
[Federal Register Volume 82, Number 26 (Thursday, February 9, 2017)]
[Notices]
[Pages 10117-10123]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02649]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79958; File No. SR-FICC-2017-001]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To (1) Implement the Margin 
Proxy, (2) Modify the Calculation of the Coverage Charge in 
Circumstances Where the Margin Proxy Applies, and (3) Make Certain 
Technical Corrections

February 3, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 2, 2017, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II and III below, which 
Items have been prepared by the clearing agency.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On February 2, 2017, FICC filed this proposed rule change as 
an advance notice (SR-FICC-2017-801) with the Commission pursuant to 
Section 806(e)(1) of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act entitled the Payment, Clearing, and Settlement 
Supervision Act of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b-
4(n)(1)(i) of the Act, 17 CFR 240.19b-4(n)(1)(i). A copy of the 
advance notice is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.

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[[Page 10118]]

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the FICC 
Government Securities Division (``GSD'') Rulebook (``GSD Rules'') \4\ 
in order to include a minimum volatility calculation called the 
``Margin Proxy.'' Under the proposed rule change, FICC would apply the 
greater of the amount calculated by the current model-based volatility 
calculation (``Current Volatility Calculation'') and the Margin Proxy 
when determining a GSD Netting Member's (``Netting Member's'') daily 
VaR Charge,\5\ as further described below. In addition, FICC would 
modify the calculation of the Coverage Charge \6\ in circumstances 
where the Margin Proxy applies, as further described below.
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    \4\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the GSD Rules available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ The Margin Proxy would be calculated as part of the 
determination of the VaR Charge that occurs twice daily, based on 
start-of-day positions and noon positions.
    \6\ See description of Coverage Charge in GSD Rule 1, 
Definitions, supra note 4.
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    In order to effectuate the proposed rule changes described above, 
FICC proposes to (1) add a new defined term for Margin Proxy in Rule 1 
(Definitions); (2) amend the definition of VaR Charge in Rule 1 to 
reference the Margin Proxy; and (3) amend Section 1b of Rule 4 
(Clearing Fund and Loss Allocation) to modify the calculation of the 
Coverage Charge when the Margin Proxy is applied.
    In addition, FICC proposes to make certain technical corrections to 
Rule 1 and Rule 4, as further described below.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    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 IV 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

1. Purpose
    FICC is proposing to introduce the Margin Proxy, which would 
constitute a Netting Member's daily VaR Charge in circumstances where 
the Margin Proxy would be greater than the Current Volatility 
Calculation. In circumstances where the Margin Proxy is applied by 
FICC, FICC also proposes to reduce the Coverage Charge by the amount 
that the Margin Proxy exceeds the sum of the Current Volatility 
Calculation and Coverage Charge, but not by an amount greater than the 
total Coverage Charge, as further described below.
A. Overview of the Required Fund Deposit and Clearing Fund Calculation
    A key tool that FICC uses to manage market risk is the daily 
calculation and collection of Required Fund Deposits from Netting 
Members. The objective of a Netting Member's Required Fund Deposit is 
to mitigate potential losses to FICC associated with liquidation of 
such Netting Member's Margin Portfolio in the event that FICC ceases to 
act for such Netting Member (hereinafter referred to as a 
``default'').\7\
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    \7\ GSD Rule 22A.
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    A Netting Member's Required Fund Deposit consists of several 
components, including the VaR Charge and Coverage Charge. The VaR 
Charge comprises the largest portion of a Netting Member's Required 
Fund Deposit amount. The VaR Charge is calculated using a risk-based 
margin methodology that is intended to cover the market price risk 
associated with the securities in a Netting Member's Margin Portfolio.
    The Coverage Charge is calculated based on the Netting Member's 
daily backtesting results. FICC employs daily backtesting to determine 
the adequacy of each Netting Member's Required Fund Deposit. The 
backtesting compares the Required Fund Deposit for each Netting Member 
with actual price changes in the Netting Member's Margin Portfolio. The 
Margin Portfolio values are calculated using the actual positions in 
such Netting Member's Margin Portfolio on a given day and the observed 
security price changes over the following three days. These backtesting 
results are reviewed as part of FICC's VaR model performance monitoring 
and assessment of the adequacy of each Netting Member's Required Fund 
Deposit.
    The Coverage Charge is incorporated in the Required Fund Deposit 
for each Netting Member to increase the Required Fund Deposit so that 
the Netting Member's backtesting coverage may achieve the 99 percent 
confidence level (i.e., greater than two backtesting deficiency days in 
a rolling twelve-month period).
B. Proposed Change to the Existing VaR Charge Calculation
    During the fourth quarter of 2016, FICC's Current Volatility 
Calculation did not respond effectively to the level of market 
volatility at that time, and the VaR Charge amounts that were 
calculated using the profit and loss scenarios generated by the Current 
Volatility Calculation did not achieve backtesting coverage at a 99 
percent confidence level. As a result, the Required Fund Deposit 
yielded backtesting deficiencies beyond FICC's risk tolerance. 
Therefore, FICC proposes to use the Margin Proxy as the VaR Charge when 
the Margin Proxy calculation would exceed the Current Volatility 
Calculation.
    The Margin Proxy would cover circumstances where the Current 
Volatility Calculation is lower than market price volatility from 
corresponding U.S. Treasury and to-be-announced (``TBA'') \8\ 
securities benchmarks.
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    \8\ Specified pool trades are mapped to the corresponding 
positions in TBA securities for determining the VaR Charge.
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    More specifically, the Margin Proxy would reflect separate 
calculations for U.S. Treasury securities and agency pass-through 
mortgage backed securities (``MBS''). The purpose of the separate 
calculations would be to cover the historical market prices of each of 
those asset classes to a 99 percent confidence level, on a standalone 
basis, because the historical price changes of the two asset classes 
are different due to market factors, such as credit spreads and 
prepayment risk. This separate calculation would also allow FICC to 
monitor the performance of each of those asset classes individually.
    The Margin Proxy would be calculated per Netting Member. Each 
security in a Netting Member's Margin Portfolio would be mapped to a 
respective benchmark based on the security's asset class and 
maturity.\9\ All securities within each benchmark would be aggregated 
into a net exposure.\10\ Next, FICC would apply an applicable haircut 
\11\ to the net exposure per benchmark to determine the net price risk 
for each benchmark (``Net Price Risk''). Finally, FICC would

[[Page 10119]]

determine the asset class price risk (``Asset Class Price Risk'') for 
U.S. Treasury and MBS benchmarks separately by aggregating the 
respective Net Price Risk, and for the U.S. Treasury benchmarks, the 
calculation includes a correlation adjustment, to provide risk 
diversification across tenor buckets, that has been historically 
observed across the U.S. Treasury benchmarks. The Margin Proxy would 
represent the sum of the U.S. Treasury and MBS Asset Class Price Risk. 
FICC would compare the Margin Proxy to the Current Volatility 
Calculation. FICC would apply the greater of the Margin Proxy or the 
Current Volatility Calculation for each asset class as the VaR Charge 
for each Netting Member's Margin Portfolio.
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    \9\ U.S. Treasury and agency securities would be mapped to a 
U.S. Treasury benchmark security/index. Mortgage-backed securities 
would be mapped to a TBA security/index.
    \10\ Net exposure is the aggregate market value of securities to 
be purchased by the Netting Member minus the aggregate market value 
of securities to be sold by the Netting Member.
    \11\ The haircut is calculated using historical market price 
changes of the respective benchmark to cover the expected market 
price volatility at 99 percent confidence level.
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    FICC believes that this proposal would provide the adequate 
Required Fund Deposit per Netting Member because the backtesting 
coverage including the Margin Proxy has been above the 99 percent 
confidence level for the past four years. Additionally, the Margin 
Proxy would be transparent to Netting Members because it would use 
industry standard benchmarks that can be observed by Netting Members.
    The Margin Proxy methodology would be subject to performance 
reviews by FICC. Specifically, FICC would monitor each Netting Member's 
Required Fund Deposit and the aggregate Clearing Fund requirements 
versus the requirements calculated by the Margin Proxy. Consistent with 
the current GSD Rules,\12\ FICC would review the robustness of the 
Margin Proxy by comparing the results versus the three-day profit and 
loss of each Netting Member's Margin Portfolio based on actual market 
price moves. If the Margin Proxy's backtesting results do not meet 
FICC's 99 percent confidence level, FICC would consider adjustments to 
the Margin Proxy, including increasing the look-back period and/or 
applying a historical stressed period to the Margin Proxy calibration, 
as appropriate.
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    \12\ See definition of VaR Charge in GSD Rule 1, Definitions, 
supra note 4.
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C. Proposed Modification to the Coverage Charge When the Margin Proxy 
Is Applied
    FICC also proposes to modify the calculation of the Coverage Charge 
when the Margin Proxy is applied as the VaR Charge. Specifically, FICC 
would reduce the Coverage Charge by the amount that the Margin Proxy 
exceeds the sum of the Current Volatility Calculation and Coverage 
Charge, but not by an amount greater than the total Coverage. FICC's 
backtesting analysis demonstrates that the proposed Margin Proxy would 
provide sufficient margin coverage without the addition of the Coverage 
Charge because FICC backtest results inclusive of the Margin Proxy 
achieve the 99 percent confidence level without the inclusion of the 
Coverage Charge.
    FICC would not modify the Coverage Charge if the Margin Proxy is 
not applied as the VaR Charge.
D. Technical Corrections
    FICC also proposes technical corrections to the GSD Rules. 
Specifically, FICC proposes to: (1) Capitalize certain words in the 
definition of VaR Charge in Rule 1 in order to reflect existing defined 
terms, (2) add ``Netting'' before ``Member'' in the definition of VaR 
Charge to reflect the application of the VaR Charge on Netting Members, 
and (3) correct typographical errors in Section 1b(a) of Rule 4.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency 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.\13\ The proposal would 
increase FICC's collection of margin when its Margin Proxy calculation 
exceeds the Current Volatility Calculation. As such, this proposal 
would help ensure that the Required Fund Deposit that FICC collects 
from Netting Members is sufficient to mitigate the credit exposure 
presented by the Netting Members. Therefore, FICC believes that the 
proposed rule changes associated with the Margin Proxy and Coverage 
Charge would help assure the safeguarding of securities and funds which 
are in the custody or control of FICC, consistent with Section 
17A(b)(3)(F) of the Act.
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    \13\ See 15 U.S.C. 78q-1(b)(3)(F).
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    Section 17A(b)(3)(F) of the Act also requires, in part, that the 
GSD Rules promote the prompt and accurate clearance and settlement of 
securities transactions.\14\ The proposed rule changes that constitute 
technical corrections would correct typographical errors and capitalize 
terms so that existing defined terms are accurately referenced and used 
in the applicable rule provisions. As such, the proposed technical rule 
changes would help ensure that the GSD Rules remain accurate and clear, 
which helps to avoid potential interpretation differences and possible 
disputes between FICC and its Netting Members. Thus, FICC believes that 
the proposed technical rule changes would promote the prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.
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    \14\ Id.
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    In addition, FICC believes that the proposed rule changes 
associated with the Margin Proxy and Coverage Charge are consistent 
with the requirements of Rules 17Ad-22(b)(1) and (b)(2) under the 
Act.\15\ Rule 17Ad-22(b)(1) requires a registered clearing agency that 
performs central counterparty services to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to measure its credit exposures to its participants at least 
once a day and limit its exposures to potential losses from defaults by 
its participants under normal market conditions so that the operations 
of the clearing agency would not be disrupted and non-defaulting 
participants would not be exposed to losses that they cannot anticipate 
or control.\16\ The proposed rule changes associated with the Margin 
Proxy and Coverage Charge would continue FICC's practice of measuring 
its credit exposures at least once a day and would enhance GSD's risk-
based margining framework, the objective of which is to calculate each 
Netting Member's Required Fund Deposit such that, in the event of a 
Netting Member's default, the defaulting Netting Member's own Required 
Fund Deposit would mitigate potential losses to FICC and non-defaulting 
Netting Members associated with the liquidation of such defaulted 
Netting Member's portfolio. Therefore, FICC believes that these 
proposed changes are consistent with Rule 17Ad-22(b)(1) under the Act.
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    \15\ See 17 CFR 240.17Ad-22(b)(1) and (b)(2).
    \16\ See 17 CFR 240.17Ad-22(b)(1).
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    Rule 17Ad-22(b)(2) under the Act requires a registered clearing 
agency that performs central counterparty services to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements and review such 
margin requirements and the related risk-based models and parameters at 
least monthly.\17\ The proposed rule changes associated with the Margin 
Proxy and Coverage Charge would enhance the risk-based model and 
parameters that establish margin requirements for Netting Members. This 
enhancement to the risk-based model

[[Page 10120]]

and parameters would use margin requirements to limit FICC's credit 
exposure to its Netting Members. Since the proposed changes are 
designed to calculate each Netting Member's Required Fund Deposit at a 
99 percent confidence level, FICC believes each Netting Member's 
Required Fund Deposit could mitigate its own losses in the event that 
such Netting Member defaults under normal market conditions. Therefore, 
FICC believes that these proposed changes are consistent with Rule 
17Ad-22(b)(2) under the Act.
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    \17\ See 17 CFR 240.17Ad-22(b)(2).
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    FICC also believes that the proposed changes are consistent with 
Rules 17Ad-22(e)(4) and (e)(6) of the Act, which were recently adopted 
by the Commission.\18\ Rule 17Ad-22(e)(4) will require FICC 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.\19\ The Margin Proxy methodology would be subject to 
performance reviews by FICC. If the Margin Proxy's backtesting results 
do not meet FICC's 99 percent confidence level, FICC would consider 
adjustments to the Margin Proxy, including increasing the look-back 
period and/or applying a historical stressed period to the Margin Proxy 
calibration, as appropriate. Therefore, the proposed rule changes 
associated with the Margin Proxy and Coverage Charge would enhance 
FICC's ability to identify, measure, monitor and manage its credit 
exposures to Netting Members and those exposures arising from its 
payment, clearing, and settlement processes by maintaining financial 
resources to cover a wide range of foreseeable price moves under both 
normal and stressed market conditions. Therefore, FICC believes the 
proposed changes are consistent with the requirements of Rule 17Ad-
22(e)(4), promulgated under the Act.
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    \18\ The Commission adopted amendments to Rule 17Ad-22, 
including the addition of new section 17Ad-22(e), on September 28, 
2016. The amendments to Rule 17Ad-22 became effective on December 
12, 2016. FICC is a ``covered clearing agency'' as defined in Rule 
17Ad-22(a)(5) and must comply with new section (e) of Rule 17Ad-22 
by April 11, 2017. See Securities Exchange Act Release No. 78961 
(September 28, 2016), 81 FR 70786 (October 13, 2016) (S7-03-14).
    \19\ Id.
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    Rule 17Ad-22(e)(6) will require FICC 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 is monitored by management 
on an ongoing basis and regularly reviewed, tested, and verified.\20\ 
The proposed rule changes associated with the Margin Proxy enhance 
GSD's risk-based margin system that would continue to be monitored by 
FICC management on an ongoing basis and regularly reviewed, tested, and 
verified. Therefore, FICC believes that the proposed changes are 
consistent with the requirements of Rule 17Ad-22(e)(6), promulgated 
under the Act.
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    \20\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes that the proposed rule changes associated with the 
Margin Proxy and the Coverage Charge could have an impact upon 
competition. Specifically, FICC believes that those proposed changes 
could burden competition because they would result in larger Required 
Fund Deposit amounts for Netting Members when the Margin Proxy 
calculates a VaR Charge that is greater than the amount calculated 
pursuant to the Current Volatility Calculation. When application of the 
Margin Proxy increases Required Fund Deposits for Netting Members that 
have lower operating margins or higher costs of capital compared to 
other Netting Members, the proposed rule changes could burden 
competition. However, FICC does not believe that the proposed rule 
changes associated with the Margin Proxy and Coverage Charge would 
impose a significant burden on competition because the increase in the 
Required Fund Deposit would be in direct relation to the market risk 
presented by each Netting Member's Margin Portfolio. Moreover, the 
Required Fund Deposit would be calculated with the same parameters and 
at the confidence level for all Netting Members. Therefore, Netting 
Members that present similar Margin Portfolios would have similar 
impacts on their Required Fund Deposit amounts.
    FICC believes that the above described burden on competition that 
may be created by the proposed rule changes associated with the Margin 
Proxy and Coverage Charge would be necessary in furtherance of the Act, 
specifically Section 17A(b)(3)(F) of the Act, because, as described 
above, the GSD Rules must be designed to assure the safeguarding of 
securities and funds that are in FICC's custody or control or for which 
it is responsible.\21\ FICC believes that the proposed rule changes 
associated with the Margin Proxy also would support FICC's compliance 
with Rules 17Ad-22(b)(1) and (2) under the Act, which require FICC to 
employ policies and procedures reasonably designed to limit its credit 
exposures to participants and use risk-based models and parameters to 
set margin requirements.\22\ FICC believes that the proposed rule 
changes would also support FICC's compliance with Rules 17Ad-22(e)(4) 
and (e)(6) under the Act, which will require FICC to employ 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, and 
(y) cover its credit exposures to its participants by establishing a 
risk-based margin system that is monitored by management on an ongoing 
basis and regularly reviewed, tested, and verified.\23\ Implementing 
the proposed Margin Proxy would improve the risk-based model that FICC 
employs to set margin requirements and would better limit FICC's credit 
exposures to participants.
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    \21\ See 15 U.S.C. 78q-1(b)(3)(F).
    \22\ See 17 CFR 240.17Ad-22(b)(1) and (2).
    \23\ Supra note 18.
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    FICC believes that the above described burden on competition that 
could be created by the proposed rule changes associated with the 
Margin Proxy and Coverage Charge 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 above.\24\ 
Such proposed changes were designed so that: (i) No particular category 
of Netting Member would be expected to experience materially greater 
increases than any other category of Netting Members; (ii) the Net 
Price Risk will vary by benchmark, so there would be opportunities for 
Netting Members to limit the impact of the Margin Proxy if they can 
adjust their Margin Portfolio to securities with lower Net Price Risk; 
and (iii) the reduction of the Coverage Charge would alleviate the 
impact on the Required Fund Deposit from the Margin Proxy.
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    \24\ See 15 U.S.C. 78q-1(b)(3)(F).
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    Therefore, FICC believes that it has designed the proposed changes 
in a reasonable and appropriate way in order to meet compliance with 
its obligations under the Act. Specifically, implementing the proposed 
changes would improve the risk-based model that FICC employs to set 
margin requirements and better limit FICC's credit exposures to its 
Netting Members. Therefore, FICC believes the proposed

[[Page 10121]]

changes are necessary and appropriate in furtherance of FICC's 
obligations under the Act, specifically Section 17A(b)(3)(F) \25\ and 
Rule 17Ad-22(b).\26\
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    \25\ Id.
    \26\ See 17 CFR 240.17Ad-22(b).
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(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    In connection with this proposed rule change, FICC received a 
written letter from Ronin Capital LLC (``Ronin Capital'').\27\ A copy 
of this letter is attached as Exhibit 2. The aspects of this letter 
that relate to the proposed rule change are described below.
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    \27\ See Letter from Ronin Capital LLC to Messrs. Murray 
Pozmanter and Timothy Cuddihy dated January 20, 2017. This letter 
expressed a wide range of concerns, which FICC has and will continue 
to consider. The aspects of this letter which do not relate to the 
proposed rule change will be addressed by FICC outside of the 
context of this filing.
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Abbreviated Rule Approval Process
    A. The New Backup Model Is Being Rushed Into Production
    Ronin Capital has questioned whether the risk to FICC from the 
current full evaluation approach is so dire that a new backup model is 
required to be rushed into production.
    FICC believes that the Current Volatility Calculation did not 
respond effectively to volatile market conditions and that it must 
implement the proposed Margin Proxy as described in this proposed rule 
change as soon as possible to effectively mitigate the market price 
risk of each Netting Member's Margin Portfolio. As described in Item 
II(A)1. above, FICC believes that the proposed changes associated with 
the Margin Proxy and the Coverage Charge would help to ensure that each 
Netting Member's Required Fund Deposit achieves a 99 percent confidence 
level and the proposed changes would mitigate potential losses to FICC 
and non-defaulting Netting Members associated with the liquidation of a 
defaulted Netting Member's portfolio. As described in Item II(A)2. 
above, the proposed changes would support FICC's compliance with Rule 
17Ad-22(e)(4) because the Margin Proxy is designed to effectively 
identify, measure, monitor, and manage FICC's credit exposures to 
participants and those exposures arising from its payment, clearing, 
and settlement processes.\28\
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    \28\ Supra note 18.
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B. An Abbreviated Rule Approval Process May Not Be Appropriate When 
There Are Known Flaws With the Margin Proxy
    Ronin Capital has questioned whether an abbreviated rule approval 
process is appropriate when there are known flaws with the Margin 
Proxy. Ronin Capital notes that an example of a flaw is the inability 
of the Margin Proxy to reflect risk offsets among portfolio positions.
    As described in Item II(A)1. above, FICC has identified a 
deficiency in the Current Volatility Calculation and FICC believes that 
it has a responsibility to rectify this deficiency as soon as possible. 
With this in mind, FICC is requesting that the Commission accelerate 
the effectiveness of the proposed rule change pursuant to Section 
19(b)(2) of the Act \29\ in order to address the impact that market 
volatility has had on the GSD VaR Charge. FICC believes that this 
request is appropriate because the proposed changes associated with the 
Margin Proxy and the Coverage Charge would help to protect FICC and its 
Netting Members by ensuring that FICC collects sufficient Required Fund 
Deposits in the event that the Current Volatility Calculation does not 
perform as expected during volatile market conditions.
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    \29\ See 15 U.S.C. 78s(b)(2).
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    Ronin Capital's assertion that the Margin Proxy does not provide 
for risk offsets is incorrect. As described in Item II(A)1. above, the 
proposed Margin Proxy accounts for risk offsets by including a 
correlation adjustment to provide risk diversification across tenor 
buckets that have been historically observed across the U.S. Treasury 
benchmarks. The VaR Charge would preserve the same diversification 
between U.S. Treasury and MBS asset classes that is provided by the 
Current Volatility Calculation. FICC is not aware of any flaws with the 
proposed Margin Proxy and thus FICC believes that it is prudent to 
request that the Commission accelerate the effectiveness of the 
proposed change associated with the Margin Proxy and Coverage Charge.
C. The deployment of the Margin Proxy for an Extended Time May Further 
Burden Competition
    Ronin Capital has expressed concern that GSD's expedited need for a 
new VaR model may result in the deployment of the backup Margin Proxy 
methodology for an extended amount of time which may burden 
competition.
    FICC acknowledges that the proposed rule change associated with the 
Margin Proxy and Coverage Charge may burden competition, however, FICC 
believes that this burden would be necessary and appropriate in 
furtherance of the Act.
    As described in Item II(B) above, the proposed rule change 
associated with the Margin Proxy and the Coverage Charge could burden 
competition because the proposed change would result in larger Required 
Fund Deposit amounts for Netting Members when the Margin Proxy 
calculates a VaR Charge that is greater than the amount calculated 
pursuant to the Current Volatility Calculation. When application of the 
Margin Proxy increases Required Fund Deposits for Netting Members that 
have lower operating margins or higher costs of capital compared to 
other Netting Members, the proposed rule change could burden 
competition. However, FICC does not believe that the proposed rule 
change associated with the Margin Proxy and Coverage Charge would 
impose a significant burden on competition because the increase in the 
Required Fund Deposit would be in direct relation to the market risk 
presented by each Netting Member's Margin Portfolio. Moreover, the 
Required Fund Deposit would be calculated with the same parameters and 
at the confidence level for all Netting Members. Therefore, Netting 
Members that present similar Margin Portfolios would have similar 
impacts on their Required Fund Deposit amounts.
    FICC believes that the burden on competition would be necessary and 
appropriate in furtherance of the Act, specifically Section 
17A(b)(3)(F).\30\ As described in Items II(A)2. and II(B) above, the 
proposed changes associated with the Margin Proxy and the Coverage 
Charge would be consistent with Section 17A(b)(3)(F) because the 
changes would help assure the safeguarding of securities and funds 
which are in the custody or control of FICC.\31\ In addition, the 
proposed changes would support FICC's compliance with Rule 17Ad-
22(b)(1) under the Act because the proposed changes would be reasonably 
designed to (x) measure FICC's credit exposures to its participants at 
least once a day and (y) limit FICC's exposures to potential losses 
from defaults by its participants under normal market conditions.\32\ 
The proposed changes would also support FICC's compliance with Rule 
17Ad-22(b)(2) under the Act because the proposed changes would reflect 
FICC's use of risk-based models and parameters to set margin

[[Page 10122]]

requirements which would be reviewed monthly.\33\ The proposed Margin 
Proxy would also support FICC's compliance with Rule 17Ad-22(e)(4) and 
(e)(6) under the Act because the Margin Proxy would be subject to a 
performance review by FICC and the Margin Proxy is a risk based margin 
system that would be monitored, regularly reviewed, tested and verified 
on an ongoing basis.\34\
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    \30\ See 15 U.S.C. 78q-1(b)(3)(F).
    \31\ Id.
    \32\ See 17 CFR 240.17Ad-22(b)(1).
    \33\ See 17 CFR 240.17Ad-22(b)(2).
    \34\ Supra note 18.
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    For these reasons, FICC believes that any burden on competition as 
a result of the proposed changes associated with the Margin Proxy and 
Coverage Charge would be necessary and appropriate in furtherance in 
further of the Act as cited above.
D. The Margin Proxy Should Be Tested Before Filing a Rule Change and 
Netting Members Should Have the Opportunity to Prepare for the 
Temporary Model
    Ronin Capital expressed concern about whether FICC conducted a 
study of the Margin Proxy's impact prior to filing a rule change. Ronin 
Capital also noted that Netting Members have experience with the 
idiosyncrasies of the current model and that it does not make sense to 
rush to a new temporary model without giving Netting Members any length 
of time to prepare.
    FICC believes that it conducted sufficient analysis prior to the 
submission of this proposed rule change to the Commission. FICC 
evaluated the sufficiency of the proposed changes for a period that 
exceeded 2 months. FICC's study included historical analysis of the 
backtesting sufficiency of the Margin Proxy. In addition, FICC reviewed 
the impact that the Margin Proxy would have on each Netting Member's 
Required Fund Deposit. In an effort to help Netting Members prepare for 
this proposed rule change, FICC outlined the rationale for the Margin 
Proxy and provided each Netting Member with reports that reflect the 
impact that the proposed change would have on such Netting Member's 
Required Fund Deposit. Thus, FICC believes that it has provided Netting 
Members with sufficient information and advance notice regarding the 
proposed changes. FICC recognizes that Netting Members may have 
experience with the idiosyncrasies of the Current Volatility 
Calculation. Nonetheless, FICC believes that the proposed rule change 
must be employed to help ensure that FICC collects sufficient Required 
Fund Deposit amounts at all times, particularly during volatile market 
conditions.
Lack of Transparency
A. Netting Members Should Have Access to Prospective Rule Changes 
Before Rules Are Filed
    Ronin Capital acknowledged that it appreciates FICC's communication 
with Netting Members about sensitive topics before submitting rules for 
commentary; however, Ronin Capital also noted that it is important for 
Netting Members to have access to prospective rules changes before such 
rules are filed with regulatory authorities.
    FICC notes that it has and continues to engage in ongoing 
discussion with Netting Members about how proposals would impact them. 
With respect to this proposed change, FICC's outreach to Netting 
Members included discussions regarding GSD's Clearing Fund calculation 
as well as the VaR Charge methodology. As described above, in an effort 
to help Netting Members prepare for this proposed rule change, FICC 
outlined the rationale for the Margin Proxy and provided each Netting 
Member with reports that reflect the impact that the proposed change 
would have on such Netting Member's Required Fund Deposit. FICC staff 
has always made itself available to answer all questions or concerns 
raised by Netting Members. FICC believes that it has provided Netting 
Members with an appropriate level of disclosure regarding this proposed 
rule change and such disclosure gives Netting Members the ability to 
manage their obligations under the proposed rule change.
B. FICC Should Provide Netting Members With the Ability To Conduct 
Scenario Analysis and FICC's Inability To Do So Could Be 
Anticompetitive
    Ronin Capital noted that FICC should give Netting Members the 
ability to conduct margin based scenario analysis. Ronan Capital also 
noted that given the differing costs of capital across the membership, 
FICC's inability to provide Netting Members with the ability to conduct 
such analysis could be anticompetitive.
    FICC does not have technology that would allow Netting Members to 
conduct margin based scenario analysis. While FICC recognizes that that 
there may be additional benefits that Netting Members could derive from 
the provision of such technology by FICC, FICC does not believe that 
the lack of availability of such technology is anticompetitive. FICC 
has provided sufficient disclosure regarding the proposed change to its 
Netting Members and each Netting Member has been provided with the same 
level of disclosure. In addition, FICC staff has made itself available 
to answer all questions regarding the proposed change. Thus, FICC 
believes that all Netting Members have the ability to manage their 
obligations based on the information that FICC has provided in 
connection with this proposed change. FICC recognizes there may be 
additional benefits that Netting Members could derive from margin based 
scenario analysis thus FICC will endeavor to explore the development of 
this technology in the future.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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 or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2017-001 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-2017-001. 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 Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent

[[Page 10123]]

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 Web site 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 Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2017-001 and should be submitted on or before February 24, 
2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
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    \35\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-02649 Filed 2-8-17; 8:45 am]
 BILLING CODE 8011-01-P


