[Federal Register Volume 72, Number 230 (Friday, November 30, 2007)]
[Notices]
[Pages 67770-67772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-23203]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56837; File No. SR-FICC-2007-10]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Replace the Mortgage-Backed 
Securities Division Clearing Fund Calculation Methodology With a Yield-
Driven Value-at-Risk Methodology

November 26, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 31, 2007, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on September 27, 2007, amended 
the proposed rule change as described in Items I, II, and III below, 
which items have been prepared primarily by FICC. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FICC is seeking to replace the Mortgage-Backed Securities Division 
(``MBSD'') margin calculation methodology with a Value-at-Risk 
(``VaR'') methodology.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC 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. FICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Clearing participants of MBSD are required to maintain 
participants' fund deposits. Each participant's required deposit is 
calculated daily to ensure enough funds are available to cover the 
risks associated with that participant's activities.
    The purpose served by the participants fund is to have on deposit 
from each participant assets sufficient to satisfy any losses that may 
otherwise be incurred by MBSD participants as the result of the default 
by the participant and the resultant closeout of that participant's 
settlement positions.
    FICC proposes to replace the current participants fund methodology, 
which uses haircuts and offsets, with a VaR model. FICC expects the VaR 
model to better reflect market volatility and to more thoroughly 
distinguish levels of risk presented by individual securities.
    Specifically, FICC is proposing to replace the existing MBSD margin 
calculation with a yield-driven VaR model. VaR is defined to be the 
maximum amount of money that may be lost on a portfolio over a given 
period of time within a given level of confidence. With respect to the 
MBSD, FICC is proposing a 99 percent three-day VaR.
    The changes to the components that comprise the current 
participants fund calculation versus the proposed VaR calculation in 
relation to the risks addressed by the components are summarized as 
follows:

------------------------------------------------------------------------
                                                           Proposed
      Existing methodology          Risk addressed        methodology
------------------------------------------------------------------------
Market Margin Differential,       Adjusting contract  The sum of:
 which is the greater of:.         price to market     (i) Mark-to-
(i) the P&L Requirement or......   price and post      market and
(ii) the Market Volatility         mark-to-market      (ii) Interest
 Requirement.                      fluctuations in     rate or index-
                                   security prices.    driven model, as
                                                       appropriate.\3\

[[Page 67771]]

 
Final margin requirement          Additional          Margin Requirement
 generated for second processing   exposure due to     Differential
 cycle.\4\.                        portfolio           (``MRD'') to
                                   variation.          include intraday
                                                       portfolio
                                                       variations and
                                                       protection
                                                       regarding late
                                                       margin deficit
                                                       satisfaction.
Prefunding of certain debit cash  Uncertainty of      Prefunding of
 obligation items through the      whether a member    certain debit
 participants fund (no offset      will satisfy its    cash obligation
 for credits).                     cash settlement     items through the
                                   obligation.         participants fund
                                                       (offset for
                                                       credits).\5\
N/A.............................  Potential loss in   Coverage Component
                                   unlikely            (if necessary,
                                   situations beyond   applies
                                   the model's         additional charge
                                   effective range.    to bring coverage
                                                       to the applicable
                                                       confidence
                                                       level).
Minimum Market Margin             Maintenance of a    A minimum charge
 Differential (currently           minimum amount of   of the greater
 $250,000).                        collateral to       of: (i) $100,000
                                   support potential   or (ii) a defined
                                   counterparty        percentage of
                                   liquidation         gross portfolio.
                                   losses.
------------------------------------------------------------------------
\3\ FICC shall have the discretion to not apply the interest rate model
  to classes of securities whose volatility is less amenable to
  statistical analysis (e.g., the security has a lack of pricing
  history). In lieu of such a calculation, the required charge with
  respect to such positions would be determined based on an historic
  index volatility model.
\4\ The MBSD generates a preliminary margin report as part of a first
  processing cycle at the close of the business day and calculates a
  final margin requirement as part of a second processing cycle
  completed at approximately 11:30 a.m. each business day. Upon the
  implementation of the new VaR methodology, the MBSD would no longer
  generate a margin requirement as part of the second cycle. Instead, a
  final margin requirement would be established after the running of the
  first cycle at approximately 9:00 p.m.
\5\ Cash obligation item credits are retained by the MBSD and not passed
  through to the participant. As a result, the MBSD has correspondingly
  less risk vis-[agrave]-vis a firm with cash obligation credits and
  therefore requires less collateral in this regard.

    In addition, FICC may include in a participant's participant fund 
calculation a ``special charge'' as determined by FICC from time to 
time in view of market conditions and the financial and operational 
capabilities of the participant. FICC will make any such determination 
based on such factors as it determines to be appropriate.
    Because it would become obsolete upon approval of the proposed rule 
change, FICC also proposes to eliminate the provision in the MBSD rules 
requiring participants to maintain a Basic Deposit and Minimum Market 
Margin Differential Deposit with MBSD pursuant to Article IV, Rule 1 
(Participants Fund), section 1(a) and (b).
    FICC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to FICC because it should assure the 
safeguarding of securities and funds in FICC's custody or control or 
for which it is responsible by enabling FICC to more effectively manage 
risk presented by participants' activities.
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    \6\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change would have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments have not been solicited with respect to the 
proposed rule change, and none have been received. FICC will notify the 
Commission of any written comments it receives.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date 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 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, as amended, 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 e-mail to [email protected]. Please include 
File Number SR-FICC-2007-10 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2007-10. This file 
number should be included on the subject line if e-mail 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 Web site (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 inspection and 
copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FICC and on FICC's 
Web site at http://www.ficc.com/gov/gov.docs.jsp?NS-query. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that

[[Page 67772]]

you wish to make available publicly. All submissions should refer to 
File Number SR-FICC-2007-10 and should be submitted on or before 
December 21, 2007.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\7\

    \7\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E7-23203 Filed 11-29-07; 8:45 am]
BILLING CODE 8011-01-P