[Federal Register Volume 87, Number 79 (Monday, April 25, 2022)]
[Notices]
[Pages 24369-24382]
[FR Doc No: 2022-08677]

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SECURITIES AND EXCHANGE COMMISSION

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

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

April 19, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 8, 2022, Fixed Income Clearing Corporation (``FICC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II and III below, which
Items have been prepared by the clearing agency. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    FICC is proposing to amend the Mortgage-Backed Securities Division
(``MBSD'') Clearing Rules (``MBSD Rules'') \3\ to (1)(a) delete the
Deterministic Risk Component (``DRC'') from the Required Fund Deposit
calculation, (b) move certain items currently in the DRC (Mark-to-
Market items, cash obligation items and accrued principal and interest)
to Cash Settlement and (c) retain the six days' interest for Fails item
currently in the DRC calculation as a separate part of the Required
Fund Deposit, (2) revise the definition of Intraday Mark-to Market
Charge to reflect the movement of the DRC items to Cash Settlement and
to revise certain thresholds and parameters, (3) establish a new
intraday VaR Charge and (4) make other clarifying changes in the MBSD
Rules, as described in more detail below.
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    \3\ Capitalized terms not otherwise defined herein are defined
in the MBSD Rules, as applicable, available at http://www.dtcc.com/legal/rules-and-procedures.
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    The proposal would also make certain conforming changes to the
Methodology and Model Operations Document--MBSD Quantitative Risk Model
(the ``QRM Methodology'') in order to implement the proposed changes to
the MBSD Rules, which changes are attached hereto [sic] as Exhibit 5B,
as described in greater detail below.\4\
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    \4\ Because FICC requested confidential treatment, the QRM
Methodology was filed separately with the Secretary of the U.S.
Securities and Exchange Commission (``Commission'') as part of
proposed rule change SR-FICC-2016-007 (the ``VaR Filing''). See
Securities Exchange Act Release No. 79868 (January 24, 2017), 82 FR
8780 (January 30, 2017) (SR-FICC-2016-007) (``VaR Filing Approval
Order''). FICC also filed the VaR Filing proposal as an advance
notice pursuant to Section 806(e)(1) of the Payment, Clearing, and
Settlement Supervision Act of 2010 (12 U.S.C. 5465(e)(1)) and Rule
19b-4(n)(1)(i) under the Securities Exchange Act of 1934, as amended
(``Act'') (17 CFR 240.19b-4(n)(1)(i)), with respect to which the
Commission issued a Notice of No Objection. See Securities Exchange
Act Release No. 79843 (January 19, 2017), 82 FR 8555 (January 26,
2017) (SR-FICC-2016-801). The QRM Methodology has been amended
following the VaR Filing Approval Order. See Securities Exchange Act
Release Nos. 85944 (May 24, 2019), 84 FR 25315 (May 31, 2019) (SR-
FICC-2019-001), 90182 (October 14, 2020) 85 FR 66630 (October 20,
2020) (SR-FICC-2020-009) and 92303 (June 30, 2021) 86 FR 35854 (July
7, 2021) (SR-FICC-2020-017).
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

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

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

1. Purpose
    As described in greater detail below, FICC is proposing changes to
the MBSD Rules that would move mark-to-market components from Clearing
Members' Required Fund Deposits to Cash Settlement. While the proposed
change would impact, in some cases, the form of Clearing Members'
payments with respect to these obligations, a study described in
greater detail below indicated that the impact to Clearing Members with
debit balances would not be material as compared to their total
Clearing Fund obligations.
    In connection with this proposed change, the proposal would also
make conforming changes to the definition of ``Intraday Mark-to-Market
Charge'' and would clarify the MBSD Rules regarding the thresholds and
parameters used in collecting this charge. An impact study based on the
hypothetical assumption that MBSD would reduce the thresholds to the
proposed floors, as described in greater detail below, indicated the
proposal could increase total average Intraday Mark-to-Market Charges
collected by FICC by an amount that represented approximately 2.8% of
the total average Clearing Fund collected on those days.
    Finally, the proposal would provide greater transparency to
Clearing Members by introducing a formal Intraday VaR Charge, which
FICC currently collects as a special charge in certain market
conditions. Again, a study conducted to approximate the impact of this
proposed change indicated it could result in an increase in amounts
collected by FICC, but that amount represented approximately less than
0.1% of total average Clearing Fund collected on the study dates, as
described in greater detail below.
    These proposed changes to the MBSD Rules are summarized below and
described in greater detail in this filing:
    (1) Move Mark-to-Market related charges from the Required Fund
Deposit calculation to Cash Settlement. FICC is proposing to move all
of the mark-to-market components currently in the DRC (except for six
days' interest for Fails) \5\ to Cash Settlement. FICC proposes to
accomplish this by deleting the DRC from the Required Fund Deposit
calculation and moving certain DRC items (Mark-to-Market items, cash

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

(i) Background
Required Fund Deposit/VaR Charge
    The Required Fund Deposit serves as each Clearing Member's margin.
The objective of the Required Fund Deposit is to mitigate potential
losses to FICC associated with liquidation of the Clearing Member's
portfolio in the event that FICC ceases to act for a Clearing Member
(hereinafter referred to as a ``default''). Pursuant to the MBSD Rules,
each Clearing Member's Required Fund Deposit amount currently consists
of the greater of (i) the Minimum Charge or (ii) the sum of the
following components: The VaR Charge, the DRC, a special charge (to the
extent determined to be appropriate),\9\ and, if applicable, the
Backtesting Charge, Holiday Charge, Intraday Mark-to-Market Charge and
the Margin Liquidity Adjustment Charge.\10\ Of these components, the
VaR Charge typically comprises the largest portion of a Clearing
Member's Required Fund Deposit amount.
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    \9\ In order to mitigate exposure from certain market conditions
and other financial and operational capabilities of a Clearing
Member, FICC may impose a special charge. For instance, as discussed
below, in connection with its intraday VaR monitoring, FICC
currently imposes a special charge if a Clearing Member has an
intraday VaR increase exceeding 100% and $1 million.
    \10\ MBSD Rule 4 Section 2, supra, note 3.
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    The VaR Charge is calculated using a risk-based margin methodology
that is intended to capture the market price risk associated with the
securities in a Clearing Member's portfolio. The VaR Charge provides an
estimate of the projected liquidation losses at a 99% confidence level.
The methodology is designed to project the potential gains or losses
that could occur in connection with the liquidation of a defaulting
Clearing Member's portfolio, assuming that a portfolio would take three
days to hedge or liquidate in normal market conditions. The projected
liquidation gains or losses are used to determine the amount of the VaR
Charge, which is calculated to cover projected liquidation losses at
99% confidence level.\11\
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    \11\ Unregistered Investment Pool Clearing Members are subject
to a VaR Charge with a minimum targeted confidence level assumption
of 99.5 percent. See MBSD Rule 4, Section 2(c), supra note 3.
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    The aggregate of all Clearing Members' Required Fund Deposits
constitutes the Clearing Fund of MBSD, which FICC would be able to
access in the event a defaulting Clearing Member's own Required Fund
Deposit is insufficient to satisfy losses to FICC caused by the
liquidation of that Clearing Member's portfolio.
(ii) Proposed Changes
(a) Proposal To Delete the DRC, Move Certain DRC Items (the Mark-to-
Market Items, Cash Obligation Items, and the Accrued Principal and
Interest) to Cash Settlement and Retain Six Days' Interest for Fails in
the Required Fund Deposit Calculation
Mark-to-Market--DRC
    MBSD calculates the full suite of components that comprise the
Required Fund Deposit \12\ and imposes the Required Fund Deposit once
per day, at the start of the day, based on a Clearing Member's prior
end-of-day positions. One of the components of the daily Required Fund
Deposit is a start-of-day Mark-to-Market component,\13\ which is
designed to mitigate the risk arising out of the value change between
the contract/settlement value of a Clearing Member's open positions and
the market value at the end of the prior day. Currently, MBSD's Mark-
to-Market items, cash obligation items, and accrued principal and
interest are included as the DRC in a Clearing Member's Required Fund
Deposit calculation.\14\ When the DRC is calculated, a debit or credit
is added to the Required Fund Deposit amount of each Clearing Member
raising the amount or lowering the amount, respectively.
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    \12\ Section 2 of MBSD Rule 4 set forth each component of the
Required Fund Deposit. MBSD Rule 4 Section 2, supra, note 3.
    \13\ MBSD Rule 4 Section 2(a), supra, note 3.
    \14\ MBSD Rules 4, Section 2(c)(ii), supra note 3. See also
definition of ``Deterministic Risk Component'' in MBSD Rule 1, supra
note 3.
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Move Mark-to-Market, Cash Obligation Items and Accrued Principal and
Interest to Cash Settlement
    The DRC is designed to bring a Clearing Member's portfolio of open
positions to market value. This charge is calculated as (i) the Mark-
to-Market Debit; minus (ii) the Mark-to-Market Credit; plus (iii) a
cash obligation item debit; minus (iv) a cash obligation item credit;
plus or minus (v) accrued principal and interest.\15\ FICC also
includes another parameter, six days' interest for Fails, in the DRC
calculation which is not explicitly referenced in the DRC definition in
the MBSD Rules and is discussed in more detail below. FICC is proposing
to move the Mark-to-Market items, cash obligation items, and accrued
principal and interest from the Required Fund Deposit calculation to
the Cash Settlement process in order to more closely align to industry
practices regarding the handling of mark-to-market, in response to
regulatory feedback on its margin methodologies and to ensure the
unrealized gains from mark-to-market changes do not leave the Required
Fund Deposit insufficient to cover future exposure.\16\
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    \15\ Definition of ``Deterministic Risk Component'' in MBSD Rule
1, supra note 3.
    \16\ The Basel Committee on Banking Supervision and the Board of
the International Organization of Securities Commissions recognized
that the exchange of mark-to-market gains/losses ``is a prudent risk
management tool that limits the build-up of systemic risk''--
particularly for longer-dated transactions such as derivatives. See
Basel Committee on Banking Supervision & Board of the International
Organization of Securities Commissions, Margin Requirements for Non-
Centrally Cleared Derivatives, at page 7 (2015), available at
https://www.bis.org/bcbs/publ/d317.pdf.
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    One cash obligation item that would be moved from DRC and the
Required Fund Deposit calculation to Cash Settlement is the TBA
Transaction Adjustment Payment. The TBA Transaction Adjustment Payment
is the difference between the Settlement Price and the System Price at
settlement of a TBA Transaction.\17\ In connection with each TBA
Transaction, a Clearing Member pays a TBA Transaction Adjustment
Payment at Cash Settlement.\18\ Currently, the TBA Transaction
Adjustment Payment amount is calculated by FICC beginning three days
prior to the settlement. The pre-settlement calculated TBA Transaction
Adjustment Payment amount is included as a cash obligation item which
is a component of the DRC and included in the Required Fund Deposit.
The TBA Transaction Adjustment Payment amount is paid by Clearing
Members into the Required Fund Deposit each day beginning two days
prior to the settlement of the TBA Transaction and every day until Cash
Settlement. FICC is proposing to move this cash obligation item to
daily Cash Settlement and, as a result, pre-settlement TBA Transaction
Adjustment Payment amounts will be paid by Clearing Members beginning
two days prior to settlement of the TBA Transaction through Cash
Settlement. As a result, the Clearing Member that is receiving the TBA
Transaction Adjustment Payment credits prior to settlement of the TBA
Transaction will pay the amount of overnight interest on those funds
through Cash Settlement which interest amount will then be credited to
the Clearing Member that paid the TBA Transaction Adjustment Payment
amount. This overnight interest will be added as a Cash Settlement item
in the MBSD Rules.
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    \17\ Definition of ``TBA Transaction Adjustment Payment'' in
MBSD Rule 1, supra note 3.
    \18\ MBSD Rule 11, Section 1 and Section 7(a), supra note 3.

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

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

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

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

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

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

    \29\ See Securities Exchange Act Release No. 81485 (August 25,
2017), 82 FR 41433 (August 31, 2017) (SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008); Securities Exchange Act Release No. 84458
(October 19, 2018), 83 FR 53925 (October 25, 2018) (SR-DTC-2018-009;
SR-FICC-2018-010; SR-NSCC-2018-009); Securities Exchange Act Release
No. 88911 (May 20, 2020), 85 FR 31828 (May 27, 2020) (SR-DTC-2020-
008; SR-FICC-2020-004; SR-NSCC-2020-008); Securities Exchange Act
Release No. 92380 (July 13, 2021), 86 FR 38140 (July 19, 2021) (SR-
FICC-2021-006); Securities Exchange Release No. 94271 (February 17,
2022), 87 FR 10411 (February, 24 2022) (SR-FICC-2022-001).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

the Required Fund Deposit for such Clearing Members, the amount of the
DRC debit balance that had been paid in Eligible Clearing Fund
Securities that would need to be paid in cash totaled on average $191
million in the aggregate for all such Clearing Members and
approximately $8.3 million for each Clearing Member. These amounts
represent approximately 1.4% of the total Clearing Fund collected on
those dates and an average of 6.7% of those Clearing Members' Clearing
Fund obligations.
(b) Changes To Revise the Intraday Mark-to-Market Charge
    FICC believes that the changes to revise the definition of the
Intraday Mark-to-Market Charge to remove the specific thresholds and
provide a floor for the Dollar Threshold and the Percentage Threshold
and to remove the Coverage Target from the definition, as described
above, would not have a substantial impact on Clearing Members. As
discussed above, the MBSD Rules currently provide the ability to waive
or adjust such provisions under certain conditions and FICC believes
that providing more flexibility with respect to setting the default
thresholds would provide more transparency to the Clearing Members.
    The proposal to remove the Coverage Target from the Intraday Mark-
to-Market calculation would have resulted in approximately 353
additional Intraday Mark-to-Market Charges over the study period and
such additional charges would have resulted in an average aggregate
daily increase of total Intraday Mark-to-Market Charges collected by
approximately $109,822,538. This amount represents approximately 0.8%
of the total average Clearing Fund collected on those dates.
    While FICC does not intend to change the Dollar Threshold
($1,000,000) or the Percentage Threshold (30%) that it is currently
using upon implementation of the proposed changes, it has conducted an
Impact Study of the results of the impact if it were to reduce the
Percentage Threshold to the proposed 10% floor. As shown in the Impact
Study from the period from July 1, 2020 to June 30, 2021, if FICC were
to decrease the percentage threshold to 10% and remove the Coverage
Target, the Intraday Mark-to-Market Charge would have resulted in
approximately 2,522 additional Intraday Mark-to-Market Charges over
that period, and such charges would have result in an average aggregate
daily increase of total Intraday Mark-to-Market Charges collected by
approximately $376,905,268. This amount represents approximately 2.8%
of the total average Clearing Fund collected on those dates.
(c) Introduction of the Intraday VaR Charge
    The proposed Intraday VaR Charge would formalize a charge that FICC
is currently collecting under its authority to collect a special
charge. Similar to the proposed change to Intraday Mark-to-Market
Charge parameters and thresholds, this proposed change would align the
Rules with FICC's current practice and would provide Clearing Members
with greater transparency regarding this margin charge. However, the
proposal would not implement substantive or material changes to the
risk this charge is designed to mitigate or to the overall methodology
or key components of the calculation of this charge.
    As discussed above, FICC would begin charging the Intraday VaR
Charge on both SIFMA designated settlement dates and non-SIFMA
designated settlement dates if the thresholds are crossed regardless of
whether the increase in VaR could lead to a backtesting deficiency or
push a Clearing Member below 99% backtest coverage. As a result, the
introduction of the Intraday VaR Charge would result in more consistent
intraday VaR collections when compared to the current practice, on both
SIFMA designated settlement dates and non-SIFMA designated settlement
dates.
    The Impact Study showed the Intraday VaR Charge would have resulted
in approximately 126 Intraday VaR Charges collected over the Impact
Study period, and such charges would have been an average of
$11,663,204, which represents less than 0.1% of the total average
Clearing Fund collected on those dates. The Impact Study did not
indicate that the introduction of the Intraday VaR would have an impact
on any specific Clearing Member type or Clearing Members that held
particular portfolios.
(d) Clarifying Changes
    The proposed clarifying changes would not have any substantive
effect on the Clearing Members because such changes are clarifications
and will not affect the rights or obligations of FICC or the Clearing
Members.
(v) Implementation Timeframe
    FICC would implement the proposed changes no later than 60 Business
Days after the approval of the proposed rule change by the Commission
and would announce the effective date of the proposed changes by
Important Notice posted to its website. As proposed, a legend would be
added to MBSD Rule 1, MBSD Rule 4, MBSD Rule 11 and the Interpretive
Guidance With Respect to Watchlist Consequences in the MBSD Rules
stating that the changes would be effective no later than 60 Business
Days after the approval of the proposed rule change by the Commission,
that FICC would announce the effective date of the proposed changes by
Important Notice posted to its website and that once this proposal is
implemented the legend would automatically be removed.
2. Statutory Basis
    FICC believes that the proposed changes are consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a registered clearing agency. In particular, FICC
believes that the proposed changes are consistent with Section
17A(b)(3)(F) of the Act,\37\ and Rules 17Ad-22(e)(4)(i), (e)(6)(i) and
(e)(6)(iii), each promulgated under the Act,\38\ for the reasons
described below.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

    Rule 17Ad-22(e)(4)(i) under the Act \45\ requires a covered
clearing agency to establish, implement, maintain and enforce written
policies and procedures reasonably designed to effectively identify,
measure, monitor, and manage its credit exposures to participants and
those exposures arising from its payment, clearing, and settlement
processes by maintaining sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-FICC-2022-002 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2022-002. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2022-002 and should be submitted on
or before May 16, 2022.

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