[Federal Register Volume 88, Number 81 (Thursday, April 27, 2023)]
[Notices]
[Pages 25721-25725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-08827]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97342; File No. SR-FICC-2023-003]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Order Granting Proposed Rule Change To Revise the Description of the 
Stressed Period Used To Calculate the Value-at-Risk Charge and Make 
Other Changes

April 21, 2023.
    On February 17, 2023, the Fixed Income Clearing Corporation 
(``FICC'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change SR-FICC-2023-003 pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The proposed rule change was published 
for comment in the Federal Register on March 7, 2023.\3\ The Commission 
has received no comments regarding the proposed rule change. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 97001 (Mar. 1, 2023), 88 
FR 14189 (Mar. 7, 2023) (File No. SR-FICC-2023-003) (``Notice'').
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I. Description of the Proposed Rule Change

    FICC operates two divisions: the Government Securities Division 
(``GSD'') and the Mortgage Backed Securities Division (``MBSD''). GSD 
provides trade comparison, netting, risk management, settlement, and 
central counterparty services for the U.S. Government securities 
market. MBSD provides the same services for the U.S. mortgage-backed 
securities market. GSD and MBSD maintain separate sets of rules, margin 
models, and clearing funds.
    A key tool that FICC uses to manage its credit exposures to its 
members is the daily collection of margin from each member. A member's 
margin is designed to mitigate potential losses associated with 
liquidation of the member's portfolio in the event of that member's 
default. The aggregated amount of all GSD and MBSD members' margin 
constitutes the GSD Clearing Fund and MBSD Clearing Fund, which FICC 
would be able to access should a defaulted member's own margin be 
insufficient to satisfy losses to FICC caused by the liquidation of 
that member's portfolio. Each member's margin consists of a number of 
applicable components, including a the value-at-risk (``VaR'') charge 
(``VaR Charge'') designed to capture the potential market price risk 
associated with the securities in a member's portfolio. The VaR Charge 
is typically the largest component of a member's margin requirement. 
The VaR Charge is designed to cover FICC's projected liquidation losses 
with respect to a defaulted member's portfolio at a 99% confidence 
level.
    FICC states that it has observed significant volatility in the U.S. 
government securities market due to tightening monetary policy, 
increasing inflation, and recession fears, and that this volatility has 
led to greater risk exposures for FICC.\4\ FICC represents that, in 
order to mitigate the increased risk exposures, FICC has to quickly and 
timely respond to rapidly changing market conditions.\5\ For example, 
in order to respond to rapidly changing market conditions, FICC states 
that it may need to quickly adjust the look-back period that FICC uses 
for purposes of calculating the VaR Charge with an appropriate stressed 
period, as needed, to enable FICC to calculate and collect adequate 
margin from members.\6\
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    \4\ See Notice, supra note 3, 88 FR at 14189.
    \5\ Id.
    \6\ Id.
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    Accordingly, FICC is proposing to amend the GSD Quantitative Risk 
Management (``QRM'') Methodology Document--GSD Initial Market Risk 
Margin Model (``GSD QRM Methodology Document'') \7\ and the MBSD 
Methodology and Model Operations Document--MBSD Quantitative Risk Model 
(``MBSD QRM Methodology Document,'' \8\ and collectively with the GSD 
QRM Methodology Document, the ``QRM Methodology Documents'') to revise 
the description of the stressed period used to calculate the VaR Charge 
in order to help FICC quickly and timely adjust the look-back period 
used for calculating the VaR Charge with an appropriate stressed 
period, as needed. FICC states that adjustments to the look-back period 
could affect the amount of the VaR Charge that members are assessed by 
either increasing or decreasing such charge to reflect the level of 
risk the activities of the members presented to FICC.\9\ FICC is also 
proposing to amend the GSD QRM Methodology Document to clarify the 
language describing the parameters used to calculate the VaR Floor.\10\ 
Finally, FICC is proposing to

[[Page 25722]]

amend the GSD QRM Methodology Document to make certain technical 
changes described in greater detail below.
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    \7\ FICC filed an excerpt of the GSD QRM Methodology Document 
showing the proposed changes as a confidential exhibit to this 
proposed rule change, pursuant to 17 CFR 240.24-b2. FICC originally 
filed the GSD QRM Methodology Document confidentially as part of a 
previous proposed rule change and advance notice approved by the 
Commission regarding FICC's GSD sensitivity VaR. See Securities 
Exchange Act Release Nos. 83362 (Jun. 1, 2018), 83 FR 26514 (Jun. 7, 
2018) (SR-FICC-2018-001) and 83223 (May 11, 2018), 83 FR 23020 (May 
17, 2018) (SR-FICC-2018-801). The GSD QRM Methodology Document has 
been subsequently amended. See Securities Exchange Act Release Nos. 
85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-FICC-2019-001), 
90182 (Oct. 14, 2020), 85 FR 66630 (Oct. 20, 2020) (SR-FICC-2020-
009), 93234 (Oct. 1, 2021), 86 FR 55891 (Oct. 7, 2021) (SR-FICC-
2021-007), and 95605 (Aug. 25, 2022), 87 FR 53522 (Aug. 31, 2022) 
(SR-FICC-2022-005).
    \8\ FICC filed an excerpt of the MBSD QRM Methodology Document 
showing the proposed changes as a confidential exhibit to this 
proposed rule change, pursuant to 17 CFR 240.24-b2. FICC originally 
filed the MBSD QRM Methodology Document confidentially as part of a 
previous proposed rule change and advance notice approved by the 
Commission regarding FICC's MBSD sensitivity VaR. See Securities 
Exchange Act Release Nos. 79868 (Jan. 24, 2017), 82 FR 8780 (Jan. 
30, 2017) (SR-FICC-2016-007) and 79843 (Jan. 19, 2017), 82 FR 8555 
(Jan. 26, 2017) (SR-FICC-2016-801). The MBSD QRM Methodology 
Document has been subsequently amended. See Securities Exchange Act 
Release Nos. 85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-
FICC-2019-001), 90182 (Oct. 14, 2020), 85 FR 66630 (Oct. 20, 2020) 
(SR-FICC-2020-009), 92303 (Jun. 30, 2021), 86 FR 35854 (Jul. 7, 
2021) (SR-FICC-2020-017) and 95070 (Jun. 8, 2022), 87 FR 36014 (Jun. 
14, 2022) (SR-FICC-2022-002).
    \9\ See Notice, supra note 3, 88 FR at 14189.
    \10\ Capitalized terms used herein and not defined shall have 
the meaning assigned to such terms in the FICC's GSD Rulebook (``GSD 
Rules'') and MBSD Clearing Rules (``MBSD Rules''), available at 
http://www.dtcc.com/legal/rules-and-procedures.aspx.
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A. Revising the Description of the Stressed Period Used To Calculate 
the VaR Charge

    FICC calculates VaR Charge by using a methodology referred to as 
the sensitivity approach. The sensitivity approach allows FICC to 
adjust the look-back period that FICC uses for purposes of calculating 
the VaR Charge. In particular, the sensitivity approach leverages 
external vendor data \11\ to incorporate a look-back period of 10 
years, which allows the GSD and MBSD models to capture periods of 
historical volatility. In the event FICC observes that the 10-year 
look-back period does not contain a sufficient number of stressed 
market events, FICC will include an additional period of historically 
observed stressed market events to the 10-year look-back period.\12\
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    \11\ FICC states that the sensitivity approach leverages 
external vendor expertise in supplying the market risk attributes, 
which would then be incorporated by FICC into the GSD and MBSD 
models to calculate the VaR Charge. Specifically, FICC sources 
security-level risk sensitivity data and relevant historical risk 
factor time series from an external vendor for all eligible 
securities. The sensitivity data is generated by a vendor based on 
its econometric, risk, and pricing models. See Notice, supra note 3, 
88 FR at 14189-90.
    \12\ See Notice, supra note 3, 88 FR at 14190.
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    The QRM Methodology Documents currently describe the additional 
stressed period as a configurable continuous period (typically one 
year). The GSD QRM Methodology Document further specifies the duration 
of the stressed period as one-year of stressed market events. FICC 
states that it regularly reviews metrics from various assessments to 
ensure the GSD and MBSD models are performing as designed.
    In order to provide FICC with more flexibility with respect to the 
inclusion of sufficient number of stressed market events in the look-
back period so FICC can respond to rapidly changing market conditions 
more quickly and timely, FICC is proposing to eliminate this detailed 
description of the stressed period from the GSD QRM Methodology 
Document (in Sections 2.10.1 (The list of key parameters) and A4.5.16.1 
(Stressed VaR Calculation)), as well as the MBSD QRM Methodology 
Document (Section 5.17.1 (Stressed VaR Calculation)), and replace it 
with a more general description. Specifically, the proposed new 
description of the stressed period would provide in the GSD QRM 
Methodology Document (Section A4.5.16.1) and the MBSD QRM Methodology 
Document (Section 5.17.1) that the ``stressed period'' shall be a 
period of time that FICC may add, in its sole discretion, to the 10-
year historical look-back period that includes stressed market events 
that are not otherwise captured in the look-back period.
    The proposed new description would also provide that a stressed 
period, if added to the look-back period, shall be no shorter than 6 
months and no longer than 36 months, and comprised of either one 
continuous period specified by a start date and an end date or 
comprised of more than one non-continuous period. FICC states that it 
is currently contemplating changing the stressed period at GSD from one 
year to 1.5 years while keeping the current one-year stressed period at 
MBSD unchanged.\13\
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    \13\ Id.
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    In addition, the proposed new description would provide that, when 
determining whether it is necessary to add a stressed period to the 10-
year historical look-back period (and the appropriate length of an 
added stressed period), FICC would review all relevant information 
available to it at the time of such determination, including, for 
example, (1) the nature of the stressed market events in the current 
10-year historical look-back period, (2) backtesting coverage ratios, 
and (3) market volatility observed by FICC. Further, the proposed new 
description would provide that changes to the stressed period shall be 
approved through FICC's model governance process set forth in the 
Clearing Agency Model Risk Management Framework (``Framework''),\14\ 
and any current stressed period shall be documented and published to 
FICC members at the time such stressed period becomes effective.\15\
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    \14\ The Framework sets forth the model risk management 
practices that FICC and its affiliates The Depository Trust Company 
(``DTC'') and National Securities Clearing Corporation (``NSCC,'' 
and together with FICC and DTC, the ``Clearing Agencies'') follow to 
identify, measure, monitor, and manage the risks associated with the 
design, development, implementation, use, and validation of 
quantitative models. The Framework is filed as a rule of the 
Clearing Agencies. See Securities Exchange Act Release Nos. 81485 
(Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (File Nos. SR-DTC-2017-
008; SR-FICC-2017-014; SR-NSCC-2017-008), 88911 (May 20, 2020), 85 
FR 31828 (May 27, 2020) (File Nos. SR-DTC-2020-008; SR-FICC-2020-
004; SR-NSCC-2020-008), 92380 (Jul. 13, 2021), 86 FR 38140 (Jul. 19, 
2021) (File No. SR-FICC-2021-006), 92381 (Jul. 13, 2021), 86 FR 
38163 (Jul. 19, 2021) (File No. SR-NSCC-2021-008), 92379 (Jul. 13, 
2021), 86 FR 38143 (Jul. 19, 2021) (File No. SR-DTC-2021-003), 94271 
(Feb. 17, 2022), 87 FR 10411 (Feb. 24, 2022) (File No. SR-FICC-2022-
001), 94272 (Feb. 17, 2022) 87 FR 10419 (Feb. 24, 2022) (File No. 
SR-NSCC-2022-001), and 94273 (Feb. 17, 2022), 87 FR 10395 (Feb. 24, 
2022) (File No. SR-DTC-2022-001).
    \15\ See Notice, supra note 3, 88 FR at 14190.
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    FICC believes that having a more general description would enable 
FICC to adjust the stressed period more quickly and timely because the 
adjustment process, such as constructing a stressed period comprised of 
more than one year's historical data that may not be continuous,\16\ 
would be more streamlined and not require a rule change.\17\ By being 
able to quickly and timely make adjustments to the stressed period, 
FICC states that it would have the flexibility to respond to rapidly 
changing market conditions more quickly and timely, which would, in 
turn, help better ensure that FICC calculates and collects adequate 
margin from members and risk manages its credit exposures to its 
members.\18\ The look-back period would continue to be tracked in the 
monthly model parameter report, pursuant to the QRM Methodology 
Documents, and any changes to the look-back period \19\ would continue 
to be subject to the internal model governance process of the 
Depository Trust and Clearing Corporation (``DTCC''), as described in 
the Framework.\20\
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    \16\ FICC believes constructing a longer than one-year stressed 
period, or a stressed period that may not be continuous, would 
enable FICC to (i) better cope with market volatility spikes by 
increasing the calibrated volatility level of the VaR models, i.e., 
longer stressed periods generally result in higher calibrated 
volatility levels, and (ii) capture a sufficient number of stressed 
market events. Id.
    \17\ Pursuant to Section 806(e)(1) of Title VIII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act and Rule 19b-
4(n)(1)(i) under the Act, if a change materially affects the nature 
or level of risks presented by FICC, then FICC is required to file 
an advance notice filing. 12 U.S.C. 5465(e)(1) and 17 CFR 240.19b-
4(n)(1)(i).
    \18\ See Notice, supra note 3, 88 FR at 14190.
    \19\ The look-back period includes the stressed period, if any. 
Id.
    \20\ See supra note 14.
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    FICC conducted an impact study for the period from January 2021 to 
October 2022 (``Impact Study''), which reviewed the overall impact of 
the contemplated change to the stressed period (i.e., changing the 
current stressed period of one year (September 2008 to August 2009) to 
a stressed period of 1.5 years (January 2008 to June 2009) on the GSD 
VaR model backtesting coverage and VaR Charge amounts, as well as the 
effect on the GSD Members during the Impact Study period. The results 
of the Impact Study indicate that, if a stressed period of 1.5 years 
had been in place for GSD,\21\ the GSD's rolling 12-month VaR model 
backtesting coverage ratio would have improved by 29 bps (from 98.52%

[[Page 25723]]

to 98.81%) as of October 2022 and the associated VaR Charge increase 
for GSD would be approximately $387 million (or 2.1%) on average during 
that period.\22\
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    \21\ As noted above, FICC states that it is currently 
contemplating changing the stressed period at GSD from one year to 
1.5 years while keeping the current one-year stressed period at MBSD 
unchanged. See Notice, supra note 3, 88 FR at 14190.
    \22\ FICC filed a summary of the Impact Study as confidential 
Exhibit 3 to this proposed rule change. Exhibit 3 provides more 
granular data concerning these results, including comparisons of the 
GSD VaR model backtesting coverage ratios for the current stressed 
period against the contemplated 1.5 year stressed period on a 
monthly basis, as well as comparisons of member-level VaR Charge 
amounts under those two stressed periods. FICC requested 
confidential treatment of Exhibit 3 pursuant to 17 CFR 240.24-b2.
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    The Impact Study further indicated that the three GSD Members with 
the largest average daily VaR Charge increases in dollar amount during 
the Impact Study period would have had increases of approximately $43.7 
million, $43.24 million, and $39.55 million, representing an average 
daily increase for such Members of 3.4%, 4.4%, and 2.8%, respectively. 
The three GSD Members with the largest average daily VaR Charge 
increases as a percentage of VaR Charges paid by such Members during 
the Impact Study period would have had an average daily increase of 
16.6%, 15.7% and 12.7%, respectively, had the contemplated stressed 
period been in place.
    The three GSD Members with the largest average daily VaR Charge 
decreases in dollar amount during the Impact Study period would have 
had decreases of approximately $8.59 million, $7.93 million, and $7.24 
million representing an average daily decrease for such Members of 
4.3%, 1.3%, and 2.9%, respectively. The three GSD Members with the 
largest average daily VaR Charge decreases as a percentage of VaR 
Charges paid by such Members during the Impact Study period would have 
had an average daily decrease of 4.3%, 4.0% and 3.4%, respectively, had 
the contemplated stressed period been in place.

B. Clarifying the VaR Floor Parameter Language

    The VaR Charge is subject to a minimum amount (the ``VaR Floor'') 
that FICC employs as an alternative to the amount calculated by the VaR 
model for portfolios where the VaR Floor \23\ is greater than the 
model-based charge amount. A VaR Floor addresses the risk that the VaR 
model may calculate too low a VaR Charge for certain portfolios where 
the VaR model applies substantial risk offsets among long and short 
positions in different classes of securities that have a high degree of 
historical correlation. Because this high degree of historical price 
correlation may not apply in future changing market conditions, FICC 
applies a VaR Floor to protect FICC against such risk in the event that 
FICC is required to liquidate a large securities portfolio in stressed 
market conditions.\24\
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    \23\ See definition of ``VaR Charge'' in GSD Rule 1 
(Definitions), supra note 10.
    \24\ See Securities Exchange Act Release Nos. 83362 (Jun. 1, 
2018), 83 FR 26514 (Jun. 7, 2018) (SR-FICC-2018-001) and 83223 (May 
11, 2018), 83 FR 23020 (May 17, 2018) (SR-FICC-2018-801).
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    VaR Floor at GSD is determined by multiplying the absolute value of 
the sum of the Net Long Positions and Net Short Positions of Eligible 
Securities, grouped by product and remaining maturity, by a percentage 
designated by FICC from time to time for such group. Currently, the GSD 
Rules provide that for (i) U.S. Treasury and agency securities, such 
percentage shall be a fraction, no less than 10%, of the historical 
minimum volatility of a benchmark fixed income index (i.e., haircut 
rate) for such group by product and remaining maturity and (ii) 
mortgage-backed securities, such percentage shall be a fixed percentage 
that is no less than 0.05%.\25\ However, the GSD QRM Methodology 
Document specifies these percentages (referred to as floor parameters 
therein) for government bond and MBS Pool as simply 10% and 5 Bps, 
respectively.
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    \25\ See definition of ``VaR Charge'' in GSD Rule 1 
(Definitions), supra note 10.
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    To avoid inconsistency with the GSD Rules, FICC is proposing 
clarifying changes to the floor parameter language in Section 2.10.1 of 
the GSD QRM Methodology Document. Specifically, FICC is proposing to 
revise the description of the floor parameter for government bond by 
deleting the reference to 10% and adding language that state the 
parameter is a percentage as designated by FICC from time to time 
pursuant to the GSD Rules and applied to the haircut rate of the 
respective government bonds. Similarly, for the description of the 
floor parameter for MBS Pool, FICC is proposing to revise it by 
deleting the reference to 5 Bps and adding language that state the 
parameter is a percentage as designated by FICC from time to time 
pursuant to the GSD Rules.
    In addition, FICC is proposing to add a sentence making it clear 
that the floor parameters are tracked in the monthly model parameter 
report and that any future changes to the floor parameters would be 
subject to DTCC's internal model governance process set forth in the 
Framework.\26\
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    \26\ See supra note 14.
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    Lastly, consistent with the proposed changes to the floor 
parameters described above, FICC is proposing to delete from the GSD 
QRM Methodology Document the language in Sections 3.2.2 (Calculation of 
haircut of Treasury and Agency bonds without sensitivity analytics 
data) and 3.5 (Total VaR, Core Charge and Standalone VaR) that 
references the floor parameters for government bond and MBS pool 
positions being tentatively set to 10% and 0.05%, respectively.

C. Technical Changes

    FICC is proposing to make certain technical changes to the GSD QRM 
Methodology Document. Specifically, FICC proposes to clarify in 
Sections 1.1 (Purpose and scope), A4.5.16 (Stressed VaR), and A4.5.16.1 
(Stressed VaR Calculation) of the GSD QRM Methodology Document that 
``SVaR'' refers to sensitivity VaR and not stressed VaR. In addition, 
FICC is also proposing to fix typographical errors in Sections 2.10.1 
(The list of key parameters) and A4.5.16.1 (Stressed VaR Calculation) 
of the GSD QRM Methodology Document.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and rules and regulations thereunder applicable to such 
organization. After careful consideration, the Commission finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to FICC.\27\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Sections 17A(b)(3)(F) and (b)(3)(I) of the Act,\28\ as 
well as Rules 17Ad-22(e)(4) and (e)(6) thereunder.\29\
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    \27\ 15 U.S.C. 78s(b)(2)(C).
    \28\ 15 U.S.C. 78q-1(b)(3)(F) and (b)(3)(I).
    \29\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(v).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed to, among other things, promote the 
prompt and accurate clearance and settlement of securities transactions 
and assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.\30\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described in Section I.A above, FICC proposes replacing the 
current detailed description of the stressed period in the QRM 
Methodology

[[Page 25724]]

Documents with a more general description, so FICC would have the 
flexibility to quickly adjust the look-back period FICC uses for 
purposes of calculating the VaR Charge with an appropriate stressed 
period, as needed, to enable FICC to calculate and collect adequate 
margin from members. Specifically, the proposal would change the 
current description of the stressed period in the QRM Methodology 
Documents from a configurable continuous period that is typically one 
year to a continuous period, or more than one non-continuous period, 
that would be no shorter than 6 months and no longer than 36 months.
    As described above in Section I.A and in the Notice, FICC has 
provided data demonstrating that if FICC had changed the current 
stressed period of one year (September 2008 to August 2009) to a 
stressed period of 1.5 years (January 2008 to June 2009), GSD's rolling 
12-month VaR model backtesting coverage ratio would have increased from 
98.52% to 98.81% during the period of January 2021 to October 2022.\31\ 
The Commission has reviewed FICC's data and agrees that its results 
indicate that the proposed changes should help FICC generate margin 
amounts that more effectively cover its credit exposures than under the 
current rule.
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    \31\ See Notice, supra note 3, 88 FR at 14191.
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    Accordingly, the Commission believes that the proposed change to 
the description of the stressed period should provide FICC with more 
flexibility to quickly adjust the stressed period, which should enhance 
FICC's ability to collect margin that better reflects the risks and 
particular attributes of its members' portfolios during periods rapidly 
changing market conditions. For these reasons, the Commission believes 
that implementing this change should help ensure that, in the event of 
a member default, FICC's operation of its critical clearance and 
settlement services would not be disrupted because of insufficient 
financial resources. Accordingly, the Commission finds that the change 
to the description of the stressed period should help FICC to continue 
providing prompt and accurate clearance and settlement of securities 
transactions in the event of a member default, consistent with Section 
17A(b)(3)(F) of the Act.
    Moreover, as described above in Section I, in the event of a 
clearing member default, FICC would access the mutualized the Clearing 
Fund should a defaulted member's own margin be insufficient to satisfy 
losses to FICC caused by the liquidation of that member's portfolio. 
The proposed change to the description of the stressed period should 
help FICC collect sufficient margin from members, thereby limiting non-
defaulting members' exposure to mutualized losses in the event of a 
member default. The Commission believes that by helping to limit the 
exposure of FICC's non-defaulting members to mutualized losses, the 
proposed changes should help FICC assure the safeguarding of securities 
and funds which are in its custody or control, consistent with Section 
17A(b)(3)(F) of the Act.
    In addition to the proposed changes to the stressed period, FICC 
proposes several technical and conforming changes, described above in 
Sections I.B and I.C, to enhance the clarity of the GSD QRM Methodology 
Document. For example, for consistency with the GSD Rules, FICC would 
clarify in the GSD QRM Methodology Document that the floor parameters 
used for the calculation of the VaR Floor would be specified in the GSD 
Rules, that those floor parameters would be tracked in the monthly 
model parameter report, and that any future changes to the floor 
parameters would be subject to DTCC's internal model governance 
process. The Commission believes that greater clarity of the GSD QRM 
Methodology Document should better enable FICC to effectively implement 
the document's provisions. Accordingly, the Commission believes that 
these proposed changes should better enable FICC to assess and collect 
sufficient margin from its members, thereby assuring the safeguarding 
of securities and funds that are in FICC's custody or control, 
consistent with Section 17A(b)(3)(F) of the Act.

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

    Rule 17Ad-22(e)(4)(i) under the Act requires a covered clearing 
agency \32\ 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.\33\
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    \32\ A ``covered clearing agency'' means, among other things, a 
clearing agency registered with the Commission under Section 17A of 
the Act (15 U.S.C. 78q-1 et seq.) that is designated systemically 
important by Financial Stability Oversight Council (``FSOC'') 
pursuant to the Clearing Supervision Act (12 U.S.C. 5461 et seq.). 
See 17 CFR 240.17Ad-22(a)(5) and (a)(6). Because FICC is a 
registered clearing agency with the Commission that has been 
designated systemically important by FSOC, FICC is a covered 
clearing agency.
    \33\ 17 CFR 240.17Ad-22(e)(4)(i).
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    As described in Section I.A above, FICC's proposal to change the 
description of the stressed period in the QRM Methodology Documents 
should enhance FICC's ability to calculate and collect sufficient 
margin from its members. For example, the results of FICC's Impact 
Study demonstrate that during the period of January 2021 to October 
2022, GSD's rolling 12-month VaR model backtesting coverage ratio would 
have improved by 29 bps (from 98.52% to 98.81%) by increasing the look-
back period to 1.5 years.\34\ The added flexibility from the more 
general description of the stressed period under the proposal should 
also provide FICC with the ability to quickly adjust the stress period 
in response to rapidly changing market conditions, which in turn, 
should better enable FICC to risk manage its members' positions and 
collect sufficient margin to effectively cover FICC's credit exposures.
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    \34\ See supra note 22.
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    Because the foregoing proposed changes should better enable FICC to 
collect sufficient margin from members, the Commission believes that 
the proposed changes should enhance FICC's ability to maintain 
sufficient financial resources to cover its credit exposures to 
applicable member portfolios fully with a high degree of confidence, 
consistent with Rule 17Ad-22(e)(4)(i) under the Act.

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

    Rule 17Ad-22(e)(6)(i) under the Act requires a covered clearing 
agency to establish, implement, maintain, and enforce written policies 
and procedures reasonably designed to cover 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.\35\ Rule 17Ad-22(e)(6)(v) under the Act 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, uses an appropriate method for measuring 
credit exposure that accounts for relevant product risk factors and 
portfolio effects across products.\36\
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    \35\ 17 CFR 240.17Ad-22(e)(6)(i).
    \36\ 17 CFR 240.17Ad-22(e)(6)(v).

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[[Page 25725]]

    As described in Section I.A above, FICC's proposal to replace the 
current detailed description of the stressed period with a more general 
description should give FICC more flexibility to respond to rapidly 
changing market conditions more quickly because FICC would be able to 
make adjustments to the stressed period without a rule change. As a 
result, this flexibility should enable FICC to better risk manage its 
credit exposure by enhancing FICC's ability to calculate and collect 
margin commensurate with the risks and particular attributes of each 
member's portfolio.
    For these reasons, the Commission believes that the proposed 
changes should help ensure that FICC produces margin levels 
commensurate with the risks and particular attributes of its members' 
portfolios by adding flexibility to parameters for the stressed period 
to help ensure that the look-back period captures a sufficient number 
of stressed market events, and allowing FICC to make timely adjustments 
to the stressed period in response to rapidly changing market 
conditions. Accordingly, the Commission believes that the proposed 
changes would enhance FICC's risk-based margin system to better enable 
FICC to cover its credit exposures to its members because the proposed 
changes consider the risks and particular attributes of the relevant 
products, portfolios, and markets, consistent with the requirements of 
Rule 17Ad-22(e)(6)(i).\37\ Similarly, the Commission believes that the 
proposed changes are reasonably designed to cover FICC's credit 
exposures to its members because the proposed changes would enhance 
FICC's risk-based margin system using appropriate methods for measuring 
credit exposures that account for relevant product risk factors and 
portfolio effects, consistent with the requirements of Rule 17Ad-
22(e)(6)(v).\38\
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    \37\ 17 CFR 240.17Ad-22(e)(6)(i).
    \38\ 17 CFR 240.17Ad-22(e)(6)(v).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act \39\ and 
the rules and regulations promulgated thereunder. It is therefore 
ordered, pursuant to Section 19(b)(2) of the Act \40\ that proposed 
rule change SR-FICC-2023-003, be, and hereby are, approved.\41\
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    \39\ 15 U.S.C. 78q-1.
    \40\ 15 U.S.C. 78s(b)(2).
    \41\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-08827 Filed 4-26-23; 8:45 am]
BILLING CODE 8011-01-P


