[Federal Register Volume 84, Number 105 (Friday, May 31, 2019)]
[Notices]
[Pages 25315-25318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11322]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85944; File No. SR-FICC-2019-001]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Amend the GSD and MBSD 
Methodology Documents and the MBSD Clearing Rules

May 24, 2019.

I. Introduction

    On April 5, 2019, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2019-001. The proposed rule change was published for comment in 
the Federal Register on April 23, 2019.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 85676 (April 17, 2019), 
84 FR 16921 (April 23, 2019) (SR-FICC-2019-001) (``Notice'').
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II. Description of the Proposed Rule Change \4\
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    \4\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the FICC Government Securities 
Division (``GSD'') Rulebook (``GSD Rules'') and the FICC Mortgage-
Backed Securities Division (``MBSD,'' and together with GSD, the 
``Divisions'') Clearing Rules (``MBSD Rules''), as applicable, 
available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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    FICC proposes to amend the GSD Methodology Document--GSD Initial 
Market Risk Margin Model (``GSD QRM Methodology Document'') \5\ and the 
MBSD Methodology and Model Operations Document--MBSD

[[Page 25316]]

Quantitative Risk Model \6\ (``MBSD QRM Methodology Document,'' and 
together with the GSD QRM Methodology Document, the ``QRM Methodology 
Documents'' \7\) to (i) modify the look-back periods for the Margin 
Proxy of GSD and MBSD,\8\ and the GSD Haircut Rates, (ii) make 
clarifications, corrections, and technical changes to the GSD QRM 
Methodology Document, and (iii) make clarification and technical 
changes to the MBSD QRM Methodology Document. FICC also proposes to 
make clarifying changes to the MBSD Rules.
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    \5\ FICC filed the GSD QRM Methodology Document as a 
confidential exhibit in the rule filing and advance notice for GSD 
sensitivity VaR. See Securities Exchange Act Release No. 83362 (June 
1, 2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) (``GSD 
Approval Order'') and Securities Exchange Act Release No. 83223 (May 
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801) (``GSD 
Advance Notice'').
    \6\ FICC filed the MBSD QRM Methodology Document as a 
confidential exhibit in the rule filing and advance notice for MBSD 
sensitivity VaR. See Securities Exchange Act Release No. 79868 
(January 24, 2017), 82 FR 8780 (January 30, 2017) (SR-FICC-2016-007) 
(``MBSD Approval Order'') and Securities Exchange Act Release No. 
79843 (January 19, 2017), 82 FR 8555 (January 26, 2017) (SR-FICC-
2016-801) (``MBSD Advance Notice'').
    \7\ FICC requested confidential treatment of the QRM Methodology 
Documents and has filed them separately with the Secretary of the 
Commission. See 17 CFR 240-24b-2.
    \8\ FICC has adopted procedures that would govern in the event 
that the vendor fails to provide risk analytics data used by FICC to 
calculate the VaR Charge (which is defined in GSD Rule 1 and MBSD 
Rule 1). Supra note 4. These procedures include the application of 
the Margin Proxy. Specifically, each Division's Margin Proxy would 
be applied as an alternative volatility calculation for the VaR 
Charge (subject to the VaR Floor) if FICC determines that the data 
disruption will extend beyond five (5) business days. For more 
detailed and complete information about the GSD and the MBSD Margin 
Proxy, see GSD Approval Order and MBSD Approval Order, supra notes 5 
and 6.
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A. Replacing Specific References to the Look-Back Periods for the 
Margin Proxy of GSD and MBSD and the GSD Haircut Rates With More 
General Language in the QRM Methodology Documents

    FICC is proposing to amend the QRM Methodology Documents to remove 
the specific references to the current look-back periods in use and 
replace them with general language that would (i) refer to a monthly 
parameter report, (ii) state that the look-back period would not be 
less than one year, and (iii) specify the governance around changing 
the look-back periods.\9\
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    \9\ Notice, supra note 3, at 16922.
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    The QRM Methodology Documents provide the methodology by which FICC 
calculates the GSD and MBSD VaR Charges.\10\ Specifically, the QRM 
Methodology Documents specify model inputs, parameters, and 
assumptions, among other information.\11\ With respect to the Margin 
Proxy, which is an alternative volatility calculation of GSD and MBSD, 
each of the QRM Methodology Documents refers to specific look-back 
periods, which are in use today.\12\ Similarly, the GSD QRM Methodology 
Document refers to the specific look-back periods for the two haircut 
rates that form the basis of the GSD haircut charge.\13\
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    \10\ Id.
    \11\ Id.
    \12\ Id.
    \13\ Id. FICC states that, occasionally, portfolios contain 
classes of securities that reflect market price changes that are not 
consistently related to historical risk factors. FICC further states 
that the value of these securities is often uncertain because the 
securities' market volume varies widely, thus the price histories 
are limited. Because 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. FICC utilizes a haircut method (hereinafter 
referred to as the ``GSD haircut charge'') based on the volatility 
of historic index returns for any security that lacks sufficient 
historical data to be incorporated into the sensitivity approach. 
See GSD Approval Order and MBSD Approval Order, supra notes 5 and 6. 
The GSD haircut charge consists of two haircut rates: (i) The 
haircut rate for mortgage-backed securities (``MBS'') pools without 
sensitivity analytics data and (ii) the haircut rate for Treasury 
and Agency bonds without sensitivity analytics data (hereinafter, 
the ``GSD Haircut Rates''). The proposal applies to the look-back 
periods for the GSD Haircut Rates.
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    Currently, if FICC observes material differences between the Margin 
Proxy calculations and the aggregate Clearing Fund requirement 
calculated using the proposed VaR model (i.e., the sensitivity 
approach), or if the Margin Proxy's backtesting results do not meet 
FICC's 99 percent confidence level, management may recommend remedial 
actions to the Model Risk Governance Committee (``MRGC''), and to the 
extent necessary the Management Risk Committee (``MRC''), such as 
increasing the look-back period and/or applying an appropriate 
historical stressed period to the Margin Proxy calibration.\14\ In 
addition, the GSD Rules provide that the Margin Proxy shall cover such 
range of historical market price moves and parameters as FICC from time 
to time deems appropriate.\15\ With respect to the GSD haircut charge, 
the GSD QRM Methodology Document provides that certain key model 
parameters, including the look-back periods for the GSD Haircut Rates, 
are subject to periodic review and recalibration.\16\
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    \14\ Notice, supra note 3, at 16922; see Securities Exchange Act 
Release No. 82588 (January 26, 2018), 83 FR 4687, 4692 (February 1, 
2018) (SR-FICC-2018-001) (``Notice of GSD Rule Filing''); Securities 
Exchange Act Release No. 79491 (December 7, 2016), 81 FR 90001, 
90005 (December 13, 2016) (SR-FICC-2016-007) (``Notice of MBSD Rule 
Filing''); MBSD Approval Order, supra note 6, at 8782-8783.
    \15\ GSD Rules, Rule 1--Definitions, supra note 4.
    \16\ Notice, supra note 3, at 16922.
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    Under the proposal, the QRM Methodology Documents would provide 
that the look-back periods for the Margin Proxy and the two GSD Haircut 
Rates would be tracked in a monthly parameter report. The QRM 
Methodology Documents would also provide that these look-back periods 
shall not be less than one year. Finally, the QRM Methodology Documents 
would state that any changes to these look-back periods would be 
subject to the governance process set forth in the Clearing Agency 
Model Risk Management Framework (the ``Framework'').\17\
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    \17\ Id.; see Securities Exchange Act Release No. 81485 (August 
25, 2017), 82 FR 41433 (August 31, 2017) (SR-DTC-2017-008; SR-FICC-
2017-014; SR-NSCC-2017-008) (``Framework Approval Order''). In 
general, the Framework describes the model risk management practices 
adopted by FICC, National Securities Clearing Corporation, and The 
Depository Trust Company. FICC states that the Framework is designed 
to help identify, measure, monitor, and manage the risks associated 
with the design, development, implementation, use, and validation of 
quantitative models. The Framework describes (i) governance of the 
Framework; (ii) key terms; (iii) model inventory procedures; (iv) 
model validation procedures; (v) model approval process; and (vi) 
model performance procedures. Framework Approval Order, at 41435.
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    The Framework provides that the Model Validation and Control Group 
(``MVC'') prepares Model performance monitoring reports on both a 
monthly and daily basis.\18\ On a monthly basis, MVC (i) performs 
sensitivity analysis on each of FICC's Models,\19\ (ii) reviews key 
parameters and assumptions for backtesting, and (iii) considers 
modifications to ensure that the backtesting practices of FICC are 
appropriate for determining the adequacy of its applicable margin 
resources.\20\ The Framework states that MRGC will review the Model 
performance monitoring, which includes review of risk-based Models used 
to calculate margin requirements and relevant parameters/threshold 
indicators, sensitivity analysis, and Model backtesting results, and 
serious performance concerns will be escalated to the MRC.\21\
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    \18\ Notice, supra note 3, at 16922.
    \19\ Id. The term ``Model'' refers to a quantitative method, 
system, or approach that applies statistical, economic, financial, 
or mathematical theories, techniques, and assumptions to process 
input data into quantitative estimates. Framework Approval Order, 
supra note 17, at 41433.
    \20\ Notice, supra note 3, at 16922; Framework Approval Order, 
supra note 17, at 41435.
    \21\ Notice, supra note 3, at 16922; Framework Approval Order, 
supra note 17, at 41435.
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B. Clarifications, Corrections, and Technical Changes to the GSD QRM 
Methodology Document

    First, FICC would make certain clarifications to the GSD QRM 
Methodology Document.\22\ In the section of the GSD QRM Methodology 
Document that describes key parameters (where the look-back periods are 
currently listed), FICC proposes to

[[Page 25317]]

rearrange the list so that the look-back periods associated with 
sensitivity VaR are grouped together and the look-back periods for GSD 
Haircut Rates are grouped together.\23\ FICC also proposes to add sub-
headings to enhance readability and clarity.\24\
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    \22\ Notice, supra note 3, at 16923.
    \23\ Id.
    \24\ Id.
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    In addition, in the section of the GSD QRM Methodology Document 
that describes key parameters, FICC would amend the language describing 
the GSD Haircut Rates to correspond to the language used in later 
sections for clarity and consistency.\25\
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    \25\ Id.
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    Where the GSD QRM Methodology Document references the governance 
practice regarding the review and recalibration of the look-back 
periods, FICC also proposes to specifically reference the 
Framework.\26\ FICC would provide additional clarity by adding language 
describing types of data that would be used to determine key model 
parameters.\27\ FICC would also clarify the GSD QRM Methodology 
Document by adding language stating that management may implement any 
approved changes by MRGC or MRC.\28\ Currently, the GSD QRM Methodology 
Document states that if the Margin Proxy's backtesting results do not 
meet FICC's 99 percent confidence level, management may recommend 
remedial actions to MRGC, and to the extent necessary the MRC, such as 
increasing the look-back period and/or applying an appropriate 
historical stressed period to the Margin Proxy calibration.\29\
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    \26\ Id.
    \27\ Id.
    \28\ Id.
    \29\ Notice, supra note 3, at 16922.
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    With respect to the descriptions of some of the GSD Haircut Rates, 
FICC would add clarifying terminology and delete duplicative 
explanations and replace them with a cross-reference to the appendix, 
which contains the same explanation.\30\
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    \30\ Notice, supra note 3, at 16923.
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    Second, FICC proposes to make certain corrections to the GSD QRM 
Methodology Document.\31\ FICC would correct a typographical error in 
the description of key parameters by revising a reference from MBSD to 
MBS.\32\ In addition, to correct what FICC states is an omission in the 
GSD QRM Methodology Document, FICC would add that if FICC observes 
material differences between the Margin Proxy calculations and the 
aggregate Clearing Fund requirement calculated using the VaR model, 
management may recommend remedial actions (as was stated in the GSD 
sensitivity VaR rule filing).\33\
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    \31\ Id.
    \32\ Id.
    \33\ Id.
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    Finally, FICC proposes to make certain technical changes (e.g., 
word usage, spacing corrections, grammar changes, and revising certain 
references from singular to plural) to the GSD QRM Methodology 
Document.\34\ For example, for consistency, FICC proposes to revise a 
reference from ``window'' to ``period'' in the description of key 
parameters and all references from ``lookback'' to ``look-back'' and 
from ``TBA/pool'' to ``Pool-TBA.'' \35\
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    \34\ Id.
    \35\ Id.
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C. Clarification and Technical Changes to the MBSD QRM Methodology 
Document

    FICC proposes to clarify the MBSD QRM Methodology Document by 
adding language stating that management may implement any approved 
changes by MRGC or MRC.\36\ Currently, the MBSD QRM Methodology 
Document states that if FICC observes material differences between the 
Margin Proxy calculations and the aggregate Clearing Fund requirement 
calculated using the VaR model, or the Margin Proxy's backtesting 
results do not meet FICC's 99 percent confidence level, management may 
recommend remedial actions to the MRGC, and to the extent necessary the 
MRC, such as increasing the look-back period and/or applying an 
appropriate historical stressed period to the Margin Proxy 
calibration.\37\
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    \36\ Id.
    \37\ Notice, supra note 3, at 16922.
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    In addition, FICC proposes to make certain technical changes to the 
MBSD QRM Methodology Document (e.g., grammar changes and revising 
certain references from singular to plural).\38\ FICC would also revise 
a reference from ``lookback'' to ``look-back'' for consistency.\39\ 
FICC would remove the revision history because it is solely 
administrative and would not affect the calculation of margin or 
Clearing Members' substantive rights or obligations.\40\
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    \38\ Notice, supra note 3, at 16923.
    \39\ Id.
    \40\ Id.
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D. Clarifications to the MBSD Rules

    FICC proposes to make certain clarifications to the MBSD Rules.\41\ 
Specifically, FICC would add a definition of ``Margin Proxy'' and use 
such term in the definition of ``VaR Charge.'' \42\ In addition, FICC 
would clarify the definition of ``VaR Charge'' in the MBSD Rules by 
adding the word ``Clearing'' before the word ``Members.'' \43\
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    \41\ Id.
    \42\ Id.
    \43\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \44\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the proposed rule change is consistent with 
Sections 17A(b)(3)(F) \45\ of the Act and Rule 17Ad-22(e)(23)(ii) 
thereunder.\46\
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    \44\ 15 U.S.C. 78s(b)(2)(C).
    \45\ 15 U.S.C. 78q-1(b)(3)(F).
    \46\ 17 CFR 240.17Ad-22(e)(23)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency 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.'' \47\
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    \47\ 15 U.S.C. 78q-1(b)(3)(F).
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    First, as described above in Section II.A., the proposed rule 
change would amend the QRM Methodology Documents to remove specific 
references (and explanations relating thereto) to the look-back periods 
for (1) the Margin Proxy of GSD and MBSD and (2) the two GSD Haircut 
Rates, and replace them with more general language. The proposed rule 
change would state that the specific look-back periods would be tracked 
in the monthly parameter report, any changes to the look-back periods 
would not be less than one year, and any changes would be subject to 
the governance process set forth in the Framework.\48\ The Commission 
believes that such change, which is subject to the minimum look-back 
period and the governance process, would help FICC to better cover its 
credit exposures to its Members because the changes would help FICC to 
more accurately adjust the look-back periods under the following 
circumstances:
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    \48\ Notice, supra note 3, at 16922; Framework Approval Order, 
supra note 17.

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[[Page 25318]]

     When FICC observes material differences between the Margin 
Proxy calculations and the aggregate Clearing Fund requirement 
calculated using the VaR model;
     when the Margin Proxy's backtesting results do not meet 
FICC's 99 percent confidence level; or
     when FICC observes that the asset class backtesting 
performance associated with the GSD Haircut Rates is not at the 99 
percent confidence level.
    The Commission believes that the changes would help enhance FICC's 
ability to calculate and collect adequate margin from its Clearing 
Members and Netting Members, and in turn, better manage the risks 
associated with losses arising from member defaults, protecting non-
defaulting Clearing Members and Netting Members from such losses. 
Therefore, the Commission believes that the proposed rule changes to 
the look-back periods would allow FICC to effectively cover its losses, 
and 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.\49\
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    \49\ 15 U.S.C. 78q-1(b)(3)(F).
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    Second, as described above in Sections II.B. and II.C., the 
proposed rule change would clarify, correct, and technically change the 
GSD QRM Methodology Document, and clarify and technically change the 
MBSD QRM Methodology Document to state how FICC would calculate the 
components of the margin calculation. The Commission believes that the 
changes described in Sections II.B. and II.C. would help enhance the 
clarity of the QRM Methodology Documents for FICC. FICC states that the 
QRM Methodology Documents are used by FICC Risk Management personnel to 
calculate margin requirements. Accordingly, helping to enhance the 
clarity of the QRM Methodology Documents would help FICC Risk 
Management personnel to accurately understand and implement the 
margining process, charge an appropriate level of margin, and in turn, 
allow FICC to better manage its risks from loss events. Therefore, the 
Commission believes that the changes described in Sections II.B. and 
II.C. 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.\50\
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    \50\ Id.
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    Third, as described in Section II.D., the proposed rule change 
would add and clarify certain definitions. The Commission believes that 
the proposed clarifications to Rule 1 of the MBSD Rules would help 
ensure that the calculation of margin is clear and transparent to 
Clearing Members and FICC, and thereby help ensure that FICC calculates 
and collects adequate margin from Clearing Members, and that Clearing 
Members understand the relevant definition. Therefore, the Commission 
believes that the proposed clarifications to Rule 1 of the MBSD Rules 
would also 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.\51\
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    \51\ Id.
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B. Consistency With Rule 17Ad-22(e)(23)(ii) Under the Act

    Rule 17Ad-22(e)(23)(ii) under the Act requires that a covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide sufficient 
information to enable participants to identify and evaluate the risks, 
fees, and other material costs they incur by participating in the 
covered clearing agency.\52\
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    \52\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    As described above in Section II.D., the proposal would help to 
clarify Rule 1 of the MBSD Rules, which in turn, would help ensure that 
the calculation of margin is transparent and clear to Clearing Members, 
thereby enabling Clearing Members to better understand the calculation 
of margin, as well as providing them with increased predictability and 
certainty regarding their obligations. As such, the Commission believes 
that the proposed rule changes are consistent with Rule 17Ad-
22(e)(23)(ii) under the Act.\53\
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    \53\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\54\ and the rules and regulations promulgated thereunder.
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    \54\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\55\ that proposed rule change SR-FICC-2019-001, be, and hereby is, 
APPROVED.\56\
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    \55\ 15 U.S.C. 78s(b)(2).
    \56\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \57\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\57\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-11322 Filed 5-30-19; 8:45 am]
BILLING CODE 8011-01-P