[Federal Register Volume 87, Number 79 (Monday, April 25, 2022)]
[Notices]
[Pages 24369-24382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-08677]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94745; File No. SR-FICC-2022-002]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Revise the MBSD Clearing 
Rules To Move Certain DRC Items (Mark-to-Market Items, Cash Obligation 
Items and Accrued Principal and Interest) From the Required Fund 
Deposit Calculation to Cash Settlement, Revise Certain Thresholds and 
Parameters in the Intraday Mark-to-Market Charge, Establish a New 
Intraday VaR Charge and Make Certain Other Clarifications

April 19, 2022.
    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 April 8, 2022, 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

    FICC is proposing to amend the Mortgage-Backed Securities Division 
(``MBSD'') Clearing Rules (``MBSD Rules'') \3\ to (1)(a) delete the 
Deterministic Risk Component (``DRC'') from the Required Fund Deposit 
calculation, (b) move certain items currently in the DRC (Mark-to-
Market items, cash obligation items and accrued principal and interest) 
to Cash Settlement and (c) retain the six days' interest for Fails item 
currently in the DRC calculation as a separate part of the Required 
Fund Deposit, (2) revise the definition of Intraday Mark-to Market 
Charge to reflect the movement of the DRC items to Cash Settlement and 
to revise certain thresholds and parameters, (3) establish a new 
intraday VaR Charge and (4) make other clarifying changes in the MBSD 
Rules, as described in more detail below.
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    \3\ Capitalized terms not otherwise defined herein are defined 
in the MBSD Rules, as applicable, available at http://www.dtcc.com/legal/rules-and-procedures.
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    The proposal would also make certain conforming changes to the 
Methodology and Model Operations Document--MBSD Quantitative Risk Model 
(the ``QRM Methodology'') in order to implement the proposed changes to 
the MBSD Rules, which changes are attached hereto [sic] as Exhibit 5B, 
as described in greater detail below.\4\
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    \4\ Because FICC requested confidential treatment, the QRM 
Methodology was filed separately with the Secretary of the U.S. 
Securities and Exchange Commission (``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 Securities Exchange Act of 1934, as amended 
(``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). The QRM Methodology has been amended 
following the VaR Filing Approval Order. See Securities Exchange Act 
Release Nos. 85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-
FICC-2019-001), 90182 (October 14, 2020) 85 FR 66630 (October 20, 
2020) (SR-FICC-2020-009) and 92303 (June 30, 2021) 86 FR 35854 (July 
7, 2021) (SR-FICC-2020-017).
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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
    As described in greater detail below, FICC is proposing changes to 
the MBSD Rules that would move mark-to-market components from Clearing 
Members' Required Fund Deposits to Cash Settlement. While the proposed 
change would impact, in some cases, the form of Clearing Members' 
payments with respect to these obligations, a study described in 
greater detail below indicated that the impact to Clearing Members with 
debit balances would not be material as compared to their total 
Clearing Fund obligations.
    In connection with this proposed change, the proposal would also 
make conforming changes to the definition of ``Intraday Mark-to-Market 
Charge'' and would clarify the MBSD Rules regarding the thresholds and 
parameters used in collecting this charge. An impact study based on the 
hypothetical assumption that MBSD would reduce the thresholds to the 
proposed floors, as described in greater detail below, indicated the 
proposal could increase total average Intraday Mark-to-Market Charges 
collected by FICC by an amount that represented approximately 2.8% of 
the total average Clearing Fund collected on those days.
    Finally, the proposal would provide greater transparency to 
Clearing Members by introducing a formal Intraday VaR Charge, which 
FICC currently collects as a special charge in certain market 
conditions. Again, a study conducted to approximate the impact of this 
proposed change indicated it could result in an increase in amounts 
collected by FICC, but that amount represented approximately less than 
0.1% of total average Clearing Fund collected on the study dates, as 
described in greater detail below.
    These proposed changes to the MBSD Rules are summarized below and 
described in greater detail in this filing:
    (1) Move Mark-to-Market related charges from the Required Fund 
Deposit calculation to Cash Settlement. FICC is proposing to move all 
of the mark-to-market components currently in the DRC (except for six 
days' interest for Fails) \5\ to Cash Settlement. FICC proposes to 
accomplish this by deleting the DRC from the Required Fund Deposit 
calculation and moving certain DRC items (Mark-to-Market items, cash

[[Page 24370]]

obligation items and accrued principal and interest) to Cash 
Settlement. One item that FICC currently includes in the DRC 
calculations is six days' interest for Fails \6\ which will be added 
directly to the Required Fund Deposit calculation and not moved to Cash 
Settlement.
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    \5\ A Fail is a Transaction the clearing of which has not 
occurred or has not been reported to FICC as having occurred on the 
Contractual Settlement Date, or expiration date, as applicable. See 
definition of ``Fail'' in MBSD Rule 1, supra note 3.
    \6\ In addition to interest that has accrued with respect to a 
Fails position in Clearing Member's portfolio, FICC also collects an 
additional six days of interest that has not yet accrued from the 
seller of any Fail because FICC assumes it could take three days to 
close out the position if the Clearing Member fails and the pool 
allocation process could take an additional three days.
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    While these changes would impact how Clearing Members pay those 
amounts (i.e., through Cash Settlement rather than as part of the 
Required Fund Deposit), these changes would not affect the manner in 
which these items are calculated or the amounts that Clearing Members 
are paying with respect to these items. All of the items that are being 
moved to Cash Settlement would be required to be settled in cash. 
Therefore, the proposed change would require that Clearing Members 
satisfy their DRC obligations in cash as part of Cash Settlement, 
rather than through a mix of cash and Eligible Clearing Fund Securities 
as is permitted to satisfy Required Fund Deposit obligations.
    FICC is proposing these changes in order to more closely align 
FICC's collections to industry practice, in response to regulatory 
feedback on its margin methodologies and to ensure the unrealized gains 
from mark-to-market changes do not leave the Required Fund Deposit 
insufficient to cover future exposure.
    (2) Revise the Intraday Mark-to-Market Charge Definition to reflect 
movement of Mark-to-Market charges to Cash Settlement and to revise 
thresholds and parameters. FICC is proposing to modify the definition 
of ``Intraday Mark-to-Market Charge'' to reflect the proposed movement 
of the Mark-to-Market items and related items to Cash Settlement. In 
addition, FICC is proposing to remove the specific amounts listed for 
the dollar threshold and the percentage threshold and instead put 
floors in for the dollar threshold and percentage threshold. FICC is 
also proposing to remove the backtesting coverage target parameter. As 
discussed below, FICC currently has the ability to waive such 
thresholds and parameter under certain circumstances under the MBSD 
Rules which it does from time to time. However, FICC's current practice 
is to waive or adjust these thresholds and parameter in volatile market 
conditions, as permitted by the MBSD Rules. Therefore, these proposed 
changes to the Intraday Mark-to-Market Charge definition would align 
the MBSD Rules with FICC's current practice in certain circumstances 
and provide Clearing Members with greater transparency and certainty 
regarding the application of this charge outside of those 
circumstances. While FICC would have the authority to take this charge 
more frequently under the proposal, subject to the floors to the 
thresholds, neither the current calculation methodology nor the key 
components of the Intraday Mark-to-Market Charge would change.
    FICC would also remove the provision allowing FICC to collect an 
Intraday Mark-to-Market Charge under certain circumstances where a 
Clearing Member meets a certain Surveillance Threshold that is set by a 
Clearing Member's rating on the Credit Risk Rating Matrix. FICC 
currently does not apply that provision and does not intend to apply 
that provision in the future.
    FICC believes that the proposed changes to the thresholds and 
parameters are consistent with its current practices with respect to 
these thresholds and parameters as provided in the MBSD Rules and would 
not have a substantial impact on Clearing Members. FICC is transparent 
with Clearing Members when it sets and waives thresholds and parameters 
and would continue to notify Clearing Members through publication of 
Important Notices on its website of the current thresholds and 
parameters it is using and of any changes to those thresholds and 
parameters.\7\ FICC would also continue to provide access to reports 
and calculator tools to allow Clearing Members to determine impacts of 
certain activity on their Required Fund Deposit amounts.\8\
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    \7\ Important Notices are available at https://www.dtcc.com/legal/important-notices.
    \8\ For instance, FICC provides access to the FICC Risk Client 
Portal which is a Clearing Member accessible website portal that 
provides Clearing Members the ability, for information purposes, to 
view and analyze certain risks relating to their portfolio, 
including calculators to assess the risk and Clearing Fund impact of 
certain activities. FICC maintains the FICC Client Calculator 
available on the FICC Risk Client Portal that provides functionality 
to Clearing Members to enter `what-if' position data and recalculate 
their VaR charge to determine margin impact pre-trade execution. The 
FICC Client Calculator allows Clearing Members to see the impact to 
the VaR Charge if specific transactions are executed, or to 
anticipate the impact of an increase or decrease to a current 
clearing position.
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    FICC is proposing to change the thresholds and remove the 
backtesting coverage target parameter in order align the MBSD Rules 
with FICC's current practice and to provide FICC with greater 
flexibility to adjust the application of the Intraday-Mark-to-Market 
Charge to better respond to changing market conditions and other 
factors in connection with its regular reviews of its margining 
methodologies without having to rely on the waiver provisions. FICC is 
proposing to remove the provision relating to Surveillance Threshold 
because it is a provision that FICC does not currently use and does not 
think is necessary.
    (3) Establish a formal Intraday VaR Charge. FICC is proposing to 
establish a formal Intraday VaR Charge in the MBSD Rules. FICC 
currently monitors VaR intraday and periodically requires intraday VaR 
collections in the Required Fund Deposit under certain conditions 
described below as a special charge. The proposed Intraday VaR Charge 
would formalize a charge that FICC is currently collecting under its 
authority to collect a special charge. Similar to the proposed change 
to Intraday Mark-to-Market Charge parameters and thresholds, this 
proposed change would align the Rules with FICC's current practice and 
would provide Clearing Member's with greater transparency regarding 
this margin charge. However, the proposal would not implement 
substantive or material changes to the risk this charge is designed to 
mitigate or to the overall methodology or key components of the 
calculation of this charge. As discussed below, FICC is proposing to 
remove the discretion to apply the Intraday VaR Charge under certain 
circumstances compared to when it implements the special charge. As a 
result, the introduction of the Intraday VaR Charge would result in 
more consistent intraday VaR collections when compared to the current 
practice, on both Securities Industry and Financial Markets Association 
(``SIFMA'') designated settlement dates and non-SIFMA designated 
settlement dates.
    (4) Make certain clarifying changes. FICC is proposing to make 
certain clarifying changes to the MBSD Rules. Specifically, FICC would 
move certain definitions so that they are in alphabetical order, re-
letter certain subsections that follow to conform to the deletion of 
certain subsections and update certain cross-references to improve the 
readability of the MBSD Rules and to reflect other changes set forth 
herein. The proposed clarifying changes would not have any substantive 
effect on the Clearing Members because such changes are clarifications 
and will not affect the rights or obligations of FICC or the Clearing 
Members.
    FICC would also update the QRM Methodology to reflect the proposed 
changes to the MBSD Rules.

[[Page 24371]]

(i) Background
Required Fund Deposit/VaR Charge
    The Required Fund Deposit serves as each Clearing Member's margin. 
The objective of the Required Fund Deposit is to mitigate potential 
losses to FICC associated with liquidation of the Clearing Member's 
portfolio in the event that FICC ceases to act for a Clearing Member 
(hereinafter referred to as a ``default''). Pursuant to the MBSD Rules, 
each Clearing Member's Required Fund Deposit amount currently consists 
of the greater of (i) the Minimum Charge or (ii) the sum of the 
following components: The VaR Charge, the DRC, a special charge (to the 
extent determined to be appropriate),\9\ and, if applicable, the 
Backtesting Charge, Holiday Charge, Intraday Mark-to-Market Charge and 
the Margin Liquidity Adjustment Charge.\10\ Of these components, the 
VaR Charge typically comprises the largest portion of a Clearing 
Member's Required Fund Deposit amount.
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    \9\ In order to mitigate exposure from certain market conditions 
and other financial and operational capabilities of a Clearing 
Member, FICC may impose a special charge. For instance, as discussed 
below, in connection with its intraday VaR monitoring, FICC 
currently imposes a special charge if a Clearing Member has an 
intraday VaR increase exceeding 100% and $1 million.
    \10\ MBSD Rule 4 Section 2, supra, note 3.
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    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 VaR Charge provides an 
estimate of the projected liquidation losses at a 99% confidence level. 
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 
99% confidence level.\11\
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    \11\ 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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    The aggregate of all Clearing Members' Required Fund Deposits 
constitutes the Clearing Fund of MBSD, which FICC would be able to 
access in the event a defaulting Clearing Member's own Required Fund 
Deposit is insufficient to satisfy losses to FICC caused by the 
liquidation of that Clearing Member's portfolio.
(ii) Proposed Changes
(a) Proposal To Delete the DRC, Move Certain DRC Items (the Mark-to-
Market Items, Cash Obligation Items, and the Accrued Principal and 
Interest) to Cash Settlement and Retain Six Days' Interest for Fails in 
the Required Fund Deposit Calculation
Mark-to-Market--DRC
    MBSD calculates the full suite of components that comprise the 
Required Fund Deposit \12\ and imposes the Required Fund Deposit once 
per day, at the start of the day, based on a Clearing Member's prior 
end-of-day positions. One of the components of the daily Required Fund 
Deposit is a start-of-day Mark-to-Market component,\13\ which is 
designed to mitigate the risk arising out of the value change between 
the contract/settlement value of a Clearing Member's open positions and 
the market value at the end of the prior day. Currently, MBSD's Mark-
to-Market items, cash obligation items, and accrued principal and 
interest are included as the DRC in a Clearing Member's Required Fund 
Deposit calculation.\14\ When the DRC is calculated, a debit or credit 
is added to the Required Fund Deposit amount of each Clearing Member 
raising the amount or lowering the amount, respectively.
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    \12\ Section 2 of MBSD Rule 4 set forth each component of the 
Required Fund Deposit. MBSD Rule 4 Section 2, supra, note 3.
    \13\ MBSD Rule 4 Section 2(a), supra, note 3.
    \14\ MBSD Rules 4, Section 2(c)(ii), supra note 3. See also 
definition of ``Deterministic Risk Component'' in MBSD Rule 1, supra 
note 3.
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Move Mark-to-Market, Cash Obligation Items and Accrued Principal and 
Interest to Cash Settlement
    The DRC is designed to bring a Clearing Member's portfolio of open 
positions to market value. This charge is calculated as (i) the Mark-
to-Market Debit; minus (ii) the Mark-to-Market Credit; plus (iii) a 
cash obligation item debit; minus (iv) a cash obligation item credit; 
plus or minus (v) accrued principal and interest.\15\ FICC also 
includes another parameter, six days' interest for Fails, in the DRC 
calculation which is not explicitly referenced in the DRC definition in 
the MBSD Rules and is discussed in more detail below. FICC is proposing 
to move the Mark-to-Market items, cash obligation items, and accrued 
principal and interest from the Required Fund Deposit calculation to 
the Cash Settlement process in order to more closely align to industry 
practices regarding the handling of mark-to-market, in response to 
regulatory feedback on its margin methodologies and to ensure the 
unrealized gains from mark-to-market changes do not leave the Required 
Fund Deposit insufficient to cover future exposure.\16\
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    \15\ Definition of ``Deterministic Risk Component'' in MBSD Rule 
1, supra note 3.
    \16\ The Basel Committee on Banking Supervision and the Board of 
the International Organization of Securities Commissions recognized 
that the exchange of mark-to-market gains/losses ``is a prudent risk 
management tool that limits the build-up of systemic risk''--
particularly for longer-dated transactions such as derivatives. See 
Basel Committee on Banking Supervision & Board of the International 
Organization of Securities Commissions, Margin Requirements for Non-
Centrally Cleared Derivatives, at page 7 (2015), available at 
https://www.bis.org/bcbs/publ/d317.pdf.
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    One cash obligation item that would be moved from DRC and the 
Required Fund Deposit calculation to Cash Settlement is the TBA 
Transaction Adjustment Payment. The TBA Transaction Adjustment Payment 
is the difference between the Settlement Price and the System Price at 
settlement of a TBA Transaction.\17\ In connection with each TBA 
Transaction, a Clearing Member pays a TBA Transaction Adjustment 
Payment at Cash Settlement.\18\ Currently, the TBA Transaction 
Adjustment Payment amount is calculated by FICC beginning three days 
prior to the settlement. The pre-settlement calculated TBA Transaction 
Adjustment Payment amount is included as a cash obligation item which 
is a component of the DRC and included in the Required Fund Deposit. 
The TBA Transaction Adjustment Payment amount is paid by Clearing 
Members into the Required Fund Deposit each day beginning two days 
prior to the settlement of the TBA Transaction and every day until Cash 
Settlement. FICC is proposing to move this cash obligation item to 
daily Cash Settlement and, as a result, pre-settlement TBA Transaction 
Adjustment Payment amounts will be paid by Clearing Members beginning 
two days prior to settlement of the TBA Transaction through Cash 
Settlement. As a result, the Clearing Member that is receiving the TBA 
Transaction Adjustment Payment credits prior to settlement of the TBA 
Transaction will pay the amount of overnight interest on those funds 
through Cash Settlement which interest amount will then be credited to 
the Clearing Member that paid the TBA Transaction Adjustment Payment 
amount. This overnight interest will be added as a Cash Settlement item 
in the MBSD Rules.
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    \17\ Definition of ``TBA Transaction Adjustment Payment'' in 
MBSD Rule 1, supra note 3.
    \18\ MBSD Rule 11, Section 1 and Section 7(a), supra note 3.

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[[Page 24372]]

    In order to move the Mark-to-Market items, cash obligation items, 
and accrued principal and interest from the DRC to the Cash Settlement 
process, FICC would change the calculation of Cash Settlement to 
include amounts for the following: (i) Amounts of pre-settlement TBA 
Transaction Adjustment Payments, (ii) the return of the pre-settlement 
TBA Transaction Adjustment Payments, (iii) accrued overnight interest 
in connection with pre-settlement TBA Transaction Adjustment Payments, 
(iv) Mark-to-Markets, (v) accrued principal and interest payments 
required for any Fail, (vi) the return of Mark-to-Market for each 
Transaction, and principal and interest related payments for each Fail 
that was collected or paid during the prior Cash Settlement Amount, and 
(vii) accrued overnight interest in connection with Mark-to-Markets.
    As a result of this change, a Clearing Member's Cash Settlement 
amount would be calculated to include such Clearing Member's pre-
settlement TBA Transaction Adjustment Payment items, Mark-to-Market 
items, cash obligation items, and accrued principal and interest. The 
Cash Settlement amount would be a cash-only event that is collected or 
paid (as applicable) by the payment deadlines established by FICC. FICC 
currently processes MBSD cash settlement debits at 10 a.m. EST daily 
and cash settlement credits at 2:45 p.m. EST daily.\19\
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    \19\ The schedule of cash settlement for MBSD is posted on its 
website at http://www.dtcc.com. See MBSD Rule 11, Section 9(f), 
supra note 3.
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Six Days' Interest for Fails
    Currently, in addition to interest on Fails that has accrued with 
respect to any Fails position, the DRC calculation also includes an 
additional amount equal to six days' interest that has not yet accrued 
for a sell position of a Fail. This parameter is not in the MBSD Rules. 
It is reflective of FICC's current practice and it is designed to 
account for the risk that if a Clearing Member with a net sell position 
defaults, FICC would make appropriate principal and interest payments 
on an allocated pool that settles past record date, in addition to the 
delivery of the related securities to the non-defaulting Clearing 
Member with the corresponding buy position. FICC collects an additional 
six days of interest from the seller of any Fail because FICC assumes 
it could take three days to close out the position and the pool 
allocation process could take an additional three days.
    Although FICC is proposing to move three of the items of the DRC 
from the Required Fund Deposit calculation to MBSD's Cash Settlement 
process as discussed above, FICC would continue to include the six 
days' interest for Fails as a component in the Required Fund Deposit 
calculation. FICC is proposing to keep the six days' interest for Fails 
in the Required Fund Deposit calculation because this amount would not 
have accrued but would continue to mitigate additional interest that 
may accrue in the event that FICC must close out the position in the 
event of a Clearing Member default. Therefore, the six days' interest 
for Fails would remain in the Required Fund Deposit calculation and 
would be formally added in the MBSD Rules.
(b) Proposal To Revise the Definition of Intraday Mark-to-Market Charge
Intraday Mark-to-Market Charge
    Another component of the daily Required Fund Deposit is the 
Intraday Mark-to-Market Charge. During each trading day, the exposure a 
Clearing Member's position presents to FICC may change due to the 
settlement of existing transactions and new trade activities and as the 
value of the Clearing Member's portfolio changes due to market 
influences. The DRC is intended to cover FICC's exposure to a Clearing 
Member that is due to market moves and/or trading and settlement 
activity by bringing the portfolio of outstanding positions up to the 
market value at the end of the prior day. However, because the DRC is 
calculated only once daily using the prior end-of-day positions and 
prices, it does not mitigate FICC's exposure arising out of intraday 
changes to a Clearing Member's positions and to the market value of the 
Clearing Member's portfolio that result in an adverse change to the 
Clearing Member's Mark-to-Market. FICC manages this intraday risk 
exposure by observing hourly snapshots of Clearing Members' portfolios 
from 9:00 a.m. EST to 4:00 p.m. EST and monitoring intraday changes to 
each Clearing Member's Mark-to-Market. FICC may then collect an 
Intraday Mark-to-Market Charge from Clearing Members to cover 
significant risk exposures that warrant the collection of intraday 
margin pursuant to the MBSD Rules.
    FICC currently calculates the Intraday Mark-to-Market Charge by 
tracking three criteria (each, a ``Parameter Break'') for each Clearing 
Member.\20\ The Parameter Breaks help FICC determine whether a Clearing 
Member's Mark-to-Market exposure poses a risk to FICC that is 
significant enough to warrant an Intraday Mark-to-Market Charge. The 
objective of the Parameter Breaks is to ensure that FICC is able to 
limit exposure to intraday Mark-to-Market fluctuations that (a) are of 
a large dollar amount (the ``Dollar Threshold''), (b) exhaust a 
significant portion of a Clearing Member's VaR Charge (the ``Percentage 
Threshold'') and (c) are experienced by Clearing Members with 
backtesting deficiencies that bring backtesting results for that 
Clearing Member below the 99 percent confidence target (the ``Coverage 
Target''), indicating that a Clearing Member's activity was not 
sufficiently covered by margin.\21\
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    \20\ See definition of ``Intraday Mark-to-Market Charge'' in 
MBSD Rule 1, supra note 3. See also Securities Exchange Release No. 
80253 (March 15, 2017), 82 FR 14581 (March 21, 2017) (SR-FICC-2017-
004) (codifying FICC's practices with respect to the assessment and 
collection of the intraday Mark-to-Market charge in the MBSD Rules 
and describing the Intraday Mark-to-Market Charge) (``Intraday Mark-
to-Market Charge Filing'').
    \21\ Id.
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    FICC's current practice is to review intraday snapshots of each 
Clearing Member's portfolios to determine whether the Clearing Member 
has experienced a change in its Mark-to-Market exposure that warrants 
FICC assessing an Intraday Mark-to-Market Charge. More specifically, if 
a Clearing Member's Mark-to-Market exposure breaches all three 
Parameter Breaks, the Clearing Member will be subject to the Intraday 
Mark-to-Market Charge and FICC will collect the charge subject to 
waivers or changes to the amount of the calculated charge, as described 
below. However, where FICC determines that certain market conditions 
exist, including but not limited to (i) sudden swings in an equity 
index in either direction that exceed certain threshold amounts 
determined by FICC and (ii) moves in U.S. Treasury yields and mortgage-
backed security spreads outside of historically observed market moves, 
FICC does not require that the Coverage Target be breached and FICC may 
reduce the Dollar Threshold and the Percentage Threshold if FICC 
determines that such reduction is appropriate in order to accelerate 
collection of anticipated additional margin from Clearing Members whose 
portfolios may present relatively greater risks to FICC on an overnight 
basis. Any such reduction would not cause the Dollar Threshold to be 
less than $250,000 and the Percentage Threshold to be less than 5 
percent.\22\
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    \22\ See Section (b) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
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    Irrespective of market conditions, FICC retains the discretion to 
impose the Intraday Mark-to-Market Charge on

[[Page 24373]]

Clearing Members that (i) are approaching but have not yet breached the 
Percentage Threshold (but are at 20 percent or greater of the daily VaR 
Charge) and (ii) have a Mark-to-Market exposure that exceeds a certain 
dollar amount (``Surveillance Threshold'') that is set by FICC per 
Clearing Member based on the Clearing Member's internal Credit Risk 
Rating Matrix (``CRRM'') rating and/or the Clearing Member's Watch List 
status, if the Corporation determines that the size of such Clearing 
Member's Mark-to-Market change exposes the Corporation to increased 
risk (``Surveillance Threshold Provision'').\23\
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    \23\ See Section (c) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
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    Although FICC generally collects the Intraday Mark-to-Market Charge 
under the conditions described above, FICC retains the discretion to 
waive or alter such Intraday Mark-to-Market Charge in circumstances 
where it determines that the Mark-to-Market exposure and/or the 
breaches of the Parameter Breaks do not accurately reflect FICC's risk 
exposure to the Clearing Member's intraday Mark-to-Market fluctuation 
(e.g., Mark-to-Market fluctuation arising from trade error).\24\ Based 
on FICC's assessment of the impact of these circumstances and FICC's 
actual risk exposure to a Clearing Member, FICC may, in its discretion, 
waive or alter (decrease or increase) an Intraday Mark-to-Market Charge 
for a Clearing Member. Given the variability of the factors that result 
in breaches of the Parameter Breaks, FICC believes that it is important 
to maintain such discretion in order to limit the imposition of the 
Intraday Mark-to-Market Charge to those Clearing Members with Mark-to-
Market exposures that pose a significant level of risk to FICC. The 
MBSD Rules provide that such Intraday Mark-to-Market Charge as a result 
of this waiver provision would not reduce a Clearing Member's Required 
Fund Deposit below the amount reported at the start of day and any 
increase to the Intraday Mark-to-Market Charge would not cause the 
Intraday Mark-to-Market Charge to be greater than two times its 
calculated amount.\25\
---------------------------------------------------------------------------

    \24\ See Section (d) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
    \25\ Id.
---------------------------------------------------------------------------

Revise the Intraday Mark-to-Market Charge To Reflect Movement of Mark-
to-Market Items to Cash Settlement and To Revise Thresholds and 
Parameters
    FICC is proposing to revise the definition of Intraday Mark-to-
Market Charge in order to reflect the movement of the Mark-to-Market 
items to Cash Settlement from the Required Fund Deposit. FICC is also 
proposing to revise the Dollar Threshold and the Percentage Threshold 
to remove the specific threshold amounts currently listed and provide a 
floor amount for each. In addition, FICC is proposing to remove the 
Coverage Target from the definition.
    FICC is proposing each of these changes to provide it with greater 
flexibility to change the thresholds that apply to the Intraday Mark-
to-Market Charge. Although the definition currently provides FICC the 
ability to (i) change the Dollar Threshold and the Percentage Threshold 
and not consider the Coverage Target if certain market conditions 
occur,\26\ (ii) collect an Intraday Mark-to-Market Charge from a 
Clearing Member if it has not breached the Percentage Threshold but 
exceeds a certain dollar threshold based on the Clearing Member's CRRM 
rating \27\ and (iii) waive or alter the imposition of the Intraday 
Mark-to-Market Charge under certain circumstances,\28\ FICC would like 
the ability to change the default thresholds that apply from time to 
time (subject to a floor) rather than rely on the set percentages 
because it believes that this would allow FICC to more quickly adapt to 
changing market conditions and more accurately reflects FICC's current 
application of the Dollar Threshold and Percentage Threshold.
---------------------------------------------------------------------------

    \26\ See Section (b) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
    \27\ See Section (c) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
    \28\ See Section (d) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
---------------------------------------------------------------------------

    In addition, FICC's current practice is to waive or adjust the 
Dollar Threshold and parameter in volatile market conditions, as 
permitted by the MBSD Rules. Therefore, these proposed changes to the 
Intraday Mark-to-Market Charge definition would align the MBSD Rules 
with FICC's current practice in certain circumstances and provide 
Clearing Members with greater transparency and certainty regarding the 
application of this charge outside of those circumstances. While FICC 
would have the authority to take this charge more frequently under the 
proposed changes, subject to the threshold floors, neither the current 
calculation methodology nor the key components of the Intraday Mark-to-
Market Charge would change.
    FICC has relied on the waiver provisions in the definition and 
reduced the thresholds from time to time on a case-by-case basis. FICC 
believes that removing the set percentages and providing a floor of not 
less than $1,000,000 for the Dollar Threshold and not less than 10 
percent of the daily VaR Charge for the Percentage Threshold, would 
align the MBSD Rules with FICC's current practice in certain 
circumstances and give Clearing Members a better understanding of the 
default thresholds that FICC is using to determine whether to apply the 
Intraday Mark-to-Market Charge. FICC is transparent with Clearing 
Members when it sets and waives thresholds and parameters and would 
continue to notify Clearing Members of the current thresholds and 
parameters it is using and of any changes to those thresholds and 
parameters. FICC would also continue to provide reports and tools to 
allow Clearing Members to determine impacts of certain activity on 
their Required Fund Deposit amounts.
    FICC would notify Clearing Members by important notice of the 
Dollar Threshold and Percentage Threshold that it would be applying and 
upon changes to those thresholds. Changes to such parameters and 
thresholds would be subject to FICC's model risk management governance 
procedures set forth in the Clearing Agency Model Risk Management 
Framework which include daily backtesting of model performance, 
periodic sensitivity analyses of models and annual validation of models 
(``Model Risk Management Framework'').\29\ Initially, upon 
implementation of the proposed changes, FICC would continue to use the 
same Dollar Threshold ($1,000,000) and the same Percentage Threshold 
(30%) that it is currently using in determining whether to apply the 
Intraday Mark-to-Market Charge.
---------------------------------------------------------------------------

    \29\ 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); Securities Exchange Act Release No. 84458 
(October 19, 2018), 83 FR 53925 (October 25, 2018) (SR-DTC-2018-009; 
SR-FICC-2018-010; SR-NSCC-2018-009); Securities Exchange Act Release 
No. 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-DTC-2020-
008; SR-FICC-2020-004; SR-NSCC-2020-008); Securities Exchange Act 
Release No. 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (SR-
FICC-2021-006); Securities Exchange Release No. 94271 (February 17, 
2022), 87 FR 10411 (February, 24 2022) (SR-FICC-2022-001).
---------------------------------------------------------------------------

Remove the Coverage Target
    FICC is also proposing to remove the Coverage Target from the 
definition because it believes that it is not necessary with the other 
Parameter Breaks. In addition, in volatile market conditions an 
Intraday Mark-to-Market Charge may be appropriate even if a Clearing 
Member is meeting the

[[Page 24374]]

established Coverage Target. This concept is already reflected in 
Section (b) of the definition of Intraday Mark-to-Market Charge \30\ 
which provides FICC the ability to not consider the Coverage Target. 
FICC has relied on the waiver provisions in the definition and not 
considered the Coverage Target on a case-by-case basis. FICC believes 
that removing the Coverage Target would align the MBSD Rules with 
FICC's current practice and also provide greater transparency into 
FICC's application of the Intraday Mark-to-Market Charge rather than 
relying on the waiver provision in Section (b) on a case-by-case basis 
giving Clearing Members a better understanding of the default 
thresholds that FICC is using to determine whether to apply the 
Intraday Mark-to-Market Charge.
---------------------------------------------------------------------------

    \30\ See Section (b) of the definition of ``Intraday Mark-to-
Market Charge'' in MBSD Rule 1, supra note 3.
---------------------------------------------------------------------------

Remove the Surveillance Threshold Provision
    FICC is also proposing to remove the Surveillance Threshold 
Provision. The Surveillance Thresholds were intended as a tool to aid 
FICC in identifying Clearing Members whose Mark-to-Market exposures may 
necessitate the collection of an Intraday Mark-to-Market Charge.\31\ 
However, FICC does not currently apply the Surveillance Threshold 
Provision and does not intend to apply the Surveillance Threshold 
Provision in the future, Therefore, FICC believes that removing the 
provision would align the MBSD Rules with FICC's current practice.
---------------------------------------------------------------------------

    \31\ See Intraday Mark-to-Market Charge Filing supra note 20.
---------------------------------------------------------------------------

(c) Proposal To Introduce the Intraday VaR Charge
Intraday VaR Collections
    MBSD observes hourly snapshots from 8:00 a.m. EST to 4:00 p.m. EST 
of Clearing Members' portfolios to monitor large changes due to SIFMA 
TBA settlement activity. If a Clearing Member's portfolio has an 
intraday VaR Charge increase exceeding 100% and $1 million from the 
start-of-day VaR Charge, FICC may assess a special charge, typically on 
SIFMA designated settlement dates, and require the Clearing Member to 
make an intraday payment to the Required Fund Deposit. A Clearing 
Member may also be subject to an intraday VaR collection via a special 
charge on any non-SIFMA designated settlement date if the Clearing 
Member's portfolio has an intraday VaR Charge increase exceeding 100% 
and $1 million and it is deemed by FICC that the increase in VaR could 
lead to a backtesting deficiency or push a Clearing Member below 99% 
backtest coverage.
Establish Intraday VaR Charge
    FICC is proposing to amend the MBSD Rules to include a formal 
Intraday VaR Charge. More specifically, FICC is proposing to utilize 
its existing intraday monitoring to determine when the difference 
between a Clearing Member's (1) start of day VaR Charge, collected on 
that Business Day as part of the Clearing Member's start of day 
Required Fund Deposit based on that Clearing Member's prior end-of-day 
positions, and (2) a calculation of the VaR Charge based on that 
Clearing Member's adjusted intraday positions as of a point intraday 
between the collection of the start of day Required Fund Deposit and 
end of day settlement, exceeds a certain percentage or dollar 
amount.\32\ FICC has occasionally observed significant intraday changes 
to market price volatility and significant changes to the size and 
composition of Clearing Members' portfolios that could cause the amount 
collected as the VaR Charge at the start of that Business Day to no 
longer be sufficient to mitigate the volatility risks that such 
positions present to FICC. Therefore, FICC believes it is appropriate 
to implement an Intraday VaR Charge that, similar to the current 
Intraday Mark-to-Market Charge and the intraday VaR collections 
pursuant to the special charge, may be collected by FICC when certain 
thresholds are met.
---------------------------------------------------------------------------

    \32\ FICC would continue to monitor intraday volatility in 
increments throughout the day, and the calculation of the Intraday 
VaR Charge would be done at those intervals. Similar to the Intraday 
Mark-to-Market Charge, collections may occur multiple times 
throughout the day, as determined from time to time by FICC.
---------------------------------------------------------------------------

    The Intraday VaR Charge would be collected when (1) the start of 
day VaR Charge, collected on that Business Day as part of the Clearing 
Member's start of day Required Fund Deposit based on that Clearing 
Member's prior end-of-day positions, and (2) a calculation of the VaR 
Charge based on that Clearing Member's adjusted intraday positions as 
of a point intraday between the collection of the start of day Required 
Fund Deposit and end of day settlement, exceeds a certain percentage 
threshold and dollar amount. As with the current intraday VaR 
monitoring and collections through the special charge, the initial 
percentage threshold and dollar amount to be used by FICC would be 100% 
and $1 million. FICC could adjust the percentage amount and dollar 
threshold or other parameters from time to time as appropriate in order 
to continue to reflect a threshold that mitigates the volatility risks 
that such positions present to FICC. Changes to the Intraday VaR Charge 
thresholds would be subject to FICC's model risk management governance 
procedures set forth in the Model Risk Management Framework.\33\ FICC 
would update Clearing Members by important notice if the default 
thresholds or parameters for the Intraday VaR Charge are changed.
---------------------------------------------------------------------------

    \33\ See supra note 29.
---------------------------------------------------------------------------

    As discussed above, FICC currently may impose a special charge on 
non-SIFMA designated settlement dates if a Clearing Member's portfolio 
has an intraday VaR Charge increase exceeding 100% and $1 million and 
it is deemed by FICC that the increase in VaR could lead to a 
backtesting deficiency or push a Clearing Member below 99% backtest 
coverage. FICC would impose the Intraday Var Charge using the same 
methodology on SIFMA-designated settlement dates and non SIFMA-
designated settlement dates. As a result, FICC would begin charging the 
Intraday VaR Charge on both SIFMA designated settlement dates and non-
SIFMA designated settlement dates if the thresholds are crossed 
regardless of whether the increase in VaR could lead to a backtesting 
deficiency or push a Clearing Member below 99% backtest coverage.
    Portfolio compositions in MBSD can change materially between the 
day before settlement and the settlement date, when components of the 
portfolio settle. FICC has implemented an intraday market price risk 
surveillance process to monitor the change in market price risk 
associated with settlement risk. The portfolio that is currently 
margined intraday includes the actual settled positions and the 
intraday trades/positions that have been transacted, providing FICC 
with the accurate portfolio to margin and measure whether the Intraday 
VaR Charge should be applied.
(d) Proposed Clarifying Changes
    FICC is proposing to make certain clarifying changes to the MBSD 
Rules. Specifically, FICC would move certain definitions so that they 
are in alphabetical order, re-letter certain subsections that follow to 
conform to the deletion of certain subsections and update certain 
cross-references to reflect other changes set forth herein. The 
proposed clarifying changes would not have any substantive effect on 
the Clearing Members because such changes are clarifications and will 
not affect the

[[Page 24375]]

rights or obligations of FICC or the Clearing Members.
(iii) Detailed Description of the Proposed Changes to the MBSD Rules
(a) Proposed Changes to MBSD Rule 1 (Definitions)
    FICC is proposing to amend the definition of the term ``Aggregated 
Account'' to reflect that the Mark-to-Market requirements would be 
included in the calculation for the Cash Settlement obligations.
    FICC is proposing to delete the term ``Deterministic Risk 
Component'' because FICC would eliminate DRC from the Required Fund 
Deposit calculation as set forth in MBSD Rule 4 and move three items 
DRC to Cash Settlement, as described above.
    FICC is proposing to move the placement of the term ``Government 
Securities Division Funds-Only Settling Bank Member'' so that it 
appears in the correct alphabetical order.
    FICC is proposing to move the placement of the term ``Government 
Securities Issuer Clearing Member'' so that it appears in the correct 
alphabetical order.
    FICC is proposing to revise the term ``Intraday Mark-to-Market 
Charge'' to (i) reflect the movement of the DRC items to Cash 
Settlement, (ii) revise the Dollar Threshold to be a certain threshold 
dollar amount as determined by FICC from time to time subject to a 
$1,000,000 floor, (iii) revise the Percentage Threshold to be a certain 
threshold percentage as determined by FICC from time to time subject to 
a 10% floor, (iv) remove the Coverage Target, (v) remove the 
Surveillance Threshold Provision, as described above and (vi) re-letter 
and change certain cross-references to reflect the foregoing changes.
    FICC is proposing to add the new defined term ``Intraday VaR 
Charge''. This term would be defined as an additional charge that is 
collected from a Clearing Member if the difference of (i) a Clearing 
Member's VaR Charge collected pursuant to MBSD Rule 4 and (ii) such 
Clearing Member's intraday VaR calculations exceeds a certain 
percentage threshold and dollar amount determined by FICC from time to 
time based on its regular review of margining methodologies.
    FICC is proposing to add the following terms that would be referred 
to in MBSD Rule 11 which governs the Cash Settlement process in 
connection with the movement of the cash obligation items and accrued 
principal and interest of the DRC from the Required Fund Deposit 
calculation to Cash Settlement:
    ``Margin Transaction Adjustment Payment Return Interest''--This 
term would be defined as the overnight interest that accrued on the 
Margin Transaction Adjustment Payment for each Transaction that was 
collected or paid during the prior Cash Settlement.
    ``Margin Transaction Adjustment Payment Return''--This term would 
be defined as the return of Margin Transaction Adjustment Payment for 
each Transaction that was collected or paid during the prior Cash 
Settlement.
    ``Margin Transaction Adjustment Payment Return Interest''--This 
term would be defined as the overnight interest that accrued on the 
Margin Transaction Adjustment Payment for each Transaction that was 
collected or paid during the prior Cash Settlement.
    ``Mark Return''--This term would be defined as the return of Mark-
to-Market for each Transaction, and principal and interest related 
payments for each Fail that was collected or paid during the prior Cash 
Settlement.
    ``Mark Return Interest''--The term ``Mark Return Interest'' means 
the overnight interest that accrued on the Mark Return for each 
Transaction that was collected or paid during the prior Cash 
Settlement.
    FICC is proposing to amend the term ``Mark-to-Market'' to change 
the cross-reference from MBSD Rule 4 to MBSD Rule 11 because the Mark-
to-Market calculation would be moved to MBSD Rule 11 in connection with 
the movement of Mark-to-Market items of the DRC from the Required Fund 
Deposit calculation to Cash Settlement.
    FICC is proposing to delete the terms ``Mark-to-Market Credit'' and 
``Mark-to-Market Debit'' because those terms are only used in the 
definition of ``Deterministic Risk Component'' which FICC is proposing 
to delete in connection with the movement of DRC items the Required 
Fund Deposit calculation to Cash Settlement.
(b) Proposed Changes to MBSD Rule 4 (Clearing Fund and Loss Allocation)
Section 2 (Required Fund Deposit Requirements)
    FICC is proposing to amend this section as follows: (i) Move the 
Mark-to-Market calculation of profits and losses (as set forth in 
subsection (a)) to the Cash Settlement process (set forth in Section 7 
of MBSD Rule 11); (ii); re-letter the subsections that follow to 
conform to the deletion of subsection (a); (iii) update cross-
references; (iv) reflect that the definitions of Long Position and 
Short Position would now also be used in Rule 11 in connection with the 
movement of the Mark-to-Market calculation to Rule 11; (v) add, with 
respect to a Clearing Member that is a seller, an amount equal to six 
days interest for any Fail as a separate item in the Required Fund 
Deposit; (vi) add the Intraday VaR Charge as a separate line item of 
the Required Fund Deposit to reflect the introduction of the Intraday 
VaR Charge and (vii) capitalize ``Intraday VaR Charge'' in new proposed 
Section 2(e) to reflect the introduction of the Intraday VaR Charge.
Proposed New Section 3a (Calculation of Intraday VaR Charge and 
Intraday Mark-to-Market Charge)
    FICC is proposing to add this new Section 3a to provide it with the 
authority to collect an Intraday VaR Charge and the Intraday Mark-to-
Market Charge from Clearing Members as discussed above. In connection 
with this change, FICC would re-letter current Sections 3a (Special 
Provisions Relating to Deposits of Cash) and 3b (Special Provisions 
Relating to Deposits of Eligible Clearing Fund Securities) in order to 
conform to this proposed new Section 3a. The section would provide that 
pursuant to procedures established by the FICC, FICC would re-calculate 
intraday, each Business Day, at the times established by FICC for this 
purpose, the amount of the Intraday VaR Charge and the Intraday Mark-
to-Market Charge to each Clearing Member's margin portfolio based upon 
the open positions in such margin portfolio at a designated time 
intraday, for purposes of establishing whether a Clearing Member shall 
be required to make payment of an additional amount to its Required 
Fund Deposit. Such additional amounts would be deemed part of the 
Clearing Member's Required Fund Deposit for all purposes under the MBSD 
Rules.
    The section would provide that FICC would establish procedures for 
collection of an amount calculated in respect of a Clearing Member's 
Intraday VaR Charge and Intraday Mark-to-Market Charge, including 
parameters regarding threshold amounts that require payment, and the 
form and time by which payment is required to be made to FICC. 
Consistent with the application of the special charge, FICC would also 
reserve the right to require a Clearing Member or Clearing Members 
generally to make additional Intraday VaR Charges or Intraday Mark-to-
Market Charges if FICC determines it to be necessary to protect itself 
and its Clearing Members in response to factors such as market 
conditions or financial or operational capabilities affecting a 
Clearing Member or Clearing Members generally. The methodology for such

[[Page 24376]]

additional Intraday Var Charges or Intraday Market Charges would be 
subject to FICC's model risk management governance procedures set forth 
in the Model Risk Management Framework. \34\
---------------------------------------------------------------------------

    \34\ See supra note 29.
---------------------------------------------------------------------------

Section 5 (Use of Clearing Fund)
    FICC is proposing to replace the reference to ``Section 3a'' with 
``Section 3b'' in order to reflect the proposed renumbering of Section 
3a to 3b described above.
(c) Proposed Changes to MBSD Rule 11 (Cash Settlement)
Proposed New Section 7 (Mark-to-Market--Computation of Profits or Loss)
    FICC is proposing to move the Mark-to-Market calculation (as set 
forth in Section 2(a) of MBSD Rule 4) to proposed new Section 7 of MBSD 
Rule 11 to reflect the movement of Mark-to-Market to Cash Settlement, 
as described above. This proposed section would be further amended to 
state that on each Business Day, profits and/or losses would be 
computed by FICC and such amounts would be reflected on a Report made 
available to Clearing Members by FICC. The amount reflected would be 
either paid by FICC to the Clearing Member or paid by the Clearing 
Member to FICC.
Section 7 (Computation of Cash Balance for Each Account)
    FICC is proposing to re-number this current Section 7 as Section 8a 
to conform to the proposed changes to move the Mark-to-Market 
calculation to Section 7 in MBSD Rule 11.
    FICC is proposing to amend the Cash Balance calculation to include 
the positive and negative amounts of any (i) Margin Transaction 
Adjustment Payment, (ii) Margin Transaction Adjustment Payment Return, 
(iii) Margin Transaction Adjustment Payment Return Interest, (iv) Mark-
to-Market; (v) accrued principal and interest payments required for any 
Fail, (vi) Mark Return and (vii) Mark Return Interest. FICC is 
proposing to add these defined terms in connection with the movement of 
the cash obligation items and accrued principal and interest of the DRC 
from the Required Fund Deposit calculation to Cash Settlement. In 
connection with these changes, FICC would re-letter the remainder of 
the clauses listed in this section.
Section 8 (Netting of Cash Balances for Aggregated Accounts)
    FICC is proposing to re-number this current Section 8 as Section 8b 
to conform to the proposed changes to move the Mark-to-Market 
calculation to Section 7 in MBSD Rule 11.
(d) Proposed Change to the Section Entitled ``Interpretative Guidance 
With Respect to Watch List Consequences''
    FICC is proposing to amend subsection 1 (Additional Clearing Fund 
Deposits) of Section A (Clearing Fund-Related Consequences) to (i) 
update the reference to Section 2(a) of Rule 4 to Section 3a of Rule 4 
to reflect the new Section 3a; (ii) add a reference to the Intraday VaR 
Charge; (iii) change references of ``Surveillance Thresholds'' to 
``thresholds'' to reflect the removal of the Surveillance Threshold 
Provision and the definition of Surveillance Threshold and to reflect 
that the Intraday VaR Charge may be subject to certain thresholds that 
are not ``Surveillance Thresholds''; (iv) delete the statement that 
pursuant to Section 2(f) of MBSD Rule 4, the Corporation may subject a 
Clearing Member to an intraday VaR Charge if the Clearing Member is on 
the Watch List because such statement would be redundant following the 
proposed changes just described and (v) change cross references for 
subsections 2(c) of MBSD Rule 4 to 2(b) to conform to the proposed 
renumbering of subsection 2(c) of MBSD Rule 4.
(e) Proposed QRM Methodology Changes
    In connection with the proposed changes, FICC would modify the QRM 
Methodology to reflect the move of the DRC items from the Required Fund 
Deposit calculation to the MBSD Cash Settlement process and delete the 
concept of the DRC and to add the six days' interest for any Fail by a 
seller in the Required Fund Deposit calculation.
(iv) Impact on Clearing Members
    FICC conducted an impact study of the proposed changes based on 
data from July 1, 2020 to June 30, 2021 (``Impact Study''). The results 
of the Impact Study are described below.
(a) Proposed Movement of DRC Items to Cash Settlement
    FICC does not believe that the movement of the DRC items to Cash 
Settlement would have a substantial economic impact on Clearing Members 
because the amounts that are currently imposed on Clearing Members for 
the DRC items and included in their Required Fund Deposit amounts would 
not change. However, pursuant to this proposed change such amounts 
would be effectuated as a cash pass-through--meaning that, those 
Clearing Members that are in a net debit position would be obligated to 
submit payments that are then used to pay Clearing Members in a net 
credit position, and the calculated amounts would reflect the 
difference between the contract value of a trade and the current market 
value of the security in a Clearing Member's portfolio. The movement 
would require any debits as a result of such components to be paid in 
cash through Cash Settlement rather than increasing the Required Fund 
Deposit amount. Clearing Members currently may pay a portion of the 
Required Fund Deposit in Eligible Clearing Fund Securities.\35\ As a 
result of the proposed change to move the DRC items to Cash Settlement, 
Clearing Members would be required to fund any debits as a result of 
such items with cash, rather than through a mix of cash and Eligible 
Clearing Fund Securities as is permitted to satisfy Required Fund 
Deposit obligations.
---------------------------------------------------------------------------

    \35\ See MBSD Rule 4, supra note 3.
---------------------------------------------------------------------------

    FICC also believes that while the requirement to fund such 
adjustments with cash rather than Eligible Clearing Fund Securities may 
present some operational changes for Clearing Members, it does not 
believe such changes would have a substantial economic effect on such 
Clearing Members because the amounts that the Clearing Members are 
required to pay with respect to the DRC obligations would not change. 
Clearing Members would be paying the same amounts for the Mark-to-
Market components following the movement of such components to Cash 
Settlement. The only impact on Clearing Members would be that the 
Clearing Members would be paying such debits as part of Cash Settlement 
rather than as part of the Required Fund Deposit.
    Over the Impact Study period, 49 of the 102 Clearing Members had an 
overall average DRC debit balance.\36\ Of those 49 Clearing Members, on 
average, 26 Clearing Members funded their Required Fund Deposit with 
only cash. Therefore, based on the Impact Study period data, these 26 
Clearing Members would not have had to change the form of their payment 
whatsoever with respect to the DRC items if the proposed change to move 
these items to Cash Settlement had been in effect on those dates.
---------------------------------------------------------------------------

    \36\ The data reflected in the impact study reflects only the 
Clearing Members who had average DRC debits over the study period.
---------------------------------------------------------------------------

    Of the remaining 23 Clearing Members with an average DRC debit 
balance, taking into consideration the average ratio of cash and 
Eligible Clearing Fund Securities on deposit in

[[Page 24377]]

the Required Fund Deposit for such Clearing Members, the amount of the 
DRC debit balance that had been paid in Eligible Clearing Fund 
Securities that would need to be paid in cash totaled on average $191 
million in the aggregate for all such Clearing Members and 
approximately $8.3 million for each Clearing Member. These amounts 
represent approximately 1.4% of the total Clearing Fund collected on 
those dates and an average of 6.7% of those Clearing Members' Clearing 
Fund obligations.
(b) Changes To Revise the Intraday Mark-to-Market Charge
    FICC believes that the changes to revise the definition of the 
Intraday Mark-to-Market Charge to remove the specific thresholds and 
provide a floor for the Dollar Threshold and the Percentage Threshold 
and to remove the Coverage Target from the definition, as described 
above, would not have a substantial impact on Clearing Members. As 
discussed above, the MBSD Rules currently provide the ability to waive 
or adjust such provisions under certain conditions and FICC believes 
that providing more flexibility with respect to setting the default 
thresholds would provide more transparency to the Clearing Members.
    The proposal to remove the Coverage Target from the Intraday Mark-
to-Market calculation would have resulted in approximately 353 
additional Intraday Mark-to-Market Charges over the study period and 
such additional charges would have resulted in an average aggregate 
daily increase of total Intraday Mark-to-Market Charges collected by 
approximately $109,822,538. This amount represents approximately 0.8% 
of the total average Clearing Fund collected on those dates.
    While FICC does not intend to change the Dollar Threshold 
($1,000,000) or the Percentage Threshold (30%) that it is currently 
using upon implementation of the proposed changes, it has conducted an 
Impact Study of the results of the impact if it were to reduce the 
Percentage Threshold to the proposed 10% floor. As shown in the Impact 
Study from the period from July 1, 2020 to June 30, 2021, if FICC were 
to decrease the percentage threshold to 10% and remove the Coverage 
Target, the Intraday Mark-to-Market Charge would have resulted in 
approximately 2,522 additional Intraday Mark-to-Market Charges over 
that period, and such charges would have result in an average aggregate 
daily increase of total Intraday Mark-to-Market Charges collected by 
approximately $376,905,268. This amount represents approximately 2.8% 
of the total average Clearing Fund collected on those dates.
(c) Introduction of the Intraday VaR Charge
    The proposed Intraday VaR Charge would formalize a charge that FICC 
is currently collecting under its authority to collect a special 
charge. Similar to the proposed change to Intraday Mark-to-Market 
Charge parameters and thresholds, this proposed change would align the 
Rules with FICC's current practice and would provide Clearing Members 
with greater transparency regarding this margin charge. However, the 
proposal would not implement substantive or material changes to the 
risk this charge is designed to mitigate or to the overall methodology 
or key components of the calculation of this charge.
    As discussed above, FICC would begin charging the Intraday VaR 
Charge on both SIFMA designated settlement dates and non-SIFMA 
designated settlement dates if the thresholds are crossed regardless of 
whether the increase in VaR could lead to a backtesting deficiency or 
push a Clearing Member below 99% backtest coverage. As a result, the 
introduction of the Intraday VaR Charge would result in more consistent 
intraday VaR collections when compared to the current practice, on both 
SIFMA designated settlement dates and non-SIFMA designated settlement 
dates.
    The Impact Study showed the Intraday VaR Charge would have resulted 
in approximately 126 Intraday VaR Charges collected over the Impact 
Study period, and such charges would have been an average of 
$11,663,204, which represents less than 0.1% of the total average 
Clearing Fund collected on those dates. The Impact Study did not 
indicate that the introduction of the Intraday VaR would have an impact 
on any specific Clearing Member type or Clearing Members that held 
particular portfolios.
(d) Clarifying Changes
    The proposed clarifying changes would not have any substantive 
effect on the Clearing Members because such changes are clarifications 
and will not affect the rights or obligations of FICC or the Clearing 
Members.
(v) Implementation Timeframe
    FICC would implement the proposed changes no later than 60 Business 
Days after the approval of the proposed rule change by the Commission 
and would announce the effective date of the proposed changes by 
Important Notice posted to its website. As proposed, a legend would be 
added to MBSD Rule 1, MBSD Rule 4, MBSD Rule 11 and the Interpretive 
Guidance With Respect to Watchlist Consequences in the MBSD Rules 
stating that the changes would be effective no later than 60 Business 
Days after the approval of the proposed rule change by the Commission, 
that FICC would announce the effective date of the proposed changes by 
Important Notice posted to its website and that once this proposal is 
implemented the legend would automatically be removed.
2. Statutory Basis
    FICC believes that the proposed changes are consistent with the 
requirements of the Act and the rules and regulations 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,\37\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and 
(e)(6)(iii), each promulgated under the Act,\38\ for the reasons 
described below.
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78q-1(b)(3)(F).
    \38\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (iii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\39\ FICC believes the 
proposed changes are designed to assure the safeguarding of securities 
and funds which are in its custody or control or for which it is 
responsible because they are designed to enable FICC to better limit 
its exposure to Clearing Members in the event of a Clearing Member 
default, as described below. The proposal to move DRC items (Mark-to-
Market items, cash obligation items and accrued principal and interest) 
from the Required Fund Deposit calculation to the MBSD Cash Settlement 
process would more closely align FICC's mark-to-market process to 
industry practice and better segregate the unrealized gains or losses 
associated with a Clearing Member's margin portfolio from the portion 
of the margin that measures potential future exposure and limit the 
build-up of systemic risk. Currently, the Required Fund Deposit may be 
reduced by credits relating to unrealized mark-to-market gains. During 
the time between the last margin collection and the close out of a 
Clearing Member's position such gains may reduce without a 
corresponding increase in the Required Fund Deposit leaving the 
Required Fund Deposit insufficient to cover the future exposure. 
Therefore, FICC believes that

[[Page 24378]]

moving such mark-to-market items to a cash pass-through adjustment is 
consistent with Section 17A(b)(3)(F) of the Act.\40\ FICC believes that 
the changes to revise the definition of the Intraday Mark-to-Market 
Charge to (i) remove the specific thresholds and provide a floor for 
the Dollar Threshold and the Percentage Threshold and (ii) remove the 
Coverage Target from the definition, as described above, is designed to 
assure the safeguarding of securities and funds which are in its 
custody or control or for which it is responsible because the removal 
of the specific thresholds would provide the ability for FICC to adjust 
the Intraday Mark-to-Market Charge default thresholds more quickly and 
effectively in response to adverse changes in market conditions, 
consistent with Section 17A(b)(3)(F) of the Act.\41\
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78q-1(b)(3)(F).
    \40\ Id.
    \41\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    FICC believes the proposed change to implement an Intraday VaR 
Charge is designed to assure the safeguarding of securities and funds 
which are in its custody or control or for which it is responsible 
because it is designed to mitigate changes in volatility that could 
occur intraday and increase the risks to FICC related to liquidating a 
Clearing Member's portfolio following that Clearing Member's default. 
Specifically, the proposed Intraday VaR Charge would allow FICC to 
collect financial resources to cover its exposures that it may face due 
to increases in volatility that occur between collections of start-of-
day Required Fund Deposits.
    The Clearing Fund is a key tool that FICC uses to mitigate 
potential losses to FICC associated with liquidating a Clearing 
Member's portfolio in the event of Clearing Member default. The 
proposed Intraday VaR Charge would formalize a charge that FICC is 
currently collecting under its authority to collect a special charge. 
Similar to the proposed change to Intraday Mark-to-Market Charge 
parameters and thresholds, this proposed change would align the Rules 
with FICC's current practice and would provide Clearing Member's with 
greater transparency regarding this margin charge. While the proposed 
changes are not expected to materially change the overall methodology 
or key components of the calculation of this charge, the changes would 
result in more consistency in the application of this charge on SIFMA 
designated settlement dates and non-SIFMA designated settlement dates. 
As discussed above, FICC would begin charging the Intraday VaR Charge 
on both SIFMA designated settlement dates and non-SIFMA designated 
settlement dates if the thresholds are crossed regardless of whether 
the increase in VaR could lead to a backtesting deficiency or push a 
Clearing Member below 99% backtest coverage. As a result, the 
introduction of the Intraday VaR Charge would result in more consistent 
intraday VaR collections when compared to the current practice, on both 
SIFMA designated settlement dates and non-SIFMA designated settlement 
dates.
    Therefore, the proposed change to include an Intraday VaR Charge 
among the Clearing Fund components, when applicable, would enable FICC 
to better address any changes to market price volatility or the size of 
a Clearing Member's portfolio that occur intraday, such that, in the 
event of Clearing Member default, FICC's operations would not be 
disrupted, and non-defaulting Members would not be exposed to losses 
they cannot anticipate or control. In this way, the proposed change to 
implement the Intraday VaR Charge is designed to assure the 
safeguarding of securities and funds which are in the custody or 
control of FICC or for which it is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\42\
---------------------------------------------------------------------------

    \42\ Id.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act also requires, in part, that the 
rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\43\ FICC 
believes that the proposed changes to the Parameter Breaks for the 
Intraday Mark-to-Market Charge and removal of the Coverage Target and 
Surveillance Threshold Provision would provide greater transparency and 
improve Clearing Members' understanding of the application of the 
Intraday Market-to-Market Charge by providing that the default 
thresholds could be adjusted, subject to a floor, and providing that 
the Coverage Target would no longer be a Parameter Break and that the 
Surveillance Threshold Provision, which is not currently being applied 
by FICC, would no longer be applicable. FICC also believes that the 
proposal to introduce the Intraday VaR Charge, which would formalize 
the intraday VaR charge that FICC is currently collecting under its 
authority to collect a special charge, would also align the MBSD Rules 
to FICC's current practices and bring greater transparency to Clearing 
Members. In addition, FICC believes that the proposal to make certain 
clarifying changes in the MBSD Rules and the QRM Methodology are 
consistent with Section 17(A)(b)(3)(F) of the Act because such changes 
would enhance the clarity and transparency of the MBSD Rules. By 
enhancing the clarity and transparency of the MBSD Rules, the proposed 
changes would allow Clearing Members to more efficiently and 
effectively conduct their business in accordance with the MBSD Rules, 
which FICC believes would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\44\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1(b)(3)(F).
    \44\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act \45\ 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.
---------------------------------------------------------------------------

    \45\ See 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    FICC believes that the proposed changes to move the DRC items to 
Cash Settlement are consistent with Rule 17Ad-22(e)(4)(i) under the Act 
because the changes would help to ensure that FICC maintains sufficient 
financial resources to cover its credit exposure to each Clearing 
Member with a high degree of confidence by better segregating the 
unrealized gains or losses associated with a Clearing Member's margin 
portfolio from the portion of the margin that measures potential future 
exposure and by limiting the build-up of systemic risk. By better 
segregating the unrealized gains or losses from the Required Fund 
Deposit and moving the mark-to market adjustments to a cash-pass 
through adjustment, FICC believes that the proposed changes would help 
ensure that FICC maintains sufficient financial resources by 
calculating and collecting margin to cover its credit exposure to each 
Clearing Member with a high degree of confidence, consistent with Rule 
17Ad-22(e)(4)(i) under the Act.\46\
---------------------------------------------------------------------------

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

    FICC believes the proposed change to add the Intraday VaR Charge 
would enable it to better identify, measure, monitor, and, through the 
collection of Clearing Members' Required Fund Deposits, manage its 
credit exposures to Clearing Members by maintaining sufficient 
resources to cover those credit exposures fully with a high degree of 
confidence. Specifically, FICC believes that the proposed Intraday VaR 
Charge would effectively mitigate the risks

[[Page 24379]]

related to intraday increases in volatility and would address the 
increased risks FICC may face related to liquidating a Clearing 
Member's portfolio following that Clearing Member's default.
    The proposed Intraday VaR Charge would formalize a charge that FICC 
is currently collecting under its authority to collect a special 
charge. This proposed change would align the Rules with FICC's current 
practice and would provide Clearing Member's with greater transparency 
regarding this margin charge. While the proposed changes are not 
expected to materially change the overall methodology or key components 
of the calculation of this charge, the changes would result in more 
consistency in the application of this charge on SIFMA designated 
settlement dates and non-SIFMA designated settlement dates. As 
discussed above, FICC would begin charging the Intraday VaR Charge on 
both SIFMA designated settlement dates and non-SIFMA designated 
settlement dates if the thresholds are crossed regardless of whether 
the increase in VaR could lead to a backtesting deficiency or push a 
Clearing Member below 99% backtest coverage. As a result, the 
introduction of the Intraday VaR Charge would result in more consistent 
intraday VaR collections when compared to the current practice, on both 
SIFMA designated settlement dates and non-SIFMA designated settlement 
dates.
    Therefore, FICC believes the proposal would enhance FICC's ability 
to effectively identify, measure and monitor its credit exposures and 
would enhance its ability to maintain sufficient financial resources to 
cover its credit exposure to each participant fully with a high degree 
of confidence, consistent with Rule 17Ad-22(e)(4)(i) under the Act.\47\
---------------------------------------------------------------------------

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

    Rule 17Ad-22(e)(6)(i) under the Act requires, in part, that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market.\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    The Required Fund Deposits are made up of risk-based components (as 
margin) that are calculated and assessed daily to limit FICC's credit 
exposures to Clearing Members. FICC believes that the proposed changes 
to move the DRC items to Cash Settlement are consistent with Rule 17Ad-
22(e)(6)(i) under the Act because the changes would help to ensure that 
FICC produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market by better 
segregating the unrealized gains or losses associated with a Clearing 
Member's margin portfolio from the portion of the margin that measures 
potential future exposure and by limiting the build-up of systemic 
risk. By better segregating the unrealized mark-to-market gains that 
currently reduce Required Fund Deposits, FICC believes that the 
proposed changes would help ensure that FICC maintains a risk-based 
margin system that considers, and produces margin levels commensurate 
with, the risks of portfolios that experience significant mark-to-
market volatility on an intraday basis, consistent with Rule 17Ad-
22(e)(6)(i) under the Act.\49\
---------------------------------------------------------------------------

    \49\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    FICC's proposed change to introduce an Intraday VaR Charge is 
designed to more effectively address the risks presented by significant 
intraday changes to market price volatility or a Clearing Member's 
portfolio. The proposed Intraday VaR Charge would formalize a charge 
that FICC is currently collecting under its authority to collect a 
special charge. This proposed change would align the Rules with FICC's 
current practice and would provide Clearing Member's with greater 
transparency regarding this margin charge. While the proposed changes 
are not expected to materially change the overall methodology or key 
components of the calculation of this charge, the changes would result 
in more consistency in the application of this charge on SIFMA 
designated settlement dates and non-SIFMA designated settlement dates. 
As discussed above, FICC would begin charging the Intraday VaR Charge 
on both SIFMA designated settlement dates and non-SIFMA designated 
settlement dates if the thresholds are crossed regardless of whether 
the increase in VaR could lead to a backtesting deficiency or push a 
Clearing Member below 99% backtest coverage. As a result, the 
introduction of the Intraday VaR Charge would result in more consistent 
intraday VaR collections when compared to the current practice, on both 
SIFMA designated settlement dates and non-SIFMA designated settlement 
dates.
    FICC believes the addition of the Intraday VaR Charge would enable 
FICC to assess a more appropriate level of margin that accounts for 
increases in these volatility risks that may occur intraday. This 
proposed change is designed to assist FICC in maintaining a risk-based 
margin system that considers, and produces margin levels commensurate 
with, the risks of portfolios that experience significant volatility on 
an intraday basis. Therefore, FICC believes the proposed change is 
consistent with Rule 17Ad-22(e)(6)(i) under the Act.\50\
---------------------------------------------------------------------------

    \50\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(iii) under the Act \51\ requires a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to cover its credit 
exposures to its participants by establishing a risk-based margin 
system that, at a minimum, calculates margin sufficient to cover its 
potential future exposure to participants in the interval between the 
last margin collection and the close out of positions following a 
participant default.
---------------------------------------------------------------------------

    \51\ See 17 CFR 240.17Ad-22(e)(6)(iii).
---------------------------------------------------------------------------

    FICC believes that the proposed changes are consistent with Rule 
17Ad-22(e)(6)(iii) under the Act cited above because moving the DRC 
items to Cash Settlement would better segregate the unrealized gains or 
losses associated with a Clearing Member's margin portfolio from the 
portion of the margin that measures potential future exposure and limit 
the build-up of systemic risk. Currently, the Required Fund Deposit may 
be reduced by credits relating to unrealized mark-to-market gains. 
During the time between the last margin collection and the close out of 
a Clearing Member's position such gains may reduce without a 
corresponding increase in the Required Fund Deposit leaving the 
Required Fund Deposit insufficient to cover the future exposure. As 
such, by segregating the unrealized mark-to-market gains and losses 
from the Required Fund Deposit FICC believes that the proposed changes 
are designed to allow FICC to calculate amounts that are sufficient to 
cover FICC's potential future exposure to Clearing Members in the 
interval between the last margin collection and the close out of 
positions following a participant default, consistent with Rule 17Ad-
22(e)(6)(iii) under the Act.\52\
---------------------------------------------------------------------------

    \52\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    FICC does not believe that the proposed rule changes would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the Act.\53\
---------------------------------------------------------------------------

    \53\ See 15 U.S.C. 78q-1(b)(3)(I).

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

[[Page 24380]]

    FICC believes that the proposal to move the DRC items to Cash 
Settlement could impose a burden on competition because the proposed 
change could require a Clearing Member to fund debits relating to such 
items with cash rather than have the ability to fund all or a portion 
of such debits with Eligible Clearing Fund Securities. FICC also 
believes that while the requirement to fund such adjustments with cash 
rather than Eligible Clearing Fund Securities would present some 
operational changes for Clearing Members it does not believe such 
changes would have a substantial economic effect on such Clearing 
Members or otherwise be a significant burden on competition because the 
amounts that the Clearing Members are required to pay with respect to 
the DRC obligations would not change. Clearing Members would be paying 
the same amounts for the Mark-to-Market components following the 
movement of such components to Cash Settlement. The only impact on 
Clearing Members would be that the Clearing Members would be paying 
such debits as part of Cash Settlement rather than as part of the 
Required Fund Deposit.
    FICC believes that the changes to the Parameter Breaks for the 
Intraday Mark-to-Market Charge could have an impact on competition. 
Specifically, the removal of the Coverage Target Parameter Break and 
setting a floor for the Percentage Threshold that is lower than the 
current default threshold could result in the Intraday Mark-to-Market 
Charge being applied more often on Clearing Members. However, FICC has 
the ability to waive the Coverage Target and lower the Percentage 
Threshold currently under certain conditions.\54\ In addition, the use 
of the Intraday Mark-to-Market Charge would be in direct relation to 
the specific risks presented by each Clearing Members' portfolio, and 
each Clearing Member's Required Fund Deposit would continue to be 
calculated with the same parameters and at the same confidence level 
for each Clearing Member. Therefore, because the impact of the proposal 
on a Clearing Member is related to the specific risks presented by that 
Clearing Member's clearing activity and not on the type or size of a 
Clearing Member, FICC believes that any burden on competition imposed 
by the proposed change would be both necessary and appropriate in 
furtherance of FICC's efforts to mitigate risks and meet the 
requirements of the Act, as described in this filing and further below.
---------------------------------------------------------------------------

    \54\ FICC exercises its ability to waive the Coverage Target and 
lower the Percentage Threshold consistently across Clearing Member 
types based on its model risk management governance procedures set 
forth in the Clearing Agency Model Risk Management Framework. See 
supra note 29. For instance, FICC may waive the Coverage Target for 
all Clearing Members during volatile market conditions if 
backtesting indicates that such change is necessary to ensure its 
models are accurately accessing risk.
---------------------------------------------------------------------------

    FICC believes that the proposed change to introduce the Intraday 
VaR Charge could have an impact on competition. Specifically, FICC 
believes the proposed change could burden competition because it would 
result in larger Required Fund Deposit amounts for Clearing Members 
when the Intraday VaR Charge is applicable and result in a Required 
Fund Deposit that is greater than the amount calculated pursuant to the 
current methodology.
    The impacts of this proposal on a particular Clearing Member with 
respect to the Intraday VaR Charge would depend on the size and 
composition of the Clearing Member's portfolio and the potential market 
volatility of positions in that portfolio and would not be due to the 
type of legal entity or size of a Clearing Member. Therefore, Clearing 
Members that present similar adjusted intraday portfolios, regardless 
of the type or size of Clearing Member, would have similar impacts on 
their Required Fund Deposit amounts.
    When the Intraday VaR Charge results in a larger Required Fund 
Deposit, the proposed change could burden competition for Clearing 
Members that have lower operating margins or higher costs of capital 
compared to other Clearing Members. However, the increase in Required 
Fund Deposit would be in direct relation to the specific risks 
presented by each Clearing Member's adjusted intraday positions, and 
each Clearing Member's Required Fund Deposit would continue to be 
calculated with the same parameters and at the same confidence level 
for each Clearing Member. Therefore, because the impact of the proposal 
on a Clearing Member is related to the specific risks presented by that 
Clearing Member's clearing activity and not on the type or size of a 
Clearing Member, FICC believes that any burden on competition imposed 
by the proposed change would be both necessary and appropriate in 
furtherance of FICC's efforts to mitigate risks and meet the 
requirements of the Act, as described in this filing and further below.
    FICC believes the above-described burden on competition that may be 
created by the proposed changes would be necessary in furtherance of 
the Act, specifically Section 17A(b)(3)(F) of the Act.\55\
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, the proposal to move DRC items (Mark-to-Market 
items, cash obligation items and accrued principal and interest) from 
the Required Fund Deposit calculation to the MBSD Cash Settlement 
process would more closely align FICC's mark-to-market process to 
industry practice and better segregate the unrealized gains or losses 
associated with a Clearing Member's margin portfolio from the portion 
of the margin that measures potential future exposure and limit the 
build-up of systemic risk consistent with Section 17A(b)(3)(F) of the 
Act.\56\
---------------------------------------------------------------------------

    \56\ Id.
---------------------------------------------------------------------------

    As discussed above, FICC believes that the changes to revise the 
definition of the Intraday Mark-to-Market Charge to remove the specific 
thresholds and provide a floor for the Dollar Threshold and the 
Percentage Threshold and to remove the Coverage Target from the 
definition, as described above, are designed to assure the safeguarding 
of securities and funds which are in its custody or control or for 
which it is responsible because they would provide the ability for FICC 
to adjust the Intraday Mark-to-Market Charge default thresholds more 
quickly and effectively in response to adverse changes in market 
conditions consistent with Section 17A(b)(3)(F) of the Act.\57\ In 
addition, FICC believes that the proposed changes to the Parameter 
Breaks for the Intraday Mark-to-Market Charge and removal of the 
Surveillance Threshold Provision would also align the MBSD Rules to 
FICC's current practice in certain circumstances and provide greater 
transparency and improve Clearing Members' understanding of the 
application of the Intraday Market-to-Market Charge, which is also 
consistent with Section 17A(b)(3)(F) of the Act, as described 
above.\58\
---------------------------------------------------------------------------

    \57\ Id.
    \58\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In addition, as stated above, the proposed Intraday VaR Charge is 
designed to address the risks of increases in market price volatility 
or other changes to a Clearing Member's portfolio on an intraday basis 
that could increase the costs to FICC of liquidating a Member portfolio 
in the event of the Clearing Member's default. Specifically, the 
proposed intraday volatility charge would allow FICC to collect 
sufficient financial resources to cover its exposure that it may face 
increased costs in liquidating positions that experience intraday 
volatility that is not captured by the start of day VaR Charge. The 
proposed Intraday VaR Charge would formalize a charge that FICC is 
currently

[[Page 24381]]

collecting under its authority to collect a special charge. As 
discussed above, the change would align the Rules with FICC's current 
practice and would provide Clearing Member's with greater transparency 
regarding this margin charge. While the proposed changes are not 
expected to materially change the overall methodology or key components 
of the calculation of this charge, the changes would result in more 
consistency in the application of this charge on SIFMA designated 
settlement dates and non-SIFMA designated settlement dates.
    Therefore, FICC believes this proposed change is necessary and 
appropriate in furtherance of the requirements of Section 17A(b)(3)(F) 
of the Act, which requires that the MBSD Rules be designed to assure 
the safeguarding of securities and funds that are in FICC's custody or 
control or which it is responsible.\59\
---------------------------------------------------------------------------

    \59\ Id.
---------------------------------------------------------------------------

    FICC believes these proposed changes would also support FICC's 
compliance with Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(6)(iii) under 
the Act,\60\ which require FICC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to (x) 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by maintaining sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence; (y) cover 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 and (z) cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, calculates 
margin sufficient to cover its potential future exposure to 
participants in the interval between the last margin collection and the 
close out of positions following a participant default.
---------------------------------------------------------------------------

    \60\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i) and (iii).
---------------------------------------------------------------------------

    As described above, FICC believes that moving the DRC items to Cash 
Settlement would better address the increased risks FICC may face when 
intraday mark-to-market adjustments are necessary for a Clearing 
Member's portfolio. FICC believes that moving such mark-to-market 
adjustments as cash pass-through adjustments will segregate the 
unrealized gains or losses associated with a Clearing Member's margin 
portfolio from the portion of the margin that measures potential future 
exposure and limit the build-up of systemic risk. Currently, the 
Required Fund Deposit may be reduced by credits relating to unrealized 
mark-to-market gains. During the time between the last margin 
collection and the close out of a Clearing Member's position such gains 
may reduce without a corresponding increase in the Required Fund 
Deposit leaving the Required Fund Deposit insufficient to cover the 
future exposure. Therefore, removing such mark-to-market adjustments 
from the Required Fund Deposit would better limit FICC's credit 
exposures to Clearing Members, necessary and appropriate in furtherance 
of the requirements of Rules 17Ad-22(e)(4)(i), (e)(6)(i) and 
(e)(6)(iii) under the Act.\61\
---------------------------------------------------------------------------

    \61\ Id.
---------------------------------------------------------------------------

    As described above, FICC believes the introduction of the Intraday 
VaR Charge would allow FICC to employ a risk-based methodology that 
would address the increased risks FICC may face when intraday 
volatility changes a Clearing Member's portfolio such that the VaR 
Charge collected at the start of the day no longer addresses the risks 
these positions present to FICC. The proposed Intraday VaR Charge would 
formalize a charge that FICC is currently collecting under its 
authority to collect a special charge. As discussed above, the change 
would align the Rules with FICC's current practice and would provide 
Clearing Member's with greater transparency regarding this margin 
charge. While the proposed changes are not expected to materially 
change the overall methodology or key components of the calculation of 
this charge, the changes would result in more consistency in the 
application of this charge on SIFMA designated settlement dates and 
non-SIFMA designated settlement dates. Therefore, the proposed change 
would better limit FICC's credit exposures to Clearing Members, 
necessary and appropriate in furtherance of the requirements of Rules 
17Ad-22(e)(4)(i) and Rule 17Ad-22(e)(6)(i) under the Act.\62\
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
---------------------------------------------------------------------------

    FICC believes that the above-described burden on competition that 
could be created by the proposed change would be appropriate in 
furtherance of the Act because such changes have been appropriately 
designed to assure the safeguarding of securities and funds which are 
in the custody or control of FICC or for which it is responsible, as 
described in detail above. The proposed movement of the DRC items to 
Cash Settlement and the proposed Intraday VaR Charge would also enable 
FICC to produce margin levels more commensurate with the risks and 
particular attributes of each Clearing Member's portfolio.
    The proposed changes would do this by segregating the unrealized 
gains in Clearing Member's portfolios as discussed above with respect 
to the movement of the DRC items to Cash Settlement and by measuring 
the change in volatility that impacts Clearing Members' portfolios and 
could occur intraday with respect to the Intraday VaR Charge. 
Therefore, because the proposed changes are designed to provide FICC 
with an appropriate measure of the volatility risks presented by 
Clearing Members' portfolios, FICC believes the proposal is 
appropriately designed to meet its risk management goals and its 
regulatory obligations.
    FICC believes it has designed the proposed changes in an 
appropriate way in order to meet compliance with its obligations under 
the Act. Specifically, the proposals would improve the risk-based 
margining methodology that FICC employs to set margin requirements and 
better limit FICC's credit exposures to its Clearing Members.
    Therefore, FICC does not believe that the proposed changes would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the Act.\63\
---------------------------------------------------------------------------

    \63\ 15.U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

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

    In an effort to ensure that Clearing Members understand the 
proposed changes, FICC has invited all Clearing Members to participate 
in several informational sessions.
    In addition, the FICC Product Management, FICC Risk Management and 
FICC Relationship Management teams have made themselves available to 
answer individual questions from Clearing Members. One Clearing Member 
has expressed concern regarding FICC's proposed change to move the 
Mark-to-Market amount to the Cash Settlement process. This Clearing 
Member has noted that the proposed change would create a significant 
burden because the change would require it to fund the mark-to-market 
differences with cash while under the current MBSD Rules, the amount 
could be funded with cash or securities. FICC believes that while the 
requirement to fund such adjustments with cash rather than Eligible 
Clearing Fund Securities would present some operational

[[Page 24382]]

changes for Clearing Members it does not believe such changes would 
have a substantial economic effect on such Clearing Members or 
otherwise be a significant burden. Clearing Members would be paying the 
same amounts for the Mark-to-Market components following the movement 
of such components to Cash Settlement. The only impact on Clearing 
Members would be that the Clearing Members would be paying such debits 
as part of Cash Settlement rather than as part of the Required Fund 
Deposit.
    FICC has not received or solicited any written comments relating to 
this proposal. If any written comments are received, they will be 
publicly filed as an Exhibit 2 to this filing, as required by Form 19b-
4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.

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 [email protected]. Please include 
File Number SR-FICC-2022-002 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-2022-002. 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-2022-002 and should be submitted on 
or before May 16, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\64\
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    \64\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-08677 Filed 4-22-22; 8:45 am]
BILLING CODE 8011-01-P


