[Federal Register Volume 84, Number 153 (Thursday, August 8, 2019)]
[Notices]
[Pages 39041-39046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-16938]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86553; File No. SR-FICC-2019-003]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise the MBSD VaR Floor

August 2, 2019.
    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 July 18, 2019, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of a proposal to change the 
calculation of the VaR Floor (as defined below) and the corresponding 
description in the FICC Mortgage-Backed Securities Division (``MBSD'') 
Clearing Rules (``MBSD Rules'') \3\ to: (i) Allow FICC, subject to the 
governance process set forth in the Clearing Agency Model Risk 
Management Framework (``Framework'') \4\ (as described below), to 
adjust the ``VaR Floor percentage'' (as defined below) within a 
proposed range when FICC's review of the VaR Floor percentage indicates 
that the VaR Floor percentage is not sufficient to cover FICC's credit 
exposure to each Clearing Member fully with a high degree of 
confidence, (ii) state that Clearing Members would be notified in 
advance of any such adjustment to the VaR Floor percentage, (iii) 
designate that the VaR Floor percentage would be subject to at least 
monthly model performance monitoring, and (iv) make certain technical 
changes.
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    \3\ Capitalized terms not defined herein are defined in the MBSD 
Rules, available at http://www.dtcc.com/legal/rules-and-procedures.
    \4\ See Securities Exchange Act Release No. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008). The Framework sets forth the model risk 
management practices adopted by FICC, National Securities Clearing 
Corporation, and The Depository Trust Company. The Framework is 
designed to help identify, measure, monitor, and manage the risks 
associated with the design, development, implementation, use, and 
validation of quantitative models. The Framework describes: (i) 
Governance of the Framework; (ii) key terms; (iii) model inventory 
procedures; (iv) model validation procedures; (v) model approval 
process; and (vi) model performance procedures.
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    The proposed changes would necessitate changes to the Methodology 
and Model Operations Document--MBSD Quantitative Risk Model (the ``QRM 
Methodology'').\5\ FICC is requesting confidential treatment of the QRM 
Methodology and has filed it separately with the Secretary of the 
Commission.\6\
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    \5\ Because FICC requested confidential treatment, the QRM 
Methodology was filed separately with the Commission as part of 
proposed rule change SR-FICC-2016-007 (the ``VaR Filing''). See 
Securities Exchange Act Release No. 79868 (January 24, 2017), 82 FR 
8780 (January 30, 2017) (SR-FICC-2016-007) (``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. 79843 (January 19, 2017), 82 FR 
8555 (January 26, 2017) (SR-FICC-2016-801).
    \6\ 17 CFR 240.24b-2.
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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
    The purpose of the proposed rule change is to change the 
calculation of the VaR Floor (as defined below) and the corresponding 
description in the MBSD Rules to: (i) Allow FICC, subject to the 
governance process set forth in the Framework (as described below), to 
adjust the VaR Floor percentage (as defined below) within a proposed 
range when FICC's review of the VaR Floor percentage indicates that the 
VaR Floor percentage is not sufficient to cover FICC's credit exposure 
to each Clearing Member fully with a high degree of confidence, (ii) 
state that Clearing Members would be notified in advance of any such 
adjustment to the VaR Floor percentage, (iii) designate that the VaR 
Floor percentage would be subject to at least monthly model performance 
monitoring, and (iv) make certain technical changes. The proposed 
changes would necessitate changes to the QRM Methodology. The proposed 
changes are described in detail below.
Background
    On January 24, 2017, the Commission approved FICC's VaR Filing to 
make certain enhancements to the MBSD value-at-risk (``VaR'') margin 
calculation methodology.\7\ The VaR Filing amended the definition of 
VaR Charge to include the VaR Floor.\8\ The VaR Charge comprises the 
largest portion of a Clearing Member's Required Fund Deposit amount. 
The VaR Charge is calculated using a risk-based margin methodology that 
is intended to capture the market price risk associated with the 
securities in a Clearing Member's portfolio. The methodology is 
designed to project the potential gains or losses that could occur in 
connection with the liquidation of a defaulting Clearing Member's 
portfolio, assuming that a portfolio would take three days to hedge or 
liquidate in normal market conditions. The projected liquidation gains 
or losses are used to determine the amount of the VaR Charge, which is 
calculated to cover projected liquidation losses at a 99 percent 
confidence level.\9\
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    \7\ See VaR Filing Approval Order, supra note 5.
    \8\ The term ``VaR Floor'' is defined within the definition of 
VaR Charge. See MBSD Rule 1, supra note 3.
    \9\ Unregistered Investment Pool Clearing Members are subject to 
a VaR Charge with a minimum targeted confidence level assumption of 
99.5 percent. See MBSD Rule 4, Section 2(c), supra note 3.
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    FICC uses the VaR Floor as an alternative to the VaR Charge amount 
calculated by the VaR model for Clearing Members' portfolios where the 
VaR Floor calculation is greater than the model-based calculation. The 
VaR Floor addresses the risk that the VaR model may calculate too low a 
VaR Charge for certain portfolios where the VaR model applies 
substantial risk offsets among long and short positions in different 
classes of mortgage-backed securities that have a high degree of 
historical price correlation. FICC applies the VaR

[[Page 39042]]

Floor at the Clearing Member portfolio level. Because the historical 
price correlation may not persist in future market conditions,\10\ FICC 
believes that it is prudent to apply a VaR Floor that is based upon the 
market value of the gross unsettled positions in the Clearing Member's 
portfolio in order to protect FICC against such risk in the event that 
FICC is required to liquidate a mortgage-backed securities portfolio in 
stressed market conditions.
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    \10\ For example, certain TBAs may have highly correlated 
historical price returns despite having different coupons and, 
although the net risk exposure may be adequately modeled under 
current market conditions, future market conditions could cause the 
risk relationship to change in a way that may not be adequately 
captured by the model. TBA is defined in MBSD Rule 1. See MBSD Rule 
1, supra note 3.
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(i) Proposed Rule Changes Allowing FICC To Adjust the VaR Floor 
Percentage
    The MBSD Rules currently define the VaR Floor as ``5 basis points 
of the market value of a Clearing Member's gross unsettled positions.'' 
\11\ Therefore, the VaR Floor is utilized as the Clearing Member's VaR 
Charge if the VaR model yields an amount that is lower than 5 basis 
points (referred to herein as the ``VaR Floor percentage'') of the 
market value of a Clearing Member's gross unsettled positions.
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    \11\ See definition of ``VaR Charge.'' See MBSD Rule 1, supra 
note 3.
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    FICC is proposing to revise the definition of the VaR Floor to 
allow FICC, subject to the governance process set forth in the 
Framework, to adjust the VaR Floor percentage within a proposed range 
when FICC's review of the VaR Floor percentage indicates that the VaR 
Floor percentage is not sufficient to cover FICC's credit exposure to 
each Clearing Member fully with a high degree of confidence. FICC is 
proposing that the VaR Floor percentage would be no less than 5 basis 
points and no more than 30 basis points of the gross unsettled 
positions.
    FICC believes that the range of 5 to 30 basis points would allow 
FICC to effectively set a floor on the VaR Charge at a level that has 
historically impacted only a small number of Clearing Members based on 
the impact study discussed below.\12\ In order to determine the 
specific VaR Floor percentage within the permissible range, FICC would 
review, on at least an annual basis, the impact of alternative VaR 
Floor parameters within the proposed range of 5 to 30 basis points to 
the backtesting performance and to Clearing Members' margin charges. 
Upon approval of this filing, FICC proposes to initially set the VaR 
Floor at 10 basis points based on observed backtesting coverage on 
actual Clearing Members' positions and hypothetical portfolios \13\ 
that could result in low VaR Charges.\14\
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    \12\ For the period February 27, 2017 through February 28, 2019, 
a 5 basis point VaR Floor would impact less than 0.4% of Clearing 
Members on average daily who have a VaR Charge, a 10 basis point VaR 
Floor would impact less than 2.3%, a 15 basis point VaR Floor would 
impact less than 5.0%, a 20 basis point VaR Floor would impact less 
than 8.2%, a 25 basis point VaR Floor would impact less than 11.4%, 
a 30 basis point VaR Floor would impact less than 14.4%, a 45 basis 
point VaR Floor would impact less than 22.3%, and a 60 basis point 
VaR Floor would impact less than 30.6%.
    \13\ For example, FICC can create hypothetical settlement 
portfolios with long/short positions where the net market value is 
zero to identify potential settlement portfolios where historical 
price changes of different classes of mortgage-backed securities did 
not experience offsetting price moves (commonly referred to as 
``basis risk'').
    \14\ FICC's coverage at the Clearing Agency level is at 99%. The 
issue has arisen with respect to certain Clearing Members whose 
portfolios are achieving below 99% coverage on a 12-month rolling 
basis.
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    As stated above, any adjustment to the VaR Floor percentage would 
be subject to the governance process set forth in the Framework. 
Specifically, the Framework provides that all model performance 
concerns will be escalated by the Model Validation and Control Group 
(``MVC'') to the Model Risk Governance Committee (``MRGC''), including 
model performance enhancement concerns and the MRGC may further 
recommend certain matters for further escalation to the Management Risk 
Committee and/or Risk Committee of the Board.
(ii) Proposed Clearing Member Notifications Regarding Adjustments to 
the VaR Floor Percentage
    For adjustments to the VaR Floor percentage that would fall within 
the proposed range, FICC would provide Clearing Members with 10 
Business Days' notice prior to the implementation of such adjustment. 
Clearing Members would be notified of the applicable VaR Floor 
percentage by an Important Notice issued no later than 10 Business Days 
prior to the implementation of the adjustment. For adjustments that 
would fall outside of the proposed range, FICC would submit a rule 
filing to the Commission. As proposed, FICC would not apply a VaR Floor 
percentage that is less than 5 basis points (which is the current VaR 
Floor percentage); however, the proposed change would allow FICC to 
adjust such VaR Floor percentage above 5 basis points (up to 30 basis 
points).
(iii) Proposed Rule Changes To Designate that the VaR Floor Percentage 
Would Be Subject to at Least Monthly Model Performance Monitoring
    The Framework provides that, as part of model performance 
monitoring, on at least a monthly basis, sensitivity analysis is 
performed on FICC's margin model, the key parameters and assumptions 
for backtesting are reviewed, and modifications are considered to 
ensure FICC's backtesting practices are appropriate for determining the 
adequacy of the applicable margin resources of FICC. The Framework also 
describes that MVC performs a model validation for each FICC model 
approved for use in production not less than annually, including, among 
other things, on its margin systems and related models.\15\
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    \15\ Supra note 4.
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    The VaR Floor percentage is currently subject to periodic model 
validations as part of FICC's margin model validation on at least an 
annual basis to determine if the VaR Floor percentage would remain 
adequate to cover FICC's credit exposure to Clearing Members with 
certain types of portfolios fully with a high degree of confidence. 
FICC would propose, as part of model performance monitoring, to 
designate the VaR Floor percentage as a parameter of its VaR model that 
will be reviewed on at least a monthly basis per the Framework. As 
such, FICC proposes to amend the QRM Methodology to reference the at 
least monthly model performance monitoring of the VaR Floor percentage.
(iv) Proposed Technical Changes
    The proposed rule change would also make technical changes to 
restate the calculation of the VaR Floor to provide more detail than 
the current provision and to use defined terms (that is, the terms Long 
Positions \16\ and Short Positions \17\).
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    \16\ The term ``Long Position'' means a Member's obligations 
with respect to the purchase of an Eligible Security or an Option 
Contract, as determined pursuant to the MBSD Rules. MBSD Rule 1, 
supra note 3.
    \17\ The term ``Short Position'' means a Member's obligation 
with respect to the sale of an Eligible Security or an Option 
Contract, as determined pursuant to the MBSD Rules. MBSD Rule 1, 
supra note 3.
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    Specifically, FICC would (i) delete ``5 basis points of the market 
value of a Clearing Member's gross unsettled positions'' and replace it 
with ``an amount designated by the Corporation'' and (ii) add a new 
sentence that would read: ``Such VaR Floor will be determined by 
multiplying the sum of the absolute values of Long Positions and Short 
Positions, at market value, by

[[Page 39043]]

a percentage designated by the Corporation that is no less than 0.05% 
and no greater than 0.30%. The Corporation shall determine the 
percentage within this range to be applied based on factors including 
but not limited to a review performed at least annually of the impact 
of the VaR Floor parameter at different levels within the range to the 
backtesting performance and to Clearing Members' margin charges. The 
Corporation shall inform Clearing Members of the applicable percentage 
utilized by the VaR Floor by an Important Notice issued no later than 
10 Business Days prior to the implementation of such percentage.''
    In addition, FICC proposes a technical change to the QRM 
Methodology to reference that there will be at least annual model 
validation of the VaR Floor percentage; the QRM methodology currently 
provides that the VaR Floor percentage is reviewed annually and 
updated.
(v) Review and Need for VaR Floor Percentage Adjustment
    FICC conducted a review of the VaR Floor percentage in June 2017 
and conducted impact studies beginning in February 2017, which found 
that an increase in the VaR Floor percentage to 10 basis points is 
necessary to bring the VaR Charge to a level that would cover FICC's 
credit exposure to certain Clearing Members that have long-short 
portfolios fully with a high degree of confidence.\18\ The review, 
performed in June 2017, found that portfolios that contained long-short 
positions, for example, where a portfolio was long the GNMA II/FNMA 
basis at a higher coupon and short the GNMA II/FNMA basis at a lower 
coupon, were not adequately covered by a VaR Floor percentage of 5 
basis points during periods of market volatility. Increasing the VaR 
Floor percentage to 10 basis points would improve the backtesting 
coverage of this group to 99.8%. As a result, FICC began monitoring all 
portfolios with a VaR Charge below 10 basis points of the portfolio's 
gross positions for a potential Intraday Mark-to-Market Charge to 
ensure sufficient margin coverage during periods of market volatility. 
Although a recent impact study for the twelve months ended February 
2019 found the backtesting coverage of the VaR Charge for certain 
Clearing Members with long-short portfolios had improved to the 99% 
confidence level without the change to the VaR Floor percentage, FICC 
believes it is prudent to make the change to ensure the VaR Charge 
remains adequate if market conditions change. The June 2017 review of 
the VaR Floor percentage that included a period of market volatility 
also found that an increase in the VaR Floor percentage to 20 basis 
points if the alternative volatility calculation (which was referred to 
as the ``Margin Proxy'' in the VaR Filing \19\) is applied would better 
cover risks of portfolios with offsetting long and short positions 
within the same agency program, given that the Margin Proxy allows for 
further netting among positions within the same agency program than 
would occur within the VaR model.\20\ The recent impact study for the 
twelve months ended February 2019 found if the VaR Floor percentage 
were increased to 20 basis points, the backtesting coverage of the 
Margin Proxy \21\ would improve to 99% for eleven of the fourteen 
portfolios that would otherwise have been below the 99% confidence 
level target. Additionally, the backtesting deficiencies of the three 
small portfolios that would have remained below the 99% confidence 
target would be reduced to an average 11 backtesting deficiencies if 
the VaR Floor percentage were increased to 20 basis points, from an 
average 45 backtesting deficiencies utilizing the current VaR Floor 
percentage of 5 basis points. If Margin Proxy were invoked as an 
alternative volatility calculation, FICC would utilize the Backtesting 
Charge \22\ to further mitigate exposure to FICC caused by settlement 
risks that may not be adequately captured by the alternative volatility 
model. Upon Commission approval of this proposed rule change, FICC 
would provide Clearing Members with 10 Business Days' notice of the 
increase of the VaR Floor percentage to 10 basis points. The notice 
would also inform Clearing Members that in the event that the 
alternative volatility calculation (the Margin Proxy) would be 
employed, the VaR Floor percentage would be increased to 20 basis 
points.
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    \18\ These are portfolios that net down to a low VaR Charge 
amount but represent large gross positions.
    \19\ The Margin Proxy is used as an alternative volatility 
calculation in the event that the requisite data used for the 
methodology (i.e., sensitivity approach) that is used to calculate 
the VaR Charge is unavailable for an extended period of time. See 
VaR Filing Approval Order, 82 FR at 8781.
    \20\ FICC proposed and received Commission approval to increase 
the look-back period and apply a historical stressed period to the 
Margin Proxy calibration. See Securities Exchange Act Release No. 
85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-FICC-2019-001).
    \21\ The Margin Proxy study was calibrated using a 10-year 
historical look-back period plus 1-year stress period.
    \22\ See definition of ``Backtesting Charge.'' See MBSD Rule 1, 
supra note 3.
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(vi) Impact Study
    FICC performed an impact study on Clearing Members' portfolios for 
the period beginning February 27, 2017, when the changes in the VaR 
Filing were implemented, to February 28, 2019, that showed increasing 
the VaR Floor percentage to 10 basis points would impact a small number 
of Clearing Members, and the total MBSD Clearing Fund impact would be 
small. Nevertheless, FICC believes this change is necessary to maintain 
sufficient financial resources to cover FICC's credit exposures to 
certain Clearing Members' portfolios fully with a high degree of 
confidence.
    Over the study period, increasing the VaR Floor percentage to 10 
basis points would have affected, on average, two portfolios per day, 
and the average daily margin increase to MBSD's Clearing Fund would 
have been approximately $6 million per day (0.12% of the average daily 
VaR Charge of $5 billion). The largest daily increase for the total VaR 
Charge over the study period would have been $37 million for all 
Clearing Members, 1% of the total VaR Charge of $ 3.7 billion on that 
day.
    Although for the twelve months ended February 28, 2019, 21 
portfolios would have been impacted by the increase to the VaR Floor 
percentage over the study period, for each portfolio the increase was 
less than 1% of the Clearing Member's Excess Capital \23\ and 4 
portfolios accounted for over 50% of the instances of margin increase. 
The impact study showed the largest daily increase of an individual 
portfolio was $25.5 million. Given the VaR model amount for this 
portfolio was also below the current 5 basis point VaR Floor, an 
increase to a 10 basis point VaR Floor would have doubled that 
portfolio's VaR Charge for that day.
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    \23\ The term ``Excess Capital'' means Excess Net Capital, net 
assets, or equity capital as applicable to a Clearing Member based 
on its type of regulation. MBSD Rule 1, supra note 3.
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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 
\24\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and

[[Page 39044]]

(e)(23)(ii), each promulgated under the Act,\25\ for the reasons 
described below.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (e)(23)(ii).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the MBSD 
Rules be designed to (i) promote the prompt and accurate clearance and 
settlement of securities transactions and (ii) 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\
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    \26\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed changes described in Item II(A)1(i) above would allow 
FICC, subject to the governance process in the Framework, to adjust the 
VaR Floor percentage within a proposed range when FICC's review of the 
VaR Floor percentage indicates that the VaR Floor percentage is not 
sufficient to cover FICC's credit exposure to each Clearing Member 
fully with a high degree of confidence. FICC believes these proposed 
changes would assure the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible. 
Specifically, the proposed changes would provide FICC with discretion 
to adjust the VaR Floor percentage, subject to governance, to cover 
FICC's credit exposure to each Clearing Member with a high degree of 
confidence. Covering FICC's exposure to each Clearing Member with a 
high degree of confidence would help FICC ensure that it maintains an 
appropriate level of margin to address its risk management needs. 
Therefore, FICC believes the proposed changes described in Item 
II(A)1(i) above would safeguard the securities and funds that are in 
the custody and control of FICC or for which it is responsible, 
consistent with Section 17A(b)(3)(F) of the Act.\27\
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    \27\ Id.
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    FICC believes that the proposed changes described in Item 
II(A)1(ii) above to state that Clearing Members would be notified in 
advance of any adjustment to the VaR Floor percentage would promote the 
prompt and accurate clearance and settlement of securities 
transactions. Specifically, FICC believes that providing notice in 
advance of the implementation of any adjustment would provide Clearing 
Members with time to adjust to any new VaR Charge amounts that result 
from any adjustments to the VaR Floor percentage. FICC believes 10 
Business Days' prior notice would provide Clearing Members with 
sufficient time to prepare for any new VaR Charge amounts and thereby 
ensure that the Clearing Members have the funds to satisfy their new 
VaR Charge amounts. This in turn would help FICC ensure that FICC has 
an adequate margin to address its risk management needs. Therefore, 
FICC believes the proposed changes described in Item II(A)1(ii) above 
would promote the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\28\
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    \28\ Id.
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    In addition, FICC believes that the proposed changes described in 
Item II(A)1(iii) above to the QRM Methodology to state that the VaR 
Floor percentage would be subject to at least monthly performance 
monitoring would assure the safeguarding of securities and funds which 
are in the custody and control of FICC or for which it is responsible, 
consistent with Section 17A(b)(3)(F) the Act.\29\ Specifically, this 
would require FICC to monitor the VaR Floor percentage frequently. This 
would help FICC ensure that there is an appropriate level of margin as 
FICC would be monitoring the VaR Floor percentage at least monthly. 
This change would also alert FICC of the need to make any adjustments 
to the VaR Floor percentage. As such, FICC believes the proposed 
changes described in Item II(A)1(iii) above would safeguard the 
securities and funds that are in the custody and control of FICC or for 
which it is responsible, consistent with Section 17A(b)(3)(F) of the 
Act.\30\
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    \29\ Id.
    \30\ Id.
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    FICC believes that the proposed technical changes to the MBSD Rules 
described in Item II(A)1(iv) above would promote the prompt and 
accurate clearance and settlement of securities transactions by 
ensuring that the MBSD Rules remain clear and accurate to Clearing 
Members. Having clear and accurate MBSD Rules would facilitate Clearing 
Members' understanding of those rules and provide Clearing Members with 
increased predictability and certainty regarding their obligations. 
FICC also believes that proposed technical changes to the QRM 
Methodology described in Item II(A)1(iv) above would enhance the 
clarity of the QRM Methodology for FICC. As the QRM Methodology is used 
by FICC Risk Management personnel regarding the frequency of model 
validation of the VaR Floor percentage, FICC believes that enhancing 
clarity of the description as to how often this review should be 
conducted would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) the Act.\31\
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    \31\ Id.
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    Rule 17Ad-22(e)(4)(i) under the Act \32\ 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. The proposed changes described in Item II(A)1(i) would 
allow adjustment of the VaR Floor percentage (subject to FICC's 
governance). This change would allow FICC to limit its credit exposures 
to Clearing Members in the event that the VaR model yields too low a 
VaR Charge for such portfolios. Under the proposed rule changes, the 
VaR Floor percentage would be subject to at least monthly model 
performance monitoring and continue to be subject to at least annual 
model validations by FICC. In the event the review reveals that the VaR 
Floor percentage is not resulting in coverage with a high degree of 
confidence, FICC would adjust the VaR Floor percentage within the 
proposed range after going through its required governance (and 
providing Clearing Members with the 10 Business Days' notice as 
described above). Therefore, FICC believes the proposed changes are 
consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the 
Act.\33\
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    \32\ 17 CFR 240.17Ad-22(e)(4)(i).
    \33\ Id.
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    Rule 17Ad-22(e)(6)(i) under the Act \34\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover, if the covered 
clearing agency provides central counterparty services, 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, which provides central 
counterparty services, believes that the proposed changes to allow 
FICC, subject to its governance, to adjust the VaR Floor percentage 
within a proposed range (as described in Item II(A)1(i) above) are 
consistent with the requirements of Rule 17Ad-22(e)(6)(i) cited above. 
Specifically, FICC believes the proposed changes would provide FICC 
with the discretion (subject to its

[[Page 39045]]

governance) to appropriately limit FICC's credit exposure to Clearing 
Members in the event that the VaR model yields too low a VaR Charge. 
The proposed changes would therefore allow FICC to continue 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.\35\
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    \34\ 17 CFR 240.17Ad-22(e)(6)(i).
    \35\ Id.
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    The proposed technical changes to the MBSD Rules described in Item 
II(A)1(iv) above are designed to be consistent with Rule 17Ad-
22(e)(23)(ii) under the Act.\36\ Rule 17Ad-22(e)(23)(ii) under the Act 
requires a covered clearing agency to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide sufficient information to enable participants to identify and 
evaluate the risks, fees, and other material costs they incur by 
participating in the covered clearing agency.\37\ The proposed 
technical changes to the MBSD Rules would provide more details as to 
how the VaR Floor is calculated than is currently set forth in the MBSD 
Rules. As such, FICC believes the proposed changes would enable 
Clearing Members to have a better understanding of the operation of the 
VaR Floor because there would be more clarity as to how the VaR Floor 
to which they are subject is calculated. FICC believes the additional 
details would provide Clearing Members with sufficient information to 
enable them to evaluate the costs they incur by participating in FICC. 
As such, FICC believes that the proposed technical changes to the MBSD 
Rules described in Item II(A)1(iv) above are consistent with Rule 17Ad-
22(e)(23)(ii) under the Act.\38\
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    \36\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \37\ Id.
    \38\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    FICC believes the proposed rule changes described in Item II(A)1(i) 
above to allow FICC, subject to its governance, to adjust the VaR Floor 
percentage within a proposed range in the circumstances described above 
could both promote competition and could impose a burden on 
competition. In circumstances where FICC exercises its authority to 
decrease the VaR Floor percentage within the proposed range, Clearing 
Members would experience decreases in their VaR Charge. FICC believes 
this may promote competition because Clearing Members would have a 
lower VaR Charge, and therefore could use their funds for other 
purposes.
    However, FICC also believes that the proposed changes described in 
Item II(A)1(i) above could impose a burden on competition. 
Specifically, in circumstances where FICC exercises its authority to 
increase the VaR Floor percentage within the proposed range, Clearing 
Members who are affected by the VaR Floor would experience increases in 
their VaR Charge. Such increases could burden Clearing Members that 
have lower operating margins or higher costs of capital than other 
Clearing Members. It is not clear whether the burden on competition 
would necessarily be significant because it would depend on whether the 
affected Clearing 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 that derives 
from the proposed rule changes described in Item II(A)1(i) above would 
be necessary and appropriate in furtherance of the purposes of the 
Act.\39\
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    \39\ 15.U.S.C. 78q-1(b)(3)(I).
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    Specifically, FICC believes that the proposed rule changes 
described in Item II(A)1(i) above would be necessary in furtherance of 
the purposes of the Act because they would allow FICC to make 
adjustments to the VaR Floor percentage within a proposed range when 
FICC's review of the VaR Floor percentage indicates that the VaR Floor 
percentage is not sufficient to cover FICC's credit exposure to each 
Clearing Member with a high degree of confidence. The proposed rule 
changes would provide FICC with the discretion (subject to its 
governance) to limit its exposure to Clearing Members by ensuring that 
each Clearing Member has an appropriate minimum VaR Charge in the event 
that the VaR model yields too low a VaR Charge for such portfolios. 
Maintaining an appropriate minimum VaR Charge for each Clearing Member 
would be necessary in furtherance of the Act because it would allow 
FICC to maintain sufficient financial resources to cover its credit 
exposure to each Clearing Member. FICC also believes that any burden on 
competition that derives from the proposed rule change would be 
appropriate in furtherance of the purposes of the Act because FICC's 
discretion would be limited by its governance and also the proposed 
range for the VaR Floor percentage. Making any proposed adjustments to 
the VaR Floor percentage subject to a required governance process would 
be appropriate in furtherance of the Act because it would ensure that 
the final decision as to whether the adjustment ought to be made falls 
on a clear and transparent decision-making process. Making any proposed 
adjustments to the VaR Floor percentage subject to the proposed range 
would be appropriate in furtherance of the Act because as described 
above, the proposed range would effectively set a floor on the VaR 
Charge at a level that has historically impacted only a small number of 
Clearing Members while at the same time ensuring that FICC can make 
adjustments to the VaR Floor percentage to minimize FICC's credit 
exposure to Clearing Members. Therefore, FICC does not believe that the 
proposed changes described in Item II(A)1(i) above would impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the Act.\40\
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    \40\ Id.
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    FICC does not believe that the proposed changes described in Item 
II(A)1(ii) above to provide Clearing Members with 10 Business Days' 
notice prior to the implementation of any adjustment to the VaR Floor 
percentage would impact competition. FICC believes that the proposed 
change to provide notification of adjustments to the VaR Floor 
percentage would enhance Clearing Members' information regarding their 
margin requirements; FICC believes that the proposed 10 Business Days' 
notice would provide Clearing Members with adequate opportunity to 
adjust their portfolios if they wish to do so and adequate time to 
prepare for the increase in their VaR Charge.
    FICC does not believe the proposed changes described in Item 
II(A)1(iii) above to state that the VaR Floor percentage would be 
subject to monthly performance monitoring would impact competition. The 
proposed rule changes regarding at least monthly model performance 
review would not alter Clearing Members' rights and obligations. 
Rather, they would enable FICC to identify any issues with the VaR 
Floor percentage on a more frequent basis than the current annual model 
validation. Moreover, the proposed change regarding at least monthly 
model performance reviews would be consistent with the Framework.
    FICC does not believe that the proposed rule changes described in 
Item II(A)1(iv) above to make technical changes to the MBSD Rules to 
restate the calculation of the VaR Floor to provide more detail than 
the current provision and to use defined terms would impact 
competition. The proposed technical changes would

[[Page 39046]]

ensure that the MBSD Rules remain clear by replacing the current 
language with language that sets out in words the calculation of the 
VaR Floor amount. By doing so, Clearing Members can better understand 
how the VaR Floor is calculated and understand whether they would be 
subject to it. FICC believes that the technical changes would not 
affect Clearing Members' rights and obligations. As such, FICC believes 
that these proposed rule changes would not have any impact on 
competition.
    FICC does not believe that the proposed technical changes described 
in Item II(A)1(iv) to the QRM Methodology to reflect at least annual 
model validation of the VaR Floor percentage would have any impact on 
competition. This change would reflect current practice and would not 
alter Clearing Members' rights or obligations. Therefore, FICC does not 
believe that these proposed changes to clarify the language in the QRM 
Methodology would have any impact on competition.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    Written comments relating to the proposed rule changes have not 
been solicited or received. FICC will notify the Commission of any 
written comments received by FICC.

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.

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-2019-003 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-2019-003. 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 (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 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 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2019-003 and should be submitted on 
or before August 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\41\
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    \41\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-16938 Filed 8-7-19; 8:45 am]
 BILLING CODE 8011-01-P


