Document ID: SEC-2022-0929-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2022-07-15T04:00Z

[Federal Register Volume 87, Number 135 (Friday, July 15, 2022)]
[Notices]
[Pages 42524-42530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-15179]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95256; File No. SR-FICC-2022-005]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of a Proposed Rule Change to Revise the Formula Used 
to Calculate the VaR Charge for Repo Interest Volatility

July 12, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 29, 2022, 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 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

    FICC is proposing to amend the GSD Methodology Document--GSD 
Initial Market Risk Margin Model (``QRM Methodology Document'') \3\ in 
order to revise the formula used to calculate the VaR Charge (as 
defined below) for repo interest volatility and make conforming changes 
to the description of this formula. In addition, FICC is proposing to 
amend the QRM Methodology Document to make certain technical changes, 
as described in greater detail below.\4\
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    \3\ The GSD QRM Methodology Document was filed as a confidential 
exhibit in the rule filing and advance notice for GSD sensitivity 
VaR. See Securities Exchange Act Release Nos. 83362 (June 1, 2018), 
83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 11, 
2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
    \4\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the FICC Government Securities 
Division (``GSD'') Rulebook (``Rules''), available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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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 amend the QRM Methodology Document to revise 
the formula used to calculate the VaR Charge for repo interest 
volatility and make conforming changes to the description of this 
formula. In addition, FICC is proposing to amend the QRM Methodology 
Document to make certain technical changes.
(1) Revise the Formula Used To Calculate the VaR Charge for Repo 
Interest Volatility and Make Conforming Changes
    FICC, through GSD, serves as a central counterparty (``CCP'') and 
provider of clearance and settlement services for the U.S. government 
securities market. 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 Members' margin constitutes the 
Clearing Fund, which FICC would be able to access should a defaulted 
Member's own margin be insufficient to satisfy losses to FICC caused by 
the liquidation of that Member's portfolio. Each Member's margin 
consists of a number of applicable components, including a value-at-
risk (``VaR'') charge (``VaR Charge'') designed to capture the 
potential market price risk associated with the securities in a 
Member's portfolio. The VaR Charge is typically the largest component 
of a Member's margin requirement. The VaR Charge is designed to cover 
FICC's projected liquidation losses with respect to a defaulted 
Member's portfolio at a 99% confidence level.
    The VaR Charge includes a component that addresses repo interest 
volatility, which the QRM Methodology Document refers to as the ``repo 
interest volatility charge.'' Interest on a repurchase (``repo'') 
transaction, hereinafter referred to as ``repo interest,'' is the 
difference between the repurchase settlement amount and the start 
amount paid on the repo inception date. In its role as a CCP in 
clearing a repo transaction, FICC guarantees that the borrowers receive 
their repo collateral back at the close of the repo transaction while 
lenders receive the start amount paid on the repo inception date plus 
repo interest. The market value of interest payments for the remaining 
life of the repo trades are subject to the risk of movements of the 
market repo interest rates. Since FICC guarantees the repo interest 
payment to the lenders, this risk needs to be mitigated. The repo 
interest volatility charge is designed to mitigate such risk, i.e., the 
risk arising out of fluctuations in market repo interest rates during 
the margin period of risk (``MPOR''). MPOR is currently set at 3 days 
for FICC. It represents the duration of time when a CCP is exposed to 
market risk post-member default, starting from the time of the last 
successful margin collection to the time the market risk exposure is 
effectively mitigated. The repo interest volatility charge is a small 
component of the total GSD margin (currently about 3% at CCP level).
    The QRM Methodology Document contains the formula for the 
calculation of the repo interest volatility charge and describes the 
components and calculation thereof.
    Currently, the repo interest volatility charge is assessed through 
application of a haircut schedule with a single haircut rate applied to 
each risk bucket after netting short and long repo interest

[[Page 42525]]

positions within the relevant risk bucket. Specifically, under the 
current formula, the repo interest positions for a given Member 
portfolio are put into different risk buckets based on (a) whether the 
underlying repo trade is a generic repo trade or a special repo trade 
and (b) the time to settlement of the underlying repo trade. The total 
net amount of each risk bucket is calculated as the sum of the product 
of repo start amount and the time to settlement of each repo interest 
position in that risk bucket. If the total net amount is positive 
(long), then the long repo haircut rate for that specific risk bucket 
is applied to the total net amount for that specific risk bucket to 
arrive at the repo interest volatility charge for that specific risk 
bucket. If the total net amount is negative (short), then the short 
repo haircut rate for that specific risk bucket is applied to the 
absolute value of the total net amount to arrive at the repo interest 
volatility charge for that specific risk bucket. The total repo 
interest volatility charge for the portfolio is the sum of the repo 
interest volatility charges of all of the risk buckets in the 
portfolio. As such, the current formula reflects a repo interest rate 
index driven approach where a single repo haircut rate is applied to 
the absolute value of the total net amount of each risk bucket of repo 
interest positions.\5\
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    \5\ FICC has developed its repo interest rate indices using FICC 
delivery-versus-payment repo transactions.
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    In order to provide FICC with more flexibility with respect to the 
calculation of the repo interest volatility charge so FICC can respond 
to rapidly changing market conditions more quickly and timely, FICC is 
proposing revisions to the current formula. The proposed new formula is 
similar to the current formula in certain respects. For example, the 
proposed new formula would continue to be repo interest rate index 
driven and would use a similar mathematical calculation as the current 
formula. In addition, under the proposed new formula, the repo interest 
positions for a given Member portfolio would continue to be placed into 
risk buckets based on (a) whether the underlying repo trade is a 
generic repo trade or a special repo trade and (b) the time to 
settlement of the underlying repo trade. However, unlike the current 
formula, more than one repo haircut rate could apply to each risk 
bucket. This is because the repo haircut rate that would be applied 
would no longer be based on whether the total net amount for a specific 
risk bucket is long or short. Instead, as proposed, the specific repo 
haircut rate to be applied would be based on whether the individual 
repo interest position in a specific risk bucket is either long or 
short. Specifically, as proposed, FICC would apply a long repo haircut 
rate to all the long positions and a short repo haircut rate to all the 
short positions in each risk bucket. The long positions and the short 
positions can offset each other within the same risk bucket but cannot 
offset each other across different risk buckets. As proposed, the repo 
interest volatility charge for a specific risk bucket would be the 
absolute value of the sum of the product of repo start amount, time to 
settlement, and repo haircut rate of the individual repo interest 
positions in the risk bucket. However, as is the case with the current 
formula, the total repo interest volatility charge for the portfolio 
would still be the sum of the repo interest volatility charges of all 
of the risk buckets in the portfolio. Doing so would provide FICC the 
flexibility to use two haircuts for each risk bucket, one for long 
positions and the other for short positions,\6\ thus allowing FICC to 
respond to rapidly changing market conditions more quickly and timely, 
particularly when the long and short repo interest positions exhibit 
very different risk profiles. In turn, the proposed changes would help 
better ensure that FICC calculates and collects adequate margin from 
Members and lead to a better risk management practice.
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    \6\ As an initial matter, FICC would take a streamlined and 
prudent approach by setting the repo haircut rates for long 
positions and short positions to be the same rate, i.e., the larger 
of the two rates, so that the long and short positions in a specific 
risk bucket would be subject to the same repo haircut rate.
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    Based on FICC's 2020 and 2021 annual model validation reports, the 
rolling 12-month backtest coverage on the sub-portfolios of repo 
interest only positions had been below the 99 percent coverage target 
from June 2019 to September 2020. In order to improve the backtesting 
coverage, FICC is also proposing to add a repo bid/ask spread to each 
repo haircut rate (one for long positions and one for short positions) 
within the same risk bucket. The repo bid/ask spread would be 
calculated based on the historical percentile movements of the 
internally constructed repo interest rate indices. FICC is proposing to 
add the repo bid/ask spread to each repo haircut rate to account for 
the difference observed in the repo market between the highest rate a 
repo participant is willing to pay to borrow money in a repo trade and 
the lowest rate a repo participant is willing to accept to lend money 
in a repo trade. FICC believes adding the repo bid/ask spread to each 
of the repo haircut rates would improve backtesting coverage, 
particularly with respect to sub-portfolios of repo interest only 
positions.
    For example, assuming a portfolio contains two repo interest 
positions, both with half a year to settlement, one position has a repo 
start amount of +$1 million, and the other has a repo start amount of -
$0.8 million. In this example, the two repo interest positions have the 
same time to settlement, so they would fall into the same risk bucket. 
Let's further assume that for that specific risk bucket, the long repo 
haircut rate is 40 bps and the short repo haircut rate is 45 bps.
    Under the current formula, we first calculate the total net amount 
of the risk bucket by adding the product of repo start amount and the 
time to settlement of the two repo interest positions, i.e., (+$1 
million*0.5 year) + (-$0.8 million*0.5 year). As calculated, the total 
net amount is +$100,000. Given that the total net amount is positive 
(long), we apply the long repo haircut rate of 40 bps, i.e., 
$100,000*40 bps, and calculate the repo interest volatility charge for 
the portfolio as $400.
    Under the proposed new formula, we would calculate the individual 
repo interest positions and apply the applicable repo haircut rate at 
the position level. Specifically, we would first calculate each repo 
interest position by multiplying the repo start amount and the time to 
settlement, i.e., (+$1 million*0.5 year) = +$500,000, and then apply 
the applicable repo haircut rate, i.e., because +$500,000 is a long 
position, we would apply the long repo haircut rate of 40 bps and 
calculate the amount for that long position as $2,000. For the second 
repo interest position, we would first multiply the repo start amount 
(-$0.8 million) and the time to settlement (0.5 year) and get -
$400,000. Given it is a short position, we would apply the short repo 
haircut rate of 45 bps and calculate the amount for that short position 
as -$1,800. For the repo interest volatility charge for the portfolio, 
we would take the absolute value of the sum of the two amounts 
($2,000+(-$1,800)) and get $200 as the repo interest volatility charge 
for the portfolio using the proposed new formula.7 8
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    \7\ As an initial matter, FICC would set the repo haircut rates 
for long positions and short positions to be the same rate, i.e., 
the larger of the two rates, so that the long and short positions in 
a specific risk bucket would be subject to the same repo haircut 
rate. Supra note 6. Using the new proposed formula under this 
approach, the repo interest volatility charge for the portfolio 
would be $450. Instead of using 40 bps for long positions and 45 bps 
for short positions, we would apply 45 bps (the larger of the two 
rates) to both the long and short positions in the risk bucket, 
i.e., (+$500,000*45 bps) and (-$400,000*45 bps), and get $2,250 and 
-$1,800 as the haircut amounts, respectively. The repo interest 
volatility charge for the portfolio would then be calculated by 
adding $2,250 and -$1,800, i.e., $450.
    \8\ Under the proposed new formula, the repo interest volatility 
charge would always be a positive number because the calculation 
thereof is based on the absolute value of the sum of the relevant 
amounts. For example, assuming a portfolio contains two repo 
interest positions, both with half a year to settlement, one 
position has a repo start amount of -$1 million, and the other has a 
repo start amount of +$0.8 million. In this example, the two repo 
interest positions have the same time to settlement, so they would 
fall into the same risk bucket. Let's further assume that for that 
specific risk bucket, the long repo haircut rate is 45 bps and the 
short repo haircut rate is 40 bps. Under the proposed new formula, 
we would first calculate each repo interest position by multiplying 
the repo start amount and the time to settlement, i.e., (-$1 
million*0.5 year) = -$500,000, and then apply the applicable repo 
haircut rate, i.e., because -$500,000 is a short position, we would 
apply the short repo haircut rate of 40 bps and calculate the amount 
for that short position as -$2,000. For the second repo interest 
position, we would first multiply the repo start amount (+$0.8 
million) and the time to settlement (0.5 year) and get +$400,000. 
Given it is a long position, we would apply the long repo haircut 
rate of 45 bps and calculate the amount for that long position as 
+$1,800. For the repo interest volatility charge for the portfolio, 
we would take the absolute value of the sum of the two amounts, 
i.e., abs(-$2,000+(+$1,800)) and get $200 as the repo interest 
volatility charge for the portfolio using the proposed new formula.

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[[Page 42526]]

    The QRM Methodology Document also contains a detailed description 
of the repo haircut rate calculation for all risk buckets. FICC is 
proposing to eliminate this detailed description from the QRM 
Methodology Document and replace it with a more general description of 
the repo haircut rate calculation. FICC believes that having a more 
general description would provide FICC with more flexibility to respond 
to rapidly changing market conditions more quickly and timely by 
enabling FICC to adjust how the repo haircut rate is calculated without 
undergoing a rule filing process.\9\ By being able to quickly make 
adjustments to the calculation of the repo haircut rate, FICC would be 
able to better risk manage the repo interest positions. Specifically, 
FICC believes this proposed change would enable FICC to make 
appropriate and timely adjustments to the repo haircut rates based on 
an evaluation of a number of factors, including, but not limited to, 
repo interest rate volatility outlook and backtesting coverage results. 
Furthermore, there are certain known data availability limitations with 
respect to the current repo interest rate index. That is, the current 
repo interest rate index is missing data for a volatile period, so repo 
haircut rates that have been calibrated based on the current repo 
interest rate index may not be sufficient if the repo market were to 
experience heightened volatility. FICC believes the proposed changes 
would therefore also help counterbalance potential data availability 
limitation issues by enabling FICC to adjust how the repo haircut rate 
is calculated more quickly and timely and thereby provide FICC with the 
flexibility to respond to rapidly changing market conditions more 
quickly and effectively.
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    \9\ 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 filing. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
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    FICC would instead describe the detailed calculations of the repo 
haircut rates in an internal standalone document. Nonetheless, any 
future changes to the repo haircut rate calculations would continue to 
follow DTCC's internal model governance procedure as described in the 
Clearing Agency Model Risk Management Framework.\10\ In addition, the 
repo haircut rates would continue to be tracked in the monthly model 
parameter report.
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    \10\ The Clearing Agency Model Risk Management Framework 
(``Framework'') sets forth the model risk management practices that 
FICC and its affiliates The Depository Trust Company (``DTC'') and 
National Securities Clearing Corporation (``NSCC,'' and together 
with FICC and DTC, the ``Clearing Agencies'') follow to identify, 
measure, monitor, and manage the risks associated with the design, 
development, implementation, use, and validation of quantitative 
models. The Framework is filed as a rule of the Clearing Agencies. 
See Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 
FR 41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008), 88911 (May 20, 2020), 85 FR 31828 (May 27, 
2020) (File Nos. SR-DTC-2020-008; SR-FICC-2020-004; SR-NSCC-2020-
008), 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (File No. 
SR-FICC-2021-006), 92381 (July 13, 2021), 86 FR 38163 (July 19, 
2021) (File No. SR-NSCC-2021-008) and 92379 (July 13, 2021), 86 FR 
38143 (July 19, 2021) (File No. SR-DTC-2021-003).
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    Accordingly, FICC believes that revising the formula for the 
calculation of the repo interest volatility charge as described above 
and replacing the current specific description with a more general 
description in the QRM Methodology Document would collectively provide 
FICC with more flexibility and allow FICC to respond to rapidly 
changing market conditions more quickly by enabling FICC to adjust how 
the repo haircut rate is calculated without a rule filing. In addition, 
FICC believes that the proposed changes would enable FICC to better 
address the backtest coverage issue and thereby risk manage the repo 
interest positions more effectively.
Impact Study
    FICC conducted an impact study for the period of January 2018 to 
February 2022 (``Impact Study''). The result of the Impact Study 
indicates that, at the CCP level, if the proposed changes had been in 
place, the backtesting coverage ratio for the repo interest volatility 
charge would have increased from approximately 98.7% to 99.2%.
    Specifically, the Impact Study shows that had the proposed changes 
been in place from January 2018 to February 2022, it would have 
affected 90 out of 145 (approximately 62%) portfolios of GSD Members 
per day on average, and the average daily margin increase of the VaR 
Charge for these Member portfolios would have been approximately $0.7 
million (representing approximately 3% of their average daily VaR 
Charge). For GSD, the proposed changes would have resulted in an 
average daily VaR Charge increase of approximately $86 million 
(representing approximately 0.8% of the average daily VaR Charge).
(2) Technical Changes
    FICC is also proposing to make certain technical changes to the QRM 
Methodology Document to enhance clarity.
    FICC proposes to revise the term ``GCF Repo'' to ``repo'' in ``2.1 
Market risks associated with products cleared by GSD'' and ``3.2.4 Repo 
Interest Volatility Charge'' sections of the QRM Methodology Document 
for clarity.
    In ``2.5.4. Repo Interest Volatility Charge'' and ``3.2.4 Repo 
Interest Volatility Charge'' sections of the QRM Methodology Document, 
FICC proposes to change ``inception date'' to ``repo inception date'' 
and ``above'' to ``in the above sections'' to enhance clarity. FICC 
also proposes to clarify and update certain descriptions in the 
``2.5.4. Repo Interest Volatility Charge'' and ``3.2.4 Repo Interest 
Volatility Charge'' sections. For example, FICC is proposing to clarify 
the description of the risk that the repo interest volatility charge is 
designed to address and the repo trades that it applies to. In 
addition, FICC is proposing to update the paragraphs in ``2.5.4. Repo 
Interest Volatility Charge'' section describing the use of risk buckets 
to reflect the current practice.
    Furthermore, FICC proposes to change ``repurchase price'' to 
``repurchase settlement amount'' and ``original sale price'' to ``start 
amount paid on the repo inception date'' in ``3.2.4 Repo Interest 
Volatility Charge'' section for clarity. To enhance the clarity of the 
QRM Methodology Document, FICC also proposes to remove a formula from

[[Page 42527]]

``3.2.4 Repo Interest Volatility Charge'' section of the QRM 
Methodology Document that is no longer used but had been included for 
historical reference.
    In addition, FICC is proposing to clarify the description of the 
repo interest curve in ``3.2.4 Repo Interest Volatility Charge'' 
section of the QRM Methodology Document, including, among other things, 
the description the categories that a collateral security in a repo 
trade can be designated as and how those categories are treated in the 
repo interest volatility charge calculation, as well as how the repo 
rate indices are constructed. FICC also proposes to add that any 
changes or adjustments to the repo haircut rate calculation would need 
to go through DTCC's model governance process.
    Lastly, FICC is proposing certain grammar-related technical changes 
in ``2.1 Market risks associated with products cleared by GSD'' and 
``3.2.4 Repo Interest Volatility Charge'' sections of the QRM 
Methodology Document.
Implementation Timeframe
    Subject to approval by the Commission, FICC would implement the 
proposed rule changes approximately within 30 days following such 
approval and would announce the effective date of the proposed change 
by an Important Notice posted to its 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 to the Rules and the QRM Methodology Document 
described above are consistent with Section 17A(b)(3)(F) of the Act, 
for the reasons described below.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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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 assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\12\
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    \12\ Id.
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    FICC believes that the proposed changes to the QRM Methodology 
Document described in Item II.(A)1(1) above to revise the formula used 
to calculate the VaR Charge for repo interest volatility and make 
conforming changes to the description of this formula are designed to 
assure the safeguarding of securities and funds which are in the 
custody or control of FICC or for which it is responsible, consistent 
with Section 17A(b)(3)(F) of the Act.\13\ As described above, FICC 
believes these proposed changes would provide FICC with more 
flexibility with respect to the calculation of the repo interest 
volatility charge and thus allow FICC to respond to rapidly changing 
market conditions more quickly and timely, particularly when the long 
and short repo interest positions exhibit very different risk profiles. 
FICC believes that having more flexibility with respect to this 
calculation would help better ensure that FICC calculates and collects 
adequate margin from Members and thereby 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.\14\
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    \13\ Id.
    \14\ Id.
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    FICC believes that the proposed technical changes described in Item 
II.(A)1(2) above would enhance the clarity of the QRM Methodology 
Document for FICC. As the QRM Methodology Document is used by FICC Risk 
Management personnel regarding the calculation of margin requirements, 
it is therefore important that FICC Risk Management has a clear 
description of the calculation of the margin methodology. Having a 
clear description of the calculation of the margin methodology would 
promote an accurate and smooth functioning of the margining process. 
Having an accurate and smooth functioning of the margining process 
would help better ensure that FICC calculates and collects adequate 
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. As such, FICC believes that enhancing the clarity of 
the QRM Methodology Document would assure the safeguarding of 
securities and funds which are in the custody or control of FICC or for 
which it is responsible, consistent with Section 17A(b)(3)(F) of the 
Act.\15\
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    \15\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act \16\ 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. FICC believes that the proposed changes in Item II.(A)1(1) 
above are consistent with the requirements of Rule 17Ad-22(e)(4)(i) 
under the Act.\17\ As described above, FICC believes these proposed 
changes to revise the formula used to calculate the VaR Charge for repo 
interest volatility would (i) provide FICC with more flexibility with 
respect to the calculation of the repo interest volatility charge and 
(ii) improve backtesting coverage. FICC believes that having more 
flexibility with respect to the calculation of the repo interest 
volatility charge would allow FICC to respond to rapidly changing 
market conditions more quickly and timely. Having the ability to 
respond to rapidly changing market conditions more quickly and timely 
would in turn help FICC better measure, monitor, and manage its credit 
exposures to participants and those exposures arising from its payment, 
clearing, and settlement processes. Moreover, as the result of the 
Impact Study indicates, having the proposed changes would increase the 
backtesting coverage ratio for the repo interest volatility charge 
beyond 99% and thereby help ensure that FICC maintains sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence. Therefore, FICC believes that 
the proposed changes described in Item II.(A)1(1) above are consistent 
with the requirements of Rule 17Ad-22(e)(4)(i) under the Act.\18\
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    \16\ 17 CFR 240.17Ad-22(e)(4)(i).
    \17\ Id.
    \18\ Id.
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    Rule 17Ad-22(e)(6)(i) under the Act \19\ 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 
in Item II.(A)1(1) above are consistent with the requirements of Rule 
17Ad-22(e)(6)(i).\20\
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    \19\ 17 CFR 240.17Ad-22(e)(6)(i).
    \20\ Id.
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    Specifically, FICC believes the proposed new formula to allow FICC 
the flexibility to apply two separate repo haircut rates (one for long 
positions and the other for short positions) within the same risk 
bucket would enable FICC to be better equipped to respond to rapidly 
changing market conditions,

[[Page 42528]]

particularly when the long and short repo interest positions exhibit 
very different risk profiles. FICC believes having this flexibility 
would help lead to a better risk management practice because it would 
enable FICC to refine its calculation of the repo interest volatility 
charge in response to fast changing market conditions. Being able to 
refine its calculation of the repo interest volatility charge in 
response to fast changing market conditions would help FICC cover its 
credit exposures to its participants by allowing FICC to continue 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.\21\
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    \21\ Id.
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    Similarly, FICC believes that the proposed changes to replace the 
current detailed description of the repo haircut rate calculation for 
all risk buckets with a more general description, as described above, 
would also provide FICC with more flexibility to respond to rapidly 
changing market conditions more quickly and timely because FICC would 
be able to make adjustments to the repo haircut rate calculation 
without a rule filing. Having this flexibility would enable FICC to 
better risk manage the repo interest positions because FICC would then 
be able to make appropriate and timely adjustments to the repo haircut 
rates, as described above. Furthermore, as described above, FICC 
believes these proposed changes would also help counterbalance 
potential data availability limitation issues by enabling FICC to 
adjust how the repo haircut rate is calculated more quickly and timely. 
Being able to adjust its calculation of the repo haircut rate quickly 
and timely would help FICC cover its credit exposures to its 
participants by allowing FICC to continue 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.\22\
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    \22\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(v) under the Act \23\ 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 in Item II.(A)1(1) above are consistent with the requirements 
of Rule 17Ad-22(e)(6)(v).\24\
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    \23\ 17 CFR 240.17Ad-22(e)(6)(v).
    \24\ Id.
---------------------------------------------------------------------------

    Specifically, FICC believes the proposed new formula to allow FICC 
the flexibility to apply two separate repo haircut rates (one for long 
positions and the other for short positions) within the same risk 
bucket would enable FICC to be better equipped to respond to rapidly 
changing market conditions, particularly when the long and short repo 
interest positions exhibit very different risk profiles. FICC believes 
having this flexibility would help lead to a better risk management 
practice because it would enable FICC to refine its calculation of the 
repo interest volatility charge in response to fast changing market 
conditions. Being able to refine its calculation of the repo interest 
volatility charge in response to fast changing market conditions would 
help FICC cover its credit exposures to its participants by allowing 
FICC to continue 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.\25\
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    \25\ Id.
---------------------------------------------------------------------------

    Similarly, FICC believes that the proposed changes to replace the 
current detailed description of the repo haircut rate calculation for 
all risk buckets with a more general description, as described above, 
would also provide FICC with more flexibility to respond to rapidly 
changing market conditions more quickly and timely because FICC would 
be able to make adjustments to the repo haircut rate calculation 
without a rule filing. Having this flexibility would enable FICC to 
better risk manage the repo interest positions because FICC would then 
be able to make appropriate and timely adjustments to the repo haircut 
rates, as described above. Furthermore, as described above, FICC 
believes these proposed changes would also help counterbalance 
potential data availability limitation issues by enabling FICC to 
adjust how the repo haircut rate is calculated more quickly and timely. 
Being able to adjust its calculation of the repo haircut rate quickly 
and timely would help FICC cover its credit exposures to its 
participants by allowing FICC to continue to product 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.\26\
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    \26\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes described in Item 
II.(A)1(1) above may have an impact on competition because these 
changes could result in Members being assessed a higher margin than 
they would have been assessed using the current formula in calculation 
of the repo interest volatility charge. FICC believes that the proposed 
change could burden competition by potentially increasing these 
Members' operating costs. Nonetheless, FICC believes any burden on 
competition imposed by the proposed changes described in Item 
II.(A)1(1) 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.\27\
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    \27\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes any burden on competition imposed by the proposed 
changes described in Item II.(A)1(1) would not be significant. As the 
result of the Impact Study indicates, had the proposed changes been in 
place, approximately 62% of the GSD Member portfolios would have had an 
increase of approximately 3% in their average daily VaR Charge, and at 
a GSD level the increase would have been approximately 0.8% of the 
average daily VaR Charge.
    However, even if the burden on competition imposed by the proposed 
changes described in Item II.(A)1(1) were deemed significant, FICC 
believes that any such burden on competition would be necessary 
because, as described above, the proposed changes would provide FICC 
with more flexibility with respect to the calculation of the repo 
interest volatility charge and allow FICC to respond to rapidly 
changing market conditions more quickly and timely, particularly when 
the long and short repo interest positions exhibit very different risk 
profiles. Having more flexibility with respect to this calculation 
would thus help better ensure that FICC calculates and collects 
adequate 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,

[[Page 42529]]

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)
---------------------------------------------------------------------------

    In addition, FICC believes the proposed changes described in Item 
II.(A)1(1) are necessary to support FICC's compliance with Rules 17ad-
22(e)(4)(i), (e)(6)(i), and (e)(6)(v) under the Act. Specifically, as 
described above, FICC believes these proposed changes would provide 
FICC with more flexibility with respect to the calculation of the repo 
interest volatility charge. Having more flexibility with respect to the 
calculation of the repo interest volatility charge would allow FICC to 
respond to rapidly changing market conditions more quickly and timely. 
Having the ability to respond to rapidly changing market conditions 
more quickly and timely would in turn 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 Rules 17ad-22(e)(4)(i) under the 
Act.\29\
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    \29\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    FICC also believes these proposed changes would enable FICC to be 
better equipped to respond to rapidly changing market conditions, 
particularly when the long and short repo interest positions exhibit 
very different risk profiles. FICC believes having this flexibility 
would help lead to a better risk management practice because it would 
enable FICC to refine its calculation of the repo interest volatility 
charge in response to fast changing market conditions. Being able to 
refine its calculation of the repo interest volatility charge in 
response to fast changing market conditions would help FICC cover its 
credit exposures to its participants, consistent with the requirements 
of Rule 17Ad-22(e)(6)(i) and (e)(6)(v) under the Act.\30\
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    \30\ 17 CFR 240.17Ad-22(e)(6)(i) and (e)(6)(v).
---------------------------------------------------------------------------

    FICC also believes that any burden on competition imposed by the 
proposed changes described in Item II.(A)1(1) 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. As 
described above, FICC believes these proposed changes would help better 
ensure that FICC calculates and collects adequate margin from Member, 
thus enable FICC to produce margin levels more commensurate with the 
risks it faces as a CCP. Accordingly, FICC believes these proposed 
changes are appropriately designed to meet its risk management goals 
and regulatory obligations.
    FICC believes that the proposed changes described in Item 
II.(A)1(1) above may also promote competition because these changes 
could also result in Members being assessed a lower margin than they 
would have been assessed using the current calculation of the repo 
interest volatility charge, and thereby could potentially lower 
operating costs for Members.\31\
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    \31\ The proposed changes described in Item II.(A)1(1) could 
result in Members being assessed a lower margin than they would have 
been assessed using the current calculation of the repo interest 
volatility charge. As illustrated by the example in Item II.(A)1(1) 
above, when using the current formula, the repo interest volatility 
charge for the portfolio in the example is $400, but when using the 
proposed new formula, the repo interest volatility charge for the 
portfolio is reduced to $200 instead.
---------------------------------------------------------------------------

    With respect to the proposed changes described in Item II.(A)1(2) 
above to make technical changes to the QRM Methodology Document, FICC 
does not believe these proposed changes would have any impact on 
competition because these proposed changes would only enhance the 
clarity of the QRM Methodology Document, which would promote an 
accurate and smooth functioning of the margining process at FICC and 
would not affect the substantive rights of Members.

(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 [email protected] or 
202-551-5777.
    FICC reserves the right not to 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-2022-005 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-2022-005. 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

[[Page 42530]]

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 (http://dtcc.com/legal/sec-rule-filings.aspx). All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FICC-2022-005 
and should be submitted on or before August 5, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-15179 Filed 7-14-22; 8:45 am]
BILLING CODE 8011-01-P