[Federal Register Volume 86, Number 192 (Thursday, October 7, 2021)]
[Notices]
[Pages 55891-55893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-21863]



[[Page 55891]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93234; File No. SR-FICC-2021-007]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Remove the Early Unwind 
Intraday Charge, Change the Treatment of Short-Term Treasuries, and 
Make Other Changes

October 1, 2021.
    On August 13, 2021, 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-2021-007 (the ``Proposed Rule Change'') to amend (1) the FICC 
Government Securities Division (``GSD'') Rulebook (``Rules'') \3\ in 
order to remove the Early Unwind Intraday Charge (``EUIC''), (2) the 
GSD Methodology Document--GSD Initial Market Risk Margin Model (``QRM 
Methodology Document'') to change the treatment of U.S. Treasury 
(``Treasury'') securities with remaining time-to-maturities equal to or 
less than a year (``Short-Term Treasuries''), and (3) the Rules and the 
QRM Methodology Document to make certain technical changes, as 
described more fully below. The Proposed Rule Change was published for 
public comment in the Federal Register on August 31, 2021,\4\ and the 
Commission received no comment letters regarding the changes proposed 
therein. 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\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the Rules, available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ Securities Exchange Act Release No. 92756 (August 25, 2021), 
86 FR 48770 (August 31, 2021) (SR-FICC-2021-007) (``Notice'').
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I. Description of the Proposed Rule Change

A. Elimination of the EUIC for the GCF Repo Service

    The GCF Repo service allows members of FICC's Government Securities 
Division to trade general collateral finance repos (``GCF Repos'') \5\ 
throughout the day without requiring intraday, trade-for-trade 
settlement on a delivery-versus-payment basis. A key tool that FICC 
uses to manage its respective credit exposures to its members is the 
daily collection of margin from each member. The aggregated amount of 
all members' margin constitutes the Clearing Fund, which FICC would 
access should a defaulted member's own margin be insufficient to 
satisfy losses to FICC caused by the liquidation of that member's 
portfolio. The EUIC was adopted as a component of margin in 2014 and is 
generally determined based on the risk posed by underlying collateral 
pertaining to GCF Repo positions in FICC's 12 p.m. intraday margin 
call. The purpose of the EUIC is to address the under-margined 
conditions that can occur in two situations in the GCF Repo service 
involving the substitution of securities with cash.\6\ The first 
situation may occur when, on an intraday basis, a GCF Repo Member 
substitutes cash for the securities that had been used as collateral 
for a GCF Repo position the prior day. The second situation may occur 
when the GCF Clearing Agent Bank unwound the cash lending side of a GCF 
Repo Transaction that occurred on an interbank basis \7\ at 
approximately 7:30 a.m.\8\ FICC represents that both of these 
situations had the potential to result in higher cash balances in the 
underlying collateral of GCF Repo positions at 12:00 p.m. when FICC is 
calculating the intraday margin associated with GCF Repo positions.\9\ 
These situations could cause an under-margined condition because there 
is no VaR Charge associated with cash collateral,\10\ and the GCF Repo 
Member would likely replace the cash with securities (which would be 
subject to the VaR Charge) by end of day.
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    \5\ A GCF Repo is one in which the lender of funds is willing to 
accept any of a class of U.S. Treasuries, U.S. government agency 
securities, and certain mortgage-backed securities as collateral for 
the repurchase obligation. This is in contrast to a specific 
collateral repo.
    \6\ Securities Exchange Act Release Nos. 73389 (October 17, 
2014), 79 FR 63456 (October 23, 2014) (SR-FICC-2014-01) and 73388 
(October 17, 2014), 79 FR 63458 (October 23, 2014) (SR-FICC-2014-
801).
    \7\ At the time of the EUIC approval, the GCF Repo Service was 
operating on both an ``interbank'' and ``intrabank'' basis. 
``Interbank'' means that the two GCF Repo Members which have been 
matched in a GCF Repo transaction each clear at a different clearing 
bank. ``Intrabank'' means that the two GCF Repo Members which have 
been matched in a GCF Repo transaction clear at the same clearing 
bank. The GCF Repo Service now operates on an intrabank basis only 
because the interbank service of the GCF Repo service is no longer 
available. See Securities Exchange Act Release No. 78206 (June 30, 
2016), 81 FR 44388 (July 7, 2016) (SR-FICC-2016-002).
    \8\ All times herein are Eastern Time.
    \9\ Notice, supra note 4, at 48771.
    \10\ The value-at-risk (``VaR'') Charge is designed to capture 
the risks related to the movement of market prices associated with 
the securities in a member's portfolio, and calculate the potential 
losses on a portfolio over a three-day period of risk assumed 
necessary to liquidate the portfolio. See Securities Exchange Act 
Release No. 90182 (October 14, 2020), 85 FR 66630 (October 20, 2020) 
(SR-FICC-2020-009). There is no VaR Charge associated with cash 
collateral because there is no need for liquidation.
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    FICC represents that it can address the first situation described 
above by applying the Intraday Supplemental Fund Deposit, as updated in 
2018,\11\ instead of the EUIC.\12\ The current EUIC is only applied 
based on a Netting Member's 12:00 p.m. GCF Repo positions, as the 
lesser of (i) the net reduction in the VaR Charge attributable to 
either cash substitutions, or (ii) the prior end of day VaR Charge 
minus the intraday VaR Charge.\13\ On the other hand, FICC receives 
hourly intraday GCF Repo lockup files from 8:00 a.m. to 3:00 p.m. from 
The Bank of New York Mellon.\14\ These hourly intraday GCF Repo lockup 
files provide FICC with information with respect to the GCF Repo 
Members' positions throughout the day that FICC can use to calculate an 
intraday VaR Charge. As such, throughout the day, FICC can use the 
information in these files to assess the exposure that arises from 
collateral substitution (in addition to any other position changes) and 
can charge an Intraday Supplemental Fund Deposit amount to the GCF Repo 
Member, if necessary, to address this exposure.
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    \11\ See Securities Exchange Act Release No. 83362 (June 1, 
2018), 83 FR 26514 (June 7, 2018) (SR-FICC-2018-001) and 83223 (May 
1, 2018), 83 FR 23020 (May 17, 2018) (FICC-2018-801).
    \12\ Notice, supra note 4, at 48771.
    \13\ Id.
    \14\ Id.
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    Regarding the second situation described above, the situation no 
longer exists because interbank services were suspended in 2016, and 
accordingly, the unwind of the cash lending side of a GCF Repo 
Transaction that occurred on an interbank basis does not take 
place.\15\
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    \15\ See Securities Exchange Act Release No. 78206 (June 30, 
2016), 81 FR 44388 (July 7, 2016) (SR-FICC-2016-002).
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B. Treatment of Short-Term Treasuries

    The confidentially filed QRM Methodology Document, which describes 
the current GSD margin methodology, does not reflect any special 
treatment for determining the margin for transactions in Short-Term 
Treasuries. Short-Term Treasuries are margined as part of the entire 
portfolio using the sensitivity VaR Charge methodology, and a haircut-
based methodology is used as a backup for Short-Term Treasuries where 
sensitivity analytics data is not available. Specifically, Short-Term 
Treasuries that do not have sensitivity analytics data are subject to a 
single haircut rate calibrated to the volatility of the

[[Page 55892]]

Bloomberg/Barclays Index of Treasury securities with remaining time-to-
maturities equal to or less than a year.
    FICC represents that one concern with the current approach is 
related to the potentially large impact that market events can have on 
the yields of Short-Term Treasuries. Under the current approach, the 
VaR Charge calculated for portfolios with a high concentration of 
Short-Term Treasuries may not adequately cover the potentially large 
impact on the ``short-end'' of the Treasury yield curve.\16\ FICC 
represents that another concern with the current approach is that it 
may not adequately address the volatility of certain portfolios of 
Short-Term Treasuries if the composition of those portfolios differs 
greatly from the composition of the Bloomberg/Barclays Index of 
Treasury securities described above. Using one haircut rate based on 
the volatility of the Bloomberg/Barclays index may not adequately cover 
the risk of securities with longer duration maturities in the equal to 
or less than one-year.\17\
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    \16\ Notice, supra note 4, at 48772.
    \17\ Id.
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    In order to address the concerns above, FICC proposes to use a 
haircut methodology to margin all Short-Term Treasuries and not just 
for the Short-Term Treasuries without sensitivity analytics data. In 
addition, FICC proposes to use two different haircut rates depending on 
the time to maturity of the Short-Term Treasuries. The first rate would 
apply to Treasury securities with remaining time to maturity equal to 
or less than six months with a haircut floor set at 12.5 basis points. 
The second rate would apply to Treasury securities with remaining time 
to maturity greater than six months but equal to or less than one year 
with a haircut floor set at 25 basis points. The haircut charges would 
be applied to the absolute value of the net market value of the 
Treasury securities in the respective rates, and the correlation offset 
would not be applied.
    FICC examined the backtesting results of the current approach, as 
applied at a product level, for Short-Term Treasuries.\18\ The results 
show that the current approach does not meet FICC's 99% confidence 
level standard.\19\ FICC's backtesting results for the period between 
January and December 2020 showed that the Proposed Rule Change would 
improve the backtesting results from approximately 94.9% to 99.4%.\20\
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    \18\ FICC filed the backtesting results as a confidential 
Exhibit 3 to the Proposed Rule Change pursuant to 17 CFR 240.24b-2. 
Backtesting is an ex-post comparison of actual outcomes with 
expected outcomes derived from the use of margin methodology.
    \19\ Notice, supra note 4, at 48772.
    \20\ Id.
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C. Technical Changes

    FICC proposes to make conforming technical changes to renumber the 
paragraphs in Section 1b of Rule 4. FICC also proposes to make 
technical changes to the QRM Methodology Document. Specifically, FICC 
proposes to make clarifying and grammatical changes to a sentence that 
describes the indices in a haircut used for short TIPS bonds.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \21\ 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 the rules and regulations thereunder 
applicable to such organization. After careful consideration, the 
Commission finds that the Proposed Rule Change is consistent with the 
requirements of the Act and the rules and regulations applicable to 
FICC.\22\ In particular, the Commission finds that the Proposed Rule 
Change is consistent with Section 17A(b)(3)(F) \23\ of the Act and 
Rules 17Ad-22(e)(4)(i) \24\ and 17Ad-22(e)(6)(i) \25\ thereunder.
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ The Commission's findings are based on its review of the 
Proposed Rule Change, including its analysis of the backtesting 
results, which are summarized in Section I.B. above. See supra note 
18 and accompanying text.
    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(4)(i).
    \25\ 17 CFR 240.17Ad-22(e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) \26\ of the Act requires, in part, that the 
rules of a clearing agency, such as FICC, be designed to, among other 
things, promote the prompt and accurate clearance and settlement of 
securities transactions and assure the safeguarding of securities and 
funds which are in the custody or control of the clearing agency or for 
which it is responsible.
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in Section I.A. above, the proposed change to 
eliminate the EUIC is designed to provide more accurate coverage by 
avoiding potential under-margining due to the two situations described 
involving cash substitution. As stated above, the EUIC was established 
in 2014 to reduce this risk of potential under-margining. However, in 
2018, FICC amended its methodology for determining the VaR Charge and 
clarified the nature of the Intraday Supplemental Fund Deposit to more 
effectively address market volatility. As described above, the EUIC is 
applied based on data produced once per day while the Intraday 
Supplemental Fund Deposit is based on hourly information. Accordingly, 
the Intraday Supplemental Fund Deposit can more accurately calculate 
margin the exposure presented. Furthermore, the second situation 
involving interbank transactions no longer exists because inter bank 
services were suspended in 2016.
    As described in Section I.B. above, the proposed changes to the QRM 
Methodology Document are designed to mitigate the vulnerabilities of 
the current GSD margin methodology when it is applied to portfolios 
with a high concentration of Short-Term Treasuries. As stated above, 
the current GSD Margin methodology does not reflect any special 
treatment for determining the margin for Short-Term Treasuries. 
Currently, Short-Term Treasuries are margined as part of the entire 
portfolio using the sensitivity VaR Charge methodology, and a haircut-
based methodology is used as a backup where sensitivity analytics data 
is not available. Pursuant to the Proposed Rule Change, a haircut 
methodology would be used to margin all Short-Term Treasuries and two 
different haircuts with floors would be used depending on the time to 
maturity of the Short-Term Treasuries. The proposed changes would help 
FICC to calculate and collect adequate margin for Short-Term Treasuries 
from members. Moreover, the backtesting results show that the Proposed 
Rule Change would help FICC achieve its backtesting standards, which is 
a 99 percent coverage target with 3-days of margin period of risk.
    As described in Section I.C. above, the proposed technical changes 
to the QRM Methodology Document would enhance the clarity of the 
document for FICC. As the QRM Methodology Document is used by FICC's 
risk management personnel regarding the calculation of margin 
requirements, the proposed changes would help ensure that FICC's 
personnel understand and apply the calculation of the GSD margin 
methodology.
    Taken together, the Commission believes that the Proposed Rule 
Change would allow FICC to more accurately calculate each member's 
margin. This enhancement, in turn, would help FICC to produce margin 
levels more commensurate with the risks associated with its members' 
portfolios, and more effectively cover its credit exposure to its 
members. FICC's collection of margin

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amount in a manner that fully manages FICC's applicable credit 
exposures should help ensure that, in the event of a member default, 
FICC's operations would not be disrupted and non-defaulting members 
would not be exposed to losses that they cannot anticipate or control. 
Accordingly, the Commission finds that NSCC's Proposed Rule Change is 
designed to help promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\27\ Moreover, FICC's collection of margin 
amounts that better limit FICC's credit exposure to members would help 
ensure that FICC maintains adequate funds necessary to manage the risks 
associated with performing its clearance and settlement functions, 
which could, in turn, help reduce the amount of credit losses that 
would be distributed to non-defaulting members in the event of a 
default. Accordingly, the Commission finds that FICC's Proposed Rule 
Change is designed to help promote the prompt and accurate clearance 
and settlement of securities transactions and assure the safeguarding 
or securities and funds that are in FICC's custody or control. 
Therefore, the Commission believes that the Proposed Rule Change is 
consistent with Section 17A(b)(3)(F) of the Act.\28\
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    \27\ Id.
    \28\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act \29\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those exposures arising from its payment, clearing, and settlement 
processes by maintaining sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.
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    \29\ 17 CFR 240.17Ad-22(e)(4)(i).
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    The proposed change to eliminate the EUIC is designed to more 
accurately address the potential under-margining situations described 
above. The EUIC is charged once a day, while FICC may charge an 
Intraday Supplemental Fund Deposit amount, if necessary, throughout the 
day, based on the hourly information that FICC receives regarding GCF 
Repo Members' positions. As such, because FICC can continuously assess 
its exposure and charge additional margin throughout the day with the 
Intraday Supplemental Fund Deposit rather than at one point in time, 
the proposed changes would help FICC better measure and monitor its 
credit exposures to members.
    The proposed changes to the QRM Methodology Document are designed 
to allow FICC to use the haircut methodology to determine the margin 
for all Short-Term Treasuries and not just for the Short-Term 
Treasuries without sensitivity analytics data, as is the current case. 
In addition, FICC would differentiate Short-Term Treasuries based on 
the time to maturity, and apply two haircuts. This proposed approach 
would address the deficienties with the current approach when it is 
applied to portfolios with a high concentration of Short-Term 
Treasuries as described above and thereby better enable FICC to limit 
its credit exposures to members.
    Therefore, for the reasons discussed above, the Commission believes 
that the Proposed Rule Change is consistent with the requirements of 
Rule 17Ad-22(e)(4)(i) under the Act.\30\
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    \30\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) under the Act \31\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market.
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    \31\ 17 CFR 240.17Ad-22(e)(6)(i).
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    The proposed change to eliminate the EUIC and thus relying on 
Intraday Supplemental Fund Deposit to calculate and collect margins is 
designed to cover FICC's credit exposures to its members. As described 
above, Intraday Supplemental Fund Deposit would better enable FICC to 
consider and produce margin levels commensurate with the risk and 
particular attributes of a GCF Repo Member's portfolio and is able to 
be more precisely tailored to the risks presented by a particular 
portfolio because it allows for more frequent consideration of the 
appropriate charge, as opposed to at one point during the day under the 
EUIC.
    The proposed changes to the QRM Methodology Document are designed 
to cover FICC's credit exposures to its members, especially those 
members who have a high concentration of Short-Term Treasuries in their 
portfolios because, as described above, this proposed approach would 
address two vulnerabilities associated with the current approach when 
it is applied to portfolios with a high concentration of Short-Term 
Treasuries. By providing targeted margin methodologies for Short-Term 
Treasuries and addressing two vulnerabilities, the proposed changes 
would enhance NSCC's ability to cover its credit exposures to its 
members and produce margin levels commensurate with the risks and 
particular attributes of Short-Term Treasuries.
    Therefore, for the reasons discussed above, the Commission believes 
that the Proposed Rule Change is consistent with the requiremens of 
Rule 17Ad-22(e)(6)(i) under the Act.\32\
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    \32\ Id.
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III. 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 Section17A of the Act \33\ and 
the rules and regulations promulgated thereunder.
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    \33\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\34\ that Proposed Rule Change SR-FICC-2021-007, be, and hereby is, 
approved.\35\
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    \34\ 15 U.S.C. 78s(b)(2).
    \35\ In approving the Proposed Rule Change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-21863 Filed 10-6-21; 8:45 am]
BILLING CODE 8011-01-P