[Federal Register Volume 86, Number 127 (Wednesday, July 7, 2021)]
[Notices]
[Pages 35854-35864]
[FR Doc No: 2021-14390]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92303; File No. SR-FICC-2020-017]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Order Approving a Proposed Rule Change To Modify the Calculation of the
MBSD VaR Floor To Incorporate a Minimum Margin Amount

June 30, 2021.
    On November 20, 2020, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'')
proposed rule change SR-FICC-2020-017 (``Proposed Rule Change'')
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule Change
was published for comment in the Federal Register on December 10,
2020.\3\ On December 30, 2020, pursuant

to Section 19(b)(2) of the Act,\4\ the Commission designated a longer
period within which to approve, disapprove, or institute proceedings to
determine whether to approve or disapprove the Proposed Rule Change.\5\
On February 16, 2021, the Commission instituted proceedings to
determine whether to approve or disapprove the Proposed Rule Change.\6\
On June 11, 2021, pursuant to Section 19(b)(2) of the Act,\7\ the
Commission extended the period for the conclusion of proceedings to
determine whether to approve or disapprove the Proposed Rule Change.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 90568 (December 4,
2020), 85 FR 79541 (December 10, 2020) (SR-FICC-2020-017)
(``Notice''). FICC also filed the proposal contained in the Proposed
Rule Change as advance notice SR-FICC-2020-804 (``Advance Notice'')
with the Commission pursuant to Section 806(e)(1) of the Dodd-Frank
Wall Street Reform and Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010 (``Clearing
Supervision Act''). 12 U.S.C. 5465(e)(1); 17 CFR 240.19b-4(n)(1)(i).
Notice of filing of the Advance Notice was published for comment in
the Federal Register on January 6, 2021. Securities Exchange Act
Release No. 90834 (December 31, 2020), 86 FR 584 (January 6, 2021)
(File No. SR-FICC-2020-804) (``Notice of Filing''). Upon publication
of the Notice of Filing, the Commission extended the review period
of the Advance Notice for an additional 60 days because the
Commission determined that the Advance Notice raised novel and
complex issues. On March 12, 2021, the Commission issued a request
for information regarding the Advance Notice. See Commission's
Request for Additional Information, available at https://www.sec.gov/comments/sr-ficc-2020-804/srficc2020804-8490035-229981.pdf. On April 16, 2021, FICC submitted its response thereto.
See Response to Commission's Request for Additional Information,
available at https://www.sec.gov/comments/sr-ficc-2020-804/srficc2020804-8685526-235624.pdf; Letter from James Nygard, Director
and Assistant General Counsel, FICC (April 16, 2021), available at
https://www.sec.gov/comments/sr-ficc-2020-804/srficc2020804-8679555-235605.pdf. The proposal contained in the Proposed Rule Change and
the Advance Notice shall not take effect until all regulatory
actions required with respect to the proposal are completed.
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ Securities Exchange Act Release No. 90794 (December 23,
2020), 85 FR 86591 (December 30, 2020) (SR-FICC-2020-017).
    \6\ Securities Exchange Act Release No. 91092 (February 9,
2021), 86 FR 9560 (February 16, 2021) (SR-FICC-2020-017).
    \7\ 15 U.S.C. 78s(b)(2)(B)(ii)(II).
    \8\ Securities Exchange Act Release No. 92117 (June 7, 2021), 86
FR 31354 (June 11, 2021) (SR-FICC-2020-017).
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    The Commission received comment letters on the Proposed Rule
Change.\9\ In addition, the Commission received a letter from FICC
responding to the public comments.\10\ For the reasons discussed below,
the Commission is approving the Proposed Rule Change.
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    \9\ Comments on the Proposed Rule Change are available at
https://www.sec.gov/comments/sr-ficc-2020-017/srficc2020017.htm.
Comments on the Advance Notice are available at https://www.sec.gov/comments/sr-ficc-2020-804/srficc2020804.htm. Because the proposals
contained in the Advance Notice and the Proposed Rule Change are the
same, all comments received on the proposal were considered
regardless of whether the comments were submitted with respect to
the Advance Notice or the Proposed Rule Change.
    \10\ See Letter from Timothy J. Cuddihy, Managing Director of
Depository Trust & Clearing Corporation Financial Risk Management,
(March 5, 2021) (``FICC Letter'').
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I. Description of the Proposed Rule Change

A. Background

    FICC, through MBSD, serves as a central counterparty (``CCP'') and
provider of clearance and settlement services for the mortgage-backed
securities (``MBS'') markets. A key tool that FICC uses to manage its
respective credit exposures to its members is the daily collection of
margin from each member. The aggregated amount of all members' margin
constitutes the Clearing Fund, which FICC would access should a
defaulted member's own margin be insufficient to satisfy losses to FICC
caused by the liquidation of that member's portfolio.
    Each member's margin consists of a number of applicable components,
including a value-at-risk (``VaR'') charge (``VaR Charge'') designed to
capture the potential market price risk associated with the securities
in a member's portfolio. The VaR Charge is typically the largest
component of a member's margin requirement. The VaR Charge is designed
to provide an estimate of FICC's projected liquidation losses with
respect to a defaulted member's portfolio at a 99 percent confidence
level.
    To determine each member's daily VaR Charge, FICC generally uses a
model-based calculation designed to quantify the risks related to the
volatility of market prices associated with the securities in a
member's portfolio.\11\ As an alternative to this calculation, FICC
also uses a haircut-based calculation to determine the ``VaR Floor,''
which replaces the model-based calculation to become a member's VaR
Charge in the event that the VaR Floor is greater than the amount
determined by the model-based calculation.\12\ Thus, the VaR Floor
currently operates as a minimum VaR Charge.
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    \11\ The model-based calculation, often referred to as the
sensitivity VaR model, relies on historical risk factor time series
data and security-level risk sensitivity data. Specifically, for
TBAs, the model-based calculation incorporates the following risk
factors: (1) Key rate, which measures the sensitivity of a price
change to changes in interest rates; (2) convexity, which measures
the degree of curvature in the price/yield relationship of key
interest rates; (3) spread, which is the yield spread added to a
benchmark yield curve to discount a TBA's cash flows to match its
market price; (4) volatility, which reflects the implied volatility
observed from the swaption market to estimate fluctuations in
interest rates; (5) mortgage basis, which captures the basis risk
between the prevailing mortgage rate and a blended Treasury rate;
and (6) time risk factor, which accounts for the time value change
(or carry adjustment) over an assumed liquidation period. See
Securities Exchange Act Release No. 79491 (December 7, 2016), 81 FR
90001, 90003-04 (December 13, 2016) (File No. SR-FICC-2016-007).
    \12\ FICC uses the VaR Floor to mitigate the risk that the
model-based calculation does not result in margin amounts that
accurately reflect FICC's applicable credit exposure, which may
occur in certain member portfolios containing long and short
positions in different asset classes that share a high degree of
historical price correlation.
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    During the period of extreme market volatility in March and April
2020, FICC's current model-based calculation and the VaR Floor haircut-
based calculation generated VaR Charge amounts that were not sufficient
to mitigate FICC's credit exposure to its members' portfolios at a 99
percent confidence level. Specifically, during the period of extreme
market volatility, FICC observed that its margin collections yielded
backtesting deficiencies beyond FICC's risk tolerance.\13\ FICC states
that these deficiencies arose from a particular aspect of its margin
methodology with respect to MBS (particularly, higher coupon TBAs
\14\), i.e., that current prices may reflect higher mortgage prepayment
risk than FICC's margin methodology currently takes into account during
periods of extreme market volatility. In the Proposed Rule Change, FICC
proposes to revise the margin methodology in its Rules \15\ and its
quantitative risk model \16\ to better address the risks posed by
member portfolios holding TBAs during such volatile market conditions.
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    \13\ Backtesting is an ex-post comparison of actual outcomes
(i.e., the actual margin collected) with expected outcomes derived
from the use of margin models. See 17 CFR 240.17Ad-22(a)(1). FICC
conducts daily backtesting to determine the adequacy of its margin
assessments. MBSD's monthly backtesting coverage ratio with respect
to margin amounts was 86.6 percent in March 2020 and 94.2 percent in
April 2020. See Notice, supra note 3 at 79543.
    \14\ The vast majority of agency MBS trading occurs in a forward
market, on a ``to-be-announced'' or ``TBA'' basis. In a TBA trade,
the seller agrees on a sale price, but does not specify which
particular securities will be delivered to the buyer on settlement
day. Instead, only a few basic characteristics of the securities are
agreed upon, such as the MBS program, maturity, coupon rate, and the
face value of the bonds to be delivered.
    \15\ The MBSD Clearing Rules are available at https://www.dtcc.com/legal/rules-and-procedures.aspx.
    \16\ As part of the Proposed Rule Change, FICC filed Exhibit
5B--Proposed Changes to the Methodology and Model Operations
Document MBSD Quantitative Risk Model (``QRM Methodology'').
Pursuant to 17 CFR 240.24b-2, FICC requested confidential treatment
of Exhibit 5B.
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B. Minimum Margin Amount

    FICC proposes to introduce a new minimum margin amount into its
margin methodology. Under the proposal, FICC would revise the existing
definition of the VaR Floor, which acts as the minimum margin
requirement, to mean the greater of (1) the current haircut-based
calculation, as described above, and (2) the proposed minimum margin
amount, which would use a dynamic haircut method based on observed TBA
price moves. Application of the minimum margin amount would increase
FICC's margin collection during periods of extreme market volatility,
particularly when TBA price changes would otherwise significantly
exceed those projected by either the model-based calculation or the
current VaR Floor calculation.
    Specifically, the minimum margin amount would serve as a minimum
VaR Charge for net unsettled positions, calculated using the historical
market price changes of certain benchmark TBA securities.\17\ FICC
proposes to calculate

the minimum margin amount per member portfolio.\18\ The proposal would
allow offsetting between short and long positions within TBA securities
programs since the TBAs aggregated in each program exhibit similar risk
profiles and can be netted together to calculate the minimum margin
amount to cover the observed market price changes for each portfolio.
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    \17\ FICC would consider the MBSD portfolio as consisting of
four programs: Federal National Mortgage Association (``Fannie
Mae'') and Federal Home Loan Mortgage Corporation (``Freddie Mac'')
conventional 30-year mortgage-backed securities (``CONV30''),
Government National Mortgage Association (``Ginnie Mae'') 30-year
mortgage-backed securities (``GNMA30''), Fannie Mae and Freddie Mac
conventional 15-year mortgage-backed securities (``CONV15''), and
Ginnie Mae 15-year mortgage-backed securities (``GNMA15''). Each
program would, in turn, have a default benchmark TBA security.
     FICC would map 10-year and 20-year TBAs to the corresponding
15-year TBA security benchmark. As of August 31, 2020, 20-year TBAs
account for less than 0.5%, and 10-year TBAs account for less than
0.1%, of the positions in MBSD clearing portfolios. FICC states that
these TBAs were not selected as separate TBA security benchmarks due
to the limited trading volumes in the market. See Notice, supra note
3 at 79543.
    \18\ The specific calculation would involve the following: FICC
would first calculate risk factors using historical market prices of
the benchmark TBA securities. FICC would then calculate each
member's portfolio exposure on a net position across all products
and for each securitization program (i.e., CONV30, GNMA30, CONV15
and GNMA15). Finally, FICC would multiply a ``base risk factor'' by
the absolute value of the member's net position across all products,
plus the sum of each risk factor spread to the base risk factor
multiplied by the absolute value of its corresponding position, to
determine the minimum margin amount.
    To determine the base risk factor, FICC would calculate an
``outright risk factor'' for GNMA30 and CONV30, which constitute the
majority of the TBA market and of positions in MBSD portfolios. For
each member's portfolio, FICC would assign the base risk factor
based on whether GNMA30 or CONV30 constitutes the larger absolute
net market value in the portfolio. If GNMA30 constitutes the larger
absolute net market value in the portfolio, the base risk factor
would be equal to the outright risk factor for GNMA30. If CONV30
constitutes the larger absolute net market value in the portfolio,
the base risk factor would be equal to the outright risk factor for
CONV30.
    For a detailed example of the minimum margin amount calculation,
see Notice, supra note 3 at 79544.
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    The proposal would allow a lookback period for those historical
market price moves and parameters of between one and three years, and
FICC would set the initial lookback period for the minimum margin
amount at two years.\19\ FICC states that the minimum margin amount
would improve the responsiveness of its margin methodology during
periods of market volatility because it would have a shorter lookback
period than the model-based calculation, which reflects a ten-year
lookback period.\20\
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    \19\ FICC would be permitted to adjust the lookback period
within the range in accordance with FICC's model risk management
practices and governance procedures set forth in the Clearing Agency
Model Risk Management Framework. 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).
    \20\ Notice, supra note 3 at 79543-44.
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II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \21\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if it
finds that such proposed rule change is consistent with the
requirements of the Act and rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Sections 17A(b)(3)(F) \22\ and (b)(3)(I) \23\ of the Act and Rules
17Ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii) thereunder.\24\
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 15 U.S.C. 78q-1(b)(3)(I).
    \24\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(6)(i), and (e)(23)(ii).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \25\ requires that the rules of a
clearing agency, such as FICC, be designed to, among other things, (i)
promote the prompt and accurate clearance and settlement of securities
transactions, (ii) assure the safeguarding of securities and funds
which are in the custody or control of the clearing agency or for which
it is responsible, and (iii) protect investors and the public interest.
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    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above in Section I.B., FICC proposes to introduce the
minimum margin amount into its margin methodology to help ensure that
FICC collects sufficient margin to manage its potential loss exposure
during periods of extreme market volatility, particularly when TBA
price changes would otherwise significantly exceed those projected by
the current model-based calculation and the current VaR Floor
calculation (i.e., during periods of extreme market volatility, similar
to that which occurred in March and April 2020). The minimum margin
amount calculation would use a dynamic haircut method based on observed
TBA price moves.\26\ FICC states that the minimum margin amount would
improve the responsiveness of its margin methodology during periods of
market volatility because it would have a shorter lookback period (two
years, initially) than the model-based calculation (ten years).\27\
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    \26\ See supra note 17.
    \27\ Notice, supra note 3 at 79543-44. VaR calculations
typically rely on historical data over a specified lookback period
to estimate the probability distribution of potential market prices.
The length of the lookback period is designed to reflect the market
movements over the lookback period, and calculate margin levels
accordingly. A VaR calculation that utilizes a relatively short
lookback period would therefore respond with a sharper increase to a
period of market volatility than a VaR calculation that utilizes a
longer lookback period. Similarly, a VaR calculation that utilizes a
short lookback period would respond with a sharper decrease once the
period of market volatility recedes beyond lookback period. As a
result, while a longer lookback period typically produces more
stable VaR estimates over time, a shorter lookback period is
typically more responsive to recent market events. See, e.g.,
Securities Exchange Act Release No. 80341 (March 30, 2017), 82 FR
16644 (April 5, 2017) (SR-FICC-2017-801).
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    As described above in Section I.A., FICC provided backtesting data
to demonstrate that during the period of extreme market volatility in
March and April 2020, FICC's current model-based calculation and VaR
Floor haircut generated VaR Charge amounts that were not sufficient to
mitigate FICC's credit exposure to its members' portfolios at a 99
percent confidence level.
    FICC designed the minimum margin amount calculation to better
address the risks posed by member portfolios holding TBAs during such
periods of extreme market volatility. As described in the Notice, FICC
has provided data demonstrating that if the minimum margin amount had
been in place, overall margin backtesting coverage (based on 12-month
trailing backtesting) would have increased from approximately 99.3% to
99.6% through January 31, 2020 and approximately 97.3% to 98.5% through
June 30, 2020.\28\ The Commission has reviewed FICC's data and analysis
(including detailed information regarding the impact of the proposed
change on the portfolio of each FICC member over various time periods),
and agrees that its results indicate that the proposed minimum margin
amount would generate margin levels that should better enable FICC to
cover the credit exposure arising from its members' portfolios.
Moreover, the Commission believes that adding the minimum margin amount
to FICC's margin methodology should allow FICC to collect margin that
better reflects the risks and particular attributes of its members'
portfolios during periods of extreme market

volatility. For these reasons, the Commission believes that
implementing the minimum margin amount should help ensure that, in the
event of a member default, FICC's operation of its critical clearance
and settlement services would not be disrupted because of insufficient
financial resources. Accordingly, the Commission finds that the minimum
margin amount should help FICC to continue providing prompt and
accurate clearance and settlement of securities transactions in the
event of a member default, consistent with Section 17A(b)(3)(F) of the
Act.
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    \28\ See Notice, supra note 3 at 79545.
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    Moreover, as described above in Section I.A., FICC would access the
mutualized Clearing Fund should a defaulted member's own margin be
insufficient to satisfy losses to FICC caused by the liquidation of
that member's portfolio. The minimum margin amount should help ensure
that FICC has collected sufficient margin from members, thereby
limiting non-defaulting members' exposure to mutualized losses. The
Commission believes that by helping to limit the exposure of FICC's
non-defaulting members to mutualized losses, the minimum margin amount
should help FICC assure the safeguarding of securities and funds which
are in its custody or control, consistent with Section 17A(b)(3)(F) of
the Act.
    The Commission believes that the Proposed Rule Change should also
help protect investors and the public interest by mitigating some of
the risks presented by FICC as a CCP. Because a defaulting member could
place stresses on FICC with respect to FICC's ability to meet its
clearance and settlement obligations upon which the broader financial
system relies, it is important for FICC to maintain a robust margin
methodology to limit FICC's credit risk exposure in the event of a
member default. As described above in Section I.B., the proposed
minimum margin amount likely would function as the VaR Charge during
periods of extreme market volatility, particularly when TBA price
changes could otherwise significantly exceed those projected by the
model-based calculation and the current VaR Floor calculation. When
applicable, the minimum margin amount would increase FICC's margin
collection during periods of extreme market volatility. The minimum
margin amount should help improve FICC's ability to collect sufficient
margin amounts commensurate with the risks associated with its members'
portfolios during periods of extreme market volatility. By enabling
FICC to collect margin that more accurately reflects the risk
characteristics of mortgage-backed securities and market conditions,
FICC would be in a better position to absorb and contain the spread of
any losses that might arise from a member default. Therefore, the
minimum margin amount should reduce the possibility that FICC would
need to utilize resources from non-defaulting members due to a member
default, which could cause liquidity stress to non-defaulting members
and inhibit their ability to facilitate securities transactions.
Accordingly, because the minimum margin amount should help mitigate
some of the risks presented by FICC as a CCP, the Commission believes
that the proposal is designed to protect investors and the public
interest, consistent with Section 17A(b)(3)(F) of the Act.
    Several commenters suggest that FICC's implementation of the
minimum margin amount would not be in the public interest because it
would burden markets in times of stress and force members to maintain
additional reserve funding capacity.\29\ More specifically, commenters
suggest that due to potentially increased margin requirements, small-
and mid-sized broker-dealers will be forced to scale back their
offerings of risk management tools and services to smaller originators,
who will then turn to larger institutions for these tools and services.
They suggest that this would result in a more concentrated market, or
that smaller originators would not be able to obtain these tools and
services, putting the smaller originators in a position in which they
could not implement their desired risk management approaches or fully
serve their customer bases.\30\
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    \29\ See Letter from James Tabacchi, Chairman, Independent
Dealer and Trade Association, Mike Fratantoni, Chief Economist/
Senior Vice President, Mortgage Bankers Association (January 26,
2021) (``IDTA/MBA Letter I'') at 2-3, 5; Letter from Christopher
Killian, Managing Director, Securities Industry and Financial
Markets Association (January 29, 2021) (``SIFMA Letter I'') at 2, 4;
Letter from Christopher Killian, Managing Director, Securities
Industry and Financial Markets Association (February 23, 2021)
(``SIFMA Letter II'') at 2; Letter from Christopher A. Iacovella,
Chief Executive Officer, American Securities Association (January
28, 2021) (``ASA Letter'') at 1-2. The Commission further addresses
these comments below in Sections II.C. and II.D. to the extent the
comments raise issues related to Rules (e)(4)(i) and (e)(6)(i) under
the Exchange Act. 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i).
    \30\ See id.
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    In response, FICC states that the Proposed Rule Change is not
intended to advantage or disadvantage capital formation in any
particular market segment.\31\ Instead, FICC states that the Proposed
Rule Change focuses entirely on managing the clearance and settlement
risk associated with TBAs.\32\
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    \31\ See FICC Letter at 4.
    \32\ See id.
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    The Commission acknowledges that the minimum margin amount could
increase the margin required from some members, which may, in turn,
cause such members to incur additional costs to access the liquidity
needed to meet elevated margin requirements. Despite these potential
impacts, the Commission believes that FICC has provided sufficient
justification for the proposal. Specifically, FICC's backtesting data
demonstrates that its current methodology did not generate enough
margin during March and April 2020, and the proposed minimum margin
amount would generate margin levels that should better enable FICC to
cover the credit exposure arising from its members' portfolios.
    The Commission also acknowledges the possibility that, as a result
of the Proposed Rule Change, some members might pass along some of the
costs related to margin requirements such that these costs ultimately
are borne, to some degree, by their clients. However, a non-defaulting
member's exposure to mutualized losses resulting from a member default,
and any consequent disruptions to clearance and settlement absent the
Proposed Rule Change, might also increase costs to a member's clients
and potentially adversely impact market participation, liquidity, and
access to capital. The Proposed Rule Change, by helping to reduce
counterparty default risk, would allow the corresponding portion of
transaction costs to be allocated to more productive uses by members
and their clients who otherwise would bear those costs.\33\ Moreover,
as discussed above, by helping to limit the exposure of non-defaulting
members to mutualized losses, the Proposed Rule Change should help FICC
assure the safeguarding of securities and funds of its members that are
in FICC's custody or control, consistent with Section 17A(b)(3)(F).
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    \33\ See Securities Exchange Act Release No. 78961 (September
28, 2016), 81 FR 70786, 70866-67 (October 13, 2016) (S7-03-14)
(``CCA Standards Adopting Release'').
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    While the Commission acknowledges that the proposal could result in
certain FICC members raising the price of liquidity provision (or
reducing the amount of liquidity provision) to their mortgage
originator clients to account for increased margin requirements, a
number of factors could mitigate such effects on market liquidity.
First, to the extent that the minimum margin amount might raise margin
requirements differently across MBS (e.g., higher coupon TBAs might
generate higher margin requirements

than other MBS), market participants, including mortgage originators,
could respond by trading more of the securities for which the minimum
margin amount would not increase margin or would increase margin less
than higher coupon TBAs. Alternatively, mortgage originators could
hedge the interest rate risk of their mortgage pipelines by trading in
other hedging instruments such as Treasury futures and mortgage option
contracts.\34\
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    \34\ See Vickery, James I., and Joshua Wright. ``TBA trading and
liquidity in the agency MBS market.'' Economic Policy Review 19, no.
1 (2013).
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    Moreover, the Commission does not believe that the impact of the
Proposed Rule Change would be that mortgage originators would raise
mortgage rates in response to increased costs for liquidity. The
ability of mortgage originators to raise mortgage rates depends in part
on competition at the local loan market level, which could incentivize
mortgage originators to avoid raising mortgage rates in spite of
absorbing the costs associated with the minimum margin amount. Because
competition between mortgage originators varies across local loan
markets,\35\ their ability to raise mortgage rates likely also varies
across markets. Mortgage originators in more competitive markets likely
would have less ability to raise mortgage rates to pass on costs that
may be associated with the Proposed Rule Change than mortgage
originators in less competitive markets.\36\ Thus, it is unclear
whether this proposal will have any effect on mortgage rates.
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    \35\ See Scharfstein, David, and Adi Sunderam. ``Market power in
mortgage lending and the transmission of monetary policy.''
Unpublished working paper, Harvard University 2 (2016) (showing that
county-level competition among mortgage originators, as measured by
the market share of the top four mortgage originators concentration,
varies across different counties in the U.S.).
    \36\ See id. at 3.
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    Further, the introduction of cost-saving technologies may lower
mortgage origination costs and facilitate the entry of new mortgage
originators operating on lower-cost business models.\37\ The entry of
these new mortgage originators could limit the pricing power of
incumbent mortgage originators in a given loan market. Finally, the
Federal Reserve's continued commitment to purchasing agency MBS \38\
could continue to exert downward pressure on mortgage rates and
mitigate an increase in mortgage rates, if any, by mortgage originators
in response to Proposed Rule Change. FICC also provided confidential
analysis as part of the Proposed Rule Change indicating that there does
not appear to be a clear linkage between FICC margin amounts and
community lenders' mortgage activity.
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    \37\ See Buchak, Greg, Gregor Matvos, Tomasz Piskorski, and Amit
Seru. ``Fintech, regulatory arbitrage, and the rise of shadow
banks.'' Journal of Financial Economics 130, no. 3 (2018): 453-483.
    \38\ In response to the COVID-19 outbreak, the Federal Open
Market Committee (``FOMC'') announced that the Federal Reserve would
purchase at least $200 billion of agency mortgage-backed securities
over the coming months. While the Federal Reserve tapered purchases
between April and May 2020, it restarted purchases in June 2020.
(See https://www.federalreserve.gov/newsevents/pressreleases/monetary20200315a.htm). On December 12, 2020, the FOMC directed the
Federal Reserve Bank of New York to continue to purchase $40 billion
of agency mortgage-backed securities per month. (See https://www.newyorkfed.org/markets/opolicy/operating_policy_201216).
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    Finally, the Commission believes that the impact of the minimum
margin amount would be entirely determined by a member's portfolio
composition and trading activity rather than the member's size or type.
The Proposed Rule Change would calculate the VaR Charge based on the
risks presented by positions in the member's portfolio. To the extent a
member's VaR Charge would increase under the Proposed Rule Change, that
increase would be based on the securities held by the member and FICC's
requirement to collect margin to appropriately address the associated
risk.
    Accordingly, notwithstanding the potential impact that the Proposed
Rule Change might indirectly have on small mortgage originators, the
Commission believes that such potential impacts are justified by the
potential benefits to members and the resulting overall improved risk
management at FICC described above (i.e., the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds based on the collection of margin
commensurate with the risks presented by TBAs), to render the Proposed
Rule Change consistent with the investor protection and public interest
provisions of Section 17A(b)(3)(F) of the Act.
    For the reasons discussed above, the Commission believes that the
Proposed Rule Change is consistent with the requirements of Section
17A(b)(3)(F) of the Act.\39\
---------------------------------------------------------------------------

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

B. Consistency With Section 17A(b)(3)(I) of the Act

    Section 17A(b)(3)(I) of the Act requires that the rules of a
clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the Act.\40\ This provision does not
require the Commission to find that a proposed rule change represents
the least anticompetitive means of achieving the goal. Rather, it
requires the Commission to balance the competitive considerations
against other relevant policy goals of the Act.\41\
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1(b)(3)(I).
    \41\ See Bradford National Clearing Corp., 590 F.2d 1085, 1105
(D.C. Cir. 1978).
---------------------------------------------------------------------------

    The Commission received comments regarding the impacts the Proposed
Rule Change might have on competition. One commenter argues that FICC
has not explained how the additional margin collected pursuant to the
minimum margin amount would be equitably distributed amongst members to
avoid an unnecessary burden on competition.\42\ Several commenters
argued that the proposal would disproportionately affect small- and
mid-sized broker-dealer members rather than larger bank-affiliated
broker-dealer members.\43\ One commenter states that FICC's impact
study demonstrates that smaller members would bear a greater burden
than larger members if the minimum margin amount were to be
adopted.\44\ One commenter argues that larger members should bear more
of the minimum margin amount burden because their business models
likely include subsidiaries that confer an unfair advantage by enabling
them to net their exposures.\45\
---------------------------------------------------------------------------

    \42\ See Letter from James Tabacchi, Chairman, Independent
Dealer and Trade Association, Mike Fratantoni, Chief Economist/
Senior Vice President, Mortgage Bankers Association (February 23,
2021) (``IDTA/MBA Letter II'') at 3.
    \43\ See IDTA/MBA Letter I at 2-4, 6; IDTA/MBA Letter II at 2-3;
ASA Letter at 1-2; SIFMA Letter I at 4.
    \44\ See IDTA/MBA Letter II at 2-3. Specifically, the commenter
cites FICC's statement that during the impact study period, the
largest dollar increase for any member would have been $333 million,
or 37% increase in the VaR Charge. The commenter assumes that the
member with the largest dollar increase is one of FICC's largest
clearing members. The commenter also cites FICC's statement that the
largest percentage increase in VaR Charge for any member would have
been 146%, or $22 million. The commenter assumes that the member
with the largest percentage increase is a smaller member. Thus, the
commenter concludes that the minimum margin amount would affect
smaller members more dramatically than larger members. Additionally,
the commenter cites FICC's statement that the top 10 members based
on size of the VaR Charges would have contributed 69.3% of the
aggregate VaR Charges had the minimum margin amount been in place;
whereas those 10 members only would be responsible for 54% of the
additional margin collected pursuant to the minimum margin amount.
Therefore, the commenter concludes that FICC's largest members would
contribute disproportionately less than FICC's smaller members
pursuant to the minimum margin amount.
    \45\ See Letter from James Tabacchi, Chairman, Independent
Dealer and Trade Association (February 23, 2021) (``IDTA Letter'')
at 2. The commenter also speculates that the business models of
larger members that enable them to net their exposures likely
increases concentration risk at those members, which the minimum
margin amount does not address.

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

    In response, FICC states that the Notice addressed concerns that
the Proposed Rule Change would impose a burden on competition.\46\
Specifically, the Notice acknowledged that based on FICC's impact
studies, the minimum margin amount would have increased members' VaR
Charges by an average of approximately 42% during the impact study
period, and that the Proposed Rule Change could impose a burden on
competition.\47\ Additionally, the Notice stated that members may be
affected disproportionately by the minimum margin amount because
members with higher percentages of higher coupon TBAs in their
portfolios were more likely to be impacted.\48\
---------------------------------------------------------------------------

    \46\ See FICC Letter at 3; Notice, supra note 3 at 79547-48.
    \47\ See id.
    \48\ See id.
---------------------------------------------------------------------------

    Regarding comments that the minimum margin amount would
disproportionately affect smaller members, FICC acknowledges that the
minimum margin amount could increase margin requirements as a result of
extreme market volatility, and that it may also result in higher margin
costs overall for members whose business is concentrated in higher
coupon TBAs, relative to other members with more diversified
portfolios.\49\ However, FICC states that the methodology for computing
the minimum margin amount does not take into consideration the member's
size or overall mix of business.\50\ Any effect the proposal would have
on a particular member's margin requirement is solely a function of the
default risk posed to FICC by the member's activity at FICC--firm size
or business model is not pertinent to the assessment of that risk.\51\
Accordingly, FICC believes that the Proposed Rule Change does not
discriminate against members or affect them differently on either of
those bases.\52\
---------------------------------------------------------------------------

    \49\ See FICC Letter at 3; Notice, supra note 3 at 79545, 47.
    \50\ See FICC Letter at 4.
    \51\ See id.
    \52\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges that the Proposed Rule Change could
entail increased margin charges. In considering the costs and benefits
of the requirements of Rule 17Ad-22(e)(6), the Commission expressly
acknowledged that ``since risk-based initial margin requirements may
cause market participants to internalize some of the costs borne by the
CCP as a result of large or risky positions, confirming that margin
models are well-specified and correctly calibrated with respect to
economic conditions will help ensure that the margin requirements
continue to align the incentives of a CCP's members with the goal of
financial stability.'' \53\ Nevertheless, in response to the comments
that the Proposed Rule Change would disproportionately affect small-
and mid-sized broker-dealer members or those broker-dealer members that
are not affiliated with large banks, the Commission believes that the
impact of the minimum margin amount would be entirely determined by a
member's portfolio composition and trading activity rather than the
member's size or type. The Proposed Rule Change would calculate the VaR
Charge based on the risks presented by positions in the member's
portfolio. To the extent a member's VaR Charge would increase under the
Proposed Rule Change, that increase would be based on the securities
held by the member and FICC's requirement to collect margin to
appropriately address the associated risk.
---------------------------------------------------------------------------

    \53\ See CCA Standards Adopting Release, supra note 33, 81 FR at
70870. In addition, when considering the benefits, costs, and
effects on competition, efficiency, and capital formation, the
Commission recognized that a covered clearing agency, such as FICC,
might pass incremental costs associated with compliance on to its
members, and that such members may seek to terminate their
membership with that CCA. See id., 81 FR at 70865. Moreover, when
considering similar comments related to a proposed rule change
designed to address a covered clearing agency's liquidity risk, the
Commission concluded that the imposition of additional costs did not
render the proposal inconsistent with the Act. See Securities
Exchange Act Release No. 82090 (November 15, 2017), 82 FR 55427,
55438 n. 209 (November 21, 2017) (SR-FICC-2017-002).
---------------------------------------------------------------------------

    In addition, as noted above, the Commission acknowledges that the
impact of a higher margin requirement may present higher costs on some
members relative to others due to a number of factors, such as access
to liquidity resources, cost of capital, business model, and applicable
regulatory requirements. These higher relative burdens may weaken
certain members' competitive positions relative to other members.\54\
However, the Commission believes that such burden on competition
stemming from a higher impact on some members than on others is
necessary and appropriate in furtherance of the Act. FICC is required
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers and produces margin levels commensurate with the
risks and particular attributes of each relevant product, portfolio,
and market.\55\ FICC's members include a large and diverse population
of entities with a range of ownership structures.\56\ By participating
in FICC, each member is subject to the same margin requirements, which
are designed to satisfy FICC's regulatory obligation to manage the
risks presented by its members. As discussed in more detail in Section
II.D. below, the Proposed Rule Change is designed to ensure that FICC
collects margin that is commensurate with the risks presented by each
member's portfolio resulting from periods of extreme market volatility.
---------------------------------------------------------------------------

    \54\ These potential burdens are not fixed, and affected members
may choose to restructure their liquidity sources, costs of capital,
or business model, thereby moderating the potential impact of the
Proposed Rule Change.
    \55\ See 17 CFR 240.17Ad-22(e)(6)(i).
    \56\ See FICC MBSD Membership Directory, available at https://www.dtcc.com/client-center/ficc-mbs-directories.
---------------------------------------------------------------------------

    Furthermore, FICC has provided data demonstrating that if the
minimum margin amount had been in place, overall margin backtesting
coverage (based on 12-month trailing backtesting) would have increased
from approximately 99.3% to 99.6% through January 31, 2020 and
approximately 97.3% to 98.5% through June 30, 2020.\57\ As noted above,
the Commission has reviewed FICC's backtesting data and agrees that it
indicates that had the minimum margin amount been in place during the
study period, it would have generated margin levels that better reflect
the risks and particular attributes of the member portfolios and help
FICC achieve backtesting coverage closer to FICC's targeted confidence
level. In turn, the Commission believes that the Proposed Rule Change
would improve FICC's ability to maintain sufficient financial resources
to cover its credit exposures to each member in full with a high degree
of confidence. By helping FICC to better manage its credit exposure,
the Proposed Rule Change would improve FICC's ability to mitigate the
potential losses to FICC and its members associated with liquidating a
member's portfolio in the event of a member default, in furtherance of
FICC's obligations under Section 17A(b)(3)(F) of the Act.
---------------------------------------------------------------------------

    \57\ See Notice, supra note 3 at 79545.
---------------------------------------------------------------------------

    Therefore, for the reasons stated above, the Commission believes
that the Proposed Rule Change is consistent with the requirements of
Section 17A(b)(3)(I) of the Act \58\ because any competitive burden
imposed by the Proposed Rule Change is necessary and appropriate in
furtherance of the Act.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78q-1(b)(3)(I).

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

C. Consistency With Rule 17Ad-22(e)(4)(i)

    Rule 17Ad-22(e)(4)(i) under the Act requires that FICC establish,
implement, maintain and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes, including by maintaining
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence.\59\
---------------------------------------------------------------------------

    \59\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    Several commenters question whether FICC has adequately
demonstrated that the proposed minimum margin amount is consistent with
Rule 17Ad-22(e)(4)(i) under the Exchange Act, arguing that there are
more effective methods that FICC could use to mitigate the relevant
risks. Three commenters argue that the model-based calculation is well-
suited to address FICC's credit risk in volatile market conditions, and
instead of adding the minimum margin amount to its margin methodology,
FICC should enhance this calculation to address periods of extreme
market volatility such as occurred in March and April 2020.\60\
---------------------------------------------------------------------------

    \60\ See IDTA/MBA Letter I at 4-5; ASA Letter at 1; SIFMA Letter
I at 2-3; Letter from Christopher Killian, Managing Director,
Securities Industry and Financial Markets Association (February 23,
2021) (``SIFMA Letter II'') at 1-2.
---------------------------------------------------------------------------

    In response to these comments, FICC explains that enhancing the
model-based calculation would not be an effective approach towards
mitigating the risk resulting from periods of extreme market
volatility. Although the model-based calculation takes into account
risk factors typical to TBAs, the extreme market volatility of March
and April 2020 was caused by other factors (e.g., changes in the
Federal Reserve purchase program) affecting TBA factors, yet such
factors are not accounted for in the model-based calculation.\61\ To
further demonstrate why the minimum margin amount is necessary, FICC
relies upon the results of recent backtesting analyses demonstrating
that its existing VaR Charge calculations did not respond effectively
to the March and April 2020 levels of market volatility and economic
uncertainty such that FICC's margin collections during that period did
not meet its 99 percent confidence level.\62\
---------------------------------------------------------------------------

    \61\ See FICC Letter at 2-3.
    \62\ See FICC Letter at 3.
---------------------------------------------------------------------------

    The Commission believes that the proposed minimum margin amount is
consistent with Rule 17Ad-22(e)(4)(i) under the Exchange Act.\63\ As
described above, FICC's current VaR Charge calculations resulted in
margin amounts that were not sufficient to mitigate FICC's credit
exposure to its members' portfolios at FICC's targeted confidence level
during periods of extreme market volatility, particularly when TBA
price changes significantly exceeded those implied by the VaR model
risk factors. The Commission believes that adding the minimum margin
amount calculation to its margin methodology should better enable FICC
to collect margin amounts that are sufficient to mitigate FICC's credit
exposure to its members' portfolios.
---------------------------------------------------------------------------

    \63\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    In reaching this conclusion, the Commission thoroughly reviewed and
analyzed the (1) Proposed Rule Change, including the supporting
exhibits that provided confidential information on the calculation of
the proposed minimum margin amount, impact analyses (including detailed
information regarding the impact of the proposed change on the
portfolio of each FICC member over various time periods), and
backtesting coverage results, (2) comments received, and (3)
Commission's own understanding of the performance of the current margin
methodology, with which the Commission has experience from its general
supervision of FICC, compared to the proposed margin methodology.\64\
Specifically, as discussed above, the Commission has considered the
results of FICC's backtesting coverage analyses, which indicate that
the current margin methodology results in backtesting coverage that
does not meet FICC's targeted confidence level. FICC's backtesting data
shows that if the minimum margin amount had been in place, overall
margin backtesting coverage (based on 12-month trailing backtesting)
would have increased from approximately 99.3% to 99.6% through January
31, 2020 and approximately 97.3% to 98.5% through June 30, 2020.\65\
The analyses also indicate that the minimum margin amount would result
in improved backtesting coverage towards meeting FICC's targeted
coverage level. Therefore, the Commission believes that the proposal
would provide FICC with a more precise margin calculation, thereby
enabling FICC to manage its credit exposures to members by maintaining
sufficient financial resources to cover such exposures fully with a
high degree of confidence.
---------------------------------------------------------------------------

    \64\ In addition, because the proposals contained in the Advance
Notice and the Proposed Rule Change are the same, all information
submitted by FICC was considered regardless of whether the
information was submitted with respect to the Advance Notice or the
Proposed Rule Change. See supra note 9.
    \65\ See Notice, supra note 3 at 79545.
---------------------------------------------------------------------------

    In response to the comments regarding enhancing the model-based
calculation instead of adding the minimum margin amount, the Commission
believes that FICC's model-based calculation takes into account risk
factors that are typical TBA attributes, whereas the extreme market
volatility of March and April 2020 was caused by other external factors
that are less subject to modeling. Thus, the commenters' preferred
approach is not a viable alternative that would allow for consideration
of such factors.
    Accordingly, for the reasons discussed above, the Commission
believes that the changes proposed in the Proposed Rule Change are
reasonably designed to enable FICC to effectively identify, measure,
monitor, and manage its credit exposure to members, consistent with
Rule 17Ad-22(e)(4)(i).\66\
---------------------------------------------------------------------------

    \66\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

D. Consistency With Rules 17Ad-22(e)(6)(i) and (iii)

    Rules 17Ad-22(e)(6)(i) and (iii) under the Act require 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, and calculates margin sufficient to cover its potential
future exposure to participants.\67\
---------------------------------------------------------------------------

    \67\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
---------------------------------------------------------------------------

    One commenter suggests that the minimum margin amount would be
inefficient and ineffective at collecting margin amounts commensurate
with the risks presented by the securities in member portfolios.\68\
Several commenters argue that the proposed minimum margin amount
calculation would produce sudden and persistent spikes in margin
requirements.\69\ One commenter argues that the minimum margin amount
would effectively replace FICC's existing model-based calculation with
one likely to produce procyclical results by increasing margin
requirements at times of increased market volatility.\70\ One commenter
suggests the March-April 2020 market volatility was so unique that FICC
need

not adjust its margin methodology to account for a future similar
event.\71\
---------------------------------------------------------------------------

    \68\ See id.
    \69\ See IDTA/MBA Letter I at 5; ASA Letter at 2; SIFMA Letter I
at 3-4.
    \70\ See IDTA/MBA Letter I at 5.
    \71\ See SIFMA Letter I at 3.
---------------------------------------------------------------------------

    In addition, one commenter argues that the proposed minimum margin
amount is inconsistent with Rule 17Ad-22(e)(6)(i) because the minimum
margin amount calculation is not reasonably designed to mitigate future
risk due to its reliance on historical price movements that will not
generate margin requirements that equate to future protections against
market volatility.\72\ Two commenters argue that the proposed minimum
margin amount calculation is not reasonably designed to mitigate future
risks because the calculation relies on historical price movements,
which will not necessarily generate margin amounts that will protect
against future periods of market volatility.\73\ One commenter argues
that the minimum margin amount is not necessary despite the March and
April 2020 backtesting deficiencies because there were no failures or
other events that caused systemic issues.\74\
---------------------------------------------------------------------------

    \72\ See IDTA/MBA Letter I at 4.
    \73\ See IDTA/MBA Letter I at 5; SIFMA Letter I at 2.
    \74\ See SIFMA Letter I at 2.
---------------------------------------------------------------------------

    Several commenters speculate that since the minimum margin amount
is typically larger than the model-based calculation, the minimum
margin amount will likely become the predominant calculation for
determining a member's VaR Charge.\75\ One commenter argues that
instead of the minimum margin amount, FICC should consider adding
concentration charges to its margin methodology to address the relevant
risks.\76\
---------------------------------------------------------------------------

    \75\ See IDTA/MBA Letter I at 4-5; ASA Letter at 1; SIFMA Letter
I at 2-3.
    \76\ See IDTA/MBA Letter I at 5.
---------------------------------------------------------------------------

    In response, FICC states that any increased margin requirements
resulting from the proposed minimum margin amount during periods of
extreme market volatility would appropriately reflect the relevant
risks presented to FICC by member portfolios holding large TBA
positions.\77\ FICC also states that the minimum margin amount's
reliance on observed price volatility with a shorter lookback period
will provide margin that responds quicker during market volatility to
limit FICC's exposures.\78\ FICC also notes that the margin increases
that the minimum margin amount would have imposed following the March-
April 2020 market volatility would not have persisted at such high
levels indefinitely.\79\
---------------------------------------------------------------------------

    \77\ See FICC Letter at 5-6.
    \78\ See id.
    \79\ See id.
---------------------------------------------------------------------------

    In addition, regarding whether the minimum margin amount will
likely become the predominant calculation for determining a member's
VaR Charge, FICC states that as the period of extreme market volatility
stabilized and the model-based calculation recalibrated to current
market conditions, the average daily VaR Charge increase decreased from
$2.2 billion (i.e., 42%) to $838 million (i.e., 7%) during the fourth
quarter of 2020.\80\ Regarding concentration charges, FICC states that
concentration charges and the minimum margin amount address separate
and distinct types of risk.\81\ Whereas the minimum margin amount is
designed to cover the risk of market price volatility, concentration
charges (e.g., FICC's recently approved Margin Liquidity Adjustment
Charge \82\) are designed to mitigate the risk to FICC of incurring
additional market impact cost from liquidating a directionally
concentrated portfolio.\83\
---------------------------------------------------------------------------

    \80\ See FICC Letter at 5.
    \81\ See FICC Letter at 7-8.
    \82\ See Securities Exchange Act Release No. 90182 (October 14,
2020), 85 FR 66630 (October 20, 2020) (SR-FICC-2020-009).
    \83\ See FICC Letter at 7-8.
---------------------------------------------------------------------------

    The Commission believes that the proposal is consistent with Rule
17Ad-22(e)(6)(i). Implementing the proposed minimum margin amount would
result in margin requirements that reflect the risks such holdings
present to FICC better than FICC's current margin methodology. In
reaching this conclusion and considering the comments above, the
Commission thoroughly reviewed and analyzed the (1) Proposed Rule
Change, including the supporting exhibits that provided confidential
information on the calculation of the proposed minimum margin amount,
impact analyses, and backtesting coverage results, (2) comments
received, and (3) Commission's own understanding of the performance of
the current margin methodology, with which the Commission has
experience from its general supervision of FICC, compared to the
proposed margin methodology. Based on its review and analysis of these
materials, including the effect that the minimum margin amount would
have on FICC's backtesting coverage, the Commission believes that the
proposed minimum margin amount is designed to consider, and collect
margin commensurate with, the market risk presented by member
portfolios holding TBA positions, specifically during periods of market
volatility such as what occurred in March and April 2020. For the same
reasons, the Commission disagrees with the comments suggesting that the
minimum margin amount calculation is not designed to effectively and
efficiently collect margin sufficient to mitigate the risks presented
by the securities.
    In response to comments regarding the sudden and persistent
increases in margin that could arise from the minimum margin amount,
the Commission acknowledges that, for some member portfolios in certain
market conditions, application of the minimum margin amount calculation
would result in an increase in the member's margin requirement based on
the potential exposures arising from the TBA positions. The Commission
notes that, by design, the minimum margin amount should respond more
quickly to heightened market volatility because of its use of
historical price data over a relatively short lookback period, as
opposed to the model-based calculation which relies on risk factors and
uses a longer lookback period.
    The Commission also observes, however, based on its review and
analysis of FICC's confidential data and analyses, that the increase in
margin requirements generated by the minimum margin amount--as compared
to the other calculations--would generally only apply during periods of
high market volatility and for a time period thereafter.\84\ The
frequency with which the minimum margin amount would constitute a
majority of members' margin requirements decreases as markets become
less volatile, and therefore, is not expected to persist
indefinitely.\85\ The Commission believes that including the minimum
margin amount as a potential method of determining a member's margin
requirement is appropriate, in light of the potential exposures that
could arise in a time of heightened market volatility and the need for
FICC to cover those exposures. Therefore, the Commission believes that
the proposal would provide FICC with a margin calculation better
designed to enable FICC to cover its credit exposures to its members by
enhancing FICC's risk-based margin system to produce margin levels
commensurate with, the risks and particular attributes of TBAs.
---------------------------------------------------------------------------

    \84\ FICC provided this data as part of its response to the
Commission's Request for Additional Information in connection with
the Advance Notice. Pursuant to 17 CFR 240.24b-2, FICC requested
confidential treatment of its RFI response. See also FICC Letter at
5.
    \85\ See FICC Letter at 5.
---------------------------------------------------------------------------

    In response to the comments regarding the potential procyclical
nature of the minimum margin amount calculation and whether it is

appropriate for the margin methodology to take into account such
extreme market events, the Commission notes that as a general matter,
margin floors generally operate to reduce procyclicality by preventing
margin levels from falling too low. Moreover, despite the commenters'
procyclicality concerns, the Commission understands that the purpose of
the minimum margin amount calculation is to ensure that FICC collects
sufficient margin in times of heightened market volatility, which means
that FICC would, by design, collect additional margin at such times if
the minimum margin amount applies. The Commission believes that,
because heightened market volatility may lead to increased credit
exposure for FICC, it is reasonable for FICC's margin methodology to
collect additional margin at such times and to be responsive to market
activity of this nature.
    In response to the comment that the proposed minimum margin amount
is not necessary because the March and April 2020 market volatility did
not cause the failure of FICC members or otherwise cause broader
systemic problems, the Commission disagrees. Similar to the
Commission's analysis above, the relevant standard is not merely for
FICC to maintain sufficient financial resources to avoid failures or
systemic issues, but for FICC to cover its credit exposures to members
with a risk-based margin system that produces margin levels
commensurate with, the risks and particular attributes of each relevant
product, portfolio, and market.\86\ During periods of extreme market
volatility, FICC has demonstrated that adding the minimum margin amount
to its margin methodology better enables FICC to manage its credit
exposures to members by producing margin charges commensurate with the
applicable risks. The Commission has reviewed and analyzed FICC's
backtesting data, and agrees that the data demonstrate that the minimum
margin amount would result in better backtesting coverage and,
therefore, less credit exposure of FICC to its members. Accordingly,
the Commission believes that the proposed minimum margin amount would
enable FICC to better manage its credit risks resulting from periods of
extreme market volatility.
---------------------------------------------------------------------------

    \86\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    In response to the comments regarding the minimum margin amount
calculation's reliance on historical price movements, the Commission
does not agree that Rule 17Ad-22(e)(6)(i) precludes FICC from
implementing a margin methodology that relies, at least in part, on
historical price movements or that FICC's margin methodology must
generate margin requirements that ``equate to future protections
against market volatility.'' FICC's credit exposures are reasonably
measured both by events that have actually happened as well as events
that could potentially occur in the future. For this reason, a risk-
based margin system is necessary for FICC to cover its potential future
exposure to members.\87\ Potential future exposure is, in turn, defined
as the maximum exposure estimated to occur at a future point in time
with an established single-tailed confidence level of at least 99
percent with respect to the estimated distribution of future
exposure.\88\ Thus, to be consistent with its regulatory requirements,
FICC must consider potential future exposure, which includes, among
other things, losses associated with the liquidation of a defaulted
member's portfolio.
---------------------------------------------------------------------------

    \87\ See 17 CFR 240.17Ad-22(e)(6)(iii) (requiring 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).
    \88\ 17 CFR 240.17Ad-22(a)(13).
---------------------------------------------------------------------------

    In response to the comments regarding enhancing the model-based
calculation instead of adding the minimum margin amount, the Commission
believes that, as FICC stated in its response, the inputs to FICC's
model-based calculation include risk factors that are typical TBA
attributes, whereas the extreme market volatility of March and April
2020, which affected the TBA markets, was caused by other external
factors that are less subject to modeling. Accordingly, the Commission
believes that FICC would more effectively cover its exposure during
such periods by including the minimum margin amount as an alternative
margin component based on the price volatility in each member's
portfolio using observable TBA benchmark prices, using a relatively
short lookback period.\89\
---------------------------------------------------------------------------

    \89\ See FICC Letter at 3.
---------------------------------------------------------------------------

    In response to the comments regarding whether the minimum margin
amount will likely become the predominant calculation for determining a
member's VaR Charge, the Commission disagrees. For example, the average
daily VaR Charge increase from February 3, 2020 through June 30, 2020
would have been approximately $2.2 billion or 42%, but as the model-
based calculation took into account the current market conditions, the
average daily increase during Q4 of 2020 would have been approximately
$838 million or 7%.\90\
---------------------------------------------------------------------------

    \90\ See FICC Letter at 5. The Commission's conclusion is also
based upon information that FICC submitted confidentially regarding
member-level impact of the proposal from February through December
2020.
---------------------------------------------------------------------------

    Finally, in response to the comments regarding concentration
charges, the Commission notes that there is a distinction between
concentration charges and the VaR Charge in that they are generally
designed to mitigate different risks. Whereas the VaR Charge is
designed to cover the risk of market price volatility, concentration
charges are typically designed to mitigate the risk of incurring
additional market impact cost from liquidating a directionally
concentrated portfolio.\91\
---------------------------------------------------------------------------

    \91\ See Securities Exchange Act Release No. 34-90182 (October
14, 2020), 85 FR 66630 (October 20, 2020).
---------------------------------------------------------------------------

    Accordingly, the Commission believes that adding the minimum margin
amount to FICC's margin methodology would be consistent with Rules
17Ad-22(e)(6)(i) and (iii) because this new margin calculation should
better enable FICC to establish a risk-based margin system that
considers and produces relevant margin levels commensurate with the
risks associated with liquidating member portfolios in a default
scenario, including volatility in the TBA market.\92\
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    \92\ 17 CFR 240.17Ad-22(e)(6)(i) and (iii).
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E. Consistency With Rule 17Ad-22(e)(23)(ii)

    Rule 17Ad-22(e)(23)(ii) under the Exchange Act requires each
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide
sufficient information to enable participants to identify and evaluate
the risks, fees, and other material costs they incur by participating
in the covered clearing agency.\93\
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    \93\ 17 CFR 240.17Ad-22(e)(23)(ii).
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    Several commenters express concerns that the Proposed Rule Change
does not provide sufficient information to enable FICC's members to
identify and evaluate the minimum margin amount. Two commenters argue
that FICC's margin calculations are opaque, which makes liquidity
planning difficult for members.\94\ In particular, these commenters
express concern that the minimum margin amount could trigger sudden
margin spikes that could result in forced selling or other market
disruptions.\95\ One commenter argues that since the Proposed Rule
Change

would set a member's VaR Charge as the greater of the model-based
calculation, current VaR Floor haircut, and the minimum margin amount,
members would always need to be prepared to fund the minimum margin
amount, which makes it difficult for members to identify and evaluate
the material costs associated with their trading activities.\96\ Two
commenters argue that the Proposed Rule Change did not discuss the
anticipated impacts on members' cost to do business or disparate
impacts between large and small members.\97\ One commenter argues that
enhancing the model-based calculation would better enable members to
understand the causes of increased margin requirements than the minimum
margin amount.\98\ One commenter claims that at the time of its comment
letter, FICC had not yet provided members with updated impact studies
demonstrating that as 2020 market volatility stabilized, the minimum
margin amount and model-based calculation became more aligned.\99\ One
commenter claims that FICC has not explained which entities contributed
to the March and April 2020 backtesting deficiencies, or how any
reduced Backtesting Charges during the impact study period were
equitably distributed among members.\100\ One commenter states that
while the proposed lookback period for the minimum margin amount would
be two years, the period FICC appears to have used to determine a
deficit in the desired 99 percent coverage ratio is only one
month.\101\ Finally, one commenter argues that the minimum margin
amount is difficult to evaluate because FICC did not discuss whether
the minimum margin amount would cause additional member obligations
with respect to FICC's Capped Contingency Liquidity Facility
(``CCLF'').\102\
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    \94\ See SIFMA Letter I at 4; ASA Letter at 2.
    \95\ See id.
    \96\ See SIFMA Letter II at 2.
    \97\ See SIFMA Letter I at 4; ASA Letter at 2.
    \98\ See SIFMA Letter I at 4.
    \99\ See IDTA/MBA Letter I at 3.
    \100\ See IDTA/MBA Letter I at 3; IDTA/MBA Letter II at 3.
    \101\ See SIFMA Letter I at 3.
    \102\ See SIFMA Letter I at 4. CCLF is a rules-based, committed
liquidity resource designed to enable FICC to meet its cash
settlement obligations in the event of a default of the member or
family of affiliated members to which FICC has the largest exposure
in extreme but plausible market conditions. See MBSD Rule 17, supra
note 15.
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    In response to the comments, the Commission notes that FICC
provided a detailed member-level impact analysis of the minimum margin
amount as part of the Proposed Rule Change filing.\103\ FICC discussed
the impact analysis in the narrative of the Proposed Rule Change in
general terms to avoid disclosing confidential member information.\104\
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    \103\ As part of the Proposed Rule Change, FICC filed Exhibit
3--FICC Impact Studies. Pursuant to 17 CFR 240.24b-2, FICC requested
confidential treatment of Exhibit 3.
    \104\ See Notice, supra note 3 at 79545.
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    Additionally, FICC responds that it has provided its members with
explanations regarding the effects of the minimum margin amount,
including updated impact study data through the fourth quarter of
2020.\105\ FICC further states that it provides ongoing tools and
resources to assist its members to determine their margin requirements
and the anticipated impact of the minimum margin amount.\106\
Specifically, FICC maintains the Real Time Matching Report Center,
Clearing Fund Management System, and FICC Customer Reporting service,
which are member-accessible websites for accessing risk reports and
other risk disclosures.\107\ These websites enable a member to view and
download margin requirement information and component details.\108\ The
reporting enables a member to view, for example, a portfolio breakdown
by CUSIP, including the amounts attributable to the model-based
calculation.\109\ In addition, members are able to view and download
spreadsheets that contain market amounts for current clearing
positions, and the associated VaR Charge.\110\ FICC also maintains the
FICC Risk Client Portal, which is a member-accessible website that
enables members to view and analyze certain risks related to their
portfolios, including daily customer reports and calculators to assess
the risk and margin impact of certain activities.\111\ FICC maintains
the FICC Client Calculator that enables members to enter ``what-if''
position data and recalculate their VaR Charge to determine margin
impact before trade execution.\112\ Finally, the FICC Client Calculator
allows 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.\113\
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    \105\ See FICC Letter at 6.
    \106\ See id.
    \107\ See id.
    \108\ See id.
    \109\ See id.
    \110\ See id.
    \111\ See FICC Letter at 6-7.
    \112\ See FICC Letter at 7.
    \113\ See id.
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    Regarding the comment that although the proposed lookback period
for the minimum margin amount would be two years, the period FICC
appears to have used to determine a deficit in the desired 99 percent
coverage ratio is only one month, FICC states that the minimum margin
amount lookback period is for the model calibration, whereas the
backtesting coverage calculation is based on rolling 12 months.\114\
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    \114\ See FICC Letter 5.
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    Finally, regarding CCLF, FICC states margin requirements and CCLF
obligations are not directly related, and each is designed to account
for different risks.\115\ Margin requirements are designed to address
the market risk inherent in each member's portfolio and mitigate
potential losses to FICC associated with liquidating a member's
portfolio in a default scenario. CCLF is a rules-based liquidity tool
designed to ensure that MBSD has sufficient liquidity resources to
complete settlement in the event of the failure of FICC's largest
member (including affiliates). FICC does not believe that CCLF
procedures or member obligations would need to be modified as a result
of implementing the minimum margin amount.\116\
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    \115\ See FICC Letter at 7.
    \116\ See id.
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    For the foregoing reasons, the Commission disagrees with the
comments stating that the Proposed Rule Change does not provide
sufficient information to enable members to identify and evaluate the
risks and other material costs they incur by participating in FICC or
that the Proposed Rule Change does not allow members to predict the
minimum margin amount's impact on their activities. The Commission
acknowledges that, as some commenters have noted, the Proposed Rule
Change does not provide or specify the actual models or calculations
that FICC would use to determine the minimum margin amount. However,
when adopting the CCA Standards,\117\ the Commission declined to adopt
a commenter's view that a covered clearing agency should be required to
provide, at least quarterly, its methodology for determining initial
margin requirements at a level of detail adequate to enable
participants to replicate the covered clearing agency's calculations,
or, in the alternative, that the covered clearing agency should be
required to provide a computational method with the ability to
determine the initial margin associated with changes to each respective
participant's portfolio or hypothetical portfolio, participant defaults
and other relevant information. The Commission stated that
``[m]andating disclosure of this

frequency and granularity would be inconsistent with the principles-
based approach the Commission is taking in Rule 17Ad-22(e).'' \118\
Consistent with that approach, the Commission does not believe that
Rule 17Ad-22(e)(23)(ii) would require FICC to disclose its actual
margin methodology, so long as FICC has provided sufficient information
for its members to understand the potential costs and risks associated
with participating in FICC.
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    \117\ 17 CFR 240.17Ad-22(e).
    \118\ See CCA Standards Adopting Release, supra note 33, 81 FR
at 70845.
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    For the reasons discussed above, the Commission believes that the
Proposed Rule Change would enable FICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to provide sufficient information to enable members to
identify and evaluate the risks, fees, and other material costs they
incur as FICC's members, consistent with Rule 17Ad-22(e)(23)(ii).\119\
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    \119\ 17 CFR 240.17Ad-22(e)(23)(ii).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act \120\ and
the rules and regulations promulgated thereunder.
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    \120\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\121\ that proposed rule change SR-FICC-2020-017, be, and hereby is,
approved.\122\
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    \121\ 15 U.S.C. 78s(b)(2).
    \122\ In approving the proposed rule change, the Commission
considered the proposals' impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f). See also Sections II.A. and
II.B.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\123\
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    \123\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-14390 Filed 7-6-21; 8:45 am]
BILLING CODE 8011-01-P