[Federal Register Volume 89, Number 98 (Monday, May 20, 2024)]
[Notices]
[Pages 43941-43950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10956]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100140; File No. SR-FICC-2024-801]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Partial Amendment No. 1 to an Advance Notice To 
Adopt a Minimum Margin Amount at GSD

May 14, 2024.
    On February 27, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
advance notice SR-FICC-2024-801 (``Advance Notice'') pursuant to 
section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform 
and Consumer Protection Act entitled the Payment, Clearing, and 
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ 
and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 
(``Act'').\2\ The notice of filing and extension of the review period 
of the Advance Notice was published for comment in the Federal Register 
on March 15, 2024.3 4 The Commission has received comments 
regarding the substance of the changes proposed in the Advance 
Notice.\5\
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 99712 (March 11, 2024), 
89 FR 18981 (March 15, 2024) (SR-FICC-2024-801). Pursuant to section 
806(e)(1)(H) of the Clearing Supervision Act, the Commission may 
extend the review period of an advance notice for an additional 60 
days, if the changes proposed in the advance notice raise novel or 
complex issues, subject to the Commission providing the clearing 
agency with prompt written notice of the extension. 12 U.S.C. 
5465(e)(1)(H). The Commission found that the Advance Notice raised 
novel and complex issues and, accordingly, extended the review 
period of the Advance Notice for an additional 60 days until June 
26, 2024, pursuant to section 806(e)(1)(H). Id.
    \4\ On February 27, 2024, FICC filed the Advance Notice as a 
proposed rule change with the Commission pursuant to section 
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 
17 CFR 240.19b-4. The notice of proposed rule change was published 
in the Federal Register on March 15, 2024. Securities Exchange Act 
Release No. 99710 (March 11, 2024), 89 FR 18991 (March 15, 2024) 
(SR-FICC-2024-003). On March 25, 2024, the Commission extended the 
review period of the proposed rule change, pursuant to section 
19(b)(2) of the Act, 15 U.S.C. 78s(b)(2)(ii), until June 13, 2024, 
as the date by which the Commission shall either approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change. Securities Exchange Act Release 
No. 99769 (March 19, 2024), 89 FR 20716 (March 25, 2024) (SR-FICC-
2024-003).
    \5\ Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801.htm. Comments on 
the proposed rule change are available at https://www.sec.gov/comments/sr-ficc-2024-003/srficc2024003.htm. Because the proposals 
contained in the Advance Notice and the proposed rule change are the 
same, the Commission considers all comments received on the 
proposal, regardless of whether the comments are submitted with 
respect to the Advance Notice or the proposed rule change.
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    On March 22, 2024, the Commission requested additional information 
from FICC pursuant to section 806(e)(1)(D) of the Clearing Supervision 
Act, which tolled the Commission's period of review of the Advance 
Notice until 120 days from the date the information requested by the 
Commission was received by the Commission.\6\ On April 26, 2024, the 
Commission received FICC's response to the Commission's request for 
additional information.\7\
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    \6\ 12 U.S.C. 5465(e)(1)(D). The Commission's memo regarding the 
Request for Additional Information and the tolled due date has been 
publicly available on the Commission's website at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-449019-1150022.pdf.
    \7\ See 12 U.S.C. 5465(e)(1)(E)(ii) and (G)(ii); The 
Commission's memo regarding its receipt of FICC's response to the 
Request for Additional Information is available at https://www.sec.gov/comments/sr-ficc-2024-801/srficc2024801-471851-1323835.pdf.
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    On April 5, 2024, FICC filed Partial Amendment No. 1 to the Advance 
Notice to correct errors FICC discovered regarding the impact analysis 
filed as Exhibit 3 and discussed in the filing narrative, as well as 
correct a typo in the methodology formula in Exhibit 5b.\8\ The 
corrections in Partial Amendment No. 1 do not change the substance of 
the

[[Page 43942]]

Advance Notice. Partial Amendment No. 1 corrects percentages and other 
figures throughout the filing narrative. Accordingly, the Commission is 
publishing notice of the Advance Notice, as modified by Partial 
Amendment No. 1, in its entirety and reopening the public comment 
period.
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    \8\ To promote the public availability and transparency of its 
post-notice partial amendment, FICC submitted a copy of Partial 
Amendment No. 1 through the Commission's electronic public comment 
letter mechanism. Accordingly, Partial Amendment No. 1 has been 
posted to the Commission's website at https://www.sec.gov/comments/sr-ficc-2024-003/srficc2024003-455611-1167714.pdf and thus been 
publicly available since April 5, 2024. 12 U.S.C. 5465(e)(1)(E) and 
(G). FICC has requested confidential treatment pursuant to 17 CFR 
240.24b-2 with respect to Exhibit 3 and Exhibit 5b.
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    The Advance Notice, as modified by Partial Amendment No. 1, is 
described in Items I and II below, which Items have been prepared 
primarily by FICC. The Commission is publishing this notice to solicit 
comments on the Advance Notice, as modified by Partial Amendment No. 1, 
from interested persons.\9\
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    \9\ On April 5, 2024, FICC filed Partial Amendment No. 1 to the 
proposed rule change, which makes the same corrections as Partial 
Amendment No. 1 to the Advance Notice. In a separate publication, 
the Commission is publishing notice of the associated proposed rule 
change (SR-FICC-2024-003), as modified by Partial Amendment No. 1, 
in its entirety and reopening the public comment period.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance 
Notice, as Modified by Partial Amendment No. 1

    This Advance Notice, as modified by Partial Amendment No. 1, 
consists of amendments to FICC's Government Securities Division 
(``GSD'') Rulebook (``GSD Rules'') \10\ in order to (1) enhance the VaR 
Floor by incorporating a ``Minimum Margin Amount'' and (2) expand the 
application of the enhanced VaR Floor to include Margin Proxy, as 
described in greater detail below.
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    \10\ Terms not defined herein are defined in the GSD Rules, 
available at www.dtcc.com/legal/rules-and-procedures.
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    The proposed rule change would necessitate changes to the 
Methodology Document--GSD Initial Market Risk Margin Model (the ``QRM 
Methodology''), which is filed as Exhibit 5b.\11\ FICC is requesting 
confidential treatment of the QRM Methodology and has filed it 
separately with the Commission.\12\
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    \11\ The QRM Methodology was filed as a confidential exhibit as 
part of proposed rule change SR-FICC-2018-001 (the ``VaR Filing''). 
See Securities Exchange Act Release No. 83362 (June 1, 2018), 83 FR 
26514 (June 7, 2018) (SR-FICC-2018-001) (``VaR Filing Approval 
Order''). FICC also filed the VaR Filing proposal as an advance 
notice pursuant to section 806(e)(1) of the Payment, Clearing, and 
Settlement Supervision Act of 2010 (12 U.S.C. 5465(e)(1) and Rule 
19b-4(n)(1)(i) under the Act (17 CFR 240.19b-4(n)(1)(i)), with 
respect to which the Commission issued a Notice of No Objection. See 
Securities Exchange Act Release No. 83223 (May 11, 2018), 83 FR 
23020 (May 17, 2018) (SR-FICC-2018-801). The QRM Methodology has 
been subsequently amended following the VaR Filing Approval Order. 
See Securities Exchange Act Release Nos. 85944 (May 24, 2019), 84 FR 
25315 (May 31, 2019) (SR-FICC-2019-001), 90182 (Oct. 14, 2020), 85 
FR 66630 (Oct. 20, 2020) (SR-FICC-2020-009), 93234 (Oct. 1, 2021), 
86 FR 55891 (Oct. 7, 2021) (SR-FICC-2021-007), 95605 (Aug. 25, 
2022), 87 FR 53522 (Aug. 31, 2022) (SR-FICC-2022-005), 97342 (Apr. 
21, 2023), 88 FR 25721 (Apr. 27, 2023) (SR-FICC-2023-003), and 99447 
(Jan. 30, 2024), 89 FR 8260 (Feb. 6, 2024) (SR-FICC-2024-001).
    \12\ 17 CFR 240.24b-2.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Advance Notice, as modified by Partial Amendment No. 1

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the Advance Notice, 
as modified by Partial Amendment No. 1, and discussed any comments it 
received on the Advance Notice, as modified by Partial Amendment No. 1. 
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 and B below, of the most significant aspects of such 
statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice, as 
Modified by Partial Amendment No. 1, 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. FICC reserves the 
right not to respond to any comments received.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing 
Supervision Act

Nature of the Proposed Change
    FICC is proposing to enhance the VaR Floor by incorporating a 
Minimum Margin Amount in order to supplement the VaR model and improve 
its responsiveness and resilience to extreme market volatility. 
Specifically, FICC is proposing to modify the VaR Floor and the 
corresponding description in the GSD Rules to incorporate a Minimum 
Margin Amount. In addition, FICC is proposing to expand the application 
of the enhanced VaR Floor to include Margin Proxy. The proposed change 
would necessitate changes to the QRM Methodology.
    FICC has observed extreme market volatility in the fixed income 
market due to monetary policy changes, inflation, and recession fears. 
The extreme market volatility has led to greater risk exposures for 
FICC. Specifically, the extreme market volatilities during the two 
arguably most stressful market periods, i.e., the COVID period during 
March of 2020 and the successive interest rate hikes that began in 
March 2022, have led to market price changes that exceeded the VaR 
model's projections, which yielded insufficient VaR Charges. As a 
result, FICC's VaR backtesting metrics fell below the performance 
target due to unprecedented levels of extreme market volatility. This 
highlighted the need for FICC to enhance its VaR model so that it can 
better respond to extreme market volatility.
    In order to better manage its risk exposures during extreme market 
volatility events, FICC is proposing to adopt a Minimum Margin Amount 
that would be applied as a minimum volatility calculation to ensure 
that FICC calculates sufficient margin to cover its risk exposures, 
particularly during extreme market volatility. The proposed Minimum 
Margin Amount would be incorporated into the VaR Floor to supplement 
the VaR model and enhance its responsiveness to extreme market 
volatility. As proposed, the Minimum Margin Amount is designed to 
improve the margin backtesting performance during periods of heightened 
market volatility by maintaining a VaR Charge that is appropriately 
calibrated to reflect the current market volatility. The proposed 
Minimum Margin Amount aims to enhance backtesting coverage when there 
are potential VaR model performance challenges, particularly when 
securities price changes significantly exceed those implied by the VaR 
model risk factors, as observed during the recent periods of extreme 
market volatility. FICC believes the proposed Minimum Margin Amount 
would provide a more reliable estimate for the portfolio risk level 
when current market conditions significantly deviate from historical 
observations.
    The proposed Minimum Margin Amount would be determined using 
historical price returns to represent risk along with amounts 
calculated (i) using a filtered historical simulation approach, (ii) 
using a haircut method, and (iii) to incorporate other risk factors. By 
using a filtered historical simulation approach in which historical 
returns are scaled to current market volatility, the proposed Minimum 
Margin Amount would operate as a floor to the VaR Charge to improve the 
responsiveness of the VaR model to extreme volatility. Because the use 
of historical price return-based risk representation is not dependent 
on any sensitivity data vendor, it would allow the proposed Minimum 
Margin Amount to also operate as a floor to the Margin Proxy

[[Page 43943]]

and improve the responsiveness of Margin Proxy to extreme volatility.
    As a result of this proposal, Members may experience increases in 
their Required Fund Deposits to the Clearing Fund. Based on an impact 
study conducted by FICC, on average, at the Member level, the proposed 
Minimum Margin Amount would have increased the SOD VaR Charge by 
approximately $22.43 million, or 17.56%, and the noon VaR Charge by 
approximately $23.25 million, or 17.43%, over a 2-year impact study 
period.
Background
    FICC, through GSD, serves as a central counterparty and provider of 
clearance and settlement services for transactions in the U.S. 
government securities, as well as repurchase and reverse repurchase 
transactions involving U.S. government securities.\13\ 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 
GSD Rules.\14\ The Required Fund Deposit serves as each Member's 
margin.
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    \13\ GSD also clears and settles certain transactions on 
securities issued or guaranteed by U.S. government agencies and 
government sponsored enterprises.
    \14\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 10. 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 240.17Ad-22(e)(4).
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    The objective of a Member's Required Fund Deposit is to mitigate 
potential losses to FICC associated with liquidating a Member's 
portfolio in the event FICC ceases to act for that Member (hereinafter 
referred to as a ``default'').\15\ The aggregate amount of all Members' 
Required Fund Deposit constitutes the Clearing Fund. FICC would access 
the Clearing Fund should a defaulting Member's own Required Fund 
Deposit be insufficient to satisfy losses to FICC caused by the 
liquidation of that Member's portfolio.
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    \15\ The GSD Rules identify when FICC may cease to act for a 
Member and the types of actions FICC may take. For example, FICC may 
suspend a firm's membership with FICC or prohibit or limit a 
Member's access to FICC's services in the event that Member defaults 
on a financial or other obligation to FICC. See GSD Rule 21 
(Restrictions on Access to Services) of the GSD Rules, supra note 
10.
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    FICC regularly assesses market and liquidity risks as such risks 
relate to its margin methodologies to evaluate whether margin levels 
are commensurate with the particular risk attributes of each relevant 
product, portfolio, and market. For example, FICC employs daily 
backtesting to determine the adequacy of each Member's Required Fund 
Deposit.\16\ FICC compares the Required Fund Deposit \17\ for each 
Member with the simulated liquidation gains/losses, using the actual 
positions in the Member's portfolio(s) 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 and highlights exposure that could subject 
FICC to potential losses in the event that a Member defaults.
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    \16\ 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 (Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-
FICC-2017-014), 84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 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), 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 
24, 2022) (SR-FICC-2022-001), and 97890 (July 13, 2023), 88 FR 46287 
(July 19, 2023) (SR-FICC-2023-008).
    \17\ 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 10 (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 GSD Clearing Fund.
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    FICC investigates the cause(s) of any backtesting deficiencies and 
determines if there is an identifiable cause of repeat backtesting 
deficiencies. FICC also evaluates whether multiple Members may 
experience backtesting deficiencies for the same underlying reason.
    Pursuant to the GSD Rules, each Member's Required Fund Deposit 
amount consists of a number of applicable components, each of which is 
calculated to address specific risks faced by FICC, as identified 
within the GSD Rules.\18\ These components include the VaR Charge, 
Blackout Period Exposure Adjustment, Backtesting Charge, Holiday 
Charge, Margin Liquidity Adjustment Charge, special charge, and 
Portfolio Differential Charge.\19\ The VaR Charge generally comprises 
the largest portion of a Member's Required Fund Deposit amount.
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    \18\ Supra note 10.
    \19\ See GSD Rule 4 (Clearing Fund and Loss Allocation), Section 
1b. Supra note 10.
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VaR Charge
    The VaR Charge is based on the potential price volatility of 
unsettled positions using a sensitivity-based Value-at-Risk (VaR) 
methodology. The VaR methodology provides an estimate of the possible 
losses for a given portfolio based on: (1) confidence level, (2) a time 
horizon and (3) historical market volatility. The VaR methodology is 
intended to capture the risks related to market price that are 
associated with the Net Unsettled Positions in a Member's Margin 
Portfolios. This risk-based margin methodology is designed to project 
the potential losses that could occur in connection with the 
liquidation of a defaulting Member's Margin Portfolio, assuming a 
Margin Portfolio would take three days to liquidate in normal market 
conditions. The projected liquidation gains or losses are used to 
determine the amount of the VaR Charge to each Margin Portfolio, which 
is calculated to capture the market price risk \20\ associated with 
each Member's Margin Portfolio(s) at a 99% confidence level.
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    \20\ Market price risk refers to the risk that volatility in the 
market causes the price of a security to change between the 
execution of a trade and settlement of that trade. This risk is 
sometimes also referred to as volatility risk.
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    FICC's VaR model is designed to provide a margin calculation that 
covers the market risk in a Member's Margin Portfolio. The VaR model 
calculates the risk profile of each Member's Margin Portfolio by 
applying certain representative risk factors to measure the degree of 
responsiveness of the Margin Portfolio's value to the changes of these 
risk factors over a historical lookback period of at least 10 years 
that may be supplemented with an additional stressed period.
    The VaR model has been shown to perform well in low to moderate 
volatility markets. From January 2013 to March 2020, the VaR model has 
generally performed above the 99% performance target, with 
deterioration in backtesting coverage only during the two arguably most 
stressful market periods, i.e., the COVID period during March of 2020 
and the successive interest rate hikes that began in March 2022. The 
market events during these two stressful periods, including monetary 
policy changes, inflation and recession fears, have resulted in 
significant market volatility in the fixed income market that exceeded 
the 99-percentile of the observed historical data set. Specifically, 
the extreme market volatilities during these two periods have led to 
market price changes that exceeded the VaR model's projections, which 
yielded insufficient VaR Charges. As a result, FICC's VaR backtesting 
metrics fell below the performance target due to unprecedented levels 
of extreme market

[[Page 43944]]

volatility. This highlighted the need for FICC to enhance its VaR model 
so that it can better respond to extreme market volatility. 
Accordingly, FICC is proposing changes to the VaR Floor that FICC 
believes would mitigate the risk of potential underperformance of its 
VaR model under extreme market volatility.
Current VaR Floor
    On June 1, 2018, the Commission approved FICC's VaR Filing to make 
changes to GSD's method of calculating a Member's Required Fund Deposit 
amount, including the VaR Charge.\21\ The VaR Filing amended the 
definition of VaR Charge to, among other things, incorporate the VaR 
Floor.\22\ FICC established the VaR Floor to address the risk that in a 
long/short portfolio the VaR model could calculate a VaR Charge that is 
erroneously low where the gross market value of unsettled positions in 
a Member's portfolio is high and the cost of liquidation in the event 
of the Member default is also high. This is likely to occur when the 
VaR model applies substantial risk offsets among long and short 
unsettled positions in different classes of securities that have a high 
degree of historical price correlation.\23\ When this high degree of 
historical price correlations does not apply as a result of changing 
market conditions, the VaR Charge derived from the VaR model can be 
inadequate, and the VaR Floor would then be applied by FICC to mitigate 
such risk.
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    \21\ See VaR Filing Approval Order, supra note 10.
    \22\ The term ``VaR Floor'' is currently defined within the 
definition of VaR Charge. See GSD Rule 1 (Definitions), supra note 
10.
    \23\ As an example, certain securities may have highly 
correlated historical price returns, but if market conditions were 
to substantially change, these historical correlations could break 
down, leading to model-generated offsets that could not adequately 
capture a portfolio's risk.
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    Currently, the VaR Floor is based upon the market value of the 
gross unsettled positions in the Member's portfolio. The VaR Floor is 
determined by multiplying the absolute value of the sum of Net Long 
Positions and Net Short Positions of Eligible Securities, grouped by 
product and remaining maturity, by a percentage designated by FICC from 
time to time for such group. For U.S. Treasury and agency securities, 
such percentage shall be a fraction, no less than 10%, of the 
historical minimum volatility of a benchmark fixed income index for 
such group by product and remaining maturity. For mortgage-backed 
securities, such percentage shall be a fixed percentage that is no less 
than 0.05%.\24\
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    \24\ See ``VaR Charge'' definition in GSD Rule 1 (Definitions). 
Supra note 10.
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    The current VaR Floor is not designed to address the risk of 
potential underperformance of the VaR model under extreme market 
volatility.
Incorporate a Minimum Margin Amount Into the VaR Floor
    In order to mitigate the risk of potential underperformance of its 
VaR model under extreme market volatility, FICC proposes to incorporate 
a Minimum Margin Amount into the VaR Floor to supplement the VaR model 
and enhance its responsiveness to extreme market volatility. FICC 
believes this proposal would complement and improve the VaR model 
performance during stressed market conditions. Specifically, FICC 
believes this proposal would improve the margin backtesting performance 
during periods of heightened market volatility by maintaining a VaR 
Charge that is appropriately calibrated to reflect the current market 
volatility.
    FICC is proposing to introduce a new calculation called the 
``Minimum Margin Amount'' to complement the existing VaR Floor in the 
GSD Rules. The Minimum Margin Amount would enhance backtesting coverage 
when there are potential VaR model performance challenges, particularly 
when securities price changes significantly exceed those implied by the 
VaR model risk factors, as observed during the recent periods of 
extreme market volatility. FICC believes the proposed Minimum Margin 
Amount would provide a more reliable estimate for the portfolio risk 
level when current market conditions significantly deviate from 
historical observations.
    The Minimum Margin Amount would be defined in the GSD Rules as, 
with respect to each Margin Portfolio, a minimum volatility calculation 
for specified Net Unsettled Positions of a Netting Member as of the 
time of such calculation. The proposed definition would provide that 
the Minimum Margin Amount shall use historical price returns to 
represent risk \25\ and be calculated as the sum of the following: (a) 
amounts calculated using a filtered historical simulation (``FHS'') 
approach \26\ to assess volatility by scaling historical market price 
returns to current market volatility, with market volatility being 
measured by applying exponentially weighted moving average to the 
historical market price returns with a decay factor between 0.93 and 
0.99, as determined by FICC from time to time based on sensitivity 
analysis, macroeconomic conditions, and/or backtesting performance, (b) 
amounts calculated using a haircut method to measure the risk exposure 
of those securities that lack sufficient historical price return data, 
(c) amounts calculated to incorporate risks related to (i) repo 
interest volatility (``repo interest volatility charge'') \27\ and (ii) 
transaction costs related to bid-ask spread in the market that could be 
incurred when liquidating a portfolio (``bid-ask spread risk 
charge'').\28\ In addition, the proposed definition would require FICC 
to provide Members with at a minimum one Business Day advance notice of 
any change to the decay factor via an Important Notice.\29\
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    \25\ This proposed approach is referred to as the ``price 
return-based risk representation'' in the QRM Methodology. Given the 
availability and accessibility of historical price returns data, 
FICC believes the proposed approach would help minimize and 
diversify FICC's risk exposure from external data vendors.
    \26\ The FHS method differs from the historical simulation 
method by incorporating the volatilities of historical price returns 
as a crucial element. In particular, the FHS method constructs the 
filtered historical price returns in two steps: first, 
``devolatilizing'' the historical price returns by dividing them by 
a volatility estimate for the day of the price return, and second, 
``revolatilizing'' the devolatilized price returns by multiplying 
them by a volatility estimate based on the current market. For 
additional background on the FHS method, see Filtered historical 
simulation Value-at-Risk models and their competitors, Pedro 
Gurrola-Perez and David Murphy, Bank of England, March 2015, at 
www.bankofengland.co.uk/working-paper/2015/filtered-historical-simulation-value-at-risk-models-and-their-competitors.
    \27\ The ``repo interest volatility charge'' is a component of 
the VaR Charge that is designed to address repo interest volatility. 
The repo interest volatility charge is calculated based on 
internally constructed repo interest rate indices. This rule change 
is proposing to also include the repo interest volatility charge as 
a component of the Minimum Margin Amount; however, it is not 
proposing to change the repo interest volatility charge or the 
manner in which this component is calculated.
    \28\ The ``bid-ask spread risk charge'' is a component of the 
VaR Charge that is designed to address transaction costs related to 
bid-ask spread in the market that could be incurred when liquidating 
a portfolio. This rule change is proposing to also include the bid-
ask spread risk charge as a component of the Minimum Margin Amount; 
however, it is not proposing to change the bid-ask spread risk 
charge or the manner in which this component is calculated.
    \29\ Although the QRM Methodology is being submitted as a 
confidential Exhibit 5b to this proposal due to its proprietary 
content, FICC makes available to Members a Value-at-Risk (VaR) 
calculator that can be used to estimate their Clearing Fund 
requirements based on their portfolios.
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    FICC is proposing to revise the definition of the VaR Floor to 
incorporate the Minimum Margin Amount, such that the VaR Floor would be 
the greater of (i) the VaR Floor Percentage Amount and (ii) the Minimum 
Margin Amount.
    The ``VaR Floor Percentage Amount'' would be the new defined term 
used to describe the current VaR Floor percentage calculation in the 
GSD

[[Page 43945]]

Rules. This rule change is not proposing to change the VaR Floor 
percentage or the manner in which this component is calculated.
    As proposed, the Minimum Margin Amount would be utilized as the VaR 
Charge for a Member's Margin Portfolio when it is greater than the 
current VaR Charge of the Margin Portfolio and the VaR Floor Percentage 
Amount.
    Under the proposed changes to the QRM Methodology, the Minimum 
Margin Amount would use a price return-based risk representation (i.e., 
use historical price returns to represent risk) \30\ and be calculated 
as the sum of (i) amounts calculated using a FHS method that scales 
historical market price returns to current market volatility, (ii) 
amounts calculated using a haircut method for securities that lack 
sufficient historical price return data, and (iii) amounts calculated 
to incorporate additional risk factors.
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    \30\ Supra note 25.
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FHS Method
    Following the FHS method, FICC would first construct historical 
price returns using certain mapped fixed income securities benchmarks. 
As proposed, the mapped fixed income securities benchmarks to be used 
with the FHS method when calculating the Minimum Margin Amount in the 
QRM Methodology would be Bloomberg Treasury indexes for U.S. Treasury 
and agency securities, Bloomberg TIPS indexes for Treasury Inflation-
Protected Securities (``TIPS''), and to-be-announced (``TBA'') 
securities for mortgage-backed securities (``MBS'') pools. These 
benchmarks were selected because their price movements generally 
closely track those of the securities mapped to them and that their 
price history is generally readily available and accessible.
    After constructing historical price returns, FICC would estimate a 
market volatility associated with each historical price return by 
applying exponentially weighted moving average (``EWMA'') to the 
historical price returns. The historical price returns are then 
``devolatilized'' by dividing them by the corresponding EWMA 
volatilities to obtain the residual returns. The residual returns are 
then ``revolatilized'' by multiplying them by the current EWMA 
volatility to obtain the filtered returns.
    The filtered return time series are then used to simulate the 
profits and losses of a Member's Margin Portfolio and derive the 
volatility of the Margin Portfolio using the standard historical 
simulation approach. In particular, each security that is in a Member's 
Margin Portfolio would be mapped to a respective fixed income 
securities benchmark, as applicable, based on the security's asset 
class and remaining maturity. The filtered returns of the benchmark are 
used as the simulated returns of the mapped security to calculate the 
simulated profits and losses of a Member's Margin Portfolio. The 
Minimum Margin Amount is then calculated as the 99-percentile of the 
simulated portfolio loss.
Haircut Method
    Occasionally, a Member's Margin Portfolio(s) contain classes of 
securities that reflect market price changes that are not consistently 
related to historical price moves. The value of these securities is 
often uncertain because the securities' market volume varies widely, 
thus the price histories are limited. Because the volume and price 
information for such securities are not robust, the FHS method would 
not generate Minimum Margin Amounts that adequately reflect the risk 
profile of such securities. Accordingly, the proposed changes to the 
QRM Methodology would provide that the Minimum Margin Amount would use 
a haircut method to assess the market risk of those securities that are 
more difficult to simulate, for example, because of thin trading 
history.
    Specifically, the proposed haircut method would be used for MBS 
pools that are not TBA securities eligible, floating rate notes and 
U.S. Treasury/agency securities with remaining time to maturities of 
less than or equal to one year.
    A haircut method would also be used to size up the basis risk 
between an agency security and the mapped U.S. Treasury index to 
supplement the historical market price moves generated by the FHS 
method for agency securities to reflect any residual risks between 
agency securities and the mapped fixed income securities benchmarks, 
i.e., Bloomberg Treasury indexes. Similarly, a haircut method would be 
used to size up the MBS pool/TBA basis risk to address the residual 
risk for using TBA price returns as proxies for MBS pool returns used 
in the FHS method.
Minimum Margin Amount Calculation
    FICC is proposing to modify the QRM Methodology to specify that the 
Minimum Margin Amount would use a price return-based risk 
representation and be calculated per Member Margin Portfolio as the sum 
of (i), (ii), and (iii):
(i) FHS Method
    (a) the amount calculated using historical market price returns of 
mapped fixed income securities benchmarks derived based on the FHS 
method.
(ii) Haircut Method
    (a) the haircut charge for MBS pools that are not TBA securities 
eligible,
    (b) the supplemental haircut charge for agency securities,
    (c) the haircut charge for floating rate notes and U.S. Treasury/
agency securities with remaining time to maturities of less than or 
equal to one year, and
    (d) the supplemental basis haircut charge for mortgage pool 
securities.
(iii) Additional Risk Factors
    (a) the repo interest volatility charge,\31\ and
---------------------------------------------------------------------------

    \31\ Supra note 27.
---------------------------------------------------------------------------

    (b) the bid-ask spread risk charge.\32\
---------------------------------------------------------------------------

    \32\ Supra note 28.
---------------------------------------------------------------------------

    The mapped fixed income securities benchmarks, historical market 
price returns, parameters and volatility assessments to be used to 
calculate the Minimum Margin Amount would be determined by FICC from 
time to time in accordance with FICC's model risk management practices 
and governance set forth in the Clearing Agency Model Risk Management 
Framework.\33\
---------------------------------------------------------------------------

    \33\ See Model Risk Management Framework, supra note 16.
---------------------------------------------------------------------------

Minimum Margin Amount Parameters
    The proposed Minimum Margin Amount uses a lookback period for the 
filtered historical simulation and a decay factor for calculating the 
EWMA volatility of the historical prices returns.
    In particular, the lookback period of the proposed Minimum Margin 
Amount is the same as the lookback period used for the VaR model, which 
is 10 years, plus, to the extent applicable, a stressed period. 
Consistent with the VaR methodology outlined in the QRM Methodology and 
pursuant to the model performance monitoring required under the Model 
Risk Management Framework,\34\ the lookback period would be analyzed to 
evaluate its sensitivity and impact to the model performance.
---------------------------------------------------------------------------

    \34\ The Model Risk Management Framework provides that all 
models undergo ongoing model performance monitoring and backtesting 
which is the process of (i) evaluating an active model's ongoing 
performance based on theoretical tests, (ii) monitoring the model's 
parameters through the use of threshold indicators, and/or (iii) 
backtesting using actual historical data/realizations to test a VaR 
model's predictive power. Supra note 16.
---------------------------------------------------------------------------

    The decay factor in general affects (i) whether and how the Minimum 
Margin Amount would be invoked, (ii) the peak level of margin increase 
or the degree of procyclicality, and (iii) how quickly the

[[Page 43946]]

margin would fall back to pre-stress levels. Similar to the lookback 
period, the decay factor of the proposed Minimum Margin Amount would 
also be analyzed to evaluate its sensitivity and impact to the model 
performance pursuant to the model performance monitoring required under 
the Model Risk Management Framework.\35\ The decay factor would be, as 
proposed, between 0.93 and 0.99, and any update thereto is expected to 
be an infrequent event and would typically happen only when there is an 
unprecedented market volatility event which resulted in risk exposures 
to FICC that cannot be adequately mitigated by the then calibrated 
decay factor. The decision to update the decay factor would be based on 
the above-mentioned sensitivity analysis with considerations to 
factors, such as the impact to the VaR Charges, macroeconomic 
conditions, and/or backtesting performance. The initial decay factor 
for the Minimum Margin Amount calculation would be 0.97 but may be 
adjusted as set forth above in accordance with FICC's model risk 
management practices and governance set forth in the Model Risk 
Management Framework.\36\
---------------------------------------------------------------------------

    \35\ Supra note 34.
    \36\ See Model Risk Management Framework, supra note 16.
---------------------------------------------------------------------------

    The Model Risk Management Framework would also require FICC to 
conduct ongoing model performance monitoring of the Minimum Margin 
Amount methodology.\37\ FICC's current model performance monitoring 
practices would provide for sensitivity analysis of relevant model 
parameters and assumptions to be conducted monthly, or more frequently 
when markets display high volatility. In addition, FICC would monitor 
each Member's Required Fund Deposit and the aggregate Clearing Fund 
requirements versus the requirements calculated by the Minimum Margin 
Amount. Specifically, FICC would review and assess the robustness of 
the Required Fund Deposit inclusive of the Minimum Margin Amount by 
comparing the results versus the three-day profit and loss of each 
Member's Margin Portfolio based on actual market price moves. Based on 
the results of the sensitivity analysis and/or backtesting, FICC could 
consider adjustments to the Minimum Margin Amount, including changing 
the decay factor as appropriate. Any adjustment to the Minimum Margin 
Amount calculation would be subject to the model risk management 
practices and governance process set forth in the Model Risk Management 
Framework.\38\
---------------------------------------------------------------------------

    \37\ See note 28.
    \38\ See Model Risk Management Framework, supra note 16.
---------------------------------------------------------------------------

Expand Application of VaR Floor To Include Margin Proxy
    The GSD Margin Proxy methodology is currently deployed as an 
alternative volatility calculation in the event that the requisite 
vendor data used for the VaR model is unavailable for an extended 
period of time.\39\ In circumstances where the Margin Proxy is applied 
by FICC, FICC is proposing to have the VaR Floor operate as a floor for 
the Margin Proxy. Specifically, FICC is proposing to expand the 
application of the VaR Floor to include Margin Proxy so that if the 
Margin Proxy, when deployed, is lower than the VaR Floor, then the VaR 
Floor would be utilized as the VaR Charge with respect to a Member's 
Margin Portfolio. FICC believes this proposed change would enable 
Margin Proxy to be a more effective risk mitigant under extreme market 
volatility and heightened market stress, thereby enhancing the overall 
resilience of the FICC risk management.
---------------------------------------------------------------------------

    \39\ FICC may deem such data to be unavailable and deploy Margin 
Proxy when there are concerns with the quality of data provided by 
the vendor.
---------------------------------------------------------------------------

Proposed GSD Rule Changes
    In connection with incorporating the Minimum Margin Amount into the 
VaR Floor, FICC would modify the GSD Rules to:
    I. Add a definition of ``Minimum Margin Amount'' and define it as, 
with respect to each Margin Portfolio, a minimum volatility calculation 
for specified Net Unsettled Positions of a Member as of the time of 
such calculation. The definition would provide that the Minimum Margin 
Amount shall use historical price returns to represent risk and be 
calculated as the sum of the following: (a) amounts calculated using a 
filtered historical simulation approach to assess volatility by scaling 
historical market price returns to current market volatility, with 
market volatility being measured by applying exponentially weighted 
moving average to the historical market price returns with a decay 
factor between 0.93 and 0.99, as determined by FICC from time to time 
based on sensitivity analysis, macroeconomic conditions, and/or 
backtesting performance, (b) amounts calculated using a haircut method 
to measure the risk exposure of those securities that lack sufficient 
historical price return data, and (c) amounts calculated to incorporate 
risks related to (i) repo interest volatility (``repo interest 
volatility charge'') and (ii) transaction costs related to bid-ask 
spread in the market that could be incurred when liquidating a 
portfolio (``bid-ask spread risk charge''). In addition, the proposed 
definition would require FICC to provide Members with at a minimum one 
Business Day advance notice of any change to the decay factor via an 
Important Notice;
    II. Add a definition of ``VaR Floor Percentage Amount'' which would 
be defined the same as the current calculation for the VaR Floor 
percentage with non-substantive modifications to reflect that the 
calculated amount is a separate defined term; and
    III. Move the defined term VaR Floor out of the definition of VaR 
Charge and define it as the greater of (i) the VaR Floor Percentage 
Amount and (ii) the Minimum Margin Amount.
    In connection with applying the VaR Floor to include Margin Proxy, 
FICC would modify the GSD Rules to revise the definition of ``VaR 
Charge'' by adding a reference to the Margin Proxy with respect to the 
VaR Floor application and clarifying that VaR Charge is calculated at 
the Margin Portfolio-level.
Proposed QRM Methodology Changes
    In connection with incorporating the Minimum Margin Amount into the 
VaR Floor, FICC would modify the QRM Methodology to:
    I. Describe how the Minimum Margin Amount, as defined in the GSD 
Rules, would be calculated, including:
    (i) Establishing mapped fixed income securities benchmarks for 
purposes of the calculation using historical market price returns of 
such securities with the FHS method;
    (ii) Using a haircut method to assess the market risk of certain 
securities that are more difficult to simulate due to thin trading 
history; and
    (iii) Detailing other risk factors that would be incorporated in 
the calculation.
    II. Describe the developmental evidence and impacts to backtesting 
performance and margin charges relating to Minimum Margin Amount.
    In connection with applying the VaR Floor to include Margin Proxy, 
FICC would modify the QRM Methodology to reflect that the Minimum 
Margin Amount would serve as a floor for the Margin Proxy.
    In addition, FICC would modify the QRM Methodology to:
    I. Make certain clarifying changes to the QRM Methodology to delete 
an out-of-date description of the Margin Proxy being used as an 
adjustment factor to

[[Page 43947]]

the VaR,\40\ enhance the description of the VaR Floor Percentage 
Amount, and update the list of key model parameters to reflect the 
Margin Proxy lookback period; and
---------------------------------------------------------------------------

    \40\ FICC currently does not use Margin Proxy as an adjustment 
factor to the VaR and does not intend to use it as such in the 
future.
---------------------------------------------------------------------------

    II. Make certain technical changes to the QRM Methodology to 
renumber sections and tables, correct grammatical and typographical 
errors, delete out-of-date index names, and update certain formula 
notations and section titles as necessary.
Impact Study
    FICC performed an impact study on Members' Margin Portfolios for 
the period beginning July 1, 2021 through June 30, 2023 (``Impact Study 
Period').41 42 If the proposed rule changes \43\ had been in 
place during the Impact Study Period compared to the existing GSD 
Rules, the aggregate average daily start-of-day (``SOD'') VaR Charges 
would have increased by approximately $2.90 billion or 13.89%, the 
aggregate average daily noon VaR Charges would have increased by 
approximately $3.03 billion or 14.06%, and the aggregate average daily 
Backtesting Charges would have decreased by approximately $622 million 
or 64.46%.
---------------------------------------------------------------------------

    \41\ GSD increased the minimum Required Fund Deposit for Members 
to $1 million on Dec. 5, 2022 (see Securities Exchange Act Release 
No. 96136 (Oct. 24, 2022), 87 FR 65268 (Oct. 28, 2022) (SR-FICC-
2022-006)); however, for the purpose of this Impact Study, the $1 
million minimum Requirement Fund Deposit is assumed to be in effect 
for the entirety of the Impact Study period.
    \42\ GSD adopted a Portfolio Differential Charge (``PD Charge'') 
as an additional component to the GSD Required Fund Deposit on Oct. 
30, 2023 (see Securities Exchange Act Release No. 98494 (Sep. 25, 
2023), 88 FR 67394 (Sep. 29, 2023) (SR-FICC-2023-011)); however, for 
the purpose of this Impact Study, the PD Charge is assumed to be in 
effect for the entirety of the Impact Study period.
    \43\ Margin Proxy was not deployed during the Impact Study 
Period; however, if the proposed rule changes had been in place and 
the Margin Proxy were deployed during the Impact Study Period, the 
aggregate average daily SOD VaR Charges would have increased by 
approximately $4.16 billion or 20.97%. The impact study also 
indicated that if the proposed rule changes had been in place and 
the Margin Proxy were deployed, the VaR model backtesting coverage 
would have increased from approximately 98.17% to 99.38% during the 
Impact Study Period. Specifically, if the proposed rule changes had 
been in place and the Margin Proxy were deployed during the Impact 
Study Period, the number of the VaR model backtesting deficiencies 
would have been reduced by 899 (from 1358 to 459, or approximately 
66.2%).
---------------------------------------------------------------------------

    The impact study indicated that if the proposed rule changes had 
been in place, the VaR model backtesting coverage would have increased 
from approximately 98.86% to 99.46% during the Impact Study Period. 
Specifically, if the proposed rule changes had been in place during the 
Impact Study Period, the number of VaR model backtesting deficiencies 
would have been reduced by 441 (from 843 to 402, or approximately 52%).
    The impact study also indicated that if the proposed rule changes 
had been in place, overall margin backtesting coverage would have 
increased from approximately 98.87% to 99.33% during the Impact Study 
Period. Specifically, if the proposed rule changes had been in place 
during the Impact Study Period, the number of overall margin 
backtesting deficiencies would have been reduced by 280 (from 685 to 
405, or approximately 41%) and the overall margin backtesting coverage 
for 94 Members (approximately 72% of the GSD membership) would have 
improved with 36 Members who were below 99% coverage would be brought 
back to above 99%.
Impacts to Members Over the Impact Study Period
    On average, at the Member level, the proposed Minimum Margin Amount 
would have increased the SOD VaR Charge by approximately $22.43 
million, or 17.56%, and the noon VaR Charge by approximately $23.25 
million, or 17.43%, over the Impact Study Period. The largest average 
percentage increase in SOD VaR Charge for any Member would have been 
approximately 66.88%, or $97,051 (0.21% of the Member's average Net 
Capital),\44\ and the largest average percentage increase in noon VaR 
Charge for any Member would have been approximately 64.79%, or $61,613 
(0.13% of the Member's average Net Capital). The largest average dollar 
increase in SOD VaR Charge for any Member would have been approximately 
$268.51 million (0.34% of the Member's average Net Capital), or 19.06%, 
and the largest dollar increase in noon VaR Charge for any Member would 
have been approximately $289.00 million (1.07% of the Member's average 
Net Capital), or 13.67%. The top 10 Members based on the size of their 
average SOD VaR Charges and average noon VaR Charges would have 
contributed approximately 51.87% and 53.64% of the aggregated SOD VaR 
Charges and aggregated noon VaR Charges, respectively, during the 
Impact Study Period had the proposed Minimum Margin Amount been in 
place. The same Members would have contributed to 50.08% and 51.52% of 
the increase in aggregated SOD VaR Charges and aggregated noon VaR 
Charges, respectively, had the proposed Minimum Margin Amount been in 
place during the Impact Study Period.
---------------------------------------------------------------------------

    \44\ 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. See GSD Rule 1 (Definitions), supra note 10.
---------------------------------------------------------------------------

Implementation Timeframe
    FICC would implement the proposed rule changes by no later than 60 
Business Days after the later of the approval of the related proposed 
rule change filing \45\ and no objection to the advance notice by the 
Commission. FICC would announce the effective date of the proposed 
changes by an Important Notice posted to its website.
---------------------------------------------------------------------------

    \45\ FICC filed this advance notice as a proposed rule change 
(File No. SR-FICC-2024-003) with the Commission pursuant to section 
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, 
17 CFR 240.19b-4. A copy of the proposed rule change is available at 
www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------

Anticipated Effect on and Management of Risk
    FICC believes that the proposed change, which consists of a 
proposal to (i) modify the calculation of the VaR Floor and the 
corresponding description in the GSD Rules and QRM Methodology to 
incorporate a Minimum Margin Amount and (ii) expand the application of 
the VaR Floor to include Margin Proxy, would enable FICC to better 
limit its exposure to Members arising out of the activity in their 
portfolios. As stated above, the proposed change is designed to enhance 
the GSD VaR model performance and improve the backtesting coverage 
during periods of extreme market volatility. The proposed charge would 
help ensure that FICC maintains an appropriate level of margin to 
address its risk management needs.
    Specifically, the proposed rule change seeks to remedy potential 
situations that are described above where FICC's VaR model and/or 
Margin Proxy, including the existing VaR Floor, does not respond 
effectively to increased market volatility and the VaR Charge amounts 
do not achieve a 99% confidence level. Therefore, by enabling FICC to 
collect margin that more accurately reflects the risk characteristics 
of its Members, the proposal would enhance FICC's risk management 
capabilities.
    By providing FICC with a more effective limit on its exposures, the 
proposed change would also mitigate risk for Members because lowering 
the risk profile for FICC would in turn lower the risk exposure that 
Members may have with respect to FICC in its role as a central 
counterparty. Further, the proposal is designed to meet FICC's risk 
management goals and its

[[Page 43948]]

regulatory obligations, as described below.
Consistency With the Clearing Supervision Act
    Although Title VIII of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010 (``Clearing Supervision Act'') does not specify 
a standard of review for an advance notice, its stated purpose is 
instructive: to mitigate systemic risk in the financial system and 
promote financial stability by, among other things, promoting uniform 
risk management standards for systemically important financial market 
utilities and strengthening the liquidity of systemically important 
financial market utilities.\46\
---------------------------------------------------------------------------

    \46\ 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    FICC believes that the proposal is consistent with the Clearing 
Supervision Act, specifically with the risk management objectives and 
principles of section 805(b), and with certain of the risk management 
standards adopted by the Commission pursuant to section 805(a)(2), for 
the reasons described below.
(i) Consistency With Section 805(b) of the Clearing Supervision Act
    Section 805(b) of the Clearing Supervision Act \47\ states that the 
objectives and principles for the risk management standards prescribed 
under section 805(a) shall be to, among other things, promote robust 
risk management, promote safety and soundness, reduce systemic risks, 
and support the stability of the broader financial system. For the 
reasons described below, FICC believes that the proposed changes in 
this advance notice are consistent with the objectives and principles 
of the risk management standards as described in section 805(b) of the 
Clearing Supervision Act.
---------------------------------------------------------------------------

    \47\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    FICC is proposing to (i) modify the calculation of the VaR Floor 
and the corresponding description in the GSD Rules and QRM Methodology 
to incorporate a Minimum Margin Amount and (ii) expand the application 
of the VaR Floor to include Margin Proxy, both of which would enable 
FICC to better limit its exposure to Members arising out of the 
activity in their portfolios. FICC believes these proposed changes are 
consistent with promoting robust risk management because the changes 
would better enable FICC to limit its exposure to Members in the event 
of a Member default by collecting adequate prefunded financial 
resources to cover its potential losses resulting from the default of a 
Member and the liquidation of a defaulting Member's portfolio.
    Specifically, the proposed Minimum Margin Amount would modify the 
VaR Floor to cover circumstances, such as extreme market volatility, 
where the current VaR Charge calculation and the VaR Floor are both 
lower than market price volatility from corresponding securities 
benchmarks. The proposed changes are designed to more effectively 
measure and address risk characteristics in situations where the risk 
factors used in the VaR method do not adequately predict market price 
movements and associated credit risk exposure. As reflected in 
backtesting studies, FICC believes the proposed changes would 
appropriately limit FICC's credit exposure to Members in the event that 
the VaR model yields too low a VaR Charge in such situations. Such 
backtesting studies indicate that the aggregate average daily 
Backtesting Charges would have decreased by approximately $622 million 
or 64.46% during the Impact Study Period, and the overall margin 
backtesting coverage (based on 12-month trailing backtesting) would 
have improved from approximately 98.87% to 99.33% during the Impact 
Study Period if the Minimum Margin Amount calculation had been in 
place. Improving the overall backtesting coverage level would help FICC 
ensure that it maintains an appropriate level of margin to address its 
risk management needs.
    The use of the Minimum Margin Amount would reduce risk by allowing 
FICC to calculate the exposure in each portfolio using historical price 
returns to represent risk along with amounts calculated (i) using a FHS 
method that scales historical market price returns to current market 
volatility, (ii) using a haircut method for those securities that lack 
sufficient historical price return data, and (iii) to incorporate other 
risk factors. As reflected by backtesting studies during the Impact 
Study Period, using the FHS method would provide a more reliable 
estimate than the FICC VaR historical data set for the portfolio risk 
level when current market conditions deviate from historical 
observations. Adding the Minimum Margin Amount to the VaR Floor and 
applying the VaR Floor to include Margin Proxy would help to ensure 
that the risk exposure during periods of extreme market volatility is 
adequately captured in the VaR Charges. FICC believes that would help 
to ensure that FICC continues to accurately calculate and assess margin 
and in turn, collect sufficient margin from its Members and better 
enable FICC to limit its exposures that could be incurred when 
liquidating a portfolio.
    The proposed change to expand the application of VaR Floor to 
include Margin Proxy would enable Margin Proxy to be a more effective 
risk mitigant under extreme market volatility and heightened market 
stress. By improving the effectiveness of Margin Proxy as a risk 
mitigant under extreme market volatility and heightened market stress 
would help ensure that the margin that FICC collects from Members is 
sufficient to mitigate the credit exposure presented by the Members.
    For these reasons, FICC believes the proposed changes would help to 
promote GSD's robust risk management, which, in turn, is consistent 
with reducing systemic risks and supporting the stability of the 
broader financial system, consistent with section 805(b) of the 
Clearing Supervision Act.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    FICC also believes the changes proposed in this advance notice are 
consistent with promoting safety and soundness, which, in turn, is 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system, consistent with section 805(b) of the 
Clearing Supervision Act.\49\ As described above, the proposed changes 
are designed to help ensure that FICC is collecting adequate prefunded 
financial resources to cover its potential losses resulting from the 
default of a Member and the liquidation of a defaulting Member's 
portfolio in times of extreme market volatility. Because the proposed 
changes would better position FICC to limit its exposures to Members in 
the event of a Member default, FICC believes the proposed changes are 
consistent with promoting safety and soundness, which, in turn, is 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system.
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

(ii) Consistency With 805(a)(2) of the Clearing Supervision Act
    Section 805(a)(2) of the Clearing Supervision Act \50\ authorizes 
the Commission to prescribe risk management standards for the payment, 
clearing and settlement activities of designated clearing entities, 
like FICC, and financial institutions engaged in designated activities 
for which the Commission is the supervisory agency or the appropriate 
financial regulator. The Commission has adopted risk management 
standards under section 805(a)(2) of the Clearing Supervision

[[Page 43949]]

Act \51\ and section 17A of the Act \52\ (the risk management standards 
are referred to as the ``Covered Clearing Agency Standards'').\53\
---------------------------------------------------------------------------

    \50\ 12 U.S.C. 5464(a)(2).
    \51\ Id.
    \52\ 15 U.S.C. 78q-1.
    \53\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

    The Covered Clearing Agency Standards require registered clearing 
agencies to establish, implement, maintain, and enforce written 
policies and procedures that are reasonably designed to be consistent 
with the minimum requirements for their operations and risk management 
practices on an ongoing basis.\54\ FICC believes that this proposal is 
consistent with Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated 
under the Act,\55\ for the reasons described below.
---------------------------------------------------------------------------

    \54\ Id.
    \55\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act \56\ 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. 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 backtesting studies, implementation of a 
Minimum Margin Amount by changing the GSD Rules and QRM Methodology as 
described herein would allow FICC to limit its credit exposures to 
Members in the event that the current VaR model yields too low a VaR 
Charge for such portfolios and improve backtesting performance. As 
indicated by the backtesting studies, the aggregate average daily SOD 
VaR Charges would have increased by approximately $2.90 billion or 
13.89%, the aggregate average daily noon VaR Charges would have 
increased by approximately $3.03 billion or 14.06%, the aggregate 
average daily Backtesting Charges would have decreased by approximately 
$622 million or 64.46% during the Impact Study Period, and the overall 
margin backtesting coverage (based on 12-month trailing backtesting) 
would have improved from approximately 98.87% to 99.33% during the 
Impact Study Period if the Minimum Margin Amount calculation had been 
in place. By identifying and providing for appropriate VaR Charges, 
adding the Minimum Margin Amount to the VaR Floor would help to ensure 
that the risk exposure during periods of extreme market volatility is 
adequately identified, measured and monitored. Similarly, the proposed 
change to expand the application of VaR Floor to include Margin Proxy 
would enable Margin Proxy to be a more effective risk mitigant under 
extreme market volatility and heightened market stress. By improving 
the effectiveness of Margin Proxy as a risk mitigant under extreme 
market volatility and heightened market stress would help ensure that 
the margin that FICC collects from Members is sufficient to mitigate 
the credit exposure presented by the Members. As a result, FICC 
believes that the proposal would enhance FICC's ability to effectively 
identify, measure and monitor its credit exposures and would enhance 
its ability to maintain sufficient financial resources to cover its 
credit exposure to each participant fully with a high degree of 
confidence, consistent with the requirements of Rule 17Ad-22(e)(4)(i) 
of the Act.\57\
---------------------------------------------------------------------------

    \56\ 17 CFR 240.17Ad-22(e)(4)(i).
    \57\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act \58\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, considers, and produces margin levels 
commensurate with, the risks and particular attributes of each relevant 
product, portfolio, and market. FICC believes that the proposed changes 
to adjust the VaR Floor to include the Minimum Margin Amount by 
changing the GSD Rules and QRM Methodology as described herein are 
consistent with the requirements of Rule 17Ad-22(e)(6)(i) cited above. 
The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit FICC's credit 
exposures to Members. FICC is proposing changes that are designed to 
more effectively measure and address risk characteristics in situations 
where the risk factors used in the VaR method do not adequately predict 
market price movements. As reflected in backtesting studies, FICC 
believes the proposed changes would appropriately limit FICC's credit 
exposure to Members in the event that the VaR model yields too low a 
VaR Charge in such situations. Such backtesting studies indicate that 
the aggregate average daily SOD VaR Charges would have increased by 
approximately $2.90 billion or 13.89%, the aggregate average daily noon 
VaR Charges would have increased by approximately $3.03 billion or 
14.06%, the aggregate average daily Backtesting Charges would have 
decreased by approximately $622 million or 64.46% during the Impact 
Study Period, and the overall margin backtesting coverage (based on 12-
month trailing backtesting) would have improved from approximately 
98.87% to 99.33% during the Impact Study Period if the Minimum Margin 
Amount calculation had been in place. By identifying and providing for 
appropriate VaR Charges, adding the Minimum Margin Amount to the VaR 
Floor would help to ensure that margin levels are commensurate with the 
risk exposure of each portfolio during periods of extreme market 
volatility. Similarly, the proposed change to expand the application of 
VaR Floor to include Margin Proxy would enable Margin Proxy to be a 
more effective risk mitigant under extreme market volatility and 
heightened market stress. By improving the effectiveness of Margin 
Proxy as a risk mitigant under extreme market volatility and heightened 
market stress would help ensure that the margin that FICC collects from 
Members is sufficient to mitigate the credit exposure presented by the 
Members. Overall, the proposed changes would allow FICC to more 
effectively address the risks presented by Members. In this way, the 
proposed changes enhance the ability of FICC to produce margin levels 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market. As such, FICC believes that the 
proposed changes are consistent with the requirements of Rule 17Ad-
22(e)(6)(i) under the Act.\59\
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    \58\ 17 CFR 240.17Ad-22(e)(6)(i).
    \59\ Id.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the Advance 
Notice, as modified by Partial Amendment No. 1, is consistent with the 
Clearing Supervision Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's internet comment form (www.sec.gov/rules/sro.shtml); or

[[Page 43950]]

     Send an email to [email protected]. Please include 
File Number SR-FICC-2024-801 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-2024-801. 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 (www.sec.gov/rules/sro.shtml). Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the Advance Notice, as modified by Partial Amendment 
No. 1, that are filed with the Commission, and all written 
communications relating to the Advance Notice, as modified by Partial 
Amendment No. 1, between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FICC and on 
DTCC's website (www.dtcc.com/legal/sec-rule-filings). Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to File Number SR-FICC-2024-801 and should be submitted on 
or before June 10, 2024.

IV. Date and Timing for Commission Action

    Section 806(e)(1)(G) of the Clearing Supervision Act provides that 
FICC may implement the changes if it has not received an objection to 
the proposed changes within 60 days of the later of (i) the date that 
the Commission receives an advance notice or (ii) the date that any 
additional information requested by the Commission is received,\60\ 
unless extended as described below.
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    \60\ 12 U.S.C. 5465(e)(1)(G).
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    Pursuant to section 806(e)(1)(H) of the Clearing Supervision Act, 
the Commission may extend the review period of an advance notice for an 
additional 60 days, if the changes proposed in the advance notice raise 
novel or complex issues, subject to the Commission providing the 
clearing agency with prompt written notice of the extension.\61\
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    \61\ 12 U.S.C. 5465(e)(1)(H).
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    The date that is 60 days after FICC filed the advance notice with 
the Commission is April 27, 2024. However, the Commission extended the 
review period of the Advance Notice for an additional 60 days under 
section 806(e)(1)(H) of the Clearing Supervision Act \62\ due to the 
Commission's finding that the Advance Notice is both novel and 
complex.\63\ Additionally, on March 22, 2024, the Commission requested 
additional information from FICC pursuant to section 806(e)(1)(D) of 
the Clearing Supervision Act, which tolled the Commission's review 
period of review of the Advance Notice until 120 days from the date the 
information requested by the Commission was received by the 
Commission.\64\ On April 26, 2024, the Commission received FICC's 
response to the Commission's request for additional information.\65\ 
Accordingly, August 23, 2024, is the date by which the Commission shall 
notify FICC of an objection regarding the Advance Notice, unless the 
Commission requests further information for consideration of the 
Advance Notice.
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    \62\ Id.
    \63\ See supra note 3.
    \64\ See supra note 6.
    \65\ See supra note 7.
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    All submissions should refer to File Number SR- FICC-2024-801 and 
should be submitted on or before June 10, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\66\
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    \66\ 17 CFR 200.30-3(a)(91) and 17 CFR 200.30-3(a)(94).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10956 Filed 5-17-24; 8:45 am]
BILLING CODE 8011-01-P