[Federal Register Volume 85, Number 165 (Tuesday, August 25, 2020)]
[Notices]
[Pages 52387-52392]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18560]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89616; File No. SR-FICC-2020-010]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Describe Key Components of 
the Mortgage-Backed Securities Division Stress Testing Program

August 19, 2020.
    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 August 11, 2020, 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 amend the FICC 
Mortgage-Backed Securities Division (``MBSD'') Clearing Rules (``MBSD 
Rules'') \3\ to include a new section that would describe the key 
components of MBSD's stress testing program. This section would also 
disclose FICC's proposal to (1) utilize vendor-supplied historical risk 
factor \4\ time series data (``Historical Data'') and vendor-supplied 
security-level risk sensitivity \5\ data (``Security-Level Data'') \6\ 
in the stress testing

[[Page 52388]]

program \7\ and (2) implement a back-up calculation that MBSD would 
utilize in the event that the vendor fails to provide such data to 
MBSD.\8\ The proposed changes are further described below.\9\
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    \3\ Capitalized terms used herein and not otherwise defined 
shall have the meanings assigned to such terms in the MBSD Rules, 
available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ Generally, the term ``risk factor'' (or ``risk driver'') 
means an attribute, characteristic, variable or other concrete 
determinant that influences the risk profile of a system, entity, or 
financial asset. Risk factors may be causes of risk or merely 
correlated with risk.
    \5\ The term ``sensitivity'' means the percentage value change 
of a security given each risk factor change.
    \6\ FICC would receive the following data from the vendor: 
Interest rate (including 11 tenors) measures the sensitivity of a 
price change to changes in interest rates; convexity measures the 
degree of curvature in the price/yield relationship of key interest 
rates (convexity would not be utilized in the scenarios selection 
process; it would only be utilized in the stress profit and loss 
calculation); mortgage option adjusted spread is the yield spread 
that is added to a benchmark yield curve to discount a TBA's cash 
flows to match its market price, which takes into account a credit 
premium and the option-like feature of mortgage-backed-securities 
due to prepayment; interest rate volatility reflects the implied 
volatility observed from the swaption market to estimate 
fluctuations in interest rates; and mortgage basis captures the 
basis risk between the prevailing mortgage rate and a blended U.S. 
Treasury rate, which impacts borrowers' refinance incentives and the 
model prepayment assumptions. The Historical Data would include (1) 
interest rate, (2) mortgage option adjusted spread, (3) interest 
rate volatility, and (4) mortgage basis. The Security-Level Data 
would include (1) sensitivity to interest rates, (2) convexity, (3) 
sensitivity to mortgage option adjusted spread, (4) sensitivity to 
interest rate volatility, and (5) sensitivity to mortgage basis. 
FICC does not believe that its current engagement of the vendor 
would present a conflict of interest because the vendor is not an 
existing Clearing Member nor are any of the vendor's affiliates 
existing Clearing Members. To the extent that the vendor or any of 
its affiliates applies to become a Clearing Member, FICC will 
negotiate an appropriate information barrier with the applicant in 
an effort to prevent a conflict of interest from arising. An 
affiliate of the vendor currently provides an existing service to 
FICC; however, this arrangement does not present a conflict of 
interest because the existing agreement between FICC and the vendor, 
and the existing agreement between FICC and the vendor's affiliate, 
each contains provisions that limit the sharing of confidential 
information.
    \7\ FICC currently utilizes the Historical Data and Security-
Level Data in MBSD's value-at-risk (``VaR'') model, which calculates 
the VaR Charge component in each Clearing Member's margin (referred 
to in the MBSD Rules as Required Fund Deposit). See MBSD Rule 1, 
Definitions--VaR Charge, supra note 3. FICC is proposing to use this 
same data set in MBSD's stress testing program.
    \8\ FICC's proposal to (1) include the Historical Data and 
Security-Level Data in MBSD's stress testing program and (2) 
implement a back-up calculation in the event that the vendor fails 
to provide such data is described in an advance notice filing that 
FICC filed with the Commission. See Securities Exchange Act Release 
No. 88382 (March 13, 2020), 85 FR 15830 (March 19, 2020) (SR-FICC-
2020-801).
    \9\ On January 21, 2020, FICC filed this proposed rule change as 
an advance notice with the Commission pursuant to Section 806(e)(1) 
of Title VIII 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) under the Act, 17 CFR 240.19b-4(n)(1)(i) (the ``Advance 
Notice Filing''). See Release No. 88266 (February 24, 2020), 85 FR 
11413 (February 27, 2020) (SR-FICC-2020-801). The Commission issued 
a notice of no objection to the Advance Notice Filing on March 13, 
2020. See Release No. 88382 (March 13, 2020), 85 FR 15830 (March 19, 
2020) (SR-FICC-2020-801). A copy of the Advance Notice Filing and 
the Commission's notice of no objection are available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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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
    FICC is proposing to include a new section in the MBSD Rules that 
would describe the key components of MBSD's stress testing program. 
This section would also include FICC's proposal to (1) utilize 
Historical Data and Security-Level Data in the stress testing program, 
and (2) implement a back-up calculation that MBSD would utilize in the 
event that the vendor fails to provide such data to MBSD. The proposed 
changes are further described below.
A. Background
    MBSD provides trade comparison, netting, risk management, 
settlement, and central counterparty services for the U.S. mortgage-
backed securities market. FICC manages its credit exposures to its 
Clearing Members by collecting an appropriate amount of margin 
(referred to in the MBSD Rules as Required Fund Deposit) from each 
Clearing Member.\10\ The aggregate of all Clearing Members' margin 
amounts (together with certain other deposits required under the MBSD 
Rules) constitutes MBSD's Clearing Fund, which FICC would access should 
a Clearing Member default with insufficient margin to satisfy any FICC 
losses caused by the liquidation of the defaulting member's 
portfolio.\11\
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    \10\ See MBSD Rule 4, supra note 3.
    \11\ Id.
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    In contrast to FICC's margin methodologies, which are designed to 
limit FICC's credit exposures under normal market conditions, FICC 
conducts daily stress testing that is designed to (1) test the 
sufficiency of the Clearing Fund against FICC's potential losses 
assuming the default of a Clearing Member with the largest credit 
exposure and its entire affiliated family (that are also Clearing 
Members) (``Affiliated Family'') under extreme but plausible market 
conditions, and (2) identify both (x) Clearing Members who may pose a 
greater market risk under certain market conditions, and (y) potential 
weaknesses in FICC's margin methodologies. As a result, stress testing 
is an essential component of FICC's risk management because FICC uses 
it to test the sufficiency of its prefunded financial resources.
    FICC's stress testing program is described in the Clearing Agency 
Stress Testing Framework (Market Risk) \12\ (the ``Framework''), which 
is maintained in compliance with Rule 17Ad-22(e)(4)(i), and (iii) 
through (vii), under the Act.\13\ The Framework describes (1) the 
sources of the total prefunded financial resources, (2) the key 
components of the stress testing program, (3) the stress testing 
governance and execution processes, and (4) the model validation 
practices.\14\ The Framework is a rule, though it is a standalone 
document that has been filed confidentially with the Commission, and it 
applies to FICC and its affiliates, The Depository Trust Company and 
National Securities Clearing Corporation.\15\
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    \12\ See Securities Exchange Act Release No. 82368 (December 19, 
2017), 82 FR 61082 (December 26, 2017) (SR-FICC-2017-009; SR-DTC-
2017-005; SR-NSCC-2017-006) (``Framework Approval Order'').
    \13\ See 17 CFR 240.17Ad-22(e)(4)(i), and (iii) through (vii).
    \14\ See Framework Approval Order, supra note 12.
    \15\ The term ``rule'' refers to the ``rules of a self-
regulatory organization'' as defined in Section 3(a)(28) of the Act. 
See 15 U.S.C. 78c(a)(28).
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B. Proposal To Include a New Section in the MBSD Rules That Describes 
the Key Components of MBSD's Stress Testing Program
    FICC is proposing to include a new section in the MBSD Rules that 
would describe MBSD's stress testing program. FICC is proposing this 
change because the new section would add transparency to MBSD's stress 
testing program given that the Framework is a confidential document. 
The new section would describe the three key components of MBSD's 
stress testing program, which are as follows:\16\
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    \16\ Id.
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    (i) Risk Identification. FICC identifies the principal credit/
market risk drivers that are representative and specific to each 
Clearing Member's clearing portfolio to determine risk exposures by 
analyzing the securities and risk exposures in such Members' clearing 
portfolios to identify representative principal market risk drivers and 
to capture the risk sensitivity of such clearing portfolios under 
stressed market conditions.
    (ii) Scenario Development. FICC constructs comprehensive and 
relevant sets of extreme but plausible historical and hypothetical 
stress scenarios for the identified risk drivers. Historical scenarios 
are based on stressed market conditions that occurred on specific dates 
in the past. Hypothetical stress scenarios are based on theoretical 
market conditions that may not actually have occurred but could 
conceivably occur. FICC applies the historical and hypothetical 
scenarios to Clearing Members' portfolio positions.
    (iii) Risk Measurement and Aggregation. FICC calculates risk 
metrics for each Clearing Member's actual portfolio to estimate the 
profits and losses in connection with such Clearing Member's close out 
under the chosen stress scenarios.
C. Proposal To Utilize Vendor-Supplied Data in MBSD's Stress Testing 
Program
    In connection with FICC's stress testing program, FICC is proposing 
to use vendor-supplied data in MBSD's Scenario Development process, and 
Risk Measurement and Aggregation process.

[[Page 52389]]

(1) Proposal To Use Historical Data in the Scenario Development Process
    As described in Section B. above, the Scenario Development process 
is a key component of MBSD's stress testing program and it involves 
FICC's construction of comprehensive and relevant sets of extreme but 
plausible historical and hypothetical stress scenarios for identified 
risk drivers.\17\ In its development of historical stress scenarios, 
FICC is proposing to examine Historical Data to identify the largest 
historical changes of risk factors that influence the pricing of 
mortgage-backed securities. FICC would obtain the Historical Data from 
a vendor.
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    \17\ Id.
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    FICC is proposing to use Historical Data because it believes that 
this data would better explain the market price changes of TBA 
transactions cleared by MBSD.\18\ In addition, FICC believes that the 
data would (1) identify stress risk exposures under broader and more 
varied market conditions and (2) provide MBSD with an enhanced 
capability to design more transparent scenarios. Because Clearing 
Members typically use risk factor analysis for their own risk and 
financial reporting, such Members would have comparable data and 
analysis to stress test their portfolios. Thus, Clearing Members would 
be able to simulate their stressed portfolios to a closer degree.
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    \18\ Specified Pool Trades and Stipulated Trades are mapped to 
the corresponding TBAs. FICC's guarantee of Option Contracts on TBAs 
is limited to the intrinsic value of the option positions, meaning 
that, when the underlying price of the TBA position is above the 
call price, the Option Contract is considered in-the-money and 
FICC's guarantee reflects this portion of the Option Contract's 
positive value at the time of a Clearing Member's insolvency. The 
value change of an Option Contract's position is simulated as the 
change in its intrinsic value. No changes are being proposed to 
MBSD's treatment of Specified Pool Trades, Stipulated Trades and 
Option Contracts pursuant to this proposal.
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    As noted above, FICC's use of Historical Data in connection with 
the development of MBSD's historical stress scenarios would be 
disclosed in the proposed new section of the MBSD Rules that describes 
the stress testing program.
(2) Proposal To Use Historical Data and Security-Level Data in the Risk 
Measurement and Aggregation Component
    As described in section B. above, the Risk Measurement and 
Aggregation process calculates risk metrics for each Clearing Member's 
actual portfolio to estimate the profits and losses in connection with 
such Clearing Member's close out under chosen stress scenarios. In 
connection with this calculation, FICC is proposing to use a financial 
profit-and-loss calculation that leverages the Historical Data and the 
Security-Level Data. The Security-Level Data is generated using the 
vendor's suite of security valuation models that includes an agency 
mortgage prepayment model and interest rate term structure model.\19\ 
FICC believes that the vendor's approach generates more stable and 
robust Security-Level Data. Because the stress profits and losses 
calculation would include Security-Level Data, FICC believes that the 
calculated results would be improved and would reflect results that are 
closer to actual price changes for TBA securities during larger market 
moves which are typical of stress testing scenarios.
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    \19\ A prepayment model captures cash flow uncertainty as a 
result of unscheduled payments of principal (prepayments). An 
interest rate term structure model describes the relationship 
between interest rates of different maturities.
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    FICC's use of Historical Data and Security-Level Data would be 
disclosed in the proposed new section of the MBSD Rules which describes 
the stress testing program.
D. Proposal To Include a Back-Up Calculation in the MBSD Rules
    FICC is proposing to implement a back-up calculation that it would 
use in the event the vendor fails to provide data to FICC.\20\ 
Specifically, if the vendor fails to provide any data or a significant 
portion of data in accordance with the timeframes agreed to by FICC and 
the vendor, FICC would use the most recently available data on the 
first day that such disruption occurs. Subject to discussions with the 
vendor, if FICC determines that the vendor would resume providing data 
within five (5) Business Days, FICC would determine whether the daily 
stress testing calculation should continue to be calculated by using 
the most recently available data or whether the back-up calculation (as 
described below) should be invoked.\21\ Subject to discussions with the 
vendor, if FICC determines that the data disruption would extend beyond 
five (5) Business Days, the back-up calculation would be employed for 
daily stress testing, subsequent to the approval of FICC's designated 
internal authority.
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    \20\ This is consistent with the Advance Notice Filing, which 
states the following: If the vendor fails to provide any data or a 
significant portion of the data in accordance with the timeframes 
agreed to by FICC and the vendor, FICC would use the most recently 
available data on the first day that such disruption occurs. Subject 
to discussions with the vendor, if a Managing Director, who oversees 
Market Risk Management, determines that the vendor would resume 
providing data within five (5) business days, such Managing Director 
would determine whether the daily stress testing calculation should 
continue to be calculated by using the most recently available data 
or whether the back-up calculation . . . should be invoked, subject 
to the approval of DTCC's Group Chief Risk Officer or his/her 
designee. Subject to discussions with the vendor, if a Managing 
Director, who oversees Market Risk Management, determines that the 
data disruption would extend beyond five (5) business days, the 
back-up calculation would be applied, subsequent to the approval of 
DTCC's Management Risk Committee, followed by notification to the 
Board Risk Committee.
    See Advance Notice Filing, supra note 9, at 11416.
    \21\ For the avoidance of doubt, after taking into consideration 
the vendor's condition and, to the extent applicable, market 
conditions, FICC may invoke the back-up calculation sooner.
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    The proposed back-up calculation would be as follows: MBSD would 
(1) calculate each Clearing Member's portfolio net exposures in four 
securitization programs,\22\ (2) calculate the historical stress return 
for each securitization program as the three-day price return for each 
securitization program index for each scenario date, and (3) calculate 
each Clearing Member's stress profits and losses as the sum of the 
products of the net exposure of each securitization program and the 
stress return value for each securitization program. FICC would use 
publicly available indices as the data source for the stress return 
calculations.\23\ This calculation would be referred to as the Back-up 
Stress Testing Calculation.
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    \22\ The securitization programs are as follows: (1) Fannie Mae 
and Freddie Mac conventional 30-year mortgage-backed securities, (2) 
Ginnie Mae 30-year mortgage-backed securities, (3) Fannie Mae and 
Freddie Mac conventional 15-year mortgage-backed securities, and (4) 
Ginnie Mae 15-year mortgage-backed securities.
    \23\ The proposed calculation is similar to MBSD's calculation 
of the Margin Proxy, which is the back-up calculation that MBSD will 
use to calculate the VaR Charge in the event of a vendor data 
disruption. See MBSD Rule 1, Definitions--Margin Proxy, supra note 
3.
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    FICC's use of the proposed back-up calculation would be disclosed 
in the proposed new section of the MBSD Rules that describes the stress 
testing program.
FICC's Due Diligence Relating to the Vendor-Supplied Data
    FICC feels comfortable using the vendor-supplied data in MBSD's 
stress testing program because it is the same data that FICC currently 
uses in connection with its MBSD VaR model. Prior to MBSD's use of this 
data in its VaR model, FICC reviewed a description of the vendor's 
calculation methodology and the way the market data is used to 
calibrate the vendor's models. At that time, DTCC's Quantitative Risk 
Management, Vendor Risk Management, and Information Technology teams

[[Page 52390]]

conducted due diligence of the vendor in order to evaluate its control 
framework for managing key risks.\24\ FICC's due diligence included an 
assessment of the vendor's technology risk, business continuity, 
regulatory compliance, and privacy controls. Because of FICC's due 
diligence and its use of the vendor data in connection with the 
calculation of MBSD's margin model, FICC understands and remains 
comfortable with the vendor's controls. In addition, DTCC's Data 
Integrity department manages the data that FICC receives including, but 
not limited to, market data and analytical data provided by 
vendors.\25\ As a result, FICC feels comfortable with leveraging the 
Historical Data and the Security-Level Data for purposes of MBSD's 
stress testing program.
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    \24\ DTCC is FICC's parent company. DTCC operates on a shared 
services model with respect to FICC. Most corporate functions are 
established and managed on an enterprise-wide basis pursuant to 
intercompany agreements under which DTCC generally provides a 
relevant service to FICC.
    \25\ DTCC's Data Integrity department oversees data integrity on 
behalf of DTCC's Counterparty Credit, Market, and Liquidity Risk 
Management groups as well as the Securities Valuation, Model 
Validation and Control, and Quantitative Risk Management groups 
(collectively, Financial Risk Management (``FRM'')), and the 
Systemic Risk Office. The Data Integrity department's mission is to 
align with FRM, and ensure that the highest data quality is managed 
for the purpose of lowering risk and improving efficiency within 
FRM. The Data Integrity department's prime directive consists of the 
following: (1) Ensuring a data governance framework is established 
and adhered to within FRM; (2) ensuring sufficient integrity of key 
data sources through active rules-based data monitoring; (3) 
ensuring sufficient alerting is in place to inform necessary parties 
when data anomalies occur; (4) liaising with subject matter experts 
to resolve data anomalies in an efficient and effective manner; and 
(5) ensuring that critical FRM data is catalogued and defined in the 
enterprise data dictionary.
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E. Proposed Changes to the MBSD Rules
Proposed Change to MBSD Rule 1--Definitions
    FICC is proposing to include a new defined term referred to as 
``Back-up Stress Testing Calculation.'' This term would be defined as a 
back-up method for calculating the stress profits and losses of each 
portfolio when the vendor fails to provide data to FICC. The definition 
would state that FICC shall (1) calculate each Clearing Member's 
portfolio net exposures in four securitization programs,\26\ (2) 
calculate the historical stress return for each securitization program 
as the three-day price return for each securitization program index for 
each scenario date, and (3) calculate each Clearing Member's stress 
profits and losses as the sum of the products of the net exposure of 
each securitization program and the stress return value for each 
securitization program. Further, the definition would state that FICC 
shall use publicly available indices as the data source for the stress 
return calculations.
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    \26\ See supra note 22.
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Proposed Change to MBSD Rule 4--Clearing Fund and Loss Allocation
    FICC is proposing to amend MBSD Rule 4 to include a new section 
referred to as ``Section 13--Stress Testing.''
    This new section would include a subsection entitled ``(a) Stress 
Testing Program.'' This subsection would state that FICC uses stress 
testing to (1) test the sufficiency of the Clearing Fund against FICC's 
potential losses assuming the default of a Clearing Member with the 
largest credit exposure and its entire Affiliated Family under extreme 
but plausible market conditions, and (2) identify both (x) Clearing 
Members who may pose a greater market risk under certain market 
conditions, and (y) potential weaknesses in FICC's margin 
methodologies. This subsection would also state that FICC's stress 
testing program is comprised of the following three key components.
    (i) Risk Identification. FICC identifies the principal credit/
market risk drivers that are representative and specific to each 
Clearing Member's clearing portfolio to determine risk exposures by 
analyzing the securities and risk exposures in such Members' clearing 
portfolios to identify representative principal market risk drivers and 
to capture the risk sensitivity of such clearing portfolios under 
stressed market conditions.
    (ii) Scenario Development. FICC constructs comprehensive and 
relevant sets of extreme but plausible historical and hypothetical 
stress scenarios for the identified risk drivers. Historical scenarios 
are based on stressed market conditions that occurred on specific dates 
in the past. FICC uses Historical Data in the development of the 
historical scenarios. Hypothetical stress scenarios are based on 
theoretical market conditions that may not actually have occurred but 
could conceivably occur. FICC then applies the historical and 
hypothetical scenarios to Clearing Members' portfolio positions.
    (iii) Risk Measurement and Aggregation. FICC calculates risk 
metrics for each Clearing Member's actual portfolio to estimate the 
profits and losses in connection with such Clearing Member's close out 
under the chosen stress scenarios. FICC uses Historical Data and 
Security-Level Data in its calculation of profits and losses for 
Clearing Members' portfolios.
    This subsection would state that FICC receives the Historical Data 
and the Security-Level Data from a vendor.
    This new section would also include a subsection entitled ``(b) 
Back-up Stress Testing Calculation.'' The new subsection would state 
that in the event that the vendor fails to provide any data or a 
significant portion of the data, FICC will use the most recently 
available data on the first day that such disruption occurs. Subject to 
discussions with the vendor, if FICC determines that the vendor would 
resume providing data within five (5) Business Days, FICC would 
determine whether the daily stress testing calculation should continue 
to be calculated by using the most recently available data or whether 
the Back-up Stress Testing Calculation should be invoked.\27\ Subject 
to discussions with the vendor, if FICC determines that the data 
disruption would extend beyond five (5) Business Days, the Back-up 
Stress Testing Calculation would be employed for daily stress testing, 
subsequent to the approval of FICC's designated internal authority.
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    \27\ See supra note 21.
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F. Delayed Implementation of the Proposed Rule Change
    The proposed rule change would become operative within 45 Business 
Days after the Commission's approval of this proposed rule change. 
Prior to the effective date, FICC would add legends to the MBSD Rules 
to state that the specified changes to the MBSD Rules have been 
approved but not yet implemented, and to provide the date such approved 
changes would be implemented. The legends would also include the file 
number of the approved proposed rule change and state that once 
implemented, the legends would automatically be removed from the MBSD 
Rules.
2. Statutory Basis
    As described above, FICC is proposing to include a new section in 
the MBSD Rules that would describe the key components of MBSD's stress 
testing program. This new section would include FICC's proposal to 
utilize (x) Historical Data in the development of historical scenarios 
and (y) Historical Data and Security-Level Data in the calculation of 
stress profits and losses. In addition, the section would include 
FICC's proposal to implement a back-up calculation that it would use in 
the event the vendor fails to provide data. FICC believes that the 
proposed changes are consistent with the requirements of the Act and 
the rules and regulations

[[Page 52391]]

thereunder applicable to a registered clearing agency. In particular, 
FICC believes that the proposed changes are consistent with Section 
17A(b)(3)(F) of the Act,\28\ and Rule 17Ad-22(e)(4) under the Act,\29\ 
for the reasons described below.
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    \28\ 15 U.S.C. 78q-1(b)(3)(F).
    \29\ 17 CFR 240.17Ad-22(e)(4).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and 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.\30\ As described above, the proposal would reflect the 
manner in which FICC has developed and carries out a credit risk 
management strategy to maintain sufficient prefunded financial 
resources to cover fully FICC's credit exposures to each Clearing 
Member with a high degree of confidence, and further, to maintain 
additional prefunded financial resources at a minimum to enable it to 
cover a wide range of foreseeable stress scenarios that include, but 
are not limited to extreme but plausible market conditions. As such, 
FICC's credit risk management strategy addresses its credit exposures 
and gives FICC the ability to continue the prompt and accurate 
clearance and settlement of securities and assure the safeguarding of 
securities and funds which are in FICC's custody or control or for 
which it is responsible notwithstanding those risks. Therefore, FICC 
believes that the proposed new section of the MBSD Rules, which 
describes how FICC carries out this strategy, is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\31\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ Id.
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    The proposal is designed to be consistent with Rule 17Ad-22(e)(4) 
under the Act, which requires, in part, that a covered clearing agency 
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 
arising from its payment, clearing, and settlement processes.\32\ Rule 
17Ad-22(e)(4)(i) under the Act requires that a covered clearing agency 
maintain sufficient financial resources to cover its credit exposure to 
each participant fully with a high degree of confidence.\33\ The 
proposal is consistent with Rule 17Ad-22(e)(4)(i) because it describes 
how FICC has developed and carries out a credit risk management 
strategy to maintain sufficient prefunded financial resources to cover 
fully FICC's credit exposures to each Clearing Member with a high 
degree of confidence.
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    \32\ 17 CFR 240.17Ad-22(e)(4).
    \33\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described above, FICC believes that the proposal to include the 
three key components of MBSD's stress testing program and a back-up 
calculation in the MBSD Rules would reflect the manner in which FICC 
has developed and carries out a credit risk management strategy to 
maintain sufficient prefunded financial resources to cover fully its 
credit exposures to each Clearing Member with a high degree of 
confidence, and further, to maintain additional prefunded financial 
resources at a minimum to enable FICC to cover a wide range of 
foreseeable stress scenarios that include, but are not limited to, 
extreme but plausible market conditions. FICC believes that the 
proposal to utilize Historical Data in the development of historical 
stress scenarios would incorporate a broad range of risk factors that 
enables MBSD's model to better understand a Clearing Member's exposure 
to these risk factors. FICC also believes that the proposal to utilize 
Historical Data and Security-Level Data in the calculation of stress 
profits and losses for Clearing Members' portfolios would provide for 
calculated amounts that are closer to actual price changes for TBA 
securities during larger market moves in an effort to test the adequacy 
of MBSD's prefunded resources. Lastly, FICC believes that the proposal 
to use a back-up calculation would help to ensure that FICC has a 
methodology in place that allows it to continue to measure the adequacy 
of MBSD's prefunded financial resources in the event that the vendor 
fails to provide data. For these reason, FICC believes that the 
proposed changes would improve MBSD's stress testing program, which is 
used to test the sufficiency of MBSD's prefunded resources daily to 
support compliance with Rule 17Ad-22(e)(4)(i). As such, FICC believes 
that, taken together, the proposed changes are designed to be 
consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the 
Act.\34\
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    \34\ Id.
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    Rule 17Ad-22(e)(4)(vi)(A) under the Act requires that a covered 
clearing agency conduct stress testing of its total financial resources 
once each day using standard predetermined parameters and 
assumptions.\35\ FICC believes that the proposal to (1) include the 
three key components of MBSD's stress testing program in the MBSD 
Rules, (2) utilize Historical Data in the historical scenario 
development process, (3) utilize Security-Level Data and Historical 
Data in the calculation of stress profits and losses for Clearing 
Members' portfolios, and (4) implement a back-up calculation in the 
event the vendor fails to provide data would reflect standard 
predetermined parameters and assumptions that FICC would use in MBSD's 
stress testing program to conduct daily stress testing.
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    \35\ 17 CFR 240.17Ad-22(e)(4)(vi)(A). The Framework identifies 
the sources of MBSD's prefunded resources for purposes of meeting 
FICC's requirements under Rule 17Ad-22(e)(4)(iii).
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    FICC believes that the proposal would reflect its use of standard 
predetermined parameters and assumptions in FICC's daily stress testing 
of its financial resources in order to support compliance with Rule 
17Ad-22(e)(4)(vi)(A) under the Act.\36\ As such, FICC believes that, 
taken together, the provisions as reflected in the proposed new section 
of the MBSD Rules are designed to be consistent with the requirements 
of Rule 17Ad-22(e)(4)(vi)(A) under the Act.\37\
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    \36\ Id.
    \37\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposal would have any impact, or 
impose any burden, on competition because the proposal does not affect 
the respective rights or obligations of Members that utilize MBSD's 
services.

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

    FICC has not received or solicited any written comments relating to 
this proposal. 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.

[[Page 52392]]

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-2020-010 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-2020-010. 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-2020-010 and should be submitted on 
or before September 15, 2020.
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    \38\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18560 Filed 8-24-20; 8:45 am]
BILLING CODE 8011-01-P


