Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Partial Amendment No. 1 to an Advance Notice To Adopt a Minimum Margin Amount at GSD

On February 27, 2024, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) advance notice SR-FICC-2024-801 (“Advance Notice”) pursuant to section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”) and Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 (“Act”). The notice of filing and extension of the review period of the Advance Notice was published for comment in the Federal Register on March 15, 2024. The Commission has received comments regarding the substance of the changes proposed in the Advance Notice.

On March 22, 2024, the Commission requested additional information from FICC pursuant to section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission's period of review of the Advance Notice until 120 days from the date the information requested by the Commission was received by the Commission. On April 26, 2024, the Commission received FICC's response to the Commission's request for additional information.

On April 5, 2024, FICC filed Partial Amendment No. 1 to the Advance Notice to correct errors FICC discovered regarding the impact analysis filed as Exhibit 3 and discussed in the filing narrative, as well as correct a typo in the methodology formula in Exhibit 5b. The corrections in Partial Amendment No. 1 do not change the substance of the Advance Notice. Partial Amendment No. 1 corrects percentages and other figures throughout the filing narrative. Accordingly, the Commission is publishing notice of the Advance Notice, as modified by Partial Amendment No. 1, in its entirety and reopening the public comment period.

The Advance Notice, as modified by Partial Amendment No. 1, is described in Items I and II below, which Items have been prepared primarily by FICC. The Commission is publishing this notice to solicit comments on the Advance Notice, as modified by Partial Amendment No. 1, from interested persons.

I. Clearing Agency's Statement of the Terms of Substance of the Advance Notice, as Modified by Partial Amendment No. 1

This Advance Notice, as modified by Partial Amendment No. 1, consists of amendments to FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”) in order to (1) enhance the VaR Floor by incorporating a “Minimum Margin Amount” and (2) expand the application of the enhanced VaR Floor to include Margin Proxy, as described in greater detail below.

The proposed rule change would necessitate changes to the Methodology Document—GSD Initial Market Risk Margin Model (the “QRM Methodology”), which is filed as Exhibit 5b. FICC is requesting confidential treatment of the QRM Methodology and has filed it separately with the Commission.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Advance Notice, as modified by Partial Amendment No. 1

In its filing with the Commission, the clearing agency included statements concerning the purpose of and basis for the Advance Notice, as modified by Partial Amendment No. 1, and discussed any comments it received on the Advance Notice, as modified by Partial Amendment No. 1. 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 and B below, of the most significant aspects of such statements.

(A) Clearing Agency's Statement on Comments on the Advance Notice, as Modified by Partial Amendment No. 1, Received From Members, Participants, or Others

FICC has not received or solicited any written comments relating to this proposal. If any additional 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. FICC reserves the right not to respond to any comments received.

(B) Advance Notice Filed Pursuant to Section 806(e) of the Clearing Supervision Act

Nature of the Proposed Change

FICC is proposing to enhance the VaR Floor by incorporating a Minimum Margin Amount in order to supplement the VaR model and improve its responsiveness and resilience to extreme market volatility. Specifically, FICC is proposing to modify the VaR Floor and the corresponding description in the GSD Rules to incorporate a Minimum Margin Amount. In addition, FICC is proposing to expand the application of the enhanced VaR Floor to include Margin Proxy. The proposed change would necessitate changes to the QRM Methodology.

FICC has observed extreme market volatility in the fixed income market due to monetary policy changes, inflation, and recession fears. The extreme market volatility has led to greater risk exposures for FICC. Specifically, the extreme market volatilities during the two arguably most stressful market periods, i.e., the COVID period during March of 2020 and the successive interest rate hikes that began in March 2022, have led to market price changes that exceeded the VaR model's projections, which yielded insufficient VaR Charges. As a result, FICC's VaR backtesting metrics fell below the performance target due to unprecedented levels of extreme market volatility. This highlighted the need for FICC to enhance its VaR model so that it can better respond to extreme market volatility.

In order to better manage its risk exposures during extreme market volatility events, FICC is proposing to adopt a Minimum Margin Amount that would be applied as a minimum volatility calculation to ensure that FICC calculates sufficient margin to cover its risk exposures, particularly during extreme market volatility. The proposed Minimum Margin Amount would be incorporated into the VaR Floor to supplement the VaR model and enhance its responsiveness to extreme market volatility. As proposed, the Minimum Margin Amount is designed to improve the margin backtesting performance during periods of heightened market volatility by maintaining a VaR Charge that is appropriately calibrated to reflect the current market volatility. The proposed Minimum Margin Amount aims to enhance backtesting coverage when there are potential VaR model performance challenges, particularly when securities price changes significantly exceed those implied by the VaR model risk factors, as observed during the recent periods of extreme market volatility. FICC believes the proposed Minimum Margin Amount would provide a more reliable estimate for the portfolio risk level when current market conditions significantly deviate from historical observations.

The proposed Minimum Margin Amount would be determined using historical price returns to represent risk along with amounts calculated (i) using a filtered historical simulation approach, (ii) using a haircut method, and (iii) to incorporate other risk factors. By using a filtered historical simulation approach in which historical returns are scaled to current market volatility, the proposed Minimum Margin Amount would operate as a floor to the VaR Charge to improve the responsiveness of the VaR model to extreme volatility. Because the use of historical price return-based risk representation is not dependent on any sensitivity data vendor, it would allow the proposed Minimum Margin Amount to also operate as a floor to the Margin Proxy and improve the responsiveness of Margin Proxy to extreme volatility.

As a result of this proposal, Members may experience increases in their Required Fund Deposits to the Clearing Fund. Based on an impact study conducted by FICC, on average, at the Member level, the proposed Minimum Margin Amount would have increased the SOD VaR Charge by approximately $22.43 million, or 17.56%, and the noon VaR Charge by approximately $23.25 million, or 17.43%, over a 2-year impact study period.

Background

FICC, through GSD, serves as a central counterparty and provider of clearance and settlement services for transactions in the U.S. government securities, as well as repurchase and reverse repurchase transactions involving U.S. government securities. As part of its market risk management strategy, FICC manages its credit exposure to Members by determining the appropriate Required Fund Deposit to the Clearing Fund and monitoring its sufficiency, as provided for in the GSD Rules. The Required Fund Deposit serves as each Member's margin.

The objective of a Member's Required Fund Deposit 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”). The aggregate amount of all Members' Required Fund Deposit constitutes the Clearing Fund. FICC would access the Clearing Fund should a defaulting Member's own Required Fund Deposit be insufficient to satisfy losses to FICC caused by the liquidation of that Member's portfolio.

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. FICC compares the Required Fund Deposit 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 and highlights exposure that could subject FICC to potential losses in the event that a Member defaults.

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. These components include the VaR Charge, Blackout Period Exposure Adjustment, Backtesting Charge, Holiday Charge, Margin Liquidity Adjustment Charge, special charge, and Portfolio Differential Charge. The VaR Charge generally comprises the largest portion of a Member's Required Fund Deposit amount.

VaR Charge

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 are 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 associated with each Member's Margin Portfolio(s) at a 99% confidence level.

FICC's VaR model is designed to provide a margin calculation that covers the market risk in a Member's Margin Portfolio. The VaR model calculates the risk profile of each Member's Margin Portfolio by applying certain representative risk factors to measure the degree of responsiveness of the Margin Portfolio's value to the changes of these risk factors over a historical lookback period of at least 10 years that may be supplemented with an additional stressed period.

The VaR model has been shown to perform well in low to moderate volatility markets. From January 2013 to March 2020, the VaR model has generally performed above the 99% performance target, with deterioration in backtesting coverage only during the two arguably most stressful market periods, i.e., the COVID period during March of 2020 and the successive interest rate hikes that began in March 2022. The market events during these two stressful periods, including monetary policy changes, inflation and recession fears, have resulted in significant market volatility in the fixed income market that exceeded the 99-percentile of the observed historical data set. Specifically, the extreme market volatilities during these two periods have led to market price changes that exceeded the VaR model's projections, which yielded insufficient VaR Charges. As a result, FICC's VaR backtesting metrics fell below the performance target due to unprecedented levels of extreme market volatility. This highlighted the need for FICC to enhance its VaR model so that it can better respond to extreme market volatility. Accordingly, FICC is proposing changes to the VaR Floor that FICC believes would mitigate the risk of potential underperformance of its VaR model under extreme market volatility.

Current VaR Floor

On June 1, 2018, the Commission approved FICC's VaR Filing to make changes to GSD's method of calculating a Member's Required Fund Deposit amount, including the VaR Charge. The VaR Filing amended the definition of VaR Charge to, among other things, incorporate the VaR Floor. FICC established the VaR Floor to address the risk that in a long/short portfolio the VaR model could calculate a VaR Charge that is erroneously low where the gross market value of unsettled positions in a Member's portfolio is high and the cost of liquidation in the event of the Member default is also high. This is likely to occur when the VaR model applies substantial risk offsets among long and short unsettled positions in different classes of securities that have a high degree of historical price correlation. When this high degree of historical price correlations does not apply as a result of changing market conditions, the VaR Charge derived from the VaR model can be inadequate, and the VaR Floor would then be applied by FICC to mitigate such risk.

Currently, the VaR Floor is based upon the market value of the gross unsettled positions in the Member's portfolio. The VaR Floor is determined by multiplying the absolute value of the sum of 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. For 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 for such group by product and remaining maturity. For mortgage-backed securities, such percentage shall be a fixed percentage that is no less than 0.05%.

The current VaR Floor is not designed to address the risk of potential underperformance of the VaR model under extreme market volatility.

Incorporate a Minimum Margin Amount Into the VaR Floor

In order to mitigate the risk of potential underperformance of its VaR model under extreme market volatility, FICC proposes to incorporate a Minimum Margin Amount into the VaR Floor to supplement the VaR model and enhance its responsiveness to extreme market volatility. FICC believes this proposal would complement and improve the VaR model performance during stressed market conditions. Specifically, FICC believes this proposal would improve the margin backtesting performance during periods of heightened market volatility by maintaining a VaR Charge that is appropriately calibrated to reflect the current market volatility.

FICC is proposing to introduce a new calculation called the “Minimum Margin Amount” to complement the existing VaR Floor in the GSD Rules. The Minimum Margin Amount would enhance backtesting coverage when there are potential VaR model performance challenges, particularly when securities price changes significantly exceed those implied by the VaR model risk factors, as observed during the recent periods of extreme market volatility. FICC believes the proposed Minimum Margin Amount would provide a more reliable estimate for the portfolio risk level when current market conditions significantly deviate from historical observations.

The Minimum Margin Amount would be defined in the GSD Rules as, with respect to each Margin Portfolio, a minimum volatility calculation for specified Net Unsettled Positions of a Netting Member as of the time of such calculation. The proposed definition would provide that the Minimum Margin Amount shall use historical price returns to represent risk and be calculated as the sum of the following: (a) amounts calculated using a filtered historical simulation (“FHS”) approach to assess volatility by scaling historical market price returns to current market volatility, with market volatility being measured by applying exponentially weighted moving average to the historical market price returns with a decay factor between 0.93 and 0.99, as determined by FICC from time to time based on sensitivity analysis, macroeconomic conditions, and/or backtesting performance, (b) amounts calculated using a haircut method to measure the risk exposure of those securities that lack sufficient historical price return data, (c) amounts calculated to incorporate risks related to (i) repo interest volatility (“repo interest volatility charge”) and (ii) transaction costs related to bid-ask spread in the market that could be incurred when liquidating a portfolio (“bid-ask spread risk charge”). In addition, the proposed definition would require FICC to provide Members with at a minimum one Business Day advance notice of any change to the decay factor via an Important Notice.

FICC is proposing to revise the definition of the VaR Floor to incorporate the Minimum Margin Amount, such that the VaR Floor would be the greater of (i) the VaR Floor Percentage Amount and (ii) the Minimum Margin Amount.

The “VaR Floor Percentage Amount” would be the new defined term used to describe the current VaR Floor percentage calculation in the GSD Rules. This rule change is not proposing to change the VaR Floor percentage or the manner in which this component is calculated.

As proposed, the Minimum Margin Amount would be utilized as the VaR Charge for a Member's Margin Portfolio when it is greater than the current VaR Charge of the Margin Portfolio and the VaR Floor Percentage Amount.

Under the proposed changes to the QRM Methodology, the Minimum Margin Amount would use a price return-based risk representation ( i.e., use historical price returns to represent risk) and be calculated as the sum of (i) amounts calculated using a FHS method that scales historical market price returns to current market volatility, (ii) amounts calculated using a haircut method for securities that lack sufficient historical price return data, and (iii) amounts calculated to incorporate additional risk factors.

FHS Method

Following the FHS method, FICC would first construct historical price returns using certain mapped fixed income securities benchmarks. As proposed, the mapped fixed income securities benchmarks to be used with the FHS method when calculating the Minimum Margin Amount in the QRM Methodology would be Bloomberg Treasury indexes for U.S. Treasury and agency securities, Bloomberg TIPS indexes for Treasury Inflation-Protected Securities (“TIPS”), and to-be-announced (“TBA”) securities for mortgage-backed securities (“MBS”) pools. These benchmarks were selected because their price movements generally closely track those of the securities mapped to them and that their price history is generally readily available and accessible.

After constructing historical price returns, FICC would estimate a market volatility associated with each historical price return by applying exponentially weighted moving average (“EWMA”) to the historical price returns. The historical price returns are then “devolatilized” by dividing them by the corresponding EWMA volatilities to obtain the residual returns. The residual returns are then “revolatilized” by multiplying them by the current EWMA volatility to obtain the filtered returns.

The filtered return time series are then used to simulate the profits and losses of a Member's Margin Portfolio and derive the volatility of the Margin Portfolio using the standard historical simulation approach. In particular, each security that is in a Member's Margin Portfolio would be mapped to a respective fixed income securities benchmark, as applicable, based on the security's asset class and remaining maturity. The filtered returns of the benchmark are used as the simulated returns of the mapped security to calculate the simulated profits and losses of a Member's Margin Portfolio. The Minimum Margin Amount is then calculated as the 99-percentile of the simulated portfolio loss.

Haircut Method

Occasionally, a Member's Margin Portfolio(s) contain classes of securities that reflect market price changes that are not consistently related to historical price moves. The value of these securities is often uncertain because the securities' market volume varies widely, thus the price histories are limited. Because the volume and price information for such securities are not robust, the FHS method would not generate Minimum Margin Amounts that adequately reflect the risk profile of such securities. Accordingly, the proposed changes to the QRM Methodology would provide that the Minimum Margin Amount would use a haircut method to assess the market risk of those securities that are more difficult to simulate, for example, because of thin trading history.

Specifically, the proposed haircut method would be used for MBS pools that are not TBA securities eligible, floating rate notes and U.S. Treasury/agency securities with remaining time to maturities of less than or equal to one year.

A haircut method would also be used to size up the basis risk between an agency security and the mapped U.S. Treasury index to supplement the historical market price moves generated by the FHS method for agency securities to reflect any residual risks between agency securities and the mapped fixed income securities benchmarks, i.e., Bloomberg Treasury indexes. Similarly, a haircut method would be used to size up the MBS pool/TBA basis risk to address the residual risk for using TBA price returns as proxies for MBS pool returns used in the FHS method.

Minimum Margin Amount Calculation

FICC is proposing to modify the QRM Methodology to specify that the Minimum Margin Amount would use a price return-based risk representation and be calculated per Member Margin Portfolio as the sum of (i), (ii), and (iii):

(i) FHS Method

(a) the amount calculated using historical market price returns of mapped fixed income securities benchmarks derived based on the FHS method.

(ii) Haircut Method

(a) the haircut charge for MBS pools that are not TBA securities eligible,

(b) the supplemental haircut charge for agency securities,

(c) the haircut charge for floating rate notes and U.S. Treasury/agency securities with remaining time to maturities of less than or equal to one year, and

(d) the supplemental basis haircut charge for mortgage pool securities.

(iii) Additional Risk Factors

(a) the repo interest volatility charge, and

(b) the bid-ask spread risk charge.

The mapped fixed income securities benchmarks, historical market price returns, parameters and volatility assessments to be used to calculate the Minimum Margin Amount would be determined by FICC from time to time in accordance with FICC's model risk management practices and governance set forth in the Clearing Agency Model Risk Management Framework.

Minimum Margin Amount Parameters

The proposed Minimum Margin Amount uses a lookback period for the filtered historical simulation and a decay factor for calculating the EWMA volatility of the historical prices returns.

In particular, the lookback period of the proposed Minimum Margin Amount is the same as the lookback period used for the VaR model, which is 10 years, plus, to the extent applicable, a stressed period. Consistent with the VaR methodology outlined in the QRM Methodology and pursuant to the model performance monitoring required under the Model Risk Management Framework, the lookback period would be analyzed to evaluate its sensitivity and impact to the model performance.

The decay factor in general affects (i) whether and how the Minimum Margin Amount would be invoked, (ii) the peak level of margin increase or the degree of procyclicality, and (iii) how quickly the margin would fall back to pre-stress levels. Similar to the lookback period, the decay factor of the proposed Minimum Margin Amount would also be analyzed to evaluate its sensitivity and impact to the model performance pursuant to the model performance monitoring required under the Model Risk Management Framework. The decay factor would be, as proposed, between 0.93 and 0.99, and any update thereto is expected to be an infrequent event and would typically happen only when there is an unprecedented market volatility event which resulted in risk exposures to FICC that cannot be adequately mitigated by the then calibrated decay factor. The decision to update the decay factor would be based on the above-mentioned sensitivity analysis with considerations to factors, such as the impact to the VaR Charges, macroeconomic conditions, and/or backtesting performance. The initial decay factor for the Minimum Margin Amount calculation would be 0.97 but may be adjusted as set forth above in accordance with FICC's model risk management practices and governance set forth in the Model Risk Management Framework.

The Model Risk Management Framework would also require FICC to conduct ongoing model performance monitoring of the Minimum Margin Amount methodology. FICC's current model performance monitoring practices would provide for sensitivity analysis of relevant model parameters and assumptions to be conducted monthly, or more frequently when markets display high volatility. In addition, FICC would monitor each Member's Required Fund Deposit and the aggregate Clearing Fund requirements versus the requirements calculated by the Minimum Margin Amount. Specifically, FICC would review and assess the robustness of the Required Fund Deposit inclusive of the Minimum Margin Amount by comparing the results versus the three-day profit and loss of each Member's Margin Portfolio based on actual market price moves. Based on the results of the sensitivity analysis and/or backtesting, FICC could consider adjustments to the Minimum Margin Amount, including changing the decay factor as appropriate. Any adjustment to the Minimum Margin Amount calculation would be subject to the model risk management practices and governance process set forth in the Model Risk Management Framework.

Expand Application of VaR Floor To Include Margin Proxy

The GSD Margin Proxy methodology is currently deployed as an alternative volatility calculation in the event that the requisite vendor data used for the VaR model is unavailable for an extended period of time. In circumstances where the Margin Proxy is applied by FICC, FICC is proposing to have the VaR Floor operate as a floor for the Margin Proxy. Specifically, FICC is proposing to expand the application of the VaR Floor to include Margin Proxy so that if the Margin Proxy, when deployed, is lower than the VaR Floor, then the VaR Floor would be utilized as the VaR Charge with respect to a Member's Margin Portfolio. FICC believes this proposed change would enable Margin Proxy to be a more effective risk mitigant under extreme market volatility and heightened market stress, thereby enhancing the overall resilience of the FICC risk management.

Proposed GSD Rule Changes

In connection with incorporating the Minimum Margin Amount into the VaR Floor, FICC would modify the GSD Rules to:

I. Add a definition of “Minimum Margin Amount” and define it as, with respect to each Margin Portfolio, a minimum volatility calculation for specified Net Unsettled Positions of a Member as of the time of such calculation. The definition would provide that the Minimum Margin Amount shall use historical price returns to represent risk and be calculated as the sum of the following: (a) amounts calculated using a filtered historical simulation approach to assess volatility by scaling historical market price returns to current market volatility, with market volatility being measured by applying exponentially weighted moving average to the historical market price returns with a decay factor between 0.93 and 0.99, as determined by FICC from time to time based on sensitivity analysis, macroeconomic conditions, and/or backtesting performance, (b) amounts calculated using a haircut method to measure the risk exposure of those securities that lack sufficient historical price return data, and (c) amounts calculated to incorporate risks related to (i) repo interest volatility (“repo interest volatility charge”) and (ii) transaction costs related to bid-ask spread in the market that could be incurred when liquidating a portfolio (“bid-ask spread risk charge”). In addition, the proposed definition would require FICC to provide Members with at a minimum one Business Day advance notice of any change to the decay factor via an Important Notice;

II. Add a definition of “VaR Floor Percentage Amount” which would be defined the same as the current calculation for the VaR Floor percentage with non-substantive modifications to reflect that the calculated amount is a separate defined term; and

III. Move the defined term VaR Floor out of the definition of VaR Charge and define it as the greater of (i) the VaR Floor Percentage Amount and (ii) the Minimum Margin Amount.

In connection with applying the VaR Floor to include Margin Proxy, FICC would modify the GSD Rules to revise the definition of “VaR Charge” by adding a reference to the Margin Proxy with respect to the VaR Floor application and clarifying that VaR Charge is calculated at the Margin Portfolio-level.

Proposed QRM Methodology Changes

In connection with incorporating the Minimum Margin Amount into the VaR Floor, FICC would modify the QRM Methodology to:

I. Describe how the Minimum Margin Amount, as defined in the GSD Rules, would be calculated, including:

(i) Establishing mapped fixed income securities benchmarks for purposes of the calculation using historical market price returns of such securities with the FHS method;

(ii) Using a haircut method to assess the market risk of certain securities that are more difficult to simulate due to thin trading history; and

(iii) Detailing other risk factors that would be incorporated in the calculation.

II. Describe the developmental evidence and impacts to backtesting performance and margin charges relating to Minimum Margin Amount.

In connection with applying the VaR Floor to include Margin Proxy, FICC would modify the QRM Methodology to reflect that the Minimum Margin Amount would serve as a floor for the Margin Proxy.

In addition, FICC would modify the QRM Methodology to:

I. Make certain clarifying changes to the QRM Methodology to delete an out-of-date description of the Margin Proxy being used as an adjustment factor to the VaR, enhance the description of the VaR Floor Percentage Amount, and update the list of key model parameters to reflect the Margin Proxy lookback period; and

II. Make certain technical changes to the QRM Methodology to renumber sections and tables, correct grammatical and typographical errors, delete out-of-date index names, and update certain formula notations and section titles as necessary.

Impact Study

FICC performed an impact study on Members' Margin Portfolios for the period beginning July 1, 2021 through June 30, 2023 (“Impact Study Period'). If the proposed rule changes had been in place during the Impact Study Period compared to the existing GSD Rules, the aggregate average daily start-of-day (“SOD”) VaR Charges would have increased by approximately $2.90 billion or 13.89%, the aggregate average daily noon VaR Charges would have increased by approximately $3.03 billion or 14.06%, and the aggregate average daily Backtesting Charges would have decreased by approximately $622 million or 64.46%.

The impact study indicated that if the proposed rule changes had been in place, the VaR model backtesting coverage would have increased from approximately 98.86% to 99.46% during the Impact Study Period. Specifically, if the proposed rule changes had been in place during the Impact Study Period, the number of VaR model backtesting deficiencies would have been reduced by 441 (from 843 to 402, or approximately 52%).

The impact study also indicated that if the proposed rule changes had been in place, overall margin backtesting coverage would have increased from approximately 98.87% to 99.33% during the Impact Study Period. Specifically, if the proposed rule changes had been in place during the Impact Study Period, the number of overall margin backtesting deficiencies would have been reduced by 280 (from 685 to 405, or approximately 41%) and the overall margin backtesting coverage for 94 Members (approximately 72% of the GSD membership) would have improved with 36 Members who were below 99% coverage would be brought back to above 99%.

Impacts to Members Over the Impact Study Period

On average, at the Member level, the proposed Minimum Margin Amount would have increased the SOD VaR Charge by approximately $22.43 million, or 17.56%, and the noon VaR Charge by approximately $23.25 million, or 17.43%, over the Impact Study Period. The largest average percentage increase in SOD VaR Charge for any Member would have been approximately 66.88%, or $97,051 (0.21% of the Member's average Net Capital), and the largest average percentage increase in noon VaR Charge for any Member would have been approximately 64.79%, or $61,613 (0.13% of the Member's average Net Capital). The largest average dollar increase in SOD VaR Charge for any Member would have been approximately $268.51 million (0.34% of the Member's average Net Capital), or 19.06%, and the largest dollar increase in noon VaR Charge for any Member would have been approximately $289.00 million (1.07% of the Member's average Net Capital), or 13.67%. The top 10 Members based on the size of their average SOD VaR Charges and average noon VaR Charges would have contributed approximately 51.87% and 53.64% of the aggregated SOD VaR Charges and aggregated noon VaR Charges, respectively, during the Impact Study Period had the proposed Minimum Margin Amount been in place. The same Members would have contributed to 50.08% and 51.52% of the increase in aggregated SOD VaR Charges and aggregated noon VaR Charges, respectively, had the proposed Minimum Margin Amount been in place during the Impact Study Period.

Implementation Timeframe

FICC would implement the proposed rule changes by no later than 60 Business Days after the later of the approval of the related proposed rule change filing and no objection to the advance notice by the Commission. FICC would announce the effective date of the proposed changes by an Important Notice posted to its website.

Anticipated Effect on and Management of Risk

FICC believes that the proposed change, which consists of a proposal to (i) modify the calculation of the VaR Floor and the corresponding description in the GSD Rules and QRM Methodology to incorporate a Minimum Margin Amount and (ii) expand the application of the VaR Floor to include Margin Proxy, would enable FICC to better limit its exposure to Members arising out of the activity in their portfolios. As stated above, the proposed change is designed to enhance the GSD VaR model performance and improve the backtesting coverage during periods of extreme market volatility. The proposed charge would help ensure that FICC maintains an appropriate level of margin to address its risk management needs.

Specifically, the proposed rule change seeks to remedy potential situations that are described above where FICC's VaR model and/or Margin Proxy, including the existing VaR Floor, does not respond effectively to increased market volatility and the VaR Charge amounts do not achieve a 99% confidence level. Therefore, by enabling FICC to collect margin that more accurately reflects the risk characteristics of its Members, the proposal would enhance FICC's risk management capabilities.

By providing FICC with a more effective limit on its exposures, the proposed change would also mitigate risk for Members because lowering the risk profile for FICC would in turn lower the risk exposure that Members may have with respect to FICC in its role as a central counterparty. Further, the proposal is designed to meet FICC's risk management goals and its regulatory obligations, as described below.

Consistency With the Clearing Supervision Act

Although Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (“Clearing Supervision Act”) does not specify a standard of review for an advance notice, its stated purpose is instructive: to mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.

FICC believes that the proposal is consistent with the Clearing Supervision Act, specifically with the risk management objectives and principles of section 805(b), and with certain of the risk management standards adopted by the Commission pursuant to section 805(a)(2), for the reasons described below.

(i) Consistency With Section 805(b) of the Clearing Supervision Act

Section 805(b) of the Clearing Supervision Act states that the objectives and principles for the risk management standards prescribed under section 805(a) shall be to, among other things, promote robust risk management, promote safety and soundness, reduce systemic risks, and support the stability of the broader financial system. For the reasons described below, FICC believes that the proposed changes in this advance notice are consistent with the objectives and principles of the risk management standards as described in section 805(b) of the Clearing Supervision Act.

FICC is proposing to (i) modify the calculation of the VaR Floor and the corresponding description in the GSD Rules and QRM Methodology to incorporate a Minimum Margin Amount and (ii) expand the application of the VaR Floor to include Margin Proxy, both of which would enable FICC to better limit its exposure to Members arising out of the activity in their portfolios. FICC believes these proposed changes are consistent with promoting robust risk management because the changes would better enable FICC to limit its exposure to Members in the event of a Member default by collecting adequate prefunded financial resources to cover its potential losses resulting from the default of a Member and the liquidation of a defaulting Member's portfolio.

Specifically, the proposed Minimum Margin Amount would modify the VaR Floor to cover circumstances, such as extreme market volatility, where the current VaR Charge calculation and the VaR Floor are both lower than market price volatility from corresponding securities benchmarks. The proposed changes are designed to more effectively measure and address risk characteristics in situations where the risk factors used in the VaR method do not adequately predict market price movements and associated credit risk exposure. As reflected in backtesting studies, FICC believes the proposed changes would appropriately limit FICC's credit exposure to Members in the event that the VaR model yields too low a VaR Charge in such situations. Such backtesting studies indicate that the aggregate average daily Backtesting Charges would have decreased by approximately $622 million or 64.46% during the Impact Study Period, and the overall margin backtesting coverage (based on 12-month trailing backtesting) would have improved from approximately 98.87% to 99.33% during the Impact Study Period if the Minimum Margin Amount calculation had been in place. Improving the overall backtesting coverage level would help FICC ensure that it maintains an appropriate level of margin to address its risk management needs.

The use of the Minimum Margin Amount would reduce risk by allowing FICC to calculate the exposure in each portfolio using historical price returns to represent risk along with amounts calculated (i) using a FHS method that scales historical market price returns to current market volatility, (ii) using a haircut method for those securities that lack sufficient historical price return data, and (iii) to incorporate other risk factors. As reflected by backtesting studies during the Impact Study Period, using the FHS method would provide a more reliable estimate than the FICC VaR historical data set for the portfolio risk level when current market conditions deviate from historical observations. Adding the Minimum Margin Amount to the VaR Floor and applying the VaR Floor to include Margin Proxy would help to ensure that the risk exposure during periods of extreme market volatility is adequately captured in the VaR Charges. FICC believes that would help to ensure that FICC continues to accurately calculate and assess margin and in turn, collect sufficient margin from its Members and better enable FICC to limit its exposures that could be incurred when liquidating a portfolio.

The proposed change to expand the application of VaR Floor to include Margin Proxy would enable Margin Proxy to be a more effective risk mitigant under extreme market volatility and heightened market stress. By improving the effectiveness of Margin Proxy as a risk mitigant under extreme market volatility and heightened market stress would help ensure that the margin that FICC collects from Members is sufficient to mitigate the credit exposure presented by the Members.

For these reasons, FICC believes the proposed changes would help to promote GSD's robust risk management, which, in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system, consistent with section 805(b) of the Clearing Supervision Act.

FICC also believes the changes proposed in this advance notice are consistent with promoting safety and soundness, which, in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system, consistent with section 805(b) of the Clearing Supervision Act. As described above, the proposed changes are designed to help ensure that FICC is collecting adequate prefunded financial resources to cover its potential losses resulting from the default of a Member and the liquidation of a defaulting Member's portfolio in times of extreme market volatility. Because the proposed changes would better position FICC to limit its exposures to Members in the event of a Member default, FICC believes the proposed changes are consistent with promoting safety and soundness, which, in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system.

(ii) Consistency With 805(a)(2) of the Clearing Supervision Act

Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe risk management standards for the payment, clearing and settlement activities of designated clearing entities, like FICC, and financial institutions engaged in designated activities for which the Commission is the supervisory agency or the appropriate financial regulator. The Commission has adopted risk management standards under section 805(a)(2) of the Clearing Supervision Act and section 17A of the Act (the risk management standards are referred to as the “Covered Clearing Agency Standards”).

The Covered Clearing Agency Standards require registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures that are reasonably designed to be consistent with the minimum requirements for their operations and risk management practices on an ongoing basis. FICC believes that this proposal is consistent with Rules 17Ad-22(e)(4)(i) and (e)(6)(i), each promulgated under the Act, for the reasons described below.

Rule 17Ad-22(e)(4)(i) under the Act requires a covered clearing agency to establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those exposures arising from its payment, clearing, and settlement processes by maintaining sufficient financial resources to cover its credit exposure to each participant fully with a high degree of confidence. As described above, FICC believes that the proposed changes 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. More specifically, as indicated by backtesting studies, implementation of a Minimum Margin Amount by changing the GSD Rules and QRM Methodology as described herein would allow FICC to limit its credit exposures to Members in the event that the current VaR model yields too low a VaR Charge for such portfolios and improve backtesting performance. As indicated by the backtesting studies, the aggregate average daily SOD VaR Charges would have increased by approximately $2.90 billion or 13.89%, the aggregate average daily noon VaR Charges would have increased by approximately $3.03 billion or 14.06%, the aggregate average daily Backtesting Charges would have decreased by approximately $622 million or 64.46% during the Impact Study Period, and the overall margin backtesting coverage (based on 12-month trailing backtesting) would have improved from approximately 98.87% to 99.33% during the Impact Study Period if the Minimum Margin Amount calculation had been in place. By identifying and providing for appropriate VaR Charges, adding the Minimum Margin Amount to the VaR Floor would help to ensure that the risk exposure during periods of extreme market volatility is adequately identified, measured and monitored. Similarly, the proposed change to expand the application of VaR Floor to include Margin Proxy would enable Margin Proxy to be a more effective risk mitigant under extreme market volatility and heightened market stress. By improving the effectiveness of Margin Proxy as a risk mitigant under extreme market volatility and heightened market stress would help ensure that the margin that FICC collects from Members is sufficient to mitigate the credit exposure presented by the Members. As a result, FICC believes that 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 the requirements of Rule 17Ad-22(e)(4)(i) of 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. FICC believes that the proposed changes to adjust the VaR Floor to include the Minimum Margin Amount by changing the GSD Rules and QRM Methodology as described herein are consistent with the requirements of Rule 17Ad-22(e)(6)(i) cited above. 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 is proposing changes that are designed to more effectively measure and address risk characteristics in situations where the risk factors used in the VaR method do not adequately predict market price movements. As reflected in backtesting studies, FICC believes the proposed changes would appropriately limit FICC's credit exposure to Members in the event that the VaR model yields too low a VaR Charge in such situations. Such backtesting studies indicate that the aggregate average daily SOD VaR Charges would have increased by approximately $2.90 billion or 13.89%, the aggregate average daily noon VaR Charges would have increased by approximately $3.03 billion or 14.06%, the aggregate average daily Backtesting Charges would have decreased by approximately $622 million or 64.46% during the Impact Study Period, and the overall margin backtesting coverage (based on 12-month trailing backtesting) would have improved from approximately 98.87% to 99.33% during the Impact Study Period if the Minimum Margin Amount calculation had been in place. By identifying and providing for appropriate VaR Charges, adding the Minimum Margin Amount to the VaR Floor would help to ensure that margin levels are commensurate with the risk exposure of each portfolio during periods of extreme market volatility. Similarly, the proposed change to expand the application of VaR Floor to include Margin Proxy would enable Margin Proxy to be a more effective risk mitigant under extreme market volatility and heightened market stress. By improving the effectiveness of Margin Proxy as a risk mitigant under extreme market volatility and heightened market stress would help ensure that the margin that FICC collects from Members is sufficient to mitigate the credit exposure presented by the Members. Overall, the proposed changes would allow FICC to more effectively address the risks presented by Members. In this way, the proposed changes enhance the ability of FICC to produce margin levels commensurate with the risks and particular attributes of each relevant product, portfolio, and market. As such, FICC believes that the proposed changes are consistent with the requirements of Rule 17Ad-22(e)(6)(i) under the Act.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the Advance Notice, as modified by Partial Amendment No. 1, is consistent with the Clearing Supervision Act. Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form ( www.sec.gov/rules/sro.shtml ); or
• Send an email torule-comments@sec.gov. Please include File Number SR-FICC-2024-801 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-2024-801. 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 ( www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the Advance Notice, as modified by Partial Amendment No. 1, that are filed with the Commission, and all written communications relating to the Advance Notice, as modified by Partial Amendment No. 1, 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 ( www.dtcc.com/legal/sec-rule-filings ). 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-2024-801 and should be submitted on or before June 10, 2024.

IV. Date and Timing for Commission Action

Section 806(e)(1)(G) of the Clearing Supervision Act provides that FICC may implement the changes if it has not received an objection to the proposed changes within 60 days of the later of (i) the date that the Commission receives an advance notice or (ii) the date that any additional information requested by the Commission is received, unless extended as described below.

Pursuant to section 806(e)(1)(H) of the Clearing Supervision Act, the Commission may extend the review period of an advance notice for an additional 60 days, if the changes proposed in the advance notice raise novel or complex issues, subject to the Commission providing the clearing agency with prompt written notice of the extension.

The date that is 60 days after FICC filed the advance notice with the Commission is April 27, 2024. However, the Commission extended the review period of the Advance Notice for an additional 60 days under section 806(e)(1)(H) of the Clearing Supervision Act due to the Commission's finding that the Advance Notice is both novel and complex. Additionally, on March 22, 2024, the Commission requested additional information from FICC pursuant to section 806(e)(1)(D) of the Clearing Supervision Act, which tolled the Commission's review period of review of the Advance Notice until 120 days from the date the information requested by the Commission was received by the Commission. On April 26, 2024, the Commission received FICC's response to the Commission's request for additional information. Accordingly, August 23, 2024, is the date by which the Commission shall notify FICC of an objection regarding the Advance Notice, unless the Commission requests further information for consideration of the Advance Notice.

All submissions should refer to File Number SR- FICC-2024-801 and should be submitted on or before June 10, 2024.