[Federal Register Volume 84, Number 180 (Tuesday, September 17, 2019)]
[Notices]
[Pages 48974-48978]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-20011]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86927; File No. SR-FICC-2019-003]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Approving a Proposed Rule Change To Revise the MBSD VaR Floor

September 11, 2019.

I. Introduction

    On July 18, 2019, Fixed Income Clearing Corporation (``FICC'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ proposed rule change SR-
FICC-2019-003. The proposed rule change was published for comment in 
the Federal Register on August 8, 2019.\3\ The Commission did not 
receive any comment letters on the proposed rule change. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 86553 (August 2, 2019), 
84 FR 39041 (August 8, 2019) (SR-FICC-2019-003) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    FICC proposes to amend its Mortgage-Backed Securities Division 
(``MBSD'')

[[Page 48975]]

Clearing Rules (``MBSD Rules'') \4\ and the Methodology and Model 
Operations Document MBSD Quantitative Risk Model (``QRM Methodology 
Document'') \5\ to change one of FICC's margin calculations to: (1) 
Allow FICC to adjust the margin calculation within a specified range if 
necessary to cover FICC's credit exposures to each Clearing Member 
fully with a high degree of confidence; (2) provide that FICC would 
notify Clearing Members in advance of any such change to the margin 
calculation; (3) provide that FICC would perform model performance 
monitoring of the margin calculation on at least a monthly basis; and 
(4) make certain non-substantive technical changes.
---------------------------------------------------------------------------

    \4\ Capitalized terms used herein and not defined shall have the 
meaning assigned to such terms in the MBSD Rules, available at 
http://www.dtcc.com/legal/rules-and-procedures.aspx.
    \5\ FICC requested confidential treatment of the QRM Methodology 
Document and has filed it separately with the Secretary of the 
Commission in connection with this proposed rule change. See 17 CFR 
240-24b-2.
---------------------------------------------------------------------------

A. Background

    A key tool that FICC uses to manage the credit risk presented by 
Clearing Members is the daily calculation and collection of Required 
Fund Deposits from Clearing Members.\6\ The Required Fund Deposit 
serves as each Clearing Member's margin, and the aggregate of all 
Clearing Members' Required Fund Deposits constitutes the MBSD Clearing 
Fund, which FICC would access should a defaulting Clearing Member's own 
Required Fund Deposit be insufficient to satisfy losses to FICC caused 
by the liquidation of that Clearing Member's portfolio.\7\ Each 
Clearing Member's Required Fund Deposit amount consists of multiple 
components, the largest of which is based on the volatility of 
specified net unsettled positions in the Clearing Member's portfolio, 
known as the value-at-risk (``VaR'') Charge.\8\ This model-based 
volatility calculation is designed to capture the market price risk 
associated with the securities in the Clearing Member's portfolio.\9\ 
Specifically, the methodology underlying this calculation projects 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 model-based volatility calculation uses the 
projected liquidation gains or losses to arrive at a VaR Charge amount 
that would cover the projected liquidation losses at a 99 percent 
confidence level.\10\
---------------------------------------------------------------------------

    \6\ MBSD Rule 4, supra note 4.
    \7\ Id.
    \8\ Id.
    \9\ MBSD Rule 1, supra note 4.
    \10\ 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 4.
---------------------------------------------------------------------------

    The MBSD Rules currently provide for two scenarios in which 
alternatives to the model-based volatility calculation of the VaR 
Charge would be necessary.\11\ First, FICC would base the VaR Charge on 
an alternative volatility calculation using historical market price 
changes of certain benchmark securities (the ``Margin Proxy'') for 
scenarios in which the primary source of data required to perform the 
model-based volatility calculation becomes unavailable for an extended 
period of time.\12\ Second, FICC would set the VaR Charge at 5 basis 
points of the market value of a Clearing Member's gross unsettled 
positions (the ``VaR Floor'') for scenarios in which the model-based 
volatility calculation (or Margin Proxy, if used) results in an amount 
that is less than the VaR Floor.\13\
---------------------------------------------------------------------------

    \11\ MBSD Rule 1, supra note 4.
    \12\ Id.
    \13\ Id.
---------------------------------------------------------------------------

    The VaR Floor addresses the risk that the model-based volatility 
calculation (or Margin Proxy, if used) may result in little or no VaR 
Charge for certain portfolios where the calculation methodology 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.\14\ Due to the risk that historical price 
correlation may not persist in future market conditions,\15\ FICC would 
employ the VaR Floor, which is based on 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.
---------------------------------------------------------------------------

    \14\ Such portfolios can represent large gross positions, but 
net down to a relatively low VaR Charge amount.
    \15\ 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 4.
---------------------------------------------------------------------------

B. VaR Floor Percentage Adjustments

    The MBSD Rules currently define the VaR Floor as ``5 basis points 
of the market value of a Clearing Member's gross unsettled positions.'' 
\16\ Therefore, the VaR Floor is used as the Clearing Member's VaR 
Charge when the model-based volatility calculation yields an amount 
that is lower than 5 basis points (referred to herein as the ``VaR 
Floor Percentage'') of the market value of the Clearing Member's gross 
unsettled positions.\17\
---------------------------------------------------------------------------

    \16\ MBSD Rule 1, supra note 4.
    \17\ Id.
---------------------------------------------------------------------------

    After conducting a review of the VaR Floor Percentage in June 2017, 
FICC found that a VaR Floor Percentage of 5 basis points resulted in 
VaR Charges that did not adequately cover the market risk of certain 
portfolios during periods of market volatility.\18\ FICC noted that an 
increase in the VaR Floor Percentage to 10 basis points would improve 
the backtesting coverage of those portfolios to 99.8%.\19\ The 2017 
review also revealed that when applying the Margin Proxy, a VaR Floor 
Percentage of 5 basis points resulted in VaR Charges that did not 
adequately cover certain portfolios with offsetting long and short 
positions within the same agency program.\20\ FICC further noted that 
an increase in the VaR Floor Percentage to 20 basis points would better 
cover the risks of such portfolios.\21\
---------------------------------------------------------------------------

    \18\ The 2017 review revealed that during periods of market 
volatility, a VaR Floor Percentage of 5 basis points resulted in VaR 
Charges that did not adequately cover portfolios containing long-
short positions (e.g., a portfolio that was long the GNMA II/FNMA 
basis at a higher coupon and short the GNMA II/FNMA basis at a lower 
coupon). Notice, supra note 3 at 39043.
    \19\ Id.
    \20\ The Margin Proxy allows for further netting among positions 
within the same agency program than would occur using the model-
based volatility calculation. Notice, supra note 3 at 39043.
    \21\ FICC conducted an impact study for the twelve months ending 
February 2019, and found that in the Margin Proxy scenario, a VaR 
Floor Percentage of 20 basis points would improve backtesting 
coverage to 99% for 11 of the 14 portfolios that would have been 
below 99% based on a VaR Floor Percentage of 5 basis points. 
Additionally, FICC found that increasing the VaR Floor Percentage to 
20 basis points would reduce the number of backtesting deficiencies 
associated with the 3 small portfolios that would have remained 
below the 99% confidence level (from 45 deficiencies to 11). FICC 
states that it would utilize another margin charge (the Backtesting 
Charge) to further mitigate any remaining exposure. Notice, supra 
note 3 at 39043.
---------------------------------------------------------------------------

    Accordingly, FICC proposes to revise the VaR Floor definition to 
allow FICC to adjust the VaR Floor Percentage within a specified range 
in order to cover FICC's credit exposure to each Clearing Member fully 
with a high degree of confidence.\22\ FICC proposes to set the range 
within which it would be allowed to adjust the VaR Floor Percentage at 
no less than 5 basis points and no more than 30 basis points of a 
Clearing Member's gross unsettled positions.\23\ According to FICC, the 
discretionary range for the VaR Floor Percentage up to 30 basis points 
is

[[Page 48976]]

appropriate because it will enable FICC to make timely adjustments that 
would ensure the VaR Charge remains adequate if market conditions 
change.\24\
---------------------------------------------------------------------------

    \22\ Id.
    \23\ Id.
    \24\ Id.
---------------------------------------------------------------------------

    FICC's discretion to adjust the VaR Floor Percentage would be 
subject to the governance process set forth in the Clearing Agency 
Model Risk Management Framework (``Framework'') \25\ applicable to 
model performance concerns. Specifically, the Model Validation and 
Control Group (``MVC'') would escalate any proposed VaR Floor 
Percentage adjustment to the Model Risk Governance Committee 
(``MRGC''), which, in turn, would escalate the proposed adjustment to 
the Management Risk Committee and/or Risk Committee of the Board for 
approval.\26\ Additionally, FICC proposes to review, on at least an 
annual basis, the impact of alternative VaR Floor Percentages within 
the proposed range of 5 to 30 basis points to the backtesting 
performance and to Clearing Members' margin charges.\27\
---------------------------------------------------------------------------

    \25\ 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) (``Framework Approval Order''). 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.
    \26\ Framework Approval Order, supra note 25 at 41436; Notice, 
supra note 3 at 39042.
    \27\ Notice, supra note 3 at 39042.
---------------------------------------------------------------------------

    Upon Commission approval of the proposed rule change, FICC proposes 
to initially set the VaR Floor at 10 basis points when there is 
sufficient data to generate the model-based volatility calculation, and 
20 basis points when there is insufficient data for the model-based 
volatility calculation (i.e., when the Margin Proxy is used).\28\
---------------------------------------------------------------------------

    \28\ Notice, supra note 3 at 39042-43.
---------------------------------------------------------------------------

C. Notifications to Clearing Members of Changes to VaR Floor Percentage

    For any adjustment to the VaR Floor Percentage that would fall 
within the proposed range, FICC would issue an Important Notice no 
later than 10 Business Days prior to the implementation of the 
adjustment. FICC states that providing notice in advance of the 
implementation of an adjustment is designed to provide Clearing Members 
with time to adjust to any new VaR Charge amounts that would result 
from an adjustment to the VaR Floor Percentage.\29\ FICC believes that 
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.\30\
---------------------------------------------------------------------------

    \29\ Notice, supra note 3 at 39044.
    \30\ Id.
---------------------------------------------------------------------------

    For adjustments that would fall outside of the proposed range, FICC 
has represented that it would submit a rule filing to the 
Commission.\31\ 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 the VaR Floor Percentage above 5 basis points (up to 30 basis 
points).
---------------------------------------------------------------------------

    \31\ Notice, supra note 3 at 39042.
---------------------------------------------------------------------------

D. Model Performance Monitoring of VaR Floor Percentage

    The Framework provides that, as part of model performance 
monitoring, on at least a monthly basis, FICC: (1) Performs a 
sensitivity analysis on its margin model; (2) reviews the key 
parameters and assumptions for backtesting; and (3) considers 
modifications to ensure its backtesting practices are appropriate for 
determining the adequacy of applicable margin resources.\32\ The 
Framework also states 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. \33\
---------------------------------------------------------------------------

    \32\ Framework Approval Order, supra note 25 at 41437; Notice, 
supra note 3 at 39042.
    \33\ Framework Approval Order, supra note 25 at 41434; Notice, 
supra note 3 at 39042.
---------------------------------------------------------------------------

    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.\34\ 
FICC proposes 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 Document 
to state that FICC would conduct model performance monitoring of the 
VaR Floor Percentage on at least a monthly basis.
---------------------------------------------------------------------------

    \34\ See id.
---------------------------------------------------------------------------

E. Technical Changes

    FICC proposes several 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 the defined terms ``Long Positions'' 
\35\ and ``Short Positions.'' \36\ Specifically, FICC would add a new 
sentence stating: ``Such VaR Floor will be determined by multiplying 
the sum of the absolute values of Long Positions and Short Positions, 
at market value, by a percentage designated by the Corporation that is 
no less than 0.05% and no greater than 0.30%. [FICC] 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. [FICC] 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.''
---------------------------------------------------------------------------

    \35\ 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 4.
    \36\ 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 4.
---------------------------------------------------------------------------

    Finally, FICC proposes a technical change to the QRM Methodology 
Document to reference that there will be at least annual model 
validation of the VaR Floor Percentage.\37\ FICC states that the 
purpose of the proposed technical changes is to enhance the clarity and 
accuracy of the MBSD Rules and the QRM Methodology Document.\38\
---------------------------------------------------------------------------

    \37\ The QRM methodology Document currently provides that the 
VaR Floor Percentage is reviewed annually and updated. Notice, supra 
note 3 at 39043.
    \38\ Notice, supra note 3 at 39044.
---------------------------------------------------------------------------

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \39\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the proposed rule change is consistent with 
Sections

[[Page 48977]]

17A(b)(3)(F) \40\ of the Act and Rules 17Ad-22(e)(4)(i),\41\ 
(e)(6)(i),\42\ and (e)(23)(ii),\43\ each promulgated under the Act, for 
the reasons described below.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78s(b)(2)(C).
    \40\ 15 U.S.C. 78q-1(b)(3)(F)
    \41\ 17 CFR 240.17Ad-22(e)(4)(i).
    \42\ 17 CFR 240.17Ad-22(e)(6)(i).
    \43\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible.\44\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    First, as described above in Section II.B., FICC states that the 
current VaR Floor Percentage of 5 basis points has resulted in VaR 
Charges that do not adequately cover FICC's exposure to certain 
Clearing Member portfolios. FICC's proposal for the ability to adjust 
the VaR Floor Percentage from 5 basis points up to 30 basis points 
would better enable FICC to collect margin amounts commensurate with 
its credit exposure to the types of Clearing Member portfolios not 
adequately covered using a VaR Floor Percentage of 5 basis points. 
FICC's collection of margin amounts commensurate with its credit 
exposures would help ensure that FICC maintains adequate funds 
necessary to manage the risks associated with performing its clearance 
and settlement functions. Accordingly, the Commission finds the 
proposal to allow FICC to adjust the VaR Floor Percentage from 5 basis 
points up to 30 basis points would promote the prompt and accurate 
clearance and settlement of securities transactions, consistent with 
Section 17A(b)(3)(F) of the Act.\45\ Moreover, FICC's collection of 
margin amounts commensurate with the credit exposure presented by each 
Clearing Member portfolio should help ensure that, in the event of a 
Clearing Member default, FICC's operations would not be disrupted and 
non-defaulting Clearing Members would not be exposed to losses that 
they cannot anticipate or control. Accordingly, the Commission finds 
the proposal to allow FICC to adjust the VaR Floor Percentage from 5 
basis points up to 30 basis points should safeguard the securities and 
funds that are in FICC's custody or control or for which FICC is 
responsible, consistent with Section 17A(b)(3)(F) of the Act.\46\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Id.
---------------------------------------------------------------------------

    Second, as described above in Section II.C., FICC states that it 
designed the proposal to provide 10 Business Days' notice to Clearing 
Members prior to implementing any adjustment to the VaR Floor 
Percentage in order to provide Clearing Members with sufficient time 
prepare for any new VaR Charge amounts and thereby ensure that Clearing 
Members are able to satisfy their Required Fund Deposit amounts. 
Providing such notice in advance of implementing any adjustment to the 
VaR Floor Percentage would help Clearing Members prepare to meet their 
margin obligations, and thereby facilitate FICC's collection of 
adequate margin amounts necessary to manage the risks associated with 
performing its clearance and settlement functions, as well as help 
ensure that, in the event of a Clearing Member default, FICC's 
operations would not be disrupted and non-defaulting Clearing Members 
would not be exposed to losses that they cannot anticipate or control. 
Accordingly, the Commission finds the proposal to provide 10 Business 
Days' notice to Clearing Members prior to implementing any adjustment 
to the VaR Floor Percentage should: (1) Promote the prompt and accurate 
clearance and settlement of securities transactions; and (2) safeguard 
the securities and funds that are in FICC's custody or control or for 
which FICC is responsible, consistent with Section 17A(b)(3)(F) of the 
Act.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

    Third, as described above in Section II.D., 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. FICC 
proposes to increase the frequency of this review by designating the 
VaR Floor Percentage as a parameter of its VaR model to be reviewed on 
at least a monthly basis. More frequent reviews would alert FICC of the 
need to adjust the VaR Floor Percentage and would enable FICC to make 
such adjustments in a more timely manner. Thus, more frequent reviews 
of the VaR Floor Percentage would help FICC ensure that it collects 
margin amounts commensurate with the credit risks presented by each 
Clearing Member portfolio. FICC's collection of margin amounts 
commensurate with the credit exposure presented by each Clearing Member 
portfolio should help ensure that, in the event of a Clearing Member 
default, FICC's operations would not be disrupted and non-defaulting 
Clearing Members would not be exposed to losses that they cannot 
anticipate or control. Accordingly, the Commission finds the proposal 
for FICC to review the VaR Floor Percentage on at least a monthly basis 
would safeguard the securities and funds that are in FICC's custody or 
control or for which FICC is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\48\
---------------------------------------------------------------------------

    \48\ Id.
---------------------------------------------------------------------------

    Fourth, as described above in Section II.E., FICC designed the 
proposed technical changes to enhance the clarity and accuracy of the 
MBSD Rules and the QRM Methodology Document. Enhancing the clarity and 
accuracy of the MBSD Rules helps to provide Clearing Members with a 
better understanding of their rights and obligations thereunder. A 
better understanding of Clearing Member rights and obligations would 
reasonably help to increase the predictability and certainty of 
Clearing Member interactions with FICC, which, in turn, would better 
enable FICC to perform its clearance and settlement functions. 
Additionally, since the QRM Methodology Document is used by FICC Risk 
Management personnel, enhanced clarity regarding the frequency of model 
validation of the VaR Floor Percentage would better enable FICC 
personnel to perform the related risk management functions that support 
FICC's clearance and settlement activities. Accordingly, the Commission 
finds the proposed technical changes would promote the prompt and 
accurate clearance and settlement of securities transactions, 
consistent with Section 17A(b)(3)(F) of the Act.\49\
---------------------------------------------------------------------------

    \49\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)(i) Under the Act

    Rule 17Ad-22(e)(4)(i) under the Act 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.\50\
---------------------------------------------------------------------------

    \50\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    As described above in Section II.D., FICC's proposal to conduct at 
least monthly reviews of the VaR Floor Percentage is designed to help 
FICC more effectively identify, measure, monitor, and manage its credit 
exposure to each Clearing Member portfolio by increasing the frequency 
of review from annually to monthly and thereby enabling FICC to 
identify the need for

[[Page 48978]]

adjustments to the VaR Floor Percentage in a more timely manner. 
Additionally, as described above in Section II.B., FICC's proposed 
ability to adjust the VaR Floor Percentage within the range of 5 to 30 
basis points is designed to better enable FICC to limit its credit 
exposure to certain Clearing Member portfolios in the event that the 
model-based volatility calculation (or Margin Proxy, if used) yield too 
low a VaR Charge for such portfolios. As described above in Sections 
II.B. and C., FICC's proposals for the ability to adjust the VaR Floor 
Percentage within the range of 5 to 30 basis points, as well as the 
provision of prior notice of such adjustments to Clearing Members, are 
designed to help FICC better manage its credit exposure to Clearing 
Members by collecting sufficient margin with respect to each Clearing 
Member portfolio. Accordingly, the Commission finds the proposed 
changes are consistent with the requirements of Rule 17Ad-22(e)(4)(i) 
under the Act.\51\
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(6)(i) Under the Act

    Rule 17Ad-22(e)(6)(i) under the Act 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.\52\
---------------------------------------------------------------------------

    \52\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    FICC's proposals to: (1) Monitor the VaR Floor Percentage; (2) 
adjust the VaR Floor Percentage in the event that other calculations 
result in VaR Charges that do not adequately cover the risks presented 
by certain Clearing Member portfolios; and (3) notify Clearing Members 
in advance of any adjustment to the VaR Floor Percentage, are designed 
to cover FICC's credit exposure to Clearing Member portfolios where 
such exposure has not been adequately covered in the past. 
Specifically, the proposal to allow FICC to adjust the VaR Floor 
Percentage from 5 basis points up to 30 basis points should help FICC 
to collect margin amounts commensurate with its credit exposure to the 
types of Clearing Member portfolios not adequately covered using a VaR 
Floor Percentage of 5 basis points. FICC's proposal to provide Clearing 
Members with notice in advance of implementing any adjustment to the 
VaR Floor Percentage should help Clearing Members prepare to meet their 
margin obligations, and thereby facilitate FICC's collection of margin 
amounts commensurate with affected Clearing Member portfolios. FICC's 
proposal to increase the frequency with which it reviews the VaR Floor 
Percentage from annually to monthly should alert FICC of the need to 
adjust the VaR Floor Percentage and make such adjustments in a more 
timely manner. Thus, the increased frequency of review would further 
help FICC ensure that it collects margin amounts commensurate with the 
credit risks presented by each Clearing Member portfolio. For these 
reasons, the Commission finds the proposed changes are consistent with 
the requirements of Rule 17Ad-22(e)(6)(i) under the Act.\53\
---------------------------------------------------------------------------

    \53\ Id.
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(e)(23)(ii) Under the Act

    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.\54\
---------------------------------------------------------------------------

    \54\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    As described above in Section II.E., FICC's 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. 
Providing more comprehensive written information in the MBSD Rules 
regarding the VaR Floor would enable Clearing Members to better 
understand how the VaR Floor operates, which, in turn, should enable 
Clearing Members to better evaluate the costs of participating in FICC. 
Accordingly, the Commission finds the proposed technical changes to the 
MBSD Rules are consistent with Rule 17Ad-22(e)(23)(ii) under the 
Act.\55\
---------------------------------------------------------------------------

    \55\ Id.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act 
and, in particular, with the requirements of Section 17A of the Act 
\56\ and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\57\ that proposed rule change SR-FICC-2019-003, be, and hereby is, 
approved.\58\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78s(b)(2).
    \58\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-20011 Filed 9-16-19; 8:45 am]
 BILLING CODE 8011-01-P


