Document ID: SEC-2018-0465-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2018-03-20T04:00Z

[Federal Register Volume 83, Number 54 (Tuesday, March 20, 2018)]
[Notices]
[Pages 12229-12234]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05565]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82876; File No. SR-FICC-2018-001]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change to the Required Fund Deposit 
Calculation in the Government Securities Division Rulebook

March 14, 2018.

I. Introduction

    On January 12, 2018, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2018-001 (``Proposed Rule Change'') 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ to make changes to the 
method by which the Government Securities Division (``GSD'') of FICC 
calculates the margin requirement of its members.\3\ The Proposed Rule 
Change was published for comment in the Federal Register on February 1, 
2018.\4\ As of March 14, 2018, the Commission has received two comment 
letters to the Proposed Rule Change.\5\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \6\ to determine 
whether to approve or disapprove the Proposed Rule Change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On January 12, 2018, FICC also filed the proposal contained 
in the Proposed Rule Change as advance notice SR-FICC-2018-801 
(``Advance Notice'') 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), and Rule 19b-4(n)(1)(i) of the Act, 17 CFR 240.19b-
4(n)(1)(i). Notice of filing of the Advance Notice was published for 
comment in the Federal Register on March 2, 2018. Securities 
Exchange Act Release No. 82779 (February 26, 2018), 83 FR 9055 
(March 2, 2018) (SR-FICC-2018-801). On March 7, 2018, the Commission 
extended its review period of the Advance Notice for an additional 
60 days pursuant to Section 806(e)(1)(H) of the Clearing Supervision 
Act. Securities Exchange Act Release No. 82820 (March 7, 2018), 83 
FR 10761 (March 12, 2018) (SR-FICC-2018-801). The proposal contained 
in the Proposed Rule Change and the Advance Notice shall not take 
effect until all regulatory actions required with respect to the 
proposal are completed.
    \4\ Securities Exchange Act Release No. 82588 (January 26, 
2018), 83 FR 4687 (February 1, 2018) (SR-FICC-2018-001) 
(``Notice'').
    \5\ Letter from Robert E. Pooler, Chief Financial Officer, Ronin 
Capital LLC, dated February 22, 2018, to Robert W. Errett, Deputy 
Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2018-001/ficc2018001-3133039-161947.pdf (``Ronin Letter''); 
letter from Michael Santangelo, Chief Financial Officer, Amherst 
Pierpont Securities LLC, dated February 22, 2018, to Brent J. 
Fields, Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2018-001/ficc2018001-3130095-161938.pdf (``Amherst 
Pierpont Letter''). Because the proposal contained in the Proposed 
Rule Change was also filed as an Advance Notice, supra note 3, the 
Commission is considering all public comments received on the 
proposal regardless of whether the comments were submitted to the 
Advance Notice or the Proposed Rule Change.
    \6\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

    FICC proposes to amend the FICC GSD Rulebook (``GSD Rules'') \7\ to 
make changes to GSD's method of calculating GSD members' (``Members'') 
margin.\8\

[[Page 12230]]

Specifically, FICC proposes to (1) change GSD's method of calculating 
the Value-at-Risk (``VaR'') Charge component; (2) add a new component 
referred to as the ``Blackout Period Exposure Adjustment;'' (3) 
eliminate the Blackout Period Exposure Charge and the Coverage Charge 
components; (4) amend the Backtesting Charge component to (i) include 
the backtesting deficiencies of certain GCF Counterparties during the 
Blackout Period, and (ii) give GSD the ability to assess the 
Backtesting Charge on an intraday basis for all Netting Members; and 
(5) amend the calculation for determining the Excess Capital Premium 
for Broker Members, Inter-Dealer Broker Members, and Dealer Members.\9\ 
In addition, FICC proposes to provide transparency with respect to 
GSD's existing authority to calculate and assess Intraday Supplemental 
Fund Deposit amounts.\10\ The proposed QRM Methodology document would 
reflect the proposed VaR Charge calculation and the proposed Blackout 
Period Exposure Adjustment calculation.\11\
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    \7\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \8\ See Notice, supra note 4, at 4687.
    \9\ See Notice, supra note 4, at 4687-88.
    \10\ See Notice, supra note 4, at 4688. Pursuant to the GSD 
Rules, FICC has the existing authority and discretion to calculate 
an additional amount on an intraday basis in the form of an Intraday 
Supplemental Clearing Fund Deposit. See GSD Rules 1 and 4, supra 
note 7.
    \11\ See Notice, supra note 4, at 4688.
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A. Changes to GSD's VaR Charge Component

    FICC states that the changes proposed in the Proposed Rule Change 
are designed to improve GSD's current VaR Charge so that it responds 
more effectively to market volatility.\12\ Specifically, FICC proposes 
to (1) replace GSD's current full revaluation approach with a 
sensitivity approach; \13\ (2) employ the Margin Proxy as an 
alternative (i.e., a back-up) VaR Charge calculation; (3) eliminate 
GSD's current augmented volatility adjustment multiplier; (4) utilize a 
haircut method for securities cleared by GSD that lack sufficient 
historical data; and (5) establish a VaR Floor calculation that would 
serve as a minimum VaR Charge for Members, as discussed below.\14\
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    \12\ See Notice, supra note 4, at 4690. FICC proposes to amend 
its calculation of GSD's VaR Charge because during the fourth 
quarter of 2016, FICC's current methodology for calculating the VaR 
Charge did not respond effectively to the market volatility that 
existed at that time. As a result, the VaR Charge did not achieve 
backtesting coverage at a 99 percent confidence level and, 
therefore, yielded backtesting deficiencies beyond FICC's risk 
tolerance.
    \13\ Id. GSD's proposed sensitivity approach is similar to the 
sensitivity approach that FICC's Mortgage-Backed Securities Division 
(``MBSD'') uses to calculate the VaR Charge for MBSD clearing 
members. See Securities Exchange Act Release No. 79868 (January 24, 
2017), 82 FR 8780 (January 30, 2017) (SR-FICC-2016-007) and 
Securities Exchange Act Release No. 79643 (December 21, 2016), 81 FR 
95669 (December 28, 2016) (SR-FICC-2016-801).
    \14\ Id.
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    For the proposed sensitivity approach to the VaR Charge, FICC would 
source sensitivity data and relevant historical risk factor time series 
data generated by an external vendor based on its econometric, risk and 
pricing models.\15\ FICC would conduct independent data checks to 
verify the accuracy and consistency of the data feed received from the 
vendor.\16\ In the event that the external vendor is unable to provide 
the sourced data in a timely manner, FICC would employ its existing 
Margin Proxy as a back-up VaR Charge calculation.\17\
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    \15\ See Notice, supra note 4, at 4690. The following risk 
factors would be incorporated into GSD's proposed sensitivity 
approach: Key rate, convexity, implied inflation rate, agency 
spread, mortgage-backed securities spread, volatility, mortgage 
basis, and time risk factor. These risk factors are defined as 
follows:
     Key rate measures the sensitivity of a price change to 
changes in interest rates;
     convexity measures the degree of curvature in the 
price/yield relationship of key interest rates;
     implied inflation rate measures the difference between 
the yield on an ordinary bond and the yield on an inflation-indexed 
bond with the same maturity;
     agency spread is yield spread that is added to a 
benchmark yield curve to discount an Agency bond's cash flows to 
match its market price;
     mortgage-backed securities spread is the yield spread 
that is added to a benchmark yield curve to discount a to-be-
announced (``TBA'') security's cash flows to match its market price;
     volatility reflects the implied volatility observed 
from the swaption market to estimate fluctuations in interest rates;
     mortgage basis captures the basis risk between the 
prevailing mortgage rate and a blended Treasury rate; and
     time risk factor accounts for the time value change (or 
carry adjustment) over the assumed liquidation period. Id.
    The above-referenced risk factors are similar to the risk 
factors currently utilized in MBSD's sensitivity approach; however, 
GSD has included other risk factors that are specific to the U.S. 
Treasury securities, Agency securities and mortgage-backed 
securities cleared through GSD. Id. Concerning U.S. Treasury 
securities and Agency securities, FICC would select the following 
risk factors: Key rates, convexity, agency spread, implied inflation 
rates, volatility, and time. Id. For mortgage-backed securities, 
each security would be mapped to a corresponding TBA forward 
contract and FICC would use the risk exposure analytics for the TBA 
as an estimate for the mortgage-backed security's risk exposure 
analytics. Id. FICC would use the following risk factors to model a 
TBA security: Key rates, convexity, mortgage-backed securities 
spread, volatility, mortgage basis, and time. Id. To account for 
differences between mortgage-backed securities and their 
corresponding TBA, FICC would apply an additional basis risk 
adjustment.
    \16\ Id.
    \17\ See Notice, supra note 4, at 4692. In the event that the 
data used for the sensitivity approach is unavailable for a period 
of more than five days, FICC proposes to revert back to the Margin 
Proxy as an alternative VaR Charge calculation. Id.
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    Additionally, FICC proposes to look at the historical changes of 
specific risk factors during the look-back period in order to generate 
risk scenarios to arrive at the market value changes for a given 
portfolio.\18\ A statistical probability distribution would be formed 
from the portfolio's market value changes, which would then be 
calibrated to cover the projected liquidation losses at a 99 percent 
confidence level.\19\ The portfolio risk sensitivities and the 
historical risk factor time series data would then be used by FICC's 
risk model to calculate the VaR Charge for each Member.\20\
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    \18\ See Notice, supra note 4, at 4690.
    \19\ Id.
    \20\ Id.
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    FICC also proposes to eliminate the augmented volatility adjustment 
multiplier. FICC states that the multiplier would not be necessary 
because the proposed sensitivity approach would have a longer look-back 
period and the ability to include an additional stressed market 
condition to account for periods of market volatility.\21\
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    \21\ See Notice, supra note 4, at 4692.
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    According to FICC, in the event that a portfolio contains classes 
of securities that do not have sufficient volume and price information 
available, a historical simulation approach would not generate VaR 
Charge amounts that reflect the risk profile of such securities.\22\ 
Therefore, FICC proposes to calculate the VaR Charge for these 
securities by utilizing a haircut approach based on a market benchmark 
with a similar risk profile as the related security.\23\ The proposed 
haircut approach would be calculated separately for U.S. Treasury/
Agency securities and mortgage-backed securities.\24\
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    \22\ Id.
    \23\ See Notice, supra note 4, at 4692-93.
    \24\ See Notice, supra note 4, at 4693.
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    Finally, FICC proposes to amend the existing calculation of the VaR 
Charge to include a VaR Floor, which would be the amount used as the 
VaR Charge when the sum of the amounts calculated by the proposed 
sensitivity approach and haircut method is less than the proposed VaR 
Floor.\25\ The VaR Floor would be calculated as the sum of (1) a U.S. 
Treasury/Agency bond

[[Page 12231]]

marginfloor \26\ and (2) a mortgage-backed securities margin floor.\27\
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    \25\ Id.
    \26\ Id. The U.S. Treasury/Agency bond margin floor would be 
calculated by mapping each U.S. Treasury/Agency security to a tenor 
bucket, then multiplying the gross positions of each tenor bucket by 
its bond floor rate, and summing the results. Id. The bond floor 
rate of each tenor bucket would be a fraction (initially set at 10 
percent) of an index-based haircut rate for such tenor bucket. Id.
    \27\ Id. The mortgage-backed securities margin floor would be 
calculated by multiplying the gross market value of the total value 
of mortgage-backed securities in a Member's portfolio by a 
designated amount, referred to as the pool floor rate, (initially 
set at 0.05 percent). Id.
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B. Addition of the Blackout Period Exposure Adjustment Component

    FICC proposes to add a new component to GSD's margin calculation--
the Blackout Period Exposure Adjustment.\28\ FICC states that the 
Blackout Period Exposure Adjustment would be calculated to address 
risks that could result from overstated values of mortgage-backed 
securities that are pledged as collateral for GCF Repo Transactions 
\29\ during a Blackout Period.\30\ A Blackout Period is the period 
between the last business day of the prior month and the date during 
the current month upon which a government-sponsored entity that issues 
mortgage-backed securities publishes its updated Pool Factors.\31\ The 
proposed Blackout Period Exposure Adjustment would result in a charge 
that either increases a Member's VaR Charge or a credit that decreases 
the VaR Charge.\32\
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    \28\ See Notice, supra note 4, at 4694. The proposed Blackout 
Period Exposure Adjustment would be calculated by (1) projecting an 
average pay-down rate of mortgage loan pools (based on historical 
pay down rates) for the government sponsored enterprises (Fannie Mae 
and Freddie Mac) and the Government National Mortgage Association 
(Ginnie Mae), respectively, then (2) multiplying the projected pay-
down rate by the net positions of mortgage-backed securities in the 
related program, and (3) summing the results from each program.
    \29\ GCF Repo Transactions refer to transactions made on FICC's 
GCF Repo Service that enables dealers to trade general collateral 
repos, based on rate, term, and underlying product, throughout the 
day, without requiring intra-day, trade-for-trade settlement on a 
Delivery-versus-Payment basis.
    \30\ See Notice, supra note 4, at 4694.
    \31\ Id. Pool Factors are the percentage of the initial 
principal that remains outstanding on the mortgage loan pool 
underlying a mortgage-backed security, as published by the 
government-sponsored entity that is the issuer of such security.
    \32\ Id.
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C. Elimination of the Blackout Period Exposure Charge and Coverage 
Charge Components

    FICC proposes to eliminate the existing Blackout Period Exposure 
Charge component from GSD's margin calculation.\33\ The Blackout Period 
Exposure Charge only applies to Members with GCF Repo Transactions that 
have two or more backtesting deficiencies during the Blackout Period 
and whose overall 12-month trailing backtesting coverage falls below 
the 99 percent coverage target.\34\ FICC would eliminate this charge 
because the proposed Blackout Period Exposure Adjustment would apply to 
all Members with GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period.\35\
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    \33\ Id.
    \34\ Id.
    \35\ Id.
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    FICC also proposes to eliminate the existing Coverage Charge 
component from GSD's margin calculation.\36\ FICC states that the 
Coverage Charge is based on historical portfolio activity, which may 
not be indicative of a Member's current risk profile.\37\ FICC would 
eliminate the Coverage Charge because, as FICC states, the proposed 
sensitivity approach would provide overall better margin coverage, 
rendering the Coverage Charge unnecessary.\38\
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    \36\ Id.
    \37\ Id. FICC states that it previously determined the Coverage 
Charge to be appropriate to address potential shortfalls in margin 
charges under the current, full revaluation approach.
    \38\ Id.
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D. Amendment of the Backtesting Charge Component

    FICC proposes to amend GSD's existing Backtesting Charge component 
of its margin calculation to (1) include the backtesting deficiencies 
of certain Members during the Blackout Period and (2) give GSD the 
ability to assess the Backtesting Charge on an intraday basis.\39\
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    \39\ See Notice, supra note 4, at 4695.
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    Currently, the Backtesting Charge does not apply to Members with 
mortgage-backed securities during the Blackout Period because such 
Members would be subject to a Blackout Period Exposure Charge.\40\ In 
response to FICC's proposal to eliminate the Blackout Period Exposure 
Charge, FICC proposes to amend the applicability of the Backtesting 
Charge.\41\ Specifically, FICC proposes to apply the Backtesting Charge 
to Members that experience backtesting deficiencies that are attributed 
to the Member's GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period.\42\
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    \40\ Id.
    \41\ Id.
    \42\ Id. Additionally, during the Blackout Period, the Blackout 
Period Exposure Adjustment Charge, as described in Section I.C, will 
be applied to all applicable Members.
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    FICC also proposes to amend the Backtesting Charge to apply to 
Members that experience backtesting deficiencies during the trading day 
because of such Member's intraday trading activities.\43\ The Intraday 
Backtesting Charge would be assessed on Members with portfolios that 
experience at least three intraday backtesting deficiencies over the 
prior 12-month period and would generally equal a Member's third 
largest historical intraday backtesting deficiency.\44\
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    \43\ See Notice, supra note 4, at 4695.
    \44\ Id.
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E. Amendment of the Excess Capital Premium Charge

    FICC proposes to amend GSD's calculation for determining the Excess 
Capital Premium. Currently, GSD assesses the Excess Capital Premium 
when a Member's VaR Charge exceeds the Member's Excess Capital.\45\ 
Only Members that are brokers or dealers are required to report Excess 
Net Capital figures to FICC while other Members report net capital or 
equity capital, based on the type of regulation to which the Member is 
subject.\46\ If a Member is not a broker or dealer, FICC uses the net 
capital or equity capital in order to calculate each Member's Excess 
Capital Premium.\47\ FICC proposes to move to a net capital measure for 
broker Members, inter-dealer broker Members, and dealer Members.\48\ 
FICC states that such a change would make the Excess Capital Premium 
for those Members more consistent with the equity capital measure that 
is used for other Members in the Excess Capital Premium 
calculation.\49\
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    \45\ See Notice, supra note 4, at 4696. The term ``Excess 
Capital'' means Excess Net Capital, net assets, or equity capital as 
applicable, to a Member based on its type of regulation. GSD Rules, 
Rule 1, supra note 7.
    \46\ See Notice, supra note 4, at 4696.
    \47\ Id.
    \48\ Id.
    \49\ Id.
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F. Additional Transparency Surrounding the Intraday Supplemental Fund 
Deposit

    Separate from the above changes to GSD's margin calculation, FICC 
proposes to provide transparency in the GSD Rules with respect to GSD's 
existing calculation of the Intraday Supplemental Fund Deposit.\50\ 
FICC proposes to provide more detail in the GSD rules surrounding both 
GSD's calculation of the Intraday Supplemental Fund Deposit charge and 
its determination of whether to assess the charge.\51\
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    \50\ Id.
    \51\ Id.
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    FICC calculates the Intraday Supplemental Fund Deposit by tracking 
three criteria for each Member.\52\ The

[[Page 12232]]

first criteria, the ``Dollar Threshold,'' evaluates whether a Member's 
Intraday VaR Charge equals or exceeds a set dollar amount when compared 
to the VaR Charge that was included in the most recent margin 
collection.\53\ The second criteria, the ``Percentage Threshold,'' 
evaluates whether the Intraday VaR Charge equals or exceeds a 
percentage increase of the VaR Charge that was included in the most 
recent margin collection.\54\ The third criteria, the ``Coverage 
Target,'' evaluates whether a Member is experiencing backtesting 
results below a 99 percent confidence level.\55\ In the event that a 
Member's additional risk exposure breaches all three criteria, FICC 
assess an Intraday Supplemental Fund Deposit.\56\ FICC also assess an 
Intraday Supplemental Fund Deposit if, under certain market conditions, 
a Member's Intraday VaR Charge breaches both the Dollar Threshold and 
the Percentage Threshold.\57\
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    \52\ Id.
    \53\ Id.
    \54\ See Notice, supra note 4, at 4697.
    \55\ Id.
    \56\ Id.
    \57\ Id.
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G. Description of the QRM Methodology

    The QRM Methodology document provides the methodology by which FICC 
would calculate the VaR Charge, with the proposed sensitivity approach, 
as well as other components of the Required Fund Deposit 
calculation.\58\ The QRM Methodology document specifies (i) the model 
inputs, parameters, assumptions and qualitative adjustments; (ii) the 
calculation used to generate margin amounts; (iii) additional 
calculations used for benchmarking and monitoring purposes; (iv) 
theoretical analysis; (v) the process by which the VaR methodology was 
developed as well as its application and limitations; (vi) internal 
business requirements associated with the implementation and ongoing 
monitoring of the VaR methodology; (vii) the model change management 
process and governance framework (which includes the escalation process 
for adding a stressed period to the VaR calculation); (viii) the 
haircut methodology; (ix) the Blackout Period Exposure Adjustment 
calculations; (x) intraday margin calculation; and (xi) the Margin 
Proxy calculation.\59\
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    \58\ See Notice, supra note 4, at 4697.
    \59\ Id.
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III. Summary of Comments Received

    The Commission received two comment letters in response to the 
Proposed Rule Change.\60\ One comment letter, the Amherst Pierpont 
Letter, requested additional time to provide comments on the 
proposal.\61\ A second comment letter, the Ronin Letter, objects to the 
Proposed Rule Change.
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    \60\ See supra, note 5.
    \61\ The Commission is extending the period for review and 
public comment for the Proposed Rule Change associated with this 
proposal through this Order and has also extended the period for 
review and public comment on the Advanced Notice associated with 
this proposal, supra note 3.
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    Ronin states that the Proposed Rule Change would ``unduly burden 
competition'' and be ``unnecessary and unfair'' because the VaR model 
redesign would necessitate higher margin requirements than are 
necessary for Members, specifically Members with a higher cost of 
capital.\62\ Ronin states that FICC is tasked with determining that 
each Member's margin is adequate to satisfy losses that may arise from 
the liquidation of that Member's portfolio under a default scenario, 
but Ronin emphasizes that FICC must also ensure that ``backtesting 
practices are appropriate for determining the adequacy of [FICC's] 
margin resources.'' \63\ Ronin states that certain ``flaws'' in FICC's 
current backtesting methodology should be carefully examined before 
using backtesting deficiencies as justification for the proposed 
sensitivity VaR model.\64\
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    \62\ Ronin Letter at 1-9.
    \63\ Ronin Letter at 2.
    \64\ Id.
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    Ronin also states that FICC's assumption that it would take three 
days to liquidate or hedge the portfolio of a defaulted Member is 
incorrect.\65\ Specifically, Ronin states that FICC incorrectly assumes 
that liquidity needs following a default will be identical for all 
Members.\66\ Ronin states that the three-day liquidation period creates 
an ``arbitrary and extremely high hurdle'' for historical backtesting 
by overestimating the closeout-period risk posed to FICC by many of its 
Members by ``triple-counting'' a single event.\67\
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    \65\ Id.
    \66\ Id.
    \67\ Ronin Letter at 3.
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    Ronin also states that FICC lacks visibility into its Members' 
``true risk'' because FICC only has access to a subset of a Members' 
portfolio and, consequently, FICC does not have a VaR model issue, but, 
instead, a ``data sharing problem.'' \68\ Ronin states that due to a 
lack of information regarding Members' entire portfolios, FICC is 
``improperly'' applying its VaR model to only a subset of a Member's 
portfolio, resulting in incomplete margin calculations, which FICC 
should rectify through ``cross-margin integration'' with the Chicago 
Mercantile Exchange and FICC's Mortgage-Backed Securities Division.\69\
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    \68\ Id.
    \69\ Ronin Letter at 3-4.
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    Finally, Ronin states that the VaR model input is ``biased'' 
because it continuously retains a ``stressed period'' in the proposed 
10-year look-back period.\70\ This results in higher than necessary 
margin withholdings because it ``treats every day for risk-related 
purposes as if the market is continuously in the midst of a financial 
crisis.'' \71\
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    \70\ Ronin Letter at 4.
    \71\ Id.
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IV. Proceedings To Determine Whether to Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \72\ to determine whether the Proposed Rule 
Change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the Proposed Rule Change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule Change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change.
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    \72\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\73\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the Proposed 
Rule Change's consistency with Section 17A of the Act,\74\ and the 
rules thereunder, including the following provisions:
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    \73\ Id.
    \74\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\75\ which requires, among 
other things, that the rules of a clearing agency must be designed to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency and, in general, protect 
investors and the public interest;
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    \75\ 15 U.S.C. 78q-1(b)(3)(F).
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     Section 17A(b)(3)(I) of the Act,\76\ which requires that 
the rules of a clearing agency do not impose any burden on competition 
not necessary or

[[Page 12233]]

appropriate in furtherance of the purpose of the Act;
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    \76\ 15 U.S.C. 78q-1(b)(3)(I).
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     Rule 17Ad-22(e)(4)(i) under the Act,\77\ which requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those exposures arising from its payment, clearing, and settlement 
processes by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence;
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    \77\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(6)(i) under the Act,\78\ which requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, 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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    \78\ 17 CFR 240.17Ad-22(e)(6)(i).
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     Rule 17Ad-22(e)(6)(ii) under the Act,\79\ which requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, marks participant positions to market and 
collects margin, including variation margin or equivalent charges if 
relevant, at least daily and includes the authority and operational 
capacity to make intraday margin calls in defined circumstances;
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    \79\ 17 CFR 240.17Ad-22(e)(6)(ii).
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     Rule 17Ad-22(e)(6)(iii) under the Act,\80\ which requires 
a clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, 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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    \80\ 17 CFR 240.17Ad-22(e)(6)(iii).
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     Rule 17Ad-22(e)(6)(iv) under the Act,\81\ which requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, uses reliable sources of timely price data 
and procedures and sound valuation models for addressing circumstances 
in which pricing data are not readily available or reliable; and
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    \81\ 17 CFR 240.17Ad-22(e)(6)(iv).
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     Rule 17Ad-22(e)(6)(v) under the Act,\82\ which requires a 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.
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    \82\ 17 CFR 240.17Ad-22(e)(6)(v).
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V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change. In particular, the Commission invites 
the written views of interested persons concerning whether the Proposed 
Rule Change is consistent with Sections 17A(b)(3)(F) and (I) of the 
Act, Rules 17Ad-22(e)(4)(i) and (6)(i)-(v) under the Act, cited above, 
or any other provision of the Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Act,\83\ any request for 
an opportunity to make an oral presentation.\84\
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    \83\ 17 CFR 240.19b-4(g).
    \84\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
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    Interested persons are invited to submit written data, views, and 
arguments regarding whether the Proposed Rule Change should be approved 
or disapproved by April 4, 2018. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
April 16, 2018. Comments may be submitted by any of the following 
methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2018-001 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FICC-2018-001. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the Proposed Rule Change that are filed with 
the Commission, and all written communications relating to the Proposed 
Rule Change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2018-001 and should be submitted on 
or before April 4, 2018. Rebuttal comments should be submitted by April 
16, 2018.
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    \85\ 17 CFR 200.30-3(a)(57).

[[Page 12234]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\85\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05565 Filed 3-19-18; 8:45 am]
 BILLING CODE 8011-01-P