Document ID: SEC-2023-1120-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2023-10-04T04:00Z

[Federal Register Volume 88, Number 191 (Wednesday, October 4, 2023)]
[Notices]
[Pages 68803-68811]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21938]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98592; File No. SR-FICC-2023-014]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change Relating to the GSD and MBSD 
Schedules of Haircuts for Eligible Clearing Fund Securities

September 28, 2023
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 68804]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 22, 2023, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been primarily prepared by the clearing agency. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules,'' and collectively with the GSD Rules, the ``Rules'') \3\ in 
order to modify the GSD and MBSD Schedules of Haircuts for Eligible 
Clearing Fund Securities and remove them from the respective Rules, and 
make other clarifying changes, as described in greater detail below.
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    \3\ Terms not defined herein are defined in the GSD Rules and 
MBSD Rules, as applicable, available at www.dtcc.com/legal/rules-and-procedures.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    FICC is proposing to modify the GSD and MBSD Schedules of Haircuts 
for Eligible Clearing Fund Securities, and to remove them and the 
related concentration limits from the respective Rules, and make other 
clarifying changes, as described in greater detail below.
Background
    FICC, through GSD and MBSD, serves as a central counterparty and 
provider of clearance and settlement services for the U.S. government 
securities and mortgage-backed securities markets. A key tool that FICC 
uses to manage its credit exposures to its members is the daily 
collection of margin from each member. The aggregated amount of all GSD 
and MBSD members' margin constitutes the GSD Clearing Fund and MBSD 
Clearing Fund (collectively referred to herein as the ``Clearing 
Fund'').
    The objective of the Clearing Fund is to mitigate potential losses 
to FICC associated with liquidating a member's portfolio in the event 
FICC ceases to act for that member (hereinafter referred to as a 
``default'').\4\ FICC would access the Clearing Fund should a 
defaulting member's own margin be insufficient to satisfy losses to 
FICC caused by the liquidation of that member's portfolio. The Clearing 
Fund reduces the risk that FICC would need to mutualize any losses 
among non-defaulting members during the liquidation process.
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    \4\ The GSD Rules and MBSD Rules each identify when FICC may 
cease to act for a member and the types of actions FICC may take. 
For example, FICC may suspend a firm's membership with FICC or 
prohibit or limit a member's access to FICC's services in the event 
that member defaults on a financial or other obligation to FICC. See 
GSD Rule 21 (Restrictions on Access to Services) and MBSD Rule 14 
(Restrictions on Access to Services), supra note 3.
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    Under GSD Rule 4 (Clearing Fund and Loss Allocation) and MBSD Rule 
4 (Clearing Fund and Loss Allocation), members are required to make 
deposits to the GSD and MBSD Clearing Funds, as applicable, with the 
amount of each member's required deposit being determined by FICC in 
accordance with GSD Rule 4 and MBSD Rule 4, as applicable (the 
``Required Fund Deposit'').
    A member may satisfy its Required Fund Deposit with cash or an open 
account indebtedness secured by Eligible Clearing Fund Securities.\5\ 
Eligible Clearing Fund Securities, comprised of certain agency, 
mortgage-backed, and Treasury securities, are valued based on the prior 
Business Day's closing market price, less a haircut, and may be subject 
to a concentration limit.\6\ Haircuts are used to protect FICC and its 
members from price fluctuations, i.e., if FICC is required to liquidate 
collateral of an insolvent member and such collateral is worth less at 
the time of liquidation than when it is pledged to FICC. Concentration 
limits are intended to reduce FICC's risk by limiting the percentage of 
certain types of Eligible Clearing Fund Securities pledged by members 
to secure the Clearing Fund deposits. This is because 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, such securities could present additional risk to FICC.
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    \5\ See GSD Rule 4, Section 3 (Form of Deposit) and MBSD Rule 4, 
Section 3 (Form of Deposit), supra note 3.
    \6\ See GSD Rule 1 (Definitions) and MBSD Rule 1 (Definitions) 
for applicable definitions, including Eligible Clearing Fund 
Securities and its components, which are Eligible Clearing Fund 
Agency Securities, Eligible Clearing Fund Mortgage-Backed 
Securities, and Eligible Clearing Fund Treasury Securities. Supra 
note 3.
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    Currently, collateral haircuts applicable to relevant security 
types and remaining maturity terms are specified as fixed percentages 
in the Schedule of Haircuts for Eligible Clearing Fund Securities in 
the GSD Rules and MBSD Rules.\7\ The sufficiency of collateral haircuts 
is evaluated through use of back-tests, stress-tests and market 
observations. To ensure the sufficiency of the collateral haircuts, a 
backtesting analysis of members' collateral deposits is conducted 
daily, and summary reviews are completed quarterly, each by the FICC 
market risk group pursuant to FICC's internal market risk management 
policies and procedures. FICC performs daily backtesting of collateral 
by comparing the collateral haircut for each member in simulated 
liquidations with the member's actual collateral held on deposit at 
FICC. Any exceptions noted are escalated to management daily to assess 
the root cause and determine whether further analysis and/or review 
would be appropriate. Specifically, if FICC determines that a 
particular security may present inherent volatility and/or liquidity 
risks that could likely result in an erosion in the value of the 
security exceeding the applicable collateral haircut, ad hoc reviews 
may be conducted by risk management pursuant to FICC's internal market 
risk management procedures. On a quarterly basis, FICC reviews and 
identifies instances where the simulated losses from available 
historical stress testing scenario dates have exceeded the collateral 
haircut values. In addition, each quarter, FICC reviews the composition 
of the Eligible Clearing Fund Securities that members have

[[Page 68805]]

pledged to secure their Required Fund Deposits in order to assess the 
sufficiency of the collateral haircuts applied and whether any haircut 
changes would be needed.
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    \7\ See Schedule of Haircuts for Eligible Clearing Fund 
Securities in the GSD Rules and MBSD Rules, supra note 3. The 
Schedule of Haircuts for Eligible Clearing Fund Securities in the 
GSD Rules and MBSD Rules was last modified in 2011 in order to 
harmonize with the increased haircuts on clearing fund collaterals 
at the National Securities Clearing Corporation, an affiliate of 
FICC. See Securities Exchange Act Release No. 64488 (May 13, 2011), 
76 FR 29018 (May 19, 2011) (SR-FICC-2011-03).
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    In addition to collateral haircuts, FICC applies concentration 
limits to certain Eligible Clearing Fund Securities. Currently, the 
concentration limits applicable to certain Eligible Clearing Fund 
Securities are specified in GSD Rule 4, MBSD Rule 4, and the Schedule 
of Haircuts for Eligible Clearing Fund Securities in the GSD Rules and 
MBSD Rules. Specifically, Section 3b(b) of GSD Rule 4 and Section 3c(b) 
of MBSD Rule 4 each provides that no more than 20 percent of a member's 
Required Fund Deposit may be in the form of Eligible Clearing Fund 
Agency Securities that are of a single issuer and no member may post as 
eligible collateral Eligible Clearing Fund Agency Securities of which 
it is the issuer. In addition, the Schedule of Haircuts for Eligible 
Clearing Fund Securities in the GSD Rules and MBSD Rules provides (i) 
any deposits of Eligible Clearing Fund Agency Securities or Eligible 
Clearing Fund Mortgage-Backed Securities in excess of 25 percent of a 
member's Required Fund Deposit will be subject to a haircut that is 
twice the amount of the percentage noted in the haircut schedule and 
(ii) a member may deposit Eligible Clearing Fund Mortgage-Backed 
Securities of which it is the issuer, however such securities will be 
subject to a premium haircut, with the initial haircut being 14 
percent, and if a member also exceeds the 25 percent concentration 
limit, the haircut shall be 21 percent.
    Changes to the collateral haircuts and concentration limits are 
currently subject to FICC's internal governance process and would 
remain so with respect to the haircut schedule changes made in 
accordance with this proposal. If FICC determines that, based on the 
analyses that it performs, there is insufficient/excessive collateral 
haircut/concentration due to an identifiable cause that affected 
multiple members and such cause would likely persist based on FICC's 
assessment of market conditions, such outcome or result could cause 
FICC to amend the haircuts/concentration limits in the haircut 
schedule. If FICC determines that a change to the haircut schedule is 
warranted, its market risk group would document the recommendation and 
rationale for the change at the time of such determination and obtain 
approval from an executive director or above with a notice to the risk 
management committee, in accordance with FICC's internal market risk 
management policies and procedures. Before making adjustments to the 
haircut schedule, FICC measures the potential impact of such 
adjustments to ensure any impact is both necessary and appropriate.
    Through its review, FICC has observed that under volatile market 
conditions with elevated frequency and magnitude of securities price 
movements, the collateral value of Eligible Clearing Fund Securities 
may shift in a relatively short period of time and the current haircuts 
may not sufficiently account for the change in value. When the erosion 
in the value of the Eligible Clearing Fund Securities exceeds the 
relevant haircuts, FICC is exposed to increased risk of potential 
losses associated with liquidating a member's portfolio in the event of 
a member default when the defaulting member's own margin is 
insufficient to satisfy losses to FICC caused by the liquidation of 
that member's portfolio. Similarly, 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, such securities 
could present additional risk to FICC. The additional risk exposures 
associated with liquidating a member's portfolio in the event of a 
member default could lead to an increase in the likelihood that FICC 
would need to mutualize losses among non-defaulting members during the 
liquidation process. However, any changes to the haircuts and/or 
concentration limits currently requires a proposed rule change to be 
filed with the Commission. In order to provide FICC with more 
flexibility in adjusting the haircuts and concentration limits so FICC 
can respond to changing market conditions more promptly in order to 
mitigate the additional risk exposure, FICC is proposing to remove the 
GSD and MBSD Schedules of Haircuts for Eligible Clearing Fund 
Securities and concentration limits from the respective Rules, and to 
publish the haircuts and concentration limits in a haircut schedule on 
FICC's website.
    Specifically, FICC is proposing to delete subsections (a), (b) and 
(c) of Section 3b (Special Provisions Relating to Deposits of Eligible 
Clearing Fund Securities) in GSD Rule 4 and Section 3c (Special 
Provisions Relating to Deposits of Eligible Clearing Fund Securities) 
in MBSD Rule 4, respectively.
    Currently, subsections (a) and (c) of Section 3b in GSD Rule 4 and 
Section 3c in MBSD Rule 4, respectively, set out certain concentration 
limits for Eligible Clearing Fund Agency Securities and Eligible 
Clearing Fund Mortgage-Backed Securities. Subsection (a) provides that 
any deposits of Eligible Clearing Fund Agency Securities or Eligible 
Clearing Fund Mortgage-Backed Securities, respectively, in excess of 25 
percent of a member's Required Fund Deposit will be subject to an 
additional haircut equal to twice the percentage as specified in the 
haircut schedule. Subsection (c) provides that a member may post as 
eligible collateral Eligible Clearing Fund Mortgage-Backed Securities 
of which it is the issuer; however, such collateral will be subject to 
a premium haircut as specified in the haircut schedule. The same 
language from subsections (a) and (c) is also currently in the 
respective GSD and MBSD haircut schedules. Having this language in both 
the Rules and the proposed haircut schedules is unnecessary and could 
potentially create confusion for members. As such, FICC is proposing to 
eliminate this duplication by deleting subsections (a) and (c) from 
Section 3b in GSD Rule 4 and Section 3c in MBSD Rule 4, respectively, 
and including this language in the proposed haircut schedule.
    Subsection (b) of Section 3b in GSD Rule 4 and Section 3c in MBSD 
Rule 4, respectively, currently sets out an additional concentration 
limit with respect to Eligible Clearing Fund Agency Securities. 
Specifically, subsection (b) provides that no more than 20 percent of 
the Required Fund Deposit may be in the form of Eligible Clearing Fund 
Agency Securities that are of a single issuer and no member may post as 
eligible collateral Eligible Clearing Fund Agency Securities of which 
it is the issuer. FICC is proposing to delete the language in 
subsection (b) and move it to the proposed haircut schedule. For 
clarity, FICC is also proposing to revise the language in the proposed 
haircut schedule to provide that no more than 20 percent of a member's 
Required Fund Deposit may be secured by pledged Eligible Clearing Fund 
Agency Securities of a single issuer, and no member may pledge Eligible 
Clearing Fund Agency Securities of which it is the issuer to secure its 
Required Fund Deposit.
    Furthermore, FICC is proposing to add language in Section 3b in GSD 
Rule 4 and Section 3c in MBSD Rule 4, respectively, that makes it clear 
that all Eligible Clearing Fund Securities pledged to secure Clearing 
Fund deposits shall, for collateral valuation purposes, be subject to a 
haircut and may be subject to a concentration limit. The proposed 
language would provide that FICC shall determine the applicable 
haircuts and any concentration limits from time to time in accordance 
with its internal policy and governance process,

[[Page 68806]]

based on factors determined to be relevant by FICC, which may include, 
for example, backtesting results and FICC's assessment of market 
conditions, in order to set appropriately conservative haircuts and/or 
concentration limits for the Eligible Clearing Fund Securities and 
minimize backtesting deficiency occurrences. The proposed language 
would also provide that the haircuts and any concentration limits 
prescribed by FICC shall be set forth in a haircut schedule that is 
published on FICC's website. Furthermore, the proposed language would 
make it clear that it shall be the member's responsibility to retrieve 
the haircut schedule, and FICC would provide members with at a minimum 
one Business Day's advance notice of any change in the haircut 
schedule.
    Lastly, FICC is proposing to delete a sentence from Section 3b in 
GSD Rule 4 and Section 3c in MBSD Rule 4, respectively, that references 
haircuts set forth in the Rules, and add a general reference to 
applicable haircuts so that it is clear to members that the valuation 
of Eligible Clearing Fund Securities is subject to applicable haircuts.
    FICC believes that the proposed change to move the haircuts and 
concentration limits from the Rules to the website would enable FICC to 
adjust the haircuts and concentration limits without undergoing a rule 
filing process.\8\ By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, FICC would have 
the flexibility to respond to changing market conditions more promptly. 
Having the flexibility to respond to changing market conditions more 
promptly would in turn help better ensure that FICC collects sufficient 
margin from members as well as risk manages its credit exposures to its 
members. The proposed change would also align FICC with the manner in 
which its affiliate, The Depository Trust Company (``DTC''), provides 
haircut schedules to participants.\9\
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    \8\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature 
or level of risks presented by FICC, then FICC is required to file 
an advance notice. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
    \9\ DTC also allows its participants to pledge eligible 
collateral as a portion of the participant fund; however, instead of 
being in the DTC rulebook, the collateral haircut schedules are 
published periodically by Important Notice to DTC participants.
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    Concurrent with moving the haircuts and concentration limits from 
the Rules to the website, FICC is also proposing to reconfigure the 
categories relating to Treasury securities haircuts by moving the 
Treasury Inflation-Protected Securities (``TIPS'') to a separate 
category and increasing the haircut levels for TIPS. The proposed 
change to TIPS is reflected in Exhibit 3c to this filing. TIPS are a 
type of Treasury security issued by the U.S. government that are 
indexed to inflation such that the principal value of the security 
rises as inflation rises.
    In connection with FICC's assessments of its collateral haircuts, 
FICC employs daily backtesting to determine the adequacy of each 
member's collateral haircuts. FICC compares the collateral haircuts for 
each member with the simulated liquidation gains/losses using the 
actual positions in the member's portfolio, and the actual historical 
security returns. A backtesting deficiency occurs when a member's 
collateral haircuts would not have been adequate to cover the simulated 
liquidation losses.
    In connection with such assessments, FICC has determined that in 
periods where the inflation rate fluctuates, the current haircut levels 
for TIPS have been inadequate to address the fluctuations from time to 
time. This is because TIPS are indexed to the inflation rate, and 
prices on TIPS move inversely to their yields, e.g., when the inflation 
rate increases, prices on TIPS decrease. When the decline in market 
value of TIPS exceeds the haircut for TIPS, FICC would be exposed to 
potential liquidation losses. Specifically, during the period from 
September 1, 2021 to August 31, 2022, with TIPS comprising less than 10 
percent of the total collateral value across the GSD and MBSD divisions 
at FICC, FICC has observed 29 backtesting deficiencies at FICC,\10\ 26 
at GSD and 3 at MBSD, where the collateral value that FICC attributed 
to the TIPS that were posted by members as margin (inclusive of the 
applicable current haircuts) was insufficient to cover the liquidation 
of such securities by FICC without incurring a loss. Accordingly, FICC 
is proposing to reconfigure and modify the haircut information that 
would be posted on FICC's website to ensure that the haircut levels 
would be commensurate with the particular risk attributes of TIPS.
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    \10\ The 29 backtesting deficiencies represent a sum total of 
approximately $9.4 million across four days during the impact study 
period, less than 0.1% of the total collateral value at FICC on each 
of those days.
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    Specifically, FICC would list TIPS of various maturity groupings in 
a separate category from Treasury bills, notes and bonds. In addition, 
FICC would change the haircut level applicable for TIPS as follows:

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                                                            Maturity                 Current %      Proposed %
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TIPS..........................................  Zero to 1 year..................             2.0             2.0
                                                1 year to 2 years...............             2.0             3.0
                                                2 years to 5 years..............             3.0             5.0
                                                5 years to 10 years.............             4.0             7.0
                                                10 years to 15 years............             6.0             7.0
                                                15 years or greater.............             6.0            10.0
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    In determining the appropriate haircut levels for TIPS, FICC 
conducted a review of TIPS haircuts at other registered clearing 
agencies and foreign central counterparty clearing houses (``CCPs'') to 
compare FICC's current TIPS haircuts with that required by registered 
clearing agencies and foreign CCPs when TIPS are deposited to their 
clearing funds, or the equivalent thereof. The results of the review 
and comparison indicated that FICC's current haircut levels for TIPS 
are generally lower than the TIPS haircuts required by other clearing 
agencies and foreign CCPs, particularly with respect to maturity ranges 
of 10 years or longer. While the TIPS haircut requirement at such other 
entities is not dispositive as to the risk borne by FICC or the proper 
TIPS haircut levels to offset such risk, it is indicative of the TIPS 
haircuts being applied to users of other similarly situated entities in 
order to use the services of the clearing agencies and foreign CCPs and 
the impact to such users. The chart below shows the haircut that 
participants of other clearing agencies and foreign CCPs are currently 
subject to when using TIPS to

[[Page 68807]]

meet their margin requirements, as compared with the existing TIPS 
haircut required at FICC.
[GRAPHIC] [TIFF OMITTED] TN04OC23.014

    FICC is not proposing any changes to the concentration limits at 
this time.
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    \11\ See ICE Clear U.S. Acceptable Collateral and Haircuts, 
available at www.theice.com/publicdocs/clear_us/ICUS_Collateral_Information.pdf.
    \12\ See LCH LTD-Margin Collateral Haircut Schedule, available 
at www.lch.com/system/files/media_root/Collateral/Acceptable%20Collateral%20Haircuts%20LCH%20Ltd_0.pdf.
    \13\ See CME Group Acceptable Performance Bond Collateral for 
Base Guaranty Fund Products, available at www.cmegroup.com/clearing/files/acceptable-collateral-futures-options-select-forwards.pdf.
    \14\ See OCC Collateral Haircut Schedule, available at 
www.theocc.com/clearance-and-settlement/acceptable-collateral-haircuts.
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Impact Study
    FICC conducted an impact study for the period from September 1, 
2021 through August 31, 2022 (``Impact Study''). The results of the 
Impact Study indicate that, if the haircut changes for TIPS had been in 
place, all 29 backtesting deficiencies would have been eliminated.
    If the proposed haircut adjustments had been in place during the 
Impact Study period, the changes would have resulted in an aggregate 
average daily increase for all members of $40.75 million (approximately 
0.15%) in the Clearing Fund for GSD and an aggregate average daily 
increase of $16.60 million (approximately 0.14%) in the Clearing Fund 
for MBSD. The three largest daily average dollar increases to GSD 
Members would be $11.1 million (approximately 0.91%), $8.3 million 
(approximately 1.07%) and $4.3 million (approximately 1.26%). The three 
largest daily average percentage increases for GSD Members would be 
1.78%, 1.76% and 1.29%. The three largest daily average dollar 
increases to MBSD would be $4.08 million (approximately 0.30%), $4.04 
million (approximately 0.46%) and $3.99 million (approximately 0.51%). 
The three largest daily average percentage increases for MBSD Members 
would be 1.35%, 0.71% and 0.51%. During the Impact Study period, 33 of 
132 GSD Members and 11 of 80 MBSD Members would have experienced an 
increase in their respective Clearing Fund deposits had the proposed 
changes been in place.
Implementation Timeframe
    Subject to approval by the Commission, FICC expects to implement 
this proposal by no later than 60 Business Days after such approval and 
would announce the effective date of the proposed changes by an 
Important Notice posted to FICC's website.
2. Statutory Basis
    FICC believes this proposal is consistent with the requirements of 
the Act, and the rules and regulations thereunder applicable to a 
registered clearing agency. Specifically, FICC believes that the 
proposed changes described above are consistent with Section 
17A(b)(3)(F) of the Act,\15\ and Rules 17Ad-22(e)(4)(i), (e)(5), 
(e)(6)(i), and (e)(6)(v), each promulgated under the Act,\16\ for the 
reasons described below.
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(5), (e)(6)(i), and 
(e)(6)(v).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\17\ As 
described above, FICC believes the proposed changes to move the 
collateral haircuts and concentration limits from the Rules to the 
website would provide FICC with more flexibility to respond to changing 
market conditions because adjustments to the haircuts and concentration 
limits would no longer require a rule change. By being able to make 
appropriate and timely adjustments to the haircuts and concentration 
limits, FICC would have the flexibility to respond to changing market 
conditions more promptly. FICC believes that having this additional 
flexibility to respond to changing market conditions more promptly 
would help better ensure that FICC (i) collects sufficient margin from 
members to cover the risk exposures that FICC may face in liquidating 
members' portfolios and (ii) minimizes exposures from members with 
large collateral positions in a particular group of securities with a 
similar risk profile or in a particular asset type, such that, in the 
event of a member default, FICC's

[[Page 68808]]

operations would not be disrupted, and non-defaulting members would not 
be exposed to losses they cannot anticipate or control. In this way, 
the proposed rule change to move the collateral haircuts and 
concentration limits from the Rules to the website would assure the 
safeguarding of securities and funds which are in the custody and 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\18\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ Id.
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    FICC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. FICC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS have been inadequate to address the fluctuations from time to 
time, and more conservative haircuts for TIPS are warranted. Having 
haircut levels for TIPS that are commensurate with the particular risk 
attributes of TIPS would enable FICC to collect sufficient margin from 
members to cover the risk exposures that FICC may face in liquidating 
members' portfolios 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. In this way, 
the proposed rule change to move TIPS haircuts into a separate category 
and raise the haircut levels for TIPS would assure the safeguarding of 
securities and funds which are in the custody and control of FICC or 
for which it is responsible, consistent with Section 17A(b)(3)(F) of 
the Act.\19\
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    \19\ Id.
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    FICC believes that the proposed clarifying changes would help to 
ensure that the Rules are clear to members. When members better 
understand their rights and obligations regarding the Rules, members 
are more likely to act in accordance with the Rules, which FICC 
believes would promote the prompt and accurate clearance and settlement 
of securities transactions. As such, FICC believes that the proposed 
clarifying changes would be consistent with Section 17A(b)(3)(F) of the 
Act.\20\
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    \20\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act \21\ requires a covered 
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. As described above, FICC believes the proposed changes to 
move the collateral haircuts and concentration limits from the Rules to 
the website would provide FICC with more flexibility to respond to 
changing market conditions because adjustments to the haircuts and 
concentration limits would no longer require a rule change. By being 
able to make appropriate and timely adjustments to the haircuts and 
concentration limits, FICC would have the flexibility to respond to 
changing market conditions more promptly. FICC believes that having 
this additional flexibility to respond to changing market conditions 
more promptly would help ensure that FICC (i) collects sufficient 
margin from members to cover the risk exposures that FICC may face in 
liquidating members' portfolios and (ii) minimizes exposures from 
members with large collateral positions in a particular group of 
securities with a similar risk profile or in a particular asset type, 
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. In this way, the proposed 
rule change to move the collateral haircuts and concentration limits 
from the Rules to the website would help ensure that FICC maintains 
sufficient financial resources to cover its credit exposure to each 
participant fully with a high degree of confidence, consistent with the 
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\22\
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    \21\ 17 CFR 240.17Ad-22(e)(4)(i).
    \22\ Id.
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    FICC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. FICC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS have been inadequate to address the fluctuations from time to time 
and more conservative haircuts for TIPS are warranted. Ensuring that 
the haircut levels for TIPS are commensurate with the particular risk 
attributes of TIPS would in turn help ensure that FICC requires members 
to maintain sufficient margin to cover the credit exposures that FICC 
may face related to its ability to liquidate members' portfolios in the 
event of a member default. In this way, the proposed rule change to 
move TIPS haircuts into a separate category and raise the haircut 
levels for TIPS would help ensure that FICC maintains sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence, consistent with the 
requirements of Rule 17Ad-22(e)(4)(i) under the Act.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(5) under the Act \24\ requires, in part, a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to set and enforce 
appropriately conservative haircuts and concentration limits if the 
covered clearing agency requires collateral to manage its or its 
participants' credit exposure. As described above, FICC believes the 
proposed changes to move the collateral haircuts and concentration 
limits from the Rules to the website would provide FICC with more 
flexibility to respond to changing market conditions because 
adjustments to the haircuts and concentration limits would no longer 
require a rule change. By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, FICC would have 
the flexibility to respond to changing market conditions more promptly. 
FICC believes that having this additional flexibility to respond to 
changing market conditions more promptly would help better ensure that 
FICC (i) collects sufficient margin from members to cover the risk 
exposures that FICC may face in liquidating members' portfolios and 
(ii) minimizes exposures from members with large collateral positions 
in a particular group of securities with a similar risk profile or in a 
particular asset type, 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. 
Specifically, FICC would have the ability to promptly set and enforce 
conservative collateral haircuts and concentration limits that are 
reflective of the current market conditions. In this way, the proposed 
changes to move the collateral haircuts and concentration limits from 
the Rules to the website would help FICC set and enforce appropriately 
conservative collateral haircuts and concentration limits, consistent 
with the requirements of Rule 17Ad-22(e)(5) under the Act.\25\
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(e)(5).
    \25\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut

[[Page 68809]]

levels for TIPS would help ensure that the haircut levels for TIPS 
would be commensurate with the particular risk attributes of TIPS. FICC 
has determined that in periods where the inflation rate fluctuates, the 
current haircut levels for TIPS have been inadequate to address the 
fluctuations from time to time and more conservative haircuts for TIPS 
are warranted. Specifically, FICC would have the ability to set and 
enforce conservative collateral haircuts that are commensurate with the 
particular risk attributes of TIPS. In this way, the proposed changes 
to move TIPS haircuts into a separate category and raise the haircut 
levels for TIPS would help FICC set and enforce appropriately 
conservative collateral haircuts, consistent with the requirements of 
Rule 17Ad-22(e)(5) under the Act.\26\
---------------------------------------------------------------------------

    \26\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act \27\ requires a covered 
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. FICC believes that the proposed changes 
to move the collateral haircuts and concentration limits from the Rules 
to the website would provide FICC with more flexibility to respond to 
changing market conditions because FICC would be able to make 
appropriate adjustments to the haircuts and concentration limits 
without a rule change. By being able to make appropriate and timely 
adjustments to the haircuts and concentration limits, FICC would have 
the flexibility to respond to changing market conditions more promptly. 
FICC believes that having this additional flexibility to respond to 
changing market conditions more promptly would enable FICC to better 
risk manage its credit exposure to its members by (i) collecting 
sufficient margin from members to cover the risk exposures that FICC 
may face in liquidating members' portfolios and (ii) minimizing 
exposures from members with large collateral positions in a particular 
group of securities with a similar risk profile or in a particular 
asset type, thus allowing FICC to produce margin levels commensurate 
with the risks and particular attributes of each relevant product, 
portfolio, and market. Therefore, FICC believes this proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\28\
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(6)(i).
    \28\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. FICC has determined that in periods 
where the inflation rate fluctuates, the current haircut levels for 
TIPS have been inadequate to address the fluctuations from time to time 
and more conservative haircuts for TIPS are warranted. Ensuring that 
the haircut levels for TIPS are commensurate with the particular risk 
attributes of TIPS would allow FICC to produce margin levels 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market. Therefore, FICC believes this proposed 
change is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\29\
---------------------------------------------------------------------------

    \29\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(v) under the Act \30\ requires a covered 
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. FICC believes that the proposed 
changes to move the collateral haircuts and concentration limits from 
the Rules to the website would provide FICC with more flexibility to 
respond to changing market conditions more promptly because FICC would 
be able to make appropriate adjustments to the haircuts and 
concentration limits without a rule change. Having this additional 
flexibility would enable FICC to better risk manage its credit exposure 
to its members because FICC would then be able to make appropriate and 
timely adjustments to the haircuts and concentration limits, as 
described above. Being able to adjust the haircuts and concentration 
limits appropriately and timely would allow FICC to better risk manage 
its credit exposure to its members by (i) collecting sufficient margin 
from members to cover the risk exposures that FICC may face in 
liquidating members' portfolios and (ii) minimizing exposures from 
members with large collateral positions in a particular group of 
securities with a similar risk profile or in a particular asset type, 
thus producing margin levels commensurate with relevant product risk 
factors and portfolio effects across products. Therefore, FICC believes 
this proposed change is consistent with Rule 17Ad-22(e)(6)(v) under the 
Act.\31\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(e)(6)(v).
    \31\ Id.
---------------------------------------------------------------------------

    FICC also believes the proposed changes to move TIPS haircuts into 
a separate category and raise the haircut levels for TIPS would help 
ensure that the haircut levels for TIPS would be commensurate with the 
particular risk attributes of TIPS. Specifically, as proposed, FICC 
would have collateral haircuts that are commensurate with the 
particular risk attributes of TIPS. Ensuring that the haircut levels 
for TIPS are commensurate with the particular risk attributes of TIPS 
would allow FICC to produce margin levels commensurate with relevant 
product risk factors and portfolio effects across products. Therefore, 
FICC believes this proposed change is consistent with Rule 17Ad-
22(e)(6)(v) under the Act.\32\
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    Section 17A(b)(3)(I) of the Act requires that the rules of FICC do 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.\33\ FICC does not believe the 
proposed rule changes to move the haircuts and concentration limits 
from the Rules to the website would impose a burden on competition. 
These proposed changes are designed to enable FICC to timely respond to 
increases in market volatility with haircut requirements and 
concentration limits that are more reflective of the current credit 
exposures to FICC. As discussed above, these proposed changes would 
allow FICC to better risk manage its credit exposure to its members by 
(i) collecting sufficient margin from members to cover the risk 
exposures that FICC may face in liquidating members' portfolios and 
(ii) minimizing exposures from members with large collateral positions 
in a particular group of securities with a similar risk profile or in a 
particular asset type, 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. These 
proposed changes would not unfairly inhibit access to FICC's services, 
or disadvantage or favor any particular member in relationship to 
another member. The proposed changes would allow FICC to adjust the 
haircuts

[[Page 68810]]

and concentration limits more promptly and would not otherwise affect 
members' access to FICC's services. In addition, any changes to the 
haircuts or concentration limits would be directly related to the 
perceived risk related to members' collateral based on back-tests, 
stress-tests and market observations, and would be applied uniformly to 
all members. Accordingly, FICC believes that these proposed changes 
would not impose any burden or have any impact on competition.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Similarly, FICC does not believe the proposed rule changes to move 
TIPS haircuts into a separate category would impose a burden on 
competition. These proposed changes are designed to improve the clarity 
and presentation of the haircut information. These proposed changes 
would not unfairly inhibit access to FICC's services or disadvantage or 
favor any particular member in relationship to another member, and the 
changes would be applied uniformly to all members. Accordingly, FICC 
believes that these proposed changes would not impose any burden or 
have any impact on competition.
    FICC believes the proposed changes to raise certain TIPS haircut 
levels may have an impact on competition because these changes could 
result in members' Eligible Clearing Fund Securities being subject to 
higher haircuts than they would have been under the current GSD and 
MBSD Schedules of Haircuts for Eligible Clearing Fund Securities. FICC 
believes that the proposed change could burden competition by 
potentially increasing these members' operating costs by requiring 
members who are using TIPS as collateral to pledge additional 
collateral. Nonetheless, FICC believes any burden on competition 
imposed by the proposed changes would not be significant and, 
regardless of whether such burden on competition could be deemed 
significant, would be necessary and appropriate, as permitted by 
Section 17A(b)(3)(I) of the Act for the reasons described in this 
filing and further below.\34\
---------------------------------------------------------------------------

    \34\ Id.
---------------------------------------------------------------------------

    FICC believes any burden on competition presented by the proposed 
changes to the TIPS haircut levels would not be significant. As 
discussed above, if the proposed changes to the TIPS haircut levels had 
been in place during the Impact Study period, the three largest daily 
average dollar increases to GSD Members would have been $11.1 million 
(approximately 0.91%), $8.3 million (approximately 1.07%), and $4.3 
million (approximately 1.26%); and the three largest daily average 
dollar increases to MBSD Members would have been $4.08 million 
(approximately 0.30%), $4.04 million (approximately 0.46%), and $3.99 
million (approximately 0.51%). In addition, FICC believes that the 
proposed changes to the TIPS haircut levels are comparable with what is 
being required of users of other similar registered clearing agencies 
and foreign CCPs when posting TIPS as collateral.
    FICC believes any burden on competition that may be imposed by the 
proposed changes to the TIPS haircut levels would be necessary because, 
as described above, the proposed changes would help ensure that the 
collateral values attributed to TIPS would be commensurate with the 
particular risk attributes of TIPS. Making sure proper collateral 
values are attributed to TIPS that are used as margin would thus help 
better ensure that FICC collects sufficient margin from members and 
thereby assure the safeguarding of securities and funds which are in 
the custody and control of FICC or for which it is responsible, 
consistent with Section 17A(b)(3)(F) of the Act.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, FICC believes the proposed changes to the TIPS haircut 
levels are necessary to support FICC's compliance with Rules 17Ad-
22(e)(4)(i), (e)(5), (e)(6)(i), and (e)(6)(v) under the Act. 
Specifically, as described above, FICC believes these proposed changes 
would ensure that the haircut levels for TIPS are commensurate with the 
particular risk attributes of TIPS. Having haircut levels for TIPS that 
are commensurate with the particular risk attributes of TIPS would 
ensure proper collateral valuation for TIPS used as margin. Ensuring 
proper collateral valuation for TIPS used as margin would help FICC 
better measure, monitor, and manage its credit exposures to 
participants and those exposures arising from its payment, clearing, 
and settlement processes, consistent with the requirements of Rule 
17Ad-22(e)(4)(i) under the Act.\36\ Ensuring proper collateral 
valuation for TIPS used as margin would also allow FICC to set and 
enforce appropriately conservative collateral haircuts, consistent with 
the requirements of Rule 17Ad-22(e)(5) under the Act.\37\ It would also 
help FICC cover its credit exposures to its participants, consistent 
with the requirements of Rules 17Ad-22(e)(6)(i) and (e)(6)(v) under the 
Act.\38\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(e)(4)(i).
    \37\ 17 CFR 240.17Ad-22(e)(5).
    \38\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------

    FICC also believes that any burden on competition that may be 
imposed by the proposed changes to the TIPS haircut levels would be 
appropriate in furtherance of the Act because these proposed changes 
have been specifically designed to assure the safeguarding of 
securities and funds which are in the custody and control of FICC or 
for which it is responsible, as required by Section 17A(b)(3)(F) of the 
Act.\39\ As described above, FICC believes these proposed changes would 
help better ensure that FICC collects sufficient margin from members, 
thus enabling FICC to produce margin levels more commensurate with the 
risks it faces as a central counterparty. Accordingly, FICC believes 
these proposed changes are appropriately designed to meet its risk 
management goals and regulatory obligations.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC does not believe the proposed clarifying changes to the Rules 
would impact competition. These changes would help to ensure that the 
Rules remain clear. In addition, the changes would facilitate members' 
understanding of the Rules and their obligations thereunder. These 
changes would not affect FICC's operations or the rights and 
obligations of the membership. As such, FICC believes the proposed 
clarifying changes would not have any impact on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC has not received or solicited any written comments relating to 
this proposal. If any additional written comments are received, they 
will be publicly filed as an Exhibit 2 to this filing, as required by 
Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
SEC's Division of Trading and Markets at

[[Page 68811]]

[email protected] or 202-551-5777.
    FICC reserves the right to not respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FICC-2023-014 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2023-014. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(dtcc.com/legal/sec-rule-filings). Do not include personal identifiable 
information in submissions; you should submit only information that you 
wish to make available publicly. We may redact in part or withhold 
entirely from publication submitted material that is obscene or subject 
to copyright protection. All submissions should refer to File Number 
SR-FICC-2023-014 and should be submitted on or before October 25, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
---------------------------------------------------------------------------

    \40\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21938 Filed 10-3-23; 8:45 am]
BILLING CODE 8011-01-P