
[Federal Register: April 10, 2008 (Volume 73, Number 70)]
[Notices]               
[Page 19537-19539]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10ap08-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57586; File No. SR-FICC-2007-10]

 
Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving Proposed Rule Change, as Modified by Amendment No. 1, 
To Replace the Mortgage-Backed Securities Division Clearing Fund 
Calculation Methodology With a Yield-Driven Value-at-Risk Methodology

March 31, 2008.

I. Introduction

    On August 31, 2007, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') and on September 27, 2007, amended proposed rule 
change SR-FICC-2007-10 pursuant

[[Page 19538]]

to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published in the Federal 
Register on November 30, 2007.\2\ The Commission received no comment 
letters in response to the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change, 
as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 56837 (November 26, 
2007), 72 FR 67770 (SR-FICC-2007-10).
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II. Description

    FICC is replacing the Mortgage-Backed Securities Division 
(``MBSD'') margin calculation methodology with a value-at-risk 
(``VaR'') methodology.
    Clearing participants of MBSD are required to maintain 
participants' fund deposits. Each participant's required deposit is 
calculated daily to ensure enough funds are available to cover the 
risks associated with that participant's activities.
    The purpose served by the participants fund is to have on deposit 
from each participant assets sufficient to satisfy any losses that may 
otherwise be incurred by MBSD participants as the result of the default 
by another participant and the resultant close out of the defaulting 
participant's settlement positions.
    FICC is replacing the current participants' fund methodology, which 
uses haircuts and offsets, with a VaR model. FICC expects the VaR model 
to better reflect market volatility and to more thoroughly distinguish 
levels of risk presented by individual securities.
    Specifically, FICC will replace the existing MBSD margin 
calculation 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 
MBSD, FICC will use a 99 percent three-day VaR.
    The changes to the components that comprise the current 
participants fund calculation as compared to the VaR calculation in 
relation to the risks addressed by the components are summarized below:

------------------------------------------------------------------------
    Existing methodology         Risk addressed        VaR methodology
------------------------------------------------------------------------
 Market Margin Differential,   Adjusting contract    The sum of:
 which is the greater of:      price to market       (i) Mark-to-market
 (i) The P&L Requirement or.   price and post mark-  and
 (ii) The Market Volatility    to-market             (ii) Interest rate
 Requirement..                 fluctuations in       or index-driven
                               security prices.      model, as
                                                     appropriate.\3\
 Final margin requirement      Additional exposure   Margin Requirement
 generated for second          due to portfolio      Differential
 processing cycle\4\.          variation..           (``MRD'') to
                                                     include intraday
                                                     portfolio
                                                     variations and
                                                     protection
                                                     regarding late
                                                     margin deficit
                                                     satisfaction.
 Prefunding of certain debit   Uncertainty of        Prefunding of
 cash obligation items         whether a member      certain debit cash
 through the participants      will satisfy its      obligation items
 fund (no offset for           cash settlement       through the
 credits).                     obligation.           participants fund
                                                     (offset for
                                                     credits)\5\
 N/A........................   Potential loss in     Coverage Component
                               unlikely situations   (if necessary,
                               beyond the model's    applies additional
                               effective range.      charge to bring
                                                     coverage to the
                                                     applicable
                                                     confidence level).
 Minimum Market Margin         Maintenance of a      A minimum charge of
 Differential (currently       minimum amount of     the greater of: (i)
 $250,000).                    collateral to         $100,000 or (ii) a
                               support potential     defined percentage
                               counterparty          of gross portfolio.
                               liquidation losses.
------------------------------------------------------------------------

    In  addition, FICC may include in a participant's participant fund 
calculation a ``special charge'' as determined by FICC from time to 
time in view of market conditions and the financial and operational 
capabilities of the participant. FICC will make any such determination 
based on such factors as it determines to be appropriate.
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    \3\ FICC shall have the discretion to not apply the interest 
rate model to classes of securities whose volatility is less 
amenable to statistical analysis (e.g., a security that has a lack 
of pricing history). In lieu of such a calculation, the required 
charge with respect to such positions will be determined based on an 
historic index volatility model.
    \4\ MBSD generates a preliminary margin report as part of a 
first processing cycle at the close of the business day and 
calculates a final margin requirement as part of a second processing 
cycle completed at approximately 11:30 am each business day. Upon 
the implementation of the new VaR methodology, the MBSD will no 
longer generate a margin requirement as part of the second cycle. 
Instead, a final margin requirement will be established after the 
running of the first cycle at approximately 9:00 pm.
    \5\ Cash obligation item credits are retained by MBSD and are 
not passed through to the participant. As a result, MBSD has 
correspondingly less risk vis-a-vis a firm with cash obligation 
credits and therefore requires less collateral.
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    Because it will become obsolete upon the implementation of a VaR 
based participants fund calculation, FICC is also eliminating the 
provision in MBSD rules requiring participants to maintain a Basic 
Deposit and Minimum Market Margin Differential Deposit with MBSD 
pursuant to Article IV, Rule 1 (Participants Fund), Section 1(a) and 
(b).

III. Discussion

    Section 19(b) of the Act 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 the rules and regulations thereunder applicable to such 
organization. Section 17A(b)(3)(F) of the Act requires that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds in FICC's custody or control or for which it is 
responsible.\6\ Because FICC's proposed rule change implements a VaR 
methodology that should better reflect market volatility and should 
more thoroughly distinguish the levels of risk presented by individual 
securities, FICC should be able to more accurately calculate the risk 
presented by each of its member's activity and to make participants 
fund collections to protect against that risk. As a result, FICC should 
be in a better position to assure the safeguarding of securities and 
funds in its custody or control or for which it is responsible.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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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 Section 17A of the Act and the rules and regulations 
thereunder. In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and capital 
formation.\7\
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    \7\ 15 U.S.C. 78c(f).

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[[Page 19539]]

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-FICC-2007-10), as amended, 
be and hereby is approved.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E8-7504 Filed 4-9-08; 8:45 am]

BILLING CODE 8011-01-P
