[Federal Register Volume 89, Number 98 (Monday, May 20, 2024)]
[Notices]
[Pages 43915-43926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-10957]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100141; File No. SR-FICC-2024-003]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Partial Amendment No. 1 and Order Instituting 
Proceedings To Determine Whether To Approve or Disapprove a Proposed 
Rule Change, as Modified by Partial Amendment No. 1, Concerning the 
Adoption of a Minimum Margin Amount at GSD

May 14, 2024.

I. Introduction

    On February 27, 2024, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission'') 
proposed rule change SR-FICC-2024-003 pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The notice of filing of the proposed rule change was 
published for comment in the Federal Register on March 15, 2024.\3\ On 
March 25, 2024, the Commission extended the review period of the 
proposed rule change, pursuant to section 19(b)(2) of the Act,\4\ 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.\5\ The Commission has received 
comments regarding the proposed rule change.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 99711 (March 11, 2024), 
89 FR 18991 (March 15, 2024) (SR-FICC-2024-003).
    \4\ 15 U.S.C. 78s(b)(2)(ii).
    \5\ Securities Exchange Act Release No. 99769 (March 19, 2024), 
89 FR 20716 (March 25, 2024) (SR-FICC-2024-003).
    \6\ Comments on the proposed rule change are available at 
https://www.sec.gov/comments/sr-ficc-2024-003/srficc2024003.htm.
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    On April 5, 2024, FICC filed Partial Amendment No. 1 to the 
proposed rule change 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.\7\

[[Page 43916]]

The corrections in Partial Amendment No. 1 do not change the substance 
of the proposed rule change.
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    \7\ 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. FICC has requested 
confidential treatment pursuant to 17 CFR 240.24b-2 with respect to 
Exhibit 3 and Exhibit 5b.
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    Partial Amendment No. 1 includes corrections to percentages and 
other figures throughout the filing narrative. Accordingly, the 
Commission is publishing notice of the proposed rule change, as 
modified by Partial Amendment No. 1 (hereinafter, the ``Proposed Rule 
Change''), in its entirety and reopening the public comment period.\8\
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    \8\ On February 27, 2024, FICC filed the proposed rule change as 
an advance notice with the Commission 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'') and Rule 19b-
4(n)(1)(i) under the Act. 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-
4(n)(1)(i). Notice of the advance notice was published in the 
Federal Register on March 15, 2024. 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 extended the review period of the 
advance notice for an additional 60 days after finding that the 
Advance Notice raised novel and complex issues. 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. 12 U.S.C. 5465(e)(1)(D). On April 26, 2024, the Commission 
received FICC's response to the Commission's request for additional 
information. On April 5, 2024, FICC filed Partial Amendment No. 1 to 
the advance notice, which makes the same corrections as Partial 
Amendment No. 1 to the proposed rule change. In a separate 
publication, 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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    The Proposed Rule Change, as modified by Partial Amendment No. 1, 
is described in Items II and III below, which Items have been prepared 
primarily by FICC. The Commission is publishing this notice to solicit 
comments on the Proposed Rule Change, as modified by Partial Amendment 
No. 1, from interested persons and is instituting proceedings, pursuant 
to section 19(b)(2)(B) of the Exchange Act,\9\ to determine whether to 
approve or disapprove the Proposed Rule Change, as modified by the 
Partial Amendment No. 1.
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    \9\ 15 U.S.C. 78s(b)(2)(B).
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II. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, as Modified by Partial Amendment No. 1

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') \10\ 
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. 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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    \10\ Terms not defined herein are defined in the GSD Rules, 
available at www.dtcc.com/legal/rules-and-procedures.
    \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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III. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, 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 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 V 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, as modified by Partial Amendment No. 1

1. Purpose
    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

[[Page 43917]]

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 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

[[Page 43918]]

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 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 11.
    \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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[[Page 43919]]

    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 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

[[Page 43920]]

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 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 34.
    \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

[[Page 43921]]

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 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 proposed rule 
change and no objection to the related advance notice \45\ by the 
Commission. FICC would announce the effective date of the proposed 
changes by an Important Notice posted to its website.
---------------------------------------------------------------------------

    \45\ Supra note 8.
---------------------------------------------------------------------------

2. Statutory Basis
    FICC believes that this proposal is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, FICC believes 
that this proposal is consistent with section 17A(b)(3)(F) of the Act 
\46\ and Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated under 
the Act,\47\ for the reasons described below.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(F).
    \47\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the GSD 
Rules be designed to assure the safeguarding of securities and funds 
which are in the custody or control of the clearing agency or for which 
it is responsible.\48\ 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 better limit its exposure to Members in the 
event of a Member default, as described below.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    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 to the GSD Rules and 
QRM Methodology 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. The 
proposed changes above would adjust

[[Page 43922]]

the VaR Floor to help ensure that FICC collects adequate margin from 
its Members, particularly in periods of extreme market volatility. 
During periods of extreme market volatility, the existing VaR model has 
been shown to underperform based on backtesting performances. 
Backtesting percentages covering such periods indicate the risk that 
VaR Charges would be insufficient to manage risk in the event of a 
Member default. FICC pays particular attention to Members with 
backtesting deficiencies that bring the backtesting results for that 
Member below the 99% confidence target to determine if there is an 
identifiable cause of repeat backtesting deficiencies. During the 
recent period of extreme market volatility, there was an increase in 
observed backtesting deficiencies. The Minimum Margin Amount, to be 
defined in the GSD Rules and further incorporated in the QRM 
Methodology as described herein, is a proposed targeted response to 
enhance the GSD VaR model performance and improve the backtesting 
coverage during periods of extreme market volatility.
    As a result of the recent extreme market volatility, FICC's VaR 
model did not achieve a 99% confidence level for all Members during the 
COVID period during March of 2020 and the successive interest rate 
hikes that began in June 2022. The Minimum Margin Amount is intended to 
allow the VaR Charge to be more responsive during market conditions 
when the VaR model projections do not closely correspond with observed 
market price changes. 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. 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 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, the proposed changes would appropriately limit FICC's 
credit exposure to Members when current market conditions deviate from 
historical observations, resulting in the risk factors used in the VaR 
method do not adequately predict market price movements and associated 
credit risk exposure. 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 captured in the VaR Charges. 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, FICC 
believes these proposed changes 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.
    FICC believes the proposed clarifying and technical changes to the 
GSD Rules and QRM Methodology described above would enhance the clarity 
of the GSD Rules and the QRM Methodology for FICC and its membership. 
Having clear and accurate rules would help Members better understand 
their rights and obligations under the GSD Rules, and Members would be 
more likely to act in accordance with the GSD Rules. Similarly, having 
a clear and accurate methodology document that describes how the VaR 
Charges are calculated 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.
    By better enabling FICC to limit its exposure to Members, the 
proposed changes to the GSD Rules and QRM Methodology are designed to 
better ensure that, in the event of a Member default, FICC would have 
adequate margin from the defaulting Member and non-defaulting Members 
would not be exposed to losses they cannot anticipate or control. 
Therefore, the proposed changes would be designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of FICC or for which it is responsible, consistent with section 
17A(b)(3)(F) of the Act.\49\
---------------------------------------------------------------------------

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

    Rule 17Ad-22(e)(4)(i) under the Act \50\ 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

[[Page 43923]]

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) under the Act.\51\
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17Ad-22(e)(4)(i).
    \51\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(i) under the Act \52\ 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.\53\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(6)(i).
    \53\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC believes the proposed rule changes to (i) modify the VaR Floor 
to incorporate a Minimum Margin Amount and (ii) expand the application 
of the VaR Floor to include Margin Proxy, each as described above, 
could impose a burden on competition. As a result of the proposed rule 
changes, Members may experience increases in their Required Fund 
Deposits. An impact study during the Impact Study Period indicates that 
on average each Member would have had an increase in the SOD VaR Charge 
and the noon VaR Charge of approximately $22.43 million, or 17.56%, and 
$23.25 million, or 17.43%, respectively. Such increases could burden 
Members that have lower operating margins or higher costs of capital 
than other Members. It is not clear whether the burden on competition 
would necessarily be significant because it would depend on whether the 
affected Members were similarly situated in terms of business type and 
size. Regardless of whether the burden on competition is significant, 
FICC believes that any burden on competition would be necessary and 
appropriate in furtherance of the purposes of the Act, as permitted by 
section 17A(b)(3)(I) of the Act.\54\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    Specifically, FICC believes that the proposed rule changes would be 
necessary in furtherance of the Act, as described in this filing and 
further below. FICC believes that the above-described burden on 
competition that may be created by the proposed changes is necessary, 
because the GSD 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, consistent with section 17A(b)(3)(F) of the Act.\55\ As 
described above, FICC believes that 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) a haircut 
method for securities that lack sufficient historical price return 
data, and (iii) to incorporate other risk factors, based on open 
positions within each portfolio. FICC believes the proposed change 
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. Accurately calculating and 
assessing margin and in turn, collecting sufficient margin from its 
Members would better enable FICC to limit its exposures that could be 
incurred when liquidating a portfolio. 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. By better enabling FICC to 
limit its exposure to Members, the proposed changes to the GSD Rules 
and QRM Methodology are designed to better ensure that, in the event of 
a Member default, FICC would have adequate margin from the defaulting 
Member and non-defaulting Members would not be exposed to losses they 
cannot anticipate or control. Therefore, the proposed

[[Page 43924]]

changes would be designed to assure the safeguarding of securities and 
funds which are in the custody or control of FICC or for which it is 
responsible, consistent with section 17A(b)(3)(F) of the Act.\56\
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    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ Id.
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    FICC also believes these proposed changes are necessary to support 
FICC's compliance with Rule 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) 
under the Act,\57\ 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 participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence and (y) 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.
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    \57\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
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    As described above, FICC believes that implementing the Minimum 
Margin Amount into the VaR Floor would allow FICC 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, particularly in periods of extreme volatility and economic 
uncertainty. FICC's existing VaR model underperformed in response to 
the significant levels of extreme market volatility, and the VaR Charge 
amounts that were calculated using the profit and loss scenarios 
generated by FICC's VaR model did not achieve the 99% backtesting 
coverage target during the COVID period during March of 2020 and the 
successive interest rate hikes that began in March 2022. In addition, 
the current VaR Floor is not designed to address the risk of potential 
underperformance of the VaR model under extreme market volatility. As 
reflected in backtesting studies during the Impact Study Period, FICC 
believes the proposed changes would appropriately cover FICC's credit 
exposure to Members with a high degree of confidence in the event that 
the VaR model yields too low a VaR Charge in such situations. The 
proposed rule changes would limit FICC's exposure to Members by 
ensuring that each Member has an appropriate minimum VaR Charge applied 
to its portfolios in the event that the VaR model yields too low a VaR 
Charge for such portfolios. 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. Therefore, FICC believes that these proposed changes would 
allow FICC to effectively identify, measure, monitor, and manage its 
credit exposures to Members and better limit FICC's credit exposures to 
Members by maintaining sufficient financial resources to cover its 
credit exposure to each Member fully with a high degree of confidence 
and producing margin levels commensurate with the risks and particular 
attributes of each relevant product and portfolio consistent with the 
requirements of Rule 17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under 
the Act.\58\
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    \58\ Id.
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    FICC also 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 proposed changes to incorporate the 
Minimum Margin Amount and apply the VaR Floor to include Margin Proxy 
would enable FICC to produce margin levels more commensurate with the 
risks and particular attributes of each Member's portfolio. Any 
increase in Required Fund Deposit as a result of such proposed changes 
for a particular Member would be in direct relation to the specific 
risks presented by such Members' portfolio, and each Member's Required 
Fund Deposit would continue to be calculated with the same parameters 
and at the same confidence level. Therefore, Members with portfolios 
that present similar risks, regardless of the type of Member, would 
have similar impacts on their Required Fund Deposit amounts. In 
addition, the proposed changes would improve the risk-based margining 
methodology that FICC employs to set margin requirements and better 
limit FICC's credit exposures to its Members. Impact studies indicate 
that the proposed methodology would result in backtesting coverage that 
more appropriately addresses the risks presented by each portfolio. 
Therefore, because the proposed changes are designed to provide FICC 
with a more appropriate and complete measure of the risks presented by 
Members' portfolios, FICC believes the proposals are appropriately 
designed to meet its risk management goals and its regulatory 
obligations.
    Therefore, FICC does not believe that the proposed changes would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the Act.\59\
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    \59\ 15.U.S.C. 78q-1(b)(3)(I).
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    FICC does not believe the proposed clarifying and technical changes 
to the GSD Rules and the QRM Methodology would impact competition. 
These changes would help to ensure that the GSD Rules and the QRM 
Methodology remain clear. Specifically, the changes to the GSD Rules 
would facilitate members' understanding of the GSD Rules and their 
obligations thereunder, and the changes to the QRM Methodology would 
help ensure that FICC continues to accurately calculate and assess 
margin from its Members. These changes would not affect FICC's 
operations or the rights and obligations of the membership. As such, 
FICC believes the proposed clarifying and technical changes would not 
have any impact on competition.

(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.

[[Page 43925]]

    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at 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.

IV. Proceedings To Determine Whether To Approve or Disapprove the 
Proposed Rule Change, as Modified by Partial Amendment No. 1, and 
Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to section 
19(b)(2)(B) of the Exchange Act to determine whether the Proposed Rule 
Change, as modified by Partial Amendment No. 1, should be approved or 
disapproved.\60\ Institution of proceedings is appropriate at this time 
in view of the legal and policy issues raised by the Proposed Rule 
Change, as modified by Partial Amendment No. 1. Institution of 
proceedings does not indicate that the Commission has reached any 
conclusions with respect to any of the issues involved. Rather, the 
Commission seeks and encourages interested persons to comment on the 
Proposed Rule Change, as modified by Partial Amendment No. 1, which 
would provide the Commission with arguments to support the Commission's 
analysis as to whether to approve or disapprove the Proposed Rule 
Change, as modified by Partial Amendment No. 1.
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    \60\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

    Pursuant to section 19(b)(2)(B) of the Exchange Act,\61\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. The Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
consistency of the Proposed Rule Change, as modified by Partial 
Amendment No. 1, with section 17A of the Exchange Act \62\ and the 
rules thereunder, including the following provisions:
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    \61\ Id.
    \62\ 15 U.S.C. 78q-1.
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     Section 17A(b)(3)(F) of the Exchange Act,\63\ which 
requires, among other things, that the rules of a clearing agency are 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of the clearing agency or for which it is 
responsible;
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    \63\ 15 U.S.C. 78q-1(b)(3)(F).
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     Rule 17Ad-22(e)(4)(i) under the Exchange Act,\64\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those 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; and
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    \64\ 17 CFR 240.17Ad-22(e)(4)(i).
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     Rule 17Ad-22(e)(6)(i) under the Exchange Act,\65\ which 
requires that a covered clearing agency establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
cover its credit exposures to its participants by establishing a risk-
based margin system that, at a minimum, considers, and produces margin 
levels commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market.
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    \65\ 17 CFR 240.17Ad-22(e)(6)(i).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
issues identified above, as well as any other concerns they may have 
with the Proposed Rule Change, as modified by Partial Amendment No. 1. 
In particular, the Commission invites the written views of interested 
persons concerning whether the Proposed Rule Change, as modified by 
Partial Amendment No. 1, is consistent with section 17A(b)(3)(F) \66\ 
and Rules 17Ad-22(e)(4)(i), and (e)(6)(i) \67\ of the Exchange Act, or 
any other provision of the Exchange Act, or the rules and regulations 
thereunder. Although there do not appear to be any issues relevant to 
approval or disapproval that would be facilitated by an oral 
presentation of views, data, and arguments, the Commission will 
consider, pursuant to Rule 19b-4(g) under the Exchange Act,\68\ any 
request for an opportunity to make an oral presentation.\69\
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    \66\ 15 U.S.C. 78q-1(b)(3)(F).
    \67\ 17 CFR 240.17Ad-22(e)(4)(i) and 17 CFR 240.17Ad-
22(e)(6)(i).
    \68\ 17 CFR 240.19b-4(g).
    \69\ Section 19(b)(2) of the Exchange Act grants to the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Act Amendments of 1975, Senate Comm. on 
Banking, Housing & Urban Affairs, S. Rep. No. 75, 94th Cong., 1st 
Sess. 30 (1975).
---------------------------------------------------------------------------

    The Commission asks that commenters address the sufficiency of 
FICC's statements in support of the Proposed Rule Change, as modified 
by Partial Amendment No. 1, which are set forth herein, in addition to 
any other comments they may wish to submit about the Proposed Rule 
Change, as modified by Partial Amendment No. 1.
    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
     Send an email to [email protected]. Please include 
File Number SR-FICC-2024-003 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-2024-003. 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 proposed rule change that are filed with the 
Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(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-2024-003 and 
should

[[Page 43926]]

be submitted on or before June 10, 2024. Rebuttal comments should be 
submitted by June 24, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\70\
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    \70\ 17 CFR 200.30-3(a)(31).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-10957 Filed 5-17-24; 8:45 am]
BILLING CODE 8011-01-P