[Federal Register Volume 87, Number 183 (Thursday, September 22, 2022)]
[Notices]
[Pages 57960-57967]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-20499]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95806; File No. SR-FICC-2022-006]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Increase the Minimum 
Required Fund Deposit for GSD Netting Members and Sponsoring Members, 
and Make Other Changes

September 16, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 9, 2022, Fixed Income Clearing Corporation (``FICC'') 
filed

[[Page 57961]]

with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') and 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules,'' and collectively with the GSD Rules, the ``Rules'') \3\ in 
order to increase the minimum Required Fund Deposit for GSD Netting 
Members and Sponsoring Members (collectively, ``members''), as well as 
make certain clarifying and technical changes, as described in greater 
detail below.
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    \3\ Terms not defined herein are defined in the GSD Rules, 
available at http://www.dtcc.com/~/media/Files/Downloads/legal/
rules/ficc_gov_rules.pdf, and the MBSD Rules, available at 
www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_mbsd_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    FICC is proposing to increase the minimum Required Fund Deposit for 
members, as described in greater detail below.
Background
    As part of its market risk management strategy, FICC manages its 
credit exposure to members by determining the appropriate Required Fund 
Deposit to the Clearing Fund and monitoring its sufficiency, as 
provided for in the Rules.\4\ The Required Fund Deposit serves as each 
member's margin. The objective of a member's Required Fund Deposit is 
to mitigate potential losses to FICC associated with liquidation of 
member's portfolio in the event FICC ceases to act for that member 
(hereinafter referred to as a ``default'').\5\ The aggregate of all 
member's Required Fund Deposits, together with certain other deposits 
required under the Rules, constitutes the Clearing Fund, which FICC 
would access, among other instances, should a defaulting member's own 
Clearing Fund deposit be insufficient to satisfy losses to FICC caused 
by the liquidation of that member's portfolio.
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    \4\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 3. FICC's market risk management strategy is designed to comply 
with Rule 17Ad-22(e)(4) under the Act, where these risks are 
referred to as ``credit risks.'' 17 CFR 240.17-Ad-22(e)(4).
    \5\ The Rules identify when FICC may cease to act for a member 
and the types of actions FICC may take. For example, GSD is 
permitted to cease to act for (i) a Member pursuant to GSD Rule 22A 
(Procedures for When the Corporation Ceases to Act), (ii) a 
Sponsoring Member pursuant to Section 14 of GSD Rule 3A (Sponsoring 
Members and Sponsored Members), and (iii) a Sponsored Member 
pursuant to Section 13 of GSD Rule 3A (Sponsoring Members and 
Sponsored Members). Supra note 3.
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    Pursuant to the Rules, each member's Required Fund Deposit amount 
consists of a number of applicable components, each of which is 
designed to address specific risks faced by FICC, as identified within 
GSD Rule 4.\6\ Currently, FICC requires a minimum Required Fund Deposit 
of $100,000 be made and maintained in cash.\7\ The same requirement 
applies to the GSD Sponsoring Members; \8\ however, for GSD Repo 
Brokers, the minimum Required Fund Deposit amount is $5 million.\9\
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    \6\ GSD Rule 4. Supra note 3.
    \7\ GSD Rule 4, Section 3. Supra note 3.
    \8\ GSD Rule 3A, Section 10(d). Supra note 3.
    \9\ GSD Rule 4, Section 1b. Supra note 3. Currently, if a Repo 
Broker has two Margin Portfolios, with Broker Account(s) in one 
Margin Portfolio and Dealer Account(s) in the other Margin 
Portfolio, the total minimum Required Fund Deposit applicable to the 
Repo Broker would be $5.1 million, i.e., $5 million minimum Required 
Fund Deposit for the Margin Portfolio with Broker Account(s) and 
$100,000 minimum Required Fund Deposit for the Margin Portfolio with 
Dealer Account(s).
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    FICC's margining methodologies are designed to mitigate market, 
liquidity and other risks. FICC regularly assesses its margining 
methodologies to evaluate whether margin levels are commensurate with 
the particular risk attributes of each relevant product, portfolio, and 
market. In connection with such reviews, FICC has determined that there 
are circumstances where the current minimum Required Fund Deposit 
amount at GSD is insufficient to manage FICC's risk in the event of an 
abrupt or sudden increase in a member's activity.
    FICC employs daily backtesting to determine the adequacy of each 
member's Required Fund Deposit.\10\ FICC compares the Required Fund 
Deposit \11\ for each member with the simulated liquidation gains/
losses using the actual positions in the member's portfolio, and the 
actual historical security returns. A backtesting deficiency occurs 
when a member's Required Fund Deposit would not have been adequate to 
cover the projected liquidation losses estimated from a member's 
settlement activity based on the backtesting results. FICC investigates 
the cause(s) of any backtesting deficiencies. As part of this 
investigation, FICC pays particular attention to members with 
backtesting deficiencies that bring the coverage for that member below 
the 99% confidence target (i.e., if the member had more than two 
backtesting deficiency days in a rolling twelve-month period) to 
determine if there is an identifiable cause of repeat backtesting 
deficiencies.\12\ FICC also evaluates whether multiple members may 
experience backtesting deficiencies for the same underlying reason. 
Backtesting deficiencies highlight exposure that could subject FICC to 
potential losses in the event that a member defaults.
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    \10\ The Model Risk Management Framework (``Model Risk 
Management Framework'') sets forth the model risk management 
practices of FICC and states that Value at Risk (``VaR'') and 
Clearing Fund requirement coverage backtesting would be performed on 
a daily basis or more frequently. See Securities Exchange Act 
Release Nos. 81485 (August 25, 2017), 82 FR 41433 (August 31, 2017) 
(SR-FICC-2017-014), 84458 (October 19, 2018), 83 FR 53925 (October 
25, 2018) (SR-FICC-2018-010), 88911 (May 20, 2020), 85 FR 31828 (May 
27, 2020) (SR-FICC-2020-004), 92380 (July 13, 2021), 86 FR 38140 
(July 19, 2021) (SR-FICC-2021-006), and 94271 (February 17, 2022), 
87 FR 10411 (February 24, 2022) (SR-FICC-2022-001).
    \11\ Members may be required to post additional collateral to 
the Clearing Fund in addition to their Required Fund Deposit amount. 
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements), 
supra note 3 (providing that adequate assurances of financial 
responsibility of a member may be required, such as increased 
Clearing Fund deposits). For backtesting comparisons, FICC uses the 
Required Fund Deposit amount, without regard to the actual, total 
collateral posted by the member to the Clearing Fund.
    \12\ The 99% confidence target is consistent with Rule 17Ad-
22(e)(6)(iii) which requires FICC to calculate margin to cover its 
``potential future exposure'' which is defined in Rule 17Ad-
22(a)(13) to mean the ``maximum exposure estimated to occur at a 
future point in time with an established single-tailed confidence 
level of at least 99 percent with respect to the estimated 
distribution of future exposure.'' 17 CFR 240.17Ad-22(a)(13) and 
(e)(6)(iii).
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    While multiple factors may contribute to a member's backtesting 
deficiency, a position increase by a member after the calculation of 
each member's Required Fund Deposit may be a factor that leads to the 
member incurring backtesting

[[Page 57962]]

deficiencies due to the additional exposure that is not mitigated until 
the collection of the Required Fund Deposit occurs intraday, or on the 
next Business Day. This factor is heightened for those members that 
have a low or minimum Required Fund Deposit because there are less 
deposits to mitigate any abrupt change in their portfolio exposure.
    Typical examples where a member's required Clearing Fund deposit 
amount is the same as the current minimum Required Fund Deposit amount 
of $100,000 include (1) when a new member has activated its clearing 
accounts at FICC and is growing its business, (2) when a member has 
limited or infrequent clearing activity, and (3) when a member is 
winding down its business and is in the process of retiring its FICC 
membership. In each of these circumstances, an abrupt increase in 
clearing activity following a period of low or no clearing activity 
could cause FICC to be under-margined with respect to the member and 
may result in backtesting deficiencies. This is because if a member 
with low or no clearing activity were to have an abrupt increase in 
clearing activity after the calculation of the member's Required Fund 
Deposit (which would have been calculated based on a period of low or 
no clearing activity), it could lead to the member incurring 
backtesting deficiencies due to the additional exposure to FICC from 
the increase in clearing activity that may not be mitigated until the 
collection of the Required Fund Deposit either intraday or on the next 
Business Day. Therefore, FICC is proposing to increase the GSD minimum 
Required Fund Deposit amount in order to address the risk that FICC 
becomes under-margined in circumstances when a member's required 
Clearing Fund deposit amount is the same as the current GSD minimum 
Required Fund Deposit amount, i.e., $100,000.
    In determining the appropriate minimum Required Fund Deposit 
amount, FICC reviewed different minimum Required Fund Deposit amounts 
to determine the anticipated effects of increasing the minimum Required 
Fund Deposits on Clearing Fund coverage and on backtesting results, 
i.e., $500,000 versus $1 million. FICC also conducted a review of 
minimum deposit requirements of registered clearing agencies and 
foreign central counterparty clearing houses (``CCPs'') to compare 
FICC/GSD's minimum Required Fund Deposit amount with the deposits 
required by registered clearing agencies and foreign CCPs. Based on the 
results of the reviews and the comparison of other registered clearing 
agencies and foreign CCPs, FICC believes that a proposed minimum 
Required Fund Deposit amount of $1 million for GSD would provide an 
appropriate balance of improving member backtesting results and FICC/
GSD's Clearing Fund coverage while minimizing the impact to members.
    To assess the impact on GSD backtesting coverage if the GSD minimum 
Required Fund Deposit amount were increased from $100,000 to $1 
million, FICC conducted a backtesting impact study for the 12-month 
period ended June 30, 2022 (``Backtesting Impact Study''). The result 
of the Backtesting Impact Study indicates that using $1 million as 
GSD's minimum Required Fund Deposit amount would have reduced the 
number of members with backtesting coverage below 99%.\13\ The 
Backtesting Impact Study shows 70 members below 99% backtesting 
coverage as of June 30, 2022 with a collective 396 backtesting 
deficiencies in GSD. Approximately 21% (i.e., 85 out of 396) of the 
backtesting deficiencies occurred with members that had a Required Fund 
Deposit of less than $1 million on the relevant deficiency day(s). If 
the proposed changes had been in place during the Backtesting Impact 
Study period, approximately 16% (i.e., 65 out of 396) of the 
backtesting deficiencies incurred by the members would have been 
eliminated, and the total number of members that were below the 99% 
confidence target as of June 30, 2022 would have been reduced by 8. 
Overall, a $1 million minimum requirement would have increased GSD's 
12-month backtesting coverage 0.22%, eliminated 65 backtesting 
deficiencies, and improved the rolling twelve-month backtesting 
coverage for 8 members to above 99% confidence target. In contrast, if 
a $500,000 minimum Required Fund Deposit had been applied during the 
same study period, GSD's 12-month backtesting coverage would have 
increased by 0.13%, 38 backtesting deficiencies would have been 
eliminated, and the rolling twelve-month backtesting coverage for 3 
members would have been improved to above 99% confidence target. In 
summary, if the minimum Required Fund Deposit at GSD during the study 
period had been set to $1 million compared to $500,000, there would 
have been 27 more backtesting deficiencies eliminated (i.e., 65 instead 
of 38 or an approximately 71% increase in the number of backtesting 
deficiencies that could have been eliminated), 5 more members would be 
brought back to above 99% confidence target (i.e., 8 instead of 3 or an 
approximately 166% increase in the number of members brought back to 
above 99% confidence target), and the overall GSD backtesting coverage 
would have increased an additional 0.09%.
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    \13\ Backtesting percentages indicate the risk that a minimum 
Required Fund Deposit would be insufficient to manage risk in the 
event of a member's default. A backtesting coverage that is below 
the 99% confidence target for a member means that the member has had 
more than two backtesting deficiency days in a rolling twelve-month 
period, i.e., assuming the member had a full year of trading 
history. As indicated above, consistent with Rule 17Ad-
22(e)(6)(iii), FICC pays particular attention to members with 
backtesting deficiencies that bring the results for that member 
below the 99% confidence target to determine if there is an 
identifiable cause of repeat backtesting deficiencies. Supra note 
12.
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    FICC's review of the requirements of other clearing agencies and 
foreign CCPs indicated that FICC/GSD's current minimum Required Fund 
Deposit requirement of $100,000 was significantly lower than minimum 
deposits or equivalent required by such other entities.\14\ While the 
minimum required fund deposits of such other entities is not 
dispositive as to the risk borne by FICC or the proper fund deposit 
amounts to offset such risk, it is indicative of the amounts that users 
of other similarly situated entities can expect to pay as a minimum 
required fund deposit to use the services of the clearing agencies and 
foreign CCPs and the impact to such users. The comparison shows that 
entities using other clearing agencies and foreign CCPs pay 
significantly more in minimum

[[Page 57963]]

fund deposits to use similar services than the current minimum Required 
Fund Deposit amount at GSD.
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    \14\ For example, the minimum initial contribution for The 
Options Clearing Corporation (``OCC'') is $500,000. See Rule 1002(d) 
of the OCC Rules, available at https://www.theocc.com/getmedia/9d3854cd-b782-450f-bcf7-33169b0576ce/occ_rules.pdf. The minimum 
guaranty fund deposit for Chicago Mercantile Exchange (``CME'') is 
$500,000 or $2.5 million depending on the product types being 
cleared. See Rule 816 of the CME Rulebook, available at https://www.cmegroup.com/content/dam/cmegroup/rulebook/CME/I/8/8.pdf. The 
minimum Required Fund Deposit for National Securities Clearing 
Corporation (``NSCC'') is $250,000. See Rule 4 of NSCC Rulebook, 
available at https://dtcc.com/~/media/Files/Downloads/legal/rules/
nscc_rules.pdf. The minimum default fund contribution for LCH 
Limited is GBP 500,000 (approximately $579,000 based on current 
foreign currency exchange rate). See definition of ``Minimum 
Contribution'' in the LCH Limited Default Rules, available at 
https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf. The minimum RepoClear default 
fund contribution for LCH Ltd. is GBP 2,000,000 (approximately $2.3 
million based on the current foreign currency exchange rate). See 
definition of ``Minimum RepoClear Contribution'' in the LCH Limited 
Default Rules, available at https://www.lch.com/system/files/media_root/210609_Default%20Rules_Clean_0.pdf. The minimum 
contribution to Ice Clear U.S. Guaranty Fund is $2 million. See Rule 
301 of ICE Clear U.S., Inc. Rules, available at https://www.ice.com/publicdocs/rulebooks/clear/ICE_Clear_US_Rules.pdf.
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    FICC also conducted a Clearing Fund requirement impact study for 
the period of July 1, 2021 to June 30, 2022 (``CFR Impact Study''). The 
result of the CFR Impact Study indicates that if the proposed changes 
had been in place during the CFR Impact Study period, approximately 47% 
(81 out of a total of 174) of the current members' Margin Portfolios 
would have been impacted, with an average and a weighted average (with 
weights based on number of impacted days) additional Required Fund 
Deposit of approximately $686,000 and $792,000, respectively, for each 
such Margin Portfolio per impacted day. However, when comparing the 
actual, total Clearing Fund deposit of the current members' Margin 
Portfolios with the proposed minimum Required Fund Deposit amount, only 
approximately 13% (23 out of a total 174) of such members' Margin 
Portfolios would have been impacted, requiring an average and a 
weighted average (with weights based on number of impacted days) 
additional cash deposit of approximately $649,000 and $715,000, 
respectively, for each such Margin Portfolio per impacted day. The 
result of the CFR Impact Study also shows one Repo Broker that would 
have been impacted, requiring additional Clearing Fund deposit of 
approximately $392,000 in either cash or Eligible Clearing Fund 
Securities per impacted day. Overall, the proposed changes would have 
resulted in an average increase in daily Required Fund Deposit of $31.4 
million (or 0.17%) at GSD during the CFR Impact Study period.
    Based on the Backtesting Impact Study and the CFR Impact Study 
results discussed above, FICC believes that $1 million is the 
appropriate minimum Required Fund Deposit amount at GSD that would 
minimize the financial impact to its members while improving member 
backtesting results and FICC/GSD's Clearing Fund coverage.
    As is currently provided for in the Rules, FICC/GSD is proposing to 
continue to require that members deposit in cash an amount not less 
than the minimum Required Fund Deposit.\15\ FICC permits members to 
satisfy their Required Fund Deposit obligations through a combination 
of cash and open account indebtedness secured by Eligible Clearing Fund 
Securities.\16\ Cash deposits are fungible. FICC would therefore be 
further strengthening its liquidity resources by requiring each member 
(including Repo Brokers) to deposit at least $1 million in cash to the 
GSD Clearing Fund.
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    \15\ Currently, all members (including Repo Brokers) are 
required to have at least $100,000 of the Required Fund Deposit in 
cash. See GSD Rule 4, Section 3. Supra note 3.
    \16\ Id.
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Proposed Rule Changes
    In order to implement the proposed increase in the minimum Required 
Fund Deposit amount to $1 million for the Sponsoring Members, Section 
10(c) of GSD Rule 3A (Sponsoring Members and Sponsored Members) would 
be revised to state that the Sponsoring Member Omnibus Account Required 
Fund Deposit shall be equal to the greater of: (i) $1 million or (ii) 
the sum of the following: (1) the sum of the VaR Charges for all of the 
Sponsored Members whose activity is represented in the Sponsoring 
Member Omnibus Account as derived pursuant to Section 1b(a)(i) of GSD 
Rule 4 (Clearing Fund and Loss Allocation), and (2) all amounts derived 
pursuant to the provisions of GSD Rule 4 other than pursuant to Section 
1b(a)(i) of GSD Rule 4 computed at the level of the Sponsoring Member 
Omnibus Account. In addition, Section 10(d) of GSD Rule 3A would be 
revised to replace the minimum cash amount from $100,000 to $1 million 
to match the proposed increased minimum Required Fund Deposit amount 
for the Sponsoring Members.
    In order to implement the proposed increase in the minimum Required 
Fund Deposit amount to $1 million for the GSD Netting Members, Section 
2(a) of GSD Rule 4 would be revised to state that each Netting Member 
shall be required to make a Required Fund Deposit to the Clearing Fund 
equal to the greater of (i) the Minimum Charge or (ii) the Total 
Amount. FICC is also proposing to add a sentence to Section 2(a) of GSD 
Rule 4 that makes it clear that the Minimum Charge applicable to each 
Netting Member, other than a Repo Broker, shall be no less than $1 
million. In addition, for better organization of the subject matter and 
clarity, FICC is proposing to move two sentences in GSD Rule 4 from 
Section 1b to Section 2(a) with revisions: one stipulates that the 
Minimum Charge applicable to each Repo Broker shall be no less than $5 
million for each Margin Portfolio with Broker Account(s) and no less 
than $1 million for each Margin Portfolio with Dealer Account(s) and 
the other refers to additional payments, charges and premiums being 
applied by FICC after application of Minimum Charges, which replaces 
``minimum Clearing Fund amounts''. Lastly, Section 3 of GSD Rule 4 
would be revised to replace the minimum cash amount from $100,000 to $1 
million to match the proposed increased minimum Required Fund Deposit 
amount.
    Although FICC is not proposing to increase the minimum Required 
Fund Deposit for MBSD at this time, for clarity and transparency, FICC 
is proposing to add a sentence to Section 2 of MBSD Rule 4 (Clearing 
Fund and Loss Allocation) that would make it clear the Minimum Charge 
for each margin portfolio of a Clearing Member shall be no less than 
$100,000. To enhance clarity in Section 2 of MBSD Rule 4, FICC is also 
proposing to replace (i) ``Clearing Fund requirement'' with ``Minimum 
Charge for each margin portfolio'' and (ii) ``minimum Clearing Fund 
amounts'' with ``Minimum Charges''. Furthermore, FICC is proposing a 
technical change to correct a reference to the non-Unregistered 
Investment Pool Clearing Member in Section 2 of MBSD Rule 4.
Implementation Timeframe
    Subject to approval by the Commission, FICC would implement the 
proposed changes by no later than 60 Business Days after such approval 
and would announce the effective date of the proposed changes by an 
Important Notice posted to its website.
2. Statutory Basis
    FICC believes that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \17\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(iii),\18\ each as 
promulgated under the Act, for the reasons described below.
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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    Section 17A(b)(3)(F) of the Act requires that the Rules be designed 
to, among other things, assure the safeguarding of securities and funds 
which are in the custody or control of FICC or for which it is 
responsible.\19\ FICC believes the proposed rule changes are designed 
to assure the safeguarding of securities and funds which are in its 
custody or control or for which it is responsible because they are 
designed to enable FICC to require the necessary margin for members who 
have a minimum Required Fund Deposit to limit its exposure to such 
members in the event of a member default. Having adequate margin for 
such members would help ensure that FICC does not

[[Page 57964]]

need to use its own resources, or the Eligible Clearing Fund Securities 
and funds of non-defaulting members, to cover losses in the event of a 
default of such members. Specifically, the proposed rule change seeks 
to remedy potential situations that are described above where FICC 
could be under-margined. By ensuring that members that have the minimum 
Required Fund Deposit amount are adequately covering FICC's risk of 
loss, FICC would be reducing the risk of losses, which would need to be 
addressed by using non-defaulting members' securities or funds, or 
FICC's funds. In addition, by requiring that members pay an amount not 
less than the minimum Required Fund Deposit amount in cash, FICC would 
be making available additional collateral that is easier to access upon 
a member's default, further reducing the risk of losses and using non-
defaulting members' securities or funds, or FICC's funds, for 
liquidity. Therefore, FICC believes the proposed rule change enhances 
the safeguarding of securities and funds that are in the custody or 
control of FICC, consistent with Section 17(b)(3)(F) of the Act.\20\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to members and those arising from its 
payment, clearing, and settlement processes, including by maintaining 
sufficient financial resources to cover its credit exposure to each 
member fully with a high degree of confidence.\21\ As described above, 
FICC believes that the proposed changes would enable it to better 
identify, measure, monitor, and, through the collection of members' 
Required Fund Deposits, manage its credit exposures to members by 
maintaining sufficient resources to cover those credit exposures fully 
with a high degree of confidence. More specifically, as indicated by 
the Backtesting Impact Study results, raising the minimum Required Fund 
Deposit amount to $1 million at GSD would decrease the number of 
backtesting deficiencies and help ensure that FICC maintains the 
coverage of credit exposures for more members at a confidence level of 
at least 99%. In addition, by requiring members pay an amount not less 
than the minimum Required Fund Deposit amount in cash, FICC would be 
making available collateral that is easier to access when members 
default, thus further reducing the potential risk of loss from having 
to use non-defaulting members' securities or funds, or FICC's funds, 
for liquidity. Therefore, FICC believes that the proposed changes would 
enhance FICC's ability to effectively identify, measure, monitor and 
manage its credit exposures and would enhance its ability to maintain 
sufficient financial resources to cover its credit exposure to each 
member fully with a high degree of confidence. As such, FICC believes 
the proposed changes are consistent with Rule 17Ad-22(e)(4)(i) under 
the Act.\22\
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    \21\ 17 CFR 240.17Ad-22(e)(4)(i).
    \22\ Id.
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    Rule 17Ad-22(e)(6)(iii) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its members by 
establishing a risk-based margin system that, at a minimum, calculates 
margin sufficient to cover its potential future exposure to members in 
the interval between the last margin collection and the close out of 
positions following a member default.\23\ FICC employs daily 
backtesting to determine the adequacy of each member's Required Fund 
Deposit, paying particular attention to members that have backtesting 
deficiencies below the 99% confidence target. Such backtesting 
deficiencies highlight exposure that could subject FICC to potential 
losses if a member defaults. As discussed above, FICC has determined 
that approximately 16% (i.e., 65 out of 396) of the backtesting 
deficiencies would have been eliminated during the Backtesting Impact 
Study period if the minimum Required Fund Deposit were $1 million. By 
raising the minimum Required Fund Deposit amount to $1 million at GSD, 
FICC believes it can decrease the backtesting deficiencies by members, 
and thus decrease its exposure to such members in the event of a 
default. FICC believes that the increase in margin for those members 
that currently have a Required Fund Deposit of less than $1 million 
would improve the probabilities that the margin required of such 
members is sufficient to cover FICC's potential future exposure to 
members in the interval between the last margin collection and the 
close out of positions following a member default. Therefore, FICC 
believes the proposed change is consistent with Rule 17Ad-22(e)(6)(iii) 
under the Act.\24\
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    \23\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \24\ Id.
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    Section 17A(b)(3)(F) of the Act requires, in part, that the Rules 
be designed to promote the prompt and accurate clearance and settlement 
of securities transactions.\25\ FICC believes the proposed clarifying 
and technical changes to the GSD and MBSD Rules would allow FICC to 
help promote prompt and accurate clearance and settlement of securities 
transactions. This is because the proposed changes to the Rules would 
clarify and improve the transparency of the Rules. Enhancing the 
clarity and transparency of the Rules would help members to better 
understand their rights and obligations regarding FICC's clearance and 
settlement services. FICC believes that when members better understand 
their rights and obligations regarding FICC's clearance and settlement 
services, they can act in accordance with the Rules. FICC believes that 
better enabling members to comply with the Rules would promote the 
prompt and accurate clearance and settlement of securities transactions 
by FICC. As such, FICC believes the proposed clarifying and technical 
changes are consistent with Section 17A(b)(3)(F) of the Act.\26\
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
    \26\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed changes to increase the minimum 
Required Fund Deposit could have an impact on competition. 
Specifically, FICC believes that the proposed changes could burden 
competition because they would result in larger Required Fund Deposits 
for certain members, e.g., members that currently have lower Required 
Fund Deposits would have to deposit additional cash and/or Eligible 
Clearing Fund Securities, as applicable, to their Clearing Fund 
deposits. The proposed changes could impose more of a burden on those 
members that have lower operating margins, lower cash reserves or 
higher costs of capital compared to other members. Nonetheless, FICC 
believes that any burden on competition imposed by the proposed changes 
would not be significant and would be both necessary and appropriate in 
furtherance of FICC's efforts to mitigate risks and meet the 
requirements of the Act, as described in this filing and further below.
    FICC believes that any burden on competition presented by the 
proposed changes to increase the minimum Required Fund Deposit amount 
would not be significant. As discussed above, if the minimum Required 
Fund Deposit at GSD had been increased to $1 million during the CFR 
Impact Study period, approximately 47% (81 out of a total of 174) of 
the current members' Margin Portfolios would have been impacted,

[[Page 57965]]

with an average and a weighted average additional Required Fund Deposit 
of approximately $686,000 and $ 792,000, respectively, for each such 
Margin Portfolio per impacted day. However, when comparing the actual, 
total Clearing Fund deposit of the current members' Margin Portfolios 
with the proposed minimum Required Fund Deposit amount, only 
approximately 13% (23 out of a total of 174) of such members' Margin 
Portfolios would have to deposit additional cash to the Clearing Fund, 
with an average and a weighted average cash deposit of approximately 
$649,000 and $715,000, respectively, for each such Margin Portfolio per 
impacted day. Furthermore, when comparing the average additional cash 
deposit amounts that members would be required to make if the minimum 
Clearing Fund cash deposit at GSD had been increased to $1 million with 
their respective average Net Capital \27\ during the CFR Impact Study 
period, the largest average additional cash deposit amount represented 
approximately 0.49% of the affected member's average Net Capital.\28\ 
Similarly, when comparing the average additional Clearing Fund deposit 
that members would be required to make, either in cash or Eligible 
Clearing Fund Securities, if the minimum Required Fund Deposit amount 
at GSD had been increased as proposed with their respective average Net 
Capital during the CFR Impact Study period, the largest average 
additional Clearing Fund deposit amount represented approximately 1.46% 
of the affected member's average Net Capital.\29\
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    \27\ As defined in GSD Rule 1 (Definitions), the term ``Net 
Capital'' means, as of a particular date, the amount equal to the 
net capital of a broker or dealer as defined in SEC Rule 15c3-
1(c)(2), or any successor rule or regulation thereto. Supra note 3.
    \28\ The affected member would have had to deposit an additional 
$900,000 in cash each impacted day during the CFR Impact Study 
period.
    \29\ The affected member would have had to deposit an additional 
$392,000 in either cash or Eligible Clearing Fund Securities each 
impacted day during the CFR Impact Study period.
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    In addition, FICC believes that the increase to $1 million is 
comparable with what users of other similarly situated registered 
clearing agencies and foreign CCPs are expected to pay as a minimum 
required deposit for similar services.\30\ Furthermore, by limiting the 
proposed Required Fund Deposit to $1 million rather than a higher 
minimum Required Fund Deposit, FICC would be minimizing the financial 
impact to its members while improving member backtesting results and 
FICC/GSD's Clearing Fund coverage.
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    \30\ Supra note 14.
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    While raising the minimum Required Fund Deposit to $500,000 would 
also reduce backtesting deficiencies, it would not reduce them to the 
same extent that raising the minimum Required Fund Deposit to $1 
million would have. If the minimum Required Fund Deposit were raised to 
$1 million rather than $500,000, FICC would have observed 27 fewer 
backtesting deficiencies at GSD, which represents an approximately 71% 
increase (i.e., 65 instead of 38) in the number of deficiencies that 
could have been eliminated. Backtesting deficiencies highlight exposure 
that could subject FICC to potential losses in the event that a member 
defaults. FICC believes that the additional reduction in exposure that 
would occur if the minimum Required Fund Deposit at GSD were raised to 
$1 million rather than $500,000 justifies the potential additional 
burden for members who currently have a Required Fund Deposit of less 
than $1 million.
    Even if the burden were deemed significant with respect to certain 
members, FICC believes that the above-described burden on competition 
that may be created by the proposed changes would be necessary in 
furtherance of the Act, specifically Section 17A(b)(3)(F) of the 
Act,\31\ because, as described above, the Rules must be designed to 
assure the safeguarding of securities and funds that are in FICC's 
custody or control or which it is responsible.
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    \31\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, FICC believes the proposed changes are designed 
to assure the safeguarding of securities and funds which are in its 
custody or control or for which it is responsible because they are 
designed to enable FICC to require the necessary margin for members who 
have a minimum Required Fund Deposit to limit its exposure to such 
members in the event of a member default. Having adequate margin for 
such members would help ensure that FICC does not need to use its own 
resources, or the Eligible Clearing Fund Securities and funds of non-
defaulting members, to cover losses in the event of a default of such 
members. Specifically, the proposed changes seek to remedy potential 
situations where FICC could be under-margined. By ensuring that members 
that have the minimum Required Fund Deposit amount are adequately 
covering FICC's risk of loss, FICC would be reducing the risk of 
losses, which would need to be addressed by using non-defaulting 
members' securities or funds, or FICC's funds. In addition, by 
requiring that members pay an amount equal to the minimum Required Fund 
Deposit amount in cash, FICC would be making available additional 
collateral that is easier to access upon a member's default, further 
reducing the risk of losses and using non-defaulting members' 
securities or funds, or FICC's funds, for liquidity. Therefore, FICC 
believes the proposed changes are necessary in furtherance of Section 
17A(b)(3)(F) of the Act.\32\
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    \32\ Id.
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    In addition, FICC believes these proposed changes are necessary to 
support FICC's compliance with Rules 17Ad-22(e)(4)(i) and 17Ad-
22(e)(6)(iii) under the Act,\33\ which require FICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to (x) effectively identify, measure, monitor, and 
manage its credit exposures to members and those arising from its 
payment, clearing, and settlement processes, including by maintaining 
sufficient financial resources to cover its credit exposure to each 
member fully with a high degree of confidence; and (y) cover its credit 
exposures to its members by establishing a risk-based margin system 
that, at a minimum, calculates margin sufficient to cover its potential 
future exposure to members in the interval between the last margin 
collection and the close out of positions following a member default.
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    \33\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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    As described above, FICC believes increasing the minimum Required 
Fund Deposit amount at GSD to $1 million would decrease the number of 
backtesting deficiencies and ensure that FICC maintains the coverage of 
credit exposures for more members at a confidence level of at least 
99%. This outcome is consistent with Rule 17Ad-22(e)(4)(i) which 
requires that FICC maintain sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence.\34\ This outcome is also consistent with Rule 17Ad-
22(e)(6)(iii) which requires that FICC calculate sufficient margin to 
cover its ``potential future exposure'' which is defined as the 
``maximum exposure estimated to occur at a future point in time with an 
established single-tailed confidence level of at least 99 percent with 
respect to the estimated distribution of future exposure.'' \35\ FICC 
believes that the increase in margin for those members that currently 
have a Required Fund Deposit of less than $1 million at GSD would help 
ensure that FICC maintain sufficient financial resources to cover its

[[Page 57966]]

credit exposure to each participant fully with a high degree of 
confidence and that the margin deposited by such members is sufficient 
to cover FICC's potential future exposure in the interval between the 
last margin collection and the close out of positions following a 
member default. Therefore, FICC believes that these proposed changes 
are necessary to support FICC's compliance with Rules 17Ad-22(e)(4)(i) 
and 17Ad-22(e)(6)(iii) under the Act.\36\
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    \34\ 17 CFR 240.17Ad-22(e)(4)(i).
    \35\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \36\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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    FICC believes that the above-described burden on competition that 
could be created by the proposed changes would be appropriate in 
furtherance of the Act because such changes have been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible, as 
described in detail above. The proposal would enable FICC to produce 
margin levels more commensurate with the risks it faces as a central 
counterparty. The proposed increase in minimum Required Fund Deposit at 
GSD would be in relation to the credit exposure risks presented by the 
class of members that currently have a Required Fund Deposit of less 
than $1 million, and each member's Required Fund Deposit would continue 
to be calculated with the same parameters and at the same confidence 
level for each member. Therefore, members that present similar risk, 
regardless of the type of member, would have similar impact on their 
Required Fund Deposit amounts.
    In addition, based on the comparison with other registered clearing 
agencies and foreign CCPs, FICC believes that the increase to $1 
million is comparable with what users of other similarly situated 
registered clearing agencies and foreign CCPs are expected to pay and 
would not be a significant burden on Members.\37\ Furthermore, based on 
the results of the Backtesting Impact Study and CFR Impact Study, as 
discussed above, FICC believes that a proposed minimum Required Fund 
Deposit of $1 million at GSD would provide an appropriate balance of 
improving member backtesting results while minimizing the impact to 
members by not raising the minimum Required Fund Deposit above $1 
million. Therefore, because the proposed changes are designed to 
provide FICC with a more appropriate and balanced method of managing 
the risks presented by each member while minimizing the impact to 
members, FICC believes the proposed changes are appropriately designed 
to meet its risk management goals and regulatory obligations.
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    \37\ Supra note 14.
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    FICC believes that it has designed the proposed changes in a way 
that is both necessary and appropriate to meet compliance with its 
obligations under the Act. Specifically, the proposal to increase the 
minimum Required Fund Deposit amount to $1 million at GSD would better 
limit FICC's credit exposures to its members. In addition, by 
continuing to require that members pay an amount equal to the minimum 
Required Fund Deposit amount in cash, FICC would be making available 
additional collateral that is easier for FICC to access upon a member's 
default, further limiting its credit exposure to members. Therefore, as 
described above, FICC believes the proposed changes are necessary and 
appropriate in furtherance of FICC's obligations under the Act, 
specifically Section 17A(b)(3)(F) of the Act \38\ and Rules 17Ad-
22(e)(4)(i) and 17Ad-22(e)(6)(iii) under the Act.\39\ For these 
reasons, the proposed changes are not designed to be an artificial 
barrier to entry but a necessary and appropriate change to address 
specific risks.
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(iii).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    FICC has not received or solicited any written comments relating to 
this proposal. If any additional written comments are received, they 
will be publicly filed as an Exhibit 2 to this filing, as required by 
Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
SEC's Division of Trading and Markets at [email protected] or 
202-551-5777.
    FICC reserves the right not to respond to any comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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-2022-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2022-006. 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

[[Page 57967]]

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-2022-006 and should be 
submitted on or before October 13, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-20499 Filed 9-21-22; 8:45 am]
BILLING CODE 8011-01-P