```

[Federal Register Volume 89, Number 220 (Thursday, November 14, 2024)]
[Notices]
[Pages 90109-90122]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-26531]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101569; File No. SR-FICC-2024-003]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change, as Modified by Partial 
Amendment No. 1, To Adopt a Minimum Margin Amount at GSD

November 8, 2024.
    On February 27, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2024-003 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on March 15, 2024.\3\ On March

[[Page 90110]]

25, 2024, pursuant to Section 19(b)(2) of the Act,\4\ the Commission 
designated a longer period within which to approve, disapprove, or 
institute proceedings to determine whether to approve or disapprove the 
Proposed Rule Change.\5\ On April 5, 2024, FICC filed Partial Amendment 
No. 1 to the proposed rule change to correct errors FICC discovered 
regarding the impact analysis filed as Exhibit 3 and discussed in the 
filing narrative, as well as correct a typo in the methodology formula 
in Exhibit 5b.\6\ The corrections in Partial Amendment No. 1 did not 
change the substance of the proposed rule change.\7\ The proposed rule 
change, as modified by Partial Amendment No. 1, is hereinafter referred 
to as the ``Proposed Rule Change.'' On May 20, 2024, the Commission 
published in the Federal Register notice of filing of Partial Amendment 
No. 1 and an order instituting proceedings to determine whether to 
approve or disapprove the Proposed Rule Change.\8\ On September 12, 
2024, pursuant to Section 19(b)(2) of the Act,\9\ the Commission 
extended the period for the conclusion of proceedings to determine 
whether to approve or disapprove the Proposed Rule Change.\10\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 99711 (March 11, 2024), 
89 FR 18991 (March 15, 2024) (SR-FICC-2024-003). FICC also filed the 
proposals contained in the proposed rule change as advance notice 
SR-FICC-2024-801 with the Commission pursuant to Section 806(e)(1) 
of the Dodd-Frank Wall Street Reform and Consumer Protection Act 
entitled the Payment, Clearing, and Settlement Supervision Act of 
2010 (``Clearing Supervision Act''). 12 U.S.C. 5465(e)(1); 17 CFR 
240.19b-4(n)(1)(i). Notice of the advance notice was published in 
the Federal Register on March 15, 2024. Securities Exchange Act 
Release No. 99712 (March 11, 2024), 89 FR 18981 (March 15, 2024) 
(SR-FICC-2024-801). Pursuant to Section 806(e)(1)(H) of the Clearing 
Supervision Act, the Commission extended the review period of the 
advance notice for an additional 60 days after finding that the 
advance notice raised novel and complex issues. On March 22, 2024, 
the Commission requested additional information from FICC pursuant 
to Section 806(e)(1)(D) of the Clearing Supervision Act, which 
tolled the Commission's review period of review of the advance 
notice. 12 U.S.C. 5465(e)(1)(D). On April 26, 2024, the Commission 
received FICC's response to the Commission's request for additional 
information.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 99769 (March 19, 2024), 
89 FR 20716 (March 25, 2024) (SR-FICC-2024-003).
    \6\ FICC has requested confidential treatment pursuant to 17 CFR 
240.24b-2 with respect to Exhibit 3 and Exhibit 5b.
    \7\ On April 5, 2024, FICC filed Partial Amendment No. 1 to the 
advance notice, which makes the same corrections as Partial 
Amendment No. 1 to the proposed rule change. The Commission 
published notice of the advance notice, as modified by Partial 
Amendment No. 1, for comment in the Federal Register on May 20, 
2024. Securities Exchange Act Release No. 100140 (May 14, 2024), 89 
FR 43941 (May 20, 2024) (SR-FICC-2024-801). The advance notice, as 
modified by Partial Amendment No. 1, is hereinafter referred to as 
the ``Advance Notice.'' On August 13, 2024, the Commission made a 
second request for additional information from FICC pursuant to 
Section 806(e)(1)(D) of the Clearing Supervision Act, which tolled 
the Commission's review period of review of the Advance Notice. 12 
U.S.C. 5465(e)(1)(D). On September 26, 2024, the Commission received 
FICC's response to the Commission's second request for additional 
information.
    \8\ Securities Exchange Act Release No. 100141 (May 14, 2024), 
89 FR 43915 (May 20, 2024) (SR-FICC-2024-003) (``Notice'').
    \9\ 15 U.S.C. 78s(b)(2)(B)(ii)(II).
    \10\ Securities Exchange Act Release No. 100958 (Sept. 6, 2024), 
89 FR 74309 (Sept. 12, 2024) (SR-FICC-2024-003).
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    The Commission received comment letters on the Proposed Rule 
Change.\11\ In addition, the Commission received a letter from FICC 
responding to the public comments.\12\ For the reasons discussed below, 
the Commission is approving the Proposed Rule Change.
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    \11\ Comments on the Proposed Rule Change are available at 
https://www.sec.gov/comments/sr-ficc-2024-003/srficc2024003.htm. 
Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801.htm. Because the proposals 
contained in the Advance Notice and the Proposed Rule Change are the 
same, all comments received on the proposals were considered 
regardless of whether the comments were submitted with respect to 
the Advance Notice or the Proposed Rule Change.
    \12\ See Letter from Timothy B. Hulse, Managing Director 
Financial Risk, Governance & Credit Risk of Depository Trust & 
Clearing Corporation, (June 24, 2024) (``FICC Letter'').
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I. Description of the Proposed Rule Change

A. Executive Summary

    FICC proposes to add a new Minimum Margin Amount (``MMA'') 
calculation to the GSD margin methodology to ensure that FICC collects 
sufficient margin amounts from its members during sudden periods of 
extreme market volatility. Recently, FICC faced increased risk exposure 
to its members during two periods of extreme market volatility, i.e., 
the COVID-related volatility in March 2020 and the volatility resulting 
from the successive interest rate hikes that began in March 2022. Those 
periods of volatility involved market price changes that exceeded the 
GSD margin model's projections, causing FICC to collect margin amounts 
that were insufficient to cover FICC's risk exposure to its members. 
This highlighted the need for FICC to enhance the GSD margin 
methodology to provide better coverage during periods of extreme market 
volatility.
    FICC proposes to add the MMA calculation to the Value-at-Risk 
charge (``VaR Charge'') component of the GSD margin methodology. 
Whereas the current VaR Charge is determined as the greater of two 
separate calculations, FICC proposes to add the MMA as a third 
calculation so that the VaR Charge would be the greater of three 
separate calculations. FICC specifically designed the MMA calculation 
to be more responsive to volatile market conditions than the two 
existing VaR Charge calculations. As described more fully below, the 
MMA calculation uses a filtered historical simulation (``FHS'') 
approach, which takes historical price data, removes the historical 
volatility estimates, and replaces them with volatility estimates that 
reflect current market conditions. The FHS approach also incorporates 
parameters that would give more weight to recent market events, such 
that when market volatility spikes, the MMA calculation would generate 
higher amounts and be more likely to exceed the other two VaR Charge 
calculations. Conversely, when market volatility subsides, the MMA 
calculation would generate lower amounts and be less likely to exceed 
the other two VaR Charge calculations.
    FICC conducted a 2-year impact study to analyze, among other 
things, the actual daily member-level margin amounts and backtesting 
results in comparison to the margin amounts and backtesting results had 
the MMA calculation been in place. The impact study indicates that if 
FICC used the MMA calculation during the 2-year period of analysis, 
FICC's margin collections and backtesting coverage would have 
significantly improved and enabled FICC to meet its 99 percent 
backtesting performance targets.

B. Background

    FICC, through its Government Securities Division (``GSD''),\13\ 
serves as a central counterparty (``CCP'') and provider of clearance 
and settlement services for transactions in U.S. government securities, 
as well as repurchase and reverse repurchase transactions involving 
U.S. government securities.\14\ A key tool that FICC uses to manage its 
credit exposures to its members is the daily collection of the Required 
Fund Deposit (i.e., margin) from each member.\15\ The aggregated amount 
of all members' Required Fund Deposits constitutes the Clearing Fund, 
which FICC would access should a defaulted member's own Required Fund 
Deposit be insufficient to satisfy losses to FICC caused by the 
liquidation of that member's portfolio.\16\
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    \13\ The GSD Rules are available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf. Terms not 
otherwise defined herein are defined in the GSD Rules.
    \14\ GSD also clears and settles certain transactions on 
securities issued or guaranteed by U.S. government agencies and 
government sponsored enterprises.
    \15\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 13.
    \16\ See id.
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    A member's Required Fund Deposit consists of a number of 
components,

[[Page 90111]]

each of which is calculated to address specific risks faced by 
FICC.\17\ The VaR Charge generally comprises the largest portion of a 
member's Required Fund Deposit amount. The VaR Charge is a calculation 
of the volatility of the unsettled securities positions in a member's 
portfolio.\18\ For each member portfolio, FICC currently uses two 
separate methods to calculate amounts, the greater of which constitutes 
the member's VaR Charge.\19\
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    \17\ Supra note 15.
    \18\ See GSD Rule 1 (Definitions--VaR Charge), supra note 13.
    \19\ See id.
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    FICC's first calculation uses a sensitivity-based VaR methodology 
to estimate the possible losses for a given portfolio based on: (1) 
confidence level, (2) a time horizon, and (3) historical market 
volatility. The sensitivity VaR methodology is intended to capture the 
market price risks that are associated with the securities positions in 
a member's margin portfolio,\20\ at a 99 percent confidence level. This 
methodology projects the potential losses that could occur in 
connection with the liquidation of a defaulting member's portfolio, 
assuming a portfolio would take three days to liquidate in normal 
market conditions. The sensitivity VaR methodology relies on 
sensitivity data and historical risk factor time series data generated 
by an external vendor to calculate the risk profile of each member's 
portfolio. In the event of a vendor data disruption, the GSD Rules 
provide for an alternative volatility calculation that relies on 
historical market index proxies (the ``Margin Proxy'' calculation).\21\
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    \20\ Market price risk refers to the risk that volatility in the 
market causes the price of a security to change between the 
execution of a trade and settlement of that trade. This risk is 
sometimes also referred to as volatility risk.
    \21\ See GSD Rule 1 (Definitions--Margin Proxy), supra note 13; 
Securities Exchange Act Release Nos. 80341 (March 30, 2017), 82 FR 
16644 (April 5, 2017) (SR-FICC-2017-801); Securities Exchange Act 
Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR-
FICC-2018-801).
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    FICC recognizes that the sensitivity VaR methodology might not 
generate margin amounts sufficient to cover its exposure to its members 
consistent with its regulatory obligations when applied to certain 
types of member portfolios.\22\ Therefore, FICC's second calculation 
uses a haircut-based methodology (currently referred to in the GSD 
Rules as the ``VaR Floor''),\23\ in which FICC applies a haircut to the 
market value of the gross unsettled positions in the member's 
portfolio.\24\ The current VaR Floor is not designed to address the 
risk of potential underperformance of the sensitivity VaR methodology 
under extreme market volatility.\25\ Each member's VaR Charge is either 
the sensitivity VaR calculation or the VaR Floor calculation, whichever 
is greater.\26\
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    \22\ See Notice, supra note 8 at 43918. Specifically, for member 
portfolios that contain both long and short positions in different 
classes of securities that have a high degree of historical price 
correlation, the sensitivity VaR methodology can generate inadequate 
VaR Charges. See id.
    \23\ Supra note 18.
    \24\ See Securities Exchange Act Release No. 83362 (June 1, 
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001). Specifically, 
FICC calculates the VaR Floor by multiplying the absolute value of 
the sum of the portfolio's net long positions and net short 
positions, grouped by product and remaining maturity, by a 
percentage designated by FICC for such group. For U.S. Treasury and 
agency securities, such percentage shall be a fraction, no less than 
10 percent, of the historical minimum volatility of a benchmark 
fixed income index for such group by product and remaining maturity. 
For mortgage-backed securities, such percentage shall be a fixed 
percentage that is no less than 0.05 percent. Supra note 18.
    \25\ See Notice, supra note 8 at 43918.
    \26\ Supra note 18.
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    FICC regularly assesses whether its margin methodologies generate 
margin levels commensurate with the particular risk attributes of each 
relevant product, portfolio, and market. For example, FICC employs 
daily backtesting \27\ to determine the adequacy of margin collections 
from its members.\28\ FICC compares each Member's Required Fund Deposit 
\29\ with the simulated liquidation gains/losses, using the actual 
positions in each member portfolio and the actual historical security 
returns. A backtesting deficiency occurs when a member's Required Fund 
Deposit would not have been adequate to cover the projected liquidation 
losses. Backtesting deficiencies highlight exposures that could subject 
FICC to potential losses in the event of a member default.
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    \27\ Backtesting is an ex-post comparison of actual outcomes 
(i.e., the actual margin collected) with expected outcomes derived 
from the use of margin models. See 17 CFR 240.17ad-22(a)(1).
    \28\ FICC's Model Risk Management Framework (``Model Risk 
Management Framework'') sets forth the model risk management 
practices of FICC and states that VaR and Clearing Fund requirement 
coverage backtesting would be performed on a daily basis or more 
frequently. See Securities Exchange Act Release Nos. 81485 (Aug. 25, 
2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-014); 84458 (Oct. 
19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-2018-010); 88911 
(May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-FICC-2020-004); 92380 
(July 13, 2021), 86 FR 38140 (July 19, 2021) (SR-FICC-2021-006); 
94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24, 2022) (SR-FICC-2022-
001); 97890 (July 13, 2023), 88 FR 46287 (July 19, 2023) (SR-FICC-
2023-008).
    \29\ Members may be required to post additional collateral to 
the Clearing Fund in addition to their Required Fund Deposit amount. 
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements), 
supra note 13 (providing that adequate assurances of financial 
responsibility of a member may be required, such as increased 
Clearing Fund deposits). For backtesting comparisons, FICC uses the 
Required Fund Deposit amount, without regard to the actual, total 
collateral posted by the member to the GSD Clearing Fund.
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    FICC believes that its current VaR model has performed well in low 
to moderate volatility markets,\30\ though it has not met FICC's 
performance targets during periods of extreme market volatility.\31\ As 
described more fully below, FICC performed an impact study on its 
members' margin portfolios covering the period beginning July 1, 2021 
through June 30, 2023 (``Impact Study'').\32\ During the period of the 
Impact Study, FICC's VaR model backtesting coverage was 98.86 percent, 
with 843 VaR model backtesting deficiencies.\33\ Also, during the 
period of the Impact Study, FICC's overall margin backtesting coverage 
was 98.87 percent, with 685 overall margin backtesting 
deficiencies.\34\ Thus, the Impact Study demonstrates that FICC's 
backtesting metrics fell below performance targets during the period of 
the Impact Study.\35\ FICC states that the foregoing backtesting 
deficiencies are attributable to recent periods of extreme volatility 
in the fixed income market caused by monetary policy changes, 
inflation, and recession fears, which have led to greater risk 
exposures for FICC.\36\ Specifically, FICC states that the periods of 
extreme market volatility in March 2020 related to the COVID pandemic 
and the successive interest rate hikes that began in March 2022, have 
led to market price changes that exceeded the projections of FICC's 
current VaR model, resulting in insufficient VaR Charges.\37\
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    \30\ During the periods of relatively low to moderate market 
volatility from January 2013 to March 2020, the VaR model generally 
performed above the 99 percent performance targets. See Notice, 
supra note 8 at 43917.
    \31\ During the pandemic-related volatility in March 2020 and 
the successive interest rate hikes that began in March 2022, the VaR 
model fell below the 99 percent performance targets. See Notice, 
supra note 8 at 43916-18.
    \32\ As part of the Proposed Rule Change, FICC filed Exhibit 3--
FICC Impact Study. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 3.
    \33\ See Notice, supra note 8 at 43921.
    \34\ See id.
    \35\ See Notice, supra note 8 at 43916-18.
    \36\ See id.
    \37\ See id.
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    Accordingly, in the Proposed Rule Change, FICC proposes changes to 
the VaR model that FICC believes would mitigate the risk of potential 
underperformance of the VaR model during periods of extreme market 
volatility.\38\
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    \38\ The proposed changes would revise the GSD Rules and FICC's 
Methodology Document--GSD Initial Market Risk Margin Model (the 
``QRM Methodology'') relevant to the VaR model. As part of the 
Proposed Rule Change, FICC filed Exhibit 5b--Proposed Changes to the 
QRM Methodology. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 5b. FICC originally filed the QRM 
Methodology as a confidential exhibit to proposed rule change SR-
FICC-2018-001. See supra note 24; see also Securities Exchange Act 
Release No. 83223 (May 11, 2018), 83 FR 23020 (May 17, 2018) (SR-
FICC-2018-801). FICC has subsequently amended the QRM Methodology. 
See Securities Exchange Act Release Nos. 85944 (May 24, 2019), 84 FR 
25315 (May 31, 2019) (SR-FICC-2019-001); 90182 (Oct. 14, 2020), 85 
FR 66630 (Oct. 20, 2020) (SR-FICC-2020-009); 93234 (Oct. 1, 2021), 
86 FR 55891 (Oct. 7, 2021) (SR-FICC-2021-007); 95605 (Aug. 25, 
2022), 87 FR 53522 (Aug. 31, 2022) (SR-FICC-2022-005); 97342 (Apr. 
21, 2023), 88 FR 25721 (Apr. 27, 2023) (SR-FICC-2023-003); 99447 
(Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR-FICC-2024-001).

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[[Page 90112]]

C. Proposed Changes

    In the Proposed Rule Change, FICC proposes to introduce a new 
minimum margin amount (i.e., the MMA) into the GSD margin methodology. 
FICC proposes to calculate the MMA for each member portfolio as a 
supplement to the existing sensitivity VaR calculation and the haircut-
based VaR Floor calculation described above in Section I.B. FICC 
proposes to rename the current haircut-based VaR Floor calculation as 
the ``VaR Floor Percentage Amount.'' FICC proposes to revise the 
existing VaR Floor definition to mean the greater of (1) the VaR Floor 
Percentage Amount, and (2) the MMA. Thus, the greater of the three 
calculations (i.e., sensitivity VaR, VaR Floor Percentage Amount, and 
MMA) would constitute the member's VaR Charge. Additionally, FICC 
proposes to clarify that the VaR Floor would also apply in the event 
that the Margin Proxy is invoked. The proposed changes are described in 
greater detail below.
1. Minimum Margin Amount Calculation
    FICC would calculate the MMA for each portfolio using historical 
price returns to represent risk.\39\ FICC would calculate the MMA as 
the sum of the following: (1) amounts calculated using an FHS approach 
\40\ to assess volatility by scaling historical market price returns to 
current market volatility, with market volatility being measured by 
applying an exponentially weighted moving average (``EWMA'') to the 
historical market price returns with a decay factor between 0.93 and 
0.99,\41\ as determined by FICC based on sensitivity analysis, 
macroeconomic conditions, and/or backtesting performance; (2) amounts 
calculated using a haircut method to measure the risk exposure of those 
securities that lack sufficient historical price return data; and (3) 
amounts calculated to incorporate risks related to (i) repo interest 
volatility (``repo interest volatility charge'') \42\ and (ii) 
transaction costs related to bid-ask spread in the market that could be 
incurred when liquidating a portfolio (``bid-ask spread risk 
charge'').\43\
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    \39\ FICC refers to the proposed approach as the ``price return-
based risk representation'' in the QRM Methodology. See Notice, 
supra note 8 at 43918. Given the availability and accessibility of 
historical price returns data, FICC believes the proposed approach 
would help minimize and diversify FICC's risk exposure from external 
data vendors. See id.
    \40\ The FHS method differs from the historical simulation 
method, which uses historical price return data as is, by 
incorporating the volatilities of historical price returns. In 
particular, the FHS method constructs the filtered historical price 
returns in two steps: ``devolatilizing'' the historical price 
returns by dividing them by a volatility estimate for the day of the 
price return; and ``revolatilizing'' the devolatilized price returns 
by multiplying them by a volatility estimate based on the current 
market. For additional background on the FHS method, see Filtered 
Historical Simulation Value-at-Risk Models and Their Competitors, 
Pedro Gurrola-Perez and David Murphy, Bank of England, March 2015, 
at www.bankofengland.co.uk/working-paper/2015/filtered-historical-simulation-value-at-risk-models-and-their-competitors.
    \41\ FICC would provide members with at least one Business Day 
advance notice of any change to the decay factor via an Important 
Notice.
    \42\ The ``repo interest volatility charge'' is a component of 
the VaR Charge designed to address repo interest volatility. The 
repo interest volatility charge is calculated based on internally 
constructed repo interest rate indices. As proposed, FICC would 
include the repo interest volatility charge as a component of the 
MMA; however, FICC is not proposing to otherwise change the repo 
interest volatility charge or the manner in which it is calculated. 
See Notice, supra note 8 at 43918.
    \43\ The ``bid-ask spread risk charge'' is a component of the 
VaR Charge designed to address transaction costs related to bid-ask 
spread in the market that FICC could incur when liquidating a 
portfolio. As proposed, FICC would include the bid-ask spread risk 
charge as a component of the MMA; however, FICC is not proposing to 
otherwise change the bid-ask spread risk charge or the manner in 
which it is calculated. See Notice, supra note 8 at 43918.
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    FHS Method: For the FHS method, FICC would first construct 
historical price returns using certain mapped fixed income securities 
benchmarks. Specifically, FICC proposes to use the following mapped 
fixed income securities benchmarks with the FHS method when calculating 
the MMA: (1) Bloomberg Treasury indexes for U.S. Treasury and agency 
securities; (2) Bloomberg TIPS indexes for Treasury Inflation-Protected 
Securities (``TIPS''); and (3) to-be-announced (``TBA'') securities for 
mortgage-backed securities (``MBS'') pools. FICC states that it chose 
these benchmarks because their price movements generally closely track 
those of the securities mapped to them and that their price history is 
generally readily available and accessible.\44\
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    \44\ See Notice, supra note 8 at 43919.
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    After constructing historical price returns, FICC would estimate a 
market volatility associated with each historical price return by 
applying an EWMA to the historical price returns. FICC would 
``devolatilize'' the historical price returns (i.e., remove an amount 
attributable to the historical market volatility from the price 
returns) by dividing them by the corresponding EWMA volatilities to 
obtain the residual returns. FICC would ``revolatilize'' the residual 
returns (i.e., add an amount attributable to the current market 
volatility to the residual returns) by multiplying them by the current 
EWMA volatility to obtain the filtered returns.
    FICC proposes to use the FHS method to improve the responsiveness 
of the VaR model to periods of extreme market volatility because 
historical returns are scaled to current market volatility.\45\ FICC 
would use filtered return time series to simulate the profits and 
losses of a member's portfolio and derive the volatility of the 
portfolio using the standard historical simulation approach. 
Specifically, FICC would map each security that is in a member's 
portfolio to a respective fixed income securities benchmark, as 
applicable, based on the security's asset class and remaining maturity. 
FICC would use the filtered returns of the benchmark as the simulated 
returns of the mapped security to calculate the simulated profits and 
losses of a member's portfolio. Finally, FICC would calculate the MMA 
as the 99-percentile of the simulated portfolio loss. In accordance 
with FICC's model risk management practices and governance set forth in 
the Clearing Agency Model Risk Management Framework,\46\ FICC would 
determine the mapped fixed income securities benchmarks, historical 
market price returns, parameters, and volatility assessments used to 
calculate the MMA.
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    \45\ See Notice, supra note 8 at 43916-17.
    \46\ See Model Risk Management Framework, supra note 28.
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    FHS Parameters: The proposed MMA would use a lookback period for 
the FHS and a decay factor for calculating the EWMA volatility of the 
historical price returns. Specifically, the MMA lookback period would 
be the same as the lookback period currently used for the sensitivity 
VaR calculation, which is 10 years, plus, to the extent applicable, a 
stressed period. FICC would analyze the MMA's lookback period and 
evaluate its sensitivity and impact on margin model performance, 
consistent with the VaR methodology outlined in the QRM Methodology and 
pursuant to the model performance monitoring

[[Page 90113]]

required under the Model Risk Management Framework.\47\
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    \47\ The Model Risk Management Framework provides that all 
models undergo ongoing model performance monitoring and backtesting, 
which is the process of evaluating an active model's ongoing 
performance based on theoretical tests, monitoring the model's 
parameters through the use of threshold indicators, and/or 
backtesting using actual historical data/realizations to test a VaR 
model's predictive power. Supra note 28.
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    The decay factor generally affects (1) whether and how the MMA 
would be invoked (i.e., applied as a member's VaR Charge), (2) the peak 
level of margin increase or the degree of procyclicality, and (3) how 
quickly the margin would fall back to pre-stress levels. As proposed, 
FICC would have the discretion to set the decay factor between 0.93 and 
0.99, with the initial decay factor value set at 0.97. FICC expects 
that any adjustment to the decay factor would be an infrequent event 
that would typically happen only when there is an unprecedented market 
volatility event resulting in risk exposures to FICC that cannot be 
adequately mitigated by the then-calibrated decay factor.\48\ FICC's 
decision to adjust the decay factor would be based on an analysis of 
the decay factor's sensitivity and impact to the model performance, 
considering factors including the impact to the VaR Charges, 
macroeconomic conditions, and/or backtesting performance.\49\ Any 
decision by FICC to adjust the decay factor would be in accordance with 
FICC's model risk management practices and governance set forth in the 
Model Risk Management Framework.\50\
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    \48\ See Notice, supra note 8 at 43920.
    \49\ See id.
    \50\ See Model Risk Management Framework, supra note 28. Similar 
to the lookback period described above, FICC would also analyze the 
decay factor to evaluate its sensitivity and impact to the model 
performance pursuant to the model performance monitoring required 
under the Model Risk Management Framework.
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    Haircut Method: Occasionally, a member's portfolio might contain 
classes of securities that reflect market price changes that are not 
consistently related to historical price moves. The value of such 
securities is often uncertain because the securities' market volume 
varies widely. Because the volume and historical price information for 
such securities are not sufficient to perform accurate statistical 
analyses, the FHS method would not generate an MMA amount that 
adequately reflects the risk profile of such securities. Accordingly, 
FICC would use a haircut method to assess the market risk of securities 
that are more difficult to simulate (e.g., due to thin trading 
history).
    Specifically, FICC would use a haircut method for MBS pools that 
are not TBA securities eligible, floating rate notes, and U.S. 
Treasury/agency securities with remaining time to maturities of less 
than or equal to one year. FICC would also use a haircut method to 
account for the basis risk between an agency security and the mapped 
U.S. Treasury index to supplement the historical market price moves 
generated by the FHS method for agency securities to reflect any 
residual risks between agency securities and the mapped fixed income 
securities benchmarks (i.e., Bloomberg Treasury indexes).\51\ 
Similarly, FICC would use a haircut method to account for the MBS pool/
TBA basis risk to address the residual risk for using TBA price returns 
as proxies for MBS pool returns used in the FHS method.
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    \51\ Accounting for the basis risk would enable FICC to 
explicitly model and manage the basis risk between an agency 
security and the mapped U.S. Treasury index, given that agency 
securities are not as actively traded as U.S. Treasury securities.
---------------------------------------------------------------------------

    Ongoing Performance Monitoring: The Model Risk Management Framework 
would require FICC to conduct ongoing model performance monitoring of 
the MMA methodology.\52\ FICC's current model performance monitoring 
practices would provide for sensitivity analysis of relevant model 
parameters and assumptions to be conducted monthly, or more frequently 
when markets display high volatility.\53\ Additionally, FICC would 
monitor each member's Required Fund Deposit and the aggregate Clearing 
Fund requirements versus the requirements calculated by the MMA, by 
comparing the results versus the three-day profit and loss of each 
member's portfolio based on actual market price moves.\54\ Based on the 
results of the sensitivity analysis and/or backtesting, FICC could 
consider adjustments to the MMA, including changing the decay factor as 
appropriate.\55\ Any adjustment to the MMA calculation would be subject 
to the model risk management practices and governance process set forth 
in the Model Risk Management Framework.\56\
---------------------------------------------------------------------------

    \52\ See note 28.
    \53\ See Notice, supra note 8 at 43920.
    \54\ See id.
    \55\ See id.
    \56\ See Model Risk Management Framework, supra note 28.
---------------------------------------------------------------------------

    Impact Study: As mentioned above in Section I.B., FICC performed an 
Impact Study on its members' margin portfolios covering the period 
beginning July 1, 2021 through June 30, 2023.\57\ The Impact Study 
lists the actual daily and average VaR Charges at both the member-level 
and CCP-level during the period of the Impact Study, compared with how 
those amounts would have changed if the proposed MMA had been in place. 
The Impact Study also lists the actual daily backtesting results at the 
member-level during the period of the Impact Study, compared with how 
those amounts would have changed if the proposed MMA had been in place. 
The Impact Study shows that if the proposed MMA had been in place 
during the period of the Impact Study, when compared to the current VaR 
methodology: (1) the aggregate average daily start-of-day (``SOD'') VaR 
Charges would have increased by approximately $2.90 billion or 13.89 
percent; (2) the aggregate average daily noon VaR Charges would have 
increased by approximately $3.03 billion or 14.06 percent; and (3) the 
aggregate average daily Backtesting Charges \58\ would have decreased 
by approximately $622 million or 64.46 percent.\59\
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    \57\ FICC states that it currently does not use Margin Proxy as 
an adjustment factor to the VaR and does not intend to use it as 
such in the future. See Notice, supra note 8 at 43921.
    \58\ The Backtesting Charge is an additional charge that may be 
added to a member's VaR Charge to mitigate exposures to FICC caused 
when the member exhibits a pattern of breaching the target coverage 
ratio of 99 percent. See GSD Rule 1 (Definitions--Backtesting 
Charge), supra note 13.
    \59\ Margin Proxy was not invoked during the period of the 
Impact Study. However, if the proposed MMA had been in place and the 
Margin Proxy was invoked during the period of the Impact Study: the 
aggregate average daily SOD VaR Charges would have increased by 
approximately $4.16 billion or 20.97 percent; the VaR model 
backtesting coverage would have increased from approximately 98.17 
percent to 99.38 percent; and the number of the VaR model 
backtesting deficiencies would have been reduced by 899 (from 1358 
to 459, or approximately 66.2 percent). See Notice, supra note 8 at 
43921
---------------------------------------------------------------------------

    The Impact Study indicates that if the proposed MMA had been in 
place, the VaR model backtesting coverage would have increased from 
approximately 98.86 percent to 99.46 percent during the period of the 
Impact Study and the number of VaR model backtesting deficiencies would 
have been reduced by 441 (from 843 to 402, or approximately 52 
percent). The Impact Study also indicates that if the proposed MMA had 
been in place: (1) overall margin backtesting coverage would have 
increased from approximately 98.87 percent to 99.33 percent, (2) the 
number of overall margin backtesting deficiencies would have been 
reduced by 280 (from 685 to 405, or approximately 41 percent), and (3) 
the overall margin backtesting coverage for 94 members (approximately 
72 percent of the GSD membership) would have improved, with 36 members 
who were below 99 percent coverage brought back to above 99 percent.

[[Page 90114]]

    On average, at the member-level, the proposed MMA would have 
increased the SOD VaR Charge by approximately $22.43 million, or 17.56 
percent, and the noon VaR Charge by approximately $23.25 million, or 
17.43 percent, over the period of the Impact Study. The largest average 
percentage increase in SOD VaR Charge for any member would have been 
approximately 66.88 percent, or $97,051 (0.21percent of the member's 
average Net Capital),\60\ and the largest average percentage increase 
in noon VaR Charge for any member would have been approximately 64.79 
percent, or $61,613 (0.13 percent of the member's average Net Capital). 
The largest average dollar increase in SOD VaR Charge for any member 
would have been approximately $268.51 million (0.34 percent of the 
member's average Net Capital), or 19.06 percent, and the largest dollar 
increase in noon VaR Charge for any member would have been 
approximately $289.00 million (1.07 percent of the member's average Net 
Capital), or 13.67 percent. The top 10 members based on the size of 
their average SOD VaR Charges and average noon VaR Charges would have 
contributed approximately 51.87 percent and 53.64 percent of the 
aggregated SOD VaR Charges and aggregated noon VaR Charges, 
respectively, during the period of the Impact Study had the proposed 
MMA been in place. The same members would have contributed to 50.08 
percent and 51.52 percent of the increase in aggregated SOD VaR Charges 
and aggregated noon VaR Charges, respectively, had the proposed MMA 
been in place during the period of the Impact Study.
---------------------------------------------------------------------------

    \60\ The term ``Net Capital'' means, as of a particular date, 
the amount equal to the net capital of a broker or dealer as defined 
in SEC Rule 15c3-1(c)(2), or any successor rule or regulation 
thereto. See GSD Rule 1 (Definitions), supra note 13.
---------------------------------------------------------------------------

2. Clarification of VaR Floor To Include Margin Proxy
    As mentioned above in Section I.B., the Margin Proxy methodology is 
currently invoked as an alternative volatility calculation if the 
requisite vendor data used for the sensitivity VaR calculation is 
unavailable for an extended period of time.\61\ FICC proposes to 
clarify that the VaR Floor, which does not depend upon any vendor data, 
operates as a floor for the Margin Proxy, such that if the Margin 
Proxy, when invoked, is lower than the VaR Floor, then the VaR Floor 
would be utilized as the VaR Charge with respect to a member's 
portfolio. FICC believes this clarification would enable Margin Proxy 
to be an effective risk mitigant under extreme market volatility and 
heightened market stress because as discussed above in Section I.C.1., 
the proposed VaR Floor would include the MMA calculation.\62\
---------------------------------------------------------------------------

    \61\ FICC may deem such data to be unavailable and deploy Margin 
Proxy when there are concerns with the quality of data provided by 
the vendor. See Notice, supra note 8 at 43920.
    \62\ See id.
---------------------------------------------------------------------------

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \63\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Sections 17A(b)(3)(F) and (b)(3)(I) of the Act \64\ and Rules 17Ad-
22(e)(4)(i), (e)(6)(i), and (e)(23)(ii) thereunder.\65\
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 78s(b)(2)(C).
    \64\ 15 U.S.C. 78q-1(b)(3)(F) and (b)(3)(I).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \66\ requires that the rules of a 
clearing agency, such as FICC, be designed to, among other things, (i) 
promote the prompt and accurate clearance and settlement of securities 
transactions, (ii) assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency or for which 
it is responsible, and (iii) protect investors and the public interest.
---------------------------------------------------------------------------

    \66\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above in Section I.C., FICC proposes to introduce the 
MMA into its margin methodology to help ensure that FICC collects 
sufficient margin to manage its potential loss exposure during periods 
of extreme market volatility. Specifically, the extreme market 
volatilities during recent stressful market periods led to market price 
changes that exceeded the current VaR model's projections, generating 
margin amounts that were not sufficient to mitigate FICC's credit 
exposure to its members' portfolios at a 99 percent confidence level. 
FICC's proposed incorporation of the MMA calculation into the GSD 
margin methodology would result in margin levels that better reflect 
the risks and particular attributes of member portfolios during periods 
of extreme market volatility.
    Implementing the MMA would enable FICC to collect additional margin 
when the market price volatility implied by the current sensitivity VaR 
calculation and VaR Floor calculation is lower than the market price 
volatility implied by the proposed MMA calculation. In its 
consideration of the proposed MMA, the Commission reviewed and analyzed 
the: (1) Proposed Rule Change, including the supporting exhibits that 
provided confidential information on the proposed MMA calculation, 
Impact Study (including detailed information regarding the impact of 
the proposed changes on the portfolios of each FICC member over various 
time periods),\67\ and backtesting coverage results, (2) FICC's 
response to the Commission's requests for additional information; \68\ 
(3) public comments and FICC's response; and (4) the Commission's own 
understanding of the performance of the current GSD margin methodology, 
with which the Commission has experience from its general supervision 
of FICC, compared to the proposed margin methodology.
---------------------------------------------------------------------------

    \67\ The Impact Study, filed confidentially as Exhibit 3, 
includes, among other things, the following confidentially filed 
information covering the period from July 1, 2021 through June 30 
2023: actual daily VaR amounts for each member; daily VaR amounts 
for each member had MMA been implemented; daily VaR increase 
(reflected in dollars, percent, and percent of Net Capital), if any, 
attributable to MMA; average member-level VaR amounts (reflected in 
dollars and average of Net Capital); average member-level VaR 
amounts had MMA been implemented; average member-level VaR increase 
(reflected in percent and percent of Net Capital), if any, 
attributable to MMA; further analysis of the foregoing data to 
determine minimum, maximum, and average increases to member-level 
VaR amounts, Net Capital amounts, and CCP-level VaR amounts; member-
level VaR amounts had Margin Proxy been invoked (daily and 
summarized); and member-level backtesting results (daily and 
summarized).
    \68\ See supra notes 3, 7. Because the proposals contained in 
the Proposed Rule Change and the Advance Notice are the same, all 
information submitted by FICC was considered regardless of whether 
the information was submitted with respect to the Proposed Rule 
Change or the Advance Notice. FICC's responses to the Commission's 
requests for additional information with respect to the Advance 
Notice include, among other things, the following confidentially 
filed information: FICC's proprietary information regarding the GSD 
margin methodology; backtesting data and analyses of daily member-
level sensitivity VaR, Margin Proxy, and MMA amounts with 
alternative stress periods; daily member-level backtesting, 
sensitivity VaR, and MMA amounts during the Impact Study period 
specific to bond and MBS positions; and daily member-level 
sensitivity VaR and MMA amounts for the period of February 1, 2024 
through July 31, 2024, with analysis relating to the FICC-CME cross-
margining arrangement.
---------------------------------------------------------------------------

    Based on the Commission's review of the Impact Study, had the 
proposed

[[Page 90115]]

MMA been in place, both the VaR model backtesting coverage and the 
overall margin backtesting coverage would have risen above the 99 
percent confidence level to 99.46 percent and 99.33 percent, 
respectively, over the time period covered by the Impact Study.\69\ 
Additionally, the number of VaR model backtesting deficiencies and 
overall margin backtesting deficiencies would have been reduced by 441 
and 280, respectively.\70\
---------------------------------------------------------------------------

    \69\ See Notice, supra note 8 at 43921.
    \70\ See id.
---------------------------------------------------------------------------

    The proposed MMA methodology would be more likely to apply as the 
VaR Charge during periods of extreme market volatility because the MMA 
methodology is more responsive to spikes in market volatility than the 
sensitivity VaR calculation. As described above in Section I.C.1., the 
MMA calculation relies, in part, on the FHS method, which takes 
historical price data, removes the historical volatility estimates, and 
replaces them with volatility estimates that reflect current market 
conditions. Additionally, as described above in Section I.C.1., the 
decay factor used in the FHS method affects: (1) whether and how the 
MMA would apply to determine a member's VaR Charge; (2) the peak level 
of margin increase or the degree of procyclicality; and (3) how quickly 
the margin would fall back to pre-stress levels. A faster decay (i.e., 
smaller decay factor value), like the one FICC intends to use 
initially, would give more weight to more recent market events, while a 
slower decay would give more weight to older market events. Thus, when 
market volatility spikes, the MMA calculation would generate higher 
amounts and thereby be more likely to apply as the VaR Charge (after 
exceeding the sensitivity VaR calculation). Conversely, when market 
volatility subsides, the MMA calculation would generate lower amounts 
and be less likely to apply.
    The Impact Study supports this analysis. If the proposed MMA 
calculation had been in place during the period of the Impact Study, 
the MMA would have applied primarily during the recent extreme market 
volatility events (i.e., those in March 2020 and commencing in March 
2022). In contrast, during periods of low to moderate market 
volatility, the MMA calculation would generally not be the greatest 
amount of the three calculations and thus, would not be invoked. 
Instead, in periods of low to moderate market volatility, the 
sensitivity VaR calculation is likely to be the VaR Charge for members 
whose portfolios do not contain long and short positions in different 
classes of securities that share a high degree of price correlation. 
For such long/short portfolios, in low to moderate volatility markets, 
the VaR Floor Percentage Amount calculation is more likely to be the 
VaR Charge. The sensitivity VaR calculation and VaR Floor Percentage 
Amount calculations are likely to generate sufficient margin levels 
above FICC's 99 percent performance targets during periods of low to 
moderate market volatility. Indeed, during the periods of low to 
moderate market volatility from January 2013 to March 2020, the GSD VaR 
model has generally performed above FICC's 99 percent backtesting 
performance targets.\71\ Implementing the proposed MMA should enable 
FICC to better manage its exposure to its members during periods of 
extreme market volatility by generating margin levels that meet FICC's 
99 percent backtesting performance targets.
---------------------------------------------------------------------------

    \71\ See Notice, supra note 8 at 43917.
---------------------------------------------------------------------------

    Additionally, FICC proposes to clarify that if the Margin Proxy, 
when invoked, is lower than the VaR Floor, then the VaR Floor would be 
utilized as the VaR Charge with respect to a member's portfolio. 
Although Margin Proxy was not invoked during the period of the Impact 
Study, had the proposed changes been in place during that period, the 
VaR model backtesting coverage would have increased from approximately 
98.17 percent to 99.38 percent and the VaR model backtesting 
deficiencies would have been reduced by 899 (from 1,358 to 459). The 
Commission agrees that ensuring the VaR Floor operates as a floor for 
the Margin Proxy would be more effective at mitigating risks under 
extreme market volatility because as proposed, the VaR Floor would 
include the MMA calculation.
    By helping to ensure that FICC collects margin amounts sufficient 
to manage the risk associated with its members' portfolios during 
periods of extreme market volatility, the proposed MMA changes and 
Margin Proxy clarifications would help limit FICC's exposure in a 
member default scenario. These proposed changes would generally provide 
FICC with additional resources to manage potential losses arising out 
of a member default. Such an increase in FICC's available financial 
resources would decrease the likelihood that losses arising out of a 
member default would exceed FICC's prefunded resources resulting in a 
disruption of FICC's operation of its critical clearance and settlement 
services. Accordingly, the MMA should help FICC to continue providing 
prompt and accurate clearance and settlement of securities transactions 
in the event of a member default, consistent with Section 17A(b)(3)(F) 
of the Act.\72\
---------------------------------------------------------------------------

    \72\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, as described above in Section I.B., FICC would access 
the mutualized Clearing Fund should a defaulted member's own margin be 
insufficient to satisfy losses to FICC caused by the liquidation of 
that member's portfolio. The MMA should help ensure that FICC has 
collected sufficient margin from members, thereby limiting non-
defaulting members' exposure to mutualized losses. By helping to limit 
the exposure of FICC's non-defaulting members to mutualized losses, the 
MMA should help FICC assure the safeguarding of securities and funds 
which are in its custody or control, consistent with Section 
17A(b)(3)(F) of the Act.\73\
---------------------------------------------------------------------------

    \73\ See id.
---------------------------------------------------------------------------

    The Proposed Rule Change should also help protect investors and the 
public interest by mitigating some of the risks presented by FICC as a 
CCP. Because a defaulting member could place stresses on FICC with 
respect to FICC's ability to meet its clearance and settlement 
obligations upon which the broader financial system relies, it is 
important for FICC to maintain a robust margin methodology to limit 
FICC's credit risk exposure in the event of a member default. As 
described above in Section I.C.1., the proposed MMA likely would 
function as the VaR Charge during periods of extreme market volatility. 
When applicable, the MMA would increase FICC's margin collection during 
such periods of extreme market volatility. Therefore, implementing the 
MMA should help improve FICC's ability to collect sufficient margin 
amounts that are commensurate with the risks associated with its 
members' portfolios during periods of extreme market volatility. By 
better enabling FICC to collect margin that more accurately reflects 
the risk characteristics of its members' portfolios during volatile 
markets, FICC would be in a better position to absorb and contain the 
spread of any losses that might arise from a member default. Therefore, 
the MMA should reduce the possibility that FICC would need to utilize 
resources from non-defaulting members due to a member default, which 
could cause liquidity stress to non-defaulting members and inhibit 
their ability to facilitate securities transactions. Accordingly, 
because the MMA should help mitigate some of the risks presented by 
FICC as a CCP, the Proposed Rule Change is designed to protect 
investors and the public interest,

[[Page 90116]]

consistent with Section 17A(b)(3)(F) of the Act.\74\
---------------------------------------------------------------------------

    \74\ See id.
---------------------------------------------------------------------------

    One commenter states that implementation of the MMA would increase 
costs for market participants, leading to negative effects on the 
broader U.S. Treasury markets.\75\ Specifically, the commenter states 
that markets with high margin costs generally have fewer market 
participants, decreased market liquidity, wider bid/offer spreads, and 
encourage market participants to either exit the market or pass 
additional expenses to their customers.\76\ In response, FICC states 
that the proposed MMA is not designed to advantage or disadvantage 
capital formation.\77\ Instead, FICC states that the purpose of the 
proposed MMA is to manage the risk associated with member portfolios 
during periods of extreme market volatility.\78\ FICC states that 
although the Proposed Rule Change's increased margin requirements could 
lessen liquidity for members, it is necessary and appropriate to 
mitigate the relevant risks.\79\
---------------------------------------------------------------------------

    \75\ See Letter from Independent Dealer and Trade Association 
(May 7, 2024) (``IDTA Letter'') at 5-6.
    \76\ See id.
    \77\ See FICC Letter at 5.
    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    As stated above in Section I.B., during the period of the Impact 
Study, the actual GSD VaR model backtesting coverage and overall margin 
backtesting coverage both fell below the 99 percent confidence level. 
These shortfalls are specifically attributable to the periods of 
extreme market volatility of March 2020 and commencing in March 2022. 
The Impact Study demonstrates that had the proposed MMA calculation 
been in place during that period, margin amounts would have exceeded 
the 99 percent backtesting coverage levels. Thus, implementing the MMA 
calculation would have better enabled FICC to calculate and collect 
margin amounts sufficient to mitigate the risks presented by its 
members' portfolios during periods of extreme market volatility.
    The Commission acknowledges that implementing the proposed MMA 
would increase margin requirements during periods of extreme market 
volatility. However, as detailed above in Section I.C.1., the Impact 
Study demonstrates that the increased margin requirements attributable 
to the MMA at the member-level would represent relatively small 
percentages (i.e., typically a fraction of one percent) of members' 
average Net Capital, which tends to indicate that members would likely 
have access to sufficient financial resources to meet the increased MMA 
obligation if invoked during periods of extreme market volatility. 
Therefore, the comment that the increased margin costs attributable to 
the MMA would decrease market liquidity, widen bid/offer spreads, and 
encourage market participants to either exit the market or pass 
additional expenses to their customers, do not appear likely based on 
the limited size of increased VaR Charges from the Impact Study. 
Additionally, by helping to ensure FICC collects sufficient margin to 
cover its exposure to members, implementing the MMA would decrease the 
likelihood of loss mutualization in the event of a member default, 
which could encourage greater market participation. Moreover, FICC has 
a regulatory obligation to have policies and procedures to calculate 
and collect margin amounts sufficient to mitigate the relevant risks 
presented to it by its members' portfolios.\80\ Indeed, FICC's role as 
a CCP that reduces systemic risk and promotes market stability is 
dependent on effectively managing the relevant risks, which includes 
FICC's collection of sufficient margin from its members.
---------------------------------------------------------------------------

    \80\ See 17 CFR 240.17ad-22(e)(4)(i).
---------------------------------------------------------------------------

    The Commission also acknowledges the possibility that, as a result 
of the Proposed Rule Change, some members might pass along some of the 
costs related to margin requirements such that these costs ultimately 
are borne, to some degree, by their customers. However, a non-
defaulting member's exposure to mutualized losses resulting from a 
member default, and any consequent disruptions to clearance and 
settlement absent the Proposed Rule Change, might also increase costs 
to a member's customers and potentially adversely impact market 
participation, liquidity, and access to capital. The Proposed Rule 
Change, by helping to reduce counterparty default risk, would allow the 
corresponding portion of transaction costs to be allocated to more 
productive uses by members and their customers who otherwise would bear 
those costs.\81\ Moreover, as discussed above, by helping to limit the 
exposure of non-defaulting members to mutualized losses, the Proposed 
Rule Change should help FICC assure the safeguarding of securities and 
funds of its members that are in FICC's custody or control, consistent 
with Section 17A(b)(3)(F).\82\
---------------------------------------------------------------------------

    \81\ See Securities Exchange Act Release No. 78961 (September 
28, 2016), 81 FR 70786, 70866-67 (October 13, 2016) (S7-03-14) 
(``CCA Standards Adopting Release'').
    \82\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    One commenter states that the proposed MMA would negatively affect 
markets by having a detrimental effect on certain trading strategies 
that rely on margin offsets across maturity buckets.\83\ The commenter 
states that the MMA would eliminate such offsets, resulting in gross 
margining across maturity buckets and decreased liquidity.\84\ In 
response, FICC states that the proposed MMA would not eliminate such 
margin offsets across maturity buckets.\85\ Specifically, FICC states 
that the MMA would not differ from the current VaR model insofar as the 
FHS approach would likewise offset the market risk of long positions in 
one maturity bucket with the market risk of short positions in another 
maturity bucket.\86\ Based on the Commission's review and understanding 
of FICC's proposed changes to the QRM Methodology,\87\ the Commission 
agrees with FICC's response that the FHS approach allows for similar 
offsetting as the current GSD VaR model regarding the market risk of 
long positions in one maturity bucket offsetting the market risk of 
short positions in another maturity bucket.\88\
---------------------------------------------------------------------------

    \83\ See IDTA Letter at 5 (discussing trading strategies that 
involve Treasury securities in separate maturity buckets, such as 
buyers at Treasury auctions ``rolling backwards'' ahead of the 
auction by short-selling one issue and buy a different outstanding 
Treasury, Butterfly Spread, and ``roll down the curve'').
    \84\ See id.
    \85\ See FICC Letter at 5.
    \86\ See id.
    \87\ Supra note 38.
    \88\ See FICC Letter at 5.
---------------------------------------------------------------------------

    Another commenter states that FICC's Proposed Rule Change did not 
adequately address the procyclicality risk \89\ associated with the MMA 
calculation.\90\ The commenter suggests that FICC should consider 
revising the MMA calculation to include anti-procyclical measures that 
would avoid extreme reactions to changes in market volatility.\91\ In 
response, FICC states that it considered and evaluated a number of 
anti-procyclical measures when developing the MMA.\92\ However, FICC 
states that, based on the ``outlook'' for interest rate volatility, 
FICC determined to rely on the decay factor to control the

[[Page 90117]]

MMA's responsiveness to market volatility.\93\
---------------------------------------------------------------------------

    \89\ Procyclicality risk with respect to margin requirements is 
the cycle created when a decrease in the mark-to-market value of the 
securities in a portfolio triggers an increase in margin 
requirements, which in turn, causes a further decrease in portfolio 
value.
    \90\ See Letter from Robert Toomey, Head of Capital Markets, 
Managing Director/Associate General Counsel, Securities Industry and 
Financial Markets Association (May 22, 2024) (``SIFMA Letter'') at 
6-7.
    \91\ See SIFMA Letter at 7.
    \92\ See FICC Letter at 5-6.
    \93\ See id. When referring to the ``outlook for interest rate 
volatility,'' the Commission understands that FICC is not referring 
to a particular analysis of interest rate volatility, but rather is 
referring to the potential for future interest rate volatility.
---------------------------------------------------------------------------

    The Commission disagrees with the comment that FICC's proposed MMA 
calculation does not adequately address procyclicality risk. The decay 
factor affects, among other things, the speed of the MMA calculation's 
responsiveness to spikes in extreme market volatility, as well as the 
speed with which the MMA calculation would generate lower numbers after 
such volatility subsides. FICC chose to initially set the decay factor 
at 0.97--a relatively fast decay factor--to respond to market 
volatility relatively quickly.\94\ FICC's data demonstrate that had the 
MMA been in place during the period of the Impact Study, the MMA would 
have been invoked in a targeted manner (i.e., specifically during 
periods of extreme market volatility, but not during periods of low to 
moderate market volatility). Further, the Commission understands that 
FICC would be able to use the decay factor to address future interest 
rate volatility that may occur. Thus, the Impact Study supports FICC's 
assertion that including the decay factor in the MMA calculation would 
have mitigated any procyclical results.
---------------------------------------------------------------------------

    \94\ FICC could adjust the decay factor in accordance with the 
Model Risk Management Framework. FICC would analyze the decay factor 
to evaluate its sensitivity and impact to the model performance 
pursuant to the model performance monitoring required under the 
Model Risk Management Framework. Supra note 28.
---------------------------------------------------------------------------

    Accordingly, the potential impacts of the Proposed Rule Change are 
justified by the potential benefits to members and the resulting 
overall improved risk management at FICC described above (i.e., the 
prompt and accurate clearance and settlement of securities transactions 
and the safeguarding of securities and funds based on the collection of 
margin commensurate with the risks presented by members' portfolios), 
to render the Proposed Rule Change consistent with the investor 
protection and public interest provisions of Section 17A(b)(3)(F) of 
the Act.\95\
---------------------------------------------------------------------------

    \95\ See 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    For the reasons discussed above, the Proposed Rule Change is 
consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\96\
---------------------------------------------------------------------------

    \96\ See id.
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency, such as FICC, do not impose any burden on competition 
not necessary or appropriate in furtherance of the Act.\97\ Section 
17A(b)(3)(I) does not require the Commission to make a finding that 
FICC chose the option that imposes the least possible burden on 
competition. Rather, the Act requires that the Commission find that the 
Proposed Rule Change does not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Act, 
which involves balancing the competitive effects of the proposed rule 
change against all other relevant considerations under the Act.\98\
---------------------------------------------------------------------------

    \97\ 15 U.S.C. 78q-1(b)(3)(I).
    \98\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
---------------------------------------------------------------------------

    One commenter states that the MMA's increased margin requirements 
would be disproportionately burdensome when compared to the MMA's 
benefits.\99\ Specifically, the commenter cites FICC's statement that 
during the period of the Impact Study, the overall margin backtesting 
coverage was approximately 98.87 percent, which is only 0.13 percent 
under the targeted 99 percent confidence level.\100\ In response, FICC 
states that while the overall margin backtesting coverage during the 
Impact Study period was 98.87 percent, the GSD's rolling 12-month 
backtesting coverage actually fell below the 99 percent target in June 
2022 and remained below 99 percent until June 2023, with the lowest 
being 98.33 percent in November 2022.\101\ Thus, FICC states that the 
MMA is not designed merely to increase overall margin backtesting 
coverage by 0.13 percent.\102\ As discussed above, had the MMA had been 
in place during the period of the Impact Study, GSD's overall margin 
backtesting coverage would have increased from approximately 98.87 
percent to 99.33 percent. FICC states that the proposed MMA is part of 
FICC's overall risk management enhancement program in response to the 
challenges presented by the market volatility in 2020 and 2022, with 
MMA specifically designed to enhance the GSD VaR model performance and 
improve backtesting coverage during periods of extreme market 
volatility.\103\
---------------------------------------------------------------------------

    \99\ See IDTA Letter at 2, 6.
    \100\ See id.
    \101\ See FICC Letter at 6.
    \102\ See id.
    \103\ See FICC Letter at 6-7.
---------------------------------------------------------------------------

    The Commission acknowledges that the Proposed Rule Change would 
entail increased margin charges in certain circumstances. However, 
increased margin requirements do not present an undue burden on 
competition if they are necessary or appropriate in furtherance of the 
Act. As stated above, the Commission has reviewed FICC's backtesting 
data, and the Commission agrees that it indicates that had the MMA been 
in place during the Impact Study period, it would have generated margin 
levels that better reflect the risks and particular attributes of the 
member portfolios and help FICC achieve backtesting coverage above 
FICC's targeted confidence level. In turn, the Proposed Rule Change 
would improve FICC's ability to maintain sufficient financial resources 
to cover its credit exposures to each member in full with a high degree 
of confidence. Specifically, as described above, the MMA would better 
enable FICC to calculate the VaR Charge based on the risks presented by 
the securities positions in each member's portfolio during periods of 
extreme market volatility. To the extent a member's VaR Charge would 
increase under the Proposed Rule Change, that increase would be based 
on the securities held by the member and FICC's requirement to collect 
margin to appropriately address the associated risk. By helping FICC to 
better manage its credit exposure, the MMA's increased margin 
requirements would improve FICC's ability to mitigate the potential 
losses to FICC and its members associated with liquidating a member's 
portfolio in the event of a member default.
    One commenter states that the MMA's increased margin requirements 
would unfairly burden smaller FICC members. The commenter further 
suggests that the MMA should be applied to either the largest FICC 
members only, or to FICC members in proportion to the risk posed by 
different segments of the market.\104\
---------------------------------------------------------------------------

    \104\ See IDTA Letter at 6.
---------------------------------------------------------------------------

    In response, FICC refers to its analysis in the Notice regarding 
whether the Proposed Rule Change would impose a burden on 
competition.\105\ Specifically, FICC acknowledges that during the 
Impact Study period, the MMA would have increased members' SOD and noon 
VaR Charges by an average of approximately $22.43 million, or 17.56 
percent, and $23.25 million, or 17.43 percent, respectively, and that 
the Proposed Rule Change could impose a burden on competition.\106\ 
Additionally, FICC states that members may be affected 
disproportionately by the MMA because members with lower operating 
margins or higher costs of capital than other members are more likely 
to be

[[Page 90118]]

impacted.\107\ However, FICC states that any burden on competition from 
the Proposed Rule Change is necessary and appropriate in furtherance of 
FICC's obligations under the Act, because the Proposed Rule Change 
would change the GSD Rules to better: (1) assure the safeguarding of 
securities and funds that are in FICC's custody, control, or 
responsibility, consistent with section 17A(b)(3)(F) of the Act; and 
(2) enable FICC to collect sufficient margin amounts that are 
commensurate with the risks presented by its member portfolios, 
consistent with Rules 17Ad-22(e)(4)(i) and 17Ad-22(e)(6)(i).\108\
---------------------------------------------------------------------------

    \105\ See FICC Letter at 3; Notice, supra note 8 at 43923-24.
    \106\ See id.
    \107\ See id.
    \108\ See Notice, supra note 8 at 43923-24; FICC Letter at 3-4; 
15 U.S.C. 78q-1(b)(3)(F); 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------

    Furthermore, FICC states that the methodology for computing the MMA 
does not take into consideration the member's size or overall mix of 
business relative to other members.\109\ Any effect the Proposed Rule 
Change would have on a particular member's margin requirement is solely 
a function of the default risk posed to FICC by the member's activity 
at FICC--firm size or business model is not pertinent to the assessment 
of that risk.\110\ Accordingly, FICC states that the Proposed Rule 
Change does not discriminate against members or affect them differently 
on either of those bases.\111\
---------------------------------------------------------------------------

    \109\ See FICC Letter at 4.
    \110\ See id.
    \111\ See id.
---------------------------------------------------------------------------

    As stated above, the Commission acknowledges that the Proposed Rule 
Change would entail increased margin charges in certain circumstances. 
In considering the costs and benefits of the requirements of Rule 17Ad-
22(e)(6), the Commission expressly acknowledged that ``since risk-based 
initial margin requirements may cause market participants to 
internalize some of the costs borne by the CCP as a result of large or 
risky positions, ensuring that margin models are well-specified and 
correctly calibrated with respect to economic conditions will help 
ensure that they continue to align the incentives of clearing members 
with the goal of financial stability.'' \112\ Nevertheless, in response 
to the comment that the Proposed Rule Change would disproportionately 
affect smaller FICC members, the Commission understands that the impact 
of the MMA would be entirely determined by a member's portfolio 
composition and trading activity rather than the member's size or type. 
Specifically, as described above, the MMA would better enable FICC to 
calculate the VaR Charge based on the risks presented by the securities 
positions in each member's portfolio during periods of extreme market 
volatility. To the extent a member's VaR Charge would increase under 
the Proposed Rule Change, that increase would be based on the 
securities held by the member and FICC's requirement to collect margin 
to appropriately address the associated risk.
---------------------------------------------------------------------------

    \112\ See CCA Standards Adopting Release at 70870, supra note 
81. In addition, when considering the benefits, costs, and effects 
on competition, efficiency, and capital formation, the Commission 
recognized that a covered clearing agency, such as FICC, might pass 
incremental costs associated with compliance on to its members, and 
that such members may seek to terminate their membership with that 
CCA. See id. at 70865.
---------------------------------------------------------------------------

    In addition, as discussed above, the Commission acknowledges that 
the impact of a higher margin requirement may present higher costs on 
some members relative to others due to a number of factors, such as 
access to liquidity resources, cost of capital, business model, and 
applicable regulatory requirements. These higher relative burdens may 
weaken certain members' competitive positions relative to other 
members.\113\ However, in this instance, any competitive burden 
stemming from a higher impact on some members than on others is 
necessary or appropriate in furtherance of the Act. FICC is required 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.\114\ FICC's members include a large and diverse population 
of entities with a range of ownership structures.\115\ By participating 
in FICC, each member is subject to the same margin requirements, which 
are designed to satisfy FICC's regulatory obligation to manage the 
risks presented by its members. As discussed in more detail in Section 
II.D. below, the Proposed Rule Change is designed to ensure that FICC 
collects margin that is commensurate with the risks presented by each 
member's portfolio during periods of extreme market volatility.
---------------------------------------------------------------------------

    \113\ These potential burdens are not fixed, and affected 
members may choose to restructure their liquidity sources, costs of 
capital, or business model, thereby moderating the potential impact 
of the Proposed Rule Change.
    \114\ See 17 CFR 240.17Ad-22(e)(6)(i).
    \115\ See FICC GSD Membership Directory, available at https://www.dtcc.com/client-center/ficc-gov-directories.
---------------------------------------------------------------------------

    Additionally, as discussed above, the Commission has reviewed 
FICC's backtesting data and agrees that it indicates that had the MMA 
been in place during the Impact Study period, it would have generated 
margin levels that better reflect the risks and particular attributes 
of the member portfolios and help FICC achieve backtesting coverage 
closer to FICC's targeted confidence level. In turn, the Proposed Rule 
Change would improve FICC's ability to maintain sufficient financial 
resources to cover its credit exposures to each member in full with a 
high degree of confidence. By helping FICC to better manage its credit 
exposure, the Proposed Rule Change would improve FICC's ability to (1) 
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 
Act,\116\ and (2) collect sufficient margin amounts that are 
commensurate with the risks presented by its members' portfolios, 
consistent with Rules 17Ad-22(e)(4)(i) and 17Ad-22(e)(6)(i).\117\
---------------------------------------------------------------------------

    \116\ See 15 U.S.C. 78q-1(b)(3)(F).
    \117\ See 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------

    Commenters also expressed concerns about the cumulative burdens of 
the Proposed Rule Change in conjunction with recent changes to the GSD 
Rules regarding margin requirements, including an announced special 
charge that FICC collects in connection with certain volatile market 
events (``VME Special Charge'').\118\
---------------------------------------------------------------------------

    \118\ See IDTA Letter at 4-5; SIFMA Letter at 5-6 (referring to 
other recent margin changes at FICC, including, e.g., the imposition 
of a special charge at volatile market events) (citing Memo from 
FICC to Government Securities Division Members (Apr. 12, 2024)). See 
also GSD Rule 4, Section 1b(a)(vii) (defining ``special charge''), 
supra note 13.
---------------------------------------------------------------------------

    In response, FICC states that each of the GSD margin components is 
specifically designed to mitigate a different risk and limit FICC's 
exposures.\119\ FICC states that it announced the VME Special Charge on 
April 12, 2024 to supplement a member's margin requirement for the days 
immediately surrounding five scheduled economic indicator release dates 
if a forward looking indicator were to signal potential heightened 
market volatility.\120\ FICC further states that the

[[Page 90119]]

VME Special Charge is designed to complement the Proposed Rule Change. 
Specifically, FICC states that the VME Special Charge is designed to 
cover the periods leading up to the market events that can impact the 
market, while the Proposed Rule Change, in contrast, is specifically 
designed to respond to observed market volatility and supplement the 
VaR model following the observation of extreme market volatility.\121\ 
FICC states that by applying the VME Special Charge as disclosed in the 
Important Notice, it expects that its VaR model, in conjunction with 
the proposed MMA, would be able to respond to observed market 
volatility, removing the need for additional special charges.\122\
---------------------------------------------------------------------------

    \119\ See FICC Letter at 8-9.
    \120\ See id. On April 12, 2024, FICC published on its website 
an Important Notice indicating that as of April 15, 2024, FICC would 
collect a special charge equal to 10 percent of a Netting Member's 
VaR Charge on the two days prior to, and on the day of, certain 
volatile market events specified in the Important Notice, if certain 
conditions are met. The Important Notice is available at https://
www.dtcc.com/-/media/Files/pdf/2024/4/12/GOV1681-24_-Special-
Charge-at-Volatile-Market-Events.pdf.
    \121\ See FICC Letter at 8.
    \122\ See id.
---------------------------------------------------------------------------

    FICC also describes a number of other recent changes to the GSD 
margin model, although commenters did not specify any other recent 
changes to the GSD Rules beyond the VME Special Charge. Specifically, 
FICC states that in July 2023, FICC revised the stressed period used to 
calculate the VaR Charge in order to provide better risk coverage on 
the short-end of the curve.\123\ FICC also states that in October 2023, 
FICC adopted a Portfolio Differential Charge in order to mitigate the 
risk presented to FICC by period-over-period fluctuations in a member's 
portfolio.\124\
---------------------------------------------------------------------------

    \123\ See Securities Exchange Act Release No. 97342 (April 21, 
2023), 88 FR 25721 (April 27, 2023) (SR-FICC-2023-003) (Order 
Granting Proposed Rule Change to Revise the Description of the 
Stressed Period Used to Calculate the VaR Charge and Make Other 
Changes) (``Stressed Period Order''); see FICC Letter at 8.
    \124\ See Securities Exchange Act Release No. 98494 (Sept. 25, 
2023), 88 FR 67394 (Sept. 29, 2023) (SR-FICC-2023-011) (Order 
Approving Proposed Rule Change, as Modified by Amendment No. 1, to 
Adopt a Portfolio Differential Charge as an Additional Component to 
the GSD Required Fund Deposit) (``Portfolio Differential Order''). 
FICC also states that the Impact Study was generated based on the 
assumption that the Portfolio Differential Charge was in effect 
during the entirety of the Impact Study Period. See FICC Letter at 
8.
---------------------------------------------------------------------------

    As stated above in Section I.A., each member's Required Fund 
Deposit consists of a number of components, which are calculated to 
address specific risks faced by FICC.\125\ Each Required Fund Deposit 
component, when applicable, may increase a member's margin 
requirements. However, the various margin components are designed to 
generate margin amounts commensurate with the relevant risks associated 
with the content of member portfolios. For example, the special charge 
is an additional margin component specifically provided for in the GSD 
Rules and designed to address risks associated with market conditions 
or other financial and operational factors.\126\ In particular, the VME 
Special Charge is necessary to mitigate risks--not mitigated by other 
margin components--regarding potentially heightened market volatility 
for the days immediately surrounding five scheduled economic indicator 
release dates, including the two days prior to the event when the 
volatility would not yet be captured by the current VaR model.\127\ 
Although cumulative, these margin components are consistent with FICC's 
obligation to maintain a risk-based margin system that considers, and 
produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market.\128\
---------------------------------------------------------------------------

    \125\ Supra note 15.
    \126\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 13.
    \127\ Supra note 120.
    \128\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Portfolio Differential Charge is designed to mitigate the risks 
attributable to intraday margin fluctuations in certain member 
portfolios as those members execute trades throughout the day.\129\ 
Specifically, since FICC generally novates and guarantees trades upon 
trade comparison, a member's trading activity may result in coverage 
gaps due to large unmargined intraday portfolio fluctuations that 
remain unmitigated from the time of novation until the next scheduled 
margin collection.\130\ The impact of the Portfolio Differential Charge 
depends on the period-over-period change in the size and composition of 
a member's portfolio.\131\ In approving FICC's Portfolio Differential 
proposed rule change, the Commission determined, among other things, 
that implementing the Portfolio Differential Charge would better enable 
FICC to collect margin amounts commensurate with FICC's intraday credit 
exposures to its members.\132\ The Commission also considered the 
proposed Portfolio Differential Charge's impact on competition and 
found the proposal to be consistent with the Act.\133\ Although the 
Portfolio Differential Charge, when applicable, and the VaR Charge are 
cumulative to one another, both margin components are designed to 
mitigate different risks.
---------------------------------------------------------------------------

    \129\ See Portfolio Differential Order, supra note 124 at 67396.
    \130\ See id.
    \131\ See Securities Exchange Act Release No. 98160 (Aug. 17, 
2023), 88 FR 57485, 57488 (Aug. 23, 2023) (SR-FICC-2023-011) (Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
to Adopt a Portfolio Differential Charge as an Additional Component 
to the GSD Required Fund Deposit).
    \132\ See Portfolio Differential Order, supra note 124 at 67397.
    \133\ See id.
---------------------------------------------------------------------------

    Additionally, not all margin components are cumulative to one 
another. For example, in addition to the Portfolio Differential Charge 
discussed above, one of the margin components recently changed relates 
to FICC's Stressed Period Order,\134\ which involves a VaR Charge 
calculation that would be an alternative to the MMA rather than in 
addition to the MMA. As described above in Section I.C.1., the 
sensitivity VaR methodology incorporates a lookback period of 10 years 
to capture periods of historical volatility. As described in the 
Stressed Period Order, the GSD VaR methodology allows FICC to include 
an additional period of historically observed stressed market events if 
the 10-year lookback period does not contain a sufficient number of 
stressed events.\135\ Although FICC's decision to adjust the stressed 
period could increase a member's VaR Charge, that increase would be in 
direct relation to the specific risks presented by the member's 
portfolio.\136\ The ability to quickly adjust the stressed period 
provides FICC with the flexibility to timely respond to rapidly 
changing market conditions and better ensure that the sensitivity VaR 
calculation results in margin amounts that sufficiently risk manage 
FICC's credit exposures to its members' portfolios during such market 
conditions.\137\ However, as described above in Section I.C., a 
member's VaR Charge would be the greater of three calculations (i.e., 
sensitivity VaR, VaR Floor Percentage Amount, and MMA). The sensitivity 
VaR calculation, even if increased pursuant to the Stressed Period 
Order, and MMA are not cumulative.
---------------------------------------------------------------------------

    \134\ See Stressed Period Order, supra note 123.
    \135\ See id. at 25722.
    \136\ See id. at 25722-24.
    \137\ See Stressed Period Order, supra note 123 at 25724.
---------------------------------------------------------------------------

    One commenter states that the Commission's approval of the Proposed 
Rule Change should be delayed until after conducting further analysis, 
including analyses that incorporate expected increases in cleared 
volumes and the totality of changes to margin requirements associated 
with FICC's upcoming implementation of its requirement to facilitate 
access to clearance and settlement services of all eligible secondary 
market transactions in U.S. Treasury securities.\138\ The

[[Page 90120]]

Commission disagrees that the commenter's requested additional analyses 
are necessary for the Commission to evaluate the Proposed Rule Change 
for consistency with the Act and the rules thereunder. As stated above 
in the preamble to Section II., the standard of review under Section 
19(b)(2)(C) of the Act \139\ is for the Commission to approve a 
proposed rule change of a self-regulatory organization upon finding 
that such proposed rule change is consistent with the requirements of 
the Act and rules and regulations thereunder applicable to such 
organization. In this Section II., the Commission describes its review 
of the Proposed Rule Change for consistency with the Act and 
regulations thereunder, along with the Commission's rationale for 
approving the Proposed Rule Change. The Commission will separately 
evaluate any proposed rule change that FICC files in connection with 
implementing FICC's obligations under the Treasury Clearing Rules.
---------------------------------------------------------------------------

    \138\ See SIFMA Letter at 8; Securities Exchange Act Release No. 
99149 (Dec. 13, 2023), 89 FR 2714 (Jan. 16, 2024) (the rules adopted 
therein are referred to as the ``Treasury Clearing Rules'').
    \139\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    Therefore, for the reasons stated above, the Proposed Rule Change 
is consistent with the requirements of Section 17A(b)(3)(I) of the 
Act.\140\
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to 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.\141\
---------------------------------------------------------------------------

    \141\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    The Proposed Rule Change is consistent with Rule 17ad-22(e)(4)(i) 
under the Exchange Act.\142\ As described above in Section I.C.1., the 
current GSD VaR model generated margin amounts that were not sufficient 
to mitigate FICC's credit exposure to its members' portfolios at the 99 
percent backtesting confidence level during periods of extreme market 
volatility, particularly during March 2020 and beginning in March 2022. 
The Impact Study demonstrates that had the proposed MMA calculation 
been in place during that period, margin amounts would have exceeded 
the 99 percent backtesting coverage levels. Therefore, adding the MMA 
calculation to the GSD margin methodology should better enable FICC to 
calculate and collect margin amounts that are sufficient to mitigate 
FICC's credit exposure to its members' portfolios during periods of 
extreme market volatility.
---------------------------------------------------------------------------

    \142\ See id.
---------------------------------------------------------------------------

    Additionally, FICC proposes to clarify that if the Margin Proxy, 
when invoked, is lower than the VaR Floor, then the VaR Floor would be 
utilized as the VaR Charge with respect to a member's portfolio. 
Although Margin Proxy was not invoked during the period of the Impact 
Study, had the proposed changes been in place during that period, the 
VaR model backtesting coverage would have been increased to exceed the 
99 percent backtesting coverage level. Therefore, the proposed 
clarifications regarding the applicability of the VaR Floor when Margin 
Proxy is invoked would help ensure FICC's ability to manage its credit 
exposures to members by maintaining sufficient financial resources to 
cover such exposures fully with a high degree of confidence.
    Accordingly, for the reasons discussed above, the proposed MMA 
changes and Margin Proxy clarifications are reasonably designed to 
enable FICC to effectively identify, measure, monitor, and manage its 
credit exposure to participants, consistent with Rule 17ad-
22(e)(4)(i).\143\
---------------------------------------------------------------------------

    \143\ See 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

D. Consistency With Rules 17Ad-22(e)(6)(i)

    Rules 17Ad-22(e)(6)(i) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market, and 
calculates margin sufficient to cover its potential future exposure to 
participants.\144\
---------------------------------------------------------------------------

    \144\ 17 CFR 240.17ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Proposed Rule Change is consistent with Rule 17ad-22(e)(6)(i). 
As described above in Section I.C., the Impact Study demonstrates that 
the current VaR model generated margin deficiencies during periods of 
extreme market volatility, whereas implementing the proposed MMA 
changes and Margin Proxy clarifications would result in VaR Charges 
that reflect the risks of member portfolios during such periods better 
than the current GSD VaR model. Moreover, FICC's inclusion of the decay 
factor in the MMA calculation appropriately limits invoking the MMA as 
the VaR Charge to periods of extreme market volatility. The decay 
factor affects, among other things, the peak level of margin increase 
or the degree of procyclicality and how quickly the margin would fall 
back to pre-stress levels. FICC chose to initially set the decay factor 
at 0.97--a relatively fast decay factor--to be quickly responsive to 
market volatility.\145\ FICC's data demonstrate that had the MMA been 
in place during the period of the Impact Study, the MMA would have been 
invoked in a targeted manner (i.e., specifically during periods of 
extreme market volatility, but not during periods of low to moderate 
market volatility). Thus, the MMA is specifically designed to enable 
FICC to collect margin amounts commensurate with the relevant risks 
associated with member portfolios during periods of extreme market 
volatility. The Proposed Rule Change would provide FICC with a margin 
methodology better designed to enable FICC to cover its credit 
exposures to its members by enhancing FICC's risk-based margin system 
to produce margin levels commensurate with the relevant risks during 
periods of extreme market volatility.
---------------------------------------------------------------------------

    \145\ FICC could adjust the decay factor in accordance with the 
Model Risk Management Framework. FICC would analyze the decay factor 
to evaluate its sensitivity and impact to the model performance 
pursuant to the model performance monitoring required under the 
Model Risk Management Framework. Supra note 28.
---------------------------------------------------------------------------

    Several commenters addressed FICC's Impact Study. Specifically, one 
commenter states that the Impact Study is too limited, providing 
backtesting data with extremely uneven daily impacts, thereby rendering 
it impossible to properly assess the MMA's impacts.\146\ Another 
commenter states that FICC underestimates the MMA's impacts by using 
the full two-year period of the Impact Study to calculate average 
impacts when the actual period of increased volatility only covers a 
nine-month period.\147\ This commenter states that while FICC expressed 
the increase in margin requirements in terms of long-term averages, 
broker-dealers actually plan for capitalization based on meeting their 
largest margin requirement rather than their average capital 
usage.\148\ The commenters state that while FICC's impact analysis 
cited examples of members with the largest average percentage and 
dollar increases resulting from the MMA, those market

[[Page 90121]]

participants are either too small or too large to be representative of 
the Proposed Rule Change's impact on other members.\149\ The commenters 
state that the actual effects of the MMA on middle-market dealers will 
be higher than FICC's cited examples.\150\ The commenters suggest that 
alternative impact measurements would provide a more accurate analysis 
of the proposed MMA's impacts.\151\
---------------------------------------------------------------------------

    \146\ SIFMA Letter at 6.
    \147\ See IDTA Letter at 3 (arguing that calculating averages 
using a two-year period instead of a nine-month period decreases the 
average 2.66 times).
    \148\ See IDTA Letter at 3.
    \149\ See IDTA Letter at 3; SIFMA Letter at 6.
    \150\ See e.g., IDTA Letter at 3-4 (contrasting FICC's Impact 
Study analysis that expresses the largest member increase that would 
have resulted from the MMA as 0.21 percent of net capital, against 
the average margin increase that the MMA would have added for IDTA 
members of 5.1 percent of net capital, or 16.0 percent of net 
capital for the top 100 days in terms of margin increases); see 
SIFMA Letter at 6.
    \151\ See IDTA Letter at 3-4, 7; SIFMA Letter at 6. For example, 
one commenter suggests that FICC should express the impact as the 
average percent increase for the top 100 most stressful days. See 
IDTA Letter at 3-4 (stating that the average percentage increase for 
the top 100 most stressful days in terms of margin increases for 
IDTA members, the more relevant metric in terms of capital planning 
in actual practice was 37.23 percent or $27.52 million). The other 
commenter suggests that a better measure of liquidity impact than 
average daily data would be the peak aggregate additional margin 
that would be required for both a 1-day and 5-day period. See SIFMA 
Letter at 6.
---------------------------------------------------------------------------

    In response to these comments, FICC states that due to 
confidentiality restrictions on releasing member-level data, the 
public-facing Proposed Rule Change filing narrative analyzed the Impact 
Study using anonymized data and averages of maximum dollar and 
percentage changes.\152\ However, FICC provided the Commission with 
expanded and detailed daily member-level Impact Study data 
confidentially, as part of the Proposed Rule Change filing in Exhibit 
3.\153\ FICC further states that both prior and subsequent to filing 
the Proposed Rule Change, FICC actively engaged with members on 
multiple occasions, conducting outreach to each member in order to 
provide notice of the Proposed Rule Change along with individualized 
anticipated impacts for each member.\154\
---------------------------------------------------------------------------

    \152\ See FICC Letter at 7.
    \153\ See id.
    \154\ See FICC Letter at 6.
---------------------------------------------------------------------------

    In considering the comments critical of the Impact Study and FICC's 
analyses thereof, the Commission considered the Proposed Rule Change 
(including the Impact Study \155\ and other confidentially filed data 
\156\), comment letters, FICC's response letter, and the Commission's 
own understanding of the GSD margin methodology based on its general 
supervision of FICC. Based on the Commission's review and analysis of 
these materials, the Commission disagrees with the comments suggesting 
that FICC's Impact Study and analyses are inaccurate and/or misleading. 
In the Proposed Rule Change narrative, FICC described the Impact Study 
in anonymized terms, highlighting averages and maximum dollar and 
percentage changes, due to the confidential nature of the member-level 
transactions that comprise the underlying data. However, FICC filed the 
confidential member-level data with the Commission in Exhibit 3 to the 
Proposed Rule Change filing. FICC also provided relevant confidential 
data in its response to the Commission's requests for additional 
information with respect to the Advance Notice.\157\ Additionally, in 
the Commission's supervisory role, the Commission routinely collects 
confidential margin-related data from FICC. These data sources enable 
the Commission to evaluate the effects of the MMA on a member-by-member 
basis.
---------------------------------------------------------------------------

    \155\ See supra note 67.
    \156\ Supra notes 3, 7, 68.
    \157\ Supra notes 3, 7.
---------------------------------------------------------------------------

    The purpose of the Impact Study and FICC's analyses thereof in the 
publicly available Proposed Rule Change filing materials is to 
highlight comparisons of the GSD VaR model's performance with and 
without incorporating the MMA and to highlight the Proposed Rule 
Change's general impacts on members using anonymized data and averages 
of maximum dollar and percentage changes. FICC did not state that its 
public discussion of the Impact Study was the sole source of data for 
the Commission and the public to utilize in evaluating the Proposed 
Rule Change. Rather, FICC provided additional detailed member-level 
data confidentially, both to members and the Commission, to more fully 
evaluate the impacts of the Proposed Rule Change.
    Regarding the comments that FICC's analysis of the Impact Study 
data presented an inaccurate picture of the MMA's impacts,\158\ the 
Commission recognizes that FICC provided individual impact studies for 
each member that included the average impact for the entire period of 
the Impact Study as well as the average impact on those days that the 
proposed MMA would have been applied for each member.\159\ Therefore, 
the commenters' concerns regarding the Impact Study do not take into 
account that both the Commission and FICC's members also reviewed more 
detailed confidential data to better understand the specific member-
level impacts of the Proposed Rule Change. The comment that FICC's 
public discussion of the Impact Study presented limited data, rendering 
it impossible to properly evaluate the MMA's impacts, does not take 
into account that FICC provided more comprehensive confidential data to 
the Commission and members that was sufficient to properly assess the 
MMA's impacts. Specifically, such data includes, among other things, 
actual daily VaR Charge for each member, hypothetical daily VaR Charge 
for each member had the MMA been in place, hypothetical daily VaR 
Charge for each member had Margin Proxy been invoked, analyses of 
increases attributable to the MMA, and numerous backtesting analyses. 
The comment that FICC's public discussion of the Impact Study 
underestimated the MMA's impacts by calculating the average impacts 
based on the full two-year period rather than the nine-month period of 
volatility does not take into account that FICC confidentially provided 
individual impact studies for each member that included average impacts 
on each day that the MMA would have applied to the member.\160\ 
Similarly, the comment that FICC's public discussion of the Impact 
Study expressed the increase in margin requirements in terms of long-
term averages as opposed to largest margin requirements does not take 
into account that FICC confidentially provided individual impact 
studies for each member indicating maximum margin increases on each day 
that the MMA would have applied to the member.\161\ The comment that 
FICC's public discussion of the Impact Study cited impacted members 
that are not representative and underestimate the MMA's impacts on 
middle-market participants does not take into account that FICC 
provided member-level impact data to each member.\162\
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    \158\ These comments include regarding: FICC's use of the two-
year period of the Impact Study instead of the 9-month period of 
extreme market volatility when presenting average impacts (see IDTA 
Letter at 3); FICC's use of long-term average margin increases 
instead of maximum margin increases resulting from implementing the 
MMA (see id.); FICC's examples of members with the largest average 
percentage and dollar increases resulting from the MMA (see IDTA 
Letter at 3; see SIFMA Letter at 6); and preferred alternative 
impact measurements (see IDTA Letter at 3-4; see SIFMA Letter at 6).
    \159\ See FICC Letter at 7.
    \160\ See id.
    \161\ See id.
    \162\ See id.
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    One commenter also states that FICC should expand the Impact Study 
to cover the March 2020 period of stress in light of FICC's statements 
that the Proposed Rule Change was driven, in part, by the VaR model's 
underperformance during that

[[Page 90122]]

period.\163\ In response, FICC states that inclusion of that data is 
not necessary because the Impact Study's two-year period achieves the 
purpose of demonstrating the effectiveness of the proposed MMA during 
periods of both low and high market volatility.\164\ The Commission 
agrees that the Impact Study's two-year period sufficiently 
demonstrates the performance of the proposed MMA during periods of both 
low and high market volatility, as the two-year study period also 
included periods of both low and high market volatility. Inclusion of 
March 2020 in the Impact Study is not required for the Commission to 
evaluate the responsiveness of the MMA.
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    \163\ See SIFMA Letter at 6.
    \164\ See FICC Letter at 6.
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    Accordingly, the Proposed Rule Change is consistent with Rule 17ad-
22(e)(6)(i) because the new MMA margin calculation and Margin Proxy 
clarifications should better enable FICC to establish a risk-based 
margin system that considers and produces relevant margin levels 
commensurate with the risks associated with liquidating participant 
portfolios in a default scenario during periods of extreme market 
volatility.\165\
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    \165\ 17 CFR 240.17Ad-22(e)(6)(i).
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E. Consistency With Rule 17Ad-22(e)(23)(ii)

    Rule 17Ad-22(e)(23)(ii) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide sufficient information to enable participants to 
identify and evaluate the risks, fees, and other material costs they 
incur by participating in FICC.\166\
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    \166\ 17 CFR 240.17ad-22(e)(23)(ii).
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    One commenter states that the Proposed Rule Change lacks 
transparency, quick implementation, and tools and resources to support 
market preparedness to identify risks and costs associated with how 
FICC calculates margin amounts.\167\ Specifically, the commenter urges 
FICC to provide members with (1) daily VaR calculations, (2) an MMA 
calculator, and (3) a phased implementation of the MMA, including a 
parallel run period where the MMA is calculated but not invoked.\168\
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    \167\ See SIFMA Letter at 7-8.
    \168\ See id.
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    In response, FICC states that it provides tools and resources to 
enable members to determine their margin requirements and the impact of 
FICC's proposals.\169\ Specifically, FICC maintains the Real Time 
Matching Report Center, Clearing Fund Management System, FICC Customer 
Reporting Service, and FICC Risk Client Portal which are client 
accessible websites for accessing risk reports and other risk 
disclosures.\170\ These resources enable members to view Clearing Fund 
requirement information and margin component details, including 
portfolio breakdowns by CUSIP and amounts attributable to the 
sensitivity-based VaR model.\171\ Members are also able to view data on 
market amounts for current clearing positions and associated VaR 
Charges.\172\ Additionally, the FICC Client Calculator enables members 
to, among other things, enter ``what-if'' position data to determine 
hypothetical VaR Charges before trade execution. FICC states that as of 
June 24, 2024, FICC is in the process of enhancing the FICC Client 
Calculator to incorporate the MMA and FICC expects the enhancement to 
be available to members prior to implementation of the MMA, subject to 
the Commission's approval.\173\ FICC also states that it is currently 
developing a tool that would enable non-members to assess potential VaR 
Charges (including MMA) as well.\174\
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    \169\ See FICC Letter at 7.
    \170\ See id.
    \171\ See id.
    \172\ See id.
    \173\ See id.
    \174\ See id.
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    The extensive tools and resources that FICC makes available to 
members should enable members to obtain individualized information to 
determine their Clearing Fund requirements, margin component details, 
and assess the impact of FICC's proposals. Additionally, FICC's 
multiple member outreach efforts (before and after development of the 
Proposed Rule Change) provided members with relevant individualized 
impact analyses with which to evaluate the Proposed Rule Change. 
Accordingly, FICC has provided tools and resources sufficient for its 
members to evaluate their daily VaR and other margin-related 
calculations, rendering a phased implementation of the proposed MMA 
unwarranted.
    Based on the foregoing, FICC has provided sufficient information, 
tools, and resources to enable members to identify and evaluate the 
relevant risks and costs associated with the Proposed Rule Change, 
consistent with Rule 17ad-22(e)(23)(ii).\175\
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    \175\ 17 CFR 240.17Ad-22(e)(23)(ii).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \176\ and 
the rules and regulations promulgated thereunder.
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    \176\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\177\ that proposed rule change SR-FICC-2024-003, be, and hereby is, 
approved.\178\
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    \177\ 15 U.S.C. 78s(b)(2).
    \178\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f). See also Sections II.A. and 
II.B.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\179\
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    \179\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-26531 Filed 11-13-24; 8:45 am]
BILLING CODE 8011-01-P
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