[Federal Register: July 18, 2008 (Volume 73, Number 139)]
[Notices]
[Page 41397-41399]
[DOCID:fr18jy08-132]

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

DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

Dorel Juvenile Group [Cosco] (DJG); Denial of Applications for
Determination of Inconsequential Noncompliance

    Dorel Juvenile Group (DJG), of Columbus, Indiana, the parent
company manufacturing Cosco brand child restraints, determined that
certain tether webbing used on various child restraints (39 models and
3,957,826 units) failed the webbing strength requirements of S5.4.1(a)
of Federal Motor Vehicle Safety Standard (FMVSS) No. 213, ``Child
Restraint Systems''.\1\ DJG also determined that certain harness
webbing used on various child restraints (14 models and 54,400 units)
failed the webbing strength requirements of FMVSS No. 213, S5.4.1(b).
For each noncompliance, DJG filed an appropriate report pursuant to 49
CFR part 573, ``Defect and Noncompliance Reports.'' DJG also applied to
be exempted from the notification and remedy requirements of 49 U.S.C.
Chapter 301, ``Motor Vehicle Safety,'' on the basis that the
noncompliance in both situations is inconsequential to motor vehicle
safety.
---------------------------------------------------------------------------

    \1\ Throughout this Notice, all references to FMVSS No. 213 are
based on the version of the standard in effect for the applicable
manufacturing dates of the noncompliant webbing.
---------------------------------------------------------------------------

    Notices of receipt of the applications were published on July 30,
2002 and December 3, 2002 in the Federal Register (67 FR 49387 and 67
FR 72025) with 30-day comment periods. In response to the first
petition, NHTSA received one comment from Advocates for Highway and
Auto Safety (Advocates) in support of establishing a minimum breaking
strength requirement (Docket No. NHTSA-2002-12479-2). NHTSA received no
comments in response to the second petition.
    The noncompliant tether webbing used on Cosco child restraints
failed to meet the percent-of-strength

requirement of FMVSS No. 213 when subjected to the abrasion test. The
tether webbing retained only 55 percent of its new webbing strength; 75
percent was and is required by the standard. The noncompliant harness
webbing failed to meet the percent-of-strength requirement of FMVSS No.
213 when exposed to a carbon arc light. The harness webbing retained
only 37 percent of its new webbing strength; 60 percent was and is
required by the standard.
    As indicated above, NHTSA's standards were based on retention of a
specified percentage of the original strength of the webbing. However,
there was no minimum strength requirement. These DJG petitions for
inconsequential noncompliance highlighted NHTSA's concern that the
standard could allow manufacturers to use low strength and potentially
unsafe webbing provided that the webbing retained most of its strength
following exposure to abrasion or light. At the time of receiving these
petitions, NHTSA had undertaken a rulemaking to consider whether to
amend FMVSS No. 213 to require a minimum breaking strength for webbing
to ensure that all child restraints being introduced into the market
would have adequate webbing strength to provide child safety protection
over their lifetimes. NHTSA postponed final determinations on these
petitions in order to obtain the benefit of public comments responding
to the proposed breaking strength requirements. In a rule published on
June 7, 2006 (71 FR 32855), NHTSA established minimum breaking strength
requirements.\2\
---------------------------------------------------------------------------

    \2\ Under the final rule the webbing must meet both minimum
breaking strengths and percent-of-strength retention requirements to
be compliant with the Standard.
---------------------------------------------------------------------------

Abrasion Petition Summary

    As part of the Agency's 2001 testing activities, NHTSA tested the
tether webbing used on DJG child restraints to the requirements in
FMVSS No. 213. FMVSS No. 213, S5.4.1(a) ``Performance requirements,''
requires that the webbing of belts provided with a child restraint
system, after being subjected to abrasion as specified in S5.1(d) or
S5.3(c) of FMVSS No. 209, ``Seat belt assemblies,'' have a breaking
strength of not less than 75 percent of the strength of the unabraded
webbing when tested in accordance with S5.1(b) of FMVSS No. 209.
Section 5.1(b) of FMVSS No. 209 requires that the median value of three
webbing samples meet the abrasion requirement.\3\ Following the
abrasion test, the DJG tether webbing retained only 55 percent of the
original webbing breaking strength (from 19,803 N to 10,903 N). The
noncompliant tether webbing was manufactured between January 2000 and
September 30, 2001. On July 11, 2001, as a result of its fiscal year
2001 testing, NHTSA notified DJG of a potential noncompliance regarding
DJG's tether webbing utilized for their tether assembly.
---------------------------------------------------------------------------

    \3\ The 75 percent webbing reduction requirement is calculated
using median breaking strength values of abraded webbing (out of
three samples) and original (unabraded) webbing (out of three
samples).
---------------------------------------------------------------------------

    DJG determined that one of the tether webbing suppliers had
provided some webbing that did not meet the abrasion test requirements.
However, DJG contended that because its unabraded webbing strength was
high, noncompliance with the 75 percent abrasion strength requirement
of S5.4.1(a) of FMVSS No. 213 is inconsequential to motor vehicle
safety. DJG stated that its abraded strength of 10,903 N is far in
excess of the anchorage strength requirement specified in FMVSS No.
225, ``Child restraint anchorage systems.'' DJG also asserted that the
abraded webbing strength test procedure set forth in S5.4.1(a) of FMVSS
No. 213 is flawed, and that a minimum abraded breaking strength should
be specified. Therefore, DJG filed the petition claiming that the
noncompliance is inconsequential to motor vehicle safety.

NHTSA Decision on Abrasion Petition

    As summarized above, DJG contended that because the unabraded
webbing strength was high, the noncompliance with the 75 percent
abrasion strength requirement was inconsequential to motor vehicle
safety. However, both the unabraded webbing strength and the
degradation rate requirements are important from a safety perspective,
as explained in the preamble to the June 2006 final rule.\4\ While DJG
focused on the unabraded strength of the webbing, it largely ignored
the high degradation rate of the webbing in the restraints covered by
its Part 573 report. This lack of breaking strength retention after
abrasion signals the distinct probability that the webbing strength
would be insufficient throughout a lifetime of use.\5\
---------------------------------------------------------------------------

    \4\ 71 FR 32856-858, June 7, 2006 (minimum breaking strength
requirement for new webbing); 71 FR 32858-859, June 7, 2006 (minimum
percent-of-strength requirement for exposed webbing).
    \5\ We note that following abrasion, the Dorel tether webbing
had a strength of 10,903 N. Under the 2006 rule, the minimum
strength for new webbing is 15,000 N. That rule did not change the
75 percent strength retention requirement. As a frame of reference,
webbing that had a strength of 15,000 N that retained 75 percent of
its strength would have a strength of 11,250 N. The Dorel tether
webbing had a strength, after exposure, of only 10,903 N.
---------------------------------------------------------------------------

    DJG also stated that the abraded webbing strength in its
restraints, as measured at 10,903 N, is far in excess of the anchorage
strength requirement specified in FMVSS No. 225. However, as noted in
the preamble to the June 2006 final rule, the abrasion test is an
accelerated aging test that provides a snapshot of the webbing over
prolonged exposure to environmental conditions. The test does not
replicate the lifetime use of the webbing \6\ and therefore the webbing
would have less strength after further abrasion. If the webbing from a
child restraint lost a significant percentage of its strength under the
test, there would be substantial questions about its ability to perform
as intended over a long term use of the child restraint. The high
degradation rate of the DJG webbing gives significant cause for concern
that the webbing could abrade to the point where the webbing strength
is lower than the tether anchor strength, providing for an unsafe
connection to the vehicle.
---------------------------------------------------------------------------

    \6\ 71 FR 32859, June 7, 2006.
---------------------------------------------------------------------------

    Finally, DJG stated that a minimum abraded breaking strength should
be specified in the standard. Advocates expressed a similar concern,
stating in its comment that NHTSA should establish an absolute webbing
strength requirement for unabraded webbing, as well as a minimum
numerical breaking strength requirement for webbing that has been
subjected to abrasion.\7\ NHTSA agreed with both Dorel and Advocates
and, following the submission of these petitions, published a proposal
to revise the standard. The final rule reaffirmed that retaining
control over material degradation rates is critical to ensure
sufficient webbing strength over time.\8\
---------------------------------------------------------------------------

    \7\ Advocates made no recommendation either to grant or to deny
the petition.
    \8\ 71 FR 32855-860, June 7, 2006.
---------------------------------------------------------------------------

    In summary, the DJG webbing met only 55 percent of the original
webbing breaking strength in the abrasion test. Such substantial
(almost 50 percent) degradation in strength, notwithstanding the
original webbing strength, indicates that the webbing could not be
relied upon to provide adequate strength for the life of the restraint.
    In consideration of the foregoing, NHTSA has decided that DJG has
not met its burden of persuasion that the noncompliance it describes is
inconsequential to motor vehicle safety. Accordingly, DJG's application
is hereby denied. DJG must fulfill its obligation to notify and remedy
under 49 U.S.C. 30118(d) and 30120(h).

Light Exposure Petition Summary

    The noncompliant harness webbing was identified as gray Wellington
style N2216E1-917, lots numbered 2063F, 2100F, and 2140D,
manufactured from March 15, 2002 through August 1, 2002. FMVSS No. 213,
S5.4.1(b) requires that the webbing of belts provided with a child
restraint system meet the requirements of S4.2(e) of FMVSS No. 209.
FMVSS No. 209, S4.2(e), requires a breaking strength of not less than
60 percent of the strength before exposure to a carbon arc light when
tested by the procedure specified in S5.1(e) of FMVSS No. 209.
Following the carbon arc exposure test, the DJG harness webbing
retained only 37 percent of the original webbing breaking strength
(from 12,371 N to 4,539 N).
    DJG pointed out that testing at Veridian \9\ (simulating a 30 mph
(48 km/h) crash condition) showed a dynamic load of between 846 N and
1,433 N. DJG asserted that its light-exposed harness webbing breaking
strength of 4,539 N far exceeded these dynamic loads. DJG argued that
without a minimum breaking strength requirement, other webbing with a
much lower initial breaking strength could comply with the standard at
a much lower breaking strength than the DJG's 4,539 N, as long as it
retained 60 percent of the original webbing strength. DJG commented
that while its webbing, which was made of nylon fabrics, was
noncompliant when exposed to carbon arc light filtered by a Corex-D
filter (tested according to the standard's requirements), the webbing
was compliant when exposed to carbon arc light filtered by a soda-lime
glass filter (specified by the standard for use only for polyester
fabrics). DJG also commented that because the standard relies on carbon
arc light for resistance to light testing, the method is obsolete. DJG
stated in Exhibit 7 to its petition that after being subjected to a
xenon arc lamp for 300 hours the webbing retained 93.5 percent of its
initial breaking strength. Therefore, DJG argued that the noncompliance
is inconsequential to motor vehicle safety.
---------------------------------------------------------------------------

    \9\ Veridian is now known as Calspan.
---------------------------------------------------------------------------

NHTSA Decision on Light Exposure Petition

    First, DJG asserted that its light-exposed harness webbing breaking
strength of 4,539 N far exceeds forces in dynamic crash testing at 30
mph by a factor of 3.1 to 6.8 times. NHTSA does not find this
persuasive. A 30 mile per hour test is not indicative of the upper
limit of safety. The test conditions in FMVSS No. 213 reflect the
concern that child restraints will withstand even the most severe
crashes.\10\ These are well above 30 mph.\11\
---------------------------------------------------------------------------

    \10\ 55 FR 17970, April 30, 1990.
    \11\ The forces in a crash increase exponentially as velocity
increases.
---------------------------------------------------------------------------

    DJG also asserted that under a standard that lacks a specific
minimum strength requirement, manufacturers could produce webbing with
very low after-exposure strength if the pre-exposure strength was also
low. This assertion is theoretical. The agency's FY 2000 to FY 2002
available compliance test data for harness webbing \12\ showed that the
median strength after light exposure was 10,636 N, and that the median
exposed/original webbing strength ratio was 10,636 N/12,594 N or 84
percent, both of which are far superior to DJG's webbing strength after
light exposure of only 4539 N and strength ratio of 37%.\13\ In order
to prevent manufacturers from producing harness webbing with low
strengths before and after light exposure, NHTSA established minimum
breaking strengths in the June 2006 final rule.
---------------------------------------------------------------------------

    \12\ 70 FR 37734, June 30, 2005; Docket NHTSA-2005-21243-0002.
    \13\ Of the 109 samples from the FY 2000 to FY 2002 compliance
data, only the DJG (Cosco) harness webbing failed to meet the
current 60 percent of original strength requirement after exposure
to light.
---------------------------------------------------------------------------

    DJG provided test data for its nylon webbing filtered by a soda-
lime glass filter. However, the standard specifies that webbing made of
nylon fabrics, as in this case, be tested using the Corex-D filter. The
soda-lime glass filter is appropriate only for polyester webbing.
Therefore, the DJG compliant data was based on testing using an
inappropriate light filter, and was not conducted according to FMVSS
No. 213 requirements.
    Finally, DJG did not substantiate its statement that carbon arc
testing is obsolete for testing child restraint webbing materials.
NHTSA believes that the test results obtained by the carbon arc test
method are an appropriate reflection of the strength capabilities of
DJG's webbing. While NHTSA has decided to use a xenon arc lamp for
weathering tests of glazing materials under FMVSS No. 205, ``Glazing
materials,'' \14\ the conclusion in that rulemaking does not mean that
the carbon arc is not indicative of the sunlight spectral power
distribution or that it produces invalid weathering results for webbing
materials.
---------------------------------------------------------------------------

    \14\ 68 FR 43964, July 25, 2003.
---------------------------------------------------------------------------

    In summary, the DJG harness webbing met only 37 percent of the
original webbing breaking strength when tested according to the
standard with a Corex-D filter. Such a rapid (over 60 percent) strength
degradation is an indication of a quality control problem for that
webbing and signals the distinct probability that the webbing strength
would be insufficient throughout its use.\15\
---------------------------------------------------------------------------

    \15\ We note that following light exposure, the Dorel harness
webbing had a strength of 4539 N. Under the 2006 rule, the minimum
strength for new webbing is 11,000 N. That rule did not change the
60 percent strength retention requirement. As a frame of reference,
webbing that had a strength of 11,000 N that retained 60 percent of
its strength would have a strength of 6,600 N. The Dorel tether
webbing had a strength, after exposure to light, of only 4,539 N.
---------------------------------------------------------------------------

    In consideration of the foregoing, NHTSA has decided that DJG has
not met its burden of persuasion that the noncompliance it describes is
inconsequential to motor vehicle safety. Accordingly, DJG's application
is hereby denied. DJG must fulfill its obligation to notify and remedy
under 49 U.S.C. 30118(d) and 30120(h).

    Authority: 49 U.S.C 30118(d) and 30120(h); delegations of
authority at 49 CFR 1.50 and 49 CFR 501.8

    Issued on: July 14, 2008.
Stephen R. Kratzke,
Associate Administrator for Rulemaking.
 [FR Doc. E8-16431 Filed 7-17-08; 8:45 am]

BILLING CODE 4910-59-P


[Federal Register: November 23, 2007 (Volume 72, Number 225)]
[Notices]
[Page 65773-65776]
[DOCID:fr23no07-111]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56805; File No. SR-Amex-2007-122]

Self-Regulatory Organizations; American Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Relating to Exchange Liability for the Actions or Omission of Amex Book
Clerks

November 16, 2007.
    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 November 16, 2007, the American Stock
Exchange LLC (``Exchange'' or ``Amex'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I and II below, which Items have been substantially
prepared by the Exchange. The Exchange has designated this proposal as
non-controversial under section 19(b)(3)(A)(iii) of the Act\3\ and Rule
19b-4(f)(6) thereunder,\4\ which renders the proposed rule change
effective upon filing with the Commission. 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\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to adopt new Rule 996--ANTE providing for the
limited liability of the Exchange in connection with the actions of
Amex Book Clerks (``ABCs''). The text of the proposed rule change is
available at Amex, the Commission's Public Reference Room, and http://amex.com
.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange 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 Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to permit members,
member organizations, and associated persons of member organizations to
bring a claim or claims against the Exchange, in limited circumstances,
for the actions of an ABC. The Commission, in April 2007, published for
public comment in the Federal Register the Exchange's proposal to
eliminate the agency obligations of specialists and establish ABCs.\5\
In connection with the approval of the ABC proposal, the Exchange
submits this filing relating to the liability of the Exchange for the
actions of ABCs.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 55583 (April 5,
2007), 72 FR 18695 (April 13, 2007) (notice of filing of SR-Amex-
2006-107).
---------------------------------------------------------------------------

    The ABC will be an Exchange employee or independent contractor
designated by the Exchange to be responsible for: (i) Maintaining and
operating the customer limit order book and display book for assigned
options classes; and (ii) effecting proper executions of orders placed
in the customer order limit book. The ABC will be prohibited from
having an affiliation with any member that is approved to act as a
specialist, registered options trader (``ROT''), remote registered
options trader (``RROT'') and supplemental registered options trader
(``SROT'') on the Exchange. In addition, ABCs are also responsible for
handling Linkage Orders\6\ in all appointed options classes. As a
result, the ABC will have the means to: (1) Utilize an options
specialist's account to route P/A Orders and Satisfaction Orders to
away markets based on prior instructions that must be provided by the
options specialist to the ABC, and (2) handle all Linkage Orders or
portions of Linkage Orders received by the Exchange that are not
automatically executed. The ABC also would have the means to utilize
the options specialist's account to fill Satisfaction Orders that
result from a trade-through that the Exchange effects.
---------------------------------------------------------------------------

    \6\ ``Linkage Order'' means an immediate or cancel order routed
through the Linkage as permitted under the Linkage Plan. There are
three types of Linkage Orders: (i) ``Principal Acting as Agent (``P/
A'') Order,'' which is an order for the principal account of a
specialist (or equivalent entity on another Participant Exchange
that is authorized to represent Public Customer orders), reflecting
the terms of a related unexecuted Public Customer order for which
the specialist is acting as agent; (ii) ``Principal Order,'' which
is an order for the principal account of an Eligible Market Maker
(or equivalent entity on another Participant Exchange) and is not a
P/A Order; and (iii) ``Satisfaction Order,'' which is an order sent
through the Linkage to notify a Participant Exchange of a Trade-
Through and to seek satisfaction of the liability arising from that
Trade-Through.
---------------------------------------------------------------------------

    Article IV, section 1(e) of the Amex Constitution provides that the
Exchange, its affiliates, officers, Governors, committee members,
employees or agents shall not be liable to a member, member
organization, or a person associated with a member or a member
organization for any loss, expense, damages or claims that arise out of
the use or enjoyment of the facilities or services afforded by the
Exchange, any interruption in or failure or unavailability of any such
facilities or services, or any action taken or omitted to be taken in
respect to the business of the Exchange except to the extent such loss,
expense, damages or claims are attributable to the willful misconduct,
gross negligence, bad faith or fraudulent or criminal acts of the
Exchange or its officers, employees or agent acting within the scope of
their authority. However, Article IV, section 1(e) does permit the
Board of Governors of the Exchange to provide, by rule, Exchange
liability with respect to Exchange facilities which implement the
electronic transmission of orders for the purchase or sale of
securities traded on the Exchange to the floor of the Exchange or
between the floor of the Exchange and other markets. Accordingly,
proposed Rule 996--ANTE would permit Exchange liability, in limited
circumstances, relating to the actions of ABCs for: (i) Maintaining and
operating the customer limit order book and display book; and (ii)
effecting proper executions of orders placed in the customer order
limit book.
    Limitation of Liability. The liability of the Exchange for claims
arising out of errors or omissions made by ABCs will be limited as
follows:
     As to any one or more claims made by a single member on a
single trading day, the Exchange shall not be liable in excess of the
larger of $75,000 or the amount of any recovery obtained by the
Exchange under any applicable insurance maintained by the Exchange.
     As to the aggregate of all claims made by all members on a
single trading day, the Exchange shall not be liable in excess of the
larger of $100,000 or the amount of the recovery obtained by the
Exchange under any applicable insurance maintained by the Exchange.
     As to the aggregate of all claims made by all members
during a single calendar month, the Exchange shall not be liable in
excess of the larger of $250,000 or the amount of the recovery obtained
by the Exchange under any applicable insurance maintained by the
Exchange.
    If all of the claims arising out of errors or omissions by an ABC
cannot be fully satisfied because they exceed the applicable maximum
amount of liability provided for above, then the maximum amount will be
allocated among all such claims arising on a single trading day or
during a single calendar month, as applicable, based upon the
proportion that each such claim bears to the sum of all such claims.
    Exchange liability will also be limited if a member, member
organization or the Exchange fails to close out an uncompared trade as
set forth in Rule

960.\7\ In such a case, the opposing party's liability with respect to
any claims arising from such trade will be limited to the lesser of:
(1) The loss which would have been experienced by the claimant if the
uncompared trade had been closed out at the opening off trading on the
next business day as provided in Rule 960; or (2) the actual loss
realized by the claimant.
---------------------------------------------------------------------------

    \7\ Commentary .01(b) to Rule 960 provides that all rejected
options transaction notices (``ROTNs'') must be ``OK'd'' or ``DK'd''
not later than one-half hour prior to the opening of trading on the
first business day following the trade date unless an agent
(including a specialist) was involved in the execution of a
transaction, where the time limit shall be extended to fifteen
minutes prior to such opening (these time limits may be extended by
a Floor Official).
---------------------------------------------------------------------------

    Furthermore, the Exchange's potential liability is also limited if
any damage is caused by an error or omission of an ABC which is the
result of any error or omission of a member organization. Under such
circumstances, the member organization will be required to indemnify
the Exchange and hold it harmless from any claim of liability resulting
from or relating to such damage.
    Procedure. Absent reasonable justification or excuse, any claim by
a member, member organization, or persons associated with a member or
member organization for losses arising from errors or omissions of an
ABC, and any claim by the Exchange for indemnification under paragraph
(g) of Proposed Rule 996--ANTE, must be presented in writing to the
opposing party within ten (10) business days following the transaction
giving rise to the claim; provided, that if an error or omission has
resulted in an unmatched trade, then any claim based thereon shall be
presented after the unmatched trade has been closed out but within ten
(10) business days following such resolution of the unmatched trade.
    For purposes of proposed Rule 996--ANTE, the term ``transaction''
means any single order or instruction which is placed with an ABC, or
any series of orders or instructions, which is placed with an ABC at
substantially the same time by the same member and which relates to any
one or more series of options of the same class. All errors and
omissions made by an ABC with respect to or arising out of any
transaction will give rise to a ``single claim'' against the Exchange.
The Exchange will retain any defenses to such claim or claims that it
may have. In addition, no claim will be permitted to arise as to errors
or omissions which are found to have resulted from any failure by a
member or by any person acting on behalf of a member, to enter or
cancel an order with such ABC on a timely basis or clearly and
accurately to communicate to such ABC:
    (i) The description or symbol of the security involved; or
    (ii) The exercise price or option contract price; or
    (iii) The type of option; or
    (iv) The number of trading units; or
    (v) The expiration month; or
    (vi) Any other information or data which is material to the
transaction.
    Arbitration. Pursuant to proposed Rule 996--ANTE, all disputed
claims will be referred to binding arbitration with the decision of a
majority of the arbitrators selected to hear and determine the
controversy deemed final. There will be no appeal right to the Board of
Governors from any decision of an arbitration panel. The arbitration
panel will be composed of an odd number of panelists. Each of the
parties to the dispute will select one Exchange member to serve as
panelist on the arbitration panel. The panelists so selected shall then
select one or more additional panelist(s); provided that the additional
panelist(s) so selected are members of the Exchange and that no member
of the arbitration panel may have any direct or indirect financial
interest in the claim. In the event that the initial panelists selected
by the parties to the dispute cannot agree on the selection of the
additional panelist(s), such additional panelist(s) shall be appointed
by a Floor Official chosen by a random draw who has no direct or
indirect financial interest in the claim. The NASD Code of Arbitration
Procedure for Industry Disputes (Article VIII of the Amex Constitution)
shall apply to any arbitration proceeding.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent
with section 6 of the Act \8\ in general and furthers the objectives of
section 6(b)(5) of the Act \9\ in particular in that it would remove
impediments to and perfect the mechanism of a free and open market in a
manner consistent with the protection of investors and the public
interest.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule change will not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The Exchange has filed the proposed rule change pursuant to section
19(b)(3)(A) of the Act \10\ and subparagraph (f)(6) of Rule 19b-4
thereunder. \11\ Because the foregoing proposed rule change: (i) Does
not significantly affect the protection of investors or the public
interest; (ii) does not impose any significant burden on competition;
and (iii) does not become operative for 30 days from the date on which
it was filed, or such shorter time as the Commission may designate, if
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to section
19(b)(3)(A) of the Act and Rule 19b-4(f)(6)(iii) thereunder. \12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ The Exchange has satisfied the requirement under Rule 19b-
4(f)(6)(iii) that it give written notice to the Commission of its
intent to file the proposed rule change at least five business days
prior to filing.
---------------------------------------------------------------------------

    A proposed rule change filed under Rule 19b-4(f)(6) normally does
not become operative for 30 days after the date of filing. However,
Rule 19b-4(f)(6)(iii) permits the Commission to waive the operative
delay if such action is consistent with the protection of investors and
the public interest. The Exchange has asked the Commission to waive the
operative delay to permit the proposed rule change to become effective
prior to the 30th day after filing.
    The Commission believes that waiving the 30-day operative delay is
consistent with the protection of investors and the public interest.
The Commission notes that the proposal is substantially identical to
the Chicago Board Options Exchange's (``CBOE'') rules regarding
limitation of exchange liability for acts and omission of CBOE Par
Officials, \13\ previously published for comment and approved by the
Commission, \14\ and the Exchange's

proposal raises no new issues of regulatory concern. Waiving the
operative delay will allow the proposal to become effective
simultaneously with Amex's proposal to establish ABCs, which we are
approving separately today. \15\ Therefore, the Commission has
determined to waive the 30-day delay and allow the proposed rule change
to become operative immediately. \16\
---------------------------------------------------------------------------

    \13\ See CBOE Rules 6.7, ``Exchange Liability,'' and 7.11,
``Liability of Exchange for Actions of Order Book Officials, and PAR
Officials.''
    \14\ See Securities Exchange Act Release Nos. 52017 (July 12,
2005), 70 FR 41453 (July 19, 2005) (notice of filing of SR-CBOE-
2005-46) and 52798 (November 18, 2005), 70 FR 71344 (November 28,
2005) (order approving SR-CBOE-2005-46).
    \15\ See Securities Exchange Act Release No. 56804 (November 16,
2007) (order approving SR-Amex-2006-107).
    \16\ For purposes only of waiving the operative delay of this
proposal, the Commission notes that it has considered the proposed
rule's impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.

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 e-mail to<EMAIL_ADDRESS>Please include

File No. SR-Amex-2006-67 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-Amex-2007-122. This file
number should be included on the subject line if e-mail 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 Commissions Internet Web site (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 inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. Copies of such filing also will be available for inspection and
copying at the principal office of the Exchange. All comments received
will be posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-Amex-2007-122 and should be submitted on
or before December 14, 2007.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E7-22840 Filed 11-21-07; 8:45 am]

BILLING CODE 8011-01-P


[Federal Register: March 26, 2009 (Volume 74, Number 57)]
[Notices]
[Page 13292-13293]
[DOCID:fr26mr09-127]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59607; File No. SR-NSCC-2009-02]

Self-Regulatory Organizations; National Securities Clearing
Corporation; Notice of Filing and Immediate Effectiveness of a Proposed
Rule Change Relating to the Tiered Trade Netting Fee

March 19, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on February 27, 2009,
National Securities Clearing Corporation (``NSCC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which items have
been prepared primarily by NSCC. NSCC filed the proposed rule change
pursuant to Section 19(b)(3)(A)(ii) of the Act \2\ and Rule 19b-4(f)(2)
\3\ thereunder so that the proposal was effective upon filing with the
Commission. 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\ 15 U.S.C. 78s-1(b)(3)(A)(ii).
    \3\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The proposed rule change amends the methodology of the calculation
of NSCC's tiered trade netting fee from being computed on the basis of
daily average volume to a monthly volume basis.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSCC 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. NSCC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of such
statements.\4\
---------------------------------------------------------------------------

    \4\ The Commission has modified parts of these statements.
---------------------------------------------------------------------------

(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend NSCC's fee
structure as set forth in Addendum A to NSCC's Rules to change the
methodology of the calculation of NSCC's tiered trade netting fee from
being calculated on the basis of daily average volume to the basis of
monthly volume. The current tiered structure for the netting fee became
effective on January 2, 2009; \5\ however, that calculation methodology
caused systems difficulties that will be remedied by computing the
charge on the basis of monthly volume. This change will not have a
material impact on the total fee amounts charged members on their
monthly billing statements. NSCC will commence use of the revised
methodology for billing statements reflecting February 2009 activity.
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 59285 (January 23,
2009), 74 FR 5875 (February 2, 2009) (File No. SR-NSCC-2008-13).
---------------------------------------------------------------------------

    The proposed rule change is consistent with the requirements of the
Act and the rules and regulations

thereunder because it updates NSCC's fee schedule. As such, it provides
for the equitable allocation of fees among its participants.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    NSCC does not believe that the proposed rule change will have any
impact or impose any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not yet
been solicited or received. NSCC will notify the Commission of any
written comments received by NSCC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \6\ and Rule 19b-4(f)(2) \7\ promulgated
thereunder because the proposal changes a due, fee, or other charge
applicable only to a member. At any time within sixty days of the
filing of the proposed rule change, the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \7\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-NSCC-2009-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSCC-2009-02. This file
number should be included on the subject line if e-mail 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 Web site (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 inspection and
copying in the Commission's Public Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of NSCC. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NSCC-2009-02 and should be
submitted on or before April 16, 2009.

    For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-6721 Filed 3-25-09; 8:45 am]

BILLING CODE 8010-01-P


[Federal Register Volume 85, Number 39 (Thursday, February 27, 2020)]
[Notices]
[Pages 11413-11419]
[FR Doc No: 2020-03996]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88266; File No. SR-FICC-2020-801]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Advance Notice To Amend the Mortgage-Backed
Securities Division Stress Testing Methodology

February 24, 2020.
    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'') \1\ and Rule 19b-4(n)(1)(i) under the Securities
Exchange Act of 1934 (``Act''),\2\ notice is hereby given that on
January 21, 2020, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
advance notice SR-FICC-2020-801 (``Advance Notice'') as described in
Items I, II and III below, which Items have been prepared by the
clearing agency. The Commission is publishing this notice to solicit
comments on the Advance Notice from interested persons.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This Advance Notice consists of modifications to the Mortgage-
Backed Securities Division's (``MBSD'') stress testing methodology.\3\
FICC is proposing to (1) use vendor-supplied historical risk factor \4\
time series data (``Historical Data'') in MBSD's stress testing
methodology's historical stress scenario selection (``Scenario
Selection'') process, (2) change the look-back period for identifying
historical stress scenarios for the Scenario Selection process, (3) use
vendor-supplied security-level risk sensitivity data \5\ (``Security-
Level Data'') and Historical Data in the stress testing methodology's
calculation of stress profits and losses (``P&L'') for Clearing
Members' portfolios,\6\ and (4) use a back-up calculation in the event
the vendor fails to provide the Security-Level Data and Historical Data
(such failure, a ``Vendor Data Disruption''), as described in greater
detail below.\7\ The proposed changes would not require modifications
to the MBSD Rules.
---------------------------------------------------------------------------

    \3\ Capitalized terms used herein and not otherwise defined
shall have the meaning assigned to such terms in the FICC MBSD
Clearing Rules (the ``MBSD Rules''), available at www.dtcc.com/legal/rules-and-procedures.aspx.
    \4\ Generally, the term ``risk factor'' (or ``risk driver'')
means an attribute, characteristic, variable or other concrete
determinant that influences the risk profile of a system, entity, or
financial asset. Risk factors may be causes of risk or merely
correlated with risk.
    \5\ The term ``sensitivity'' means the percentage value change
of a security given each risk factor change.
    \6\ The proposed change to use Security-Level Data would be
applicable to MBSD's stress testing methodology for historical and
hypothetical scenarios. The proposed change to use Historical Data
would be applicable only for historical scenarios. FICC currently
receives the Security-Level Data and Historical Data from a vendor.
FICC currently utilizes this Security-Level Data and Historical Data
in MBSD's value-at-risk (``VaR'') model, which calculates the VaR
Charge component in each Clearing Member's margin (referred to in
the MBSD Rules as Required Fund Deposit). See MBSD Rule 1,
Definitions--VaR Charge, supra note 3. FICC is proposing to use this
same data set in MBSD's Scenario Selection process, and stress P&L
calculation of each Clearing Member's portfolio.
    \7\ FICC would receive the following data from the vendor:
     Interest rate (including 11 tenors) measures the
sensitivity of a price change to changes in interest rates;
     convexity measures the degree of curvature in the
price/yield relationship of key interest rates (convexity would not
be utilized in the scenarios selection process; it would only be
utilized in the stress P&L calculation);
     mortgage option adjusted spread is the yield spread
that is added to a benchmark yield curve to discount a TBA's cash
flows to match its market price, which takes into account a credit
premium and the option-like feature of mortgage-backed-securities
due to prepayment;
     interest rate volatility reflects the implied
volatility observed from the swaption market to estimate
fluctuations in interest rates; and
     mortgage basis captures the basis risk between the
prevailing mortgage rate and a blended U.S. Treasury rate, which
impacts borrowers' refinance incentives and the model prepayment
assumptions.
    The Historical Data would include (1) interest rate, (2)
mortgage option adjusted spread, (3) interest rate volatility, and
(4) mortgage basis.
    The Security Level Data would include (1) sensitivity to
interest rates, (2) convexity, (3) sensitivity to mortgage option
adjusted spread, (4) sensitivity to interest rate volatility, and
(5) sensitivity to mortgage basis.
    FICC does not believe that its current engagement of the vendor
would present a conflict of interest because the vendor is not an
existing Clearing Member nor are any of the vendor's affiliates
existing Clearing Members. To the extent that the vendor or any of
its affiliates applies to become a Clearing Member, FICC will
negotiate an appropriate information barrier with the applicant in
an effort to prevent a conflict of interest from arising. An
affiliate of the vendor currently provides an existing service to
FICC; however, this arrangement does not present a conflict of
interest because the existing agreement between FICC and the vendor,
and the existing agreement between FICC and the vendor's affiliate,
each contains provisions that limit the sharing of confidential
information.
---------------------------------------------------------------------------

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice

    In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the Advance Notice
and discussed any comments it received on the Advance Notice. 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
Received From Members, Participants, or Others

    FICC has not received or solicited any written comments relating to
this proposal. FICC will notify the Commission of any written comments
received by FICC.

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

I. Nature of the Proposed Change

A. Background

    Stress testing is an essential component of FICC's risk management.
FICC uses stress testing to help ensure that it is collecting adequate
prefunded financial resources \8\ to cover MBSD's potential losses
resulting from the default of a Clearing Member and such Clearing
Member's affiliated family (that are also Clearing Members)
(``Affiliated Family'') under multiple extreme but plausible market
stress conditions (sometimes referred to as ``stress scenarios'').\9\
As set forth in the Framework, the development of FICC's

stress testing methodology is comprised of three key components.\10\
---------------------------------------------------------------------------

    \8\ MBSD's prefunded financial resources consist of Required
Fund Deposits collected from Clearing Members in the form of cash
and/or Eligible Clearing Fund Securities, with any such Eligible
Clearing Fund Securities being subject to a haircut. See MBSD Rules
1 and 4, supra note 3.
    \9\ Consistent with the Clearing Agency Stress Testing Framework
(Market Risk) (``Framework''), FICC aggregates each Clearing
Member's stress deficiency within such Clearing Member's applicable
Affiliated Family because FICC assumes that all Affiliated Families
will simultaneously default, and the gains and losses of different
legal entities within an Affiliated Family would not offset each
other. The Framework is described in rule filing SR-FICC-2017-009.
See Securities Exchange Act Release No. 82368 (December 19, 2017),
82 FR 61082 (December 26, 2017) (``Framework Approval Order'').
    \10\ Id. at 61083.
---------------------------------------------------------------------------

    The first component is the risk identification process. FICC
identifies the principal credit/market risk drivers that are
representative and specific to each Clearing Member's portfolio to
determine potential risk exposure. FICC accomplishes this by analyzing
the securities in each Clearing Member's portfolio to identify the
principal market price risk factor drivers and capture the risk
sensitivity of such portfolios under stressed market conditions.
    The second component is the scenario development process, which is
designed to construct comprehensive and relevant sets of extreme but
plausible historical and hypothetical stress scenarios. In order to
select historical stress scenarios, MBSD's stress testing model selects
dates from the past that represent stressed market conditions based on
the largest historical changes of the selected risk factors. In order
to select hypothetical stress scenarios, MBSD considers potential
future events and their perceived impact to portfolio market risk
factors.
    The third component is the risk measurement and aggregation
process. This process involves calculating risk metrics for each
Clearing Member's portfolio. The stress testing methodology calculates
stress P&L under each stress scenario and determines the loss amount
exceeding a Clearing Member's Required Fund Deposit for each scenario.
This calculation is referred to as the ``Clearing Member Level Stress
Deficiencies.'' In addition, the stress testing methodology calculates
the ratio of an Affiliated Family's deficiency \11\ over the total
value of the MBSD Clearing Fund excluding the sum value of the
applicable Affiliated Family's Required Fund Deposits. This calculation
is referred to as the ``Cover 1 Ratio.'' \12\
---------------------------------------------------------------------------

    \11\ An ``Affiliated Family deficiency'' is the aggregate of all
Clearing Members' stress deficiencies within the applicable
Affiliated Family.
    \12\ See Framework Approval Order, 82 FR at 61083.
---------------------------------------------------------------------------

B. Proposed Change to MBSD's Stress Testing Methodology

    As further described below, FICC is proposing to use Security-Level
Data and Historical Data in MBSD's stress testing methodology.
Specifically, FICC is proposing to (1) use Historical Data in the
Scenario Selection process, (2) change the look-back period used for
identifying historical stress scenarios for the Scenario Selection
process, (3) use Security-Level Data and Historical Data in the
methodology's calculation of stress P&L for Clearing Members'
portfolios,\13\ and (4) use a back-up calculation in the event of a
Vendor Data Disruption.
---------------------------------------------------------------------------

    \13\ In connection with this proposal, FICC is not proposing any
changes to the hypothetical Scenario Selection process other than to
use the vendor's data. The hypothetical scenarios are currently
represented by five interest rate tenors (i.e., 1-year, 2-year, 5-
year, 10-year, and 30-year tenors), one mortgage option adjusted
spread, and one interest rate volatility point. The hypothetical
scenarios are reflected as shocks to the referenced risk factors.
This process would not change, however, in order to calculate the
stress P&L in the proposed model, FICC would map the referenced risk
factors to the set of risk factors in the proposed model.
---------------------------------------------------------------------------

(1) Proposed Change To Use Historical Data in the Scenario Selection
Process
    FICC uses two risk factors as inputs to the MBSD stress testing
model for the historical Scenario Selection process. The risk factors
are (1) interest rate and (2) mortgage option adjusted spread. The
interest rate risk factor consists of swap rates \14\ with tenors \15\
of 2 years, 5 years, 10 years, and 30 years. The mortgage option
adjusted spread risk factor is constructed as the difference between
the agency mortgage-backed TBA securities' current coupon rate and the
average swap rate, in each case, for Fannie Mae (``FNMA'') 30-year
mortgages and Ginnie Mae (``GNMA'') 30-year mortgages. MBSD's scenario
selection algorithm uses a technique referred to as principal component
analysis \16\ to convert correlated risk factors into uncorrelated risk
drivers that account for the joint co-movements \17\ of the multiple
risk factors during the 10-year look-back period.
---------------------------------------------------------------------------

    \14\ Generally, the term ``swap rate'' means the fixed interest
rate that the receiver demands in exchange for the uncertainty of
having to pay the short-term floating rate over time.
    \15\ Generally, the term ``tenor'' means the amount of time left
for the repayment of a loan or until a financial contract expires.
    \16\ Principal component analysis is a standard statistical
technique that is applied to a set of observations of potentially
correlated variables. It is used to identify a set of linearly
uncorrelated variables, which are referred to as principal
components.
    \17\ Generally, the term ``joint co-movement'' means the
movement of two variables at the same time.
---------------------------------------------------------------------------

    FICC is proposing to continue to utilize the interest rate risk
factor and the mortgage option adjusted spread risk factor as inputs to
MBSD's stress testing model, however, both risk factors would be
sourced from a vendor. FICC is also proposing to include two new risk
factors in the methodology--interest rate volatility and mortgage
basis. The proposed change would result in an expansion of the number
of tenors for the existing interest rate risk factor and an expansion
of the number of individual factors to the existing mortgage option
adjusted spread risk factor. As a result of this change, the proposed
interest rate risk factor would include 11 tenors and the proposed
mortgage option adjusted spread risk factor would include up to
approximately 32 individual factors,\18\ which would differentiate
between various agency mortgage programs, underlying collateral
maturities, and the level of moneyness.\19\
---------------------------------------------------------------------------

    \18\ As described in the paragraph above, the current stress
testing methodology uses four tenors for the interest rate risk
factor and two individual factors for the mortgage option adjusted
spread risk factor.
    \19\ The changes of spread are parameterized according to the
difference between the underlying weighted average coupon (``WAC'')
and the current prevailing mortgage rate. This difference is also
referred to as the ``moneyness.'' A TBA security with a WAC that is
10 basis points higher than the prevailing mortgage rate is said to
be 10 basis points in the money. Fifteen moneyness points are used
to parameterize the FNMA 30-year mortgage.
---------------------------------------------------------------------------

    FICC is proposing to use the Historical Data (as described above)
because this data is more comprehensive, granular,\20\ and transparent.
The Historical Data is more comprehensive and granular because (1) it
would reflect a total of four risk factors (i.e., interest rate,
interest rate volatility, mortgage option adjusted spread and mortgage
basis), (2) the proposed interest rate risk factor would include 11
tenors and (3) the proposed mortgage option adjusted spread risk factor
would include up to approximately 32 individual factors. As a result of
this change, FICC believes that the proposed Historical Data would
better explain the market price changes of TBA transactions cleared by
MBSD \21\ and FICC would be able to identify stress risk exposures
under broader and more varied market conditions. The Historical Data
would also provide MBSD with an enhanced capability to design more
transparent scenarios. Because Clearing Members typically use risk
factor analysis for their own risk

and financial reporting, such Members would have comparable data and
analysis to stress test their portfolios. Thus, Clearing Members would
be able to simulate their stressed portfolios to a closer degree than
under the existing stress testing methodology.
---------------------------------------------------------------------------

    \20\ The term ``granular'' in the risk context means detailed
and diversified.
    \21\ Specified Pool Trades and Stipulated Trades are mapped to
the corresponding TBAs. FICC's guarantee of Option Contracts on TBAs
is limited to the intrinsic value of the option positions meaning
that, when the underlying price of the TBA position is above the
call price, the Option Contract is considered in-the-money and
FICC's guarantee reflects this portion of the Option Contract's
positive value at the time of a Clearing Member's insolvency. The
value change of an Option Contract's position is simulated as the
change in its intrinsic value. No changes are being proposed to
MBSD's treatment of Specified Pool Trades, Stipulated Trades and
Option Contracts pursuant to this proposal.
---------------------------------------------------------------------------

(2) Proposed Change to the Look-Back Period Used for the Identification
of Historical Stress Scenarios in the Scenario Selection Process
    MBSD's current set of historical stress scenarios is comprised of
scenarios that reflect the most severe market price movements which
have been observed during past periods of extreme market conditions. To
identify specific dates for these market movements, MBSD's stress
testing model analyzes the historical risk factor time series data over
a 10-year look-back period. Specifically, MBSD's stress testing model
currently selects 50 historical scenarios based on actual historical
time periods observed over a 10-year look-back period.\22\ On a
quarterly basis, MBSD eliminates all historical data that fall outside
the scope of the 10-year look-back period.
---------------------------------------------------------------------------

    \22\ In addition to these 50 historical scenarios, FICC
supplements the historical scenario set by including additional
events that have occurred outside of the 10-year look-back period
and have been identified as important periods of historical stress
because such events have had a significant impact on the financial
market. These dates include May 29, 1994 (when the Federal Reserve
significantly raised rates), October 5, 1998 (when the Long-Term
Capital Management crisis occurred), and September 11, 2001 (when
the terrorist attacks occurred).
---------------------------------------------------------------------------

    FICC is proposing to change the current 10-year look-back period to
a look-back period that starts on a fixed date of May 29, 2002 and
continues to expand forward--meaning that no portion of the timeframe
within the proposed look-back period would be eliminated from the
stress testing model; instead the entire timeframe within the look-back
period would continue to expand forward.\23\
---------------------------------------------------------------------------

    \23\ FICC would continue to include events that have occurred
prior to the proposed fixed date of May 29, 2002. These events
include the events referred to in footnote 22 above.
---------------------------------------------------------------------------

    FICC selected May 29, 2002 as the fixed starting point based on its
assessment of the accuracy and consistency of the Historical Data
provided by the vendor. FICC is proposing this change because it
believes that the expanded look-back period would better capture the
potential market price changes of TBA securities, preserve historical
dates that would otherwise be eliminated under the current 10-year
look-back period, and provide the stress testing model with a larger
set of scenarios for the historical Scenario Selection process.\24\
---------------------------------------------------------------------------

    \24\ Pursuant to the proposed change, the look-back period would
include at least 16 years of historical data.
---------------------------------------------------------------------------

(3) Proposed Change To Use Security-Level Data and Historical Data in
the Stress Testing Model's Stress P&L Calculation
    Currently, in order to determine the potential loss to a Clearing
Member's portfolio under a given stress scenario, MBSD's stress testing
methodology applies a profit-and-loss calculation that multiplies a set
of risk factors' stress movements by its corresponding risk
sensitivities. Currently this methodology utilizes two interest rate
risk factors (i.e., 2-year swap rates and 10-year swap rates) and the
FNMA 30-year current coupon mortgage option adjusted spread. The risk
sensitivities are estimated using an empirical regression with a two-
month look-back period.\25\ FICC believes that the current
methodology's use of a smaller set of risk factors and the relatively
short two-month look-back period is a limitation that contributes to an
inability to explain the results of the sensitivities estimation.
---------------------------------------------------------------------------

    \25\ Empirical regression is a statistical measure that
determines the coefficient range used in the stress P&L calculation.
---------------------------------------------------------------------------

    FICC is proposing to leverage the Security-Level Data and
Historical Data in the methodology's calculation of stress P&L.
Specifically, FICC is proposing to replace the current empirical
regression-based profit-and-loss calculation with a financial profit-
and-loss calculation. The proposed financial profit-and-loss
calculation would use the Security-Level Data and Historical Data. The
Security-Level Data is generated using the vendor's suite of security
valuation models that includes an agency mortgage prepayment model and
interest rate term structure model.\26\ FICC believes that the vendor's
approach generates more stable and robust Security-Level Data and
addresses the limitations of the current empirical regression
algorithm.\27\ Because the proposed change would include Security-Level
Data, FICC believes the proposed Security-Level Data would improve the
stress testing model's stress P&L calculation, and the calculated
results would be closer to actual price changes for TBA securities
during larger market moves which are typical of stress testing
scenarios.
---------------------------------------------------------------------------

    \26\ A prepayment model captures cash flow uncertainty as a
result of unscheduled payments of principal (prepayments). An
interest rate term structure model describes the relationship
between interest rates of different maturities.
    \27\ As described above, these limitations include the limited
number of risk factors and the two-month look-back period.
---------------------------------------------------------------------------

(4) Proposed Change To Use a Back-Up Calculation in the Event of a
Vendor Data Disruption
    As described above, FICC would utilize the vendor's data for MBSD's
stress testing methodology. Prior to MBSD's use of this data in its VaR
model, FICC reviewed a description of the vendor's calculation
methodology and the manner in which the market data is used to
calibrate the vendor's models. At that time, The Depository Trust &
Clearing Corporation's (``DTCC'') Quantitative Risk Management, Vendor
Risk Management, and Information Technology teams conducted due
diligence of the vendor in order to evaluate its control framework for
managing key risks.\28\ FICC's due diligence included an assessment of
the vendor's technology risk, business continuity, regulatory
compliance, and privacy controls. Because of FICC's due diligence and
its use of the vendor data in connection with the calculation of MBSD's
margin model, FICC understands and remains comfortable with the
vendor's controls. In addition, DTCC's Data Integrity department
manages the data that FICC receives including, but not limited to,
market data and analytical data provided by vendors.\29\ As a result,
FICC feels comfortable with leveraging the Security-Level Data and
Historical Data for purposes of MBSD's stress testing methodology.
---------------------------------------------------------------------------

    \28\ DTCC is FICC's parent company. DTCC operates on a shared
services model with respect to FICC. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which DTCC generally provides a
relevant service to FICC.
    \29\ DTCC's Data Integrity department oversees data integrity on
behalf of DTCC's Counterparty Credit, Market, and Liquidity Risk
Management groups as well as Securities Valuation, Model Validation
and Control, and Quantitative Risk Management (collectively,
Financial Risk Management (``FRM'')), and the Systemic Risk Office.
The Data Integrity department's mission is to align with FRM and
ensure that the highest data quality is managed for the purpose of
lowering risk and improving efficiency within FRM. The Data
Integrity department's prime directive consists of the following:
(1) Ensuring a data governance framework is established and adhered
to within FRM; (2) ensuring sufficient integrity of key data sources
through active rules-based data monitoring; (3) ensuring sufficient
alerting is in place to inform necessary parties when data anomalies
occur; (4) liaising with subject matter experts to resolve data
anomalies in an efficient and effective manner; and (5) ensuring
that critical FRM data is catalogued and defined in the enterprise
data dictionary.
---------------------------------------------------------------------------

    In connection with FICC's proposal to use the Security-Level Data
and Historical Data in its stress testing methodology for the
historical and hypothetical scenarios, FICC is also

proposing a back-up calculation (as described in the paragraph below)
that it would utilize in the event the vendor fails to provide the
data. If the vendor fails to provide any data or a significant portion
of the data in accordance with the timeframes agreed to by FICC and the
vendor, FICC would use the most recently available data on the first
day that such disruption occurs. Subject to discussions with the
vendor, if a Managing Director, who oversees Market Risk Management,
determines that the vendor would resume providing data within five (5)
business days, such Managing Director would determine whether the daily
stress testing calculation should continue to be calculated by using
the most recently available data or whether the back-up calculation (as
described below) should be invoked, subject to the approval of DTCC's
Group Chief Risk Officer or his/her designee.\30\ Subject to
discussions with the vendor, if a Managing Director, who oversees
Market Risk Management, determines that the data disruption would
extend beyond five (5) business days, the back-up calculation would be
applied, subsequent to the approval of DTCC's Management Risk
Committee, followed by notification to the Board Risk Committee.
---------------------------------------------------------------------------

    \30\ For the avoidance of doubt, after taking into consideration
the vendor's condition and, to the extent applicable, market
conditions, FICC may treat the interruption as an extended data
interruption sooner.
---------------------------------------------------------------------------

    The proposed back-up calculation would be as follows: MBSD would
(1) calculate each Clearing Member's portfolio net exposures in four
securitization programs,\31\ (2) calculate the stress return for each
securitization program as the three-day price return for each
securitization program index for each scenario date, and (3) calculate
each Clearing Member's stress P&L as the sum of the products of the net
exposure of each securitization program and the stress return value for
each securitization program. FICC would use publicly available indices
(e.g., the Bloomberg FNMA 30-year index, Bloomberg GNMA 30-year index,
Bloomberg FNMA 15-year index and Bloomberg GNMA 15-year index) as the
data source for the stress return calculations.\32\
---------------------------------------------------------------------------

    \31\ The securitization programs are as follows: (1) FNMA and
Freddie Mac (``FHLMC'') conventional 30-year mortgage-backed
securities, (2) GNMA 30-year mortgage-backed securities, (3) FNMA
and FHLMC conventional 15-year mortgage-backed securities, and (4)
GNMA 15-year mortgage-backed securities.
    \32\ The proposed calculation is similar to MBSD's calculation
of the Margin Proxy, which is the back-up calculation that MBSD will
use to calculate the VaR Charge in the event of a vendor data
disruption. See MBSD Rule 1, Definitions--Margin Proxy, supra note
3.
---------------------------------------------------------------------------

C. Delayed Implementation of the Proposal

    This proposal would become operative within 45 business days after
the date of the Commission's notice of no objection to this advance
notice filing. FICC would announce the operative date in an important
notice issued to Clearing Members.\33\
---------------------------------------------------------------------------

    \33\ MBSD's important notices are available at http://www.dtcc.com/legal/important-notices?subsidiary=FICC+-+MBS&pgs=1.
---------------------------------------------------------------------------

II. Anticipated Effect on and Management of Risks

    FICC believes that the proposed change to MBSD's stress testing
methodology, which consists of proposals to (1) use Historical Data in
the Scenario Selection process, (2) change the 10-year look-back period
used for the identification of historical stress scenarios in the
Scenario Selection process, (3) use Security-Level Data and Historical
Data in the stress testing methodology's calculation of stress P&L for
Clearing Members' portfolios, and (4) use a back-up calculation in the
event of a Vendor Data Disruption, would affect MBSD's management of
risk because the changes would help to ensure that MBSD's stress
testing methodology more effectively measures whether it is collecting
adequate prefunded financial resources to cover its potential losses
resulting from the default of a Clearing Member and its Affiliated
Family under multiple extreme but plausible market stress conditions.

A. Proposed Change To Use Historical Data in the Scenarios Selection
Process

    FICC's proposal to utilize Historical Data in MBSD's historical
stress scenario selection process would affect FICC's management of
risk because the change would incorporate a broader range of risk
factors to better understand a Clearing Member's exposure to these risk
factors. As described above, the proposed change would enable MBSD to
leverage vendor expertise in supplying the risk data attributes that
would then be incorporated into MBSD's stress testing model. The data
would expand the number of tenors for the existing interest rate risk
factor and expand the number of individual factors to the existing
mortgage option adjusted spread risk factor. The proposed interest rate
risk factor would include 11 tenors and the proposed mortgage option
adjusted spread risk factor would include up to approximately 32
individual factors.\34\ In addition, FICC would include two new risk
factors in the methodology--interest rate volatility and mortgage
basis. FICC believes that the proposed change would provide more
comprehensive, granular and transparent risk representations that
enable sensitivity analysis on key model parameters and assumptions.
---------------------------------------------------------------------------

    \34\ The proposed interest rate risk factor would include 11
tenors between 3 months and 30 years, and the proposed mortgage
option adjusted spread risk factor would include factors related to
relative value, spread between 15-year and 30-year products, and
spread between GNMA and FNMA.
---------------------------------------------------------------------------

B. Proposed Change to the 10-Year Look-Back Period Used for the
Identification of Historical Stress Scenarios in the Scenario Selection
Process

    FICC's proposal to change the current 10-year look-back period to a
look-back period that starts on a fixed date of May 29, 2002 and
continues to expand forward would affect FICC's management of risk
because the change (which includes at least 16 years of historical
data) would give MBSD the ability to assess a broader spectrum of
historical stressed market events that would be used in the stress
testing methodology to design a comprehensive set of historical stress
scenarios.

C. Proposed Change To Use Security-Level Data and Historical Data in
the Stress Testing Model's Stress P&L Calculation

    FICC's proposal to use Security-Level Data and Historical Data in
the stress testing methodology's calculation of stress P&L would affect
FICC's management of risk because leveraging the vendor-supplied data
would improve the estimation of the stress P&L calculation by giving
FICC the ability to attribute the stress loss under a given stress
scenario to specific risk factor changes. As described above, FICC
would replace the current empirical regression based profit-and-loss
calculation with a financial profit-and-loss calculation that uses
Security-Level Data and Historical Data, which are not included in the
current algorithm.\35\ Thus, FICC believes the proposed change would
improve the stress testing model's stress P&L calculation because the
calculated results would be closer to actual price changes for TBA
securities during larger market moves which are typical of stress
testing scenarios.
---------------------------------------------------------------------------

    \35\ As described above, the empirical regression algorithm
incorporates fewer risk factors and a shorter look-back period.
---------------------------------------------------------------------------

    In an effort to assess the impact of the proposed change, FICC
compared the results of the current stress testing

methodology with the proposed stress testing methodology for the period
of February 1, 2018 through January 1, 2019 with respect to the
historical stress scenarios. The average of the maximum daily
historical Cover 1 Ratio for this period is 20.3% for the proposed
stress testing methodology compared to 19.2% for the current stress
testing methodology (meaning that the proposed methodology would be
approximately 1.1% higher (on average) than the current methodology).

D. Proposed Change To Use a Back-Up Calculation in the Event of a
Vendor Data Disruption

    FICC's proposal to use a back-up calculation would affect FICC's
management of risk because it would help to ensure that FICC continues
to test the adequacy of MBSD's prefunded financial resources in the
event of a Vendor Data Disruption. As described above, FICC would
manage the risks associated with a potential data disruption by using
the most recently available data (before the disruption) on the first
day that a data disruption occurs. If the vendor fails to provide any
data or a significant portion of the data in accordance with the
timeframes agreed to by FICC and the vendor, FICC would use the most
recently available data on the first day that such disruption occurs.
Subject to discussions with the vendor, if a Managing Director, who
oversees Market Risk Management, determines that the vendor would
resume providing data within five (5) business days, such Managing
Director would determine whether the daily stress testing calculation
should continue to be calculated by using the most recently available
data or whether the back-up calculation should be invoked, subject to
the approval of DTCC's Group Chief Risk Officer or his/her designee.
Subject to discussions with the vendor, if a Managing Director, who
oversees Market Risk Management, determines that the data disruption
would extend beyond five (5) business days, the back-up calculation
would be applied, subject to the approval of DTCC's Management Risk
Committee, followed by notification to the Board Risk Committee.

III. Consistency With the Clearing Supervision Act and the Covered
Clearing Agency Standards

    Although the 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.\36\
---------------------------------------------------------------------------

    \36\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \37\ 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. Section 805(b) of the Clearing Supervision Act
\38\ 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. The Commission has adopted risk management standards
under Section 805(a)(2) of the Clearing Supervision Act \39\ and
Section 17A of the Act \40\ (the risk management standards are referred
to as the ``Covered Clearing Agency Standards'').\41\ 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.\42\
---------------------------------------------------------------------------

    \37\ See 12 U.S.C. 5464(a)(2).
    \38\ See 12 U.S.C. 5464(b).
    \39\ See 12 U.S.C. 5464(a)(2)
    \40\ See 15 U.S.C. 78q-1.
    \41\ See 17 CFR 240.17Ad-22.
    \42\ Id.
---------------------------------------------------------------------------

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

    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 and in the Covered Clearing Agency Standards. As discussed above,
FICC is proposing several changes to MBSD's stress testing methodology.
FICC believes the proposed changes are consistent with promoting robust
risk management because the changes are designed to enhance MBSD's
stress testing methodology, which is used to help ensure that MBSD
collects adequate prefunded financial resources to cover its potential
losses resulting from the default of a Clearing Member and its
Affiliated Family under multiple extreme but plausible market stress
conditions.
    First, FICC is proposing to leverage Historical Data in the
Scenario Selection process. FICC believes the proposed change would
promote robust risk management because the Historical Data would
incorporate a broader range of risk factors that would be used in
MBSD's stress testing model to better understand a Clearing Member's
exposure to these risk factors.
    Second, FICC is proposing to change the 10-year look-back period to
a look-back period that starts on a fixed date of May 29, 2002 and
continues to expand forward. FICC believes the proposed change would
promote robust risk management because the change, which includes at
least 16 years of historical data, would capture the potential market
price changes of TBA securities over a longer time period, preserve
historical dates that would otherwise be eliminated under the current
10-year look-back period and provide the stress testing model with a
larger set of scenarios for the historical Scenario Selection process.
    Third, FICC is proposing to leverage Security-Level Data and
Historical Data in the methodology's calculation of stress P&L. FICC
believes the proposed change would promote robust risk management
because it would replace the current empirical regression-based profit-
and-loss calculation with a financial profit-and-loss calculation that
utilizes the Security-Level Data and Historical Data. The change would
cause the stress testing model's stress P&L calculation to calculate
amounts that are closer to actual price changes for TBA securities
during larger market moves in an effort to test the adequacy of MBSD's
prefunded resources.
    Fourth, FICC is proposing to use a back-up calculation in the event
of a Vendor Data Disruption. FICC believes the proposed change would
promote robust risk management because the change would help to ensure
that FICC has a stress testing methodology in place that allows it to
continue to test the adequacy of MBSD's prefunded financial resources
in the event of a Vendor Data Disruption.
    For these reasons, FICC believes the proposed changes would help to
promote MBSD'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.\43\ 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.\44\ As described
above, the proposed changes are designed to help ensure that FICC's
stress testing methodology measures whether MBSD is collecting adequate
prefunded financial resources to cover its potential losses resulting
from the default of a Clearing Member and its Affiliated Family under
multiple extreme but plausible market stress conditions. Because the
proposed changes would better position FICC to limit its exposures to
Clearing Members in the event of a Clearing Member's 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.
---------------------------------------------------------------------------

    \43\ See 12 U.S.C. 5464(b).
    \44\ Id.
---------------------------------------------------------------------------

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

    This proposal is also designed to be consistent with Rule 17Ad-
22(e)(4) under the Act, which requires, in part, that each covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes.\45\
---------------------------------------------------------------------------

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

    Rule 17Ad-22(e)(4)(i) under the Act requires that a covered
clearing agency maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\46\ The proposed changes are consistent with Rule 17Ad-
22(e)(4)(i) because they describe how FICC has developed and carries
out a credit risk management strategy to maintain sufficient prefunded
financial resources to cover fully its credit exposures to each
Clearing Member with a high degree of confidence.
---------------------------------------------------------------------------

    \46\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    FICC believes (1) the proposal to use Historical Data in the
historical Scenario Selection process and incorporate a broader range
of risk factors that would be used in MBSD's stress testing model would
enable FICC to better understand a Clearing Member's exposure to these
risk factors, (2) the proposal to change the 10-year look-back period
to a look-back period that starts on a fixed date of May 29, 2002 and
continues to expand forward would better capture the potential market
price changes of TBA securities, preserve historical dates that would
otherwise be eliminated under the current 10-year look-back period and
provide the stress testing model with a larger set of scenarios for the
historical selection process, (3) the proposal to leverage Security-
Level Data and Historical Data in the stress testing methodology's
calculation of stress P&L for Clearing Members' portfolios would
provide for calculated amounts that are closer to actual price changes
for TBA securities during larger market moves in an effort to test the
adequacy of MBSD's prefunded resources, and (4) the proposal to use a
back-up calculation would help to ensure that FICC has a methodology in
place that allows it to continue to measure the adequacy of MBSD's
prefunded financial resources in the event of a Vendor Data Disruption.
FICC believes that the proposed changes would improve MBSD's stress
testing methodology, which is used to test the sufficiency of MBSD's
prefunded resources daily to support compliance with Rule 17Ad-
22(e)(4)(i). As such, FICC believes that, taken together, the proposed
changes are designed to be consistent with the requirements of Rule
17Ad-22(e)(4)(i) under the Act.\47\
---------------------------------------------------------------------------

    \47\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(vi)(A) under the Act requires that a covered
clearing agency conduct stress testing of its total financial resources
once each day using standard predetermined parameters and
assumptions.\48\ FICC believes the proposal to (1) use Historical Data
in the historical Scenario Selection process, (2) change the 10-year
look-back period to a look-back period that starts on a fixed date of
May 29, 2002 and continues to expand forward, (3) leverage Security-
Level Data and Historical Data in the stress testing methodology's
calculation of stress P&L for Clearing Members' portfolios, and (4) use
a back-up calculation in the event of a Vendor Data Disruption would
reflect standard predetermined parameters and assumptions that FICC
would use in MBSD's stress testing methodology to conduct daily stress
testing.
---------------------------------------------------------------------------

    \48\ 17 CFR 240.17Ad-22(e)(4)(vi)(A). The Framework identifies
the sources of MBSD's prefunded resources for purposes of meeting
FICC's requirements under Rule 17Ad-22(e)(4)(iii).
---------------------------------------------------------------------------

    FICC believes that the proposed changes would reflect its use of
standard predetermined parameters and assumptions in FICC's daily
stress testing of its financial resources in order to support
compliance with Rule 17Ad-22(e)(4)(vi)(A) under the Act.\49\ As such,
FICC believes that, taken together, the proposed changes are designed
to be consistent with the requirements of Rule 17Ad-22(e)(4)(vi)(A)
under the Act.\50\
---------------------------------------------------------------------------

    \49\ Id.
    \50\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
---------------------------------------------------------------------------

III. Date of Effectiveness of the Advance Notice, and Timing for
Commission Action

    The proposed change may be implemented if the Commission does not
object to the proposed change within 60 days of the later of (i) the
date that the proposed change was filed with the Commission or (ii) the
date that any additional information requested by the Commission is
received. The clearing agency shall not implement the proposed change
if the Commission has any objection to the proposed change.
    The Commission may extend the period for review by an additional 60
days if the proposed change raises novel or complex issues, subject to
the Commission providing the clearing agency with prompt written notice
of the extension. A proposed change may be implemented in less than 60
days from the date the advance notice is filed, or the date further
information requested by the Commission is received, if the Commission
notifies the clearing agency in writing that it does not object to the
proposed change and authorizes the clearing agency to implement the
proposed change on an earlier date, subject to any conditions imposed
by the Commission.
    The clearing agency shall post notice on its website of proposed
changes that are implemented.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the Advance
Notice 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-FICC-2020-801 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-2020-801. 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 (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice between the Commission and any person, other than those that may
be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2020-801 and should be submitted on
or before March 13, 2020.

    By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-03996 Filed 2-26-20; 8:45 am]
BILLING CODE 8011-01-P