[Federal Register Volume 82, Number 18 (Monday, January 30, 2017)]
[Notices]
[Pages 8780-8784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01895]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79868; File No. SR-FICC-2016-007]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Implement a Change to the 
Methodology Used in the MBSD VaR Model

January 24, 2017.
    On November 23, 2016, the Fixed Income Clearing Corporation filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-FICC-2016-007 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on December 13, 2016.\3\ The Commission did not 
receive any comments on the proposed rule change. This order approves 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. FICC also filed this proposal as an 
advance notice pursuant to Section 802(e)(1) of the Payment, 
Clearing, and Settlement Supervision Act of 2010 and Rule 19b-
4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1). The advance notice was published for comment in the Federal 
Register on December 28, 2016. See Securities Exchange Act Release 
No. 79643 (December 21, 2016), 81 FR 95669 (December 28, 2016) (SR-
FICC-2016-801). The Commission did not receive any comments on the 
advance notice.
    \3\ Securities Exchange Act Release No. 79491 (December 7, 
2016), 81 FR 90001 (December 13, 2016) (SR-FICC-2016-007) 
(``Notice'').

---------------------------------------------------------------------------

[[Page 8781]]

I. Description

    As described by FICC in the proposed rule change, FICC proposes to 
change the methodology that it currently uses in the Mortgage-Backed 
Securities Division's (``MBSD'') value-at-risk (``VaR'') model from one 
that employs a full revaluation approach to one that would employ a 
sensitivity approach.\4\ In connection with this change, FICC also 
proposes to amend the MBSD Clearing Rules (``MBSD Rules'') to: (i) 
Amend the definition of VaR Charge \5\ to reference an alternative 
volatility calculation (``Margin Proxy'') that FICC would use in the 
event that data used for the sensitivity approach is unavailable for an 
extended period of time; \6\ (ii) revise the definition of VaR Charge 
to include a VaR floor that FICC would use as an alternative to the 
amount calculated by the proposed VaR model for portfolios where the 
VaR floor would be greater than the model-based charge amount (``VaR 
Floor''); (iii) eliminate two components from the Required Fund Deposit 
\7\ calculation that would no longer be necessary following 
implementation of the proposed VaR Charge; and (iv) change the 
margining approach that FICC may use for certain securities with 
inadequate historical pricing data from one that calculates charges 
using a historic index volatility model to one that would use a haircut 
method.
---------------------------------------------------------------------------

    \4\ The proposed sensitivity approach methodology would be 
reflected in the Methodology and Model Operations Document--MBSD 
Quantitative Risk Model (``QRM Methodology''). FICC requested 
confidential treatment of the QRM Methodology and filed it 
separately with the Secretary of the Commission, pursuant to Rule 
24b-2 under the Act. See 17 CFR 240.24b-2.
    \5\ The term ``VaR Charge'' means, with respect to each margin 
portfolio, a calculation of the volatility of specified net 
unsettled positions of an MBSD clearing member, as of the time of 
such calculation. See MBSD Rule 1.
    \6\ Details of the Margin Proxy methodology would be reflected 
in the QRM Methodology.
    \7\ The term ``Required Fund Deposit'' means the amount an MBSD 
clearing member is required to deposit to the Clearing Fund pursuant 
to MBSD Rule 4. See MBSD Rule 1 and MBSD Rule 4 Section 2.
---------------------------------------------------------------------------

A. Overview of the Required Fund Deposit and Clearing Fund Calculation

    A key tool that FICC uses to manage market risk is the daily 
calculation and collection of Required Fund Deposits from MBSD clearing 
members (``Clearing Members'').\8\ The Required Fund Deposit serves as 
each Clearing Member's margin. The aggregate of all Clearing Members' 
Required Fund Deposits constitutes the Clearing Fund \9\ of MBSD, which 
FICC would access should a defaulting Clearing Member's own Required 
Fund Deposit be insufficient to satisfy losses to FICC caused by the 
liquidation of that Clearing Member's portfolio.
---------------------------------------------------------------------------

    \8\ The term ``Clearing Member'' means any entity admitted into 
membership pursuant to MBSD Rule 2A. See MBSD Rule 1.
    \9\ The term ``Clearing Fund'' means the Clearing Fund 
established by FICC pursuant to MBSD Rules, which shall be comprised 
of the aggregate of all Required Fund Deposits and all other 
deposits, including cross-guaranty repayment deposits. See MBSD Rule 
1.
---------------------------------------------------------------------------

    According to FICC, the objective of a Clearing Member's Required 
Fund Deposit is to mitigate potential losses to FICC associated with 
liquidation of such Clearing Member's portfolio in the event that FICC 
ceases to act for such Clearing Member (i.e., a ``default'').\10\ 
Pursuant to MBSD Rules, each Clearing Member's Required Fund Deposit 
amount consists of multiple components. Of all of the components, the 
VaR Charge comprises the largest portion of a Clearing Member's 
Required Fund Deposit amount.
---------------------------------------------------------------------------

    \10\ See Notice, 81 FR at 90002.
---------------------------------------------------------------------------

    Generally, the VaR Charge is calculated using a risk-based margin 
methodology that is intended to capture the market price risk 
associated with the securities in a Clearing Member's portfolio. More 
specifically, FICC calculates the VaR Charge using a methodology 
referred to as the full revaluation approach. The full revaluation 
approach uses a historical simulation method to fully re-price each 
security in a Clearing Member's portfolio. According to FICC, the 
methodology is designed to project the potential gains or losses that 
could occur in connection with the liquidation of a defaulting Clearing 
Member's portfolio, assuming that a portfolio would take three days to 
hedge or liquidate in normal market conditions.\11\ The projected 
liquidation gains or losses are used to determine the amount of the VaR 
Charge, which is calculated to cover projected liquidation losses at a 
99 percent confidence level.\12\
---------------------------------------------------------------------------

    \11\ Id.
    \12\ The 99 percent confidence level does not apply to 
unregistered investment pool clearing members, which are subject to 
a VaR Charge with a higher minimum targeted confidence level 
assumption of 99.5 percent.
---------------------------------------------------------------------------

    If FICC determines that a security's price history is incomplete 
and the market price risk cannot be calculated by the VaR model, then 
FICC applies the Margin Proxy until such security's trading history and 
pricing reflects market risk factors that can be appropriately 
calibrated from the security's historical data.\13\
---------------------------------------------------------------------------

    \13\ See MBSD Rule 4 Section 2(c).
---------------------------------------------------------------------------

B. Proposed Changes to the VaR Charge Calculation

    According to FICC, during the volatile market period that occurred 
during the second and third quarters of 2013, FICC's full revaluation 
approach did not respond effectively to the levels of market volatility 
at that time, and the model did not achieve a 99 percent confidence 
level.\14\ This prompted FICC to employ the Margin Proxy--a 
supplemental risk charge to ensure that each Clearing Member's VaR 
Charge would achieve a minimum 99 percent confidence level.\15\
---------------------------------------------------------------------------

    \14\ See Notice, 81 FR at 90002-03.
    \15\ The Margin Proxy is currently used to provide supplemental 
coverage to the VaR Charge; however, under this proposed change, the 
Margin Proxy would only be used as an alternative volatility 
calculation in the event that the requisite data used for the 
sensitivity approach is unavailable for an extended period of time.
---------------------------------------------------------------------------

    FICC reviewed the existing model's deficiencies, examined the root 
causes of the deficiencies, and considered options that would remediate 
the model weaknesses. As a result of this review, FICC now proposes to 
change MBSD's methodology for calculating the VaR Charge by: (i) 
Replacing the full revaluation approach with the sensitivity approach; 
(ii) using the Margin Proxy as an alternative volatility calculation in 
the event that the data used for the sensitivity approach is 
unavailable for an extended period of time; and (iii) establishing a 
VaR Floor to address a circumstance where the proposed VaR model yields 
a VaR Charge amount that is lower than 5 basis points of the market 
value of a Clearing Member's gross unsettled positions.\16\
---------------------------------------------------------------------------

    \16\ Assuming the market value of gross unsettled positions of 
$500,000,000, the VaR Floor calculation would be .0005 multiplied by 
$500,000,000 = $250,000. If the VaR model charge is less than 
$250,000, then the VaR Floor calculation of $250,000 would be set as 
the VaR Charge.
---------------------------------------------------------------------------

(i) Proposed Sensitivity Approach
    FICC's current full revaluation method uses valuation algorithms to 
fully re-price each security in a Clearing Member's portfolio over a 
range of historically simulated scenarios. While there are benefits to 
this method, according to FICC, its deficiencies are that it requires 
significant historical market data inputs, calibration of various model 
parameters, and extensive quantitative support for price 
simulations.\17\ FICC believes that the proposed sensitivity approach 
would address these deficiencies because it would leverage external 
vendor expertise in supplying the market risk

[[Page 8782]]

attributes,\18\ which would then be incorporated by FICC into its model 
to calculate the VaR Charge.\19\
---------------------------------------------------------------------------

    \17\ See Notice, 81 FR at 90003.
    \18\ The risk factors that would be incorporated into MBSD's 
proposed VaR methodology are key rate, convexity, spread, 
volatility, mortgage basis and time, as more fully described in the 
Notice. See Notice, 81 FR at 90003.
    \19\ FICC states that by leveraging external vendor expertise, 
FICC would not need to develop such expertise in-house to supply the 
market risk attributes that would then be incorporated by FICC into 
its model to calculate the VaR Charge. See Notice, 81 FR at 90004.
---------------------------------------------------------------------------

    Because data quality is an important component of calculating the 
VaR Charge, FICC would conduct independent data checks to verify the 
accuracy and consistency of the data feed received from the vendor. 
According to FICC, it has reviewed a description of the vendor's 
calculation methodology and the manner in which the market data is used 
to calibrate the vendor's models, and it states that it understands and 
is comfortable with the vendor's controls, governance process, and data 
quality standards.\20\ Additionally, FICC would conduct an independent 
review of the vendor's release of a new version of the model. To the 
extent that the vendor changes its model and methodologies that produce 
the risk factors and risk sensitivities, FICC would review the effects 
(if any) of these changes on FICC's proposed sensitivity approach. 
Moreover, according to FICC, it does not believe that engaging the 
vendor would present a conflict of interest to FICC because the vendor 
is not an existing Clearing Member nor are any of the vendor's 
affiliates existing Clearing Members.\21\ To the extent that the vendor 
or any of its affiliates submit an application to become a Clearing 
Member, FICC states that it will negotiate an appropriate information 
barrier with the applicant in an effort to prevent a conflict of 
interest from arising.\22\
---------------------------------------------------------------------------

    \20\ See Notice, 81 FR at 90003.
    \21\ See Notice, 81 FR at 90004.
    \22\ The Commission understands that FICC will address any 
potential conflicts of interest.
---------------------------------------------------------------------------

    According to FICC, the sensitivity approach would provide three key 
benefits.\23\ First, the sensitivity approach would incorporate both 
historical data and current risk factor sensitivities while the full 
revaluation approach is calibrated with only historical data. According 
to FICC, the integration of both observed risk factor changes and 
current market conditions would enable the model to more effectively 
respond to current market price moves that may not be reflected in the 
historical price moves.\24\ FICC performed backtesting to validate the 
performance of the proposed model and determine the impact on the VaR 
Charge. According to FICC, the backtesting results and impact study 
show that the sensitivity approach provides better coverage on volatile 
days and a material improvement in margin coverage, while not 
significantly increasing the overall Clearing Fund.\25\ FICC believes 
that the proposed sensitivity approach would be more responsive to 
changing market dynamics and would not negatively impact FICC or its 
Clearing Members.\26\
---------------------------------------------------------------------------

    \23\ See Notice, 81 FR at 90004.
    \24\ Id.
    \25\ Id.
    \26\ Id.
---------------------------------------------------------------------------

    Second, FICC states that the proposed sensitivity approach would 
provide more transparency to Clearing Members. Since Clearing Members 
typically use risk factor analysis for their own risk and financial 
reporting, these Clearing Members would have comparable data and 
analysis to assess the variation in their VaR Charges based on changes 
in the market value of their portfolios. Therefore, Clearing Members 
would be able to simulate the VaR Charge to a closer degree than under 
the existing VaR model.
    Third, FICC states that the proposed sensitivity approach would 
better provide FICC with the ability to increase the look-back period 
used to generate the risk scenarios from one year to 10 years plus an 
additional stressed period, as determined necessary by FICC.\27\ The 
extended look-back period would be used to ensure that the historical 
simulation is inclusive of stressed market periods. While FICC could 
extend the one-year look-back period in the existing full revaluation 
approach to a 10-year look-back period, performance of the existing 
model could deteriorate if current market conditions are materially 
different than indicated in the historical data. Additionally, since 
the full revaluation method requires FICC to maintain in-house complex 
pricing models and mortgage prepayment models, enhancing these models 
to extend the look-back period to include 10-years of historical data 
would involve significant model development.
---------------------------------------------------------------------------

    \27\ Under the proposed model, the 10-year look-back period 
would include the 2008/2009 financial crisis scenario. To the extent 
that an equally or more stressed market period does not occur when 
the 2008/2009 financial crisis period is phased out from the 10-year 
look-back period (e.g., from September 2018 onward), FICC would 
continue to include the 2008/2009 financial crisis scenario in its 
historical scenarios. However, if an equally or more stressed market 
period emerges in the future, FICC may choose not to augment its 10-
year historical scenarios with those from the 2008/2009 financial 
crisis. On an annual basis, FICC would assess whether an additional 
stressed period should be included. This assessment would include a 
review of: (i) The largest moves in the dominating market risk 
factor of the proposed VaR model; (ii) the impact analyses resulting 
from the removal and/or addition of a stressed period; and (iii) the 
backtesting results of the proposed look-back period.
---------------------------------------------------------------------------

(ii) Proposed Margin Proxy
    In connection with FICC's proposal to source data for the proposed 
sensitivity approach from an external vendor, FICC is also proposing 
procedures that would govern in the event that the vendor fails to 
provide sensitivity data and risk factor data. If the vendor fails to 
provide any data or a significant portion of the data timely, FICC 
would use the most recently available data on the first day that such 
data disruption occurs.\28\ If it is determined that the vendor will 
resume providing data within five business days, management would 
determine whether the VaR Charge should continue to be calculated by 
using the most recently available data along with an extended look-back 
period or whether the Margin Proxy should be invoked, as described 
below. If it is determined that the data disruption will extend beyond 
five business days, the Margin Proxy would be applied.
---------------------------------------------------------------------------

    \28\ FICC states it has existing policies and procedures in 
accordance with Regulation Systems Compliance and Integrity 
(``SCI''), 17 CFR 242.1001(c)(1) (``Regulation SCI''), to determine 
whether a disruption to, or significant downgrade of, the normal 
operation of FICC's risk management system has occurred as defined 
under Regulation SCI. In the event that the vendor fails to provide 
the requisite sensitivity data and risk factor data, the responsible 
SCI personnel at FICC would determine whether an SCI event has 
occurred, and FICC would fulfill its obligations with respect to the 
SCI event.
---------------------------------------------------------------------------

    FICC would calculate the Margin Proxy on a daily basis, and the 
Margin Proxy method would be subject to monthly performance review. 
FICC would monitor the performance of the calculation on a monthly 
basis to ensure that it could be used in the circumstance described 
above. Specifically, FICC would monitor each Clearing Member's Required 
Fund Deposit and the aggregate Clearing Fund requirements versus the 
requirements calculated by Margin Proxy. FICC would also backtest the 
Margin Proxy results versus the three-day profit and loss based on 
actual market price moves. If FICC observes material differences 
between the Margin Proxy calculations and the aggregate Clearing Fund 
requirement calculated using the proposed VaR model, or if the Margin 
Proxy's backtesting results do not meet FICC's 99 percent confidence 
level, management may recommend remedial actions, such as increasing 
the look-back

[[Page 8783]]

period and/or applying an appropriate historical stressed period to the 
Margin Proxy calibration.
(iii) Proposed Change To Establish a VaR Floor
    FICC proposes to amend the definition of VaR Charge to include a 
VaR Floor. The VaR Floor would be used as an alternative to the amount 
calculated by the proposed model for portfolios where the VaR Floor 
would be greater than the model-based charge amount. FICC's proposal to 
establish a VaR Floor seeks to address the risk that the proposed VaR 
model may calculate too low a VaR Charge for certain portfolios where 
the VaR model applies substantial risk offsets among long and short 
positions in different classes of mortgage-backed securities that have 
a high degree of historical price correlation. According to FICC, 
because this high degree of historical price correlation may not apply 
in future changing market conditions,\29\ it is prudent to apply a VaR 
Floor that is based upon the market value of the gross unsettled 
positions in the Clearing Member's portfolio to protect FICC against 
such risk in the event that FICC is required to liquidate a large 
mortgage-backed securities portfolio in stressed market conditions.
---------------------------------------------------------------------------

    \29\ According to FICC, for example, and without limitation, 
certain classes of mortgage-backed securities may have highly 
correlated historical price returns despite having different 
coupons. However, if future mortgage market conditions were to 
generate substantially greater prepayment activity for some but not 
all such classes, these historical correlations could break down, 
leading to model-generated offsets that would not adequately capture 
a portfolio's risk.
---------------------------------------------------------------------------

C. Proposed Change To Eliminate the Coverage Charge and the Margin 
Requirement Differential

    FICC proposes to eliminate two components of the Required Fund 
Deposit--the Coverage Charge \30\ and the Margin Requirement 
Differential (``MRD'') \31\--that FICC believes would become 
unnecessary with the proposed changes to the VaR Charge. Both 
components are based on historical portfolio activity, which may not be 
indicative of a Clearing Member's current risk profile, but were 
determined by FICC to be appropriate to address potential shortfalls in 
margin charges under the existing VaR model.
---------------------------------------------------------------------------

    \30\ The Coverage Charge is an additional charge to help bring a 
Clearing Member's margin coverage to a targeted confidence level by 
preemptively increasing the Required Fund Deposit by an amount 
calculated to forecast potential deficiencies in the margin 
coverage. See MBSD Rule 1.
    \31\ The MRD is designed to help mitigate the risks posed to 
FICC by day-over-day fluctuations in a Clearing Member's portfolio. 
It does this by forecasting future changes in a Clearing Member's 
portfolio based on a historical look-back of each portfolio over a 
given time period. See MBSD Rule 4 Section 2.
---------------------------------------------------------------------------

    According to FICC, as part of the development and assessment of the 
sensitivity approach for the proposed VaR model, FICC obtained an 
independent validation of the proposed model by an external party, 
backtested the model's performance and analyzed the impact of the 
margin changes. Results of the analysis indicated that the proposed 
sensitivity approach would be more responsive to changing market 
dynamics and a Clearing Member's portfolio composition coverage than 
the existing model. The model validation and backtesting analysis also 
demonstrated that the proposed sensitivity model would provide 
sufficient margin coverage on a standalone basis. Because testing and 
validation of MBSD's proposed VaR model show a material improvement in 
margin coverage, FICC believes that the Coverage Charge and MRD 
components are no longer necessary.

D. Proposed Change To Replace the Historic Index Volatility Model With 
a Haircut Method

    According to FICC, occasionally, portfolios contain classes of 
securities that reflect market price changes not consistently related 
to historical risk factors. The value of these securities is often 
uncertain because the securities' market volume varies widely, which 
limits their price histories. Since the volume and price information 
for such securities is not robust, a historical simulation approach 
would not generate VaR Charge amounts that adequately reflect the risk 
profile of such securities. Currently, MBSD Rule 4 provides that FICC 
may use a historic index volatility model to calculate the VaR 
component of the Required Fund Deposit for these classes of 
securities.\32\ FICC is proposing to amend MBSD Rule 4 to replace the 
historic index volatility model with a haircut method. FICC believes 
that the haircut method would better capture the risk profile of these 
securities because the lack of adequate historical data makes it 
difficult to map such securities to a historic index volatility model.
---------------------------------------------------------------------------

    \32\ See MBSD Rule 4 Section 2(c).
---------------------------------------------------------------------------

    FICC proposes to calculate the component of the Required Fund 
Deposit applicable to these securities by applying a fixed haircut 
level to the gross market value of the positions. FICC has selected an 
initial haircut of one percent based on its analysis of a five-year 
historical study of three-day returns during a period that such 
securities were traded. This percentage would be reviewed annually or 
more frequently if market conditions warrant and updated, if necessary, 
to ensure sufficient coverage.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \33\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that the proposed rule change is consistent with the requirements 
of the Act and the rules and regulations thereunder applicable to such 
organization.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change described above 
is consistent with the Act, in particular Section 17A(b)(3)(F) of the 
Act,\34\ and Rules 17Ad-22(b)(1) \35\ and (b)(2) under the Act.\36\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F).
    \35\ 17 CFR 240.17Ad-22(b)(1).
    \36\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act \37\ requires that the rules of a 
registered clearing agency must be designed to, among other things, 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible. As discussed above, FICC is proposing a number of changes 
to the way it calculates its Required Fund Deposits--a key tool that 
FICC uses to mitigate potential losses to FICC associated with 
liquidating a Clearing Member's portfolio in the event of Clearing 
Member default. The Commission believes that the proposed changes 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 
because they are designed to enable FICC to better limit its exposure 
to Clearing Members in the event of Clearing Member default.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    First, FICC proposes to implement the sensitivity approach to its 
VaR Charge calculation. The change would enable FICC to better limit 
its exposure to Clearing Members by correcting deficiencies in MBSD's 
existing VaR methodology by leveraging an external vendor's expertise 
in supplying market risk attributes used to calculate the VaR Charge in 
the proposed sensitivity approach. In turn, the sensitivity approach 
would enable FICC to view and respond more effectively to market 
volatility by allowing FICC to attribute market price moves to various 
risk factors such as key rates. Second, the proposal to implement the 
Margin Proxy as a back-up methodology to the

[[Page 8784]]

sensitivity approach would enable FICC to better limit its exposure to 
Clearing Members by helping ensure that FICC could continue to 
calculate each Clearing Member's VaR Charge in the event that FICC 
experiences a data disruption with the vendor that supplies the 
sensitivity data. Third, FICC's proposal to implement the VaR Floor is 
designed to enable FICC to better limit its exposure to Clearing 
Members in the event that the proposed sensitivity VaR model calculates 
too low of a VaR Charge for portfolios where the model applies 
substantial offsets from certain offsetting long and short positions. 
Fourth, the proposed change to implement a haircut method for 
securities with inadequate historical pricing data would enable FICC to 
better limit its exposure to Clearing Members by better capturing the 
risk profile of the securities. Finally, FICC's proposal to remove the 
Coverage Charge and MRD components would enable FICC to remove 
unnecessary components from the Clearing Fund calculation that may not 
be indicative of a Clearing Member's current risk profile.
    By better limiting exposure to Clearing Members, the proposed 
changes are designed to ensure that, in the event of Clearing Member 
default, MBSD's operations would not be disrupted and non-defaulting 
Clearing Members would not be exposed to losses that they cannot 
anticipate or control. In this way, the proposed rules 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 and are 
therefore consistent with Section 17A(b)(3)(F) of the Act.\38\
---------------------------------------------------------------------------

    \38\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(1) under the Act \39\ requires a registered 
clearing agency that performs central counterparty services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, among other things, limit its 
exposures to potential losses from defaults by its participants under 
normal market conditions so that the operations of the clearing agency 
would not be disrupted and non-defaulting participants would not be 
exposed to losses that they cannot anticipate or control. FICC's 
proposal would enable FICC to better limit its exposure to potential 
losses from defaults by its Clearing Members under normal market 
conditions. As discussed above, the sensitivity approach would enable 
FICC to view and respond more effectively to market volatility. The 
Margin Proxy would help manage data disruption. The VaR Floor would 
ensure FICC collects at least a minimum VaR Charge. The haircut method 
would better capture the risk profile of securities with inadequate 
historical pricing data. Finally, removing the Coverage Charge and MRD 
would help ensure the Clearing Fund calculation would not include 
unnecessary components that may not be indicative of a Clearing 
Member's current risk profile. By better limiting its exposures to 
potential losses from defaults by its participants under normal market 
conditions, the proposed changes are designed to ensure that the 
operations of the clearing agency would not be disrupted and non-
defaulting participants would not be exposed to losses that they cannot 
anticipate or control. Therefore, the Commission believes this proposal 
is consistent with Rule 17Ad-22(b)(1) under the Act.\40\
---------------------------------------------------------------------------

    \39\ 17 CFR 240.17Ad-22(b)(1).
    \40\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(2) under the Act \41\ requires a registered 
clearing agency that performs central counterparty services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, among other things, use margin 
requirements to limit its credit exposures to participants under normal 
market conditions and use risk-based models and parameters to set 
margin requirements. The Required Fund Deposits are the margin 
requirements that FICC collects to limit its credit exposures to 
participants under normal market conditions. Additionally, FICC's 
proposed changes use a risk-based model (i.e., the sensitivity 
approach) and parameters (e.g., the VaR Floor and Margin Proxy) to set 
margin requirements. The proposed changes are designed to improve 
FICC's margin requirements to better limit FICC's credit exposures to 
Clearing Members, in the event of default, under normal market 
conditions. Therefore, the Commission believes this proposal is 
consistent with Rule 17Ad-22(b)(2) under the Act.\42\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(b)(2).
    \42\ Id.
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\43\ that the proposed rule change (SR-FICC-2016-007) be, and it 
hereby is, approved as of the date of this order or the date of a 
notice by the Commission authorizing FICC to implement FICC's advance 
notice proposal (SR-FICC-2016-801) that is consistent with this 
proposed rule change, whichever is later.\44\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78s(b)(2).
    \44\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\45\
---------------------------------------------------------------------------

    \45\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-01895 Filed 1-27-17; 8:45 am]
 BILLING CODE 8011-01-P