[Federal Register Volume 86, Number 29 (Tuesday, February 16, 2021)]
[Notices]
[Pages 9560-9562]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-02996]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91092; File No. SR-FICC-2020-017]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Instituting Proceedings To Determine Whether To Approve or 
Disapprove a Proposed Rule Change To Modify the Calculation of the MBSD 
VaR Floor To Incorporate a Minimum Margin Amount

February 9, 2021.

I. Introduction

    On November 20, 2020, 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-2020-017 to introduce a new ``Minimum Margin Amount'' to 
complement the existing VaR Floor calculation.\3\ The proposed rule 
change was published for comment in the Federal Register on December 
10, 2020.\4\ The Commission has received comment letters on the 
proposed rule change.\5\ On December 23, 2020, pursuant to Section 
19(b)(2) of the Act,\6\ the Commission designated a longer period 
within which to approve, disapprove, or institute proceedings to 
determine whether to approve or disapprove the proposed rule change and 
the Commission designated a longer period for comment on the proposed 
rule change.\7\ This order institutes proceedings, pursuant to Section 
19(b)(2)(B) of the Act,\8\ to determine whether to approve or 
disapprove the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On November 27, 2020, FICC also filed the proposal contained 
in the proposed rule change as advance notice SR-FICC-2020-804 with 
the Commission pursuant to Section 806(e)(1) of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act entitled the Payment, 
Clearing, and Settlement Supervision Act of 2010 (``Clearing 
Supervision Act''), 12 U.S.C. 5465(e)(1), and Rule 19b-4(n)(1)(i) of 
the Act, 17 CFR 240.19b-4(n)(1)(i). Notice of filing of the advance 
notice and extension of the review period was published for comment 
in the Federal Register on January 6, 2021. Securities Exchange Act 
Release No. 90834 (December 31, 2020), 86 FR 584 (January 6, 2021) 
(SR-FICC-2020-804). The proposal contained in the proposed rule 
change and the advance notice shall not take effect until all 
regulatory actions required with respect to the proposal are 
completed.
    \4\ Securities Exchange Act Release No. 90568 (December 4, 
2020), 85 FR 79541 (December 10, 2020) (SR-FICC-2020-017) 
(``Notice'').
    \5\ See Letter from Christopher Killian, Managing Director, 
Securities Industry and Financial Markets Association, dated January 
29, 2021, to Vanessa Countryman, Secretary, Commission, available at 
https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8154310-226759.pdf; Letter from Christopher A. Iacovella, Chief Executive 
Officer, American Securities Association, dated January 28, 2021, to 
Vanessa Countryman, Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2020-804/srficc2020804-8302307-228379.pdf; Letter from James Tabacchi, Chairman, Independent Dealer 
and Trader Association and Mike Fratantoni, Chief Economist, Senior 
Vice President, Mortgage Bankers Association, dated January 26, 
2021, to Allison Herren Lee, Acting Chair, Commission, available at 
https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8290678-228219.pdf; Letter from Kelli McMorrow, Head of Government Affairs, 
American Securities Association, dated December 18, 2020, to Vanessa 
Countryman, Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8173139-227003.pdf; Letter 
from Pete Mills, Senior Vice President, Mortgage Bankers 
Association, dated December 17, 2020, to Jay Clayton, Chairman, 
Commission, available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8155338-226778.pdf; Letter from Christopher 
Killian, Managing Director, Securities Industry and Financial 
Markets Association, dated December 16, 2020, to Vanessa Countryman, 
Secretary, Commission, available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8154310-226759.pdf; Letter from Curtis 
Richins, President & CEO, Mortgage Capital Trading, Inc., dated 
December 15, 2020, to Vanessa Countryman, Secretary, Commission, 
available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8156568-226839.pdf; and Letter from James Tabacchi, 
Chairman, Independent Dealer and Trader Association, dated December 
10, 2020, to Vanessa Countryman, Secretary, Commission, available at 
https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017-8127766-226454.pdf. See comments on the proposed rule change (SR-FICC-2020-
017), available at https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017.htm. Because the proposal contained in the proposed 
rule change was also filed as an advance notice, supra note 3, the 
Commission is considering all public comments received on the 
proposal regardless of whether the comments were submitted to the 
advance notice or the proposed rule change.
    \6\ 15 U.S.C. 78s(b)(2).
    \7\ Securities Exchange Act Release No. 90794 (December 23, 
2020), 85 FR 86591 (December 30, 2020) (SR-FICC-2020-017).
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Summary of the Proposed Rule Change

A. Background

    FICC, through its Mortgage-Backed Securities Division (``MBSD''), 
serves as a central counterparty (``CCP'') and provider of clearance 
and settlement services for the non-private label mortgage-backed 
securities markets. A key tool that FICC uses to manage its respective 
credit exposures to its members is collecting margin from each member. 
The aggregated amounts of all members' margin constitutes the Clearing 
Fund, which FICC would access should a defaulted member's own margin be 
insufficient to satisfy losses to the CCP 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 designed to capture the 
potential market price risk associated with the securities in a 
member's portfolio. The VaR Charge is typically the largest of the 
margin components.
    To determine the VaR Charge, FICC generally uses a risk-based 
calculation designed to quantify the risks related to the volatility of 
market prices associated with the securities in a member's portfolio. 
However, FICC also uses a haircut-based calculation to determine a VaR 
Floor, which replaces the risk-based calculation to become a member's 
VaR Charge in the event that the VaR Floor is greater than the amount 
determined by the risk-based calculation, operating as a minimum VaR 
Charge. FICC uses the VaR Floor to mitigate the risk that the risk-
based calculation does not result in margin amounts that accurately 
reflect FICC's applicable credit exposure, which may occur in certain 
member portfolios containing long and short positions in different 
asset classes that share a high degree of historical price correlation.

B. Minimum Margin Amount

    FICC is proposing to introduce a new calculation called the 
``Minimum Margin Amount'' to complement the existing VaR Floor 
calculation. Under the proposal, FICC would revise the existing 
definition of the VaR Floor to be the greater of (1) the current VaR 
Floor calculation, and (2) the Minimum Margin Amount. The Minimum 
Margin Amount would enhance FICC's margin collection during periods of 
market volatility, particularly when TBA \9\ price changes 
significantly exceed those implied by the VaR model risk factors, such 
as rates and option-adjusted spread. FICC observed this situation occur 
during March and April 2020, with the result that margin amounts 
collected were not sufficient to mitigate FICC's credit exposure to its 
members' portfolios.\10\ The Minimum Margin

[[Page 9561]]

Amount would be calculated based on historical price movements of the 
securities in the member's portfolio. Specifically, FICC would use a 
dynamic haircut method based on observed TBA price moves that would 
provide a more reliable estimate for the portfolios' risk level when 
current market conditions deviate from historical observations.
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    \9\ The vast majority of agency MBS trading occurs in a forward 
market, on a ``to-be-announced'' or ``TBA'' basis. In a TBA trade, 
the seller of MBS agrees on a sale price, but does not specify which 
particular securities will be delivered to the buyer on settlement 
day. Instead, only a few basic characteristics of the securities are 
agreed upon, such as the MBS program, maturity, coupon rate, and the 
face value of the bonds to be delivered.
    \10\ Although FICC expects its margin methodology to cover 
projected liquidation losses at a 99 percent confidence level, 
MBSD's monthly backtesting coverage of the VaR Charge was 86.6 
percent in March 2020 and 94.2 percent in April 2020.
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    The Minimum Margin Amount would be a minimum volatility calculation 
for specified net unsettled positions, calculated \11\ using the 
historical market price changes of such benchmark TBA securities 
determined by FICC. The Minimum Margin Amount would cover such range of 
historical market price moves and parameters using a look-back period 
of no less than one year and no more than three years.
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    \11\ See generally Notice, supra note 4, 85 FR at 79543-44 for a 
more detailed description of the calculation.
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C. Summary of the Effect of the Changes Proposed in the Proposed Rule 
Change

    FICC performed an impact study on members' portfolios for the 
period beginning February 3, 2020 through June 30, 2020. On average, at 
the member level, FICC found that the Minimum Margin Amount would have 
increased the VaR Charge by $27 million during the period of the impact 
study.\12\ The largest percent increase in VaR Charge for any member 
would have been 146%, or $22 million.\13\ The largest dollar increase 
for any member would have been $333 million, or 37% increase in the VaR 
Charge.\14\ The top 10 members based on the size of their VaR Charges 
would have contributed 69.3% of the aggregate VaR Charges had the 
Minimum Margin Amount been in place.\15\ The same members would have 
contributed to 54% of the increase resulting from the Minimum Margin 
Amount.\16\
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    \12\ Notice, supra note 4, 85 FR at 79545.
    \13\ Id.
    \14\ Id.
    \15\ Id.
    \16\ Id.
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    Backtesting studies indicate that average daily Backtesting Charges 
\17\ would have decreased by approximately $450 million or 53% during 
the impact study period and the overall margin backtesting coverage 
(based on 12 month trailing backtesting) would have improved from 
approximately 97.3% to 98.5% through June 30, 2020 if the Minimum 
Margin Amount calculation had been in place.\18\
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    \17\ The Backtesting Charge is an existing charge FICC adds to a 
member's VaR Charge when a member has 12-month trailing backtesting 
coverage below the 99 percent backtesting coverage target. The 
Backtesting Charge is generally equal to the member's third largest 
deficiency that occurred during the previous 12 months.
    \18\ Notice, supra note 4, 85 FR at 79545.
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III. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \19\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change. Institution of proceedings does not 
indicate that the Commission has reached any conclusions with respect 
to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the proposed rule change, 
and provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the proposed rule 
change.
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    \19\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\20\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of, and input from commenters with respect to, the proposed 
rule change's consistency with Section 17A of the Act,\21\ and the 
rules thereunder, including the following provisions:
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    \20\ Id.
    \21\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Act,\22\ which requires, among 
other things, that the rules of a clearing agency must 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 and to protect investors and the public interest;
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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     Section 17A(b)(3)(I) of the Act,\23\ which requires that 
the rules of a clearing agency do not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the Act;
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    \23\ 15 U.S.C. 78q-1(b)(3)(I).
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     Rule 17Ad-22(e)(4)(i) under the Act,\24\ which requires a 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage its credit exposures to 
participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence;
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    \24\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(6)(i) and (v) under the Act, which require 
a covered clearing agency to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum (1) considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market, and (2) uses an appropriate method for 
measuring credit exposure that accounts for relevant product risk 
factors and portfolio effects across products; and
     Rule 17Ad-22(e)(23)(ii) under the Act,\25\ which requires 
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.
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    \25\ 17 CFR 240.17Ad-22(e)(23)(ii).
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IV. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposed 
rule change is consistent with Section 17A(b)(3)(F) of the Act,\26\ 
Section 17A(b)(3)(I) of the Act,\27\ Rule 17Ad-22(e)(4)(i) under the 
Act,\28\ Rule 17Ad-22(e)(6)(i) and (v),\29\ Rule 17Ad-22(e)(23)(ii) 
under the Act,\30\ or any other provision of the Act, or the rules and 
regulations thereunder. Although there do not appear to be any issues 
relevant to approval or disapproval that would be facilitated by an 
oral presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Act,\31\ any request for 
an opportunity to make an oral presentation.\32\
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
    \27\ 15 U.S.C. 78q-1(b)(3)(I).
    \28\ 17 CFR 240.17Ad-22(e)(4)(i).
    \29\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
    \30\ 17 CFR 240.17Ad-23(e)(23)(ii).
    \31\ 17 CFR 240.19b-4(g).
    \32\ Section 19(b)(2) of the Act grants to the Commission 
flexibility to determine what type of proceeding--either oral or 
notice and opportunity for written comments--is appropriate for 
consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).

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[[Page 9562]]

    Interested persons are invited to submit written data, views, and 
arguments regarding whether the proposed rule change should be approved 
or disapproved by February 23, 2021. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal by 
March 3, 2021.
    The Commission asks that commenters address the sufficiency of 
FICC's statements in support of the proposed rule change, which are set 
forth in the Notice,\33\ in addition to any other comments they may 
wish to submit about the proposed rule change.
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    \33\ See Notice, supra note 3.
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    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-2020-017 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2020-017. 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 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-2020-017 and should be submitted on 
or before February 23, 2021. Rebuttal comments should be submitted by 
March 3, 2021.
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    \34\ 17 CFR 200.30-3(a)(31).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-02996 Filed 2-12-21; 8:45 am]
BILLING CODE 8011-01-P