VaR calculation or the VaR Floor calculation, whichever is greater.27 FICC regularly assesses whether its margin methodologies generate margin levels commensurate with the particular risk attributes of each relevant product, portfolio, and market. For example, FICC employs daily backtesting 28 to determine the adequacy of margin collections from its members.29 FICC 22 See GSD Rule 1 (Definitions—Margin Proxy), supra note 14; Securities Exchange Act Release Nos. 80341 (March 30, 2017), 82 FR 16644 (April 5, 2017) (SR–FICC–2017–801); Securities Exchange Act Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR–FICC–2018–801). 23 See Notice of Filing, supra note 9 at 43944. Specifically, for member portfolios that contain both long and short positions in different classes of securities that have a high degree of historical price correlation, the sensitivity VaR methodology can generate inadequate VaR Charges. See id. 24 Supra note 19. 25 See Securities Exchange Act Release No. 83362 (June 1, 2018), 83 FR 26514 (June 7, 2018) (SR– FICC–2018–001). Specifically, FICC calculates the VaR Floor by multiplying the absolute value of the sum of the portfolio’s net long positions and net short positions, grouped by product and remaining maturity, by a percentage designated by FICC for such group. For U.S. Treasury and agency securities, such percentage shall be a fraction, no less than 10 percent, 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 percent. Supra note 19. 26 See Notice of Filing, supra note 9 at 43944. 27 Supra note 19. 28 Backtesting is an ex-post comparison of actual outcomes (i.e., the actual margin collected) with expected outcomes derived from the use of margin models. See 17 CFR 240.17ad–22(a)(1). 29 FICC’s Model Risk Management Framework (‘‘Model Risk Management Framework’’) sets forth the model risk management practices of FICC and states that 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 E:\FR\FM\14NON1.SGM 14NON1 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 compares each Member’s Required Fund Deposit 30 with the simulated liquidation gains/losses, using the actual positions in each member portfolio and the actual historical security returns. A backtesting deficiency occurs when a member’s Required Fund Deposit would not have been adequate to cover the projected liquidation losses. Backtesting deficiencies highlight exposures that could subject FICC to potential losses in the event of a member default. FICC believes that its current VaR model has performed well in low to moderate volatility markets,31 though it has not met FICC’s performance targets during periods of extreme market volatility.32 As described more fully below, FICC performed an impact study on its members’ margin portfolios covering the period beginning July 1, 2021 through June 30, 2023 (‘‘Impact Study’’).33 During the period of the Impact Study, FICC’s VaR model backtesting coverage was 98.86 percent, with 843 VaR model backtesting deficiencies.34 Also, during the period of the Impact Study, FICC’s overall margin backtesting coverage was 98.87 percent, with 685 overall margin backtesting deficiencies.35 Thus, the Impact Study demonstrates that FICC’s backtesting metrics fell below performance targets during the period of the Impact Study.36 FICC states that the foregoing backtesting deficiencies are attributable to recent periods of extreme volatility in the fixed income market caused by monetary policy changes, (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); 97890 (July 13, 2023), 88 FR 46287 (July 19, 2023) (SR– FICC–2023–008). 30 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 14 (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. 31 During the periods of relatively low to moderate market volatility from January 2013 to March 2020, the VaR model generally performed above the 99 percent performance targets. See Notice of Filing, supra note 9 at 43943. 32 During the pandemic-related volatility in March 2020 and the successive interest rate hikes that began in March 2022, the VaR model fell below the 99 percent performance targets. See Notice of Filing, supra note 9 at 43942–44. 33 As part of the Advance Notice, FICC filed Exhibit 3—FICC Impact Study. Pursuant to 17 CFR 240.24b–2, FICC requested confidential treatment of Exhibit 3. 34 See Notice of Filing, supra note 9 at 43947. 35 See id. 36 See Notice of Filing, supra note 9 at 43943–44. VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 inflation, and recession fears, which have led to greater risk exposures for FICC.37 Specifically, FICC states that the periods of extreme market volatility in March 2020 related to the COVID pandemic and the successive interest rate hikes that began in March 2022, have led to market price changes that exceeded the projections of FICC’s current VaR model, resulting in insufficient VaR Charges.38 Accordingly, in the Advance Notice, FICC proposes changes to the VaR model that FICC believes would mitigate the risk of potential underperformance of the VaR model during periods of extreme market volatility.39 C. Proposed Changes In the Advance Notice, FICC proposes to introduce a new minimum margin amount (i.e., the MMA) into the GSD margin methodology. FICC proposes to calculate the MMA for each member portfolio as a supplement to the existing sensitivity VaR calculation and the haircut-based VaR Floor calculation described above in Section I.B. FICC proposes to rename the current haircutbased VaR Floor calculation as the ‘‘VaR Floor Percentage Amount.’’ FICC proposes to revise the existing VaR Floor definition to mean the greater of (1) the VaR Floor Percentage Amount, and (2) the MMA. Thus, the greater of the three calculations (i.e., sensitivity VaR, VaR Floor Percentage Amount, and MMA) would constitute the member’s VaR Charge. Additionally, FICC proposes to clarify that the VaR Floor would also apply in the event that the Margin Proxy is invoked. The proposed changes are described in greater detail below. 37 See Notice of Filing, supra note 9 at 43942–44. id. 39 The proposed changes would revise the GSD Rules and FICC’s Methodology Document—GSD Initial Market Risk Margin Model (the ‘‘QRM Methodology’’) relevant to the VaR model. As part of the Advance Notice, FICC filed Exhibit 5b— Proposed Changes to the QRM Methodology. Pursuant to 17 CFR 240.24b–2, FICC requested confidential treatment of Exhibit 5b. FICC originally filed the QRM Methodology as a confidential exhibit to proposed rule change SR–FICC–2018– 001. See supra note 25; see also Securities Exchange Act Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR–FICC–2018–801). FICC has subsequently amended the QRM Methodology. 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); 99447 (Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR–FICC–2024–001). 38 See PO 00000 Frm 00201 Fmt 4703 Sfmt 4703 90147 1. Minimum Margin Amount Calculation FICC would calculate the MMA for each portfolio using historical price returns to represent risk.40 FICC would calculate the MMA as the sum of the following: (1) amounts calculated using an FHS approach 41 to assess volatility by scaling historical market price returns to current market volatility, with market volatility being measured by applying an exponentially weighted moving average (‘‘EWMA’’) to the historical market price returns with a decay factor between 0.93 and 0.99,42 as determined by FICC based on sensitivity analysis, macroeconomic conditions, and/or backtesting performance; (2) amounts calculated using a haircut method to measure the risk exposure of those securities that lack sufficient historical price return data; and (3) amounts calculated to incorporate risks related to (i) repo interest volatility (‘‘repo interest volatility charge’’) 43 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’’).44 40 FICC refers to the proposed approach as the ‘‘price return-based risk representation’’ in the QRM Methodology. See Notice of Filing, supra note 9 at 43944. 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. See id. 41 The FHS method differs from the historical simulation method, which uses historical price return data as is, by incorporating the volatilities of historical price returns. In particular, the FHS method constructs the filtered historical price returns in two steps: (1) ‘‘devolatilizing’’ the historical price returns by dividing them by a volatility estimate for the day of the price return, and (2) ‘‘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. 42 FICC would provide members with at least one Business Day advance notice of any change to the decay factor via an Important Notice. 43 The ‘‘repo interest volatility charge’’ is a component of the VaR Charge designed to address repo interest volatility. The repo interest volatility charge is calculated based on internally constructed repo interest rate indices. As proposed, FICC would include the repo interest volatility charge as a component of the MMA; however, FICC is not proposing to otherwise change the repo interest volatility charge or the manner in which it is calculated. See Notice of Filing, supra note 9 at 43944. 44 The ‘‘bid-ask spread risk charge’’ is a component of the VaR Charge designed to address transaction costs related to bid-ask spread in the market that FICC could incur when liquidating a portfolio. As proposed, FICC would include the bidask spread risk charge as a component of the MMA; E:\FR\FM\14NON1.SGM Continued 14NON1 ddrumheller on DSK120RN23PROD with NOTICES1 90148 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices FHS Method: For the FHS method, FICC would first construct historical price returns using certain mapped fixed income securities benchmarks. Specifically, FICC proposes to use the following mapped fixed income securities benchmarks with the FHS method when calculating the MMA: (1) Bloomberg Treasury indexes for U.S. Treasury and agency securities; (2) Bloomberg TIPS indexes for Treasury Inflation-Protected Securities (‘‘TIPS’’); and (3) to-be-announced (‘‘TBA’’) securities for mortgage-backed securities (‘‘MBS’’) pools. FICC states that it chose these benchmarks 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.45 After constructing historical price returns, FICC would estimate a market volatility associated with each historical price return by applying an EWMA to the historical price returns. FICC would ‘‘devolatilize’’ the historical price returns (i.e., remove an amount attributable to the historical market volatility from the price returns) by dividing them by the corresponding EWMA volatilities to obtain the residual returns. FICC would ‘‘revolatilize’’ the residual returns (i.e., add an amount attributable to the current market volatility to the residual returns) by multiplying them by the current EWMA volatility to obtain the filtered returns. FICC proposes to use the FHS method to improve the responsiveness of the VaR model to periods of extreme market volatility because historical returns are scaled to current market volatility.46 FICC would use filtered return time series to simulate the profits and losses of a member’s portfolio and derive the volatility of the portfolio using the standard historical simulation approach. Specifically, FICC would map each security that is in a member’s portfolio to a respective fixed income securities benchmark, as applicable, based on the security’s asset class and remaining maturity. FICC would use the filtered returns of the benchmark as the simulated returns of the mapped security to calculate the simulated profits and losses of a member’s portfolio. Finally, FICC would calculate the MMA as the 99-percentile of the simulated portfolio loss. In accordance with FICC’s model risk management practices and governance set forth in the Clearing Agency Model Risk however, FICC is not proposing to otherwise change the bid-ask spread risk charge or the manner in which it is calculated. See Notice of Filing, supra note 9 at 43944. 45 See Notice of Filing, supra note 9 at 43945. 46 See Notice of Filing, supra note 9 at 43942. VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 Management Framework,47 FICC would determine the mapped fixed income securities benchmarks, historical market price returns, parameters, and volatility assessments used to calculate the MMA. FHS Parameters: The proposed MMA would use a lookback period for the FHS and a decay factor for calculating the EWMA volatility of the historical price returns. Specifically, the MMA lookback period would be the same as the lookback period currently used for the sensitivity VaR calculation, which is 10 years, plus, to the extent applicable, a stressed period. FICC would analyze the MMA’s lookback period and evaluate its sensitivity and impact on margin model performance, consistent with the VaR methodology outlined in the QRM Methodology and pursuant to the model performance monitoring required under the Model Risk Management Framework.48 The decay factor generally affects (1) whether and how the MMA would be invoked (i.e., applied as a member’s VaR Charge), (2) the peak level of margin increase or the degree of procyclicality, and (3) how quickly the margin would fall back to pre-stress levels. As proposed, FICC would have the discretion to set the decay factor between 0.93 and 0.99, with the initial decay factor value set at 0.97. FICC expects that any adjustment to the decay factor would be an infrequent event that would typically happen only when there is an unprecedented market volatility event resulting in risk exposures to FICC that cannot be adequately mitigated by the thencalibrated decay factor.49 FICC’s decision to adjust the decay factor would be based on an analysis of the decay factor’s sensitivity and impact to the model performance, considering factors including the impact to the VaR Charges, macroeconomic conditions, and/or backtesting performance.50 Any decision by FICC to adjust the decay factor would be in accordance with FICC’s model risk management practices and governance set forth in the Model Risk Management Framework.51 47 See Model Risk Management Framework, supra note 29. 48 The Model Risk Management Framework provides that all models undergo ongoing model performance monitoring and backtesting, which is the process of (1) evaluating an active model’s ongoing performance based on theoretical tests, (2) monitoring the model’s parameters through the use of threshold indicators, and/or (3) backtesting using actual historical data/realizations to test a VaR model’s predictive power. Supra note 29. 49 See Notice of Filing, supra note 9 at 43946. 50 See id. 51 See Model Risk Management Framework, supra note 29. Similar to the lookback period described above, FICC would also analyze the decay factor to PO 00000 Frm 00202 Fmt 4703 Sfmt 4703 Haircut Method: Occasionally, a member’s portfolio might contain classes of securities that reflect market price changes that are not consistently related to historical price moves. The value of such securities is often uncertain because the securities’ market volume varies widely. Because the volume and historical price information for such securities are not sufficient to perform accurate statistical analyses, the FHS method would not generate an MMA amount that adequately reflects the risk profile of such securities. Accordingly, FICC would use a haircut method to assess the market risk of securities that are more difficult to simulate (e.g., due to thin trading history). Specifically, FICC would use a haircut method 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. FICC would also use a haircut method to account for 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).52 Similarly, FICC would use a haircut method to account for 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. Ongoing Performance Monitoring: The Model Risk Management Framework would require FICC to conduct ongoing model performance monitoring of the MMA methodology.53 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.54 Additionally, FICC would monitor each member’s Required Fund Deposit and the aggregate Clearing Fund requirements versus the requirements calculated by the MMA, by comparing the results versus the three-day profit evaluate its sensitivity and impact to the model performance pursuant to the model performance monitoring required under the Model Risk Management Framework. 52 Accounting for the basis risk would enable FICC to explicitly model and manage the basis risk between an agency security and the mapped U.S. Treasury index, given that agency securities are not as actively traded as U.S. Treasury securities. 53 See note 29. 54 See Notice of Filing, supra note 9 at 43946. E:\FR\FM\14NON1.SGM 14NON1 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices and loss of each member’s portfolio based on actual market price moves.55 Based on the results of the sensitivity analysis and/or backtesting, FICC could consider adjustments to the MMA, including changing the decay factor as appropriate.56 Any adjustment to the MMA calculation would be subject to the model risk management practices and governance process set forth in the Model Risk Management Framework.57 Impact Study: As mentioned above in Section I.B., FICC performed an Impact Study on its members’ margin portfolios covering the period beginning July 1, 2021 through June 30, 2023.58 The Impact Study lists the actual daily and average VaR Charges at both the member-level and CCP-level during the period of the Impact Study, compared with how those amounts would have changed if the proposed MMA had been in place. The Impact Study also lists the actual daily backtesting results at the member-level during the period of the Impact Study, compared with how those amounts would have changed if the proposed MMA had been in place. The Impact Study shows that if the proposed MMA had been in place during the period of the Impact Study, when compared to the current VaR methodology: (1) the aggregate average daily start-of-day (‘‘SOD’’) VaR Charges would have increased by approximately $2.90 billion or 13.89 percent; (2) the aggregate average daily noon VaR Charges would have increased by approximately $3.03 billion or 14.06 percent; and (3) the aggregate average daily Backtesting Charges 59 would have decreased by approximately $622 million or 64.46 percent.60 The Impact Study indicates that if the proposed MMA had been in place, the VaR model backtesting coverage would 55 See id. id. 57 See Model Risk Management Framework, supra note 29. 58 FICC states that it 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. See Notice of Filing, supra note 9 at 43947. 59 The Backtesting Charge is an additional charge that may be added to a member’s VaR Charge to mitigate exposures to FICC caused when the member exhibits a pattern of breaching the target coverage ratio of 99 percent. See GSD Rule 1 (Definitions—Backtesting Charge), supra note 14. 60 Margin Proxy was not invoked during the period of the Impact Study. However, if the proposed MMA had been in place and the Margin Proxy was invoked during the period of the Impact Study: the aggregate average daily SOD VaR Charges would have increased by approximately $4.16 billion or 20.97 percent; the VaR model backtesting coverage would have increased from approximately 98.17 percent to 99.38 percent; and the number of the VaR model backtesting deficiencies would have been reduced by 899 (from 1358 to 459, or approximately 66.2 percent). ddrumheller on DSK120RN23PROD with NOTICES1 56 See VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 have increased from approximately 98.86 percent to 99.46 percent during the period of the Impact Study and the number of VaR model backtesting deficiencies would have been reduced by 441 (from 843 to 402, or approximately 52 percent). The Impact Study also indicates that if the proposed MMA had been in place: (1) overall margin backtesting coverage would have increased from approximately 98.87 percent to 99.33 percent, (2) the number of overall margin backtesting deficiencies would have been reduced by 280 (from 685 to 405, or approximately 41 percent), and (3) the overall margin backtesting coverage for 94 members (approximately 72 percent of the GSD membership) would have improved, with 36 members who were below 99 percent coverage brought back to above 99 percent. On average, at the member-level, the proposed MMA would have increased the SOD VaR Charge by approximately $22.43 million, or 17.56 percent, and the noon VaR Charge by approximately $23.25 million, or 17.43 percent, over the period of the Impact Study. The largest average percentage increase in SOD VaR Charge for any member would have been approximately 66.88 percent, or $97,051 (0.21percent of the member’s average Net Capital),61 and the largest average percentage increase in noon VaR Charge for any member would have been approximately 64.79 percent, or $61,613 (0.13 percent of the member’s average Net Capital). The largest average dollar increase in SOD VaR Charge for any member would have been approximately $268.51 million (0.34 percent of the member’s average Net Capital), or 19.06 percent, and the largest dollar increase in noon VaR Charge for any member would have been approximately $289.00 million (1.07 percent of the member’s average Net Capital), or 13.67 percent. The top 10 members based on the size of their average SOD VaR Charges and average noon VaR Charges would have contributed approximately 51.87 percent and 53.64 percent of the aggregated SOD VaR Charges and aggregated noon VaR Charges, respectively, during the period of the Impact Study had the proposed MMA been in place. The same members would have contributed to 50.08 percent and 51.52 percent of the increase in aggregated SOD VaR Charges and aggregated noon VaR Charges, 61 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 14. PO 00000 Frm 00203 Fmt 4703 Sfmt 4703 90149 respectively, had the proposed MMA been in place during the period of the Impact Study. 2. Clarification of VaR Floor To Include Margin Proxy As mentioned above in Section I.B., the Margin Proxy methodology is currently invoked as an alternative volatility calculation if the requisite vendor data used for the sensitivity VaR calculation is unavailable for an extended period of time.62 FICC proposes to clarify that the VaR Floor, which does not depend upon any vendor data, operates as a floor for the Margin Proxy, such that if the Margin Proxy, when invoked, is lower than the VaR Floor, then the VaR Floor would be utilized as the VaR Charge with respect to a member’s portfolio. FICC believes this clarification would enable Margin Proxy to be an effective risk mitigant under extreme market volatility and heightened market stress because as discussed above in Section I.C.1., the proposed VaR Floor would include the MMA calculation.63 II. Discussion and Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, the stated purpose of the Clearing Supervision Act 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 (SIFMUs) and strengthening the liquidity of SIFMUs.64 Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe regulations containing risk management standards for the payment, clearing, and settlement activities of designated clearing entities engaged in designated activities for which the Commission is the supervisory agency.65 Section 805(b) of the Clearing Supervision Act provides the following objectives and principles for the Commission’s risk management standards prescribed under Section 805(a): 66 • to promote robust risk management; • to promote safety and soundness; • to reduce systemic risks; and 62 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. See Notice of Filing, supra note 9 at 43946. 63 See id. 64 See 12 U.S.C. 5461(b). 65 12 U.S.C. 5464(a)(2). 66 12 U.S.C. 5464(b). E:\FR\FM\14NON1.SGM 14NON1 90150 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices • to support the stability of the broader financial system. Section 805(c) provides, in addition, that the Commission’s risk management standards may address such areas as risk management and default policies and procedures, among other areas.67 The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act and Section 17A of the Exchange Act (the ‘‘Clearing Agency Rules’’).68 The Clearing Agency Rules require, among other things, each covered clearing agency to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to meet certain minimum requirements for its operations and risk management practices on an ongoing basis.69 As such, it is appropriate for the Commission to review advance notices against the Clearing Agency Rules and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act. As discussed below, the proposals in the Advance Notice are consistent with the objectives and principles described in Section 805(b) of the Clearing Supervision Act 70 and in the Clearing Agency Rules, in particular Rule 17ad–22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).71 A. Consistency With Section 805(b) of the Clearing Supervision Act The proposals in the Advance Notice are consistent with the stated objectives and principles of Section 805(b) of the Clearing Supervision Act.72 Specifically, the changes proposed in the Advance Notice are consistent with promoting robust risk management, promoting safety and soundness, reducing systemic risks, and supporting the broader financial system.73 67 12 U.S.C. 5464(c). CFR 240.17ad–22. See Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7–08–11). See also Securities Exchange Act Release No. 78961 (September 28, 2016), 81 FR 70786 (October 13, 2016) (S7–03–14). FICC is a ‘‘covered clearing agency’’ as defined in Rule 17ad–22(a)(5). 69 Id. 70 12 U.S.C. 5464(b). 71 17 CFR 240.17ad–22(e)(4)(i), (e)(6)(i), and (e)(23)(ii). 72 12 U.S.C. 5464(b). 73 Several of the issues raised by the commenters are directed at the proposed rule change and will be addressed in that context. These comments generally relate to the proposal’s impact on competition and its consistency with the Exchange Act. See Letter from Independent Dealer and Trade Association (May 7, 2024) (‘‘IDTA Letter’’) at 2, 3– 6; Letter from Robert Toomey, Head of Capital Markets, Managing Director/Associate General Counsel, Securities Industry and Financial Markets Association (May 22, 2024) (‘‘SIFMA Letter’’) at 2, 5, 7–8 (commenting on the proposal’s impact on ddrumheller on DSK120RN23PROD with NOTICES1 68 17 VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 1. Promoting Robust Risk Management and Safety and Soundness Incorporating the proposed MMA into the GSD margin methodology would be consistent with the promotion of robust risk management and safety and soundness at FICC. As described above in Section I.B., the extreme market volatilities during recent stressful market periods led to market price changes that exceeded the current VaR model’s projections, generating margin amounts that were not sufficient to mitigate FICC’s credit exposure to its members’ portfolios at a 99 percent confidence level. FICC’s proposed incorporation of the MMA calculation into the GSD margin methodology would result in margin levels that better reflect the risks and particular attributes of member portfolios during periods of extreme market volatility, which is consistent with promoting robust risk management. Implementing the MMA would enable FICC to collect additional margin when the market price volatility implied by the current sensitivity VaR calculation and VaR Floor calculation is lower than the market price volatility implied by the proposed MMA calculation. In its consideration of the proposed MMA, the Commission reviewed and analyzed the: (1) Advance Notice, including the supporting exhibits that provided confidential information on the proposed MMA calculation, Impact Study (including detailed information regarding the impact of the proposed changes on the portfolios of each FICC member over various time periods), and backtesting coverage results, (2) FICC’s response to the Commission’s requests for additional information; 74 and (3) the Commission’s own understanding of the performance of the current GSD margin methodology, with which the Commission has experience from its general supervision of FICC, compared to the proposed margin methodology.75 Based on the Commission’s review of the Impact Study, had the proposed MMA been in place, both the VaR model backtesting coverage and the overall margin backtesting coverage competition). The Commission’s evaluation of the Advance Notice is conducted under the Clearing Supervision Act and, as noted above, generally considers whether the proposal would promote robust risk management, promote safety and soundness, reduce systemic risks, and support the broader financial system. 74 See supra notes 7, 11. 75 In addition, because the proposals contained in the Advance Notice and the proposed rule change are the same, all information submitted by FICC was considered regardless of whether the information submitted with respect to the Advance Notice or the proposed rule change. See supra note 9. PO 00000 Frm 00204 Fmt 4703 Sfmt 4703 would have risen above the 99 percent confidence level to 99.46 percent and 99.33 percent, respectively, over the time period covered by the Impact Study.76 Additionally, the number of VaR model backtesting deficiencies and overall margin backtesting deficiencies would have been reduced by 441 and 280, respectively.77 The proposed MMA methodology would be more likely to apply as the VaR Charge during periods of extreme market volatility because the MMA methodology is more responsive to spikes in market volatility than the sensitivity VaR calculation. As described above in Section I.C.1., the MMA calculation relies, in part, on the FHS method, which takes historical price data, removes the historical volatility estimates, and replaces them with volatility estimates that reflect current market conditions. Additionally, as described above in Section I.C.1., the decay factor used in the FHS method affects (1) whether and how the MMA would apply to determine a member’s VaR Charge; (2) the peak level of margin increase or the degree of procyclicality; and (3) how quickly the margin would fall back to pre-stress levels. A faster decay (i.e., smaller decay factor value), like the one FICC intends to use initially, would give more weight to more recent market events, while a slower decay would give more weight to older market events. Thus, when market volatility spikes, the MMA calculation would generate higher amounts and thereby be more likely to apply as the VaR Charge (after exceeding the sensitivity VaR calculation). Conversely, when market volatility subsides, the MMA calculation would generate lower amounts and be less likely to apply. The Impact Study supports this analysis. If the proposed MMA calculation had been in place during the period of the Impact Study, the MMA would have applied primarily during the recent extreme market volatility events (i.e., those in March 2020 and commencing in March 2022). In contrast, during periods of low to moderate market volatility, the MMA calculation would generally not be the greatest amount of the three calculations and thus, would not be invoked. Instead, in periods of low to moderate market volatility, the sensitivity VaR calculation is likely to be the VaR Charge for members whose portfolios do not contain long and short positions in different classes of securities that share a high degree of price correlation. For such long/short portfolios, in low to 76 See 77 See E:\FR\FM\14NON1.SGM Notice of Filing, supra note 9 at 43947. id. 14NON1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices moderate volatility markets, the VaR Floor Percentage Amount calculation is more likely to be the VaR Charge. The sensitivity VaR calculation and VaR Floor Percentage Amount calculations are likely to generate sufficient margin levels above FICC’s 99 percent performance targets during periods of low to moderate market volatility. Indeed, during the periods of low to moderate market volatility from January 2013 to March 2020, the GSD VaR model has generally performed above FICC’s 99 percent backtesting performance targets.78 Implementing the proposed MMA should enable FICC to better manage its exposure to its members during periods of extreme market volatility by generating margin levels that meet FICC’s 99 percent backtesting coverage targets. Accordingly, the proposal is consistent with promoting robust risk management because the MMA would enable FICC to better manage the relevant risks presented by the securities it clears in volatile market conditions. Additionally, FICC proposes to clarify that if the Margin Proxy, when invoked, is lower than the VaR Floor, then the VaR Floor would be utilized as the VaR Charge with respect to a member’s portfolio. Although Margin Proxy was not invoked during the period of the Impact Study, had the proposed changes been in place during that period, the VaR model backtesting coverage would have increased from approximately 98.17 percent to 99.38 percent and the VaR model backtesting deficiencies would have been reduced by 899 (from 1,358 to 459). The Commission agrees that ensuring the VaR Floor operates as a floor for the Margin Proxy would be more effective at mitigating risks under extreme market volatility because as proposed, the VaR Floor would include the MMA calculation. Accordingly, the proposal is consistent with promoting robust risk management because the enhanced VaR Floor would enable FICC to better manage the relevant risks, regardless of whether the sensitivity VaR calculation or Margin Proxy are invoked. Further, by helping to ensure that FICC collects margin amounts sufficient to manage the risk associated with its members’ portfolios during periods of extreme market volatility, the proposed MMA changes and Margin Proxy clarifications would help limit FICC’s exposure in a member default scenario. These proposed changes would generally provide FICC with additional resources to manage potential losses arising out of a member default. Such an increase in FICC’s available financial resources would decrease the likelihood that losses arising out of a member default would exceed FICC’s prefunded resources and threaten the safety and soundness of FICC’s ongoing operations. Accordingly, the proposals are also consistent with promoting safety and soundness at FICC. 2. Reducing Systemic Risks and Supporting the Stability of the Broader Financial System Consistent with the objectives and principles of the Clearing Supervision Act, the Commission also considers whether the proposals in the Advance Notice would reduce systemic risks and support the stability of the broader financial system.79 The proposed MMA changes and Margin Proxy clarifications are consistent with reducing systemic risks and supporting the stability of the broader financial system. As discussed above in Section I.B., FICC would access its Clearing Fund should a defaulted member’s own margin be insufficient to satisfy losses to FICC caused by the liquidation of the member’s portfolio. FICC proposes to add the MMA calculation to the GSD margin methodology to collect additional margin from members during periods of extreme market volatility to cover such costs, and thereby better manage the potential costs of liquidating a defaulted member’s portfolio. Similarly, FICC’s proposal to clarify the application of the VaR Floor to include Margin Proxy would ensure FICC’s ability to collect additional margin from members if the Margin Proxy, when invoked, is lower than the VaR Floor. These changes and clarifications to the GSD margin methodology could reduce the possibility that FICC would need to mutualize among the non-defaulting members a loss arising out of the closeout process. Reducing the potential for loss mutualization could, in turn, reduce the potential resultant effects on non-defaulting members, their customers, and the broader market arising out of a member default. One commenter states that FICC’s implementation of the proposed MMA would increase costs for market participants, leading to negative effects on the broader U.S. Treasury markets.80 Specifically, the commenter states that markets with high margin costs generally have fewer market participants, decreased market liquidity, wider bid/offer spreads, and encourage 79 See 78 See Notice of Filing, supra note 9 at 43943. VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 80 See PO 00000 12 U.S.C. 5464(b). IDTA Letter at 5–6. Frm 00205 Fmt 4703 90151 market participants to either exit the market or pass additional expenses to their customers.81 In response, FICC states that the proposed MMA is not designed to advantage or disadvantage capital formation.82 Instead, FICC states that the purpose of the proposed MMA is to manage the risk associated with member portfolios during periods of extreme market volatility.83 FICC states that although the proposal’s increased margin requirements could lessen liquidity for members, it is necessary and appropriate to mitigate the relevant risks.84 In considering the comments opposing FICC’s implementation of the MMA calculation as proposed, the Commission considered the Advance Notice filing materials including the Impact Study, comment letters, FICC’s response letter, and the Commission’s own understanding of the GSD margin methodology based on the Commission’s general supervision of FICC. As stated above in Section II.A.1., during the period of the Impact Study, the actual GSD VaR model backtesting coverage and overall margin backtesting coverage both fell below the 99 percent confidence level. These shortfalls are specifically attributable to the periods of extreme market volatility of March 2020 and commencing in March 2022. The Impact Study demonstrates that had the proposed MMA calculation been in place during that period, margin amounts would have exceeded the 99 percent backtesting coverage levels. Thus, implementing the MMA calculation would have better enabled FICC to calculate and collect margin amounts sufficient to mitigate the risks presented by its members’ portfolios during periods of extreme market volatility. The Commission acknowledges that implementing the proposed MMA would increase margin requirements during periods of extreme market volatility. However, as detailed above in Section I.C.1., the Impact Study demonstrates that the increased margin requirements attributable to the MMA at the member-level would represent relatively small percentages (i.e., typically a fraction of one percent) of members’ average Net Capital,85 which 81 See id. FICC Letter at 5. 83 See id. 84 See id. 85 See GSD Rule 1 (Definitions—Net Capital) (defining Net Capital’’ to mean, 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) and 17 CFR 240.15c3–1(c)(2) (requiring that every broker or 82 See Continued Sfmt 4703 E:\FR\FM\14NON1.SGM 14NON1 90152 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 indicates that members would likely have access to sufficient financial resources to meet the increased MMA obligation if invoked during periods of extreme market volatility. Therefore, the comment that the increased margin costs attributable to the MMA would decrease market liquidity, widen bid/ offer spreads, and encourage market participants to either exit the market or pass additional expenses to their customers, do not appear likely based on the limited size of increased VaR Charges from the Impact Study. Additionally, by helping to ensure FICC collects sufficient margin to cover its exposure to members, implementing the MMA would decrease the likelihood of loss mutualization in the event of a member default, which could encourage greater market participation. Moreover, FICC has a regulatory obligation to have policies and procedures to calculate and collect margin amounts sufficient to mitigate the relevant risks presented to it by its members’ portfolios.86 Indeed, FICC’s role as a CCP that reduces systemic risk and promotes market stability is dependent on effectively managing the relevant risks, which includes FICC’s collection of sufficient margin from its members. One commenter states that the proposed MMA would negatively affect markets by having a detrimental effect on certain trading strategies that rely on margin offsets across maturity buckets.87 The commenter states that the MMA would eliminate such offsets, resulting in gross margining across maturity buckets and decreased liquidity.88 In response, FICC states that the proposed MMA would not eliminate such margin offsets across maturity buckets.89 Specifically, FICC states that the MMA would not differ from the current VaR model insofar as the FHS approach would likewise offset the market risk of long positions in one maturity bucket with the market risk of short positions in another maturity bucket.90 Based on the Commission’s review and understanding of FICC’s proposed changes to the QRM Methodology,91 the Commission agrees dealer at all times have and maintain net capital no less than a particular requirement, as set forth in the Rule). 86 See 17 CFR 240.17ad–22(e)(4)(i). 87 See IDTA Letter at 5 (discussing trading strategies that involve Treasury securities in separate maturity buckets, such as buyers at Treasury auctions ‘‘rolling backwards’’ ahead of the auction by short-selling one issue and buy a different outstanding Treasury, Butterfly Spread, and ‘‘roll down the curve’’). 88 See id. 89 See FICC Letter at 5. 90 See id. 91 Supra note 40. VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 with FICC’s response that the FHS approach allows for similar offsetting as the current GSD VaR model regarding the market risk of long positions in one maturity bucket offsetting the market risk of short positions in another maturity bucket.92 Another commenter states that FICC’s proposal did not adequately address the procyclicality risk 93 associated with the MMA calculation.94 The commenter suggests that FICC should consider revising the MMA calculation to include anti-procyclical measures that would avoid extreme reactions to changes in market volatility.95 In response, FICC states that it considered and evaluated a number of anti-procyclical measures when developing the MMA proposal.96 However, FICC states that, based on the outlook for interest rate volatility, FICC determined to rely on the decay factor to control the MMA’s responsiveness to market volatility.97 The Commission disagrees with the comment that FICC’s proposed MMA calculation does not adequately address procyclicality risk. The decay factor affects, among other things, the speed of the MMA calculation’s responsiveness to spikes in extreme market volatility, as well as the speed with which the MMA calculation would generate lower numbers after such volatility subsides. FICC chose to initially set the decay factor at 0.97—a relatively fast decay factor—to respond to market volatility relatively quickly.98 FICC’s data demonstrate that had the MMA been in place during the period of the Impact Study, the MMA would have been invoked in a targeted manner (i.e., specifically during periods of extreme market volatility, but not during periods of low to moderate market volatility). Further, the Commission understands that FICC would be able to use the decay factor to address future interest rate volatility that may occur. Thus, the Impact Study supports FICC’s assertion that including the decay factor in the 92 See FICC Letter at 5. risk with respect to margin requirements is the cycle created when a decrease in the mark-to-market value of the securities in a portfolio triggers an increase in margin requirements, which in turn, causes a further decrease in portfolio value. 94 See SIFMA Letter at 6–7. 95 See SIFMA Letter at 7. 96 See FICC Letter at 5–6. 97 See id. 98 FICC could adjust the decay factor in accordance with the Model Risk Management Framework. FICC would analyze the decay factor to evaluate its sensitivity and impact to the model performance pursuant to the model performance monitoring required under the Model Risk Management Framework. Supra note 29. 93 Procyclicality PO 00000 Frm 00206 Fmt 4703 Sfmt 4703 MMA calculation would have mitigated any procyclical results. Accordingly, the Commission finds that FICC’s adoption of the proposed MMA and changes to the Margin Proxy would be consistent with the reduction of systemic risk and supporting the stability of the broader financial system. For the reasons stated above, the changes proposed in the Advance Notice are consistent with Section 805(b) of the Clearing Supervision Act.99 B. Consistency With Rule 17ad– 22(e)(4)(i) Rule 17ad–22(e)(4)(i) requires that FICC establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence.100 The proposals in the Advance Notice are consistent with Rule 17ad–22(e)(4)(i) under the Exchange Act.101 As described above in Section II.A.1., the current GSD VaR model generated margin amounts that were not sufficient to mitigate FICC’s credit exposure to its members’ portfolios at the 99 percent backtesting confidence level during periods of extreme market volatility, particularly during March 2020 and beginning in March 2022. The Impact Study demonstrates that had the proposed MMA calculation been in place during that period, margin amounts would have exceeded the 99 percent backtesting coverage levels. Therefore, adding the MMA calculation to the GSD margin methodology should better enable FICC to calculate and collect margin amounts that are sufficient to mitigate FICC’s credit exposure to its members’ portfolios during periods of extreme market volatility. Additionally, FICC proposes to clarify that if the Margin Proxy, when invoked, is lower than the VaR Floor, then the VaR Floor would be utilized as the VaR Charge with respect to a member’s portfolio. Although Margin Proxy was not invoked during the period of the Impact Study, had the proposed changes been in place during that period, the VaR model backtesting coverage would have been increased to exceed the 99 percent backtesting coverage level. 99 12 U.S.C. 5464(b). CFR 240.17ad–22(e)(4)(i). 101 See id. 100 17 E:\FR\FM\14NON1.SGM 14NON1 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices Therefore, the proposed clarifications regarding the applicability of the VaR Floor when Margin Proxy is invoked would help ensure FICC’s ability to manage its credit exposures to members by maintaining sufficient financial resources to cover such exposures fully with a high degree of confidence. Accordingly, for the reasons discussed above, the proposed MMA changes and Margin Proxy clarifications are reasonably designed to enable FICC to effectively identify, measure, monitor, and manage its credit exposure to participants, consistent with Rule 17ad–22(e)(4)(i).102 ddrumheller on DSK120RN23PROD with NOTICES1 C. Consistency With Rule 17ad– 22(e)(6)(i) Rule 17ad–22(e)(6)(i) requires that FICC establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market, and calculates margin sufficient to cover its potential future exposure to participants.103 The proposals in the Advance Notice are consistent with Rule 17ad– 22(e)(6)(i). As described above in Section II.A.1., the Impact Study demonstrates that the current VaR model generated margin deficiencies during periods of extreme market volatility, whereas implementing the proposed MMA changes and Margin Proxy clarifications would result in VaR Charges that reflect the risks of member portfolios during such periods better than the current GSD VaR model. Moreover, FICC’s inclusion of the decay factor in the MMA calculation appropriately limits invoking the MMA as the VaR Charge to periods of extreme market volatility. As described above in Section II.A.1., the decay factor affects, among other things, the peak level of margin increase or the degree of procyclicality and how quickly the margin would fall back to pre-stress levels. FICC chose to initially set the decay factor at 0.97—a relatively fast decay factor—to be quickly responsive to market volatility.104 FICC’s data demonstrate that had the MMA been in 102 See id. CFR 240.17ad–22(e)(6)(i). 104 FICC could adjust the decay factor in accordance with the Model Risk Management Framework. FICC would analyze the decay factor to evaluate its sensitivity and impact to the model performance pursuant to the model performance monitoring required under the Model Risk Management Framework. Supra note 29. 103 17 VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 place during the period of the Impact Study, the MMA would have been invoked in a targeted manner (i.e., specifically during periods of extreme market volatility, but not during periods of low to moderate market volatility). Thus, the MMA is specifically designed to enable FICC to collect margin amounts commensurate with the relevant risks associated with member portfolios during periods of extreme market volatility. The proposal would provide FICC with a margin methodology better designed to enable FICC to cover its credit exposures to its members by enhancing FICC’s riskbased margin system to produce margin levels commensurate with the relevant risks during periods of extreme market volatility. Several commenters addressed FICC’s Impact Study. Specifically, one commenter states that the Impact Study is too limited, providing backtesting data with extremely uneven daily impacts, thereby rendering it impossible to properly assess the MMA’s impacts.105 Another commenter states that FICC underestimates the MMA’s impacts by using the full two-year period of the Impact Study to calculate average impacts when the actual period of increased volatility only covers a nine-month period.106 This commenter states that while FICC expressed the increase in margin requirements in terms of long-term averages, brokerdealers actually plan for capitalization based on meeting their largest margin requirement rather than their average capital usage.107 These commenters state that while FICC’s impact analysis cited examples of members with the largest average percentage and dollar increases resulting from the MMA, those market participants are either too small or too large to be representative of the proposal’s impact on other members.108 The commenters state that the actual effects of the MMA on middle-market dealers will be higher than FICC’s cited examples.109 These two commenters suggest that alternative impact measurements would provide a more 105 SIFMA Letter at 6. IDTA Letter at 3 (arguing that calculating averages using a two-year period instead of a ninemonth period decreases the average 2.66 times). 107 See IDTA Letter at 3. 108 See IDTA Letter at 3; SIFMA Letter at 6. 109 See e.g., IDTA Letter at 3–4 (contrasting FICC’s Impact Study analysis that expresses the largest member increase that would have resulted from the MMA as 0.21 percent of net capital, against the average margin increase that the MMA would have added for IDTA members of 5.1 percent of net capital, or 16.0 percent of net capital for the top 100 days in terms of margin increases); see SIFMA Letter at 6. 106 See PO 00000 Frm 00207 Fmt 4703 Sfmt 4703 90153 accurate analysis of the proposed MMA’s impacts.110 In response to these comments, FICC states that due to confidentiality restrictions on releasing member-level data, the public-facing Advance Notice filing narrative analyzed the Impact Study using anonymized data and averages of maximum dollar and percentage changes.111 However, FICC provided the Commission with expanded and detailed daily memberlevel Impact Study data confidentially, as part of the Advance Notice filing in Exhibit 3.112 FICC further states that both prior and subsequent to filing the Advance Notice, FICC actively engaged with members on multiple occasions, conducting outreach to each member in order to provide notice of the proposal along with individualized anticipated impacts for each member.113 In considering the comments critical of the Impact Study and FICC’s analyses thereof, the Commission considered the Advance Notice (including the Impact Study 114 and other confidentially filed data 115), comment letters, FICC’s 110 See IDTA Letter at 3–4, 7; SIFMA Letter at 6. For example, one commenter suggests that FICC should express the impact as the average percent increase for the top 100 most stressful days. See IDTA Letter at 3–4 (stating that the average percentage increase for the top 100 most stressful days in terms of margin increases for IDTA members, the more relevant metric in terms of capital planning in actual practice was 37.23 percent or $27.52 million). The other commenter suggests that a better measure of liquidity impact than average daily data would be the peak aggregate additional margin that would be required for both a 1-day and 5-day period. See SIFMA Letter at 6. 111 See FICC Letter at 7. 112 See id. 113 See FICC Letter at 6. 114 Exhibit 3 includes, among other things, the following confidentially filed information covering the period from July 1, 2021 through June 30 2023: actual daily VaR amounts for each member; daily VaR amounts for each member had MMA been implemented; daily VaR increase (reflected in dollars, percent, and percent of Net Capital), if any, attributable to MMA; average member-level VaR amounts (reflected in dollars and average of Net Capital); average member-level VaR amounts had MMA been implemented; average member-level VaR increase (reflected in percent and percent of Net Capital), if any, attributable to MMA; further analysis of the foregoing data to determine minimum, maximum, and average increases to member-level VaR amounts, Net Capital amounts, and CCP-level VaR amounts; member-level VaR amounts had Margin Proxy been invoked (daily and summarized); and member-level backtesting results (daily and summarized). 115 FICC’s responses to the Commission’s requests for additional information include, among other things, the following confidentially filed information: FICC’s proprietary information regarding the GSD margin methodology; backtesting data and analyses of daily member-level sensitivity VaR, Margin Proxy, and MMA amounts with alternative stress periods; daily member-level backtesting, sensitivity VaR, and MMA amounts during the Impact Study period specific to bond and MBS positions; and daily member-level E:\FR\FM\14NON1.SGM Continued 14NON1 90154 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices ddrumheller on DSK120RN23PROD with NOTICES1 response letter, and the Commission’s own understanding of the GSD margin methodology based on its general supervision of FICC. Based on the Commission’s review and analysis of these materials, the Commission disagrees with the comments suggesting that FICC’s Impact Study and analyses are inaccurate and/or misleading. In the Advance Notice narrative, FICC described the Impact Study in anonymized terms, highlighting averages and maximum dollar and percentage changes, due to the confidential nature of the member-level transactions that comprise the underlying data. However, FICC filed the confidential member-level data with the Commission in Exhibit 3 to the Advance Notice filing. FICC also provided relevant confidential data in its response to the Commission’s requests for additional information.116 Additionally, in the Commission’s supervisory role, the Commission routinely collects confidential marginrelated data from FICC. These data sources enable the Commission to evaluate the effects of the MMA on a member-by-member basis. The purpose of the Impact Study and FICC’s analyses thereof in the publicly available Advance Notice filing materials is to highlight comparisons of the GSD VaR model’s performance with and without incorporating the MMA and to highlight the proposal’s general impacts on members using anonymized data and averages of maximum dollar and percentage changes. FICC did not state that its public discussion of the Impact Study was the sole source of data for the Commission and the public to utilize in evaluating the proposals in the Advance Notice. Rather, FICC provided additional detailed memberlevel data confidentially, both to members and the Commission, to more fully evaluate the impacts of the proposals in the Advance Notice. Regarding the comments that FICC’s analysis of the Impact Study data presented an inaccurate picture of the MMA’s impacts,117 the Commission sensitivity VaR and MMA amounts for the period of February 1, 2024 through July 31, 2024, with analysis relating to the FICC–CME cross-margining arrangement. 116 Supra notes 7, 11. 117 These comments include regarding: FICC’s use of the two-year period of the Impact Study instead of the 9-month period of extreme market volatility when presenting average impacts (see IDTA Letter at 3); FICC’s use of long-term average margin increases instead of maximum margin increases resulting from implementing the MMA (see id.); FICC’s examples of members with the largest average percentage and dollar increases resulting from the MMA (see IDTA Letter at 3; see SIFMA Letter at 6); and preferred alternative impact VerDate Sep<11>2014 20:16 Nov 13, 2024 Jkt 265001 recognizes that FICC provided individual impact studies for each member that included the average impact for the entire period of the Impact Study as well as the average impact on those days that the proposed MMA would have been applied for each member.118 Therefore, the commenters’ concerns regarding the Impact Study do not take into account that both the Commission and FICC’s members also reviewed more detailed confidential data to better understand the specific member-level impacts of the proposals. The comment that FICC’s public discussion of the Impact Study presented limited data, rendering it impossible to properly evaluate the MMA’s impacts, does not take into account that FICC provided more comprehensive confidential data to the Commission and members that was sufficient to properly assess the MMA’s impacts. Specifically, such data includes, among other things, actual daily VaR Charge for each member, hypothetical daily VaR Charge for each member had the MMA been in place, hypothetical daily VaR Charge for each member had Margin Proxy been invoked, analyses of increases attributable to the MMA, and numerous backtesting analyses. The comment that FICC’s public discussion of the Impact Study underestimated the MMA’s impacts by calculating the average impacts based on the full two-year period rather than the nine-month period of volatility does not take into account that FICC confidentially provided individual impact studies for each member that included average impacts on each day that the MMA would have applied to the member.119 Similarly, the comment that FICC’s public discussion of the Impact Study expressed the increase in margin requirements in terms of long-term averages as opposed to largest margin requirements does not take into account that FICC confidentially provided individual impact studies for each member indicating maximum margin increases on each day that the MMA would have applied to the member.120 The comment that FICC’s public discussion of the Impact Study cited impacted members that are not representative and underestimate the MMA’s impacts on middle-market participants does not take into account that FICC provided member-level impact data to each member.121 One commenter also states that FICC should expand the Impact Study to cover the March 2020 period of stress in light of FICC’s statements that the MMA proposal was driven, in part, by the VaR model’s underperformance during that period.122 In response, FICC states that inclusion of that data is not necessary because the Impact Study’s two-year period achieves the purpose of demonstrating the effectiveness of the proposed MMA during periods of both low and high market volatility.123 The Commission agrees that the Impact Study’s two-year period sufficiently demonstrates the performance of the proposed MMA during periods of both low and high market volatility, as the two-year study period also included periods of both low and high market volatility. Inclusion of March 2020 in the Impact Study is not required for the Commission to evaluate the responsiveness of the MMA. Accordingly, the proposals in the Advance Notice are consistent with Rule 17ad–22(e)(6)(i) because the new MMA margin calculation and Margin Proxy clarifications should better enable FICC to establish a risk-based margin system that considers and produces relevant margin levels commensurate with the risks associated with liquidating participant portfolios in a default scenario during periods of extreme market volatility.124 D. Consistency With Rule 17ad– 22(e)(23)(ii) Rule 17ad–22(e)(23)(ii) requires that FICC establish, implement, maintain and enforce written policies and procedures reasonably designed to provide sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in FICC.125 One commenter states that FICC’s proposals in the Advance Notice lack transparency, quick implementation, and tools and resources to support market preparedness to identify risks and costs associated with how FICC calculates margin amounts.126 Specifically, the commenter urges FICC to provide members with (1) daily VaR calculations, (2) an MMA calculator, and (3) a phased implementation of the MMA, including a parallel run period 121 See measurements (see IDTA Letter at 3–4; see SIFMA Letter at 6). 118 See FICC Letter at 7. 119 See id. 120 See id. PO 00000 Frm 00208 Fmt 4703 Sfmt 4703 id. SIFMA Letter at 6. 123 See FICC Letter at 6. 124 17 CFR 240.17ad–22(e)(6)(i). 125 17 CFR 240.17ad–22(e)(23)(ii). 126 See SIFMA Letter at 7–8. 122 See E:\FR\FM\14NON1.SGM 14NON1 ddrumheller on DSK120RN23PROD with NOTICES1 Federal Register / Vol. 89, No. 220 / Thursday, November 14, 2024 / Notices where the MMA is calculated but not invoked.127 In response, FICC states that it provides tools and resources to enable members to determine their margin requirements and the impact of FICC’s proposals.128 Specifically, FICC maintains the Real Time Matching Report Center, Clearing Fund Management System, FICC Customer Reporting Service, and FICC Risk Client Portal which are client accessible websites for accessing risk reports and other risk disclosures.129 These resources enable members to view Clearing Fund requirement information and margin component details, including portfolio breakdowns by CUSIP and amounts attributable to the sensitivity-based VaR model.130 Members are also able to view data on market amounts for current clearing positions and associated VaR Charges.131 Additionally, the FICC Client Calculator enables members to, among other things, enter ‘‘what-if’’ position data to determine hypothetical VaR Charges before trade execution. FICC states that as of June 24, 2024, FICC is in the process of enhancing the FICC Client Calculator to incorporate the MMA and FICC expects the enhancement to be available to members prior to implementation of the MMA, subject to the Commission’s approval.132 FICC also states that it is currently developing a tool that would enable non-members to assess potential VaR Charges (including MMA) as well.133 The extensive tools and resources that FICC makes available to members should enable members to obtain individualized information to determine their Clearing Fund requirements, margin component details, and assess the impact of FICC’s proposals. Additionally, FICC’s multiple member outreach efforts (before and after development of the proposals in the Advance Notice) provided members with relevant individualized impact analyses with which to evaluate the proposals in the Advance Notice. Accordingly, FICC has provided tools and resources sufficient for its members to evaluate their daily VaR and other margin-related calculations, rendering a phased implementation of the proposed MMA unwarranted. 127 See id. FICC Letter at 7. 129 See id. 130 See id. 131 See id. 132 See id. 133 See id. 128 See VerDate Sep<11>2014 20:16 Nov 13, 2024 Based on the foregoing, FICC has provided sufficient information, tools, and resources to enable members to identify and evaluate the relevant risks and costs associated with the changes proposed in the Advance Notice, consistent with Rule 17ad– 22(e)(23)(ii).134 III. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act, that the Commission does not object to Advance Notice (SR– FICC–2024–801) and that FICC is authorized to implement the proposed change as of the date of this notice or the date of an order by the Commission approving proposed rule change SR– FICC–2024–003, whichever is later. By the Commission. Sherry R. Haywood, Assistant Secretary. [FR Doc. 2024–26519 Filed 11–13–24; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–101551; File No. SR–OCC– 2024–010] Self-Regulatory Organizations; the Options Clearing Corporation; Order Instituting Proceedings To Determine Whether To Approve or Disapprove a Proposed Rule Change, as Modified by Partial Amendment No. 1, by the Options Clearing Corporation To Establish a Margin Add-On Charge That Would Be Applied to All Clearing Member Accounts To Help Mitigate the Risks Arising From Intraday and Overnight Trading Activity November 7, 2024. I. Introduction On July 25, 2024, the Options Clearing Corporation (‘‘OCC’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change SR–OCC–2024– 010 pursuant to Section 19(b) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 2 thereunder to establish a margin add-on charge that would be applied to all Clearing Member accounts to assist with mitigating the risks arising from intraday and overnight trading activity, particularly activity attributable to short-dated options trading. Proposed rule change SR–OCC–2024–010 was published for public comment in the 134 17 CFR 240.17ad–22(e)(23)(ii). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 Jkt 265001 PO 00000 Frm 00209 Fmt 4703 Sfmt 4703 90155 Federal Register on August 12, 2024.3 The Commission has received comments regarding the proposed rule change.4 On September 4, 2024, OCC amended the proposed rule change to include as Exhibit 2 an information memorandum OCC published on its website informing OCC’s membership of the details of the margin add-on charge.5 On September 25, 2024, pursuant to Section 19(b)(2) of the Exchange Act,6 the Commission issued a Notice of Filing of Partial Amendment No. 1 and designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the proposed rule change.7 This order institutes proceedings, pursuant to Section 19(b)(2)(B) of the Exchange Act,8 to determine whether to approve or disapprove the proposed rule change, as modified by Partial Amendment No. 1 (hereinafter ‘‘Proposed Rule Change’’). II. Summary of the Proposed Rule Change OCC is a central counterparty (‘‘CCP’’), which means that as part of its function as a clearing agency, it interposes itself as the buyer to every seller and the seller to every buyer for certain financial transactions. As the CCP for the listed options markets in the United States,9 as well as for certain futures and stock loans, OCC is exposed certain risks arising from providing clearing and settlement services to its Clearing Members.10 Because OCC is obligated to perform on the contracts it clears, even where one of its Clearing Members defaults, one such risk to which OCC is exposed is credit risk in the form of exposure to a Clearing 3 Securities Exchange Act Release No. 100664 (Aug. 6, 2024), 89 FR 65695 (Aug. 12, 2024) (File No. SR–OCC–2024–010) (‘‘Notice of Filing’’). 4 Comments on the proposed rule change are available at https://www.sec.gov/comments/sr-occ2024-010/srocc2024010.htm. 5 See OCC Info Memo #55123, Intraday Risk Monitoring (dated Aug. 30, 2024), available at https://infomemo.theocc.com/ infomemos?number=55123. The amendment did not change the purpose or basis of the proposed rule change. 6 15 U.S.C. 78s(b)(2). 7 Securities Exchange Act Release No. 101193 (Sept. 25, 2024), 89 FR 79977 (Oct. 1, 2024) (File No. SR–OCC–2024–010). 8 15 U.S.C. 78s(b)(2)(B). 9 OCC describes itself as ‘‘the sole clearing agency for standardized equity options listed on a national securities exchange registered with the Commission (‘listed options’).’’ See Securities Exchange Act Release No. 96533 (Dec. 19, 2022), 87 FR 79015 (Dec. 23, 2022) (File No. SR–OCC–2022–012). 10 Capitalized terms have the same meaning as provided in OCC’s By-Laws and Rules, which can be found on OCC’s public website: https:// www.theocc.com/Company-Information/ Documents-and-Archives/By-Laws-and-Rules. E:\FR\FM\14NON1.SGM 14NON1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90145-90155]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26519]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101566; File No. SR-FICC-2024-801]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of No Objection to Advance Notice, as Modified by Partial 
Amendment No. 1, To Adopt a Minimum Margin Amount at GSD

November 8, 2024.
    On February 27, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2024-801 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\ In the advance notice, 
FICC proposes to add a minimum margin amount calculation to the margin 
methodology of FICC's Government Securities Division (``GSD'') to 
enhance margin collections during periods of extreme market volatility, 
as described more fully below. The notice of filing of the advance 
notice was published for comment in the Federal Register on March 15, 
2024.^{3 4} Upon publication of notice of filing of the advance 
notice, the Commission extended the review period of the advance notice 
for an additional 60 days because the Commission determined that the 
advance notice raised novel and complex issues.\5\ On March 22, 2024, 
the Commission requested additional information from FICC pursuant to 
Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the 
Commission's period of review of the advance notice until 120 days from 
the date the information requested by the Commission was received by 
the Commission.\6\ On April 26, 2024, the Commission received FICC's 
response to the Commission's request for additional information.\7\
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 99712 (March 11, 2024), 
89 FR 18981 (March 15, 2024) (SR-FICC-2024-801).
    \4\ On February 27, 2024, FICC filed the advance notice as a 
proposed rule change 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. The notice of proposed rule change was published 
in the Federal Register on March 15, 2024. Securities Exchange Act 
Release No. 99710 (March 11, 2024), 89 FR 18991 (March 15, 2024) 
(SR-FICC-2024-003). On March 25, 2024, the Commission extended the 
review period of the proposed rule change, pursuant to section 
19(b)(2) of the Act, 15 U.S.C. 78s(b)(2)(ii), until June 13, 2024, 
as the date by which the Commission shall either approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change. Securities Exchange Act Release 
No. 99769 (March 19, 2024), 89 FR 20716 (March 25, 2024) (SR-FICC-
2024-003). On May 20, 2024, the Commission published in the Federal 
Register an Order Instituting Proceedings to determine whether to 
approve or disapprove the proposed rule change. Securities Exchange 
Act Release No. 100141 (May 14, 2024), 89 FR 43915 (May 20, 2024) 
(SR-FICC-2024-003). On September 12, 2024, the Commission designated 
a longer period for Commission action on the proceedings to 
determine whether to disapprove the proposed rule change, until 
November 10, 2024. Securities Exchange Act Release No. 100958 (Sept. 
6, 2024), 89 FR 74309 (Sept. 12, 2024) (SR-FICC-2024-003).
    \5\ Pursuant to Section 806(e)(1)(H) of the 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 financial 
market utility (``FMU'') with prompt written notice of the 
extension.12 U.S.C. 5465(e)(1)(H); see supra note 3 at 18990 
(explaining the Commission's rationale for determining that the 
proposed changes in the advance notice raise novel and complex 
issues because the proposed changes to FICC's margin model are a 
direct response by FICC to address the unique circumstances that 
occurred during recent periods of extreme market volatility (i.e., 
the pandemic-related market volatility in March 2020 and the 
volatility during the successive interest rate hikes that began in 
March 2022).
    \6\ See 12 U.S.C. 5465(e)(1)(D). A memo regarding the Request 
for Additional Information and the tolled period of review is 
available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-449019-1150022.pdf.
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii). A memo 
regarding receipt of FICC's response to the Request for Additional 
Information is available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-471851-1323835.pdf.
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    On April 5, 2024, FICC filed Partial Amendment No. 1 to the advance 
notice to correct errors FICC discovered regarding the impact analysis 
filed as Exhibit 3 and discussed in the filing narrative, as well as 
correct a typo in the methodology formula in Exhibit 5b.\8\ Partial 
Amendment No. 1 corrected percentages and other figures throughout the 
filing narrative. The corrections in Partial Amendment No. 1 did not 
change the substance of the advance notice. On May 20, 2024, the 
Commission published notice of the advance notice, as modified by 
Partial Amendment No. 1 (hereinafter, the ``Advance Notice''), for 
comment in the Federal Register.\9\
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    \8\ FICC has requested confidential treatment pursuant to 17 CFR 
240.24b-2 with respect to Exhibit 3 and Exhibit 5b.
    \9\ Securities Exchange Act Release No. 99712 (May 14, 2024), 89 
FR 43941 (May 20, 2024) (SR-FICC-2024-801) (``Notice of Filing'').
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    On August 13, 2024, the Commission made a second request for 
additional information from FICC pursuant to Section 806(e)(1)(D) of 
the Clearing Supervision Act, which tolled the Commission's period of 
review of the advance notice until 120 days from the date the 
information requested by the Commission was received by the 
Commission.\10\ On September 26, 2024, the Commission received FICC's 
response to the Commission's second request for additional 
information.\11\
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    \10\ See 12 U.S.C. 5465(e)(1)(D). A memo regarding the second 
Request for Additional Information and the tolled period of review 
is available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-506275-1473822.pdf.
    \11\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii). A memo 
regarding receipt of FICC's response to the second Request for 
Additional Information is available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-527175-1514362.pdf.
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    The Commission has received comments regarding the substance of the 
changes proposed in the Advance Notice.\12\ In addition, the Commission 
received a letter from FICC responding to the comments.\13\ This 
publication serves as notice of no objection to the Advance Notice.
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    \12\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801.htm. Comments on 
the proposed rule change are available at https://www.sec.gov/comments/sr-ficc-2024-003/srficc2024003.htm. Because the proposals 
contained in the Advance Notice and the proposed rule change are the 
same, the Commission considers all comments received on the 
proposal, regardless of whether the comments are submitted with 
respect to the Advance Notice or the proposed rule change.
    \13\ See Letter from Timothy B. Hulse, Managing Director, 
Financial Risk, Governance & Credit Risk, Depository Trust & 
Clearing Corporation, (June 24, 2024) (``FICC Letter'').
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I. The Advance Notice

A. Executive Summary

    FICC proposes to add a new Minimum Margin Amount (``MMA'') 
calculation to the GSD margin methodology to ensure that FICC collects 
sufficient margin amounts from its members during sudden periods of 
extreme market volatility. Recently, FICC faced increased risk exposure 
to its members during two periods of extreme market volatility, i.e., 
the COVID-related volatility in March 2020 and the volatility resulting 
from the successive interest rate hikes that began in March 2022. Those 
periods of volatility involved market price changes that

[[Page 90146]]

exceeded the GSD margin model's projections, causing FICC to collect 
margin amounts that were insufficient to cover FICC's risk exposure to 
its members. This highlighted the need for FICC to enhance the GSD 
margin methodology to provide better coverage during periods of extreme 
market volatility.
    FICC proposes to add the MMA calculation to the Value-at-Risk 
charge (``VaR Charge'') component of the GSD margin methodology. 
Whereas the current VaR Charge is determined as the greater of two 
separate calculations, FICC proposes to add the MMA as a third 
calculation so that the VaR Charge would be the greater of three 
separate calculations. FICC specifically designed the MMA calculation 
to be more responsive to volatile market conditions than the two 
existing VaR Charge calculations. As described more fully below, the 
MMA calculation uses a filtered historical simulation (``FHS'') 
approach, which takes historical price data, removes the historical 
volatility estimates, and replaces them with volatility estimates that 
reflect current market conditions. The FHS approach also incorporates 
parameters that would give more weight to recent market events, such 
that when market volatility spikes, the MMA calculation would generate 
higher amounts and be more likely to exceed the other two VaR Charge 
calculations. Conversely, when market volatility subsides, the MMA 
calculation would generate lower amounts and be less likely to exceed 
the other two VaR Charge calculations.
    FICC conducted a 2-year impact study to analyze, among other 
things, the actual daily member-level margin amounts and backtesting 
results in comparison to the margin amounts and backtesting results had 
the MMA calculation been in place. The impact study indicates that if 
FICC used the MMA calculation during the 2-year period of analysis, 
FICC's margin collections and backtesting coverage would have 
significantly improved and enabled FICC to meet its 99 percent 
backtesting performance targets.

B. Background

    FICC, through its Government Securities Division (``GSD''),\14\ 
serves as a central counterparty (``CCP'') and provider of clearance 
and settlement services for transactions in U.S. government securities, 
as well as repurchase and reverse repurchase transactions involving 
U.S. government securities.\15\ A key tool that FICC uses to manage its 
credit exposures to its members is the daily collection of the Required 
Fund Deposit (i.e., margin) from each member.\16\ The aggregated amount 
of all members' Required Fund Deposits constitutes the Clearing Fund, 
which FICC would access should a defaulted member's own Required Fund 
Deposit be insufficient to satisfy losses to FICC caused by the 
liquidation of that member's portfolio.\17\
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    \14\ The GSD Rules are available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not 
otherwise defined herein are defined in the GSD Rules.
    \15\ GSD also clears and settles certain transactions on 
securities issued or guaranteed by U.S. government agencies and 
government sponsored enterprises.
    \16\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 14.
    \17\ See id.
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    A member's Required Fund Deposit consists of a number of 
components, each of which is calculated to address specific risks faced 
by FICC.\18\ The VaR Charge generally comprises the largest portion of 
a member's Required Fund Deposit amount. The VaR Charge is a 
calculation of the volatility of the unsettled securities positions in 
a member's portfolio.\19\ For each member portfolio, FICC currently 
uses two separate methods to calculate amounts, the greater of which 
constitutes the member's VaR Charge.\20\
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    \18\ Supra note 16.
    \19\ See GSD Rule 1 (Definitions--VaR Charge), supra note 14.
    \20\ See id.
---------------------------------------------------------------------------

    FICC's first calculation uses a sensitivity-based VaR methodology 
to estimate the possible losses for a given portfolio based on: (1) 
confidence level, (2) a time horizon, and (3) historical market 
volatility. The sensitivity VaR methodology is intended to capture the 
market price risks that are associated with the securities positions in 
a member's margin portfolio,\21\ at a 99 percent confidence level. This 
methodology projects the potential losses that could occur in 
connection with the liquidation of a defaulting member's portfolio, 
assuming a portfolio would take three days to liquidate in normal 
market conditions. The sensitivity VaR methodology relies on 
sensitivity data and historical risk factor time series data generated 
by an external vendor to calculate the risk profile of each member's 
portfolio. In the event of a vendor data disruption, the GSD Rules 
provide for an alternative volatility calculation that relies on 
historical market index proxies (the ``Margin Proxy'' calculation).\22\
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    \21\ 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.
    \22\ See GSD Rule 1 (Definitions--Margin Proxy), supra note 14; 
Securities Exchange Act Release Nos. 80341 (March 30, 2017), 82 FR 
16644 (April 5, 2017) (SR-FICC-2017-801); Securities Exchange Act 
Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR-
FICC-2018-801).
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    FICC recognizes that the sensitivity VaR methodology might not 
generate margin amounts sufficient to cover its exposure to its members 
consistent with its regulatory obligations when applied to certain 
types of member portfolios.\23\ Therefore, FICC's second calculation 
uses a haircut-based methodology (currently referred to in the GSD 
Rules as the ``VaR Floor''),\24\ in which FICC applies a haircut to the 
market value of the gross unsettled positions in the member's 
portfolio.\25\ The current VaR Floor is not designed to address the 
risk of potential underperformance of the sensitivity VaR methodology 
under extreme market volatility.\26\ Each member's VaR Charge is either 
the sensitivity VaR calculation or the VaR Floor calculation, whichever 
is greater.\27\
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    \23\ See Notice of Filing, supra note 9 at 43944. Specifically, 
for member portfolios that contain both long and short positions in 
different classes of securities that have a high degree of 
historical price correlation, the sensitivity VaR methodology can 
generate inadequate VaR Charges. See id.
    \24\ Supra note 19.
    \25\ See Securities Exchange Act Release No. 83362 (June 1, 
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001). Specifically, 
FICC calculates the VaR Floor by multiplying the absolute value of 
the sum of the portfolio's net long positions and net short 
positions, grouped by product and remaining maturity, by a 
percentage designated by FICC for such group. For U.S. Treasury and 
agency securities, such percentage shall be a fraction, no less than 
10 percent, 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 percent. Supra note 19.
    \26\ See Notice of Filing, supra note 9 at 43944.
    \27\ Supra note 19.
---------------------------------------------------------------------------

    FICC regularly assesses whether its margin methodologies generate 
margin levels commensurate with the particular risk attributes of each 
relevant product, portfolio, and market. For example, FICC employs 
daily backtesting \28\ to determine the adequacy of margin collections 
from its members.\29\ FICC

[[Page 90147]]

compares each Member's Required Fund Deposit \30\ with the simulated 
liquidation gains/losses, using the actual positions in each member 
portfolio and the actual historical security returns. A backtesting 
deficiency occurs when a member's Required Fund Deposit would not have 
been adequate to cover the projected liquidation losses. Backtesting 
deficiencies highlight exposures that could subject FICC to potential 
losses in the event of a member default.
---------------------------------------------------------------------------

    \28\ Backtesting is an ex-post comparison of actual outcomes 
(i.e., the actual margin collected) with expected outcomes derived 
from the use of margin models. See 17 CFR 240.17ad-22(a)(1).
    \29\ FICC's Model Risk Management Framework (``Model Risk 
Management Framework'') sets forth the model risk management 
practices of FICC and states that 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); 97890 (July 13, 2023), 88 FR 46287 (July 19, 2023) (SR-FICC-
2023-008).
    \30\ 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 14 (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 believes that its current VaR model has performed well in low 
to moderate volatility markets,\31\ though it has not met FICC's 
performance targets during periods of extreme market volatility.\32\ As 
described more fully below, FICC performed an impact study on its 
members' margin portfolios covering the period beginning July 1, 2021 
through June 30, 2023 (``Impact Study'').\33\ During the period of the 
Impact Study, FICC's VaR model backtesting coverage was 98.86 percent, 
with 843 VaR model backtesting deficiencies.\34\ Also, during the 
period of the Impact Study, FICC's overall margin backtesting coverage 
was 98.87 percent, with 685 overall margin backtesting 
deficiencies.\35\ Thus, the Impact Study demonstrates that FICC's 
backtesting metrics fell below performance targets during the period of 
the Impact Study.\36\ FICC states that the foregoing backtesting 
deficiencies are attributable to recent periods of extreme volatility 
in the fixed income market caused by monetary policy changes, 
inflation, and recession fears, which have led to greater risk 
exposures for FICC.\37\ Specifically, FICC states that the periods of 
extreme market volatility in March 2020 related to the COVID pandemic 
and the successive interest rate hikes that began in March 2022, have 
led to market price changes that exceeded the projections of FICC's 
current VaR model, resulting in insufficient VaR Charges.\38\
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    \31\ During the periods of relatively low to moderate market 
volatility from January 2013 to March 2020, the VaR model generally 
performed above the 99 percent performance targets. See Notice of 
Filing, supra note 9 at 43943.
    \32\ During the pandemic-related volatility in March 2020 and 
the successive interest rate hikes that began in March 2022, the VaR 
model fell below the 99 percent performance targets. See Notice of 
Filing, supra note 9 at 43942-44.
    \33\ As part of the Advance Notice, FICC filed Exhibit 3--FICC 
Impact Study. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 3.
    \34\ See Notice of Filing, supra note 9 at 43947.
    \35\ See id.
    \36\ See Notice of Filing, supra note 9 at 43943-44.
    \37\ See Notice of Filing, supra note 9 at 43942-44.
    \38\ See id.
---------------------------------------------------------------------------

    Accordingly, in the Advance Notice, FICC proposes changes to the 
VaR model that FICC believes would mitigate the risk of potential 
underperformance of the VaR model during periods of extreme market 
volatility.\39\
---------------------------------------------------------------------------

    \39\ The proposed changes would revise the GSD Rules and FICC's 
Methodology Document--GSD Initial Market Risk Margin Model (the 
``QRM Methodology'') relevant to the VaR model. As part of the 
Advance Notice, FICC filed Exhibit 5b--Proposed Changes to the QRM 
Methodology. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 5b. FICC originally filed the QRM 
Methodology as a confidential exhibit to proposed rule change SR-
FICC-2018-001. See supra note 25; see also Securities Exchange Act 
Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR-
FICC-2018-801). FICC has subsequently amended the QRM Methodology. 
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); 99447 
(Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR-FICC-2024-001).
---------------------------------------------------------------------------

C. Proposed Changes

    In the Advance Notice, FICC proposes to introduce a new minimum 
margin amount (i.e., the MMA) into the GSD margin methodology. FICC 
proposes to calculate the MMA for each member portfolio as a supplement 
to the existing sensitivity VaR calculation and the haircut-based VaR 
Floor calculation described above in Section I.B. FICC proposes to 
rename the current haircut-based VaR Floor calculation as the ``VaR 
Floor Percentage Amount.'' FICC proposes to revise the existing VaR 
Floor definition to mean the greater of (1) the VaR Floor Percentage 
Amount, and (2) the MMA. Thus, the greater of the three calculations 
(i.e., sensitivity VaR, VaR Floor Percentage Amount, and MMA) would 
constitute the member's VaR Charge. Additionally, FICC proposes to 
clarify that the VaR Floor would also apply in the event that the 
Margin Proxy is invoked. The proposed changes are described in greater 
detail below.
1. Minimum Margin Amount Calculation
    FICC would calculate the MMA for each portfolio using historical 
price returns to represent risk.\40\ FICC would calculate the MMA as 
the sum of the following: (1) amounts calculated using an FHS approach 
\41\ to assess volatility by scaling historical market price returns to 
current market volatility, with market volatility being measured by 
applying an exponentially weighted moving average (``EWMA'') to the 
historical market price returns with a decay factor between 0.93 and 
0.99,\42\ as determined by FICC based on sensitivity analysis, 
macroeconomic conditions, and/or backtesting performance; (2) amounts 
calculated using a haircut method to measure the risk exposure of those 
securities that lack sufficient historical price return data; and (3) 
amounts calculated to incorporate risks related to (i) repo interest 
volatility (``repo interest volatility charge'') \43\ 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'').\44\
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    \40\ FICC refers to the proposed approach as the ``price return-
based risk representation'' in the QRM Methodology. See Notice of 
Filing, supra note 9 at 43944. 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. See id.
    \41\ The FHS method differs from the historical simulation 
method, which uses historical price return data as is, by 
incorporating the volatilities of historical price returns. In 
particular, the FHS method constructs the filtered historical price 
returns in two steps: (1) ``devolatilizing'' the historical price 
returns by dividing them by a volatility estimate for the day of the 
price return, and (2) ``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.
    \42\ FICC would provide members with at least one Business Day 
advance notice of any change to the decay factor via an Important 
Notice.
    \43\ The ``repo interest volatility charge'' is a component of 
the VaR Charge designed to address repo interest volatility. The 
repo interest volatility charge is calculated based on internally 
constructed repo interest rate indices. As proposed, FICC would 
include the repo interest volatility charge as a component of the 
MMA; however, FICC is not proposing to otherwise change the repo 
interest volatility charge or the manner in which it is calculated. 
See Notice of Filing, supra note 9 at 43944.
    \44\ The ``bid-ask spread risk charge'' is a component of the 
VaR Charge designed to address transaction costs related to bid-ask 
spread in the market that FICC could incur when liquidating a 
portfolio. As proposed, FICC would include the bid-ask spread risk 
charge as a component of the MMA; however, FICC is not proposing to 
otherwise change the bid-ask spread risk charge or the manner in 
which it is calculated. See Notice of Filing, supra note 9 at 43944.

---------------------------------------------------------------------------

[[Page 90148]]

    FHS Method: For the FHS method, FICC would first construct 
historical price returns using certain mapped fixed income securities 
benchmarks. Specifically, FICC proposes to use the following mapped 
fixed income securities benchmarks with the FHS method when calculating 
the MMA: (1) Bloomberg Treasury indexes for U.S. Treasury and agency 
securities; (2) Bloomberg TIPS indexes for Treasury Inflation-Protected 
Securities (``TIPS''); and (3) to-be-announced (``TBA'') securities for 
mortgage-backed securities (``MBS'') pools. FICC states that it chose 
these benchmarks 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.\45\
---------------------------------------------------------------------------

    \45\ See Notice of Filing, supra note 9 at 43945.
---------------------------------------------------------------------------

    After constructing historical price returns, FICC would estimate a 
market volatility associated with each historical price return by 
applying an EWMA to the historical price returns. FICC would 
``devolatilize'' the historical price returns (i.e., remove an amount 
attributable to the historical market volatility from the price 
returns) by dividing them by the corresponding EWMA volatilities to 
obtain the residual returns. FICC would ``revolatilize'' the residual 
returns (i.e., add an amount attributable to the current market 
volatility to the residual returns) by multiplying them by the current 
EWMA volatility to obtain the filtered returns.
    FICC proposes to use the FHS method to improve the responsiveness 
of the VaR model to periods of extreme market volatility because 
historical returns are scaled to current market volatility.\46\ FICC 
would use filtered return time series to simulate the profits and 
losses of a member's portfolio and derive the volatility of the 
portfolio using the standard historical simulation approach. 
Specifically, FICC would map each security that is in a member's 
portfolio to a respective fixed income securities benchmark, as 
applicable, based on the security's asset class and remaining maturity. 
FICC would use the filtered returns of the benchmark as the simulated 
returns of the mapped security to calculate the simulated profits and 
losses of a member's portfolio. Finally, FICC would calculate the MMA 
as the 99-percentile of the simulated portfolio loss. In accordance 
with FICC's model risk management practices and governance set forth in 
the Clearing Agency Model Risk Management Framework,\47\ FICC would 
determine the mapped fixed income securities benchmarks, historical 
market price returns, parameters, and volatility assessments used to 
calculate the MMA.
---------------------------------------------------------------------------

    \46\ See Notice of Filing, supra note 9 at 43942.
    \47\ See Model Risk Management Framework, supra note 29.
---------------------------------------------------------------------------

    FHS Parameters: The proposed MMA would use a lookback period for 
the FHS and a decay factor for calculating the EWMA volatility of the 
historical price returns. Specifically, the MMA lookback period would 
be the same as the lookback period currently used for the sensitivity 
VaR calculation, which is 10 years, plus, to the extent applicable, a 
stressed period. FICC would analyze the MMA's lookback period and 
evaluate its sensitivity and impact on margin model performance, 
consistent with the VaR methodology outlined in the QRM Methodology and 
pursuant to the model performance monitoring required under the Model 
Risk Management Framework.\48\
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    \48\ The Model Risk Management Framework provides that all 
models undergo ongoing model performance monitoring and backtesting, 
which is the process of (1) evaluating an active model's ongoing 
performance based on theoretical tests, (2) monitoring the model's 
parameters through the use of threshold indicators, and/or (3) 
backtesting using actual historical data/realizations to test a VaR 
model's predictive power. Supra note 29.
---------------------------------------------------------------------------

    The decay factor generally affects (1) whether and how the MMA 
would be invoked (i.e., applied as a member's VaR Charge), (2) the peak 
level of margin increase or the degree of procyclicality, and (3) how 
quickly the margin would fall back to pre-stress levels. As proposed, 
FICC would have the discretion to set the decay factor between 0.93 and 
0.99, with the initial decay factor value set at 0.97. FICC expects 
that any adjustment to the decay factor would be an infrequent event 
that would typically happen only when there is an unprecedented market 
volatility event resulting in risk exposures to FICC that cannot be 
adequately mitigated by the then-calibrated decay factor.\49\ FICC's 
decision to adjust the decay factor would be based on an analysis of 
the decay factor's sensitivity and impact to the model performance, 
considering factors including the impact to the VaR Charges, 
macroeconomic conditions, and/or backtesting performance.\50\ Any 
decision by FICC to adjust the decay factor would be in accordance with 
FICC's model risk management practices and governance set forth in the 
Model Risk Management Framework.\51\
---------------------------------------------------------------------------

    \49\ See Notice of Filing, supra note 9 at 43946.
    \50\ See id.
    \51\ See Model Risk Management Framework, supra note 29. Similar 
to the lookback period described above, FICC would also analyze the 
decay factor to evaluate its sensitivity and impact to the model 
performance pursuant to the model performance monitoring required 
under the Model Risk Management Framework.
---------------------------------------------------------------------------

    Haircut Method: Occasionally, a member's portfolio might contain 
classes of securities that reflect market price changes that are not 
consistently related to historical price moves. The value of such 
securities is often uncertain because the securities' market volume 
varies widely. Because the volume and historical price information for 
such securities are not sufficient to perform accurate statistical 
analyses, the FHS method would not generate an MMA amount that 
adequately reflects the risk profile of such securities. Accordingly, 
FICC would use a haircut method to assess the market risk of securities 
that are more difficult to simulate (e.g., due to thin trading 
history).
    Specifically, FICC would use a haircut method 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. FICC would also use a haircut method to 
account for 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).\52\ 
Similarly, FICC would use a haircut method to account for 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.
---------------------------------------------------------------------------

    \52\ Accounting for the basis risk would enable FICC to 
explicitly model and manage the basis risk between an agency 
security and the mapped U.S. Treasury index, given that agency 
securities are not as actively traded as U.S. Treasury securities.
---------------------------------------------------------------------------

    Ongoing Performance Monitoring: The Model Risk Management Framework 
would require FICC to conduct ongoing model performance monitoring of 
the MMA methodology.\53\ 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.\54\ Additionally, FICC would 
monitor each member's Required Fund Deposit and the aggregate Clearing 
Fund requirements versus the requirements calculated by the MMA, by 
comparing the results versus the three-day profit

[[Page 90149]]

and loss of each member's portfolio based on actual market price 
moves.\55\ Based on the results of the sensitivity analysis and/or 
backtesting, FICC could consider adjustments to the MMA, including 
changing the decay factor as appropriate.\56\ Any adjustment to the MMA 
calculation would be subject to the model risk management practices and 
governance process set forth in the Model Risk Management 
Framework.\57\
---------------------------------------------------------------------------

    \53\ See note 29.
    \54\ See Notice of Filing, supra note 9 at 43946.
    \55\ See id.
    \56\ See id.
    \57\ See Model Risk Management Framework, supra note 29.
---------------------------------------------------------------------------

    Impact Study: As mentioned above in Section I.B., FICC performed an 
Impact Study on its members' margin portfolios covering the period 
beginning July 1, 2021 through June 30, 2023.\58\ The Impact Study 
lists the actual daily and average VaR Charges at both the member-level 
and CCP-level during the period of the Impact Study, compared with how 
those amounts would have changed if the proposed MMA had been in place. 
The Impact Study also lists the actual daily backtesting results at the 
member-level during the period of the Impact Study, compared with how 
those amounts would have changed if the proposed MMA had been in place. 
The Impact Study shows that if the proposed MMA had been in place 
during the period of the Impact Study, when compared to the current VaR 
methodology: (1) the aggregate average daily start-of-day (``SOD'') VaR 
Charges would have increased by approximately $2.90 billion or 13.89 
percent; (2) the aggregate average daily noon VaR Charges would have 
increased by approximately $3.03 billion or 14.06 percent; and (3) the 
aggregate average daily Backtesting Charges \59\ would have decreased 
by approximately $622 million or 64.46 percent.\60\
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    \58\ FICC states that it 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. See Notice of Filing, supra note 9 at 43947.
    \59\ The Backtesting Charge is an additional charge that may be 
added to a member's VaR Charge to mitigate exposures to FICC caused 
when the member exhibits a pattern of breaching the target coverage 
ratio of 99 percent. See GSD Rule 1 (Definitions--Backtesting 
Charge), supra note 14.
    \60\ Margin Proxy was not invoked during the period of the 
Impact Study. However, if the proposed MMA had been in place and the 
Margin Proxy was invoked during the period of the Impact Study: the 
aggregate average daily SOD VaR Charges would have increased by 
approximately $4.16 billion or 20.97 percent; the VaR model 
backtesting coverage would have increased from approximately 98.17 
percent to 99.38 percent; and the number of the VaR model 
backtesting deficiencies would have been reduced by 899 (from 1358 
to 459, or approximately 66.2 percent).
---------------------------------------------------------------------------

    The Impact Study indicates that if the proposed MMA had been in 
place, the VaR model backtesting coverage would have increased from 
approximately 98.86 percent to 99.46 percent during the period of the 
Impact Study and the number of VaR model backtesting deficiencies would 
have been reduced by 441 (from 843 to 402, or approximately 52 
percent). The Impact Study also indicates that if the proposed MMA had 
been in place: (1) overall margin backtesting coverage would have 
increased from approximately 98.87 percent to 99.33 percent, (2) the 
number of overall margin backtesting deficiencies would have been 
reduced by 280 (from 685 to 405, or approximately 41 percent), and (3) 
the overall margin backtesting coverage for 94 members (approximately 
72 percent of the GSD membership) would have improved, with 36 members 
who were below 99 percent coverage brought back to above 99 percent.
    On average, at the member-level, the proposed MMA would have 
increased the SOD VaR Charge by approximately $22.43 million, or 17.56 
percent, and the noon VaR Charge by approximately $23.25 million, or 
17.43 percent, over the period of the Impact Study. The largest average 
percentage increase in SOD VaR Charge for any member would have been 
approximately 66.88 percent, or $97,051 (0.21percent of the member's 
average Net Capital),\61\ and the largest average percentage increase 
in noon VaR Charge for any member would have been approximately 64.79 
percent, or $61,613 (0.13 percent of the member's average Net Capital). 
The largest average dollar increase in SOD VaR Charge for any member 
would have been approximately $268.51 million (0.34 percent of the 
member's average Net Capital), or 19.06 percent, and the largest dollar 
increase in noon VaR Charge for any member would have been 
approximately $289.00 million (1.07 percent of the member's average Net 
Capital), or 13.67 percent. The top 10 members based on the size of 
their average SOD VaR Charges and average noon VaR Charges would have 
contributed approximately 51.87 percent and 53.64 percent of the 
aggregated SOD VaR Charges and aggregated noon VaR Charges, 
respectively, during the period of the Impact Study had the proposed 
MMA been in place. The same members would have contributed to 50.08 
percent and 51.52 percent of the increase in aggregated SOD VaR Charges 
and aggregated noon VaR Charges, respectively, had the proposed MMA 
been in place during the period of the Impact Study.
---------------------------------------------------------------------------

    \61\ 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 14.
---------------------------------------------------------------------------

2. Clarification of VaR Floor To Include Margin Proxy
    As mentioned above in Section I.B., the Margin Proxy methodology is 
currently invoked as an alternative volatility calculation if the 
requisite vendor data used for the sensitivity VaR calculation is 
unavailable for an extended period of time.\62\ FICC proposes to 
clarify that the VaR Floor, which does not depend upon any vendor data, 
operates as a floor for the Margin Proxy, such that if the Margin 
Proxy, when invoked, is lower than the VaR Floor, then the VaR Floor 
would be utilized as the VaR Charge with respect to a member's 
portfolio. FICC believes this clarification would enable Margin Proxy 
to be an effective risk mitigant under extreme market volatility and 
heightened market stress because as discussed above in Section I.C.1., 
the proposed VaR Floor would include the MMA calculation.\63\
---------------------------------------------------------------------------

    \62\ 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. See Notice of Filing, supra note 9 at 43946.
    \63\ See id.
---------------------------------------------------------------------------

II. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard 
of review for an advance notice, the stated purpose of the Clearing 
Supervision Act 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 (SIFMUs) and strengthening the 
liquidity of SIFMUs.\64\
---------------------------------------------------------------------------

    \64\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act authorizes the 
Commission to prescribe regulations containing risk management 
standards for the payment, clearing, and settlement activities of 
designated clearing entities engaged in designated activities for which 
the Commission is the supervisory agency.\65\ Section 805(b) of the 
Clearing Supervision Act provides the following objectives and 
principles for the Commission's risk management standards prescribed 
under Section 805(a): \66\
---------------------------------------------------------------------------

    \65\ 12 U.S.C. 5464(a)(2).
    \66\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     to promote robust risk management;
     to promote safety and soundness;
     to reduce systemic risks; and

[[Page 90150]]

     to support the stability of the broader financial system.
    Section 805(c) provides, in addition, that the Commission's risk 
management standards may address such areas as risk management and 
default policies and procedures, among other areas.\67\
---------------------------------------------------------------------------

    \67\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    The Commission has adopted risk management standards under Section 
805(a)(2) of the Clearing Supervision Act and Section 17A of the 
Exchange Act (the ``Clearing Agency Rules'').\68\ The Clearing Agency 
Rules require, among other things, each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures that are reasonably designed to meet certain minimum 
requirements for its operations and risk management practices on an 
ongoing basis.\69\ As such, it is appropriate for the Commission to 
review advance notices against the Clearing Agency Rules and the 
objectives and principles of these risk management standards as 
described in Section 805(b) of the Clearing Supervision Act. As 
discussed below, the proposals in the Advance Notice are consistent 
with the objectives and principles described in Section 805(b) of the 
Clearing Supervision Act \70\ and in the Clearing Agency Rules, in 
particular Rule 17ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).\71\
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14). FICC is a 
``covered clearing agency'' as defined in Rule 17ad-22(a)(5).
    \69\ Id.
    \70\ 12 U.S.C. 5464(b).
    \71\ 17 CFR 240.17ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).
---------------------------------------------------------------------------

A. Consistency With Section 805(b) of the Clearing Supervision Act

    The proposals in the Advance Notice are consistent with the stated 
objectives and principles of Section 805(b) of the Clearing Supervision 
Act.\72\ Specifically, the changes proposed in the Advance Notice are 
consistent with promoting robust risk management, promoting safety and 
soundness, reducing systemic risks, and supporting the broader 
financial system.\73\
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 5464(b).
    \73\ Several of the issues raised by the commenters are directed 
at the proposed rule change and will be addressed in that context. 
These comments generally relate to the proposal's impact on 
competition and its consistency with the Exchange Act. See Letter 
from Independent Dealer and Trade Association (May 7, 2024) (``IDTA 
Letter'') at 2, 3-6; Letter from Robert Toomey, Head of Capital 
Markets, Managing Director/Associate General Counsel, Securities 
Industry and Financial Markets Association (May 22, 2024) (``SIFMA 
Letter'') at 2, 5, 7-8 (commenting on the proposal's impact on 
competition). The Commission's evaluation of the Advance Notice is 
conducted under the Clearing Supervision Act and, as noted above, 
generally considers whether the proposal would promote robust risk 
management, promote safety and soundness, reduce systemic risks, and 
support the broader financial system.
---------------------------------------------------------------------------

1. Promoting Robust Risk Management and Safety and Soundness
    Incorporating the proposed MMA into the GSD margin methodology 
would be consistent with the promotion of robust risk management and 
safety and soundness at FICC. As described above in Section I.B., the 
extreme market volatilities during recent stressful market periods led 
to market price changes that exceeded the current VaR model's 
projections, generating margin amounts that were not sufficient to 
mitigate FICC's credit exposure to its members' portfolios at a 99 
percent confidence level. FICC's proposed incorporation of the MMA 
calculation into the GSD margin methodology would result in margin 
levels that better reflect the risks and particular attributes of 
member portfolios during periods of extreme market volatility, which is 
consistent with promoting robust risk management.
    Implementing the MMA would enable FICC to collect additional margin 
when the market price volatility implied by the current sensitivity VaR 
calculation and VaR Floor calculation is lower than the market price 
volatility implied by the proposed MMA calculation. In its 
consideration of the proposed MMA, the Commission reviewed and analyzed 
the: (1) Advance Notice, including the supporting exhibits that 
provided confidential information on the proposed MMA calculation, 
Impact Study (including detailed information regarding the impact of 
the proposed changes on the portfolios of each FICC member over various 
time periods), and backtesting coverage results, (2) FICC's response to 
the Commission's requests for additional information; \74\ and (3) the 
Commission's own understanding of the performance of the current GSD 
margin methodology, with which the Commission has experience from its 
general supervision of FICC, compared to the proposed margin 
methodology.\75\
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    \74\ See supra notes 7, 11.
    \75\ In addition, because the proposals contained in the Advance 
Notice and the proposed rule change are the same, all information 
submitted by FICC was considered regardless of whether the 
information submitted with respect to the Advance Notice or the 
proposed rule change. See supra note 9.
---------------------------------------------------------------------------

    Based on the Commission's review of the Impact Study, had the 
proposed MMA been in place, both the VaR model backtesting coverage and 
the overall margin backtesting coverage would have risen above the 99 
percent confidence level to 99.46 percent and 99.33 percent, 
respectively, over the time period covered by the Impact Study.\76\ 
Additionally, the number of VaR model backtesting deficiencies and 
overall margin backtesting deficiencies would have been reduced by 441 
and 280, respectively.\77\
---------------------------------------------------------------------------

    \76\ See Notice of Filing, supra note 9 at 43947.
    \77\ See id.
---------------------------------------------------------------------------

    The proposed MMA methodology would be more likely to apply as the 
VaR Charge during periods of extreme market volatility because the MMA 
methodology is more responsive to spikes in market volatility than the 
sensitivity VaR calculation. As described above in Section I.C.1., the 
MMA calculation relies, in part, on the FHS method, which takes 
historical price data, removes the historical volatility estimates, and 
replaces them with volatility estimates that reflect current market 
conditions. Additionally, as described above in Section I.C.1., the 
decay factor used in the FHS method affects (1) whether and how the MMA 
would apply to determine a member's VaR Charge; (2) the peak level of 
margin increase or the degree of procyclicality; and (3) how quickly 
the margin would fall back to pre-stress levels. A faster decay (i.e., 
smaller decay factor value), like the one FICC intends to use 
initially, would give more weight to more recent market events, while a 
slower decay would give more weight to older market events. Thus, when 
market volatility spikes, the MMA calculation would generate higher 
amounts and thereby be more likely to apply as the VaR Charge (after 
exceeding the sensitivity VaR calculation). Conversely, when market 
volatility subsides, the MMA calculation would generate lower amounts 
and be less likely to apply.
    The Impact Study supports this analysis. If the proposed MMA 
calculation had been in place during the period of the Impact Study, 
the MMA would have applied primarily during the recent extreme market 
volatility events (i.e., those in March 2020 and commencing in March 
2022). In contrast, during periods of low to moderate market 
volatility, the MMA calculation would generally not be the greatest 
amount of the three calculations and thus, would not be invoked. 
Instead, in periods of low to moderate market volatility, the 
sensitivity VaR calculation is likely to be the VaR Charge for members 
whose portfolios do not contain long and short positions in different 
classes of securities that share a high degree of price correlation. 
For such long/short portfolios, in low to

[[Page 90151]]

moderate volatility markets, the VaR Floor Percentage Amount 
calculation is more likely to be the VaR Charge. The sensitivity VaR 
calculation and VaR Floor Percentage Amount calculations are likely to 
generate sufficient margin levels above FICC's 99 percent performance 
targets during periods of low to moderate market volatility. Indeed, 
during the periods of low to moderate market volatility from January 
2013 to March 2020, the GSD VaR model has generally performed above 
FICC's 99 percent backtesting performance targets.\78\
---------------------------------------------------------------------------

    \78\ See Notice of Filing, supra note 9 at 43943.
---------------------------------------------------------------------------

    Implementing the proposed MMA should enable FICC to better manage 
its exposure to its members during periods of extreme market volatility 
by generating margin levels that meet FICC's 99 percent backtesting 
coverage targets. Accordingly, the proposal is consistent with 
promoting robust risk management because the MMA would enable FICC to 
better manage the relevant risks presented by the securities it clears 
in volatile market conditions.
    Additionally, FICC proposes to clarify that if the Margin Proxy, 
when invoked, is lower than the VaR Floor, then the VaR Floor would be 
utilized as the VaR Charge with respect to a member's portfolio. 
Although Margin Proxy was not invoked during the period of the Impact 
Study, had the proposed changes been in place during that period, the 
VaR model backtesting coverage would have increased from approximately 
98.17 percent to 99.38 percent and the VaR model backtesting 
deficiencies would have been reduced by 899 (from 1,358 to 459). The 
Commission agrees that ensuring the VaR Floor operates as a floor for 
the Margin Proxy would be more effective at mitigating risks under 
extreme market volatility because as proposed, the VaR Floor would 
include the MMA calculation. Accordingly, the proposal is consistent 
with promoting robust risk management because the enhanced VaR Floor 
would enable FICC to better manage the relevant risks, regardless of 
whether the sensitivity VaR calculation or Margin Proxy are invoked.
    Further, by helping to ensure that FICC collects margin amounts 
sufficient to manage the risk associated with its members' portfolios 
during periods of extreme market volatility, the proposed MMA changes 
and Margin Proxy clarifications would help limit FICC's exposure in a 
member default scenario. These proposed changes would generally provide 
FICC with additional resources to manage potential losses arising out 
of a member default. Such an increase in FICC's available financial 
resources would decrease the likelihood that losses arising out of a 
member default would exceed FICC's prefunded resources and threaten the 
safety and soundness of FICC's ongoing operations. Accordingly, the 
proposals are also consistent with promoting safety and soundness at 
FICC.
2. Reducing Systemic Risks and Supporting the Stability of the Broader 
Financial System
    Consistent with the objectives and principles of the Clearing 
Supervision Act, the Commission also considers whether the proposals in 
the Advance Notice would reduce systemic risks and support the 
stability of the broader financial system.\79\
---------------------------------------------------------------------------

    \79\ See 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    The proposed MMA changes and Margin Proxy clarifications are 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system. As discussed above in Section I.B., FICC 
would access its Clearing Fund should a defaulted member's own margin 
be insufficient to satisfy losses to FICC caused by the liquidation of 
the member's portfolio. FICC proposes to add the MMA calculation to the 
GSD margin methodology to collect additional margin from members during 
periods of extreme market volatility to cover such costs, and thereby 
better manage the potential costs of liquidating a defaulted member's 
portfolio. Similarly, FICC's proposal to clarify the application of the 
VaR Floor to include Margin Proxy would ensure FICC's ability to 
collect additional margin from members if the Margin Proxy, when 
invoked, is lower than the VaR Floor. These changes and clarifications 
to the GSD margin methodology could reduce the possibility that FICC 
would need to mutualize among the non-defaulting members a loss arising 
out of the close-out process. Reducing the potential for loss 
mutualization could, in turn, reduce the potential resultant effects on 
non-defaulting members, their customers, and the broader market arising 
out of a member default.
    One commenter states that FICC's implementation of the proposed MMA 
would increase costs for market participants, leading to negative 
effects on the broader U.S. Treasury markets.\80\ Specifically, the 
commenter states that markets with high margin costs generally have 
fewer market participants, decreased market liquidity, wider bid/offer 
spreads, and encourage market participants to either exit the market or 
pass additional expenses to their customers.\81\ In response, FICC 
states that the proposed MMA is not designed to advantage or 
disadvantage capital formation.\82\ Instead, FICC states that the 
purpose of the proposed MMA is to manage the risk associated with 
member portfolios during periods of extreme market volatility.\83\ FICC 
states that although the proposal's increased margin requirements could 
lessen liquidity for members, it is necessary and appropriate to 
mitigate the relevant risks.\84\
---------------------------------------------------------------------------

    \80\ See IDTA Letter at 5-6.
    \81\ See id.
    \82\ See FICC Letter at 5.
    \83\ See id.
    \84\ See id.
---------------------------------------------------------------------------

    In considering the comments opposing FICC's implementation of the 
MMA calculation as proposed, the Commission considered the Advance 
Notice filing materials including the Impact Study, comment letters, 
FICC's response letter, and the Commission's own understanding of the 
GSD margin methodology based on the Commission's general supervision of 
FICC. As stated above in Section II.A.1., during the period of the 
Impact Study, the actual GSD VaR model backtesting coverage and overall 
margin backtesting coverage both fell below the 99 percent confidence 
level. These shortfalls are specifically attributable to the periods of 
extreme market volatility of March 2020 and commencing in March 2022. 
The Impact Study demonstrates that had the proposed MMA calculation 
been in place during that period, margin amounts would have exceeded 
the 99 percent backtesting coverage levels. Thus, implementing the MMA 
calculation would have better enabled FICC to calculate and collect 
margin amounts sufficient to mitigate the risks presented by its 
members' portfolios during periods of extreme market volatility.
    The Commission acknowledges that implementing the proposed MMA 
would increase margin requirements during periods of extreme market 
volatility. However, as detailed above in Section I.C.1., the Impact 
Study demonstrates that the increased margin requirements attributable 
to the MMA at the member-level would represent relatively small 
percentages (i.e., typically a fraction of one percent) of members' 
average Net Capital,\85\ which

[[Page 90152]]

indicates that members would likely have access to sufficient financial 
resources to meet the increased MMA obligation if invoked during 
periods of extreme market volatility. Therefore, the comment that the 
increased margin costs attributable to the MMA would decrease market 
liquidity, widen bid/offer spreads, and encourage market participants 
to either exit the market or pass additional expenses to their 
customers, do not appear likely based on the limited size of increased 
VaR Charges from the Impact Study. Additionally, by helping to ensure 
FICC collects sufficient margin to cover its exposure to members, 
implementing the MMA would decrease the likelihood of loss 
mutualization in the event of a member default, which could encourage 
greater market participation. Moreover, FICC has a regulatory 
obligation to have policies and procedures to calculate and collect 
margin amounts sufficient to mitigate the relevant risks presented to 
it by its members' portfolios.\86\ Indeed, FICC's role as a CCP that 
reduces systemic risk and promotes market stability is dependent on 
effectively managing the relevant risks, which includes FICC's 
collection of sufficient margin from its members.
---------------------------------------------------------------------------

    \85\ See GSD Rule 1 (Definitions--Net Capital) (defining Net 
Capital'' to mean, 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) and 17 CFR 
240.15c3-1(c)(2) (requiring that every broker or dealer at all times 
have and maintain net capital no less than a particular requirement, 
as set forth in the Rule).
    \86\ See 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------

    One commenter states that the proposed MMA would negatively affect 
markets by having a detrimental effect on certain trading strategies 
that rely on margin offsets across maturity buckets.\87\ The commenter 
states that the MMA would eliminate such offsets, resulting in gross 
margining across maturity buckets and decreased liquidity.\88\ In 
response, FICC states that the proposed MMA would not eliminate such 
margin offsets across maturity buckets.\89\ Specifically, FICC states 
that the MMA would not differ from the current VaR model insofar as the 
FHS approach would likewise offset the market risk of long positions in 
one maturity bucket with the market risk of short positions in another 
maturity bucket.\90\ Based on the Commission's review and understanding 
of FICC's proposed changes to the QRM Methodology,\91\ the Commission 
agrees with FICC's response that the FHS approach allows for similar 
offsetting as the current GSD VaR model regarding the market risk of 
long positions in one maturity bucket offsetting the market risk of 
short positions in another maturity bucket.\92\
---------------------------------------------------------------------------

    \87\ See IDTA Letter at 5 (discussing trading strategies that 
involve Treasury securities in separate maturity buckets, such as 
buyers at Treasury auctions ``rolling backwards'' ahead of the 
auction by short-selling one issue and buy a different outstanding 
Treasury, Butterfly Spread, and ``roll down the curve'').
    \88\ See id.
    \89\ See FICC Letter at 5.
    \90\ See id.
    \91\ Supra note 40.
    \92\ See FICC Letter at 5.
---------------------------------------------------------------------------

    Another commenter states that FICC's proposal did not adequately 
address the procyclicality risk \93\ associated with the MMA 
calculation.\94\ The commenter suggests that FICC should consider 
revising the MMA calculation to include anti-procyclical measures that 
would avoid extreme reactions to changes in market volatility.\95\ In 
response, FICC states that it considered and evaluated a number of 
anti-procyclical measures when developing the MMA proposal.\96\ 
However, FICC states that, based on the outlook for interest rate 
volatility, FICC determined to rely on the decay factor to control the 
MMA's responsiveness to market volatility.\97\
---------------------------------------------------------------------------

    \93\ Procyclicality risk with respect to margin requirements is 
the cycle created when a decrease in the mark-to-market value of the 
securities in a portfolio triggers an increase in margin 
requirements, which in turn, causes a further decrease in portfolio 
value.
    \94\ See SIFMA Letter at 6-7.
    \95\ See SIFMA Letter at 7.
    \96\ See FICC Letter at 5-6.
    \97\ See id.
---------------------------------------------------------------------------

    The Commission disagrees with the comment that FICC's proposed MMA 
calculation does not adequately address procyclicality risk. The decay 
factor affects, among other things, the speed of the MMA calculation's 
responsiveness to spikes in extreme market volatility, as well as the 
speed with which the MMA calculation would generate lower numbers after 
such volatility subsides. FICC chose to initially set the decay factor 
at 0.97--a relatively fast decay factor--to respond to market 
volatility relatively quickly.\98\ FICC's data demonstrate that had the 
MMA been in place during the period of the Impact Study, the MMA would 
have been invoked in a targeted manner (i.e., specifically during 
periods of extreme market volatility, but not during periods of low to 
moderate market volatility). Further, the Commission understands that 
FICC would be able to use the decay factor to address future interest 
rate volatility that may occur. Thus, the Impact Study supports FICC's 
assertion that including the decay factor in the MMA calculation would 
have mitigated any procyclical results.
---------------------------------------------------------------------------

    \98\ FICC could adjust the decay factor in accordance with the 
Model Risk Management Framework. FICC would analyze the decay factor 
to evaluate its sensitivity and impact to the model performance 
pursuant to the model performance monitoring required under the 
Model Risk Management Framework. Supra note 29.
---------------------------------------------------------------------------

    Accordingly, the Commission finds that FICC's adoption of the 
proposed MMA and changes to the Margin Proxy would be consistent with 
the reduction of systemic risk and supporting the stability of the 
broader financial system.
    For the reasons stated above, the changes proposed in the Advance 
Notice are consistent with Section 805(b) of the Clearing Supervision 
Act.\99\
---------------------------------------------------------------------------

    \99\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

B. Consistency With Rule 17ad-22(e)(4)(i)

    Rule 17ad-22(e)(4)(i) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\100\
---------------------------------------------------------------------------

    \100\ 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------

    The proposals in the Advance Notice are consistent with Rule 17ad-
22(e)(4)(i) under the Exchange Act.\101\ As described above in Section 
II.A.1., the current GSD VaR model generated margin amounts that were 
not sufficient to mitigate FICC's credit exposure to its members' 
portfolios at the 99 percent backtesting confidence level during 
periods of extreme market volatility, particularly during March 2020 
and beginning in March 2022. The Impact Study demonstrates that had the 
proposed MMA calculation been in place during that period, margin 
amounts would have exceeded the 99 percent backtesting coverage levels. 
Therefore, adding the MMA calculation to the GSD margin methodology 
should better enable FICC to calculate and collect margin amounts that 
are sufficient to mitigate FICC's credit exposure to its members' 
portfolios during periods of extreme market volatility.
---------------------------------------------------------------------------

    \101\ See id.
---------------------------------------------------------------------------

    Additionally, FICC proposes to clarify that if the Margin Proxy, 
when invoked, is lower than the VaR Floor, then the VaR Floor would be 
utilized as the VaR Charge with respect to a member's portfolio. 
Although Margin Proxy was not invoked during the period of the Impact 
Study, had the proposed changes been in place during that period, the 
VaR model backtesting coverage would have been increased to exceed the 
99 percent backtesting coverage level.

[[Page 90153]]

Therefore, the proposed clarifications regarding the applicability of 
the VaR Floor when Margin Proxy is invoked would help ensure FICC's 
ability to manage its credit exposures to members by maintaining 
sufficient financial resources to cover such exposures fully with a 
high degree of confidence.
    Accordingly, for the reasons discussed above, the proposed MMA 
changes and Margin Proxy clarifications are reasonably designed to 
enable FICC to effectively identify, measure, monitor, and manage its 
credit exposure to participants, consistent with Rule 17ad-
22(e)(4)(i).\102\
---------------------------------------------------------------------------

    \102\ See id.
---------------------------------------------------------------------------

C. Consistency With Rule 17ad-22(e)(6)(i)

    Rule 17ad-22(e)(6)(i) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market, and 
calculates margin sufficient to cover its potential future exposure to 
participants.\103\
---------------------------------------------------------------------------

    \103\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The proposals in the Advance Notice are consistent with Rule 17ad-
22(e)(6)(i). As described above in Section II.A.1., the Impact Study 
demonstrates that the current VaR model generated margin deficiencies 
during periods of extreme market volatility, whereas implementing the 
proposed MMA changes and Margin Proxy clarifications would result in 
VaR Charges that reflect the risks of member portfolios during such 
periods better than the current GSD VaR model. Moreover, FICC's 
inclusion of the decay factor in the MMA calculation appropriately 
limits invoking the MMA as the VaR Charge to periods of extreme market 
volatility. As described above in Section II.A.1., the decay factor 
affects, among other things, the peak level of margin increase or the 
degree of procyclicality and how quickly the margin would fall back to 
pre-stress levels. FICC chose to initially set the decay factor at 
0.97--a relatively fast decay factor--to be quickly responsive to 
market volatility.\104\ FICC's data demonstrate that had the MMA been 
in place during the period of the Impact Study, the MMA would have been 
invoked in a targeted manner (i.e., specifically during periods of 
extreme market volatility, but not during periods of low to moderate 
market volatility). Thus, the MMA is specifically designed to enable 
FICC to collect margin amounts commensurate with the relevant risks 
associated with member portfolios during periods of extreme market 
volatility. The proposal would provide FICC with a margin methodology 
better designed to enable FICC to cover its credit exposures to its 
members by enhancing FICC's risk-based margin system to produce margin 
levels commensurate with the relevant risks during periods of extreme 
market volatility.
---------------------------------------------------------------------------

    \104\ FICC could adjust the decay factor in accordance with the 
Model Risk Management Framework. FICC would analyze the decay factor 
to evaluate its sensitivity and impact to the model performance 
pursuant to the model performance monitoring required under the 
Model Risk Management Framework. Supra note 29.
---------------------------------------------------------------------------

    Several commenters addressed FICC's Impact Study. Specifically, one 
commenter states that the Impact Study is too limited, providing 
backtesting data with extremely uneven daily impacts, thereby rendering 
it impossible to properly assess the MMA's impacts.\105\ Another 
commenter states that FICC underestimates the MMA's impacts by using 
the full two-year period of the Impact Study to calculate average 
impacts when the actual period of increased volatility only covers a 
nine-month period.\106\ This commenter states that while FICC expressed 
the increase in margin requirements in terms of long-term averages, 
broker-dealers actually plan for capitalization based on meeting their 
largest margin requirement rather than their average capital 
usage.\107\ These commenters state that while FICC's impact analysis 
cited examples of members with the largest average percentage and 
dollar increases resulting from the MMA, those market participants are 
either too small or too large to be representative of the proposal's 
impact on other members.\108\ The commenters state that the actual 
effects of the MMA on middle-market dealers will be higher than FICC's 
cited examples.\109\ These two commenters suggest that alternative 
impact measurements would provide a more accurate analysis of the 
proposed MMA's impacts.\110\
---------------------------------------------------------------------------

    \105\ SIFMA Letter at 6.
    \106\ See IDTA Letter at 3 (arguing that calculating averages 
using a two-year period instead of a nine-month period decreases the 
average 2.66 times).
    \107\ See IDTA Letter at 3.
    \108\ See IDTA Letter at 3; SIFMA Letter at 6.
    \109\ See e.g., IDTA Letter at 3-4 (contrasting FICC's Impact 
Study analysis that expresses the largest member increase that would 
have resulted from the MMA as 0.21 percent of net capital, against 
the average margin increase that the MMA would have added for IDTA 
members of 5.1 percent of net capital, or 16.0 percent of net 
capital for the top 100 days in terms of margin increases); see 
SIFMA Letter at 6.
    \110\ See IDTA Letter at 3-4, 7; SIFMA Letter at 6. For example, 
one commenter suggests that FICC should express the impact as the 
average percent increase for the top 100 most stressful days. See 
IDTA Letter at 3-4 (stating that the average percentage increase for 
the top 100 most stressful days in terms of margin increases for 
IDTA members, the more relevant metric in terms of capital planning 
in actual practice was 37.23 percent or $27.52 million). The other 
commenter suggests that a better measure of liquidity impact than 
average daily data would be the peak aggregate additional margin 
that would be required for both a 1-day and 5-day period. See SIFMA 
Letter at 6.
---------------------------------------------------------------------------

    In response to these comments, FICC states that due to 
confidentiality restrictions on releasing member-level data, the 
public-facing Advance Notice filing narrative analyzed the Impact Study 
using anonymized data and averages of maximum dollar and percentage 
changes.\111\ However, FICC provided the Commission with expanded and 
detailed daily member-level Impact Study data confidentially, as part 
of the Advance Notice filing in Exhibit 3.\112\ FICC further states 
that both prior and subsequent to filing the Advance Notice, FICC 
actively engaged with members on multiple occasions, conducting 
outreach to each member in order to provide notice of the proposal 
along with individualized anticipated impacts for each member.\113\
---------------------------------------------------------------------------

    \111\ See FICC Letter at 7.
    \112\ See id.
    \113\ See FICC Letter at 6.
---------------------------------------------------------------------------

    In considering the comments critical of the Impact Study and FICC's 
analyses thereof, the Commission considered the Advance Notice 
(including the Impact Study \114\ and other confidentially filed data 
\115\), comment letters, FICC's

[[Page 90154]]

response letter, and the Commission's own understanding of the GSD 
margin methodology based on its general supervision of FICC. Based on 
the Commission's review and analysis of these materials, the Commission 
disagrees with the comments suggesting that FICC's Impact Study and 
analyses are inaccurate and/or misleading. In the Advance Notice 
narrative, FICC described the Impact Study in anonymized terms, 
highlighting averages and maximum dollar and percentage changes, due to 
the confidential nature of the member-level transactions that comprise 
the underlying data. However, FICC filed the confidential member-level 
data with the Commission in Exhibit 3 to the Advance Notice filing. 
FICC also provided relevant confidential data in its response to the 
Commission's requests for additional information.\116\ Additionally, in 
the Commission's supervisory role, the Commission routinely collects 
confidential margin-related data from FICC. These data sources enable 
the Commission to evaluate the effects of the MMA on a member-by-member 
basis.
---------------------------------------------------------------------------

    \114\ Exhibit 3 includes, among other things, the following 
confidentially filed information covering the period from July 1, 
2021 through June 30 2023: actual daily VaR amounts for each member; 
daily VaR amounts for each member had MMA been implemented; daily 
VaR increase (reflected in dollars, percent, and percent of Net 
Capital), if any, attributable to MMA; average member-level VaR 
amounts (reflected in dollars and average of Net Capital); average 
member-level VaR amounts had MMA been implemented; average member-
level VaR increase (reflected in percent and percent of Net 
Capital), if any, attributable to MMA; further analysis of the 
foregoing data to determine minimum, maximum, and average increases 
to member-level VaR amounts, Net Capital amounts, and CCP-level VaR 
amounts; member-level VaR amounts had Margin Proxy been invoked 
(daily and summarized); and member-level backtesting results (daily 
and summarized).
    \115\ FICC's responses to the Commission's requests for 
additional information include, among other things, the following 
confidentially filed information: FICC's proprietary information 
regarding the GSD margin methodology; backtesting data and analyses 
of daily member-level sensitivity VaR, Margin Proxy, and MMA amounts 
with alternative stress periods; daily member-level backtesting, 
sensitivity VaR, and MMA amounts during the Impact Study period 
specific to bond and MBS positions; and daily member-level 
sensitivity VaR and MMA amounts for the period of February 1, 2024 
through July 31, 2024, with analysis relating to the FICC-CME cross-
margining arrangement.
    \116\ Supra notes 7, 11.
---------------------------------------------------------------------------

    The purpose of the Impact Study and FICC's analyses thereof in the 
publicly available Advance Notice filing materials is to highlight 
comparisons of the GSD VaR model's performance with and without 
incorporating the MMA and to highlight the proposal's general impacts 
on members using anonymized data and averages of maximum dollar and 
percentage changes. FICC did not state that its public discussion of 
the Impact Study was the sole source of data for the Commission and the 
public to utilize in evaluating the proposals in the Advance Notice. 
Rather, FICC provided additional detailed member-level data 
confidentially, both to members and the Commission, to more fully 
evaluate the impacts of the proposals in the Advance Notice. Regarding 
the comments that FICC's analysis of the Impact Study data presented an 
inaccurate picture of the MMA's impacts,\117\ the Commission recognizes 
that FICC provided individual impact studies for each member that 
included the average impact for the entire period of the Impact Study 
as well as the average impact on those days that the proposed MMA would 
have been applied for each member.\118\ Therefore, the commenters' 
concerns regarding the Impact Study do not take into account that both 
the Commission and FICC's members also reviewed more detailed 
confidential data to better understand the specific member-level 
impacts of the proposals. The comment that FICC's public discussion of 
the Impact Study presented limited data, rendering it impossible to 
properly evaluate the MMA's impacts, does not take into account that 
FICC provided more comprehensive confidential data to the Commission 
and members that was sufficient to properly assess the MMA's impacts. 
Specifically, such data includes, among other things, actual daily VaR 
Charge for each member, hypothetical daily VaR Charge for each member 
had the MMA been in place, hypothetical daily VaR Charge for each 
member had Margin Proxy been invoked, analyses of increases 
attributable to the MMA, and numerous backtesting analyses. The comment 
that FICC's public discussion of the Impact Study underestimated the 
MMA's impacts by calculating the average impacts based on the full two-
year period rather than the nine-month period of volatility does not 
take into account that FICC confidentially provided individual impact 
studies for each member that included average impacts on each day that 
the MMA would have applied to the member.\119\ Similarly, the comment 
that FICC's public discussion of the Impact Study expressed the 
increase in margin requirements in terms of long-term averages as 
opposed to largest margin requirements does not take into account that 
FICC confidentially provided individual impact studies for each member 
indicating maximum margin increases on each day that the MMA would have 
applied to the member.\120\ The comment that FICC's public discussion 
of the Impact Study cited impacted members that are not representative 
and underestimate the MMA's impacts on middle-market participants does 
not take into account that FICC provided member-level impact data to 
each member.\121\
---------------------------------------------------------------------------

    \117\ These comments include regarding: FICC's use of the two-
year period of the Impact Study instead of the 9-month period of 
extreme market volatility when presenting average impacts (see IDTA 
Letter at 3); FICC's use of long-term average margin increases 
instead of maximum margin increases resulting from implementing the 
MMA (see id.); FICC's examples of members with the largest average 
percentage and dollar increases resulting from the MMA (see IDTA 
Letter at 3; see SIFMA Letter at 6); and preferred alternative 
impact measurements (see IDTA Letter at 3-4; see SIFMA Letter at 6).
    \118\ See FICC Letter at 7.
    \119\ See id.
    \120\ See id.
    \121\ See id.
---------------------------------------------------------------------------

    One commenter also states that FICC should expand the Impact Study 
to cover the March 2020 period of stress in light of FICC's statements 
that the MMA proposal was driven, in part, by the VaR model's 
underperformance during that period.\122\ In response, FICC states that 
inclusion of that data is not necessary because the Impact Study's two-
year period achieves the purpose of demonstrating the effectiveness of 
the proposed MMA during periods of both low and high market 
volatility.\123\ The Commission agrees that the Impact Study's two-year 
period sufficiently demonstrates the performance of the proposed MMA 
during periods of both low and high market volatility, as the two-year 
study period also included periods of both low and high market 
volatility. Inclusion of March 2020 in the Impact Study is not required 
for the Commission to evaluate the responsiveness of the MMA.
---------------------------------------------------------------------------

    \122\ See SIFMA Letter at 6.
    \123\ See FICC Letter at 6.
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    Accordingly, the proposals in the Advance Notice are consistent 
with Rule 17ad-22(e)(6)(i) because the new MMA margin calculation and 
Margin Proxy clarifications should better enable FICC to establish a 
risk-based margin system that considers and produces relevant margin 
levels commensurate with the risks associated with liquidating 
participant portfolios in a default scenario during periods of extreme 
market volatility.\124\
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    \124\ 17 CFR 240.17ad-22(e)(6)(i).
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D. Consistency With Rule 17ad-22(e)(23)(ii)

    Rule 17ad-22(e)(23)(ii) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide sufficient information to enable participants to 
identify and evaluate the risks, fees, and other material costs they 
incur by participating in FICC.\125\
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    \125\ 17 CFR 240.17ad-22(e)(23)(ii).
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    One commenter states that FICC's proposals in the Advance Notice 
lack transparency, quick implementation, and tools and resources to 
support market preparedness to identify risks and costs associated with 
how FICC calculates margin amounts.\126\ Specifically, the commenter 
urges FICC to provide members with (1) daily VaR calculations, (2) an 
MMA calculator, and (3) a phased implementation of the MMA, including a 
parallel run period

[[Page 90155]]

where the MMA is calculated but not invoked.\127\
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    \126\ See SIFMA Letter at 7-8.
    \127\ See id.
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    In response, FICC states that it provides tools and resources to 
enable members to determine their margin requirements and the impact of 
FICC's proposals.\128\ Specifically, FICC maintains the Real Time 
Matching Report Center, Clearing Fund Management System, FICC Customer 
Reporting Service, and FICC Risk Client Portal which are client 
accessible websites for accessing risk reports and other risk 
disclosures.\129\ These resources enable members to view Clearing Fund 
requirement information and margin component details, including 
portfolio breakdowns by CUSIP and amounts attributable to the 
sensitivity-based VaR model.\130\ Members are also able to view data on 
market amounts for current clearing positions and associated VaR 
Charges.\131\ Additionally, the FICC Client Calculator enables members 
to, among other things, enter ``what-if'' position data to determine 
hypothetical VaR Charges before trade execution. FICC states that as of 
June 24, 2024, FICC is in the process of enhancing the FICC Client 
Calculator to incorporate the MMA and FICC expects the enhancement to 
be available to members prior to implementation of the MMA, subject to 
the Commission's approval.\132\ FICC also states that it is currently 
developing a tool that would enable non-members to assess potential VaR 
Charges (including MMA) as well.\133\
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    \128\ See FICC Letter at 7.
    \129\ See id.
    \130\ See id.
    \131\ See id.
    \132\ See id.
    \133\ See id.
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    The extensive tools and resources that FICC makes available to 
members should enable members to obtain individualized information to 
determine their Clearing Fund requirements, margin component details, 
and assess the impact of FICC's proposals. Additionally, FICC's 
multiple member outreach efforts (before and after development of the 
proposals in the Advance Notice) provided members with relevant 
individualized impact analyses with which to evaluate the proposals in 
the Advance Notice. Accordingly, FICC has provided tools and resources 
sufficient for its members to evaluate their daily VaR and other 
margin-related calculations, rendering a phased implementation of the 
proposed MMA unwarranted.
    Based on the foregoing, FICC has provided sufficient information, 
tools, and resources to enable members to identify and evaluate the 
relevant risks and costs associated with the changes proposed in the 
Advance Notice, consistent with Rule 17ad-22(e)(23)(ii).\134\
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    \134\ 17 CFR 240.17ad-22(e)(23)(ii).
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III. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the 
Clearing Supervision Act, that the Commission does not object to 
Advance Notice (SR-FICC-2024-801) and that FICC is authorized to 
implement the proposed change as of the date of this notice or the date 
of an order by the Commission approving proposed rule change SR-FICC-
2024-003, whichever is later.

    By the Commission.
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26519 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P

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