
[Federal Register Volume 88, Number 162 (Wednesday, August 23, 2023)]
[Notices]
[Pages 57485-57490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-18106]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98160; File No. SR-FICC-2023-011]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change, as Modified by Amendment No. 
1, To Adopt a Portfolio Differential Charge as an Additional Component 
to the Government Securities Division Required Fund Deposit

August 17, 2023.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 3, 2023, Fixed Income Clearing Corporation (``FICC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-FICC-2023-011. On August 16, 2023, FICC filed Amendment 
No. 1 to the proposed rule change, to make clarifications and 
corrections to the proposed rule change.\3\ The proposed rule change, 
as modified by Amendment No. 1, is 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 made clarifications and corrections to the 
description of the proposed rule change and Exhibit 3a of the filing 
(Summary of Impact Study) to incorporate a longer impact analysis. 
As originally filed, the time-period of the impact analysis was 
November 2021 to October 2022. As amended by Amendment No. 1, the 
time-period of the impact analysis is November 2021 to March 2023. 
These clarifications and corrections have been incorporated, as 
appropriate, into the description of the proposed rule change in 
Item II below. FICC has requested confidential treatment of Exhibit 
3a, pursuant to 17 CFR 240.24b-2.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of modifications to FICC's 
Government Securities Division (``GSD'') Rulebook (``Rules'') in order 
to adopt a Portfolio Differential Charge (``PD Charge'') as an 
additional component to the GSD Required Fund Deposit, as described in 
greater detail below.\4\
---------------------------------------------------------------------------

    \4\ Terms not defined herein are defined in the GSD Rules, 
available at www.dtcc.com/~/media/Files/Downloads/legal/rules/
ficc_gov_rules.pdf.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    FICC is proposing to enhance the methodology for calculating 
Required Fund Deposit to the GSD Clearing Fund by adopting a new 
component, the PD Charge, which would be calculated to mitigate the 
risk presented to FICC by period-over-period fluctuations in a Member's 
Margin Portfolio(s) that may occur between the collections of Member's 
Required Fund Deposits.
Background
    FICC, through GSD, serves as a central counterparty and provider of 
clearance and settlement services for the U.S. Treasury securities, as 
well as repurchase and reverse repurchase transactions involving U.S. 
Treasury securities.\5\ As part of its market risk management strategy, 
FICC manages its credit exposure to Members by determining the 
appropriate Required Fund Deposit to the GSD Clearing Fund and 
monitoring its sufficiency, as provided for in the GSD Rules.\6\ The 
Required Fund Deposit serves as each Member's margin.
---------------------------------------------------------------------------

    \5\ GSD also clears and settles certain transactions on 
securities issued or guaranteed by U.S. government agencies and 
government sponsored enterprises.
    \6\ See GSD Rule 4 (Clearing Fund and Loss Allocation), supra 
note 4. FICC's market risk management strategy is designed to comply 
with Rule 17Ad-22(e)(4) under the Act, where these risks are 
referred to as ``credit risks.'' 17 CFR 240.17Ad-22(e)(4).
---------------------------------------------------------------------------

    The objective of a Member's margin is to mitigate potential losses 
to FICC associated with liquidating a Member's portfolio in the event 
FICC ceases to act for that Member (hereinafter referred to as a 
``default'').\7\ The aggregate amount of all Members' margin 
constitutes the GSD Clearing Fund. FICC would access the GSD Clearing 
Fund should a defaulting Member's own margin be insufficient to satisfy 
losses to FICC caused by the liquidation of that Member's portfolio. 
Each Member's Required Fund Deposit is calculated at least twice daily 
at the start-of-day and noon on each Business Day.
---------------------------------------------------------------------------

    \7\ The GSD Rules identify when FICC may cease to act for a 
Member and the types of actions FICC may take. For example, FICC may 
suspend a firm's membership with FICC or prohibit or limit a 
Member's access to FICC's services in the event that Member defaults 
on a financial or other obligation to FICC. See GSD Rule 21 
(Restrictions on Access to Services) of the GSD Rules, supra note 4.
---------------------------------------------------------------------------

    FICC regularly assesses market and liquidity risks as such risks 
relate to its margin methodologies to evaluate whether margin levels 
are commensurate with the particular risk attributes of each relevant 
product, portfolio, and market. For example, FICC employs daily 
backtesting to determine the adequacy of each Member's Required Fund 
Deposit.\8\ FICC compares the Required Fund Deposit \9\ for each Member 
with the simulated liquidation gains/losses, using the actual positions 
in the Member's portfolio(s) and the actual historical security 
returns. A backtesting deficiency occurs when a Member's Required Fund 
Deposit would not have been adequate to cover the projected liquidation 
losses estimated from a Member's settlement activity based on

[[Page 57486]]

the backtesting results. Backtesting deficiencies highlight exposure 
that could subject FICC to potential losses in the event that a Member 
defaults.
---------------------------------------------------------------------------

    \8\ The Model Risk Management Framework (``Model Risk Management 
Framework'') sets forth the model risk management practices of FICC 
and states that Value at Risk (``VaR'') and Clearing Fund 
requirement coverage backtesting would be performed on a daily basis 
or more frequently. See Securities Exchange Act Release Nos. 81485 
(Aug. 25, 2017), 82 FR 41433 (Aug. 31, 2017) (SR-FICC-2017-014), 
84458 (Oct. 19, 2018), 83 FR 53925 (Oct. 25, 2018) (SR-FICC-2018-
010), 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-FICC-
2020-004), 92380 (Jul. 13, 2021), 86 FR 38140 (Jul. 19, 2021) (SR-
FICC-2021-006), 94271 (Feb. 17, 2022), 87 FR 10411 (Feb. 24, 2022) 
(SR-FICC-2022-001), and 97890 (Jul. 13, 2023), 88 FR 46287 (Jul. 19, 
2023) (SR-FICC-2023-008).
    \9\ Members may be required to post additional collateral to the 
GSD Clearing Fund in addition to their Required Fund Deposit amount. 
See e.g., Section 7 of GSD Rule 3 (Ongoing Membership Requirements), 
supra note 4 (providing that adequate assurances of financial 
responsibility of a member may be required, such as increased 
Clearing Fund deposits). For backtesting comparisons, FICC uses the 
Required Fund Deposit amount, without regard to the actual, total 
collateral posted by the member to the GSD Clearing Fund.
---------------------------------------------------------------------------

    FICC investigates the cause(s) of any backtesting deficiencies and 
determines if there is an identifiable cause of repeat backtesting 
deficiencies. FICC also evaluates whether multiple Members may 
experience backtesting deficiencies for the same underlying reason.
    Pursuant to the GSD Rules, each Member's Required Fund Deposit 
amount consists of a number of applicable components, each of which is 
calculated to address specific risks faced by FICC, as identified 
within the GSD Rules.\10\ These components include the VaR Charge, 
Blackout Period Exposure Adjustment, Backtesting Charge, Holiday 
Charge, Margin Liquidity Adjustment Charge, and special charge.\11\ The 
VaR Charge generally comprises the largest portion of a Member's 
Required Fund Deposit amount.
---------------------------------------------------------------------------

    \10\ Supra note 4.
    \11\ See GSD Rule 4 (Clearing Fund and Loss Allocation), Section 
1b. Supra note 4.
---------------------------------------------------------------------------

    The VaR Charge is based on the potential price volatility of 
unsettled positions using a sensitivity-based Value-at-Risk (VaR) 
methodology. The VaR methodology provides an estimate of the possible 
losses for a given portfolio based on: (1) confidence level, (2) a time 
horizon and (3) historical market volatility. The VaR methodology is 
intended to capture the risks related to market price that is 
associated with the Net Unsettled Positions in a Member's Margin 
Portfolios. This risk-based margin methodology is designed to project 
the potential losses that could occur in connection with the 
liquidation of a defaulting Member's Margin Portfolio, assuming a 
Margin Portfolio would take three days to liquidate in normal market 
conditions. The projected liquidation gains or losses are used to 
determine the amount of the VaR Charge to each Margin Portfolio, which 
is calculated to capture the market price risk \12\ associated with 
each Member's Margin Portfolio(s) at a 99% confidence level. The start-
of-day VaR component of the Required Fund Deposit addresses the risk 
presented by a Member's start-of-day positions. GSD also calculates VaR 
for intraday collection, which reflects the changes in a Member's 
positions and risk profile due to the submission of new trades and 
completed settlement activity from the start-of-day to noon.
---------------------------------------------------------------------------

    \12\ Market price risk refers to the risk that volatility in the 
market causes the price of a security to change between the 
execution of a trade and settlement of that trade. This risk is 
sometimes also referred to as volatility risk.
---------------------------------------------------------------------------

    The proposed change to include the PD Charge in the calculation of 
Required Fund Deposit to the GSD Clearing Fund is the result of FICC's 
regular review of the effectiveness of its margin methodology.
Proposed Change
    The PD Charge is designed to capture variability in the VaR Charge 
collected from the Member over the look back period. FICC believes the 
proposed PD Charge would help mitigate the risks posed to FICC by the 
variability of clearing activity submitted to GSD throughout the day by 
measuring the historical period-over-period increases in the VaR Charge 
of a Member over a given time period.
    A Member's Margin Portfolio(s) may fluctuate significantly intraday 
as the Member executes trades throughout the day. Given that the trades 
are generally novated and guaranteed by FICC upon comparison,\13\ they 
may result in a coverage gap due to large un-margined intraday 
portfolio fluctuations that may not be mitigated until the collection 
of the Required Fund Deposit occurs intraday, or on the next Business 
Day. This exposure may result in backtesting deficiencies, and the PD 
Charge is designed to mitigate such exposure.
---------------------------------------------------------------------------

    \13\ With respect to trades submitted in FICC's Sponsored GC 
service, novation of a trade occurs when all of the requirements set 
forth in GSD Rule 3A (Sponsoring Members and Sponsored Members), 
Section 7(b)(ii) are met. Supra note 4.
---------------------------------------------------------------------------

    The proposed PD Charge would increase Members' Required Fund 
Deposits by an amount designed to address the variability of clearing 
activity submitted to GSD throughout the day, based upon the Member's 
historical trading activity. The PD Charge would be calculated twice a 
day and, if applicable, charged as a part of each Member's Required 
Fund Deposit. Specifically, the PD Charge would look at historical 
period-over-period increases between the (i) start-of-day and the 
intraday VaR components and (ii) the intraday and the end-of-day VaR 
components, respectively, of a Member's Required Fund Deposit over a 
look-back period of no less than 100 days \14\ with a decay factor of 
no greater than 1 and would be calculated to equal the exponentially 
weighted moving average (``EWMA'') of such changes to the Member's VaR 
Charge during the look-back period, times a multiplier that is no less 
than 1 and no greater than 3, as determined by FICC from time to time 
based on backtesting results.\15\ The array of VaR Charge increases 
would be exponentially weighted to emphasize more recent observations 
in determining the PD Charge. By addressing the period-over-period 
changes to each Member's VaR Charge, the PD Charge would help mitigate 
the risks posed to FICC by un-margined period-over-period fluctuations 
to a Member's portfolio resulting from trading activity that would be 
guaranteed during the coverage gap.
---------------------------------------------------------------------------

    \14\ Upon implementation, FICC would use a 100-day look-back 
period in conjunction with a decay factor of 0.97. FICC has 
determined that a 100-day look-back period with a decay factor of 
0.97 would provide it with a sufficient time series to reflect the 
current market conditions. As market conditions shifts, FICC may 
modify the look-back period and/or the decay factor from time to 
time; however, any change in the look-back period and/or the decay 
factor would be subject to FICC's model governance process and 
announced by FICC via an Important Notice posted to its website.
    \15\ The uncertainty of the market condition and/or changes in 
Members' business model may lead to changes in Member activity 
pattern that would require a multiplier greater than 1 be invoked 
from time to time. FICC would determine whether to modify the 
multiplier based on the backtesting results to evaluate the 
effectiveness of PD Charge as a mitigant of the position change risk 
and may change the multiplier from time to time to maintain the 
effectiveness of the PD Charge in generating sufficient backtest 
coverage. Changes to the multiplier shall be approved through FICC's 
model governance process and would be announced by FICC via an 
Important Notice posted to its website.
---------------------------------------------------------------------------

    Accordingly, FICC is proposing to add a definition of ``Portfolio 
Differential Charge'' to GSD Rule 1 (Definitions) that would provide 
that the terms ``Portfolio Differential Charge'' or ``PD Charge'' mean, 
with respect to each Margin Portfolio, an additional charge to be 
included in each Member's Required Fund Deposit. The proposed 
definition would also provide that the PD Charge shall be calculated 
twice each Business Day as the exponentially weighted moving average 
(``EWMA'') of the historical increases in the Member's VaR Charge that 
occur between collections of Required Fund Deposits over a lookback 
period of no less than 100 days with a decay factor of no greater than 
1, times a multiplier that is no less than 1 and no greater than 3, as 
determined by FICC from time to time based on backtesting results. 
Furthermore, the proposed definition would provide that FICC will 
provide Members with at a minimum 10 Business Days advance notice of 
any change to the lookback period, the decay factor, and/or the 
multiplier via an Important Notice.
    In addition, FICC is proposing to amend Section 1b of GSD Rule 4 
(Clearing Fund and Loss Allocation) to include the PD Charge as an 
additional component in the calculation of each Member's Required Fund 
Deposit.

[[Page 57487]]

Impact Study
    FICC has conducted an impact study for the period from November 
2021 to March 2023 (``Impact Study'').\16\ The results of the Impact 
Study indicate that, if the proposed PD Charge had been in place during 
the Impact Study period, the change would have resulted in an average 
daily PD Charge of approximately $660 million for the start-of-day 
margin calculation (approximately 2.2% of the start-of-day average 
daily Clearing Fund deposit) and approximately $839 million for the 
noon margin calculation (approximately 2.9% of the noon average daily 
Clearing Fund deposit).
---------------------------------------------------------------------------

    \16\ GSD increased the minimum Required Fund Deposit for Members 
to $1 million on Dec. 5, 2022 (see Securities Exchange Act Release 
No. 96136 (Oct. 24, 2022) 87 FR 65268 (Oct. 28, 2022) (SR-FICC-2022-
006)); however, for the purpose of this Impact Study, the $1 million 
minimum Requirement Fund Deposit is assumed to be in effect for the 
entirety of the Impact Study period.
---------------------------------------------------------------------------

    The rolling 12-month Clearing Fund requirement backtesting coverage 
ratio (from April 2022 through March 2023) would have improved by 
approximately 25 bps (from 98.37% to 98.62%). Specifically, if the 
proposed PD Charge had been in place during this 12-month period, the 
number of backtesting deficiencies would have been reduced by 77 (from 
498 to 421 or approximately 15%) and the backtesting coverage for 44 
Members (approximately 34% of the GSD membership) would have improved, 
with 14 Members who were below 99% coverage brought back to above 99%.
    The average daily PD Charge in dollars per Member would be 
approximately $5.4 million (approximately 2.2% of the average daily 
Clearing Fund deposit per Member) for the start-of-day margin 
calculation and approximately $6.9 million (approximately 2.9% of the 
average daily Clearing Fund deposit per Member) for the noon margin 
calculation.
    The three largest average daily PD Charge in dollars for Members 
would be $41.09 million (approximately 3.22% of its average daily 
Clearing Fund deposit), $31.50 million (approximately 8.14% of its 
average daily Clearing Fund deposit), and $26.40 million (approximately 
5.90% of its average daily Clearing Fund deposit) for the start-of-day 
margin calculation and $104.06 million (approximately 4.55% of its 
average daily Clearing Fund deposit), $62.47 million (approximately 
7.46% of its average daily Clearing Fund deposit), and $52.15 million 
(approximately 6.38% of its average daily Clearing Fund deposit) for 
the noon margin calculation.
    The three largest average daily PD Charge for Members as 
percentages of the relevant Member's average daily Clearing Fund 
deposit would be 16.74% (PD Charge of $1.42 million), 15.76% (PD Charge 
of $3.64 million), and 13.87% (PD Charge of $7.74 million) for the 
start-of-day margin calculation and 39.76% (PD Charge $15.55 million), 
26.16% (PD Charge of $0.43 million), and 22.47% (PD Charge of $21.42 
million) for the noon margin calculation.
Implementation Timeframe
    Subject to approval by the Commission, FICC expects to implement 
this proposal by no later than 60 Business Days after such approval and 
would announce the effective date of the proposed change by an 
Important Notice posted to FICC's website.
2. Statutory Basis
    FICC believes the proposed change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. In particular, FICC 
believes the proposed rule change is consistent with section 
17A(b)(3)(F) of the Act,\17\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i), 
(e)(6)(iii), and (e)(23)(ii), each promulgated under the Act,\18\ for 
the reasons described below.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), (e)(6)(iii), and 
(e)(23)(ii).
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act requires that the rules of FICC be 
designed to, among other things, assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible and be designed to promote the prompt and 
accurate clearance and settlement of securities transactions.\19\ FICC 
believes the proposed change to implement a PD 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 risks to FICC by un-margined period-over-period 
fluctuations to a Member's portfolio that could increase the risks to 
FICC related to liquidating a Member's portfolio following that 
Member's default. Specifically, the proposed PD Charge would allow FICC 
to collect financial resources to cover exposures that it may face due 
to fluctuations in a Member's portfolio that occur between collections 
of Required Fund Deposits.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Clearing Fund is a key tool that FICC uses to mitigate 
potential losses to FICC associated with liquidating a Member's 
portfolio in the event of Member default. Therefore, the proposed 
change to include a PD Charge among the GSD Clearing Fund components 
would enable FICC to better address period-over-period changes in a 
Member's portfolio that occur between collections of Required Fund 
Deposits, such that, in the event of 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 PD 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.\20\
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(i) under the Act requires, in part, that FICC 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining sufficient financial resources to cover its credit 
exposure to each participant fully with a high degree of 
confidence.\21\ As described above, FICC believes the proposed change 
to adopt a PD Charge would enable it to better identify, measure, 
monitor, and, through the collection of Members' Required Fund 
Deposits, manage its credit exposures to Members by maintaining 
sufficient resources to cover those credit exposures fully with a high 
degree of confidence. Specifically, FICC believes that the proposed PD 
Charge would effectively mitigate the risks to FICC by un-margined 
period-over-period fluctuations to a Member's portfolio and would 
address the increased risks FICC may face related to liquidating a 
Member's portfolio following that Member's default. 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. As such, FICC believes the proposed change to adopt a PD

[[Page 57488]]

Charge is consistent with Rule 17Ad-22(e)(4)(i) under the Act.\22\
---------------------------------------------------------------------------

    \21\ 17 CFR 240.17Ad-22(e)(4)(i).
    \22\ 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.\23\ 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 Members. FICC's proposed change to introduce 
a PD Charge is designed to more effectively address the risks presented 
by un-margined period-over-period fluctuations to a Member's portfolio. 
FICC believes the addition of the PD Charge would enable FICC to assess 
a more appropriate level of margin that accounts for increases in these 
risks that may occur between collections of Required Fund Deposits. 
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 and particular attributes of each relevant 
portfolio. Therefore, FICC believes the proposed change to adopt a PD 
Charge is consistent with Rule 17Ad-22(e)(6)(i) under the Act.\24\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.17Ad-22(e)(6)(i).
    \24\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(iii) 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, 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.\25\ 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 Members. FICC's proposed change to introduce 
a PD Charge is designed to more effectively address the risks presented 
by un-margined period-over-period fluctuations to a Member's portfolio. 
FICC believes the addition of the PD Charge would enable FICC to assess 
a more appropriate level of margin that accounts for increases in these 
risks that may occur between collections of Required Fund Deposits. 
This proposed change is designed to assist FICC in maintaining a risk-
based margin system that produces margin levels 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. Therefore, FICC believes the proposed change to 
adopt a PD Charge is consistent with Rule 17Ad-22(e)(6)(iii) under the 
Act.\26\
---------------------------------------------------------------------------

    \25\ 17 CFR 240.17Ad-22(e)(6)(iii).
    \26\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(23)(ii) under the Act requires that FICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for providing sufficient information to 
enable participants to identify and evaluate the risks, fees, and other 
material costs they incur by participating in FICC.\27\ FICC is 
proposing to amend the GSD Rules to include a description of the PD 
Charge, including the method by which FICC would calculate that charge. 
Through these proposed amendments to the GSD Rules, the proposal would 
assist FICC in providing its Members with sufficient information to 
identify and evaluate the risks and costs, in the form of Required Fund 
Deposits to the GSD Clearing Fund, that they incur by participating in 
FICC. In this way, FICC believes the proposed change is consistent with 
Rule 17Ad-22(e)(23)(ii) under the Act.\28\
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \28\ Id.
---------------------------------------------------------------------------

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

    FICC believes that the proposed change to adopt a PD Charge could 
have an impact on competition. Specifically, FICC believes the proposed 
charge could burden competition because it could result in Members 
being assessed a higher Required Fund Deposit than they would have been 
assessed under the current GSD Clearing Fund formula.
    The impact of this proposal on a particular Member would depend on 
the period-over-period change in the size and composition of the 
Member's portfolio. The proposed change is not designed in a way that 
is intended to or expected to impact Members of a certain legal entity 
type or size or who employ a particular business model. FICC expects 
that Members that present similar pattern in portfolio changes, 
regardless of the type or size of the Member or a Member's particular 
business practices, would have similar impact on their Required Fund 
Deposit amounts as a result of the proposal.
    When the proposal results in a larger Required Fund Deposit, the 
proposed change could burden competition for Members that have lower 
operating margins or higher costs of capital compared to other Members. 
However, the increase in Required Fund Deposit would be in direct 
relation to the specific risks presented by each Member's portfolio, 
and each Member's Required Fund Deposit would continue to be calculated 
with the same parameters and at the same confidence level for each 
Member. Therefore, because the impact of the proposal on a Member is 
relative to the specific risks presented by that Member's clearing 
activity and not on the type or size of a Member, FICC believes that 
any burden on competition imposed by the proposed change would be both 
necessary and appropriate, as permitted by section 17A(b)(3)(I) of the 
Act for the reasons described in this filing and further below.\29\
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    FICC believes the above described burden on competition that may be 
created by the proposed PD Charge would be necessary in furtherance of 
the Act, specifically section 17A(b)(3)(F) of the Act.\30\ As stated 
above, the proposed PD Charge is designed to address the risks to FICC 
by un-margined period-over-period fluctuations to a Member's portfolio 
that could increase the costs to FICC of liquidating a Member portfolio 
in the event of the Member's default. Specifically, the proposed PD 
Charge would allow FICC to collect sufficient financial resources to 
cover exposure that it may face due to fluctuations in Members' 
portfolios that occur between collections of margin. 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 GSD Rules be designed to assure the 
safeguarding of securities and funds that are in FICC's custody or 
control or which it is responsible.\31\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ Id.

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

[[Page 57489]]

    FICC believes the proposed change would also support FICC's 
compliance with Rules 17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iii) 
under the Act, 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.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(6)(iii).
---------------------------------------------------------------------------

    As described above, FICC believes the introduction of the PD Charge 
would allow FICC to employ a risk-based methodology that would address 
the increased risks to FICC by period-over-period fluctuations to a 
Member's portfolio that may occur between collections of the Required 
Fund Deposits. Therefore, the proposed change would better limit FICC's 
credit exposures to Members, necessary in furtherance of the 
requirements of Rules 17Ad-22(e)(4)(i), (e)(6)(i) and (e)(6)(iii) under 
the Act. \33\
---------------------------------------------------------------------------

    \33\ Id.
---------------------------------------------------------------------------

    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, as described above, such change has 
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 required by section 17A(b)(3)(F) of the Act.\34\ 
Specifically, the proposed change would improve the risk-based 
margining methodology that FICC employs to set margin requirements and 
better limit FICC's credit exposures to its Members. As described 
above, the proposed PD Charge would enable FICC to produce margin 
levels more commensurate with the risks and particular attributes of 
each Member's portfolio. The proposed PD Charge would do this by 
measuring the historical period-over-period increases in the VaR Charge 
of the Member. Therefore, because the proposed PD Charge is designed to 
provide FICC with an appropriate measure of the risk presented by 
Members' portfolios, FICC believes the proposed change is appropriately 
designed to meet its risk management goals and regulatory obligations.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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

    FICC has not received or solicited any written comments relating to 
this proposal. 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 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 SEC's Division of Trading 
and Markets at [email protected] or 202-551-5777.
    FICC reserves the right not to respond to any comments received.

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-2023-011 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-2023-011. 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://www.dtcc.com/legal/sec-rule-filings.aspx). Do not include 
personal identifiable information in submissions; you should submit 
only information that you wish to make available publicly. We may 
redact in part or withhold entirely from publication submitted material 
that is obscene or subject to copyright protection. All submissions 
should refer to File Number SR-FICC-2023-011 and should be submitted on 
or before September 13, 2023.


[[Page 57490]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-18106 Filed 8-22-23; 8:45 am]
BILLING CODE 8011-01-P


