

[Federal Register: December 27, 2006 (Volume 71, Number 248)]
[Notices]               
[Page 77835-77837]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27de06-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54964; File No. SR-FICC-2006-16]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change to Replace the Government 
Securities Division Clearing Fund Calculation Methodology With a Yield-
Driven Value-at-Risk Methodology

December 19, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 4, 2006, the Fixed 
Income Clearing Corporation (``FICC'') filed with the Securities and 
Exchange Commission (``Commission'') and on November 14, 2006, amended 
the proposed rule change as described in Items I, II, and III below, 
which items have been prepared by FICC. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FICC is seeking to replace the Government Securities Division 
(``GSD'') margin calculation methodology with a value-at-risk (``VaR'') 
methodology.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by FICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Netting members of FICC's GSD are required to maintain clearing 
fund deposits. Each member's required clearing fund deposit is 
calculated daily to ensure that enough funds are available to cover the 
risks associated with that member's activities.
    The purposes served by the clearing fund are to: (i) have on 
deposit from each member clearing fund sufficient to satisfy any losses 
that may be incurred by FICC or its members resulting from the default 
by a member and the resultant close out of that member's settlement 
positions and (ii) ensure that FICC has sufficient liquidity at all 
times to meet its payment and delivery obligations.
    FICC proposes to replace the current clearing fund methodology, 
which uses haircuts and offsets, with a VaR methodology that is 
expected to better reflect market volatility and more thoroughly 
distinguish the levels of risk presented by individual securities. 
Specifically, FICC is proposing to

[[Page 77836]]

replace the existing GSD margin calculation methodology with a yield-
driven VaR model. VaR is defined to be the maximum amount of money that 
may be lost on a portfolio over a given period of time within a given 
level of confidence. With respect to the GSD, FICC is proposing a 99 
percent three-day VaR.\3\
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    \3\ Category 2 Dealers and Category 2 Futures Commission 
Merchants will be subject to higher confidence levels than other 
Netting Members.
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    The changes to the components that comprise the current clearing 
fund calculation compared to the proposed VaR methodology in relation 
to the risks addressed by the components are summarized below.

------------------------------------------------------------------------
                                                           Proposed
      Existing methodology          Risk addressed      methodology \4\
------------------------------------------------------------------------
Receive/Deliver component using   Fluctuation in      Interest rate or
 margin factors.                   security prices.    index-driven
                                                       model, as
                                                       appropriate \5\
Repo Volatility component.......  Fluctuation in      Repo index-driven
                                   repo interest       model \6\
                                   rates.
Funds Adjustment Deposit          Uncertainty of      Margin Requirement
 component (based on the average   whether a member    Differential
 size of the member's 20 highest   will satisfy its    (``MRD'') (a
 funds-only settlement amounts     funds-only          portion of which
 over the most recent 75           settlement          is based on the
 business days).                   obligation.         historical size
                                                       of a member's
                                                       funds-only
                                                       settlement
                                                       obligation)
Average Post Offset Margin        Uncertainty of      MRD (a portion of
 Amount component (based on the    whether a member    which is based on
 20 highest margin amounts         will satisfy its    the historical
 derived from all outstanding      next clearing       variability a
 net settlement positions over     fund call.          member's clearing
 the most recent 75 business                           fund requirement)
 days).
Not specifically covered........  Intraday risk and   Coverage Component
                                   additional          (if necessary,
                                   exposure due to     applies
                                   portfolio           additional
                                   variation and       minimum charge to
                                   potential loss in   bring coverage to
                                   unlikely            the applicable
                                   situations beyond   confidence level)
                                   the model's
                                   effective range.
------------------------------------------------------------------------
\4\ Under the current GSD rules, Category 1 Inter-Dealer Brokers are
  subject to a $5 million clearing fund requirement. This proposed rule
  change does not alter that requirement.
\5\ FICC would have the discretion to not apply the interest rate model
  to classes of securities whose volatility is less amenable to
  statistical analysis, which is usually due to a lack of pricing
  history. In lieu of such a calculation, the required charge with
  respect to such positions would be determined based on a historic
  index volatility model.
\6\ FICC is proposing a new definition for ``Term Repo Transaction'' to
  clarify the types of transactions covered by this component. As
  proposed, Term Repo Transaction would mean, on any particular Business
  Day, a Repo Transaction for which settlement of the Close Leg ``is
  scheduled to occur two or more Business Days after the scheduled
  settlement of the Start Leg.'' In addition, the existing definition
  for ``Term GCF Repo Transaction'' is being revised to conform to the
  proposed language for ``Term Repo Transaction'' as the new definition
  provides greater clarity as to transactions covered.

    In addition, FICC may include in a member's clearing fund 
requirement a ``special charge'' as determined by FICC based on such 
factors as it determines to be appropriate from time to time such as 
price fluctuations, volatility, or lack of liquidity of any security.
    The proposed VaR methodology, if approved, would necessitate a 
change to the risk management consequences of the late allocation of 
repo substitution collateral.\7\ Because offset classes and margin 
rates will no longer be present in the GSD's rules as proposed, FICC 
would base the margining for such a generic CUSIP on the same 
calculation as that used for securities whose volatility is less 
amenable to statistical analysis.
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    \7\ Securities Exchange Act Release No. 53534 (March 21, 2006), 
71 FR 15781 [File No. SR-FICC-2005-18]. This rule change created a 
generic CUSIP offset and applicable margin rate for determining 
clearing fund consequences for such late allocations.
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    The VaR methodology will not include calculations that are 
incorporated in the GSD's current cross-margining programs with The 
Clearing Corporation (``TCC'') and the Chicago Mercantile Exchange 
(``CME''). In order to provide for continuity of cross-margining 
following the implementation of the VaR methodology and because certain 
key calculations required for cross-margining are unique to cross-
margining, the GSD will continue to perform the applicable cross-
margining calculations outside of the VaR model. The GSD would then 
adjust the cross-margining clearing fund calculation using a scaling 
ratio of the VaR clearing fund calculation to the cross-margining 
clearing fund calculation so that the clearing fund amount available 
for cross-margining is appropriately aligned with the VaR model. The 
proposed changes described herein would necessitate amendments to 
FICC's cross-margining agreements with TCC and CME as follows:
    1. The definition of FICC's ``Margin Rate'' in each of the 
agreements would be amended to reflect that the margin rate will no 
longer be based on margin factors published in the current rules (as 
these would no longer be applied under the VaR methodology). Instead, 
they would be determined based on a percentage that would be determined 
using the same parameters and data (e.g., confidence level and historic 
indices) as those used to generate margin factors in the current rules.
    2. Section 5(a) of each cross-margining agreement would be amended 
to state that FICC's residual margin amount would be calculated as 
specified in the agreement and would be adjusted, if necessary, to 
correct for differences between the methodology of calculating the 
residual margin amount as described in the agreement and the VaR 
methodology. This change is necessary to account for the deletion of 
relevant margin factor and disallowance schedules (which, like the 
margin factors, are incorporated into the agreements by reference) from 
the GSD rules and to adjust for the possibility that the new VaR 
methodology could generate a charge that would otherwise allow for a 
cross-margining reduction that is greater than the margin requirement.
    FICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to FICC because it should assure the 
safeguarding of securities and funds in FICC's custody or control or 
for which it is responsible by enabling FICC to more effectively manage 
risk presented by members' activity.
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    \8\ 15 U.S.C. 78q-1.

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[[Page 77837]]

(B) Self-Regulatory Organization's Statement on Burden on Competition

    FICC does not believe that the proposed rule change would have any 
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    Written comments have not been solicited with respect to the 
proposed rule change, and none have been received. FICC will notify the 
Commission of any written comments it receives.

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments:

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-FICC-2006-16 on the subject line.

Paper Comments:

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FICC-2006-16. This 
file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of FICC and on 
FICC's Web site at http://www.ficc.com/gov/[fxsp0]gov.docs.jsp?NS-

query. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FICC-2006-16 and should be submitted on or before January 17, 2007.
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    \9\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E6-22085 Filed 12-26-06; 8:45 am]

BILLING CODE 8011-01-P
