26514 Federal Register / Vol. 83, No. 110 / Thursday, June 7, 2018 / Notices 

20 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. FICC also filed the Proposed 

Rule Change as advance notice SR–FICC–2018–801 

(‘‘Advance Notice’’) pursuant to Section 806(e)(1) of 

the Payment, Clearing, and Settlement Supervision 

Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b– 

4(n)(1)(i) under the Exchange Act, 17 CFR 240.19b– 

4(n)(1)(i). Notice of Filing of the Advance Notice 

was published for comment in the Federal Register 

on March 2, 2018. Securities Exchange Act Release 

No. 82779 (February 26, 2018), 83 FR 9055 (March 

2, 2018) (SR–FICC–2018–801). The Commission 

extended the deadline for its review period of the 

Advance Notice for an additional 60 days on March 

7, 2018. Securities Exchange Act Release No. 82820 

(March 7, 2018), 83 FR 10761 (March 12, 2018) (SR– 

FICC–2018–801). On April 25, 2018, FICC filed 

Amendment No.1 to the Advance Notice. Available 

at https://www/sec/gov/comments/sr-ficc-2018-801/ 

ficc2018801.htm. The Commission issued a notice 

of filing of Amendment No. 1 and notice of no 

objection to the Advance Notice, as modified by 

Amendment No. 1, on May 11, 2018. Securities 

Exchange Act Release No. 83223 (May 11, 2018), 83 

FR 23020 (May 17, 2018). 

3Securities Exchange Act Release No. 82588 

(January 26, 2018), 83 FR 4687 (February 1, 2018) 

(SR–FICC–2018–001). 

4Letter from Robert E. Pooler, Chief Financial 

Officer, Ronin Capital LLC (‘‘Ronin’’), dated 

February 22, 2018, to Robert W. Errett, Deputy 

Secretary, Commission (‘‘Ronin Letter I’’); letter 

from Michael Santangelo, Chief Financial Officer, 

Amherst Pierpont Securities LLC (‘‘Amherst’’), 

dated February 22, 2018, to Brent J. Fields, 

Secretary, Commission (‘‘Amherst Letter I’’); letter 

from Timothy Cuddihy, Managing Director, FICC, 

dated March 19, 2018, to Robert W. Errett, Deputy 

Secretary, Commission (‘‘FICC Letter I’’); letter from 

James Tabacchi, Chairman, Independent Dealer and 

Trader Association (‘‘IDTA’’), dated March 29, 

2018, to Eduardo A. Aleman, Assistant Secretary, 

Commission (‘‘IDTA Letter’’); letter from Michael 

Santangelo, Chief Financial Officer, Amherst 

Pierpont Securities LLC, dated April 4, 2018, to 

Brent J. Fields, Secretary, Commission (‘‘Amherst 

Letter II’’); letter from Levent Kahraman, Chief 

Executive Officer, KGS-Alpha Capital Markets 

(‘‘KGS’’), dated April 4, 2018, to Brent J. Fields, 

Secretary, Commission (‘‘KGS Letter’’); letter from 

Timothy Cuddihy, Managing Director, FICC, dated 

April 13, 2018, to Robert W. Errett, Deputy 

Secretary, Commission (‘‘FICC Letter II’’); and letter 

from Robert E. Pooler, Chief Financial Officer, 

Ronin, dated April 13, 2018, to Eduardo A. Aleman, 

Assistant Secretary, Commission (‘‘Ronin Letter 

II’’). Since the proposal contained in the Proposed 

Rule Change was also filed as an Advance Notice, 

supra note 2, the Commission is considering all 

public comments received on the proposal 

regardless of whether the comments were submitted 

to the Advance Notice or the Proposed Rule 

Change. 

5See Securities Exchange Act Release No. 34– 

82876 (March 14, 2018), 83 FR 12229 (March 20, 

2018) (SR–FICC–2018–001). The order instituting 

proceedings re-opened the comment period and 

extended the Commission’s period of review of the 

Proposed Rule Change. See id. 

6Available at https://www.sec.gov/comments/srficc-2018-001/ficc2018001.htm. FICC filed related 

amendments to the related Advance Notice. Supra 

note 2. 

7Available at http://www.dtcc.com/legal/rulesand-procedures. 

8Notice, supra note 3, at 4688. 

9 GCF Repo Transactions refer to transactions 

made on FICC’s GCF Repo Service that enable 

dealers to trade general collateral repos, based on 

rate, term, and underlying product, throughout the 

day, without requiring intra-day, trade-for-trade 

settlement on a Delivery-versus-Payment basis. Id. 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–NYSE–2018–24. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549 on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of the Exchange. All comments 

received will be posted without change. 

Persons submitting comments are 

cautioned that we do not redact or edit 

personal identifying information from 

comment submissions. You should 

submit only information that you wish 

to make available publicly. All 

submissions should refer to File 

Number SR–NYSE–2018–24, and 

should be submitted on or before June 

28, 2018. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.20

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–12194 Filed 6–6–18; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–83362; File No. SR–FICC– 

2018–001] 

Self-Regulatory Organizations; Fixed 

Income Clearing Corporation; Notice of 

Filing of Amendment No. 1 and Order 

Granting Accelerated Approval of a 

Proposed Rule Change, as Modified by 

Amendment No. 1, To Implement 

Changes to the Required Fund Deposit 

Calculation in the Government 

Securities Division Rulebook 

June 1, 2018. 

I. Introduction 

The Fixed Income Clearing 

Corporation (‘‘FICC’’) filed with the U.S. 

Securities and Exchange Commission 

(‘‘Commission’’) on January 12, 2018 

proposed rule change SR–FICC–2018– 

001 (‘‘Proposed Rule Change’’) pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’) 1 and Rule 19b–4 thereunder.2 The 

Proposed Rule Change was published 

for comment in the Federal Register on 

February 1, 2018.3 The Commission 

received eight comments on the 

proposal.4 On March 14, 2018, the 

Commission issued an order instituting 

proceedings to determine whether to 

approve or disapprove the Proposed 

Rule Change.5 On April 25, 2018, FICC 

filed Amendment No. 1 to the Proposed 

Rule Change (‘‘Amendment No. 1’’).6

The Commission is publishing this 

notice to solicit comment on 

Amendment No. 1 from interested 

persons and to approve the Proposed 

Rule Change, as modified by 

Amendment No. 1, on an accelerated 

basis. 

II. Description of the Proposed Rule 

Change 

FICC proposes to change the FICC 

GSD Rulebook (‘‘GSD Rules’’) 7 to adjust 

GSD’s method of calculating GSD 

netting members’ (‘‘Members’’) margin.8

Specifically, FICC proposes to (1) 

change GSD’s method of calculating the 

Value-at-Risk (‘‘VaR’’) Charge 

component; (2) add a new component 

referred to as the ‘‘Blackout Period 

Exposure Adjustment;’’ (3) eliminate the 

existing Blackout Period Exposure 

Charge and the Coverage Charge 

components; (4) adjust the existing 

Backtesting Charge component to (i) 

include the backtesting deficiencies of 

certain GCF Repo Transaction 9

counterparties during the Blackout 

Period, and (ii) give GSD the ability to 

assess the Backtesting Charge on an 

intraday basis for all Members; and (5) 

adjust the calculation for determining 


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10Notice, supra note 3, at 4689. 

11 Id. Pursuant to the GSD Rules, FICC has the 

existing authority and discretion to calculate an 

additional amount on an intraday basis in the form 

of an Intraday Supplemental Clearing Fund Deposit. 

See GSD Rules 1 and 4, supra note 7. 

12Notice, supra note 3, at 4689. 

13 Id. FICC proposes to change its calculation of 

GSD’s VaR Charge because during the fourth quarter 

of 2016, FICC’s current methodology for calculating 

the VaR Charge did not respond effectively to the 

market volatility that existed at that time. Id. As a 

result, the VaR Charge did not achieve backtesting 

coverage at a 99 percent confidence level and, 

therefore, yielded backtesting deficiencies beyond 

FICC’s risk tolerance. Id. 

14Notice, supra note 3, at 4690 GSD’s proposed 

sensitivity approach is similar to the sensitivity 

approach that FICC’s Mortgage-Backed Securities 

Division (‘‘MBSD’’) uses to calculate the VaR 

Charge for MBSD clearing members. See Securities 

Exchange Act Release No. 79868 (January 24, 2017) 

82 FR 8780 (January 30, 2017) (SR–FICC–2016– 

007); Securities Exchange Act Release No. 79643 

(December 21, 2016), 81 FR 95669 (December 28, 

2016) (SR–FICC–2016–801). 

15The Margin Proxy was implemented by FICC in 

2017 to supplement the full revaluation approach 

to the VaR Charge calculation with a minimum VaR 

Charge calculation. Securities Exchange Act Release 

No. 80349 (March 30, 2017), 82 FR 16638 (April 5, 

2016) (SR–FICC–2017–001); see also Securities 

Exchange Act Release No. 80341 (March 30, 2017), 

82 FR 16644 (April 5, 2016) (SR–FICC–2017–801). 

16 Id. 

17See Notice, supra note 3, at 4690. The 

following risk factors would be incorporated into 

GSD’s proposed sensitivity approach: Key rate, 

convexity, implied inflation rate, agency spread, 

mortgage-backed securities spread, volatility, 

mortgage basis, and time risk factor. These risk 

factors are defined as follows: 

• Key rate measures the sensitivity of a price 

change to changes in interest rates; 

• convexity measures the degree of curvature in 

the price/yield relationship of key interest rates; 

• implied inflation rate measures the difference 

between the yield on an ordinary bond and the 

yield on an inflation-indexed bond with the same 

maturity; 

• agency spread is yield spread that is added to 

a benchmark yield curve to discount an Agency 

bond’s cash flows to match its market price; 

• mortgage-backed securities spread is the yield 

spread that is added to a benchmark yield curve to 

discount a to-be-announced (‘‘TBA’’) security’s cash 

flows to match its market price; 

• volatility reflects the implied volatility 

observed from the swaption market to estimate 

fluctuations in interest rates; 

• mortgage basis captures the basis risk between 

the prevailing mortgage rate and a blended Treasury 

rate; and 

• time risk factor accounts for the time value 

change (or carry adjustment) over the assumed 

liquidation period. Id. 

The above-referenced risk factors are similar to 

the risk factors currently utilized in MBSD’s 

sensitivity approach; however, GSD has included 

other risk factors that are specific to the U.S. 

Treasury securities, Agency securities and 

mortgage-backed securities cleared through GSD. Id. 

Concerning U.S. Treasury securities and Agency 

securities, FICC would select the following risk 

factors: Key rates, convexity, agency spread, 

implied inflation rates, volatility, and time. Id. For 

mortgage-backed securities, each security would be 

mapped to a corresponding TBA forward contract 

and FICC would use the risk exposure analytics for 

the TBA as an estimate for the mortgage-backed 

security’s risk exposure analytics. Id. FICC would 

use the following risk factors to model a TBA 

security: Key rates, convexity, mortgage-backed 

securities spread, volatility, mortgage basis, and 

time. Id. To account for differences between 

mortgage-backed securities and their corresponding 

TBA, FICC would apply an additional basis risk 

adjustment. Id. 

18Notice, supra note 3, at 4690. 

19See Notice, supra note 3, at 4692. In the event 

that the data used for the sensitivity approach is 

unavailable for a period of more than five days, 

FICC proposes to revert back to the Margin Proxy 

as an alternative VaR Charge calculation. Id. 

20Notice, supra note 3, at 4691. 

21 Id. 

22Notice, supra note 3, at 4690. 

23 Id. 

24 Id. 

25Notice, supra note 3, at 4692. 

26Notice, supra note 3, at 4693. 

27 Id. 

28 Id. 

the existing Excess Capital Premium for 

Broker Members, Inter-Dealer Broker 

Members, and Dealer Members.10 In 

addition, FICC proposes to provide 

transparency with respect to GSD’s 

existing authority to calculate and 

assess Intraday Supplemental Fund 

Deposit amounts.11 The proposed QRM 

Methodology document would reflect 

the proposed VaR Charge calculation 

and the proposed Blackout Period 

Exposure Adjustment calculation.12

A. Changes to GSD’s VaR Charge 

Component 

FICC states that the changes proposed 

in the Proposed Rule Change are 

designed to improve GSD’s current VaR 

Charge so that it responds more 

effectively to market volatility.13

Specifically, FICC proposes to (1) 

replace GSD’s current full revaluation 

approach with a sensitivity approach; 14

(2) employ the existing Margin Proxy as 

an alternative (i.e., a back-up) VaR 

Charge calculation; 15 (3) use an evenlyweighted 10-year look-back period, 

instead of the current front-weighted 

one-year look-back period; (4) eliminate 

GSD’s current augmented volatility 

adjustment multiplier; (5) utilize a 

haircut method for securities cleared by 

GSD that lack sufficient historical data; 

and (6) establish a VaR Floor calculation 

that would serve as a minimum VaR 

Charge for Members, as discussed 

below.16

For the proposed sensitivity approach 

to the VaR Charge, FICC would source 

sensitivity data and relevant historical 

risk factor time series data generated by 

an external vendor based on its 

econometric, risk, and pricing models.17

FICC would conduct independent data 

checks to verify the accuracy and 

consistency of the data feed received 

from the vendor.18 In the event that the 

external vendor is unable to provide the 

sourced data in a timely manner, FICC 

would employ its existing Margin Proxy 

as a back-up VaR Charge calculation.19

Additionally, FICC proposes to 

change the look-back period from a 

front-weighted one-year look-back to an 

evenly-weighted 10-year look-back 

period that would include, to the extent 

applicable, an additional stressed 

period. FICC states that the proposed 

extended look-back period would help 

to ensure that the historical simulation 

contains a sufficient number of 

historical market conditions.20 In the 

event FICC observes that the 10-year 

look-back period does not contain a 

sufficient number of stressed market 

conditions, FICC would have the ability 

to include an additional period of 

historically observed stressed market 

conditions to a 10-year look-back period 

or adjust the length of look-back 

period.21

FICC also proposes to look at the 

historical changes of specific risk factors 

during the look-back period in order to 

generate risk scenarios to arrive at the 

market value changes for a given 

portfolio.22 A statistical probability 

distribution would be formed from the 

portfolio’s market value changes, and 

then the VaR Charge calculation would 

be calibrated to cover the projected 

liquidation losses at a 99 percent 

confidence level.23 The portfolio risk 

sensitivities and the historical risk 

factor time series data would then be 

used by FICC’s risk model to calculate 

the VaR Charge for each Member.24

FICC also proposes to eliminate the 

augmented volatility adjustment 

multiplier. FICC states that the 

multiplier would not be necessary 

because the proposed sensitivity 

approach would have a longer look-back 

period and the ability to include an 

additional stressed market condition to 

account for periods of market 

volatility.25

According to FICC, in the event that 

a portfolio contains classes of securities 

that do not have sufficient volume and 

price information available, a historical 

simulation approach would not generate 

VaR Charge amounts that reflect the risk 

profile of such securities.26 Therefore, 

FICC proposes to calculate the VaR 

Charge for these securities by utilizing 

a haircut approach based on a market 

benchmark with a similar risk profile as 

the related security.27 The proposed 

haircut approach would be calculated 

separately for U.S. Treasury/Agency 

securities and mortgage-backed 

securities.28

Finally, FICC proposes to adjust the 

existing calculation of the VaR Charge to 

include a VaR Floor, which would be 

the amount used as the VaR Charge 

when the sum of the amounts calculated 


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29 Id. 

30 Id. The U.S. Treasury/Agency bond margin 

floor would be calculated by mapping each U.S. 

Treasury/Agency security to a tenor bucket, then 

multiplying the gross positions of each tenor bucket 

by its bond floor rate, and summing the results. Id. 

The bond floor rate of each tenor bucket would be 

a fraction (initially set at 10 percent) of an indexbased haircut rate for such tenor bucket. Id. 

31Notice, supra note 3, at 4693. The mortgagebacked securities margin floor would be calculated 

by multiplying the gross market value of the total 

value of mortgage-backed securities in a Member’s 

portfolio by a designated amount, referred to as the 

pool floor rate, (initially set at 0.05 percent). Id. 

32Notice, supra note 3, at 4694. The proposed 

Blackout Period Exposure Adjustment would be 

calculated by (1) projecting an average pay-down 

rate of mortgage loan pools (based on historical pay 

down rates) for the government sponsored 

enterprises (Fannie Mae and Freddie Mac) and the 

Government National Mortgage Association (Ginnie 

Mae), respectively, then (2) multiplying the 

projected pay-down rate by the net positions of 

mortgage-backed securities in the related program, 

and (3) summing the results from each program. Id. 

33 Id. 

34 Id. 

35 Id. Pool Factors are the percentage of the initial 

principal that remains outstanding on the mortgage 

loan pool underlying a mortgage-backed security, as 

published by the government-sponsored entity that 

is the issuer of such security. Id. 

36Notice, supra note 3, at 4694. 

37 Id. 

38 Id. 

39 Id. 

40 Id. 

41Notice, supra note 3, at 4695. 

42 Id. 

43 Id. 

44 Id. 

45 Id. Additionally, during the Blackout Period, 

the proposed Blackout Period Exposure Adjustment 

Charge, as described in Section I.C, above, would 

be applied to all applicable Members. Id. 

46 Id. 

47 Id. 48Notice, supra note 3, at 4696. The term ‘‘Excess 

Capital’’ means Excess Net Capital, net assets, or 

equity capital as applicable, to a Member based on 

its type of regulation. GSD Rules, Rule 1, supra note 

7. 49 Id. 

50 Id. 

51 Id. 

52 Id. 

53 Id. 

54 Id. 

55 Id. 

by the proposed sensitivity approach 

and haircut method is less than the 

proposed VaR Floor.29 The VaR Floor 

would be calculated as the sum of (1) a 

U.S. Treasury/Agency bond margin 

floor 30 and (2) a mortgage-backed 

securities margin floor.31

B. Addition of the Blackout Period 

Exposure Adjustment Component 

FICC proposes to add a new 

component to GSD’s margin 

calculation—the Blackout Period 

Exposure Adjustment.32 FICC states that 

the Blackout Period Exposure 

Adjustment would be calculated to 

address risks that could result from 

overstated values of mortgage-backed 

securities that are pledged as collateral 

for GCF Repo Transactions 33 during a 

Blackout Period.34 A Blackout Period is 

the period between the last business day 

of the prior month and the date during 

the current month upon which a 

government-sponsored entity that issues 

mortgage-backed securities publishes its 

updated Pool Factors.35 The proposed 

Blackout Period Exposure Adjustment 

would result in a charge that either 

increases a Member’s VaR Charge or a 

credit that decreases the VaR Charge.36

C. Elimination of the Blackout Period 

Exposure Charge and Coverage Charge 

Components 

FICC proposes to eliminate the 

existing Blackout Period Exposure 

Charge component from GSD’s margin 

calculation.37 The Blackout Period 

Exposure Charge only applies to 

Members with GCF Repo Transactions 

that have two or more backtesting 

deficiencies during the Blackout Period 

and whose overall 12-month trailing 

backtesting coverage falls below the 99 

percent coverage target.38 FICC would 

eliminate this charge because the 

proposed Blackout Period Exposure 

Adjustment would apply to all Members 

with GCF Repo Transactions 

collateralized with mortgage-backed 

securities during the Blackout Period.39

FICC also proposes to eliminate the 

existing Coverage Charge component 

from GSD’s margin calculation.40 FICC 

would eliminate the Coverage Charge 

because, as FICC states, the proposed 

sensitivity approach would provide 

overall better margin coverage, 

rendering the Coverage Charge 

unnecessary.41

D. Adjustment to the Backtesting Charge 

Component 

FICC proposes to amend GSD’s 

existing Backtesting Charge component 

of its margin calculation to (1) include 

the backtesting deficiencies of certain 

Members during the Blackout Period 

and (2) give GSD the ability to assess the 

Backtesting Charge on an intraday 

basis.42

Currently, the Backtesting Charge 

does not apply to Members with 

mortgage-backed securities during the 

Blackout Period because such Members 

would be subject to a Blackout Period 

Exposure Charge.43 In coordination with 

its proposal to eliminate the Blackout 

Period Exposure Charge, FICC proposes 

to adjust the applicability of the 

Backtesting Charge.44 Specifically, FICC 

proposes to apply the Backtesting 

Charge to Members with backtesting 

deficiencies that also experience 

backtesting deficiencies that are 

attributed to the Member’s GCF Repo 

Transactions collateralized with 

mortgage-backed securities during the 

Blackout Period within the prior 12- 

month rolling period.45

FICC also proposes to adjust the 

Backtesting Charge to apply to Members 

that experience backtesting deficiencies 

during the trading day because of such 

Member’s intraday trading activities.46

The Intraday Backtesting Charge would 

be assessed on Members with portfolios 

that experience at least three intraday 

backtesting deficiencies over the prior 

12-month period and would generally 

equal a Member’s third largest historical 

intraday backtesting deficiency.47

E. Adjustment to the Excess Capital 

Premium Charge 

FICC proposes to adjust GSD’s 

calculation for determining the Excess 

Capital Premium. Currently, GSD 

assesses the Excess Capital Premium 

when a Member’s VaR Charge exceeds 

the Member’s Excess Capital.48 Only 

Members that are brokers or dealers are 

required to report Excess Net Capital 

figures to FICC while other Members 

report net capital or equity capital, 

based on the type of regulation to which 

the Member is subject.49 If a Member is 

not a broker or dealer, FICC uses the net 

capital or equity capital in order to 

calculate each Member’s Excess Capital 

Premium.50 FICC proposes to move to a 

net capital measure for broker Members, 

inter-dealer broker Members, and dealer 

Members.51 FICC states that such a 

change would make the Excess Capital 

Premium for those Members more 

consistent with the equity capital 

measure that is used for other Members 

in the Excess Capital Premium 

calculation.52

F. Additional Transparency 

Surrounding the Intraday Supplemental 

Fund Deposit 

Separate from the above changes to 

GSD’s margin calculation, FICC 

proposes to provide transparency in the 

GSD Rules with respect to GSD’s 

existing calculation of the Intraday 

Supplemental Fund Deposit.53 FICC 

proposes to provide more detail in the 

GSD rules surrounding both GSD’s 

calculation of the Intraday 

Supplemental Fund Deposit charge and 

its determination of whether to assess 

the charge.54

FICC calculates the Intraday 

Supplemental Fund Deposit by tracking 

three criteria for each Member.55 The 

first criterion, the ‘‘Dollar Threshold,’’ 

evaluates whether a Member’s Intraday 

VaR Charge equals or exceeds a set 


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56 Id. 

57Notice, supra note 3, at 4697. 

58 Id. 

59 Id. 

60 Id. 

61Notice, supra note 3, at 4698. 

62 Id. 

63Amendment No. 1, supra note 6. 

64 Id. 

65 Id. 

66 Id. 

67 Id. 

68 Id. 

69 Id. 

70 Id. 

71 Id. 

72 Id. 

dollar amount when compared to the 

VaR Charge that was included in the 

most recent margin collection.56 The 

second criterion, the ‘‘Percentage 

Threshold,’’ evaluates whether the 

Intraday VaR Charge equals or exceeds 

a percentage increase of the VaR Charge 

that was included in the most recent 

margin collection.57 The third criterion, 

the ‘‘Coverage Target,’’ evaluates 

whether a Member is experiencing 

backtesting results below a 99 percent 

confidence level.58 In the event that a 

Member’s additional risk exposure 

breaches all three criteria, FICC assesses 

an Intraday Supplemental Fund 

Deposit.59 FICC also assesses an 

Intraday Supplemental Fund Deposit if, 

under certain market conditions, a 

Member’s Intraday VaR Charge breaches 

both the Dollar Threshold and the 

Percentage Threshold.60

G. Description of the QRM Methodology 

The QRM Methodology document 

provides the methodology by which 

FICC would calculate the VaR Charge, 

with the proposed sensitivity approach, 

as well as other components of the 

Members’ margin calculation.61 The 

QRM Methodology document specifies 

(i) the model inputs, parameters, 

assumptions and qualitative 

adjustments; (ii) the calculation used to 

generate margin amounts; (iii) 

additional calculations used for 

benchmarking and monitoring purposes; 

(iv) theoretical analysis; (v) the process 

by which the VaR methodology was 

developed as well as its application and 

limitations; (vi) internal business 

requirements associated with the 

implementation and ongoing monitoring 

of the VaR methodology; (vii) the model 

change management process and 

governance framework (which includes 

the escalation process for adding a 

stressed period to the VaR Charge 

calculation); (viii) the haircut 

methodology; (ix) the Blackout Period 

Exposure Adjustment calculations; (x) 

intraday margin calculation; and (xi) the 

Margin Proxy calculation.62

H. Description of Amendment No. 1 

In Amendment No. 1, FICC proposes 

three things. First, FICC proposes to 

stagger the implementation of the 

proposed Blackout Period Exposure 

Adjustment and the proposed removal 

of the Blackout Period Exposure 

Charge.63 Specifically, on a date that is 

approximately three weeks after the 

later of the Commission’s order 

approving the Proposed Rule Change, as 

modified by Amendment No. 1, or its 

notice of no objection to the related 

Advance Notice, as modified by 

Amendment No. 1 (‘‘Implementation 

Date’’), FICC would charge Members 

only 50 percent of any amount 

calculated under the proposed Blackout 

Period Exposure Adjustment, while, at 

the same time, decreasing by 50 percent 

any amount charge under the Blackout 

Period Exposure Charge.64 Then, no 

later than September 30, 2018, FICC 

would increase any amount charged 

under the Blackout Period Exposure 

Adjustment to 75 percent, while, at the 

same time, decreasing by 75 percent any 

amount charge under the Blackout 

Period Exposure Charge.65 Finally, no 

later than December 31, 2018, FICC 

would increase any amount charged 

under the Blackout Period Exposure 

Adjustment to 100 percent, while, at the 

same time, eliminating the Blackout 

Period Exposure Charge. FICC states 

that it is proposing this amendment to 

address concerns raised by several 

Members that the implementation of the 

proposed Blackout Period Exposure 

Adjustment would have a material 

impact on their liquidity planning and 

margin charge.66 FICC states that the 

staggered implementation would give 

Members the opportunity to assess and 

further prepare for the impact of the 

proposed Blackout Period Exposure 

Adjustment. FICC states the proposed 

VaR Charge calculation and the existing 

Blackout Period Exposure Charge would 

appropriately mitigate the potential 

mortgage-backed securities pay-down 

on a short-term basis, given FICC’s 

assessment of mortgage-backed 

securities pay-down projections for this 

calendar year.67

Second, FICC proposes to amend the 

implementation date for the remainder 

of the proposed changes contained in 

the Proposed Rule Change.68

Specifically, FICC proposes that such 

remaining changes would become 

operative on the Implementation Date, 

as opposed to the originally proposed 45 

business days after the later of the 

Commission’s order approving the 

Proposed Rule Change, as modified by 

Amendment No. 1, or notice of no 

objection to the related Advance Notice, 

as modified by Amendment No. 1.69

FICC states that it is proposing this 

amendment because FICC is primarily 

concerned that the look-back period that 

is currently used in calculating the VaR 

Charge under the Margin Proxy may not 

calculate sufficient margin amounts to 

cover GSD’s exposure to a defaulting 

Member.70

Third, FICC proposes to correct an 

incorrect description of the calculation 

of the Excess Capital Premium that 

appears once in the narrative to the 

Proposed Rule Change, as well as in the 

corresponding location in the Exhibit 

1A to the Proposed Rule Change.71

Specifically, FICC proposes to change 

the term ‘‘Required Fund Deposit’’ to 

‘‘VaR Charge’’ in the description at 

issue, as ‘‘Required Fund Deposit’’ was 

incorrectly used in that instance.72

III. Solicitation of Comments on 

Amendment No. 1 

Interested persons are invited to 

submit written data, views and 

arguments concerning whether 

Amendment No. 1 is consistent with the 

Exchange Act. Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

FICC–2018–001 on the subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street NE, 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number SR–FICC–2018–001. This file 

number should be included on the 

subject line if email is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

internet website (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the Proposed Rule 

Change that are filed with the 

Commission, and all written 

communications relating to the 

Proposed Rule Change between the 

Commission and any person, other than 

those that may be withheld from the 


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73 15 U.S.C. 78s(b)(2)(C). 

74 In approving this Proposed Rule Change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). The Commission 

addresses comments about economic effects of the 

Proposed Rule Change, including competitive 

effects, below. 

75 15 U.S.C. 78q–1(b)(3)(F). 

76 15 U.S.C. 78q–1(b)(3)(I). 

77 17 CFR 240.17Ad–22(e)(4)(i). 

78 17 CFR 240.17Ad–22(e)(6)(i). 

79 17 CFR 240.17Ad–22(e)(6)(ii). 

80 17 CFR 240.17Ad–22(e)(6)(iv). 

81 17 CFR 240.17Ad–22(e)(6)(v). 

82 17 CFR 240.17Ad–22(e)(6)(vi)(B). 

83 17 CFR 240.17Ad–22(e)(23)(ii). 

84 15 U.S.C. 78q–1(b)(3)(F). 

85 Id. 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for website viewing and 

printing in the Commission’s Public 

Reference Room, 100 F Street NE, 

Washington, DC 20549, on official 

business days between the hours of 

10:00 a.m. and 3:00 p.m. Copies of the 

filing also will be available for 

inspection and copying at the principal 

office of FICC and on DTCC’s website 

(http://dtcc.com/legal/sec-rulefilings.aspx). All comments received 

will be posted without change. Persons 

submitting comments are cautioned that 

we do not redact or edit personal 

identifying information from comment 

submissions. You should submit only 

information that you wish to make 

available publicly. All submissions 

should refer to File Number SR–FICC– 

2018–001 and should be submitted on 

or before June 22, 2018. 

IV. Discussion and Commission 

Findings 

Section 19(b)(2)(C) of the Exchange 

Act 73 directs the Commission to 

approve a proposed rule change of a 

self-regulatory organization if it finds 

that the proposed rule change is 

consistent with the requirements of the 

Exchange Act and the rules and 

regulations thereunder applicable to 

such organization. After carefully 

considering the Proposed Rule Change, 

as modified by Amendment No. 1, and 

all comments received, the Commission 

finds that the Proposed Rule Change, as 

modified by Amendment No. 1, is 

consistent with the Exchange Act and 

the rules and regulations thereunder 

applicable to FICC.74 In particular, as 

discussed below, the Commission finds 

that the Proposed Rule Change, as 

modified by Amendment No. 1, is 

consistent with Sections 17A(b)(3)(F) 75

and (I) of the Exchange Act,76 as well as 

Rules 17Ad–22(e)(4)(i),77 (6)(i),78 (ii),79

(iv),80 (v),81 (vi)(B),82 and (23)(ii) under 

the Exchange Act.83

A. Consistency With Section 

17A(b)(3)(F) of the Exchange Act 

Section 17A(b)(3)(F) of the Exchange 

Act requires, in part, that the rules of a 

clearing agency be designed to, among 

other things, assure the safeguarding of 

securities and funds which are in the 

custody or control of the clearing agency 

or for which it is responsible.84

The Commission believes that the 

changes proposed in the Proposed Rule 

Change, as modified by Amendment No. 

1, are designed to assure the 

safeguarding of securities and funds 

which are in the custody or control of 

the clearing agency or for which it is 

responsible, consistent with Section 

17A(b)(3)(F) of the Exchange Act.85

First, as described above, FICC currently 

calculates the VaR Charge component of 

each Member’s margin using a VaR 

Charge calculation that relies on a full 

revaluation approach. FICC proposes to 

instead implement a sensitivity 

approach to its VaR Charge calculation, 

with, at minimum, an evenly-weighted 

10-year look-back period. The proposed 

sensitivity approach would leverage an 

external vendor’s expertise in supplying 

market risk attributes (i.e., sensitivity 

data) used to calculate the VaR Charge. 

Relying on such sensitivity data with a 

10-year look-back period would help 

correct deficiencies in FICC’s existing 

VaR Charge calculation, thus enabling 

FICC to better account for market risk in 

calculating the VaR Charge and better 

limit its credit exposure to Members. 

Second, as described above, FICC 

proposes to implement the existing 

Margin Proxy as a back-up methodology 

to the proposed sensitivity approach to 

the VaR Charge calculation. This 

proposed change would help FICC to 

better limit its credit exposure to 

Members by continuing to calculate 

each Member’s VaR Charge in the event 

that FICC experiences a data disruption 

with the vendor that supplies the 

sensitivity data. 

Third, as described above, FICC 

proposes to eliminate the augmented 

volatility adjustment multiplier from its 

current VaR Charge calculation. This 

proposed change would enable FICC to 

remove a component from the VaR 

Charge calculation that would no longer 

be needed on account of the proposed 

10-year look-back period that has the 

option of an additional stress period. 

Fourth, as described above, FICC 

proposes to implement a haircut method 

for securities with inadequate historical 

pricing data and, thus, lack sufficient 

data to generate a historical simulation 

that adequately reflects the risk profile 

of such securities under the proposed 

sensitivity approach to FICC’s VaR 

Charge calculation. Employing a haircut 

on such securities would help FICC 

limit its credit exposure to Members 

that transact in the securities by 

establishing a way to better capture their 

risk profile. 

Fifth, as described above, FICC 

proposes to implement a VaR Floor. The 

proposed VaR Floor would be triggered 

in the event that the proposed 

sensitivity VaR model calculates a VaR 

Charge that is too low because of offsets 

applied by the model from certain 

offsetting long and short positions. In 

other words, the VaR Floor would serve 

as a backstop to the proposed sensitivity 

approach to FICC’s VaR Charge 

calculation, which would help ensure 

that FICC continues to limit its credit 

exposure to Members. Altogether, these 

proposed changes to the VaR Charge 

component of the margin calculation 

would enable FICC to view and respond 

more effectively to market volatility by 

attributing market price moves to 

various risk factors and more effectively 

limiting FICC’s credit exposure to 

Members in market conditions that 

reflect a rapid decrease in market price 

volatility levels. 

In addition to these changes to the 

VaR Charge component of the margin 

calculation, FICC proposes to make a 

number of changes to other components 

of the margin calculation. Specifically, 

as described above, FICC proposes to (1) 

add the Blackout Period Exposure 

Adjustment component to FICC’s 

margin calculation to help address risks 

that could result from overstated values 

of mortgage-backed securities that are 

pledged as collateral for GCF Repo 

Transactions during a Blackout Period; 

(2) make changes to the existing 

Backtesting Charge component to help 

ensure that the charge will apply to (i) 

all Members that experience backtesting 

deficiencies attributable to the 

Member’s GCF Repo Transactions that 

are collateralized with mortgage-backed 

securities during the Blackout Period, 

and (ii) all Members that experience 

backtesting deficiencies during the 

trading day because of such Member’s 

intraday trading activities; (3) provide 

more detail in the GSD Rules regarding 

FICC’s calculation of the existing 

Intraday Supplemental Fund Deposit 

charge and its determination of whether 

to assess the charge; and (4) remove the 

Coverage Charge and Blackout Period 

Exposure Charge components because 

the risk these components addressed 

would be addressed by the other 

proposed changes to the margin 

calculation, specifically the proposed 


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86 Id. 

87 15 U.S.C. 78q–1(b)(3)(I). 88See 15 U.S.C. 78q–1(b)(3)(F). 89Notice, supra note 3, at 4698. 90 Id. 91Ronin Letter at 5. 92 Id. 93 Id. 94 IDTA Letter at 14. 95 IDTA Letter at 3. 

96 Id. 

97 Id. 

98 Id. 

99 IDTA Letter at 1. 

100 Id. 

101See Amherst Letter II; KGS Letter. 

102Amherst Letter II at 4. 

103 KGS Letter at 2. 

104 Id. 

105 Id. 

106See Ronin Letter; IDTA Letter. 

107Ronin Letter at 5. 

sensitivity approach to FICC’s VaR 

Charge calculation and the proposed 

Blackout Period Exposure Adjustment 

component, respectively. 

In Amendment No. 1, as described 

above, FICC proposes to (1) stagger the 

implementation of the proposed 

Blackout Period Exposure Adjustment 

and the proposed removal of the 

Blackout Period Exposure Charge in 

response to commenters; (2) accelerate 

the implementation date for the 

remainder of the proposed changes 

contained in the Proposed Rule Change, 

in order address concerns with the 

existing VaR Charge calculation sooner; 

and (3) correct an incorrect description 

of the calculation of the Excess Capital 

Premium in the originally filed 

materials. 

Taken together, the above mentioned 

proposed changes to the components of 

the margin calculation would enhance 

FICC’s current method for calculating 

each Member’s margin. This 

enhancement, in turn, would enable 

FICC to produce margin levels more 

commensurate with the risks associated 

with its Members’ portfolios in a 

broader range of scenarios and market 

conditions, and, thus, more effectively 

cover its credit exposure to its Members. 

In addition, the Proposed Rule Change 

is designed to help FICC mitigate losses 

that Member default could cause to 

FICC and its non-defaulting Members. 

By better limiting FICC’s credit 

exposure to Members, the proposed 

changes are designed to help ensure 

that, in the event of a Member default, 

FICC has collected sufficient margin 

from the defaulted Member to manage 

the default, so that non-defaulting 

Members would not be exposed to 

mutualized losses as a result of the 

default. By helping to limit nondefaulting Members’ exposure to 

mutualized losses, the proposal is 

designed to help assure the safeguarding 

of securities and funds that are in FICC’s 

custody or control. As such, the 

Proposed Rule Change, as modified by 

Amendment No. 1, is designed to help 

promote the safeguarding of securities 

and funds in FICC’s custody and 

control. Therefore, the Commission 

believes that the Proposed Rule Change, 

as modified by Amendment No. 1, is 

consistent with Section 17A(b)(3)(F) of 

the Exchange Act.86

B. Consistency With Section 17A(b)(3)(I) 

of the Exchange Act 

Section 17A(b)(3)(I) of the Exchange 

Act requires that the rules of a clearing 

agency do not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.87 As 

discussed above, FICC is proposing a 

number of changes to the way it 

calculates margin collected from 

Members—a key tool that FICC uses to 

mitigate potential losses to FICC 

associated with liquidating a Member’s 

portfolio in the event of a Member 

default. FICC states that the proposed 

changes are designed to assure the 

safeguarding of securities and funds that 

are in the custody or control of FICC, 

consistent with Section 17A(b)(3)(F) of 

the Exchange Act,88 because the 

proposed changes would enable FICC to 

better limit its credit exposure to 

Members arising out of the activity in 

Members’ portfolios.89 FICC states that 

the proposed changes would 

collectively work to help ensure that 

FICC calculates and collects adequate 

margin from its Members.90

However, several commenters stated 

that some, if not all, of the proposed 

changes would impose an undue burden 

on competition. Specifically, Ronin 

states that the proposed sensitivity VaR 

model requires more margin of its 

Members than is necessary, and thus, 

would unduly impose a competitive 

burden on Members that have higher 

costs of capital.91 Ronin further states 

that over-margining also unfairly 

exposes smaller Members to greater 

potential risk of loss should one of the 

largest Members’ default.92 Ronin also 

states the proposed changes would 

make it less economic for non-bank 

Members to participate in centralized 

clearing.93

Similarly, IDTA states that that the 

proposed changes would 

disproportionately result in greater 

increases in margin for non-Bank 

Members on a percentage basis and 

consequently would impose an 

unnecessary burden on competition.94

Specifically, IDTA states the proposed 

changes would result in a material 

increase to some Members’ margin due 

to the proposed change to the VaR 

Charge and also due to the 

compounding effect the new VaR 

Charge has on other components of the 

margin calculation.95 IDTA notes that 

FICC illustrates that the statistical 

impact of the Proposed Rule Change 

resulted in 40 percent of Members 

having a net reduction to margin and 31 

percent of Members having between no 

change and a 10 percent increase in 

margin.96 IDTA states that the remaining 

29 percent of Members therefore saw an 

increase of over 10 percent to the 

margin.97 IDTA adds that six members 

of the IDTA that submitted data saw, on 

average, an 85 percent increase under 

the proposed changes compared to the 

existing FICC margin calculation.98

IDTA states that this disproportionality 

places competitive and financial 

burdens on non-Bank Members that 

have a higher cost of funds and access 

to fewer pools of liquidity than those 

available to Bank Members.99 IDTA also 

states it is possible that these burdens 

could adversely affect the diversity of 

liquidity across fixed income markets 

during times when both market 

participants and regulators want this 

diversity.100

Two commenters state that not 

utilizing cross-margining in the GSD 

margin calculation creates a burden on 

competition.101 Specifically, Amherst 

states that the lack of cross-margining 

inflates the margin requirements and 

that the ‘‘inflation, in turn, could distort 

the liquidity profile’’ of Members.102

Additionally, KGS states that not having 

a cross-margining process for positions 

in GSD and MBSD will have a distortive 

effect on GSD’s margining system, 

producing ‘‘burdensome double 

charges.’’ 103 KGS also states that the 

absence of cross-margining will impose 

a disproportionate and adverse impact 

on all GSD members other than ‘‘the 

very largest banks and dealers’’ and that 

the burdens on competition that would 

be imposed are significant.104 Finally, 

KGS states that absent cross-margining 

for common Members of GSD and 

MBSD, ‘‘markets that are free and open 

to all competitors with the greatest 

spreading of risk’’ cannot be 

achieved.’’ 105

Two commenters state that FICC’s use 

of a 10-year look-back period and an 

additional stressed period in the VaR 

Charge calculation would impose a 

burden on competition.106 Ronin first 

notes that FICC acknowledges that the 

proposed changes might impose a 

competitive burden.107 Ronin then 


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108 Id. 

109 Id. 

110 IDTA Letter at 7, 11. 

111See Amherst Letter; IDTA Letter. 

112Amherst Letter II at 4. 

113 IDTA Letter at 9. 

114Amherst Letter II at 4. 

115 IDTA Letter at 9. 

116 Id. at 12. 

117 Id. 

118 Id. at 13. 

119FICC Letter I at 4. 

120 Id. at 3. 

121 Id. 

122 Id. 

123 Id. 

124 Id. 125 Id. 126 Id. 127FICC Letter II at 5. 128 Id. at 6. 

129 Id. 

130 Id. 

131 Id. at 12. 

132 Id. 

133 Id. 

states that the overall effect of this 

proposed rule change is to ‘‘treat every 

day as if the market was in the midst of 

a financial crisis’’ and to require more 

margin from Members at all times.108

Ronin contends that this ‘‘blunt 

approach’’ of requiring more margin by 

utilizing ‘‘statistical bias is 

discriminatory and imposes an undue 

competitive burden on firms with a 

higher cost of capital.’’ 109 Similarly, 

IDTA states that the 10-year look-back 

period and additional stressed period 

result in the unnecessary collection of 

margin, which creates harmful costs that 

disproportionately burden non-Bank 

Members as compared to larger Bank 

Members.110

Two commenters state that the 

proposed Excess Capital Premium 

charge would impose a burden on 

competition.111 Specifically, Amherst 

states that broker-dealer Members 

would see a material impact from the 

adoption of the proposed sensitivity 

approach because it would significantly 

increase the numerator in the formula 

and, thereby, increase the likelihood of 

triggering the Excess Capital Premium 

charge.112 Similarly, IDTA states that 

the proposed use of Net Capital in the 

denominator in the Excess Capital 

Premium would result in a 

discriminatory change that arbitrarily 

penalizes Dealer Members as many 

Members who currently do not have an 

Excess Capital Premium charge would 

end up having the charge if the 

Proposed Rule Change is approved.113

Amherst further states that the Excess 

Capital Premium calculation would 

impose an additional competitive 

burden on broker-dealer Members, as 

non broker-dealer Member’s Excess 

Capital used in the measurement of any 

Excess Capital Premium may not be 

based on net worth after reductions for 

haircuts or other non-allowable asset 

deductions similar to broker-dealer 

Member requirements.114 Similarly, 

IDTA states that using Net Capital as the 

Excess Capital figure also would result 

in discrimination against Dealer 

Members as compared to Bank Members 

because Bank Members’ Excess Capital 

is based on equity without any 

reduction for positions, while Dealer 

Members are required to use Net 

Capital, a measure of net worth after 

reductions for haircuts on positions.115

One commenter states that the 

Blackout Period Exposure Adjustment 

would result in a burden on 

competition.116 Specifically, IDTA 

states that serious flaws exist in the 

current Blackout Period Exposure 

Charge and the proposed Blackout 

Period Exposure Adjustment would 

result in both an inaccurate 

measurement of risk and excessive 

margin charges that are harmful to 

Members, particularly non-Bank 

Members that have a relative higher cost 

of funds than other Members.117 IDTA 

states that the proposed Blackout Period 

Exposure Adjustment assumes 100 

percent probability of a GCF Repo 

Service counterparty default across all 

Members. IDTA states that it does not 

believe a credit risk model would 

account for such a high probability of 

loss and suggests applying a credit risk 

weighting to the Blackout Period 

Exposure Adjustment.118

In response to commenters concerns, 

generally, FICC states that the proposed 

changes are necessary to ensure that its 

margin methodology would 

appropriately address the risks 

presented by Members’ clearing 

portfolios.119 Specifically, in response 

to concerns regarding the proposed 

sensitivity approach, FICC states that 

the proposed sensitivity approach 

integrates observed risk factor changes 

over current and historical market 

conditions to more effectively respond 

to current market price moves that may 

not be adequately reflected in the 

current methodology for calculating the 

VaR Charge as supplemented by the 

Margin Proxy.120 With this in mind, 

FICC states that Ronin’s assertion that 

the proposed sensitivity approach 

‘‘simply requires increased margin from 

Members’’ is inaccurate.121 FICC notes it 

proposes to eliminate the augmented 

volatility adjustment multiplier and 

Coverage Component because these 

components would have the effect of 

unnecessarily increasing margin 

amounts.122 Additionally, FICC notes 

that its impact study reveals that the 

proposed methodology does not simply 

increase the margin requirements and 

the impacts vary based on Members’ 

clearing portfolios and the market 

volatility that exists at that time.123

Statistically, FICC states that 71 percent 

of all Members will have a 10 percent 

or less increase in margin under the 

proposed changes and 40 percent of all 

Members will have no increase.124

In response to Ronin and IDTA 

concerns, discussed above, that smaller, 

non-bank Members would see greater 

increases in margin as a result of the 

proposed changes, FICC states that the 

proposed sensitivity approach is based 

on a risk factor approach for securities 

in a Member’s portfolio to calculate 

such Member’s VaR Charge.125 FICC 

states that if Members have similar 

portfolios, the impact of the proposed 

VaR Charge calculation, together with 

the other proposed changes to the 

margin calculation, would be similar.126

FICC further states that the largest 

impact of the proposal is for those 

Members with mortgage-backed 

securities (‘‘MBS’’) concentrations.127

FICC acknowledges that while smaller 

Members with MBS concentrations 

would be impacted more, many of these 

Members have less diversified 

portfolios; thus, the effect of the margin 

calculation on conventional MBS would 

be more pronounced.128 FICC notes that 

the impact of the proposal would be 

determined by a Member’s portfolio 

composition rather than a Member 

‘‘type,’’ as a result, Members with lower 

MBS concentrations would experience 

smaller impacts from the proposal.129

Therefore, FICC believes that the 

proposal does not create a burden on 

any particular size or type of Member, 

such as non-bank Members, that does 

not result from the necessary and 

appropriate risk mitigation of the 

underlying securities in each Member’s 

portfolio.130

In response to the commenters 

concerns, discussed above, regarding 

the need for utilizing cross-margining in 

the GSD margin calculation, FICC notes 

that it operates under two divisions— 

GSD and MBSD—and each has its own 

rules and members.131 FICC states that 

as a registered clearing agency, it is 

subject to the requirements that are 

contained in the Exchange Act and in 

the Commission’s regulations and rules 

thereunder.132 Further, FICC states it 

must ensure that the GSD Rules and the 

MBSD Rules, individually, are 

consistent with the Exchange Act.133

Therefore, FICC states that because it 

must comply with the Exchange Act for 


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134 Id. 

135 Id. 

136 Id. 

137 Id. 

138FICC Letter I at 4. 

139 Id. 

140FICC Letter II at 9. 

141 Id. 

142 Id. 143 Id. at 10. 144 Id. at 11. 145 Id. 146 Id. 147 Id. 148 Id. 149 Id. 150 Id. 

151 Id. at 12. 

152 Id. at 13. 

153 Id. at 14. 

154 Id. at 13. 

155 15 U.S.C. 78q–1(b)(3)(I). 

GSD and MBSD separately, FICC 

disagrees with Amherst’s statement that 

FICC’s failure to implement a crossmargining arrangement would be 

inconsistent with the requirements of 

Rule 17Ad–22(e)(6) under the Exchange 

Act.134

Nevertheless, FICC agrees that data 

sharing and cross-margining 

arrangements would be beneficial to its 

membership.135 FICC notes it has and 

will continue to explore data sharing 

and cross-margining opportunities.136

FICC also states it will continue to 

develop a framework with the Chicago 

Mercantile Exchange (‘‘CME’’) that will 

enhance FICC’s existing cross-margining 

arrangement with CME.137

In response to the commenters 

concerns, discussed above, suggesting 

FICC’s proposed use of a 10-year lookback period and an additional stressed 

period in the VaR Charge calculation 

would be unnecessary and biased, FICC 

states that the proposed changes to 

extend the look-back period and add an 

additional stressed period would help to 

ensure that the historical simulation 

contains a sufficient number of 

historical market conditions (including 

but not limited to stressed market 

conditions) that are necessary to 

calculate margin amounts that achieve a 

99 percent confidence level.138 FICC 

further states that because VaR models 

typically rely on historical data to 

estimate the probability distribution of 

potential market prices, FICC believes 

that a longer look-back period will 

typically produce more stable VaR 

estimates that adequately reflect 

extreme market moves.139 FICC notes 

that, as part of its model validation 

report, FICC performed a benchmark 

analysis of its calculation of the VaR 

Charge which included the 10-year 

look-back period and two alternative 

look-back periods—a five-year look-back 

period and a one-year look-back 

period.140 FICC notes that the model 

validation report compared the rolling 

one-year backtesting performance for 

the one-year, five-year, and 10-year 

look-back periods using all Member 

portfolios for the period of January 1, 

2013 through April 28, 2017.141 FICC 

states that the 10-year look-back period 

(which included a stress period) 

provides backtesting coverage above 99 

percent while the five-year look-back 

period and the one-year look-back 

period do not.142 Therefore, FICC states 

that the proposed look-back period 

provides the appropriate margin 

coverage for GSD’s exposures.143

In response to the commenters 

concerns, discussed above, regarding 

the Excess Capital Premium, FICC states 

that for a majority of Members, the 

proposed VaR Charge calculation would 

be higher than the current VaR Charge 

calculation excluding the Margin Proxy 

and that the higher VaR Charge could 

result in a higher Excess Capital 

Premium for some Members.144

However, FICC believes that this 

increase is appropriate for the exposure 

that the Excess Capital Premium is 

designed to mitigate.145 FICC notes that 

even with the potential increase in the 

proposed VaR Charge, the majority of 

Members would not incur the Excess 

Capital Premium.146 Additionally, FICC 

believes that the proposed change to Net 

Capital for the Excess Capital Premium 

would reduce the impact to 

Members.147 Statistically, FICC states 

that, during a test period, the proposed 

change to utilize Net Capital would 

reduce the Excess Capital Premium from 

188 to 159 instances.148 Further, FICC 

states that as a result of the proposed 

change to utilize Net Capital (instead of 

the existing practice of using the Excess 

Net Capital) in the Excess Capital 

Premium calculation, the Member with 

the largest number of instances would 

have had a 27 percent reduction in the 

number of instances of Excess Capital 

Premium and, on average, an 82 percent 

decrease in the dollar value of the 

charge on the days such Excess Capital 

Premium occurred.149 Also, FICC 

believes that the proposed change to the 

Excess Capital Premium would benefit a 

small set of Members and potentially 

lower the Excess Capital Premium for 

Members that exhibit fluctuations in 

their Excess Net Capital because the 

proposed change would be based on Net 

Capital that may be more predictable.150

In response to the commenters 

concerns, discussed above, regarding 

the Blackout Period Exposure 

Adjustment, FICC states that the 

proposed Blackout Period Exposure 

Adjustment is appropriate at the 

intraday collection cycle on the last 

business day of the month to mitigate 

exposure that begins on the first 

business day of the following month.151

FICC believes that Blackout Period 

Exposure Adjustment collections that 

occur after the MBS collateral pledge 

would not mitigate the risk that a 

Member defaults after the collateral is 

pledged but before such Member 

satisfies the next day’s margin.152 FICC 

believes the proposed Blackout Period 

Exposure Adjustment is necessary 

because it would help to ensure that 

FICC maintains a sufficient margin that 

covers FICC’s current and future 

exposure to changes in MBS collateral 

from pay-down exposure from its 

Members, at a 99 percent confidence 

level.153 In response to IDTA’s 

suggestion that a probability of default 

approach would be more appropriate, 

FICC states that such an approach 

would provide insufficient margin 

coverage to maintain a 99 percent 

confidence level.154

As a general matter, the Commission 

acknowledges that a proposal to 

enhance FICC’s VaR model, such as this 

proposal, could entail increased margin 

charges to some Members that would be 

borne by those Members and market 

participants more generally. The 

Commission understands that the 

impact of the cost of meeting an 

increased margin requirement would 

depend, in part, on each Member’s 

specific business model and that some 

Members could satisfy the increase at a 

lower cost than others. As a result, the 

proposed changes contained in the 

Proposed Rule Change that would result 

in an increased margin charge could 

impose higher costs on some Members 

relative to others because of those 

Members’ business choices. These 

higher relative burdens may weaken 

certain Members’ competitive positions 

relative to other Members. However, as 

discussed below, the Commission 

believes that any competitive burden 

imposed by the proposed changes 

would not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act.155

As discussed above, during the fourth 

quarter of 2016, FICC’s current 

methodology for calculating the VaR 

Charge did not respond effectively to 

the market volatility that existed at that 

time. As a result, the VaR Charge did 

not achieve backtesting coverage at a 99 

percent confidence level and, therefore, 

yielded backtesting deficiencies beyond 

FICC’s risk tolerance. To address this 


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156Supra note 14. 157See Amendment No. 1, supra note 6. Based on 

information learned from the Commission’s general 

supervision of FICC, the Commission agrees that 

FICC should address this concern. 

158As described further in Sections IV.A, C, D, 

and G. 

159As described further in Sections IV.A and C 

through G. 

issue, FICC has proposed the changes 

discussed herein, which are designed to 

improve GSD’s current VaR Charge 

calculation so that it responds more 

effectively to market volatility and helps 

FICC achieve backtesting coverage at a 

99 percent confidence level. Although 

FICC had previously implemented the 

Margin Proxy to help address the 

issue,156 FICC is still concerned that the 

look-back period that is currently used 

in calculating the VaR Charge under the 

Margin Proxy may not calculate 

sufficient margin amounts to cover 

GSD’s exposure to a defaulting 

Member.157 Therefore, the Commission 

believes that the Proposed Rule Change 

will help FICC better address this 

ongoing concern of maintaining 

sufficient financial resources to cover its 

credit exposure to each Member fully 

with a high degree of confidence. By 

helping FICC to better manage its credit 

exposure, the proposed changes would, 

in turn, help FICC better mitigate the 

potential losses to FICC and its 

Members associated with liquidating a 

Member’s portfolio in the event of a 

Member default, in furtherance of 

FICC’s obligations under Section 

17A(b)(3)(F) of the Exchange Act to 

safeguard the securities and funds in 

FICC’s custody or control, as discussed 

above.158

While the proposed changes 

contained in the Proposed Rule Change 

may raise the costs that certain Members 

incur to cover the risks associated with 

their portfolios, the Commission 

believes that these costs reflect the risks 

that these Members present to FICC, as 

the proposal is tailored to the different 

risk factors presented by each Member’s 

portfolio, as described above. 

Specifically, the proposal to (1) move to 

a sensitivity approach to the VaR Charge 

calculation would enable the VaR 

Charge calculation to respond more 

effectively to market volatility by 

allowing FICC to attribute market price 

moves to various risk factors; (2) 

establish an evenly-weighted 10-year 

look-back period, with the option to add 

an additional stress period, would help 

FICC to ensure that the proposed 

sensitivity VaR Charge calculation 

contains a sufficient number of 

historical market conditions, to include 

stressed market conditions; (3) use the 

existing Margin Proxy as a back-up 

methodology system would help ensure 

FICC is able to calculate a VaR Charge 

for Members despite not being able to 

receive sensitivity data; (4) to 

implement a haircut method for 

securities with insufficient sensitivity 

data would help ensure that FICC is able 

to capture the risk profile of the 

securities; (5) establish the VaR Floor 

would help ensure that FICC assesses a 

VaR Charge where the proposed 

sensitivity calculation has produce too 

low of a VaR Charge; (6) establish the 

Blackout Period Exposure Adjustment 

component would enable FICC to 

address risks that could result from 

overstated values of mortgage-backed 

securities that are pledged as collateral 

for GCF Repo Transactions during a 

Blackout Period; (7) adjust the existing 

Backtesting Charge component would 

enable FICC to ensure that the charge 

applies to all Members, as appropriate, 

and to Members intraday trading 

activities that could pose a risk to FICC 

in the event that such Members default 

during the trading day; and (8) eliminate 

the Blackout Period Exposure Charge, 

Coverage Charge, and augmented 

volatility adjustment multiplier 

components would ensure that FICC did 

not maintain elements of the prior 

margin calculation that would 

unnecessarily increase Members’ margin 

under the proposed margin calculation. 

Therefore, the Commission believes that 

each of the above proposed changes is 

tailored to the different risk factors 

presented by Members’ portfolios. 

Tailoring the proposed changes to the 

different risk factors presented would, 

in turn, help FICC better mitigate the 

potential losses to FICC and its 

Members associated with liquidating a 

Member’s portfolio in the event of a 

Member default. Specifically, such 

tailoring would help ensure that FICC 

collects adequate margin to offset the 

specific risks associated with each 

Member’s portfolio, in furtherance of 

FICC’s obligations under Section 

17A(b)(3)(F) of the Exchange Act to 

safeguard the securities and funds in 

FICC’s custody or control, as discussed 

above.159

In response to commenters’ concerns, 

discussed above, that too much margin 

would be collected, after reviewing the 

data provided by FICC in Exhibit 3 to 

the Proposed Rule Change in 

conjunction with the Commission’s 

supervisory observations, the 

Commission believes that the proposed 

changes would better enable FICC to 

collect margin commensurate with the 

different levels of risk that Members 

pose to FICC. Further, the Commission 

believes the amount of margin FICC 

would collect under the proposed 

changes would help FICC better manage 

its credit exposures to its Members and 

those exposures arising from its 

payment, clearing, and settlement 

processes. The Commission also 

believes, having reviewed Exhibit 3 to 

the Proposed Rule Change, that not all 

Members’ margin requirements would 

increase as a result of the proposed 

changes and that the impact of the 

proposed changes vary based on 

Members’ clearing portfolios and the 

market volatility that exists at that time. 

Further, the Commission believes that 

the proposed changes to the VaR Charge 

would not necessarily result in higher 

margin requirements in other 

components of the margin calculation 

where the VaR Charge is used in 

calculating the component. The 

Commission also notes that FICC 

proposes to eliminate the augmented 

volatility adjustment multiplier and 

Coverage Component because these 

components would have the effect of 

unnecessarily increasing margin 

amounts. Therefore, the Commission is 

not persuaded by IDTA’s generalized 

statement that the proposed changes 

would have such a dramatic effect as to 

limit the diversity of liquidity in the 

U.S. markets, such as by causing 

Members to terminate their GSD 

membership. Rather, the Commission 

believes that the proposed changes 

promote a margin methodology that 

would appropriately address the risks 

presented by Members’ clearing 

portfolios, enabling FICC to better 

mitigate losses that a Member default 

could cause to FICC and its nondefaulting Members. 

Commenters expressed concerns, 

discussed above, that smaller, non-bank 

Members would be overly burdened by 

the proposed changes. After reviewing 

the data provided by FICC in Exhibit 3 

to the Proposed Rule Change in 

conjunction with the Commission’s 

supervisory observations, the 

Commission believes that the proposed 

sensitivity approach appropriately 

calculates a Member’s VaR Charge based 

on risk factors presented by the 

securities held in a Member’s portfolio 

and, thus, that the impact of the 

proposed changes would be determined 

by a Member’s portfolio composition 

rather than a Member ‘‘type.’’ To the 

extent a Member’s VaR Charge would 

increase under the proposed changes, it 

would be based on the securities held 

by the Member and FICC needing to 

collect margin to appropriately address 

that risk. 

In response to the commenters 

concerns, discussed above, regarding 

the need for utilizing cross-margining in 


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160FICC Letter II at 9–10. 

161See Form X–17A–5, line 3770, available at 

https://www.sec.gov/files/formx-17a-5_2.pdf. 

162A ‘‘covered clearing agency’’ means, among 

other things, a clearing agency registered with the 

Commission under Section 17A of the Exchange 

Act (15 U.S.C. 78q–1 et seq.) that is designated 

systemically important by Financial Stability 

Continued 

the GSD margin calculation, the 

Commission notes that the Proposed 

Rule Change does not propose to 

establish or change any cross-margining 

agreements, whether between GSD and 

MBSD or between GSD, MBSD, and 

another clearing agency. As such, crossmargining is not one of the proposed 

changes under the Commission’s 

review. The Commission further notes 

that GSD and MBSD have different 

members (although a member of one 

could, and some do, apply and become 

a member of the other), offer different 

services, and clear different products. 

To the extent there is the potential to 

offset risk exposures present across the 

different products, those products are 

still cleared by different services. 

Accordingly, FICC maintains not only 

separate rulebooks for each division but 

also separate liquidity resources. 

Therefore, the Commission believes that 

the potential burden on Members that 

exists absent a proposed change in the 

Proposed Rule Change to establish 

cross-margining between GSD and 

MBSD, or to expanding cross-margining 

between GSD and another clearing 

agency, does not mean that the 

proposals are in and of themselves not 

necessary or not appropriate. Rather, the 

Commission believes that the proposed 

changes to GSD’s margin calculation are 

tailored to the specific risks associated 

with the products and services offered 

by GSD and that the proposed GSD 

margin calculation is commensurate 

with the risks associated with portfolios 

held by Members in GSD. 

The Commission also notes that 

certain other actions by FICC may 

address some of the commenter 

concerns with respect to crossmargining. For instance, FICC states that 

it has and will continue to explore data 

sharing and cross-margining 

opportunities, and that FICC is in the 

process of completing a proposal that 

would enable a margin reduction for 

Members with MBS positions that offset 

between GSD and MBSD. FICC has also 

committed to continuing to develop a 

framework with CME that will enhance 

FICC’s existing cross-margining 

arrangement with CME. 

In response to the commenters 

concerns, discussed above, regarding 

the 10-year look-back period and an 

additional stressed period in the VaR 

Charge calculation, the Commission 

believes that an evenly-weighted 10- 

year look-back period, plus an 

additional stress period, as needed, 

would be an appropriate approach to 

help ensure that the proposed 

sensitivity VaR Charge calculation 

accounts for historical market 

observations of the securities cleared by 

GSD. Such a look-back period would 

help enable FICC to be in a better 

position to maintain backtesting 

coverage above 99 percent for GSD. As 

evidenced in FICC’s second comment 

letter, a 10-year look-back period that 

includes a stress period would provide 

backtesting coverage above 99 percent, 

while a five-year look-back period and 

a one-year look-back period would 

not.160

In response to the commenters 

concerns, discussed above, regarding 

the Excess Capital Premium, the 

Commission notes that this proposed 

change would modify the denominator 

used in the calculation. Specifically, the 

denominator would become larger, as 

the proposal to use Net Capital 

(proposed denominator) is a larger 

amount than the current use of Excess 

Net Capital (current denominator).161

The effect, holding all else constant, 

would be to lower those Members’ 

Excess Capital Premium. 

The Commission notes that under the 

Proposed Rule Change, FICC is not 

proposing to amend the numerator, as 

the numerator used for calculating the 

Excess Capital Premium would still be 

calculated using the VaR Charge 

calculation. Of course, if the numerator 

in the calculation (i.e., a Member’s VaR 

Charge amount using the proposed 

sensitivity approach) were to increase as 

a result of the other proposed changes, 

then the Excess Capital Premium could 

increase. Further, the numerator will 

not necessarily increase for every 

Member. Data provided by FICC, which 

was filed with the Commission as 

Exhibit 3 to the Proposed Rule Change, 

shows that the numerator used for 

calculating the Excess Capital Premium 

could increase or decrease depending 

on the risks associated with a Member’s 

portfolio. 

In response to the commenters 

concerns, discussed above, regarding 

the calculation of the Blackout Period 

Exposure Adjustment, the Commission 

agrees with FICC. Specifically, the 

Commission agrees that (i) given the 

number of assumptions that one would 

need to make with respect to the various 

factors that influence MBS pay-down 

rates, the weighted-average approach 

would provide Members more 

transparency and certainty around the 

charge; and (ii) a credit-risk weighting 

would not likely produce a sufficient 

charge amount in the event of an actual 

Member default, as the approach would 

assume something less than a 100 

percent probability of default in 

calculating the charge. Furthermore, in 

response to commenters’ concerns 

regarding the Blackout Period Exposure 

Adjustment collection cycle, the 

Commission notes the proposed cycle 

follows the same cycle currently used 

for the Blackout Period Exposure 

Charge, which FICC proposes to 

eliminate on account of the proposed 

Blackout Period Exposure Adjustment. 

For both the current and proposed 

cycle, the Commission understands, 

based on its experience and expertise, 

that FICC’s application of the charge on 

the last business day of the month, as 

opposed to the first business day of the 

following month, is an appropriate way 

to ensure that FICC collects the funds 

before realizing the risk that the charge 

is intended to mitigate (i.e., a Member 

defaults during the Blackout Period). 

Similarly, FICC’s extension of the 

charge through the end of the day on the 

Factor Date, as opposed to releasing the 

charge during FICC’s standard intraday 

margin calculation on the Factor Date, 

also is an appropriate way to mitigate 

the risk exposure to FICC because, 

operationally, the MBS are not released 

and revalued with the update factors by 

the applicable clearing bank until after 

FICC has already completed the 

intraday margin calculation. 

Taken together, the Commission 

believes that the above discussed 

proposed changes to the components of 

the margin calculation would enhance 

FICC’s current method for calculating 

each Member’s margin. This 

enhancement would enable FICC to 

produce margin levels more 

commensurate with the risks associated 

with its Members’ portfolios in a 

broader range of scenarios and market 

conditions, and, thus, more effectively 

cover its credit exposure to its Members. 

Therefore, for all of the above reasons, 

Commission believes that the Proposed 

Rule Change is consistent with Section 

17A(b)(3)(I) of the Exchange Act, as the 

proposal would not impose a burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. 

C. Consistency With Rule 17Ad– 

22(e)(4)(i) of the Exchange Act 

The Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(4)(i) under the Exchange Act. Rule 

17Ad–22(e)(4)(i) requires each covered 

clearing agency 162 to establish, 


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Oversight Council (‘‘FSOC’’) pursuant to the 

Clearing Supervision Act (12 U.S.C. 5461 et seq.). 

See 17 CFR 240.17Ad–22(a)(5)–(6). Because FICC is 

a registered clearing agency with the Commission 

that has been designated systemically important by 

FSOC, FICC is a covered clearing agency. 

163 17 CFR 240.17Ad–22(e)(4)(i). 

164 IDTA Letter; Amherst Letter II. 

165 IDTA Letter at 9. 

166 Id. 

167 Id. at 10. 

168 Id. at 10. 

169 Id. at 10. 

170 Id. 

171Amherst Letter II at 4. 

172FICC Letter II at 10,11; see Exchange Act 

Release No. 54457 (September 15, 2006), 71 FR 

55239 (September 21, 2006) (SR–FICC–2006–03). 

173FICC Letter II at 11. 

174 Id. 

175 Id. 

176 Id. 

177 Id. 

178Supra note 12. 

179Amherst II Letter at 2. 

180 IDTA Letter at 3–4. 

181FICC Letter II at 3. 

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.163

As described above, FICC proposes a 

number of changes to the way it 

addresses credit exposure to its 

Members through its margin calculation. 

Specifically, FICC proposes to (1) 

replace its existing full revaluation VaR 

Charge calculation with a sensitivity 

approach to the VaR Charge calculation 

that uses an evenly-weighted 10-year 

look-back period; (2) utilize the existing 

Margin Proxy as a back-up VaR Charge 

calculation to the proposed sensitivity 

approach in the event that FICC 

experiences a data disruption with the 

third-party vendor; (3) implement a 

haircut method for securities that are 

ineligible for the sensitivity approach to 

FICC’s VaR Charge calculation due to 

inadequate historical pricing data; (4) 

establish the VaR Floor; (5) establish the 

Blackout Period Exposure Adjustment 

component; (6) adjust the existing 

Backtesting Charge component; and (7) 

use Net Capital instead of Excess Capital 

when calculating the Excess Capital 

Premium, as applicable, for broker 

Members, inter-dealer broker Members, 

and dealer Members. 

Two commenters expressed concerns 

regarding the proposed change to the 

Excess Capital Premium.164 IDTA states 

that FICC needs to provide further 

clarification and justification for the 

Excess Capital Premium because the 

Excess Capital Premium under the 

proposed sensitivity approach to the 

VaR Charge calculation could result in 

additional margin for some Members 

‘‘without sufficient explanation in the 

proposed rule change.’’ 165 Additionally, 

IDTA states that the use of Net Capital 

in the denominator of the Excess Capital 

Premium will result in some additional 

Members being assessed the charge, 

specifically Dealer Members.166 IDTA 

states that Dealer Members should be 

able to use net worth, as compared to 

Net Capital, because a bank Member’s 

capital figure is based on assets without 

any haircut for certain positions.167 In 

contrast, IDTA states that dealers must 

include haircuts on certain positions 

before calculating Net Capital.168 IDTA 

also states that FICC should allow dealer 

Members to calculate Net Capital for 

purposes of the Excess Capital Premium 

to not include a haircut on U.S. 

Government securities cleared at 

FICC.169 Finally, IDTA states that the 

Excess Capital Premium should instead 

be used to trigger a credit review for 

Members because, in conjunction with 

the other proposed changes, the Excess 

Capital Premium would not be a ‘‘sound 

measure’’ of a Member’s credit risk.170

Similarly, Amherst notes that FICC 

should review further how it can allow 

dealer Members to be compared 

similarly to bank Members for Excess 

Capital Premium purposes to account 

for the haircut on assets that dealers 

must account for in their Net Capital 

calculation.171

In response, FICC states that the 

Excess Capital Premium is used to more 

effectively manage the risk posed by a 

Member whose activity causes it to have 

a margin requirement that is greater 

than its excess regulatory capital.172

FICC notes that for a majority of 

Members, the proposed sensitivity VaR 

Charge calculation would be higher than 

the current VaR Charge calculation, 

excluding the Margin Proxy, and that 

the higher VaR Charge could result in a 

higher Excess Capital Premium.173

Where there is an increase, FICC states 

that this increase is appropriate for the 

exposure that the Excess Capital 

Premium is designed to mitigate.174

However, FICC notes that even with the 

potential increase in the proposed VaR 

Charge, the majority of Members would 

not incur the Excess Capital 

Premium.175 Additionally, FICC states 

that the proposed change to Net Capital 

for the Excess Capital Premium would 

reduce the impact to Members.176 For 

example, for period of December 18, 

2017 through April 2, 2018, FICC states 

that by using Net Capital instead of 

Excess Net Capital, the Member with the 

largest number of instances of the 

Excess Capital Premium would have 

had a 27 percent reduction in the 

number of instances and, on average, an 

82 percent decrease in the dollar value 

of the charge on the days such Excess 

Capital Premium occurred.177

Additionally, two commenters noted 

that the proposed sensitivity approach 

to the VaR Charge calculation is not 

needed at this time because the Margin 

Proxy 178 is sufficient to cover any gaps 

in margin requirements. Specifically, 

Amherst states that FICC has not 

presented the Commission with the full 

impact analysis of the supplemental 

Margin Proxy calculation and that the 

full analysis would reveal that the 

current margining process, inclusive of 

the Margin Proxy, has already 

significantly and materially increased 

Members’ margin amounts. Therefore, 

Amherst states that a full analysis of the 

current supplemental Margin Proxy 

calculation would reveal that the 

Margin Proxy enables FICC to collect 

adequate levels of margin to protect 

itself during stressed periods.179

Similarly, IDTA states that the Margin 

Proxy allows GSD to maintain its 

backtesting goal at the 99 percent 

confidence level.180

In response, FICC states that the 

Margin Proxy has historically provided 

a more accurate VaR Charge calculation 

than the full valuation approach, but the 

current VaR Charge as supplemented by 

the Margin Proxy calculation reflects 

relatively low market price volatility 

that has been present in the mortgagebacked securities market since the 

beginning of 2017. As such, FICC states 

that this current approach contains an 

insufficient amount of look-back data to 

ensure that the backtesting will remain 

above 99 percent if volatility returns to 

levels seen beyond the one-year lookback period that is currently used to 

calibrate the Margin Proxy for MBS.181

Additionally, in order to help ensure 

that it is calculating adequate margin, 

FICC filed Amendment No. 1 to 

accelerate the implementation of all the 

proposed changes, except for the 

proposed Blackout Period Exposure 

Adjustment and the removal of the 

existing Blackout Period Exposure 

Charge, which FICC proposes to 

implement in phases, through the 

remainder of 2018, in response to 

commenters. 

In Amendment No. 1, FICC states that 

it has been discussing the proposed 

changes with Members since August 

2017 in order to help Members prepare 

for and understand why FICC proposed 


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182 Id. 

183 Id. 

184 Id. 

185See Form X–17A–5, line 3770, available at 

https://www.sec.gov/files/formx-17a-5_2.pdf. 

186See supra note 15. 

187 17 CFR 240.17Ad–22(e)(4)(i). 

188 17 CFR 240.17Ad–22(e)(6)(i). 

the rule changes.182 FICC states that it 

is primarily concerned that the lookback period that is currently used in 

calculating the VaR Charge under the 

Margin Proxy may not calculate 

sufficient margin amounts to cover 

GSD’s exposure to a defaulting 

Member.183 Therefore, FICC proposes to 

accelerate the implementation of all the 

proposed changes, except for the 

proposed Blackout Period Exposure 

Adjustment and the removal of the 

existing Blackout Period Exposure 

Charge.184

The Commission believes that these 

proposed changes are designed to help 

FICC better identify, measure, monitor, 

and manage its credit exposure to its 

Members by calculating more precisely 

the risk presented by Members, which 

would enable FICC to assess a more 

reliable VaR Charge. Specifically, FICC’s 

proposed change to (1) switch to a 

sensitivity approach to the VaR Charge 

calculation, with a 10-year look-back 

period, would help the calculation 

respond more effectively to market 

volatility by attributing market price 

moves to various risk factors; (2) use the 

Margin Proxy as a back-up to the 

proposed sensitivity calculation would 

help ensure that FICC is able to assess 

a VaR Charge, even if its unable to 

receive sensitivity data from the thirdparty vendor; (3) apply a haircut on 

securities that are ineligible for the 

sensitivity VaR Charge calculation 

would enable FICC to better account for 

the risk presented by such securities; (4) 

establish the VaR Floor would enable 

FICC to better calculate a VaR Charge for 

portfolios where the proposed 

sensitivity approach would yield too 

low a VaR Charge; (5) establish the 

Blackout Period Exposure Adjustment 

component would enable FICC to better 

address risks that could result from 

overstated values of mortgage-backed 

securities that are pledged as collateral 

for GCF Repo Transactions during a 

Blackout Period; (6) adjust the existing 

Backtesting Charge component would 

ensure that the charge applied to all 

Members, as appropriate, and to 

Member’s intraday trading activities; 

and (7) use Net Capital instead of Excess 

Capital when calculating the Excess 

Capital Premium would make the 

Excess Capital Premium calculation for 

broker Members, inter-dealer broker 

Members, and dealer Members more 

consistent with the equity capital 

measure that is used for other Members. 

In response to commenters concerns 

regarding the proposed change to the 

Excess Capital Premium calculation, the 

Commission notes that this proposed 

change would only modify the 

denominator used in the calculation. 

Specifically, the denominator would 

become larger, as the proposal to use 

Net Capital (proposed denominator) is a 

larger amount than the current use of 

Excess Net Capital (current 

denominator).185 The effect, holding all 

else constant, would be to lower those 

Members’ Excess Capital Premium. 

Of course, if the numerator in the 

calculation (i.e., a Member’s VaR Charge 

amount) would increase, then the 

Excess Capital Premium could increase. 

However, FICC does not propose to 

change the numerator used for 

calculating the Excess Capital Premium. 

The Commission notes that under the 

Proposed Rule Change, the numerator 

used for calculating the Excess Capital 

Premium would be calculated using the 

proposed sensitivity approach to the 

VaR Charge calculation. As described 

further below, the proposed sensitivity 

approach would calculate margin 

commensurate with the risks associated 

with a Member’s portfolio. 

In response to the comments that the 

proposed sensitivity approach to the 

VaR Charge calculation is not necessary 

at this time in light of the Margin Proxy, 

the Commission disagrees. In 

considering these comments, the 

Commission thoroughly reviewed (i) the 

Proposed Rule Change, including the 

supporting exhibits that provided 

confidential information on the 

performance of the proposed sensitivity 

calculation, impact analysis, and 

backtesting results; (ii) the comments 

received; and (iii) the Commission’s 

own understanding of the performance 

of the current VaR Charge calculation, 

with which the Commission has 

experience from its general supervision 

of FICC, compared to the proposed 

sensitivity calculation. More 

specifically, the confidential Exhibit 3 

submitted by FICC includes (i) 12- 

month rolling coverage backtesting 

results; (ii) intraday backtesting impact 

analysis; (iii) a breakdown of coverage 

percentages and dollar amounts, for 

each Member, under the current margin 

model with and without Margin Proxy 

and under the proposed sensitivity 

model; and (iv) an impact study of the 

proposed changes detailing the margin 

amounts required per Member during 

Blackout Periods and non-Blackout 

Periods. 

On a Member basis, the Commission 

notes that there is not a sizeable change 

in the amount of margin collected under 

the current margin model, 

supplemented by the Margin Proxy, 

compared to the proposed sensitivity 

model. The Commission also notes that 

the Margin Proxy was implemented as 

a temporary solution to issues identified 

with the current model, as it only has 

a one year look-back period.186

Additionally, the Commission believes 

that the sensitivity approach is simpler 

and more accurate as it uses a broad 

spectrum of sensitivity data that is 

tailored to the specific risks associated 

with Members’ portfolios. Ultimately, 

the Commission finds that the proposed 

sensitivity approach, and the related 

implementation schedule proposed in 

Amendment No. 1, would provide FICC 

with a more robust margin calculation 

in FICC’s efforts to meet the applicable 

regulatory requirements for margin 

coverage. 

Therefore, for the reasons discussed 

above, the Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(4)(i) under the Exchange Act.187

D. Consistency With Rule 17Ad– 

22(e)(6)(i) of the Exchange Act 

The Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(6)(i) under the Exchange Act. Rule 

17Ad–22(e)(6)(i) requires each covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

cover its credit exposures to its 

participants by establishing a risk-based 

margin system that, at a minimum 

considers, and produces margin levels 

commensurate with, the risks and 

particular attributes of each relevant 

product, portfolio, and market.188

As described above, FICC proposes a 

number of changes to how it calculates 

Members’ margin charge through a riskbased margin system that considers the 

risks and attributes of securities that 

GSD clears. Specifically, FICC proposes 

to (1) move to a sensitivity approach to 

the VaR Charge calculation; (2) move 

from a front-weighted one-year lookback period to an evenly-weighted 10- 

year look-back period with the option 

for an additional stress period; (3) use 

the existing Margin Proxy as a back-up 

methodology to the proposed sensitivity 

approach to the VaR Charge calculation; 

(4) implement a haircut method for 

securities with insufficient sensitivity 

data due to inadequate historical 

pricing; (5) establish the VaR Floor; (6) 

establish the Blackout Period Exposure 


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189Ronin Letter I at 1. 

190 Id. at 2. 

191Ronin Letter II at 2. 

192 IDTA Letter at 11. 

193 Id. 

194 KGS Letter at 1. 

195Amherst Letter II at 2. 

196FICC Letter II at 12. 

197 Id. 

198 Id. 

199FICC Letter I at 5. 

200FICC Letter II at 12. 

201 Id. 

202 Id. 

203Ronin Letter I at 4; Ronin Letter 2 at 5. 

204 IDTA Letter I at 7. 

205 Id. 

206FICC Letter I at 4. 

207 Id. 

208FICC Letter II at 9. 

209 Id. 

Adjustment component; (7) adjust the 

existing Backtesting Charge component; 

and (8) eliminate the Blackout Period 

Exposure Charge, Coverage Charge, and 

augmented volatility adjustment 

multiplier components. 

Several commenters raised concerns 

that the proposed changes to the margin 

calculation would not produce a margin 

charge commensurate with the risks and 

particular attributes of Members’ 

complete portfolios. Specifically, Ronin 

states that the use of the proposed 

sensitivity approach to the VaR Charge 

calculation only uses a subset of a 

Member’s entire portfolio (i.e., it does 

not incorporate data from other clearing 

agencies) to calculate the Member’s risk 

to FICC.189 Ronin suggests that the 

implementation of data sharing and 

cross margining between MBSD, GSD, 

and CME would provide FICC with a 

more accurate representation of the risk 

associated with a Member’s portfolio.190

Ronin also states that the existing crossmargin agreement between FICC and 

CME needs an update to provide true 

cross-margin relief for all GSD 

Members.191 Similarly, IDTA states that 

FICC cannot accurately identify the risk 

associated with a Member’s portfolio 

due to the lack of incentive to share data 

with other clearing agencies.192 IDTA 

suggests that FICC should develop 

cross-margining ability between GSD 

and MBSD and improve cross-margining 

with CME.193 KGS and Amherst make 

similar arguments. KGS states that in 

order to more effectively analyze and 

address Members’ portfolio risks, there 

should be cross margining for Members 

that hold offsetting positions in GSD 

and MBSD, stating that not having such 

an intra-DTCC cross-margining process 

will have a distortive effect on GSD’s 

margining system, forcing members to 

reduce their use of GSD and reduce 

their positions cleared through GSD, in 

effect reducing market liquidity.194

Amherst states that not implementing 

cross-margin capabilities will inflate the 

margin requirements and distort the 

liquidity profile of the Member.195

In response, FICC disagrees with 

Amherst’s statement that FICC’s failure 

to implement a cross-margining 

arrangement would be inconsistent with 

the requirements of Rule 17Ad–22(e)(6) 

under the Exchange Act.196 FICC notes 

that it operates under two divisions, 

GSD and MBSD, each of which has its 

own rules and members.197 As a 

registered clearing agency, FICC notes 

that it is subject to the requirements that 

are contained in the Exchange Act and 

in the Commission’s regulations and 

rules thereunder.198

Nevertheless, FICC states that it agrees 

with commenters that data sharing and 

cross-margining would be beneficial to 

its Members and is exploring data 

sharing and cross-margining 

opportunities outside of the Proposed 

Rule Change.199 FICC states it is in the 

process of completing a proposal that 

would enable a margin reduction for 

Members with mortgage-backed 

securities (‘‘MBS’’) positions that offset 

between GSD and MBSD.200 FICC also 

states it will continue to develop a 

framework with CME that will enhance 

FICC’s existing cross-margining 

arrangement with CME.201 Finally, FICC 

notes that the proposed changes to the 

GSD margin methodology are necessary 

because they provide appropriate risk 

mitigation that must be in place before 

FICC can fully evaluate potential crossmargining opportunities.202

Separate from those comments, two 

commenters also raised concerns with 

the proposed extended look-back 

period. Ronin states that FICC’s 

assumption of adding a continued stress 

period to the 10-year look-back 

calculation is employing ‘‘statistical 

bias’’ because it treats every day as if the 

market is in ‘‘the midst of a financial 

crisis’’ and creates over margining.203

Similarly, IDTA states the addition of an 

arbitrary year to the look-back period is 

statistically biased and makes the ‘‘most 

volatile day’’ permanent and therefore, 

the calculations are not addressing the 

actual risk of a portfolio.204 IDTA 

believes that a shorter look-back period 

of five years without an additional stress 

period would sufficiently margin 

Members for the risk of their 

portfolios.205

In response, FICC states that a longer 

look-back period will produce a more 

stable VaR estimate that adequately 

reflects extreme market moves ensuring 

the VaR Charge does not decrease as 

quickly during periods of low volatility 

nor increase as sharply during periods 

of a market crisis.206 Additionally, FICC 

states that an extended look-back period 

including stressed market conditions are 

necessary to calculate margin 

requirements that achieve a 99 percent 

confidence level.207 As part of FICC’s 

model validation report, FICC 

performed a benchmark analysis of its 

calculation of the VaR Charge. FICC 

analyzed a 10-year look-back period, a 

five-year look-back period, and a oneyear look-back period using all Member 

portfolios from January 1, 2013 through 

April 28, 2017.208 The results of FICC’s 

analysis showed that a 10-year lookback period, which included a stress 

period, provides backtesting coverage 

above 99 percent while a five-year lookback period and a one-year look-back 

period did not.209

The Commission believes that these 

proposed changes are designed to help 

FICC better cover its credit exposures to 

its Members, as the changes would help 

establish a risk-based margin system 

that considers and produces margin 

levels commensurate with the risks and 

particular attributes of the products 

cleared in GSD. Specifically, the 

proposal to (1) move to a sensitivity 

approach to the VaR Charge calculation 

would enable the VaR Charge 

calculation to respond more effectively 

to market volatility by allowing FICC to 

attribute market price moves to various 

risk factors; (2) establish an evenlyweighted 10-year look-back period, with 

the option to add an additional stress 

period, would help FICC to ensure that 

the proposed sensitivity VaR Charge 

calculation contains a sufficient number 

of historical market conditions, to 

include stressed market conditions; (3) 

use the existing Margin Proxy as a backup methodology system would help 

ensure FICC is able to calculate a VaR 

Charge for Members despite a not being 

able to receive sensitivity date; (4) to 

implement a haircut method for 

securities with insufficient sensitivity 

data would help ensure that FICC is able 

to capture the risk profile of the 

securities; (5) establish the VaR Floor 

would help ensure that FICC assesses a 

VaR Charge where the proposed 

sensitivity calculation has produce too 

low of a VaR Charge; (6) establish the 

Blackout Period Exposure Adjustment 

component would enable FICC to 

address risks that could result from 

overstated values of mortgage-backed 

securities that are pledged as collateral 

for GCF Repo Transactions during a 

Blackout Period; (7) adjust the existing 

Backtesting Charge component would 

enable FICC to ensure that the charge 

applies to all Members, as appropriate, 


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210 Id. at 9–10. 

211 17 CFR 240.17Ad–22(e)(6)(i). 

212 17 CFR 240.17Ad–22(e)(6)(ii). 

213 Id. 214 17 CFR 240.17Ad–22(e)(6)(iv). 

and to Members’ intraday trading 

activities that could pose a risk to FICC 

in the event that such Members default 

during the trading day; and (8) eliminate 

the Blackout Period Exposure Charge, 

Coverage Charge, and augmented 

volatility adjustment multiplier 

components would ensure that FICC did 

not maintain elements of the prior 

margin calculation that would 

unnecessarily increase Members’ margin 

under the proposed margin calculation. 

In response to comments regarding 

cross-margining and its potential impact 

upon membership levels and market 

liquidity, the Commission notes that the 

Proposed Rule Change does not propose 

to establish or change any crossmargining agreements, whether between 

GSD and MBSD or between GSD, 

MBSD, and another clearing agency. As 

such, cross-margining is not one of the 

proposed changes under the 

Commission’s review. The Commission 

further notes that GSD and MBSD have 

different members (although a member 

of one could, and some may, apply and 

become a member of the other), offer 

different services, and clear different 

products. To the extent there is the 

potential to offset risk exposure present 

across the different products, those 

products are still cleared by different 

services. Accordingly, FICC maintains 

not only separate rulebooks for each 

division but also separate liquidity 

resources. 

Therefore, the Commission believes 

that the absence of a proposal in the 

Proposed Rule Change to establish 

cross-margining between GSD and 

MBSD, or to expanding cross-margining 

between GSD and another clearing 

agency, does not render the specific 

changes proposed in the Proposed Rule 

Change for GSD inconsistent with the 

Clearing Supervision Act or the 

applicable rules discussed herein. 

Rather, the Commission believes that 

the proposed changes to GSD’s margin 

calculation are designed to be tailored to 

the specific risks associated with the 

products and services offered by GSD 

and that the proposed GSD margin 

calculation is commensurate with the 

risks associated with portfolios held by 

Members in GSD. 

In response to comments about the 

proposed look-back period, the 

Commission believes that an evenlyweighted 10-year look-back period, plus 

an additional stress period, as needed, 

is an appropriate approach to help 

ensure that the proposed sensitivity VaR 

Charge calculation accounts for 

historical market observations of the 

securities cleared by GSD. Such a lookback period would help enable FICC to 

be in a better position to maintain 

backtesting coverage above 99 percent 

for GSD. As evidenced in FICC’s second 

comment letter, a 10-year look-back 

period that includes a stress period 

would provide backtesting coverage 

above 99 percent, while a five-year lookback period and a one-year look-back 

period would not.210

Therefore, for the above discussed 

reasons, the Commission believes that 

the changes proposed in the Proposed 

Rule Change are consistent with Rule 

17Ad–22(e)(6)(i) under the Exchange 

Act.211

E. Consistency With Rule 17Ad– 

22(e)(6)(ii) of the Exchange Act 

The Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(6)(ii) under the Exchange Act. 

Rule 17Ad–22(e)(6)(ii) requires each 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, marks participant 

positions to market and collects margin, 

including variation margin or equivalent 

charges if relevant, at least daily and 

includes the authority and operational 

capacity to make intraday margin calls 

in defined circumstances.212

As described above, FICC proposes to 

adjust the existing Backtesting Charge 

component. Specifically, FICC proposes 

to collect the charge from all Members 

on a daily basis, as applicable, as well 

as from Members that have backtesting 

deficiencies during the trading day due 

to large fluctuations of intraday trading 

activity that could pose risk to FICC in 

the event that such Members default 

during the trading day. 

The change is designed to help 

improve FICC’s risk-based margin 

system by authorizing FICC to assess 

this specific margin charge on all 

Members at least daily, as needed, and 

on an intra-day basis, as needed. 

Therefore, the Commission believes that 

the changes proposed in the Proposed 

Rule Change are consistent with Rule 

17Ad–22(e)(6)(ii) under the Exchange 

Act.213

F. Consistency With Rule 17Ad– 

22(e)(6)(iv) of the Exchange Act 

The Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(6)(iv) under the Exchange Act. 

Rule 17Ad–22(e)(6)(iv) requires each 

covered clearing agency to establish, 

implement, maintain and enforce 

written policies and procedures 

reasonably designed to cover its credit 

exposures to its participants by 

establishing a risk-based margin system 

that, at a minimum, uses reliable 

sources of timely price data and 

procedures and sound valuation models 

for addressing circumstances in which 

pricing data are not readily available or 

reliable.214

As described above, FICC proposes a 

number of changes to its margin 

calculation that are designed to use 

reliable price data and address 

circumstances in which pricing data 

may not be available or reliable. 

Specifically, FICC proposes to (1) 

replace its existing full revaluation VaR 

Charge calculation with the proposed 

sensitivity approach that relies upon the 

expertise of a third-party vendor to 

produce the needed sensitivity data; (2) 

utilize the existing Margin Proxy as a 

back-up to the proposed sensitivity VaR 

Charge calculation in the event that 

FICC experiences a data disruption with 

the third-party vendor; (3) implement a 

haircut method for securities that are 

ineligible for the proposed sensitivity 

approach to the VaR Charge calculation 

due to inadequate historical pricing 

data; and (4) establish the VaR Floor. 

The Commission believes that these 

proposed changes are designed to help 

FICC better cover its credit exposures to 

its Members, as the changes would help 

establish a risk-based margin system 

that uses reliable sources of timely price 

data and procedures and sound 

valuation models for addressing 

circumstances in which pricing data are 

not readily available or reliable. 

Specifically, the proposal to (1) move to 

a sensitivity approach to the VaR Charge 

calculation would not only enable the 

VaR Charge calculation to respond more 

effectively to market volatility by 

allowing FICC to attribute market price 

moves to various risk factors but also 

would enable FICC to employ the 

expertise of a third-party vendor to 

supply applicable sensitivity data; (2) 

use the existing Margin Proxy as a backup methodology system would help 

ensure FICC is able to calculate a VaR 

Charge for Members despite any 

difficulty in receiving sensitivity data 

from the third-party vendor; (3) 

implement a haircut method for 

securities with insufficient sensitivity 

data would help ensure that FICC is able 

to capture the risk profile of the 

securities; and (4) establish the VaR 

Floor would help ensure that FICC 


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215 Id. 

216 17 CFR 240.17Ad–22(e)(6)(v). 

217 IDTA Letter; Amherst Letter II. 

218 IDTA Letter at 12. 

219 Id. 

220 Id. 

221Amherst Letter II at 5. 

222 Id. 

223FICC Letter II at 13. 

224 Id. 

225 Id. 

226 Id. 

227 Id. 

228 Id. 

229 Id. 

assesses a VaR Charge where the 

proposed sensitivity VaR Charge 

calculation produces too low of a VaR 

Charge. 

Therefore, for these reasons, the 

Commission believes that the changes 

proposed in the Proposed Rule Change 

are consistent with Rule 17Ad– 

22(e)(6)(iv) under the Exchange Act.215

G. Consistency With Rule 17Ad– 

22(e)(6)(v) of the Exchange Act 

The Commission believes that the 

changes proposed in the Proposed Rule 

Change are consistent with Rule 17Ad– 

22(e)(6)(v) under the Exchange Act. Rule 

17Ad–22(e)(6)(v) requires each covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

use an appropriate method for 

measuring credit exposure that accounts 

for relevant product risk factors and 

portfolio effects across products.216

As described above, FICC proposes a 

number of changes to its margin 

calculation that are designed to help 

ensure that FICC accounts for the 

relevant product risk factors and 

portfolio effects across GSD’s products 

when measuring its credit exposure to 

Members. Specifically, FICC proposes to 

(1) replace its existing full revaluation 

VaR Charge calculation with the 

proposed sensitivity approach to the 

VaR Charge calculation; (2) implement a 

haircut method for securities that are 

ineligible for the proposed sensitivity 

approach due to inadequate historical 

pricing data; and (3) establish the 

Blackout Period Exposure Adjustment 

component. 

Two commenters raised concerns 

regarding the Blackout Period Exposure 

Adjustment.217 Specifically, IDTA states 

that that the Blackout Period Exposure 

Adjustment results in an inaccurate 

measurement of risk and excessive 

margin charges.218 First, IDTA states 

that the Blackout Period should run 

from the first business day of the current 

month to the morning of the fifth 

business day to more accurately capture 

FICC’s exposure.219 Second, IDTA states 

that the Blackout Period Exposure 

Adjustment should be calculated using 

historical pay-down rates for the MBS 

pools held in each Members’ portfolio, 

rather than historical pay-down rates for 

all active MBS pools. Finally, IDTA 

states that FICC should apply a creditrisk weighting to the Blackout Period 

Exposure Adjustment instead of 

assuming a 100 percent probability of a 

GCF Repo Service counterparty default 

across all Members.220

Amherst similarly states that using 

historical pay-down rates for all active 

MBS pools, rather than using historical 

pay-down rates for the MBS pools held 

in each Members’ portfolio, in 

calculating the Blackout Period 

Exposure Adjustment would eliminate 

‘‘prudent risk and position 

management’’ that Members can 

undertake to reduce FICC’s exposure.221

Amherst states that FICC should retain 

its current approach that provides 

incentives for Members to ‘‘manage the 

prepay characteristics of the mortgagebacked securities held within FICC.’’ 222

In response, FICC states that Blackout 

Period Exposure Adjustment collections 

that occur after the MBS collateral 

pledge would not mitigate the risk that 

a Member defaults after the collateral is 

pledged but before such Member 

satisfies the next day’s margin.223

Therefore, FICC states that IDTA’s 

proposed change to the timing of the 

Blackout Period Exposure Adjustment 

would be inconsistent with FICC’s 

requirements under the Exchange 

Act.224 Additionally, FICC states it 

considered different approaches for 

determining the calculation of the 

Blackout Period Exposure Adjustment 

that would ensure FICC has sufficient 

backtesting coverage, and give Members 

transparency and the ability to plan for 

the Blackout Period Exposure 

Adjustment requirements.225 FICC notes 

that MBS pay-down rates are influenced 

by several factors that can be projected 

at the loan level, however, such 

projections would be dependent on 

several assumptions that may not be 

predictable and transparent to 

Members.226 Thus, FICC states that the 

proposed Blackout Period Exposure 

Adjustment applies weighted averages 

of pay-down rates for all active mortgage 

pools of the related program during the 

three most recent preceding months, 

and FICC believes that this approach 

would allow Members to effectively 

plan for the Blackout Period Exposure 

Adjustment.227 Finally, FICC disagrees 

with IDTA’s suggestion that a 

probability of default approach would 

be more appropriate because a 

probability of default approach would 

provide lower margin coverage than the 

current approach.228 FICC notes this 

lower margin would not be sufficient to 

maintain the margin coverage at a 99 

percent confidence level.229

The Commission believes that these 

proposed changes are designed to help 

FICC use an appropriate method for 

measuring credit exposure that accounts 

for relevant product risk factors and 

portfolio effects across products cleared 

by GSD. Specifically, the proposal to (1) 

move to a sensitivity approach to the 

VaR Charge calculation would enable 

the VaR Charge calculation to respond 

more effectively to market volatility by 

allowing FICC to attribute market price 

moves to various risk factors; (2) to 

implement a haircut method for 

securities with insufficient sensitivity 

data would help ensure that FICC is able 

to capture the risk profile of the 

securities; and (3) establish the Blackout 

Period Exposure Adjustment component 

would enable FICC to address risks that 

could result from overstated values of 

mortgage-backed securities that are 

pledged as collateral for GCF Repo 

Transactions during a Blackout Period. 

In response to commenters’ concerns 

regarding the Blackout Period Exposure 

Adjustment collection cycle, as stated 

above, the Commission notes the 

proposed cycle follows the same cycle 

currently used for the Blackout Period 

Exposure Charge, which FICC proposes 

to eliminate on account of the proposed 

Blackout Period Exposure Adjustment. 

For both the current and proposed 

cycle, the Commission understands, 

based on its experience and expertise, 

that FICC’s application of the charge on 

the last business day of the month, as 

opposed to the first business day of the 

following month, is an appropriate way 

to ensure that FICC collects the funds 

before realizing the risk that the charge 

is intended to mitigate (i.e., a Member 

defaults during the Blackout Period). 

Similarly, FICC’s extension of the 

charge through the end of the day on the 

Factor Date, as opposed to releasing the 

charge during FICC’s standard intraday 

margin calculation on the Factor Date, 

also is an appropriate way to mitigate 

the risk exposure to FICC because, 

operationally, the MBS are not released 

and revalued with the update factors by 

the applicable clearing bank until after 

FICC has already completed the 

intraday margin calculation. 

In response to commenters’ concerns 

regarding the calculation of the Blackout 

Period Exposure Adjustment, the 

Commission agrees with FICC. 

Specifically, the Commission agrees that 

(i) given the number assumptions that 


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230 17 CFR 240.17Ad–22(e)(6)(v). 

231Rule 17Ad–22(a)(16)(i) under the Exchange 

Act defines sensitivity analysis to include an 

analysis that involves analyzing the sensitivity 

model to its assumptions, parameters, and inputs 

that consider the impact on the model of both 

moderate and extreme changes in a wide range of 

inputs, parameters, and assumptions, including 

correlations of price movements or returns if 

relevant, which reflect a variety of historical and 

hypothetical market conditions. 17 CFR 240.17Ad– 

22(a)(16)(i). Sensitivity analysis must use actual 

portfolios and, where applicable, hypothetical 

portfolios that reflect the characteristics of 

proprietary positions and customer positions. Id. 

232 17 CFR 240.17Ad–22(e)(6)(vi)(B). 

233Ronin Letter I at 2–4; IDTA Letter at 6, 7. 

234Ronin Letter I at 2–3; Ronin Letter II at 1. 

235Ronin Letter I at 3. 

236 IDTA Letter at 6; Ronin Letter II at 2. 

237 Id. 

238FICC Letter I at 3. 

239 Id. at 3–4. 

240 Id. at 4. 

241 Id. 

242 17 CFR 240.17Ad–22(e)(6)(vi)(B). 

243 17 CFR 240.17Ad–22(e)(23)(ii). 

244See Amherst Letter II; IDTA Letter; Ronin II 

Letter. 

245 IDTA Letter at 5. 

246 Id. 

247 Id. 

248Amherst Letter II at 2. 

249 Id. 

250 Id. at 5, 6. 

one would need to make with respect to 

the various factors that influence MBS 

pay-down rates, the weighted–average 

approach would provide Members more 

transparency and certainty around the 

charge; and (ii) a credit-risk weighting 

would not likely produce a sufficient 

charge amount in the event of an actual 

Member default, as the approach would 

assume something less than a 100 

percent probability of default in 

calculating the charge. 

Therefore, for these reasons, the 

Commission believes that the changes 

proposed in the Proposed Rule Change 

are consistent with Rule 17Ad– 

22(e)(6)(v) under the Exchange Act.230

H. Consistency With Rule 17Ad– 

22(e)(6)(vi)(B) of the Exchange Act 

Rule 17Ad–22(e)(6)(vi)(B) under the 

Exchange Act requires each covered 

clearing agency to establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

cover its credit exposures to its 

participants by establishing a risk-based 

margin system that, at a minimum, is 

monitored by management on an 

ongoing basis and is regularly reviewed, 

tested, and verified by conducting a 

sensitivity analysis 231 of its margin 

model and a review of its parameters 

and assumptions for backtesting on at 

least a monthly basis, and considering 

modifications to ensure the backtesting 

practices are appropriate for 

determining the adequacy of the 

covered clearing agency’s margin 

resources.232

Some of the commenters raise 

concerns that two of the presumptions 

assumed by FICC for backtesting, in 

order to determine the adequacy of the 

FICC’s margin resources, are 

inaccurate.233 First, Ronin and IDTA 

claim that FICC incorrectly assumes that 

it would take three days to liquidate or 

hedge the portfolio of a defaulting 

Member in normal market conditions. 

Specifically, Ronin states that FICC’s 

assumption that it would take three 

days to liquidate or hedge the portfolio 

of a defaulted Member is incorrect 

because FICC incorrectly assumes that 

liquidity needs following a default will 

be identical for all Members.234 Ronin 

states that the three-day liquidation 

period creates an ‘‘arbitrary and 

extremely high hurdle’’ for historical 

backtesting by overestimating the 

closeout-period risk posed to FICC by 

many of its Members by ‘‘triplecounting’’ a single event.235 Similarly, 

IDTA notes that it is arbitrary to apply 

the same liquidation period across all 

Members because smaller Member 

portfolios can be more easily liquidated 

or hedged in a short period of time.236

IDTA believes FICC should link the 

liquidation period to the portfolio size 

of the Member.237

In its response, FICC states that the 

three-day liquidation period is an 

accurate assumption of the length of 

time it would take to liquidate a 

portfolio given the volume and types of 

securities that can be found in a 

Member’s portfolio at any given time.238

Further, FICC notes that it validates the 

three-day liquidation period, at least 

annually, through FICC’s simulated 

close-out, which is augmented with 

statistical and economic analysis to 

reflect potential liquidation costs of 

sample portfolios of various sizes.239

FICC also notes that idiosyncratic 

exposures cannot be mitigated quickly 

and that the risk associated with 

idiosyncratic exposures is present in 

large and small portfolios.240 Finally, 

FICC states that although a single 

market price shock will influence a 

three-day portfolio price return, the 

mark-to-market calculation will vary 

daily based on the day’s positions and 

margin collection for each Member.241

The Commission believes that FICC’s 

assumption that it could take three days 

to liquidate the portfolio of a defaulted 

Member, regardless of the size of the 

portfolio or the type of Member, is 

appropriate. To the extent there is a 

difference in the time required for FICC 

to liquidate various GSD products over 

a three-day period, the Commission 

believes that such time is appropriate in 

order for FICC to focus on the overall 

risk management of the defaulted 

Member without creating a liquidation 

methodology that is overly complex and 

susceptible to flaws. 

Therefore, the Commission believes 

that the Proposed Rule Change is 

consistent with Rule 17Ad– 

22(e)(6)(vi)(B) under the Exchange 

Act.242

I. Consistency With Rule 17Ad– 

22(e)(23)(ii) of the Exchange Act 

Rule 17Ad–22(e)(23)(ii) under the 

Exchange Act requires each covered 

clearing agency to 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 the covered 

clearing agency.243

Three commenters expressed 

concerns regarding the limited time in 

which Members have had to evaluate 

the data provided by FICC and the 

effects of the proposed changes.244 IDTA 

states that the proposed changes are 

complex and warrant adequate testing 

and transparency between FICC and its 

Members.245 IDTA states that FICC has 

not provided Members with adequate 

time to review and evaluate the 

potential impacts of the proposed 

changes on a Member’s portfolio.246

IDTA suggests that FICC (i) provide 

more time for Members to adapt to the 

change; (ii) launch a calculator that 

enables Members to input sample 

portfolios to determine the margin 

required; and (iii) provide full 

disclosure of the methodology used.247

Similarly, Amherst states that the 

proposed changes should not be 

implemented until Members have had 

the appropriate time and sufficient 

information to complete a comparison 

between the current margin 

methodology and the proposed 

changes.248 Amherst requests that FICC 

provide the appropriate tools and 

information to replicate the new 

sensitivity model in order to manage the 

risks to Members that may be 

introduced as a result of the proposed 

changes.249 Amherst also requests that 

FICC provide transparency surrounding 

the effects of the Blackout Period 

Exposure Adjustment and the Excess 

Capital Premium calculations in order 

to assess the impacts of the proposed 

changes.250

Similarly, Ronin states that FICC has 

heavily relied on parallel and historical 

studies when providing its Members 


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251Ronin Letter II at 3. 

252 Id. 

253 Id. 

254FICC Letter I at 5; FICC Letter II at 8–9. 

255FICC Letter I at 5; FICC Letter II at 8–9. 

256FICC Letter I at 5. 

257Amendment No. 1, supra note 6. 

258 Id. 

259 17 CFR 240.17Ad–22(e)(23)(ii). 

260 15 U.S.C. 78s(b)(1). 

261 17 CFR 240.19b–4. 

262 12 U.S.C. 5465(e)(1)(A). 

263See Notice, supra note 3. 

264See 17 CFR 240.19b–4(l). 

265Available at http://www.dtcc.com/legal/secrule-filings. 

266 17 CFR 240.17Ad–22(e)(23)(ii). 

267 15 U.S.C. 78s(b)(2). 

268 Id. 

269 17 CFR 200.30–3(a)(12). 

with data, but Members lack the 

necessary tools to conduct their own 

scenario analysis.251 Ronin notes that 

when trading activity or market 

conditions deviate from assumptions 

made under the various studies 

conducted by the FICC, Members are 

forced to react rather than proactively 

manage capital needs.252 Ronin, 

therefore, states it is significantly more 

difficult to manage the capital needs of 

a business when a clearing agency does 

not provide appropriate tools for 

calculating projected margin 

requirements in advance.253

In response, FICC states that its 

Members have been provided with 

sufficient time and information to assess 

the impact of the proposed changes.254

FICC states that it has provided 

Members with numerous opportunities 

to gather information including (i) 

holding customer forums in August 

2017; (ii) making individual impact 

studies available in September 2017 and 

December 2017; (iii) providing parallel 

reporting on a daily basis since 

December 18, 2017; and (iv) meeting 

and speaking with Members on an 

individual basis and responding to 

request for additional information since 

August 2017.255 Separately, FICC agrees 

with commenters that launching a 

calculator that enables Members to 

input sample portfolios to determine the 

margin required would be beneficial to 

its Members and is exploring creating 

such a calculator outside of the changes 

proposed in the Proposed Rule 

Change.256 Additionally, in order to 

provide Members with more time, FICC 

filed Amendment No. 1 to delay 

implementation of the Blackout Period 

Exposure Adjustment and the removal 

of the Blackout Period Exposure 

Charge.257 Such changes now would be 

implemented in phases throughout the 

remainder of 2018.258

In response to commenters, the 

Commission notes that the disclosure 

requirements of Rule 17Ad–22(e)(23)(ii) 

under the Exchange Act 259 should not 

be conflated with the filing 

requirements for proposed rule changes 

under Section 19(b)(1) of the Exchange 

Act 260 and Rule 19b–4 thereunder.261

Section 19(b)(1) of the Exchange Act 

requires a self-regulatory organization to 

provide the Commission with copies of 

any proposed rule or proposed change 

to the self-regulatory organization’s 

rules, accompanied by a concise general 

statement of the basis and purpose of 

the proposed rule change,262 which 

FICC did in this case.263 Meanwhile, 

Rule 19b–4(l) under the Exchange Act 

requires the clearing agency to post the 

proposed rule change, and any 

amendments thereto, on its website 

within two business days after filing 

with the Commission,264 which FICC 

did in this case.265

Until the Commission approves the 

changes proposed in a proposed rule 

change, disclosure of the proposed 

changes under Rule 17Ad–22(e)(23)(ii) 

is not yet applicable, as there would not 

yet be (and there may not be if the 

Commission objects to the proposed 

changes) any risks, fees, or other 

material costs incurred with respect to 

the proposed changes. Nevertheless, the 

Commission notes that FICC has 

conducted outreach to Members, as 

described above, and proposes a 

staggered implementation of the 

proposed Blackout Period Exposure 

Adjustment and removal of the Blackout 

Period Exposure Charge in response to 

commenters. The Commission believes 

that the absence of a longer period of 

time to review the Proposed Rule 

Change does not render the proposed 

changes inconsistent with the Clearing 

Supervision Act or the applicable rules 

discussed herein. 

Therefore, the Commission believes 

that the changes proposed in the 

Proposed Rule Change are consistent 

with Rule 17Ad–22(e)(23)(ii) under the 

Exchange Act.266

V. Accelerated Approval of Proposed 

Rule Change, as Modified by 

Amendment No. 1 

The Commission finds good cause to 

approve the Proposed Rule Change, as 

modified by Amendment No. 1, prior to 

the thirtieth day after the date of 

publication of the notice of Amendment 

No. 1 in the Federal Register. As 

discussed above, FICC submitted 

Amendment No. 1 to (1) stagger the 

implementation of the proposed 

Blackout Period Exposure Adjustment 

and the proposed removal of the 

Blackout Period Exposure Charge; (2) 

amend the implementation date for the 

remainder of the proposed changes 

contained in the Proposed Rule Change; 

and (3) correct an incorrect description 

of the calculation of the Excess Capital 

Premium that appears once in the 

narrative to the Proposed Rule Change, 

as well as in the corresponding location 

in the Exhibit 1A to the Proposed Rule 

Change. 

The Commission believes that 

Amendment No. 1 does not raise any 

novel issues: (i) Staggering the 

implementation of the proposed 

Blackout Period Exposure Adjustment is 

in response to comments received, as 

described above; (ii) accelerating the 

implementation date for the remainder 

of the proposed changes would enable 

FICC to implement those proposed 

changes sooner, which, as discussed 

above, would help FICC address issues 

identified with its current margin 

calculation; and (iii) the remaining 

change is non-substantive. Accordingly, 

the Commission finds good cause to 

approve the proposed rule change, as 

modified by Amendment No. 1, on an 

accelerated basis, pursuant to Section 

19(b)(2) of the Exchange Act.267

VI. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Proposed 

Rule Change, as modified by 

Amendment No. 1, is consistent with 

the requirements of the Exchange Act, 

in particular, with the requirements of 

Section 17A of the Exchange Act and 

the rules and regulations thereunder. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Exchange Act,268

that proposed rule change SR–FICC– 

2018–001, as modified by Amendment 

No. 1, be, and it hereby is, approved on 

an accelerated basis. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.269

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2018–12195 Filed 6–6–18; 8:45 am] 

BILLING CODE 8011–01–P 


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