[Federal Register Volume 90, Number 80 (Monday, April 28, 2025)]
[Notices]
[Pages 17650-17653]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07219]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102907; File No. SR-FICC-2025-003]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving Proposed Rule Change To Adopt a Volatility Event Charge
April 22, 2025.
On February 27, 2025, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ the proposed rule change
SR-FICC-2025-003 (``Proposed Rule Change'') to amend FICC's Government
Securities Division (``GSD'') Rulebook (``GSD Rules'') and Mortgage-
Backed Securities Division (``MBSD'') Clearing Rules (``MBSD Rules,''
and collectively with the GSD Rules, the ``Rules'') \3\ to adopt a
volatility event charge (``Volatility Event Charge''). The proposed
rule change was published for comment in the Federal Register on March
11, 2025.\4\ The Commission has received no comments on the proposed
rule change. For the reasons discussed below, the Commission is
approving the Proposed Rule Change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Terms not defined herein are defined in the GSD Rules and
MBSD Rules, as applicable, available at www.dtcc.com/legal/rules-and-procedures.
\4\ See Securities Exchange Act Release No. 102530 (Mar. 5,
2025), 90 FR 11760 (Mar. 11, 2025) (File No. SR-FICC-2025-003)
(``Notice of Filing'').
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I. Background
FICC, through its GSD and MBSD, is a central counterparty (``CCP'')
and provider of clearance and settlement services for U.S. fixed income
transactions.\5\ In its role as a CCP, it interposes itself as the
buyer to every seller and seller to every buyer for the financial
transactions it clears. GSD provides trade comparison, netting, risk
management, settlement, and CCP services for the U.S. Government
securities market. MBSD provides the same services for the U.S.
mortgage-backed securities market. As such, FICC is exposed to the risk
that one or more of its members may fail to make a payment or to
deliver securities.
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\5\ GSD and MBSD maintain separate sets of rules, margin models,
and clearing funds.
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A key tool that FICC uses to manage its credit exposures to its
members is the daily collection of the Required Fund Deposit (i.e.,
margin) from each member. A member's margin is designed to mitigate
potential losses associated with liquidation of the member's portfolio
in the event of that member's default. The aggregated amount of all GSD
and MBSD members' margin constitutes the GSD Clearing Fund and MBSD
Clearing Fund, respectively, which FICC would be able to access should
a defaulted member's own margin be insufficient to satisfy losses to
FICC caused by the liquidation of that member's portfolio. Each
member's margin consists of several components, each of which is
designed to address specific risks faced by FICC arising out of its
members' trading activity. Each member's margin includes a value-at-
risk (``VaR'') charge (``VaR Charge'') designed to capture the
potential market price risk \6\ associated with the securities in a
member's portfolio. The VaR Charge is typically
[[Page 17651]]
the largest component of a member's margin requirement.
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\6\ 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 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 \7\ to determine the adequacy of each member's margin. A
backtesting deficiency occurs when a member's margin would not have
been adequate to cover the projected liquidation losses estimated from
the member's settlement activity based on the backtesting results.\8\
Backtesting deficiencies highlight exposure that could subject FICC to
potential losses in the event of a member default. FICC investigates
the cause(s) of any backtesting deficiencies to determine whether there
is an identifiable cause of repeat backtesting deficiencies and/or
whether multiple members may experience backtesting deficiencies for
the same underlying reason.
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\7\ Backtesting is an ex-post comparison of actual outcomes
(i.e., the actual margin collected) with expected outcomes derived
from the use of margin models. See 17 CFR 240.17Ad-22(a)(1).
\8\ FICC compares each member's margin with the simulated
liquidation gains/losses, using the actual positions in the member's
portfolio(s) and the actual historical security returns.
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FICC believes that its current VaR model has performed well in low
to moderate volatility markets,\9\ though it has not met FICC's
performance targets during periods of extreme market volatility.\10\
FICC performed an impact study on its members' margin portfolios
covering the period beginning April 15, 2024 through August 2, 2024
(``Impact Study'').\11\ During the period of the Impact Study, FICC
assessed its members a special charge equal to 10% of the member's VaR
Charge during a specified coverage period leading up to and on the day
of a list of scheduled economic events \12\ when certain forward-
looking market indicators and thresholds \13\ were exceeded during the
coverage period. The results of the Impact Study demonstrated that the
assessment of the special charge eliminated a number of backtesting
deficiencies at both GSD and MBSD. Specifically, during start-of-day
and noon margin cycles at GSD the number of backtesting deficiencies
eliminated was reduced by approximately 7% and 10%, respectively, and
by approximately 13% at MBSD.\14\ FICC states that the results of the
Impact Study highlighted the need to enhance its margin methodology and
adopt a more proactive approach to manage its backtesting deficiencies
and member-level market risk exposure during periods of extreme market
volatility.\15\
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\9\ See Notice of Filing, 90 FR at 11761.
\10\ During the pandemic-related volatility in March 2020 and
the successive interest rate hikes that began in March 2022, the VaR
model fell below the 99 percent performance targets. See Notice of
Filing, 90 FR at 11761-62.
\11\ The Impact Study, filed confidentially as Exhibit 3,
includes the following information covering each day of the period
from April 15, 2024 through August 2, 2024 for each member margin
assessment period for GSD and MBSD members: total amount of special
charges; the backtesting deficiency counts; backtesting deficiency
amounts; eliminated backtesting deficiency count; eliminated
backtesting deficiency amount; reduced backtesting deficiency count;
and reduced backtesting deficiency amount.
\12\ See Notice of Filing, 90 FR at 11763. Table 1 includes a
list of schedule economic events, including: Consumer Price Index
(CPI); Personal Consumption Expenditures (CPE) Price Index; Non-Farm
Payrolls (NFP) and Unemployment Rate; Federal Funds Target Rate; and
Minutes of the Federal Open Market Committee Meeting.
\13\ See Notice of Filing, 90 FR at 11764. Table 2 includes a
list of indicators and corresponding thresholds required to trigger
the special charge during the coverage period.
\14\ See Notice of Filing, 90 FR at 11764. Further, FICC states
that in addition to backtesting deficiencies that were eliminated by
the special charge, other deficiencies were also reduced but not
eliminated altogether.
\15\ See Notice of Filing, 90 FR at 11764.
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II. Description of the Proposed Rule Change
FICC proposes to add a new margin component, the Volatility Event
Charge, to its methodology for calculating GSD and MBSD members'
margin. FICC designed the Volatility Event Charge to address the
heightened market risks associated with scheduled economic events which
can lead to significant market volatility.\16\ This charge would
provide a proactive mechanism to complement FICC's VaR model by helping
to mitigate FICC's exposures to potential adverse market reactions
arising from certain scheduled economic events.\17\
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\16\ See Notice of Filing, 90 FR at 11765.
\17\ See Notice of Filing, 90 FR at 11762.
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The Volatility Event Charge would be assessed for each member
portfolio at GSD and MBSD, as well as for each Segregated Indirect
Participant at GSD, during periods in which FICC's forward-looking
market volatility indicators exceed predefined thresholds. The charge
would be assessed twice a day at GSD and once a day at MBSD \18\ during
the coverage period, generally beginning two business days prior to a
scheduled event and extending through the event date. However, based on
an assessment of market conditions and backtesting coverage, FICC may
extend the coverage period by an additional business day if multiple
market indicators exceed threshold levels, or reduce the coverage
period if the scheduled event itself is not expected to materially
impact market volatility. Any changes to the coverage periods would be
documented and approved in accordance with FICC's internal market risk
management policies.
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\18\ FICC currently calculates and assesses a member's margin
requirement at least twice a day for GSD Members (start-of-day and
noon) and once per day (start-of-day) for MBSD Members.
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The Volatility Event Charge would be calculated by multiplying the
VaR Charge of the affected member's portfolio by no less than 10
percent and no greater than 30 percent, as determined by FICC from time
to time based on various factors such as backtesting coverage and/or
backtesting deficiencies. The initial multiplier would be set at 10
percent, based on FICC's prior experience with special charges imposed
following the 2023 regional banking crisis.\19\ The upper bound of 30
percent is informed by FICC's analysis of historical backtesting
deficiencies under various stress events. FICC would conduct ongoing
monitoring of the charge's efficacy, with at least monthly reviews to
determine whether any adjustments are necessary to the list of
scheduled events, volatility indicators, or applicable percentage
multipliers.\20\ Any modifications would be documented and approved by
FICC's market risk group in accordance with its internal policies.\21\
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\19\ See Notice of Filing, 90 at 11762.
\20\ See Notice of Filing, 90 at 11762.
\21\ See Notice of Filing, 90 at 11762. FICC states they will
conduct ongoing monitoring of the efficacy of the charge and review
results at least monthly to determine if changes to the list of
scheduled events, forward-looking market volatility indicators and
thresholds, and/or the applicable VaR Charge percentage. The market
risk group would document the recommendation and rationale for such
change and obtain approval from FICC's management committee.
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To ensure transparency, FICC would notify members of applicable
scheduled events, forward-looking market volatility indicators, and
associated charge parameters through a quarterly Important Notice. This
notice would be issued no less than one business day before the start
of the relevant quarter or the coverage period of the first scheduled
event in that quarter, whichever is earlier.
In connection with adopting the Volatility Event Charge, FICC
proposes amendments to the GSD and MBSD rules to formally define the
charge, incorporate it into the calculation of the Required Fund
Deposit and Segregated Customer Margin Requirement, and establish the
parameters for its assessment and administration. FICC states that the
adoption of the Volatility
[[Page 17652]]
Event Charge and corresponding rule changes are intended to enhance
FICC's ability to improve margin resilience during scheduled market
events that may impact market volatility by proactively managing GSD
and MBSD member-level credit risk exposure and backtesting
performance.\22\
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\22\ See Notice of Filing, 90 at 11764.
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III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \23\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Changes are consistent with
Section 17A(b)(3)(F) \24\ of the Act and Rules 17ad-22(e)(4)(i) and
(e)(6)(i) each promulgated under the Act.\25\
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\23\ 15 U.S.C. 78s(b)(2)(C).
\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ 17 CFR 240.17ad-22(e)(4)(i) and (e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency, such as FICC, be designed to, among other things,
promote the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible.\26\ The Proposed Rule Change is consistent with Section
17A(b)(3)(F) of the Act for the reasons stated below.
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\26\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above in Section II, FICC proposes to add the
Volatility Event Charge to the margin requirements that FICC may
collect. As discussed in more detail in Section III.B infra, by adding
the Volatility Event Charge to FICC's margin methodology, the Proposed
Rule Change would help ensure that FICC collects sufficient margin to
manage member-level credit risk exposure and backtesting performance
associated with certain scheduled economic events that may impact
market volatility. By helping FICC to collect sufficient margin, the
Proposed Rule Change would better ensure that, in the event of a member
default, FICC's operation of its critical clearance and settlement
services would not be disrupted because of insufficient financial
resources. Accordingly, the Proposed Rule Change should help FICC to
continue providing prompt and accurate clearance and settlement of
securities transactions, consistent with Section 17A(b)(3)(F) of the
Act.\27\
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\27\ 15 U.S.C. 78q-1(b)(3)(F).
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Moreover, as described above in Section II, FICC would access the
mutualized Clearing Fund should a defaulted member's own margin be
insufficient to satisfy losses to FICC caused by the liquidation of
that member's portfolio. Because FICC's proposal to adopt the
Volatility Event Charge should help ensure that FICC has collected
sufficient margin from members, the Proposed Rule Change should also
help minimize the likelihood that FICC would have to access the
Clearing Fund, thereby limiting non-defaulting members' exposure to
mutualized losses. By helping to limit the exposure of FICC's non-
defaulting members to mutualized losses, the Proposed Rule Change
should help FICC assure the safeguarding of securities and funds which
are in its custody or control, consistent with Section 17A(b)(3)(F) of
the Act.\28\
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\28\ 15 U.S.C. 78q-1(b)(3)(F).
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For these reasons, the Proposed Rule Change is designed to promote
the prompt and accurate clearance and settlement of securities
transactions and assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible, consistent with Section 17A(b)(3)(F) of the Act.\29\
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17ad-22(e)(4)(i)
Rule 17Ad-22(e)(4)(i) under the Act requires that each covered
clearing agency, such as FICC, 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 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.\30\ The Proposed Rule Change is consistent
with Rule 17Ad-22(e)(4)(i) under the Act for the reasons stated below.
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\30\ 17 CFR 240.17Ad-22(e)(4)(i).
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FICC's proposal to add the Volatility Event Charge to its margin
methodology would enable FICC to better manage its credit exposures to
members by maintaining sufficient resources to cover their credit
exposures more fully with a high degree of confidence. Specifically,
the proposed Volatility Event Charge would allow FICC to more
effectively identify, measure, monitor, and manage GSD and MBSD member-
level credit exposure during periods of market volatility during
scheduled economic events. As discussed above in Section II, the
Volatility Event Charge would be assessed proactively for each member
portfolio at GSD and MBSD, as well as for each Segregated Indirect
Participant at GSD, during coverage periods leading up to scheduled
economic events in which FICC's forward-looking market volatility
indicators exceed predefined thresholds. The Volatility Event Charge
should help FICC mitigate such credit exposures and decrease
backtesting deficiencies during those coverage periods.
The Commission has reviewed and analyzed the materials filed by
FICC, including FICC's Impact Study and backtesting results,\31\ which
show the effect of a special charge assessed during the time period of
the Impact Study designed to operate in the same way as the Volatility
Event Charge. The Impact Study shows that this special charge reduced
the number of backtesting deficiencies, as well as decreasing the
magnitude of persistent backtesting deficiencies, and thereby better
enabled FICC to collect margin sufficient to meet its coverage
requirements. Accordingly, for the reasons discussed above, the
Proposed Rule Change is reasonably designed to better enable FICC to
effectively identify, measure, monitor, and manage its credit exposure
to members, and those arising from its payment, clearing, and
settlement processes, including by maintaining sufficient financial
resources to cover its credit exposure to each member fully with a high
degree of confidence consistent with Rule 17Ad-22(e)(4)(i).\32\
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\31\ See supra note 11.
\32\ 17 CFR 240.17Ad-22(e)(4)(i).
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C. Consistency With Rule 17ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) under the Act requires that each covered
clearing agency that provides central counterparty services, such as
FICC, 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
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that, at a minimum, considers, and produces margin levels commensurate
with, the risks and particular attributes of each relevant product,
portfolio, and market.\33\ The Proposed Rule Change is consistent with
Rule 17Ad-22(e)(6)(i) under the Act for the reason stated below.
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\33\ 17 CFR 240.17Ad-22(e)(6)(i).
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FICC's proposal to add the Volatility Event Charge to its margin
methodology would enable FICC to more effectively address the risks
posed to FICC by certain scheduled economic events that have the
potential to lead to significant market volatility. As noted above,
FICC provided an Impact Study regarding the impacts of a special charge
on each GSD and MBSD members in the amount of 10% of the member's VaR
Charge during the coverage periods leading up to scheduled economic
events when certain forward-looking market indicators exceeded
predefined thresholds that had been in place from April 15, 2024 to
August 2, 2024.\34\ Specifically, the Impact Study shows that the
special charge reduced the number of backtesting deficiencies at GSD by
approximately 7% and 10% for the start-of-day and noon margin cycles,
respectively, and reduced the number of backtesting deficiencies at
MBSD by approximately 13%.\35\ In addition to the backtesting
deficiencies that were eliminated by the special charge, other
deficiencies were reduced such that the magnitude of the observed
deficiency was less than without the special charge. By adding the
Volatility Event Charge to FICC's margin methodology, FICC would more
effectively mitigate the risks attributable to potential outsized and
adverse market reactions to the outcome of a scheduled economic event.
As a result, implementing the Proposed Rule Change should better enable
FICC to collect margin amounts at levels commensurate with FICC's
credit exposures to its members.
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\34\ See supra note 11.
\35\ See id.
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Accordingly, the Proposed Rule Change is consistent with Rule 17Ad-
22(e)(6)(i) under the Act because it is designed to assist FICC in
maintaining a risk-based margin system that considers, and produces
margin levels commensurate with, the risks of portfolios that
experience significant market volatility because of certain scheduled
economic events.\36\
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\36\ 17 CFR 240.17Ad-22(e)(6)(i).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \37\ and
the rules and regulations promulgated thereunder.
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\37\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\38\ that proposed rule change SR-FICC-2025-003, be, and hereby is,
approved.\39\
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\38\ 15 U.S.C. 78s(b)(2).
\39\ In approving the Proposed Rule Changes, the Commission
considered its impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07219 Filed 4-25-25; 8:45 am]
BILLING CODE 8011-01-P