[Federal Register Volume 87, Number 168 (Wednesday, August 31, 2022)]
[Notices]
[Pages 53522-53526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-18768]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95605; File No. SR-FICC-2022-005]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change To Revise the Formula Used To 
Calculate the VaR Charge for Repo Interest Volatility

August 25, 2022.

I. Introduction

    On June 29, 2022, 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-2022-005. The proposed rule change was published for comment in 
the Federal Register on July 15, 2022.\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. 95256 (July 12, 2022), 
87 FR 42524 (July 15, 2022) (SR-FICC-2022-005) (``Notice'').
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II. Description of the Proposed Rule Change

    FICC proposes to amend its Government Securities Division (``GSD'') 
\4\ Quantitative Risk Management (``QRM'') Methodology Document--GSD 
Initial Market Risk Margin Model (``QRM Methodology Document'') \5\ in 
order to (i) revise the formula FICC uses to calculate the Value at 
Risk charge (``VaR Charge'') \6\ margin component for repurchase 
agreement (``repo'') interest volatility, and (ii) make certain 
technical and conforming changes.
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    \4\ FICC operates two divisions, GSD and the Mortgage Backed 
Securities Division (``MBSD''). GSD provides trade comparison, 
netting, risk management, settlement, and central counterparty 
(``CCP'') services for the U.S. Government securities market, 
including repos. MBSD provides the same services for the U.S. 
mortgage-backed securities market. GSD and MBSD maintain separate 
sets of rules, margin models, and clearing funds. The proposed rule 
change relates solely to GSD.
    \5\ FICC filed an excerpt of the QRM Methodology Document 
showing the proposed changes as a confidential exhibit to this 
proposed rule change, pursuant to 17 CFR 240.24-b2. FICC originally 
filed the QRM Methodology Document confidentially as part of a 
previous proposed rule change and advance notice approved by the 
Commission regarding FICC's GSD sensitivity VaR. See Securities 
Exchange Act Release Nos. 83362 (June 1, 2018), 83 FR 26514 (June 7, 
2018) (SR-FICC-2018-001) and 83223 (May 11, 2018), 83 FR 23020 (May 
17, 2018) (SR-FICC-2018-801).
    \6\ Capitalized terms not defined herein are defined in FICC's 
GSD Rulebook, available at https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_gov_rules.pdf (``Rules'').
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A. Background

    Repos involve a pair of transactions between two parties. The first 
transaction consists of the sale of securities, in which one party (the 
``cash borrower'') delivers securities in exchange for the other 
party's (the ``cash lender'') delivery of cash. The second transaction 
occurs on a date after that of the first transaction and consists of a 
repurchase of the securities, in which the obligations to deliver cash 
and securities are reversed. FICC's members submit repos to FICC for 
matching, comparison, risk management, and ultimately, net settlement. 
FICC guarantees that the cash borrower receives its repo collateral 
back at the close of a repo transaction, while the cash lender receives 
the amount paid at the repo's start, plus interest. Interest on a repo 
transaction is the difference between the repurchase settlement amount 
and the start amount paid on the repo inception date.
    A key tool that FICC uses to manage its 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,\7\ which FICC would be able to access should a defaulted member's 
own margin be insufficient to satisfy losses to FICC caused by the 
liquidation of that member's portfolio. Each member's margin consists 
of a number of applicable components, including the VaR Charge which is 
designed to capture the potential market price risk associated with the 
securities in a member's portfolio.\8\ The VaR Charge is typically the 
largest component of a member's margin requirement. FICC designed the 
VaR Charge to cover FICC's projected liquidation losses with respect to 
a defaulted member's portfolio at a 99 percent confidence level.
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    \7\ See Rule 4 of the Rules, supra note 6.
    \8\ See Rule 1 of the Rules, supra note 6.
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    The VaR Charge includes, among other things, a component that 
addresses repo interest volatility (the ``repo interest volatility 
charge'').\9\ The QRM Methodology Document describes FICC's formula for 
calculating the repo interest volatility charge. The market value of 
interest payments for the duration of a repo transaction are subject to 
the risk of movements of the market repo interest rates. Since FICC 
guarantees the repo interest payment to the cash lenders, FICC must 
mitigate the risk arising out of fluctuations in market repo interest 
rates for a specified period of time after a member default.\10\
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    \9\ Currently, the repo interest volatility constitutes 
approximately 3 percent of the total GSD margin (at the CCP level). 
See Notice, supra note 3, at 42524.
    \10\ This time period is currently set at three days, which 
represents the duration of time that FICC would be subject to market 
risk after a member default, starting from the time of the last 
successful margin collection to the time the market risk exposure is 
effectively mitigated. See Notice, supra note 3, at 42524.
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    Under the current formula, the repo interest positions for a given 
member portfolio are put into different risk buckets based on (i) 
whether the underlying repo trade is a generic repo trade or a special 
repo trade,\11\ and (ii) the time to settlement of the underlying repo 
trade. FICC assesses the repo interest volatility charge by applying a 
haircut schedule to the different risk buckets, with a single haircut 
rate applied to each risk bucket after netting the short and long repo 
interest positions within the relevant bucket. The total net amount of 
each risk bucket equals the sum of the products of the repo start 
amount and the time to settlement of each repo interest position in 
that risk bucket. If the total net amount is positive (i.e., long), 
FICC applies a long repo haircut rate to the total net amount for that 
risk bucket to calculate the repo interest volatility charge for that 
risk bucket. If the total net amount is negative (i.e., short), FICC 
applies a short repo haircut rate to the absolute value of the total 
net amount for that risk bucket to calculate the repo interest 
volatility charge for that risk bucket. The total repo interest 
volatility charge for a member's portfolio is the sum of the repo 
interest volatility charges of all of the risk buckets in the 
portfolio. Accordingly, the current formula reflects a repo interest 
rate

[[Page 53523]]

index \12\ driven approach where a single repo haircut rate is applied 
to the absolute value of the total net amount of each risk bucket of 
repo interest positions.\13\ The QRM Methodology Document, which was 
filed confidentially, contains a detailed description of the repo 
haircut rate calculation for all risk buckets.
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    \11\ FICC designates repo trades as either generic or special 
depending on how the repo rate of the trade's particular collateral 
compares to the prevailing market rates of similar repo 
transactions.
    \12\ FICC has developed its repo interest rate indices using its 
delivery-versus-payment repo transactions. See Notice, supra note 3, 
at 42525.
    \13\ For a detailed example of the current repo interest 
volatility charge calculation, please refer to the Notice, supra 
note 3, at 42525.
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    Based on FICC's 2020 and 2021 annual model validation reports,\14\ 
the rolling 12-month backtesting coverage on members' repo interest 
positions were below the 99 percent coverage target from June 2019 to 
September 2020. Additionally, FICC conducted an impact study for the 
period of January 2018 to February 2022 (``Impact Study''),\15\ which 
demonstrated a backtesting coverage ratio of 98.7 percent for the repo 
interest volatility charge during that time period. To address these 
deficiencies, FICC proposes to change the formula for calculating the 
repo interest volatility charge to improve backtesting coverage and 
provide FICC with greater flexibility than the current formula to 
calculate the repo interest volatility charge in a manner that is more 
responsive to rapidly changing market conditions.
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    \14\ Pursuant to 17 CFR 240.24-b2, FICC filed excerpts of (1) 
the GSD Initial Market Risk Margin Models: Model Validation Report, 
July 2021, and (2) the Depository Trust and Clearing Corporation 
(``DTCC'') Model Validation Report/GSD Initial Market Risk Margin 
Models, July 2020, in a confidential Exhibit 3 to this proposed rule 
change.
    \15\ Pursuant to 17 CFR 240.24-b2, FICC filed a summary of the 
Impact Study in a confidential Exhibit 3 to this proposed rule 
change. The Impact Study
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B. Proposed Rule Change

1. New Formula for Calculating Repo Interest Volatility Charge
    The proposed formula is similar to the current formula in certain 
respects. For example, the proposed formula would continue to rely upon 
repo interest rate indices and would use a similar mathematical 
calculation as the current formula. In addition, under the proposed 
formula, the repo interest positions for a given member portfolio would 
continue to be placed into risk buckets based on the same criteria used 
currently, that is, (i) whether the underlying repo trade is a generic 
repo trade or a special repo trade, and (ii) the time to settlement of 
the underlying repo trade. Finally, the total repo interest volatility 
charge for the portfolio would continue to be the sum of the repo 
interest volatility charges of all of the risk buckets in the 
portfolio.
    However, unlike the current formula, the proposed formula provides 
FICC with the flexibility to apply more than one repo haircut rate to 
each risk bucket because FICC would no longer apply the repo haircut 
rate based on whether the total net amount for a specific risk bucket 
is long or short. Instead, FICC proposes to apply a specific repo 
haircut rate based on whether the individual repo interest position in 
a given risk bucket is either long or short. That is, FICC would apply 
a long repo haircut rate to all long positions and a short repo haircut 
rate to all short positions, in each risk bucket. The long positions 
and the short positions could offset each other within the same risk 
bucket, but could not offset each other across different risk buckets. 
The repo interest volatility charge for a specific risk bucket would be 
the absolute value \16\ of the sum of the products of repo start 
amount, time to settlement, and repo haircut rate of the individual 
repo interest positions in the risk bucket. Thus, by allowing FICC to 
use two haircuts for each risk bucket, one for long positions and the 
other for short positions,\17\ the proposal would enable FICC to 
respond to rapidly changing market conditions more quickly and 
timely.\18\
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    \16\ The repo interest volatility charge would always be a 
positive number because the calculation is based on the absolute 
value of the sum of the relevant amounts.
    \17\ As an initial matter, FICC would set the repo haircut rates 
for long positions and short positions to be the same rate, i.e., 
the larger of the two rates, so that the long and short positions in 
a specific risk bucket would be subject to the same repo haircut 
rate.
    \18\ See Notice, supra note 3, at 42525.
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2. Add Bid-Ask Spread To Repo Haircut Rates
    FICC also proposes to add a repo bid/ask spread to each repo 
haircut rate (one for long positions and one for short positions) 
within the same risk bucket. FICC would calculate the repo bid/ask 
spread based on the historical percentile movements of FICC's 
internally constructed repo interest rate indices. FICC states that 
this change would account for the difference observed in the repo 
market between the highest rate a repo participant is willing to pay to 
borrow money in a repo trade and the lowest rate a repo participant is 
willing to accept to lend money in a repo trade. FICC believes that 
adding the repo bid/ask spread to each of the repo haircut rates would 
improve backtesting coverage, particularly with respect to sub-
portfolios of repo interest only positions.\19\
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    \19\ Id.
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    Based on the Impact Study, had the proposed new formula and repo 
bid-ask spread been in place during the period of January 2018 to 
February 2022, the CCP-level backtesting coverage ratio for the repo 
interest volatility charge would have increased from approximately 98.7 
percent to 99.2 percent.\20\
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    \20\ See Notice, supra note 3, at 42526.
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3. Remove Description of Repo Haircut Rate Calculations
    As stated above, the QRM Methodology Document currently contains a 
detailed description of the repo haircut rate calculation for all risk 
buckets. FICC proposes to eliminate this detailed description from the 
QRM Methodology Document and replace it with a more general description 
of the repo haircut rate calculation. FICC proposes to describe the 
detailed calculations of the repo haircut rates in an internal 
standalone document.
    FICC believes a more general description of the repo haircut rate 
calculation would be sufficient for the QRM Methodology Document, and 
would provide FICC with greater flexibility to respond to rapidly 
changing market conditions more quickly and timely by enabling FICC to 
adjust the calculation.\21\ Nonetheless, FICC acknowledges that any 
future changes to the repo haircut rate calculations would continue to 
follow DTCC's internal model governance procedure as described in the 
Clearing Agency Model Risk Management Framework.\22\ Moreover, pursuant 
to Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and

[[Page 53524]]

Consumer Protection Act (``Dodd-Frank Act'') and Rule 19b-4(n)(1)(i) 
under the Act, FICC would be required to file an advance notice with 
the Commission for any proposed change to the repo haircut rate 
calculation that would materially affect the nature or level of risks 
presented by FICC.\23\ Additionally, FICC tracks the repo haircut rates 
in a monthly model parameter report, which is provided to the 
Commission in its supervisory capacity.\24\
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    \21\ See Notice, supra note 3, at 42526. Specifically, FICC 
states that the more general description would allow it to adjust 
the calculation without needing to submit a proposed rule change 
pursuant to Rule 19b-4, 17 CFR 240.19b-4. Id.
    \22\ Id. The Clearing Agency Model Risk Management Framework 
(``Framework'') sets forth the model risk management practices that 
FICC and its affiliates, The Depository Trust Company and National 
Securities Clearing Corporation, follows to identify, measure, 
monitor, and manage the risks associated with the design, 
development, implementation, use, and validation of quantitative 
models. See Securities Exchange Act Release Nos. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-
FICC-2017-014; SR-NSCC-2017-008), 88911 (May 20, 2020), 85 FR 31828 
(May 27, 2020) (File Nos. SR-DTC-2020-008; SR-FICC-2020-004; SR-
NSCC-2020-008), 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) 
(File No. SR-FICC-2021-006), 92381 (July 13, 2021), 86 FR 38163 
(July 19, 2021) (File No. SR-NSCC-2021-008) and 92379 (July 13, 
2021), 86 FR 38143 (July 19, 2021) (File No. SR-DTC-2021-003). 
Consistent with this obligation, FICC proposes to specifically state 
in the QRM Methodology Document that any changes or adjustments to 
the repo haircut rate calculation would need to go through this 
model governance process.
    \23\ 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-4(n)(1)(i).
    \24\ See Notice, supra note 3, at 42526.
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    FICC believes that enhancing its ability to quickly adjust the repo 
haircut rate calculation would better enable FICC to manage the risks 
of its members' repo interest positions.\25\ Specifically, FICC 
believes the proposed change would enable FICC to make appropriate and 
timely adjustments to the repo haircut rates based on an evaluation of 
a number of factors, including, but not limited to, repo interest rate 
volatility outlook and backtesting coverage results.\26\ Furthermore, 
FICC has identified certain known data availability limitations with 
respect to the current repo interest rate index.\27\ Specifically, the 
current repo interest rate index is missing data for a volatile period, 
such that repo haircut rates calibrated based on the current repo 
interest rate index might not calculate sufficient margin amounts 
during periods of heightened repo market volatility.\28\ FICC believes 
that the ability to quickly adjust the repo haircut rate calculation in 
response to rapidly changing market conditions would help mitigate the 
effects of such potential data availability limitations.\29\
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    \25\ Id.
    \26\ Id.
    \27\ Id.
    \28\ Id.
    \29\ Id.
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4. Technical and Conforming Changes
    FICC proposes to make certain technical and conforming changes to 
the QRM Methodology Document for clarity.\30\
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    \30\ FICC's proposed technical and conforming changes are 
designed to use more precise language, remove obsolete items, 
clarify and address substantive changes discussed in the proposal, 
and otherwise enhance the QRM Methodology Document's readability. 
For a detailed description of FICC's proposed technical and 
conforming changes, please refer to the Notice, supra note 3, at 
42526-27.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \31\ 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 thereunder 
applicable to FICC. In particular, the Commission finds that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act 
\32\ and Rules 17Ad-22(e)(4) \33\ and (e)(6) \34\ thereunder.
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    \31\ 15 U.S.C. 78s(b)(2)(C).
    \32\ 15 U.S.C. 78q-1(b)(3)(F).
    \33\ 17 CFR 240.17Ad-22(e)(4)(i).
    \34\ 17 CFR 240.17Ad-22(e)(6)(i) and (v).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency, such as FICC, be designed to promote 
the prompt and accurate clearance and settlement of securities 
transactions and 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.\35\
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    \35\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in Section II.B.1 above, FICC proposes to change its 
formula for calculating the repo interest volatility charge. 
Specifically, FICC would no longer apply the repo haircut rate based on 
whether the total net amount of a portfolio's positions in a specific 
risk bucket is long or short, as does the currently formula. Instead, 
FICC proposes to apply a specific repo haircut rate based on whether 
the individual repo interest positions in a given risk bucket are 
either long or short, specifically, enabling FICC to use two haircuts 
for each risk bucket, one for long positions and the other for short 
positions. The repo interest volatility charge for a specific risk 
bucket would be the absolute value of the sum of the products of repo 
start amount, time to settlement, and repo haircut rate of the 
individual repo interest positions in the risk bucket. The total repo 
interest volatility charge for the portfolio would be the sum of the 
repo interest volatility charges of all of the risk buckets in the 
portfolio. By allowing FICC to use two haircuts for each risk bucket, 
the proposed formula should better facilitate FICC's collection of 
sufficient margin by enabling FICC to respond to rapidly changing 
market conditions more quickly and effectively, particularly when the 
long and short repo interest positions exhibit very different risk 
profiles.
    As described in Section II.B.2 above, FICC proposes to add a repo 
bid/ask spread to each repo haircut rate within the same risk bucket, 
based on the historical percentile movements of FICC's internally 
constructed repo interest rate indices. Adding the bid/ask spread would 
generate margin amounts not currently accounted for in the current repo 
interest volatility charge formula. Specifically, the proposed bid/ask 
spread component would account for the difference observed in the repo 
market between the highest rate a repo participant is willing to pay to 
borrow money in a repo trade and the lowest rate a repo participant is 
willing to accept to lend money in a repo trade.
    Based on the Impact Study,\36\ had FICC used the proposed formula 
(i.e., two haircuts for each risk bucket) and the proposed bid/ask 
spread component, the CCP-level backtesting coverage ratio for the repo 
interest volatility charge would have increased from approximately 98.7 
percent to 99.2 during the period of January 2018 to February 2022. The 
Commission believes that the results of the Impact Study demonstrate 
that these proposed changes would have enabled FICC to generate margin 
amounts that more effectively cover FICC's relevant credit exposures 
than the current formula.
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    \36\ See supra note 15.
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    Additionally, as described in Section II.B.3 above, FICC proposes 
to move the detailed description of the repo haircut rate calculation 
for all risk buckets from the QRM Methodology Document to an internal 
standalone document, which FICC would not consider to be a ``rule'' for 
purposes of Rule 19b-4 \37\ under the Act. As such, the proposed change 
would provide FICC with greater flexibility to respond to rapidly 
changing market conditions more quickly, which in turn, would better 
enable FICC to risk manage its members' repo interest positions and 
effectively cover FICC's applicable credit exposures.
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    \37\ 17 CFR 240.19b-4. A stated policy, practice, or 
interpretation of a self-regulatory organization is not a ``rule'' 
that would be subject to the Rule 19b-4 filing requirements if, for 
example, it is reasonably and fairly implied by an existing rule of 
the self-regulatory organization. See 17 CFR 240.19b-4(c). However, 
any future changes to the repo haircut rate calculations would be 
subject to DTCC's internal model governance procedure as described 
in the Clearing Agency Model Risk Management Framework. See supra 
note 22. Moreover, any future changes to the repo haircut rate 
calculations that would materially affect the nature or level of 
risks presented by FICC would be subject to the advance notice 
filing requirements of the Dodd-Frank Act. See supra note 23.
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    Accordingly, the Commission believes that implementing the changes 
set forth in Sections II.B.1, II.B.2, and II.B.3

[[Page 53525]]

should help ensure that, in the event of a member default, FICC's 
operation of its critical clearance and settlement services would not 
be disrupted because of insufficient financial resources. The 
Commission, therefore, finds that FICC's proposals to change the repo 
interest volatility charge formula, add the bid/ask spread component, 
and remove the details of the repo haircut rate calculations from the 
QRM Methodology Document should help FICC to continue providing prompt 
and accurate clearance and settlement of securities transactions in the 
event of a member default, consistent with Section 17A(b)(3)(F) of the 
Act.\38\
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    \38\ Id.
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    Moreover, as described in Section II.A above, FICC would access the 
mutualized Clearing Fund should a defaulted member's own margin be 
insufficient to satisfy losses to FICC caused by the liquidation of 
that member's portfolio. Because FICC's proposals to change the repo 
interest volatility charge formula, add the bid/ask spread component, 
and remove the details of the repo haircut rate calculations from the 
QRM Methodology Document, should help ensure that FICC has collected 
sufficient margin from members, the proposed changes would also help 
minimize the likelihood that FICC would have to access the Clearing 
Fund, thereby limiting non-defaulting members' exposure to mutualized 
losses. The Commission believes that by helping to limit the exposure 
of FICC's non-defaulting members to mutualized losses, the proposed 
changes should help FICC assure the safeguarding of securities and 
funds which are in its custody or control, consistent with Section 
17A(b)(3)(F) of the Act.\39\
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    \39\ Id.
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    Finally, as described in Section II.B.4 above, FICC proposes 
several technical and conforming changes to the QRM Methodology 
Document to improve accuracy and clarity. The Commission believes that 
greater accuracy and clarity of the QRM Methodology Document should 
better enable FICC to effectively implement the document's provisions. 
Accordingly, the Commission believes that FICC's proposed technical and 
conforming changes should better enable FICC to assess and collect 
sufficient margin from its members with respect to the repo interest 
volatility charge, thereby promoting prompt and accurate clearance and 
settlement, and assuring the safeguarding of security and funds which 
are in FICC's custody or control, consistent with Section 17A(b)(3)(F) 
of the Act.\40\
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    \40\ Id.
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B. Consistency With Rule 17Ad-22(e)(4) Under the Act

    Rule 17Ad-22(e)(4)(i) \41\ under the Act 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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    \41\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described in Section III.A above, FICC's proposals to: (i) apply 
a specific repo haircut rate based on whether individual repo interest 
positions in a given risk bucket are either long or short; and (ii) add 
a bid/ask spread component to the repo interest volatility charge 
should improve FICC's ability to calculate and collect sufficient 
margin from its members. The results of FICC's Impact Study demonstrate 
that during the period of January 2018 to February 2022, the proposed 
changes would have enabled FICC to achieve its 99 percent coverage 
target more effectively than the current formula. Additionally, FICC's 
proposal to move the detailed description of the repo haircut rate 
calculation for all risk buckets from the QRM Methodology Document to 
an internal standalone document would enable FICC to quickly adjust the 
calculation in response to rapidly changing market conditions, which in 
turn, should better enable FICC to risk manage its members' repo 
interest positions and thereby collect sufficient margin to effectively 
cover FICC's credit exposures.
    Because the foregoing proposed changes should better enable FICC to 
collect sufficient margin in connection with member portfolios subject 
to the repo interest volatility charge, the Commission believes that 
the proposed changes should enhance FICC's ability to maintain 
sufficient financial resources to cover its credit exposures to 
applicable member portfolios fully with a high degree of confidence, 
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\42\
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    \42\ Id.
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C. Consistency With Rule 17Ad-22(e)(6) Under the Act

    Rule 17Ad-22(e)(6)(i) \43\ under the Act requires a clearing agency 
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, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market. Rule 17Ad-22(e)(6)(v) \44\ under the Act requires a 
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, uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.
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    \43\ 17 CFR 240.17Ad-22(e)(6)(i).
    \44\ 17 CFR 240.17Ad-22(e)(6)(v).
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    FICC's proposal to change its formula for calculating the repo 
interest volatility charge by applying a specific repo haircut rate 
based on whether individual repo interest positions in a given risk 
bucket are either long or short would provide FICC the flexibility to 
apply two separate repo haircut rates (for long and short positions, 
respectively) within the same risk bucket. As a result, the proposed 
change would enhance FICC's ability to respond quickly to rapidly 
changing market conditions, particularly when long and short repo 
interest positions exhibit very different risk profiles.\45\ 
Additionally, FICC's proposal to add a bid/ask spread component to the 
repo interest volatility charge would account for the difference 
observed in the repo market between the highest rate a repo participant 
is willing to pay to borrow money and the lowest rate a repo 
participant is willing to accept to lend money. Finally, based on its 
review of the Proposed Rule Change, including confidential Exhibit 3 
thereto,\46\ the Commission understands that the proposed changes 
generate sufficient margin amounts more effectively than

[[Page 53526]]

the current repo interest volatility charge formula.
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    \45\ FICC's proposal to move the detailed description of the 
repo haircut rate calculation for all risk buckets from the QRM 
Methodology Document to an internal standalone document would enable 
FICC to quickly adjust the calculation in response to rapidly 
changing market conditions, which in turn, should enable FICC to 
better risk manage its members' repo interest positions.
    \46\ See supra notes 14 and 15, describing the information 
submitted confidentially.
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    For these reasons, the Commission believes that the proposed 
changes should help ensure that FICC produces margin levels 
commensurate with the risks and particular attributes of its member 
portfolios containing repo interest positions by (i) enabling FICC to 
adjust the repo interest volatility charge formula in response to 
rapidly changing market conditions, and (ii) accounting for the bid/ask 
spread, which is not addressed in the current repo interest volatility 
charge formula. Accordingly, the Commission believes that the proposed 
changes would enhance FICC's risk-based margin system to better enable 
FICC to cover its credit exposures to its members' repo interest 
positions because the proposed changes consider the risks and 
particular attributes of the relevant products, portfolios, and 
markets, consistent with the requirements of Rule 17Ad-22(e)(6)(i).\47\ 
Similarly, the Commission believes that the proposed changes are 
reasonably designed to cover FICC's credit exposures to its members' 
repo interest positions because the proposed changes would enhance 
FICC's risk-based margin system using appropriate methods for measuring 
credit exposures that account for relevant product risk factors and 
portfolio effects, consistent with the requirements of Rule 17Ad-
22(e)(6)(v).\48\
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    \47\ 17 CFR 240.17Ad-22(e)(6)(i).
    \48\ 17 CFR 240.17Ad-22(e)(6)(v).
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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 
\49\ and the rules and regulations promulgated thereunder.
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    \49\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\50\ that proposed rule change SR-FICC-2022-005, be, and hereby is, 
APPROVED.\51\
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    \50\ 15 U.S.C. 78s(b)(2).
    \51\ 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.\52\
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    \52\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-18768 Filed 8-30-22; 8:45 am]
BILLING CODE 8011-01-P