Document ID: SEC-2022-1413-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2022-10-28T04:00Z

[Federal Register Volume 87, Number 208 (Friday, October 28, 2022)]
[Notices]
[Pages 65268-65271]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-23482]

[[Page 65268]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96136; File No. SR-FICC-2022-006]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Approval of Proposed Rule Change To Increase the Minimum 
Required Fund Deposit for Government Securities Division Netting 
Members and Sponsoring Members, and Make Other Changes

October 24, 2022.

I. Introduction

    On September 9, 2021, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2022-006 (the ``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 increase the minimum 
Required Fund Deposit for members of FICC's Government Securities 
Division (``GSD'') \3\ members, as well as make certain clarifying and 
technical changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ FICC operates two divisions, GSD and the Mortgage Backed 
Securities Division (``MBSD''). GSD provides trade comparison, 
netting, risk management, settlement, and central counterparty 
(``CCP'') services for the U.S. Government securities market, 
including repos. MBSD provides the same services for the U.S. 
mortgage-backed securities market. GSD and MBSD maintain separate 
sets of rules, margin models, and clearing funds. The proposed rule 
change relates solely to GSD, except as discussed in section II.B at 
note 19 infra.
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    The Proposed Rule Change was published for comment in the Federal 
Register on September 22, 2022,\4\ and the Commission has received no 
comments on the changes proposed therein. This order approves the 
Proposed Rule Change.
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    \4\ Securities Exchange Act Release No. 95806 (Sept. 16, 2022), 
87 FR 57960 (Sept. 22, 2022) (File No. SR-FICC-2022-006) (``Notice 
of Filing'').
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II. Description of the Proposed Rule Change

    Currently, FICC requires from each Netting Member a minimum 
required margin amount, referred to as the Required Fund Deposit, of 
$100,000 that must be made and maintained in cash, and does not require 
any specific minimum amount for Sponsoring Members.\5\ FICC proposes to 
increase each member's minimum Required Fund Deposit amount to 
$1,000,000.
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    \5\ Rule 4, section 3 (for Netting Members) and Rule 3A, section 
10(c) (for Sponsoring Members). Capitalized terms not defined herein 
are defined in the GSD Rules & Procedures (``Rules''), available at 
https://www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf. For purposes of this order, ``member'' will be 
used to describe Netting Members and Sponsoring Members, 
collectively.
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A. Background

    A key tool that FICC uses to manage its respective credit exposures 
to its members is the daily collection of margin from each member, 
which is referred to as each member's Required Fund Deposit. The 
aggregated amount of all members' margin constitutes the Clearing Fund, 
which FICC would access should a defaulted member's own margin be 
insufficient to satisfy losses to FICC caused by the liquidation of 
that member's portfolio.
    FICC conducts daily backtesting to evaluate whether each member's 
Required Fund Deposit is sufficient to cover FICC's credit exposures to 
that member based on a simulated liquidation of the member's portfolio 
on that day.\6\ Backtesting is an ex-post comparison of actual outcomes 
with expected outcomes derived from the use of margin models.\7\ A 
backtesting deficiency occurs when FICC determines that the projected 
liquidation losses to FICC arising in the event of a member's default 
would be greater than the member's Required Fund Deposit.\8\ Therefore, 
backtesting deficiencies highlight exposure that could subject FICC to 
potential losses under normal market conditions in the event that a 
member defaults.\9\
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    \6\ The Model Risk Management Framework (``Model Risk Management 
Framework'') sets forth the model risk management practices of FICC 
and states that Value at Risk (``VaR'') and Clearing Fund 
requirement coverage backtesting is performed on a daily basis or 
more frequently. See Securities Exchange Act Release Nos. 81485 
(Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-014), 
84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-2018-
010), 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-FICC-
2020-004), 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (SR-
FICC-2021-006), and 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24, 
2022) (SR-FICC-2022-001).
    \7\ See 17 CFR 240.17Ad-22(a)(1).
    \8\ See Notice of Filing, supra note 4, at 57691.
    \9\ Id.
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    FICC regularly reviews backtesting results to assess the 
effectiveness of its margin requirements.\10\ As part of its review, 
FICC investigates the causes of any backtesting deficiencies, paying 
particular attention to repeat backtesting deficiencies that would 
result in the member's backtesting coverage to fall below the 99% 
confidence target to determine if there is an identifiable cause of 
repeat backtesting deficiencies.\11\ FICC also evaluates whether 
multiple members may experience backtesting deficiencies for the same 
underlying reason.\12\
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    \10\ Id.
    \11\ FICC states that a member's backtesting coverage would fall 
below the 99% confidence target if the member has more than two 
backtesting deficiency days in a rolling twelve-month period. Id. In 
other words, if a member has three or more backtesting deficiency 
days during a twelve-month period, then the member's margin would 
not be sufficient 99% of the time. FICC believes that its targeted 
99% confidence level is consistent with its regulatory requirements 
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii). Id.; see also 17 CFR 
240.17Ad-22 (e)(4)(i), and (e)(6)(iii).
    \12\ See Notice of Filing, supra note 4, at 57961.
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    Based on its regular reviews, FICC has found that members with 
Required Fund Deposits below $100,000 disproportionately experience 
repeat backtesting deficiencies because, should the member's settlement 
activity abruptly increase, the additional exposure to FICC would not 
be mitigated until the collection of the Required Fund Deposit either 
intraday or on the next business day.\13\ FICC states it has also found 
that its current minimum margin requirement of $100,000 is 
disproportionately lower than the minimum margin requirements of other 
CCPs that clear similar securities products.\14\
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    \13\ Id. at 57961-62.
    \14\ See Notice of Filing, supra note 4, at 57962 (citing the 
following requirements: the Options Clearing Corporation's (``OCC'') 
minimum initial contribution of $500,000, see OCC Rule 1002(d), 
available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf; the Chicago Mercantile Exchange's 
(``CME'') minimum requirement of $500,000 or $2.5 million depending 
on the product types being cleared, see CME Rule 816, available at 
https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/8/8.pdf; the National Securities Clearing Corporation's (``NSCC'') 
minimum required fund deposit of $250,000, see NSCC Rule 4, 
available at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf.; LCH Limited's minimum default fund contribution of 
GBP 500,000 (approximately $566,000 based on current foreign 
currency exchange rate) and of GBP 2,000,000 (approximately $2.3 
million based on the current foreign currency exchange rate) for 
RepoClear, see LCH Limited Default Rules definition of ``Minimum 
Contribution'' and ``Minimum RepoClear Contribution'' available at 
https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf; and Ice Clear U.S.'s minimum 
contribution to Guaranty Fund of $2 million, see ICE Clear U.S. Rule 
301, available at https://www.ice.com/publicdocs/rulebooks/clear/ICE_Clear_US_Rules.pdf).
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B. Proposal

    In the Proposed Rule Change, FICC proposes to increase its minimum 
Required Fund Deposit for its members to $1,000,000.
    Specifically, to implement this change for Netting Members, FICC 
would revise Section 2(a) of Rule 4 to state that each Netting Member 
shall be required to make a Required Fund Deposit to the Clearing Fund 
equal to the greater of (i) the Minimum Charge or (ii) the Total 
Amount. FICC would also revise section 3 of GSD Rule 4 to replace the 
minimum cash amount from $100,000 to $1 million, to match the proposed

[[Page 65269]]

increased minimum Required Fund Deposit amount. To implement this 
change for Sponsoring Members, FICC would revise section 10(c) of Rule 
3A (Sponsoring Members and Sponsored Members) to state that the 
Sponsoring Member Omnibus Account Required Fund Deposit shall be equal 
to the greater of: (i) $1 million or (ii), which is what is currently 
in the Rules, the sum of the following: (1) the sum of the VaR Charges 
\15\ for all of the Sponsored Members whose activity is represented in 
the Sponsoring Member Omnibus Account as derived pursuant to, and (2) 
all amounts representing other components of the Sponsoring Member's 
Required Fund Deposit computed at the level of the Sponsoring Member 
Omnibus Account, other than the VaR Charge. In addition, Section 10(d) 
of Rule 3A would be revised to replace the minimum cash amount from 
$100,000 to $1 million to match the proposed increased minimum Required 
Fund Deposit amount for the Sponsoring Members.\16\
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    \15\ For Sponsoring Member's the VaR Charge is determined 
pursuant to Section 1b(a)(i) of GSD Rule 4 (Clearing Fund and Loss 
Allocation). The VaR Charge is generally the largest component of 
the Required Fund Deposit. It is designed to provide an estimate of 
FICC's projected liquidation losses with respect to a defaulted 
member's portfolio at a 99 percent confidence level, and it is based 
on the potential price volatility of unsettled positions using a 
sensitivity-based Value-at-Risk model. As an alternative to this 
calculation, FICC also uses a haircut-based calculation as the 
member's VaR Charge if that charge exceeds the amount determined by 
the model-based calculation. Fixed Income Clearing Corporation 
Disclosure Framework for Covered Clearing Agencies and Financial 
Market Infrastructures, at 64, available at https://www.dtcc.com/media/Files/Downloads/legal/policy-and-compliance/FICC_Disclosure_Framework.pdf; see also Exchange Act Release No. 
92303 (June 30, 2021), 86 FR 35855 (July 7, 2021).
    \16\ See Notice of Filing, supra note 4, at 57963.
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    For Repo Brokers, FICC would not propose to change the current 
minimum Required Fund Deposit of $5 million.\17\ However, for clarity, 
FICC would propose to move the minimum Required Fund Deposit to a 
different section of the Rules, to improve organization.\18\
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    \17\ Rule 4, section 1b, supra note 5. Currently, if a Repo 
Broker has two Margin Portfolios, with Broker Account(s) in one 
Margin Portfolio and Dealer Account(s) in the other Margin 
Portfolio, the total minimum Required Fund Deposit applicable to the 
Repo Broker would be $5.1 million, i.e., $5 million minimum Required 
Fund Deposit for the Margin Portfolio with Broker Account(s) and 
$100,000 minimum Required Fund Deposit for the Margin Portfolio with 
Dealer Account(s).
    \18\ FICC would also make revisions to state that the Minimum 
Charge applicable to each Repo Broker shall be no less than $5 
million for each Margin Portfolio with Broker Account(s) and no less 
than $1 million for each Margin Portfolio with Dealer Account(s), 
and to refer to additional payments, charges and premiums being 
applied by FICC after application of Minimum Charges, which term 
replaces the current term ``minimum Clearing Fund amounts.''
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    Finally, FICC proposes to add a sentence to Section 2 of MBSD Rule 
4, which addresses required clearing fund deposits, to make clear that, 
as is currently the case due to other portions of the rule, the Minimum 
Charge for each margin portfolio of a Clearing Member shall be no less 
than $100,000.\19\ FICC also proposes to replace (i) ``Clearing Fund 
requirement'' with ``Minimum Charge for each margin portfolio'' and 
(ii) ``minimum Clearing Fund amounts'' with ``Minimum Charges'' in MBSD 
Rule 4, section 2, which FICC believes will enhance clarity. 
Furthermore, FICC is proposing a technical change to correct a 
reference to the non-Unregistered Investment Pool Clearing Member in 
MBSD Rule 4, section 2.
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    \19\ Specifically, Rule 4, section 3 of the MBSD Rules, which 
addresses the form of a member's required fund deposit, states that 
a member must make deposit the lesser of $5,000,000 or 10 percent of 
its required fund deposit, with a minimum of $100,000, in cash. The 
MBSD Rules are available at https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf (``MBSD Rules'').
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C. Impact Study Results

    To support its proposal, FICC relies upon the results of recent 
analyses of backtesting and margin.\20\ Specifically, FICC examines the 
backtesting coverage of each of its members during the period for a 12-
month period ending June 30, 2022 (``Backtesting Impact Study'') under 
the current $100,000 minimum GSD Required Fund Deposit amount compared 
to hypothetical (or ``pro forma'') minimum GSD Required Fund Deposit 
amounts, including the proposed $1,000,000 amount. The Backtesting 
Impact Study shows that the number of member backtesting deficiencies 
that would have been eliminated during the period had FICC's minimum 
GSD Required Fund Deposit been $1,000,000 compared to $100,000. FICC 
then uses the Backtesting Impact Study to analyze the improvement to 
each member's backtesting coverage ratio and, taking all members' 
backtesting coverage ratio results together, to FICC's Clearing Fund 
backtesting coverage.\21\
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    \20\ FICC provided a public summary of the information in this 
Section II.B in its Notice of Filing, upon which this discussion is 
based. See Notice of Filing, supra note 4, at 57962-3. FICC 
submitted the data underlying these analyses as a confidential 
Exhibit 3 to the Proposed Rule Change pursuant to 17 CFR 240.24b-2.
    \21\ The backtesting coverage represents the daily sufficiency 
of the aggregate of all members' margin over a rolling 12-month 
period. As described in Section II.A above, FICC would be able to 
access its clearing fund to cover any losses to it should a member 
with insufficient margin default. GSD Rule 4, Section 3, supra note 
3.
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    According to FICC, the Backtesting Impact Study indicates that 
using $1 million as GSD's minimum Required Fund Deposit amount would 
have reduced the number of members with backtesting coverage below 99%. 
Specifically, the Backtesting Impact Study shows 70 members below 99% 
backtesting coverage as of June 30, 2022 with a collective 396 
backtesting deficiencies in GSD. Approximately 21% (i.e., 85 out of 
396) of the backtesting deficiencies occurred with respect to members 
that had a Required Fund Deposit of less than $1 million on the 
relevant deficiency day(s). FICC states that if the proposed changes 
had been in place during the Backtesting Impact Study period, 
approximately 16% (i.e., 65 out of 396) of the backtesting deficiencies 
incurred by the members would have been eliminated, and the total 
number of members that were below the 99% confidence target as of June 
30, 2022 would have been reduced by 8. Overall, FICC states that a $1 
million minimum requirement would have increased GSD's 12-month 
backtesting coverage 0.22%, eliminated 65 backtesting deficiencies, and 
improved the rolling twelve-month backtesting coverage for 8 members to 
above 99% confidence target.
    In addition, FICC conducted a clearing fund requirement impact 
study for the period of July 1, 2021 to June 30, 2022 (``CFR Impact 
Study'') on a member-level basis, meaning that it examined the effect 
on each member's Required Fund Deposit had the proposal been in place. 
According to FICC, the CFR Impact Study indicates that under the 
proposal, approximately 47% (81 out of a total of 174) of the current 
members' Margin Portfolios would have been impacted, with an average 
and a weighted average (with weights based on number of impacted days) 
additional Required Fund Deposit of approximately $686,000 and 
$792,000, respectively, for each such Margin Portfolio per impacted 
day. When comparing the actual, total Clearing Fund deposit of the 
current members' Margin Portfolios (that is, including any additional 
resources held at FICC in addition to the Required Fund Deposit) with 
the proposed minimum Required Fund Deposit amount, however, only 
approximately 13% (23 out of a total 174) of such members' Margin 
Portfolios would have been impacted, requiring an average and a 
weighted average (with weights based on number of impacted days) 
additional cash deposit of approximately $649,000 and $715,000, 
respectively, for each such Margin Portfolio per impacted day. FICC 
states the result of the CFR Impact Study also shows one Repo Broker 
that would have

[[Page 65270]]

been impacted, requiring additional Clearing Fund deposit of 
approximately $392,000 in either cash or Eligible Clearing Fund 
Securities per impacted day. Overall, FICC states that the proposed 
changes would have resulted in an average increase in the daily 
required margin amount, for all members' deposits in the aggregate, of 
$31.4 million (or 0.17%) at GSD during the CFR Impact Study period.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \22\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
FICC.\23\ In particular, the Commission finds that the Proposed Rule 
Change is consistent with Section 17A(b)(3)(F) and (b)(3)(I) \24\ of 
the Act and Rules 17Ad-22(e)(4) and (e)(6) thereunder.\25\
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    \22\ 15 U.S.C. 78s(b)(2)(C).
    \23\ The Commission's findings are based on its review of the 
Proposed Rule Change, including its analysis of the Backtesting and 
CFR Impact Studies, which are summarized in Section II.B above. See 
supra note 20 and accompanying text.
    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(4) and (e)(6).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency, such as FICC, be designed, in part, to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\26\ The 
Commission believes that the Proposed Rule Change is consistent with 
Section 17A(b)(3)(F) of the Act.
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed in Section II.A above, backtesting deficiencies 
highlight when a member's margin is insufficient to cover FICC's credit 
exposure to that member. If a defaulted member's margin is insufficient 
to satisfy losses caused by the closeout of that member's positions, 
FICC and its non-defaulting members may be subject to losses. As 
summarized in Section II.B above, and based on the Commission's review 
and analysis of the material submitted by FICC,\27\ the proposed 
increase would have provided FICC with additional resources, which 
would have resulted in a decrease in backtesting deficiencies and thus 
a reduction in credit exposure to its members under the proposal. 
Therefore, the Commission believes FICC would improve the probability 
that the increased minimum margin amount it collects is sufficient to 
cover FICC's credit exposure to those members, particularly in 
instances where the defaulted member's clearing activity abruptly 
increases following a period of low or no activity because FICC would 
have additional resources available to cover that additional exposure 
before collecting additional margin for that increased activity. This 
increase could reduce the possibility that FICC or its non-defaulting 
members face losses from the close-out process, in the event that FICC 
were to have to allocate losses amongst non-defaulting losses pursuant 
to its Rules.
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    \27\ See supra note 20.
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    Moreover, FICC would continue to require that members pay an amount 
equal to the minimum Required Fund Deposit amount in cash. The proposal 
therefore would enable FICC to have available additional collateral 
that is easier for FICC to access quickly to complete end of day 
settlement upon a member's default, further reducing the risk of losses 
to FICC or non-defaulting members. Accordingly, the Commission believes 
the Proposed Rule Change would promote the safeguarding of securities 
and funds which are in the custody or control of FICC or for which FICC 
is responsible, consistent with Section 17A(b)(3)(F) of the Act.
    Finally, as discussed in Section II.B above, FICC proposes 
clarifying and technical changes to the GSD and MBSD Rules. Such 
changes provide clarifications to members regarding the definitions and 
applications of Rules. The Commission believes that such changes would 
ensure that the Rules are accurate and clear to members, thus promoting 
prompt and accurate clearance and settlement, which is consistent with 
Section 17A(b)(3)(F) of the Act.\28\
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    \28\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Section 17A(b)(3)(I) of the Act

    Section 17A(b)(3)(I) of the Act requires that the rules of a 
clearing agency do not impose any burden on competition not necessary 
or appropriate in furtherance of the Act.\29\ This provision does not 
require the Commission to find that a proposed rule change represents 
the least anti-competitive means of achieving the goal.\30\ Rather, it 
requires the Commission to balance the competitive considerations 
against other relevant policy goals of the Act.
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    \29\ 15 U.S.C. 78q-1(b)(3)(I).
    \30\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105 
(D.C. Cir. 1978).
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    The Commission acknowledges that the impact of increased margin 
requirements may present higher costs to some members with lower 
operating margins, lower cash reserves or higher costs of capital 
compared to other members, which may weaken those members' competitive 
positions relative to others. Although some of FICC's members could 
experience a burden on competition because of these higher costs, the 
Commission concludes any burden to these members is necessary and 
appropriate in furtherance of the policy goals under the Act \31\ for 
the following reasons.
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    \31\ 15 U.S.C. 78q-1(b)(3)(I). Specifically, as discussed in 
greater detail in Section III.C and III.D below, the Proposed Rule 
Change is necessary and appropriate to further the policy goals 
under Rule 17Ad-22(e)(4)(i) and (e)(6)(iii), 17 CFR 240.17Ad-
22(e)(4)(i) and (e)(6)(iii).
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    As discussed in Section II.A above, FICC seeks to maintain 
sufficient resources (i.e., margin) to cover its credit exposures to 
its members fully with a high degree of confidence. Conversely, FICC 
uses backtesting to determine when a member's margin would have been 
insufficient to cover FICC's credit exposure to that member. As 
previously discussed, the Backtesting Impact Study shows the proposed 
$1,000,000 minimum Required Fund Deposit would have decreased the 
number of backtesting deficiencies, thereby increasing the number of 
members for which FICC maintained sufficient coverage at a confidence 
level of at least 99%. Therefore, the Proposed Rule Change would enable 
FICC to better manage its credit exposure to its members by ensuring it 
holds sufficient collateral to cover that exposure, thereby reducing 
the likelihood that FICC or non-defaulting members would incur losses 
resulting from a member default.
    Additionally, as described in Section II.B, FICC conducted a 
Clearing Fund impact study. Specifically, when comparing the actual, 
total Clearing Fund deposit of the current members' Margin Portfolios 
with the proposed minimum Required Fund Deposit amount, approximately 
13% (23 out of a total 174) of such members' Margin Portfolios would 
have been impacted, requiring an average and a weighted average (with 
weights based on number of impacted days) additional cash deposit of 
approximately $649,000 and $715,000, respectively, for each such

[[Page 65271]]

Margin Portfolio per impacted day. The result of the CFR Impact Study 
also shows one Repo Broker that would have been impacted, requiring an 
additional margin deposit of approximately $392,000 in either cash or 
Eligible Clearing Fund Securities per impacted day. Overall, the 
proposed changes would have resulted in an average increase in daily 
Required Fund Deposit of $31.4 million (or 0.17%) at GSD during the CFR 
Impact Study period.
    Finally, according to FICC, when comparing the average additional 
cash deposit amounts that members would be required to make if the 
minimum Clearing Fund cash deposit at GSD had been increased to 
$1,000,000 with their respective average Net Capital during the CFR 
Impact Study period, the largest average additional cash deposit amount 
represented approximately 0.49% of the affected member's average Net 
Capital.\32\ In addition, when comparing the average additional 
Clearing Fund deposit that members would be required to make, either in 
cash or Eligible Clearing Fund Securities, if the minimum Required Fund 
Deposit amount at GSD had been increased as proposed with their 
respective average Net Capital during the CFR Impact Study period, the 
largest average additional Clearing Fund deposit amount represented 
approximately 1.46% of the affected member's average Net Capital.\33\ 
In light of this analysis, and our review of the confidential data 
underlying the CFR Impact Study, the Commission believes that the 
majority of impacted members likely would not experience a weakened 
competitive position compared to others as a result of the Proposed 
Rule Change.
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    \32\ Notice of Filing, supra note 4, at 57965.
    \33\ Id.
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    Therefore, the Commission concludes that any competitive burden to 
members imposed by the Proposed Rule Change is necessary and 
appropriate in furtherance of the Act. Accordingly, the Commission 
finds that the Proposed Rule Change is consistent with the requirements 
of Section 17A(b)(3)(I) of the Act.\34\
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    \34\ 15 U.S.C. 78q-1(b)(3)(I).
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C. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) requires that FICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\35\
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    \35\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above in Section II.A, FICC and its non-defaulting 
members may be subject to losses should a defaulted member's own 
Required Fund Deposit be insufficient to satisfy losses caused by the 
liquidation of that member's portfolio. As summarized in Section II.B 
above and based on the Commission's review and analysis of the 
underlying data,\36\ the Backtesting Impact Study shows a $1,000,000 
minimum Required Fund Deposit would have decreased the number of 
backtesting deficiencies, which would likely help FICC better manage 
its credit exposure to each of its members and credit exposures arising 
from its payment, clearing, and settlement processes.
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    \36\ See supra note 23.
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    Additionally, as discussed in Section II.B above, FICC would 
continue to require that members pay an amount equal to the minimum 
Required Fund Deposit amount in cash, which should enable FICC to 
better maintain sufficient prefunded margin to mitigate potential 
future exposures to its members. Therefore, requiring the proposed 
minimum $1,000,000 deposit to be made in cash should reduce the 
probability that FICC or non-defaulting members would incur losses 
resulting from a member default. Accordingly, the Commission finds that 
FICC's proposed increase to its minimum Required Fund Deposit would be 
consistent with Rule 17Ad-22(e)(4)(i).\37\
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    \37\ 17 CFR 240.17Ad-22(e)(4)(i).
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D. Consistency With Rule 17Ad-22(e)(6)(iii)

    Rule 17Ad-22(e)(6)(iii) under the Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, calculates margin sufficient to cover its 
potential future exposure to members in the interval between the last 
margin collection and the close out of positions following a member 
default.\38\
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    \38\ 17 CFR 240.17Ad-22(e)(6)(iii).
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    As summarized in Section II.A above, FICC employs daily backtesting 
to determine the adequacy of each member's Required Fund Deposit paying 
particular attention to members that have backtesting deficiencies 
below the 99% confidence target. Such backtesting deficiencies 
highlight exposure that could subject FICC to potential losses if a 
member defaults.
    Based on the Backtesting Impact Study, which the Commission has 
reviewed and analyzed, approximately 21% of all backtesting 
deficiencies occur for those members that maintain a Required Fund 
Deposit of less than $1,000,000, and approximately 16% of the 
deficiencies of those members would have been eliminated during the 
Impact Study Period if the Required Fund Deposit were $1,000,000 or 
higher. By raising the minimum Required Fund Deposit amount to 
$1,000,000, the Commission believes the proposal should enable FICC to 
decrease the number of backtesting deficiencies by members, thereby 
improving FICC's backtesting coverage, and thus decrease FICC's 
exposure to such members in the event of a member default.
    Therefore, the Commission concludes FICC's Proposed Rule Change 
should better ensure FICC maintains sufficient margin to cover its 
potential future exposure to its members in the interval between the 
last margin collection and the close out of positions following a 
member default, thereby reducing the likelihood FICC or non-defaulting 
members would incur losses as a result. Accordingly, the Commission 
finds that FICC's proposed increase to its minimum Required Fund 
Deposit would be consistent with Rule 17Ad-22(e)(6)(iii).\39\
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    \39\ 17 CFR 240.17Ad-22(e)(6)(iii).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \40\ and 
the rules and regulations promulgated thereunder.
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    \40\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\41\ that Proposed Rule Change SR-FICC-2022-006, as modified by Partial 
Amendment No. 1, be, and hereby is, approved.\42\
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    \41\ 15 U.S.C. 78s(b)(2).
    \42\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f). See discussion supra Section 
III.B.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-23482 Filed 10-27-22; 8:45 am]
BILLING CODE 8011-01-P