Document ID: SEC-2022-0805-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2022-06-14T04:00Z

[Federal Register Volume 87, Number 114 (Tuesday, June 14, 2022)]
[Notices]
[Pages 36014-36018]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12733]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95070; File No. SR-FICC-2022-002]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of Proposed Rule Change To Revise the MBSD 
Clearing Rules To Move Certain DRC Items (Mark-to-Market Items, Cash 
Obligation Items and Accrued Principal and Interest) From the Required 
Fund Deposit Calculation to Cash Settlement, Revise Certain Thresholds 
and Parameters in the Intraday Mark-to-Market Charge, Establish a New 
Intraday VaR Charge and Make Certain Other Clarifications

June 8, 2022.

I. Introduction

    On April 8, 2022, the Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2022-002 (``Proposed Rule Change'') 
pursuant to Section 19(b) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 \2\ thereunder to amend the 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules'') \3\ to (1) move certain items from FICC's collection of margin 
(i.e., the Required Fund Deposit) to its cash settlement process, 
including, specifically, deleting the Deterministic Risk Component 
(``DRC'') from the Required Fund Deposit calculation, moving certain 
items currently in the DRC (i.e., Mark-to-Market items, cash obligation 
items, and accrued principal and interest) to Cash Settlement, and 
retaining the six days' interest for Fails item currently in the DRC 
calculation as a separate part of the Required Fund Deposit; (2) revise 
the definition of Intraday Mark-to Market Charge to reflect the 
movement of the DRC items to Cash Settlement and to revise certain 
thresholds and parameters; (3) establish a new intraday VaR Charge; and 
(4) make other clarifying changes in the MBSD Rules, as described in 
more detail below. In addition, it would also make certain conforming 
changes to the Methodology and Model Operations Document--MBSD 
Quantitative Risk

[[Page 36015]]

Model \4\ to implement the proposed changes to the MBSD Rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms not otherwise defined herein are defined 
in the MBSD Rules, as applicable, available at http://www.dtcc.com/legal/rules-and-procedures.
    \4\ As part of the Proposed Rule Change, FICC filed Exhibit 5B--
Methodology and Model Operations Document MBSD Quantitative Risk 
Model. Pursuant to 17 CFR 240.24b-2, FICC requested confidential 
treatment of Exhibit 5B.
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    The Proposed Rule Change was published for public comment in the 
Federal Register on April 25, 2022.\5\ The Commission received no 
comments regarding the substance of the Proposed Rule Change.\6\ This 
order approves the Proposed Rule Change.
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    \5\ Securities Exchange Act Release No. 94745 (Apr. 19, 2022), 
87 FR 24369 (Apr. 25, 2022) (File No. SR-FICC-2022-002) (``Notice of 
Filing'').
    \6\ The Commission received one comment letter that does not 
bear on the purpose or legal basis of the Proposed Rule Change. The 
comment on the Proposed Rule Change is available at https://www.sec.gov/comments/sr-ficc-2022-002/srficc2022002-20125933-286378.htm.
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II. Description of the Proposed Rule Change

A. Background

    FICC, through MBSD, serves as a central counterparty (``CCP'') and 
provider of clearance and settlement services for the mortgage-backed 
securities markets. A key tool that FICC uses to manage its respective 
credit exposures to its members is the daily collection of margin from 
each member, which is referred to as each member's Required Fund 
Deposit. The aggregated amount of all members' margin constitutes the 
Clearing Fund, which FICC would access should a defaulted member's own 
margin be insufficient to satisfy losses to FICC caused by the 
liquidation of that member's portfolio.
    Each member's margin consists of a number of applicable components. 
Specifically, the margin (or Required Fund Deposit) currently consists 
of the greater of a minimum charge \7\ or the sum of the following 
components: the VaR Charge,\8\ the DRC (discussed further below), a 
special charge (to the extent determined to be appropriate, based on 
market conditions and other financial and operational capabilities of 
the Member),\9\ and, if applicable, the Backtesting Charge,\10\ Holiday 
Charge,\11\ Intraday Mark-to-Market Charge,\12\ and the Margin 
Liquidity Adjustment Charge.\13\
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    \7\ MBSD Rule 1, supra note 3.
    \8\ MBSD Rules 1 and 4 section 2(c)(i), supra note 3. The VaR 
Charge is generally the largest component of the Required Fund 
Deposit. It is designed to provide an estimate of FICC's projected 
liquidation losses with respect to a defaulted member's portfolio at 
a 99 percent confidence level, and it is based on the potential 
price volatility of unsettled positions using a sensitivity-based 
Value-at-Risk model. As an alternative to this calculation, FICC 
also uses a haircut-based calculation as the member's VaR Charge if 
that charge exceeds the amount determined by the model-based 
calculation. Fixed Income Clearing Corporation Disclosure Framework 
for Covered Clearing Agencies and Financial Market Infrastructures 
(``FICC Disclosure Framework''), at 64, available at https://www.dtcc.com/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf; see also Exchange Act Release No. 
92303 (June 30, 2021), 86 FR 35855 (July 7, 2021).
    \9\ MBSD Rule 4, Section 2(c)(iii), supra note 3.
    \10\ MBSD Rules 1 and 4 section 2(c)(iv), supra note 3. The 
Backtesting Charge is calculated to mitigate exposures to MBSD 
caused by settlement risks that may not be adequately captured by 
MBSD's portfolio volatility model. FICC Disclosure Framework, supra 
note 8, at 64.
    \11\ The Holiday Charge approximates the exposure that a 
Clearing Member's trading activity on the applicable holiday could 
pose to FICC. MBSD Rule1, supra note 3.
    \12\ The Intraday Mark-to-Market Charge is an additional charge 
that is collected to mitigate FICC's exposures that may arise due to 
intraday changes in the size, composition and constituent security 
prices of such member's portfolio. MBSD Rule 1, supra note 3.
    \13\ The Margin Liquidity Adjustment Charge addresses the risk 
presented to MBSD when a member's portfolio contains large net 
unsettled positions in a particular group of securities with a 
similar risk profile or in a particular asset type. FICC Disclosure 
Framework, supra note 8, at 64; MBSD Rule 4, Section 2(c), supra 
note 3.
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    The DRC is designed to bring a member's portfolio of open positions 
to market value. It reflects mark-to-market results on outstanding 
positions, regardless of settlement date, cash items and adjustments 
that are the result of netting, and principal and interest exposure on 
failed positions.\14\ Specifically, this charge is calculated as (i) 
the Mark-to-Market Debit; minus (ii) the Mark-to-Market Credit; plus 
(iii) a cash obligation item debit; minus (iv) a cash obligation item 
credit; plus or minus (v) accrued principal and interest.\15\ FICC also 
includes another parameter, six days' interest for Fails, in the DRC 
calculation.\16\ Currently, when collected as part of a member's 
Required Fund Deposit, the member may pay a portion of the DRC in 
Eligible Clearing Fund Securities.\17\
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    \14\ FICC Disclosure Framework, supra note 8, at 65.
    \15\ Id.; see also MBSD Rule 1 (defining DRC) and 4 Section 
2(c)(ii).
    \16\ See Notice of Filing, supra note 5, 87 FR 24372.
    \17\ MBSD Rule 4, Section 2, supra note 3.
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    Cash settlement is a daily process of generating a net credit or 
debit cash amount for each Member and settling those cash amounts 
between Members and MBSD, as applicable.\18\ The cash settlement 
process is a cash pass-through process; i.e., those Members that are in 
a net debit position are obligated to submit payments that are then 
used to pay Members in a net credit position.\19\
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    \18\ MBSD Rule 11, supra note 3; FICC Disclosure Framework, 
supra note 8, at 80.
    \19\ Id.
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B. Move Mark-to-Market Related Charges From the Required Fund Deposit 
Calculation to Cash Settlement

    MBSD calculates, and then collects, its members' margin, including 
the various components thereof, once per day, at the start of the day, 
based on a member's prior end-of-day positions.\20\ As noted above, one 
of the components of the daily margin is the DRC.\21\ FICC states that 
this aspect of the margin calculation is designed to mitigate the risk 
arising out of the value change between the contract/settlement value 
of a Clearing Member's open positions and the market value at the end 
of the prior day.\22\ Thus, when the DRC is calculated, a debit or 
credit is added to the Required Fund Deposit amount of each Clearing 
Member, which raises or lowers the amount, respectively.\23\
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    \20\ MBSD Rule 4, Section 2, supra note 3.
    \21\ MBSD Rules 1 and 4, Section 2(c)(ii), supra note 3.
    \22\ See Notice of Filing, supra note 5, 87 FR 24371.
    \23\ FICC Disclosure Framework, supra note 8, at 65.
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    FICC proposes to move all of the mark-to-market components (i.e., 
the Mark-to-Market Debit and Credit, cash obligation items and the 
accrued principal and interest) currently in the DRC (except for six 
days' interest for Fails \24\) to Cash Settlement. The six days' 
interest for Fails in the DRC calculations would be added directly to 
the Required Fund Deposit calculation and not moved to Cash Settlement.
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    \24\ A Fail is a transaction the clearing of which has not 
occurred or has not been reported to FICC as having occurred on the 
Contractual Settlement Date (or expiration date). See MBSD Rule 1, 
supra note 3.
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    FICC states that while these proposed changes would impact how 
Clearing Members pay those amounts (i.e., through Cash Settlement 
rather than as part of the Required Fund Deposit), these changes would 
not affect the manner in which these items are calculated or the 
amounts that Clearing Members are paying with respect to these 
items.\25\ However, all of the items that are being moved to Cash 
Settlement would be required to be settled in cash.\26\ As such, the 
proposed changes would require that Clearing Members satisfy their DRC 
obligations in cash as part of Cash Settlement, rather than through a 
mix of cash and Eligible Clearing Fund Securities as is permitted to 
satisfy Required Fund Deposit obligations.\27\ FICC states that these 
changes would ensure the unrealized gains from mark-to-market changes 
do

[[Page 36016]]

not leave the Required Fund Deposit insufficient to cover future 
exposure.\28\
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    \25\ See Notice of Filing, supra note 5, 87 FR 24369-24370.
    \26\ MBSD Rule 11, supra note 3.
    \27\ MBSD Rule 4, Section 2, supra note 3.
    \28\ See Notice of Filing, supra note 5, 87 FR 24369-24370.
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C. Revise the Intraday Mark-to-Market Charge Definition To Reflect 
Movement of Mark-to-Market Charges to Cash Settlement and To Revise 
Thresholds and Parameters

    FICC proposes to modify its definition of ``Intraday Mark-to-Market 
Charge'' to reflect the proposed movement of the Mark-to-Market items 
and related items to Cash Settlement. The Intraday Mark-to-Market 
Charge is an additional charge that is collected from a member (unless 
waived or altered by FICC) to mitigate FICC's exposures that may arise 
due to intraday changes in the size, composition and constituent 
security prices of such member's portfolio.\29\ As part of the 
proposal, FICC would amend the definition of the Intraday Mark-to-
Market Charge to reflect the movement of the particular items (i.e., 
the mark-to-market debit and credit, cash obligation items, and accrued 
principal and interest) from the calculation of the margin due from a 
particular member to the member's cash settlement process.
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    \29\ MBSD Rule 1, supra note 3.
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    In addition, FICC proposes to revise and remove certain thresholds 
set forth in its rules. Currently, the thresholds apply to members that 
(i) experience an adverse intraday mark-to-market change that equals or 
exceeds (x) a threshold dollar amount of $1,000,000, as compared to the 
member's start-of-day mark-to-market requirement including, if 
applicable, any subsequently collected, ark-to-market amount, and (y) a 
threshold percentage of 30 percent as compared to the daily VaR Charge, 
and (ii) have 12-month backtesting coverage below 99 percent.\30\
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    \30\ MBSD Rule 1, supra note 3.
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    As part of this proposal, FICC would identify floors in for the 
dollar threshold and percentage threshold, instead of the currently 
provided specific thresholds, and it would also remove the backtesting 
coverage parameter. FICC currently has the ability to waive these 
thresholds and the parameter under certain circumstances under the MBSD 
Rules.\31\ FICC represents that, consistent with this authority, its 
current practice is to waive or adjust these thresholds and parameter 
in volatile market conditions.\32\ As such, according to FICC, the 
proposed changes to the Intraday Mark-to-Market Charge definition would 
align the MBSD Rules with FICC's current practice.\33\
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    \31\ Id.
    \32\ See Notice of Filing, supra note 5, 87 FR 24370.
    \33\ Id.
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    FICC states that by removing the set percentages, and providing a 
floor of not less than $1,000,000 for the Dollar Threshold and not less 
than 10 percent of the daily VaR Charge for the Percentage Threshold, 
members would have a better understanding of the thresholds that FICC 
is using to determine whether to apply the Intraday Mark-to-Market 
Charge, thereby providing greater transparency and certainty regarding 
its application.\34\ Neither the current calculation methodology nor 
the key components of the Intraday Mark-to-Market Charge would 
change.\35\
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    \34\ See id., at 24373.
    \35\ See Notice of Filing, supra note 5, 87 FR 24370.
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    In addition, the proposed rules would remove the Surveillance 
Threshold provision. FICC can collect an Intraday Mark-to-Market Charge 
under certain circumstances in which a member meets a certain 
Surveillance Threshold.\36\ FICC represents that it currently does not 
apply that provision, does not intend to apply that provision in the 
future, and does not believe it is necessary.\37\ As such, FICC states 
that removing the provision would align the MBSD Rules with FICC's 
current practice.\38\
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    \36\ MBSD Rule 1, supra note 3.
    \37\ See Notice of Filing, supra note 5, 87 FR 24370.
    \38\ Id.
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D. Establish a Formal VaR Charge

    FICC proposes to amend the MBSD Rules to include a formal Intraday 
VaR Charge.\39\ FICC currently monitors VaR intraday and periodically 
requires intraday VaR collections under certain conditions, using its 
existing authority to collect a special charge.\40\
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    \39\ See Notice of Filing, supra note 5, 87 FR 24370.
    \40\ MBSD Rule 4 Section 2, supra note 3. According to FICC, if 
a member's portfolio has an intraday VaR Charge increase exceeding 
100% and $1 million from the start-of-day VaR Charge, FICC would 
assess a special charge, typically on Securities Industry and 
Financial Markets Association (SIFMA) designated settlement dates, 
and require the member to make an intraday payment to the Required 
Fund Deposit. In addition, FICC represents that a member may also be 
subject to an intraday VaR collection on any non-SIFMA designated 
settlement date if the member's portfolio has an intraday VaR Charge 
increase exceeding 100% and $1 million and it is deemed by FICC that 
the increase in VaR could lead to a backtesting deficiency or push a 
member below 99% backtest coverage. See Notice of Filing, supra note 
54, 87 FR at 24374.
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    FICC states that it has occasionally observed significant intraday 
changes to market price volatility and significant changes to the size 
and composition of members' portfolios that could cause the amount 
collected as the VaR Charge at the start of that Business Day to no 
longer be sufficient to mitigate the volatility risks that such 
positions present to FICC.\41\ FICC therefore proposes the ability to 
adjust the percentage amount and dollar threshold or other parameters 
of the Intraday VaR Charge from time to time, as appropriate, to 
continue to reflect a threshold that mitigates the volatility risks 
that such positions present to FICC.\42\ The proposed rule change would 
not implement substantive or material changes to the risk this charge 
is designed to mitigate, or to the overall methodology or key 
components of the calculation of this charge.\43\ FICC proposes to 
remove the discretion to apply the Intraday VaR Charge under certain 
circumstances compared to when it implements the special charge, 
thereby making application of the Intraday VaR Charge more automatic 
and transparent on all dates. According to FICC, the introduction of 
the Intraday VaR Charge would result in more consistent intraday VaR 
collections when compared to the current practice, on both SIFMA 
designated settlement dates and non-SIFMA designated settlement 
dates.\44\
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    \41\ See Notice of Filing, supra note 5, 87 FR 24374.
    \42\ Id.
    \43\ Id.
    \44\ See id. at 24370.
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D. Make Certain Clarifying Changes

    FICC proposes to make certain clarifying changes to the MBSD Rules. 
Specifically, FICC proposes to move certain definitions so that they 
are in alphabetical order, re-letter certain subsections that follow to 
conform to the deletion of certain subsections, and update certain 
cross-references to reflect other changes set forth herein.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act 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 Exchange Act and the rules and regulations 
thereunder applicable to such organization.\45\ After carefully 
considering the Proposed Rule Change, the Commission finds that the 
proposal is consistent with the requirements of the Exchange Act and 
the rules and regulations thereunder applicable to FICC. More 
specifically, the Commission finds that the Proposed Rule Change is 
consistent with Section 17A(b)(3)(F) of the Exchange Act,\46\ and Rules 
17Ad-22(e)(4)(i), (e)(6)(i) and

[[Page 36017]]

(e)(6)(iii), each promulgated under the Act,\47\ as described in detail 
below.
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    \45\ 15 U.S.C. 78s(b)(2)(C).
    \46\ 15 U.S.C. 78q-1(b)(3)(F).
    \47\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (iii).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Exchange Act requires, among other 
things, that the rules of a clearing agency, such as NSCC, be designed 
to promote the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible.\48\
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    \48\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in Section II B above, FICC proposes to move certain 
mark-to-market components items from its margin collection (as part of 
a member's Required Fund Deposit) to Cash Settlement. The Commission 
believes that moving these specified items (i.e., the mark-to-market 
debit and credit, cash obligation items, and accrued principal and 
interest) from the calculation of margin due from a particular member 
to the member's cash settlement process would better segregate the 
unrealized gains or losses associated with the member's portfolio from 
the portion of the margin that measures potential future exposure and 
limit the build-up of systemic risk. Currently, because of the fact 
that these items are collected with the member's margin, in the 
Required Fund Deposit, the overall amount collected may be reduced by 
credits relating to unrealized mark-to-market gains. During the time 
between the last margin collection and the close out of a Clearing 
Member's position, however, such gains may reduce without a 
corresponding increase in the Required Fund Deposit, leaving the 
Required Fund Deposit insufficient to cover the future exposure. As 
such, the proposed rule change would ensure the unrealized gains from 
mark-to-market changes do not leave the Required Fund Deposit 
insufficient to cover future exposure. These changes would help ensure 
that FICC collects sufficient margin and thus more effectively cover 
its credit exposures to its members.
    In addition, as described in Section II.C above, the proposed rule 
change to revise the Intraday Mark-to-Market Charge to remove the 
specific thresholds and provide a floor for the Dollar Threshold and 
the Percentage Threshold, remove the Coverage Target from the 
definition, and remove the Surveillance Threshold from the definition, 
provides the ability for FICC to adjust the application of the Intraday 
Mark-to-Market Charge default thresholds more quickly, effectively, and 
flexibly in response to adverse or changes in market conditions, 
thereby helping to ensure that FICC collects sufficient resources to 
cover its exposures to its members in volatile market conditions. 
Further, as described in Section II.D above, FICC proposes to establish 
a formal Intraday VaR Charge. This proposed change enables FICC to 
better address any changes to market price volatility or the size of a 
member's portfolio that occur intraday such that, in the event of a 
member default, FICC's operations would not be disrupted, and non-
defaulting Members would not be exposed to losses they cannot 
anticipate or control. Accordingly, the Commission believes the 
proposed rule would allow FICC to mitigate changes in in volatility 
that could occur intraday.\49\
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    \49\ The Commission also reviewed and considered confidential 
analyses provided by FICC which analyzed the impact that these 
specified changes would have on margin collected by FICC. (As part 
of the Proposed Rule Change, FICC filed Exhibit 3--Confidential 
Supporting Information. Pursuant to 17 CFR 240.24b-2, FICC requested 
confidential treatment of Exhibit 3.) The Commission generally 
believes that the impact analyses, as summarized by FICC in the 
Notice, see Notice of Filing, supra note 5, 87 FR at 24369, further 
support its findings with respect to the consistency of the proposed 
changes with Section 17A(b)(3)(F) in that the changes set forth in 
Sections II.C and D above with respect to the Intraday Mark-to-
Market Charge and Intraday VaR Charge would increase the amount of 
resources collected by FICC and that, with respect to the changes 
set forth in II.B regarding the movement of certain DRC items to 
cash settlement, the changes would have some impact on the amount of 
resources collected in cash.
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    For these reasons, the Commission believes that implementing these 
changes set forth in Sections II.B, C, and D should help ensure that, 
in the event of a member default, FICC's operation of its critical 
clearance and settlement services would not be disrupted because of 
insufficient financial resources. Accordingly, the Commission finds 
that the changes to the DRC 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.
    Moreover, as described above in Section I.A., 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 changes of moving the DRC to the cash 
pass-through, amending the definition of the Intraday Mark-to-Market 
Charge, and instituting a regular Intraday VaR Charge should help 
ensure that FICC has collected sufficient margin from members, thereby 
limiting non-defaulting members' exposure to mutualized losses. The 
Commission believes that by helping to limit the exposure of FICC's 
non-defaulting members to mutualized losses, the minimum margin amount 
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.\50\
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    \50\ Id.
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    Finally, as described in Sections II.B, C, and D, the proposed rule 
changes would amend the Rules to improve transparency. Such changes 
provide clarifications to Clearing Members regarding the definitions 
and applications of Rules. For instance, as described in Section II.C, 
by removing set percentages and providing a floor of not less than 
$1,000,000 for the Dollar Threshold and not less than 10 percent of the 
daily VaR Charge for the Percentage Threshold, the Commission believes 
that Clearing Members will have better understanding of the default 
thresholds that FICC is using to determine whether to apply the 
Intraday Mark-to-Market Charge. The Commission believes that such 
changes would ensure that the Rules are accurate and clear to Members, 
thus promoting prompt and accurate clearance and settlement, which is 
consistent with Section 17A(b)(3)(F) of the Act.\51\
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    \51\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act \52\ requires a covered 
clearing agency, like FICC, to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those exposures arising from its payment, clearing, 
and settlement processes by maintaining sufficient financial resources 
to cover its credit exposure to each participant fully with a high 
degree of confidence.
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    \52\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As discussed above in Section II.D, FICC is introducing an Intraday 
VaR Charge, which FICC would charge the Intraday VaR Charge on both 
SIFMA designated settlement dates and non-SIFMA designated settlement 
dates if the thresholds are crossed, regardless of whether the increase 
in VaR could lead to a backtesting deficiency or push a Clearing Member 
below 99% backtest coverage. As such, the Commission believes that the 
introduction of the Intraday VaR Charge would result in more consistent 
intraday VaR collections when compared to the

[[Page 36018]]

current practice, on both SIFMA designated settlement dates and non-
SIFMA designated settlement dates. The Commission also believes that 
the proposed Intraday VaR Charge would effectively mitigate the risks 
related to intraday increases in volatility and would address the 
increased risks FICC may face related to liquidating a Clearing 
Member's portfolio following that Clearing Member's default.
    Accordingly, the Commission believes the proposed rule would 
enhance FICC's ability to effectively identify, measure and monitor its 
credit exposures and would enhance its ability to maintain sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence, consistent with Rule 17Ad-
22(e)(4)(i) under the Act.\53\
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    \53\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) \54\ under the Act requires, in part, a 
clearing agency 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.
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    \54\ 17 CFR 240.17Ad-22(e)(6)(i).
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    A member's margin (in the form of its Required Fund Deposit) is 
made up of risk-based components that are calculated and assessed daily 
to limit FICC's credit exposures to its members. As discussed in 
Section II.B, FICC proposes to move DRC items to Cash Settlement. The 
Commission believes that the proposed rule change should help ensure 
that FICC produces margin levels commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and market 
by better segregating the unrealized gains or losses associated with a 
Clearing Member's margin portfolio from the portion of the margin that 
measures potential future exposure. Further, as discussed in Section 
II.C, FICC proposes to amend and remove certain thresholds and 
parameters in its determination of the Intraday Mark-to-Market Charge, 
and as discussed in Section II.D, FICC proposes to introduce an 
Intraday VaR Charge, which is designed to more effectively address the 
risks presented by significant intraday changes to market price 
volatility or a clearing member's portfolio. The Commission believes 
these changes should enable FICC to assess a more appropriate level of 
margin that accounts for increases in these risks that may occur 
intraday.\55\
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    \55\ The Commission also reviewed and considered the results of 
FICC's impact analyses and believes that the analyses further 
support its findings regarding the consistency of the proposed 
changes with Rule 17Ad-22(e)(6)(i), for the reasons discussed in 
note 49 supra.
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    Accordingly, the Commission believes the proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\56\
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    \56\ Id.
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D. Consistency With 17Ad-22(e)(6)(iii)

    Rule 17Ad-22(e)(6)(iii) under the Act \57\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, calculates margin sufficient to cover its 
potential future exposure to participants in the interval between the 
last margin collection and the close out of positions following a 
participant default.
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    \57\ 17 CFR 240.17Ad-22(e)(6)(iii).
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    As discussed above in Section II.B, FICC proposes to move certain 
DRC items to Cash Settlement. The Commission believes the proposed rule 
change would better segregate the unrealized gains or losses associated 
with a Clearing Member's margin portfolio from the portion of the 
margin that measures potential future exposure and limit the build-up 
of systemic risk. By segregating the unrealized mark-to-market gains 
and losses from the Required Fund Deposit, the Commission believes that 
the proposed changes would allow FICC to calculate amounts that are 
sufficient to cover FICC's potential future exposure to Clearing 
Members in the interval between the last margin collection and the 
close out of positions following a participant default. Therefore, the 
Commission believes the proposed change is consistent with Rule 17Ad-
22(e)(6)(iii) under the Act.\58\
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    \58\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the 
Exchange Act, and in particular, the requirements of Section 17A of the 
Exchange Act \59\ and the rules and regulations thereunder.
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    \59\ In approving this Proposed Rule Change, the Commission has 
considered the proposed rules' impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\60\ that the Proposed Rule Change (SR-FICC-2022-002) be, 
and hereby is, approved.
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    \60\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\61\
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    \61\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12733 Filed 6-13-22; 8:45 am]
BILLING CODE 8011-01-P