[Federal Register Volume 83, Number 110 (Thursday, June 7, 2018)]
[Notices]
[Pages 26514-26530]
[FR Doc No: 2018-12195]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83362; File No. SR-FICC-2018-001]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 1 and Order Granting Accelerated
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To
Implement Changes to the Required Fund Deposit Calculation in the
Government Securities Division Rulebook

June 1, 2018.

I. Introduction

    The Fixed Income Clearing Corporation (``FICC'') filed with the
U.S. Securities and Exchange Commission (``Commission'') on January 12,
2018 proposed rule change SR-FICC-2018-001 (``Proposed Rule Change'')
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder.\2\ The Proposed Rule
Change was published for comment in the Federal Register on February 1,
2018.\3\ The Commission received eight comments on the proposal.\4\ On
March 14, 2018, the Commission issued an order instituting proceedings
to determine whether to approve or disapprove the Proposed Rule
Change.\5\ On April 25, 2018, FICC filed Amendment No. 1 to the
Proposed Rule Change (``Amendment No. 1'').\6\ The Commission is
publishing this notice to solicit comment on Amendment No. 1 from
interested persons and to approve the Proposed Rule Change, as modified
by Amendment No. 1, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4. FICC also filed the Proposed Rule Change
as advance notice SR-FICC-2018-801 (``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 Exchange Act, 17 CFR 240.19b-4(n)(1)(i). Notice
of Filing of the Advance Notice was published for comment in the
Federal Register on March 2, 2018. Securities Exchange Act Release
No. 82779 (February 26, 2018), 83 FR 9055 (March 2, 2018) (SR-FICC-
2018-801). The Commission extended the deadline for its review
period of the Advance Notice for an additional 60 days on March 7,
2018. Securities Exchange Act Release No. 82820 (March 7, 2018), 83
FR 10761 (March 12, 2018) (SR-FICC-2018-801). On April 25, 2018,
FICC filed Amendment No.1 to the Advance Notice. Available at
https://www/sec/gov/comments/sr-ficc-2018-801/ficc2018801.htm. The
Commission issued a notice of filing of Amendment No. 1 and notice
of no objection to the Advance Notice, as modified by Amendment No.
1, on May 11, 2018. Securities Exchange Act Release No. 83223 (May
11, 2018), 83 FR 23020 (May 17, 2018).
    \3\ Securities Exchange Act Release No. 82588 (January 26,
2018), 83 FR 4687 (February 1, 2018) (SR-FICC-2018-001).
    \4\ Letter from Robert E. Pooler, Chief Financial Officer, Ronin
Capital LLC (``Ronin''), dated February 22, 2018, to Robert W.
Errett, Deputy Secretary, Commission (``Ronin Letter I''); letter
from Michael Santangelo, Chief Financial Officer, Amherst Pierpont
Securities LLC (``Amherst''), dated February 22, 2018, to Brent J.
Fields, Secretary, Commission (``Amherst Letter I''); letter from
Timothy Cuddihy, Managing Director, FICC, dated March 19, 2018, to
Robert W. Errett, Deputy Secretary, Commission (``FICC Letter I'');
letter from James Tabacchi, Chairman, Independent Dealer and Trader
Association (``IDTA''), dated March 29, 2018, to Eduardo A. Aleman,
Assistant Secretary, Commission (``IDTA Letter''); letter from
Michael Santangelo, Chief Financial Officer, Amherst Pierpont
Securities LLC, dated April 4, 2018, to Brent J. Fields, Secretary,
Commission (``Amherst Letter II''); letter from Levent Kahraman,
Chief Executive Officer, KGS-Alpha Capital Markets (``KGS''), dated
April 4, 2018, to Brent J. Fields, Secretary, Commission (``KGS
Letter''); letter from Timothy Cuddihy, Managing Director, FICC,
dated April 13, 2018, to Robert W. Errett, Deputy Secretary,
Commission (``FICC Letter II''); and letter from Robert E. Pooler,
Chief Financial Officer, Ronin, dated April 13, 2018, to Eduardo A.
Aleman, Assistant Secretary, Commission (``Ronin Letter II''). Since
the proposal contained in the Proposed Rule Change was also filed as
an Advance Notice, supra note 2, the Commission is considering all
public comments received on the proposal regardless of whether the
comments were submitted to the Advance Notice or the Proposed Rule
Change.
    \5\ See Securities Exchange Act Release No. 34-82876 (March 14,
2018), 83 FR 12229 (March 20, 2018) (SR-FICC-2018-001). The order
instituting proceedings re-opened the comment period and extended
the Commission's period of review of the Proposed Rule Change. See
id.
    \6\ Available at https://www.sec.gov/comments/sr-ficc-2018-001/ficc2018001.htm. FICC filed related amendments to the related
Advance Notice. Supra note 2.
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II. Description of the Proposed Rule Change

    FICC proposes to change the FICC GSD Rulebook (``GSD Rules'') \7\
to adjust GSD's method of calculating GSD netting members'
(``Members'') margin.\8\ Specifically, FICC proposes to (1) change
GSD's method of calculating the Value-at-Risk (``VaR'') Charge
component; (2) add a new component referred to as the ``Blackout Period
Exposure Adjustment;'' (3) eliminate the existing Blackout Period
Exposure Charge and the Coverage Charge components; (4) adjust the
existing Backtesting Charge component to (i) include the backtesting
deficiencies of certain GCF Repo Transaction \9\ counterparties during
the Blackout Period, and (ii) give GSD the ability to assess the
Backtesting Charge on an intraday basis for all Members; and (5) adjust
the calculation for determining

the existing Excess Capital Premium for Broker Members, Inter-Dealer
Broker Members, and Dealer Members.\10\ In addition, FICC proposes to
provide transparency with respect to GSD's existing authority to
calculate and assess Intraday Supplemental Fund Deposit amounts.\11\
The proposed QRM Methodology document would reflect the proposed VaR
Charge calculation and the proposed Blackout Period Exposure Adjustment
calculation.\12\
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    \7\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \8\ Notice, supra note 3, at 4688.
    \9\ GCF Repo Transactions refer to transactions made on FICC's
GCF Repo Service that enable dealers to trade general collateral
repos, based on rate, term, and underlying product, throughout the
day, without requiring intra-day, trade-for-trade settlement on a
Delivery-versus-Payment basis. Id.
    \10\ Notice, supra note 3, at 4689.
    \11\ Id. Pursuant to the GSD Rules, FICC has the existing
authority and discretion to calculate an additional amount on an
intraday basis in the form of an Intraday Supplemental Clearing Fund
Deposit. See GSD Rules 1 and 4, supra note 7.
    \12\ Notice, supra note 3, at 4689.
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A. Changes to GSD's VaR Charge Component

    FICC states that the changes proposed in the Proposed Rule Change
are designed to improve GSD's current VaR Charge so that it responds
more effectively to market volatility.\13\ Specifically, FICC proposes
to (1) replace GSD's current full revaluation approach with a
sensitivity approach; \14\ (2) employ the existing Margin Proxy as an
alternative (i.e., a back-up) VaR Charge calculation; \15\ (3) use an
evenly-weighted 10-year look-back period, instead of the current front-
weighted one-year look-back period; (4) eliminate GSD's current
augmented volatility adjustment multiplier; (5) utilize a haircut
method for securities cleared by GSD that lack sufficient historical
data; and (6) establish a VaR Floor calculation that would serve as a
minimum VaR Charge for Members, as discussed below.\16\
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    \13\ Id. FICC proposes to change its calculation of GSD's VaR
Charge because during the fourth quarter of 2016, FICC's current
methodology for calculating the VaR Charge did not respond
effectively to the market volatility that existed at that time. Id.
As a result, the VaR Charge did not achieve backtesting coverage at
a 99 percent confidence level and, therefore, yielded backtesting
deficiencies beyond FICC's risk tolerance. Id.
    \14\ Notice, supra note 3, at 4690 GSD's proposed sensitivity
approach is similar to the sensitivity approach that FICC's
Mortgage-Backed Securities Division (``MBSD'') uses to calculate the
VaR Charge for MBSD clearing members. See Securities Exchange Act
Release No. 79868 (January 24, 2017) 82 FR 8780 (January 30, 2017)
(SR-FICC-2016-007); Securities Exchange Act Release No. 79643
(December 21, 2016), 81 FR 95669 (December 28, 2016) (SR-FICC-2016-
801).
    \15\ The Margin Proxy was implemented by FICC in 2017 to
supplement the full revaluation approach to the VaR Charge
calculation with a minimum VaR Charge calculation. Securities
Exchange Act Release No. 80349 (March 30, 2017), 82 FR 16638 (April
5, 2016) (SR-FICC-2017-001); see also Securities Exchange Act
Release No. 80341 (March 30, 2017), 82 FR 16644 (April 5, 2016) (SR-
FICC-2017-801).
    \16\ Id.
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    For the proposed sensitivity approach to the VaR Charge, FICC would
source sensitivity data and relevant historical risk factor time series
data generated by an external vendor based on its econometric, risk,
and pricing models.\17\ FICC would conduct independent data checks to
verify the accuracy and consistency of the data feed received from the
vendor.\18\ In the event that the external vendor is unable to provide
the sourced data in a timely manner, FICC would employ its existing
Margin Proxy as a back-up VaR Charge calculation.\19\
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    \17\ See Notice, supra note 3, at 4690. The following risk
factors would be incorporated into GSD's proposed sensitivity
approach: Key rate, convexity, implied inflation rate, agency
spread, mortgage-backed securities spread, volatility, mortgage
basis, and time risk factor. These risk factors are defined as
follows:
     Key rate measures the sensitivity of a price change to
changes in interest rates;
     convexity measures the degree of curvature in the
price/yield relationship of key interest rates;
     implied inflation rate measures the difference between
the yield on an ordinary bond and the yield on an inflation-indexed
bond with the same maturity;
     agency spread is yield spread that is added to a
benchmark yield curve to discount an Agency bond's cash flows to
match its market price;
     mortgage-backed securities spread is the yield spread
that is added to a benchmark yield curve to discount a to-be-
announced (``TBA'') security's cash flows to match its market price;
     volatility reflects the implied volatility observed
from the swaption market to estimate fluctuations in interest rates;
     mortgage basis captures the basis risk between the
prevailing mortgage rate and a blended Treasury rate; and
     time risk factor accounts for the time value change (or
carry adjustment) over the assumed liquidation period. Id.
    The above-referenced risk factors are similar to the risk
factors currently utilized in MBSD's sensitivity approach; however,
GSD has included other risk factors that are specific to the U.S.
Treasury securities, Agency securities and mortgage-backed
securities cleared through GSD. Id. Concerning U.S. Treasury
securities and Agency securities, FICC would select the following
risk factors: Key rates, convexity, agency spread, implied inflation
rates, volatility, and time. Id. For mortgage-backed securities,
each security would be mapped to a corresponding TBA forward
contract and FICC would use the risk exposure analytics for the TBA
as an estimate for the mortgage-backed security's risk exposure
analytics. Id. FICC would use the following risk factors to model a
TBA security: Key rates, convexity, mortgage-backed securities
spread, volatility, mortgage basis, and time. Id. To account for
differences between mortgage-backed securities and their
corresponding TBA, FICC would apply an additional basis risk
adjustment. Id.
    \18\ Notice, supra note 3, at 4690.
    \19\ See Notice, supra note 3, at 4692. In the event that the
data used for the sensitivity approach is unavailable for a period
of more than five days, FICC proposes to revert back to the Margin
Proxy as an alternative VaR Charge calculation. Id.
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    Additionally, FICC proposes to change the look-back period from a
front-weighted one-year look-back to an evenly-weighted 10-year look-
back period that would include, to the extent applicable, an additional
stressed period. FICC states that the proposed extended look-back
period would help to ensure that the historical simulation contains a
sufficient number of historical market conditions.\20\ In the event
FICC observes that the 10-year look-back period does not contain a
sufficient number of stressed market conditions, FICC would have the
ability to include an additional period of historically observed
stressed market conditions to a 10-year look-back period or adjust the
length of look-back period.\21\
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    \20\ Notice, supra note 3, at 4691.
    \21\ Id.
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    FICC also proposes to look at the historical changes of specific
risk factors during the look-back period in order to generate risk
scenarios to arrive at the market value changes for a given
portfolio.\22\ A statistical probability distribution would be formed
from the portfolio's market value changes, and then the VaR Charge
calculation would be calibrated to cover the projected liquidation
losses at a 99 percent confidence level.\23\ The portfolio risk
sensitivities and the historical risk factor time series data would
then be used by FICC's risk model to calculate the VaR Charge for each
Member.\24\
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    \22\ Notice, supra note 3, at 4690.
    \23\ Id.
    \24\ Id.
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    FICC also proposes to eliminate the augmented volatility adjustment
multiplier. FICC states that the multiplier would not be necessary
because the proposed sensitivity approach would have a longer look-back
period and the ability to include an additional stressed market
condition to account for periods of market volatility.\25\
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    \25\ Notice, supra note 3, at 4692.
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    According to FICC, in the event that a portfolio contains classes
of securities that do not have sufficient volume and price information
available, a historical simulation approach would not generate VaR
Charge amounts that reflect the risk profile of such securities.\26\
Therefore, FICC proposes to calculate the VaR Charge for these
securities by utilizing a haircut approach based on a market benchmark
with a similar risk profile as the related security.\27\ The proposed
haircut approach would be calculated separately for U.S. Treasury/
Agency securities and mortgage-backed securities.\28\
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    \26\ Notice, supra note 3, at 4693.
    \27\ Id.
    \28\ Id.
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    Finally, FICC proposes to adjust the existing calculation of the
VaR Charge to include a VaR Floor, which would be the amount used as
the VaR Charge when the sum of the amounts calculated

by the proposed sensitivity approach and haircut method is less than
the proposed VaR Floor.\29\ The VaR Floor would be calculated as the
sum of (1) a U.S. Treasury/Agency bond margin floor \30\ and (2) a
mortgage-backed securities margin floor.\31\
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    \29\ Id.
    \30\ Id. The U.S. Treasury/Agency bond margin floor would be
calculated by mapping each U.S. Treasury/Agency security to a tenor
bucket, then multiplying the gross positions of each tenor bucket by
its bond floor rate, and summing the results. Id. The bond floor
rate of each tenor bucket would be a fraction (initially set at 10
percent) of an index-based haircut rate for such tenor bucket. Id.
    \31\ Notice, supra note 3, at 4693. The mortgage-backed
securities margin floor would be calculated by multiplying the gross
market value of the total value of mortgage-backed securities in a
Member's portfolio by a designated amount, referred to as the pool
floor rate, (initially set at 0.05 percent). Id.
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B. Addition of the Blackout Period Exposure Adjustment Component

    FICC proposes to add a new component to GSD's margin calculation--
the Blackout Period Exposure Adjustment.\32\ FICC states that the
Blackout Period Exposure Adjustment would be calculated to address
risks that could result from overstated values of mortgage-backed
securities that are pledged as collateral for GCF Repo Transactions
\33\ during a Blackout Period.\34\ A Blackout Period is the period
between the last business day of the prior month and the date during
the current month upon which a government-sponsored entity that issues
mortgage-backed securities publishes its updated Pool Factors.\35\ The
proposed Blackout Period Exposure Adjustment would result in a charge
that either increases a Member's VaR Charge or a credit that decreases
the VaR Charge.\36\
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    \32\ Notice, supra note 3, at 4694. The proposed Blackout Period
Exposure Adjustment would be calculated by (1) projecting an average
pay-down rate of mortgage loan pools (based on historical pay down
rates) for the government sponsored enterprises (Fannie Mae and
Freddie Mac) and the Government National Mortgage Association
(Ginnie Mae), respectively, then (2) multiplying the projected pay-
down rate by the net positions of mortgage-backed securities in the
related program, and (3) summing the results from each program. Id.
    \33\ Id.
    \34\ Id.
    \35\ Id. Pool Factors are the percentage of the initial
principal that remains outstanding on the mortgage loan pool
underlying a mortgage-backed security, as published by the
government-sponsored entity that is the issuer of such security. Id.
    \36\ Notice, supra note 3, at 4694.
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C. Elimination of the Blackout Period Exposure Charge and Coverage
Charge Components

    FICC proposes to eliminate the existing Blackout Period Exposure
Charge component from GSD's margin calculation.\37\ The Blackout Period
Exposure Charge only applies to Members with GCF Repo Transactions that
have two or more backtesting deficiencies during the Blackout Period
and whose overall 12-month trailing backtesting coverage falls below
the 99 percent coverage target.\38\ FICC would eliminate this charge
because the proposed Blackout Period Exposure Adjustment would apply to
all Members with GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period.\39\
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    \37\ Id.
    \38\ Id.
    \39\ Id.
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    FICC also proposes to eliminate the existing Coverage Charge
component from GSD's margin calculation.\40\ FICC would eliminate the
Coverage Charge because, as FICC states, the proposed sensitivity
approach would provide overall better margin coverage, rendering the
Coverage Charge unnecessary.\41\
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    \40\ Id.
    \41\ Notice, supra note 3, at 4695.
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D. Adjustment to the Backtesting Charge Component

    FICC proposes to amend GSD's existing Backtesting Charge component
of its margin calculation to (1) include the backtesting deficiencies
of certain Members during the Blackout Period and (2) give GSD the
ability to assess the Backtesting Charge on an intraday basis.\42\
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    \42\ Id.
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    Currently, the Backtesting Charge does not apply to Members with
mortgage-backed securities during the Blackout Period because such
Members would be subject to a Blackout Period Exposure Charge.\43\ In
coordination with its proposal to eliminate the Blackout Period
Exposure Charge, FICC proposes to adjust the applicability of the
Backtesting Charge.\44\ Specifically, FICC proposes to apply the
Backtesting Charge to Members with backtesting deficiencies that also
experience backtesting deficiencies that are attributed to the Member's
GCF Repo Transactions collateralized with mortgage-backed securities
during the Blackout Period within the prior 12-month rolling
period.\45\
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    \43\ Id.
    \44\ Id.
    \45\ Id. Additionally, during the Blackout Period, the proposed
Blackout Period Exposure Adjustment Charge, as described in Section
I.C, above, would be applied to all applicable Members. Id.
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    FICC also proposes to adjust the Backtesting Charge to apply to
Members that experience backtesting deficiencies during the trading day
because of such Member's intraday trading activities.\46\ The Intraday
Backtesting Charge would be assessed on Members with portfolios that
experience at least three intraday backtesting deficiencies over the
prior 12-month period and would generally equal a Member's third
largest historical intraday backtesting deficiency.\47\
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    \46\ Id.
    \47\ Id.
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E. Adjustment to the Excess Capital Premium Charge

    FICC proposes to adjust GSD's calculation for determining the
Excess Capital Premium. Currently, GSD assesses the Excess Capital
Premium when a Member's VaR Charge exceeds the Member's Excess
Capital.\48\ Only Members that are brokers or dealers are required to
report Excess Net Capital figures to FICC while other Members report
net capital or equity capital, based on the type of regulation to which
the Member is subject.\49\ If a Member is not a broker or dealer, FICC
uses the net capital or equity capital in order to calculate each
Member's Excess Capital Premium.\50\ FICC proposes to move to a net
capital measure for broker Members, inter-dealer broker Members, and
dealer Members.\51\ FICC states that such a change would make the
Excess Capital Premium for those Members more consistent with the
equity capital measure that is used for other Members in the Excess
Capital Premium calculation.\52\
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    \48\ Notice, supra note 3, at 4696. The term ``Excess Capital''
means Excess Net Capital, net assets, or equity capital as
applicable, to a Member based on its type of regulation. GSD Rules,
Rule 1, supra note 7.
    \49\ Id.
    \50\ Id.
    \51\ Id.
    \52\ Id.
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F. Additional Transparency Surrounding the Intraday Supplemental Fund
Deposit

    Separate from the above changes to GSD's margin calculation, FICC
proposes to provide transparency in the GSD Rules with respect to GSD's
existing calculation of the Intraday Supplemental Fund Deposit.\53\
FICC proposes to provide more detail in the GSD rules surrounding both
GSD's calculation of the Intraday Supplemental Fund Deposit charge and
its determination of whether to assess the charge.\54\
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    \53\ Id.
    \54\ Id.
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    FICC calculates the Intraday Supplemental Fund Deposit by tracking
three criteria for each Member.\55\ The first criterion, the ``Dollar
Threshold,'' evaluates whether a Member's Intraday VaR Charge equals or
exceeds a set

dollar amount when compared to the VaR Charge that was included in the
most recent margin collection.\56\ The second criterion, the
``Percentage Threshold,'' evaluates whether the Intraday VaR Charge
equals or exceeds a percentage increase of the VaR Charge that was
included in the most recent margin collection.\57\ The third criterion,
the ``Coverage Target,'' evaluates whether a Member is experiencing
backtesting results below a 99 percent confidence level.\58\ In the
event that a Member's additional risk exposure breaches all three
criteria, FICC assesses an Intraday Supplemental Fund Deposit.\59\ FICC
also assesses an Intraday Supplemental Fund Deposit if, under certain
market conditions, a Member's Intraday VaR Charge breaches both the
Dollar Threshold and the Percentage Threshold.\60\
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    \55\ Id.
    \56\ Id.
    \57\ Notice, supra note 3, at 4697.
    \58\ Id.
    \59\ Id.
    \60\ Id.
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G. Description of the QRM Methodology

    The QRM Methodology document provides the methodology by which FICC
would calculate the VaR Charge, with the proposed sensitivity approach,
as well as other components of the Members' margin calculation.\61\ The
QRM Methodology document specifies (i) the model inputs, parameters,
assumptions and qualitative adjustments; (ii) the calculation used to
generate margin amounts; (iii) additional calculations used for
benchmarking and monitoring purposes; (iv) theoretical analysis; (v)
the process by which the VaR methodology was developed as well as its
application and limitations; (vi) internal business requirements
associated with the implementation and ongoing monitoring of the VaR
methodology; (vii) the model change management process and governance
framework (which includes the escalation process for adding a stressed
period to the VaR Charge calculation); (viii) the haircut methodology;
(ix) the Blackout Period Exposure Adjustment calculations; (x) intraday
margin calculation; and (xi) the Margin Proxy calculation.\62\
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    \61\ Notice, supra note 3, at 4698.
    \62\ Id.
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H. Description of Amendment No. 1

    In Amendment No. 1, FICC proposes three things. First, FICC
proposes to stagger the implementation of the proposed Blackout Period
Exposure Adjustment and the proposed removal of the Blackout Period
Exposure Charge.\63\ Specifically, on a date that is approximately
three weeks after the later of the Commission's order approving the
Proposed Rule Change, as modified by Amendment No. 1, or its notice of
no objection to the related Advance Notice, as modified by Amendment
No. 1 (``Implementation Date''), FICC would charge Members only 50
percent of any amount calculated under the proposed Blackout Period
Exposure Adjustment, while, at the same time, decreasing by 50 percent
any amount charge under the Blackout Period Exposure Charge.\64\ Then,
no later than September 30, 2018, FICC would increase any amount
charged under the Blackout Period Exposure Adjustment to 75 percent,
while, at the same time, decreasing by 75 percent any amount charge
under the Blackout Period Exposure Charge.\65\ Finally, no later than
December 31, 2018, FICC would increase any amount charged under the
Blackout Period Exposure Adjustment to 100 percent, while, at the same
time, eliminating the Blackout Period Exposure Charge. FICC states that
it is proposing this amendment to address concerns raised by several
Members that the implementation of the proposed Blackout Period
Exposure Adjustment would have a material impact on their liquidity
planning and margin charge.\66\ FICC states that the staggered
implementation would give Members the opportunity to assess and further
prepare for the impact of the proposed Blackout Period Exposure
Adjustment. FICC states the proposed VaR Charge calculation and the
existing Blackout Period Exposure Charge would appropriately mitigate
the potential mortgage-backed securities pay-down on a short-term
basis, given FICC's assessment of mortgage-backed securities pay-down
projections for this calendar year.\67\
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    \63\ Amendment No. 1, supra note 6.
    \64\ Id.
    \65\ Id.
    \66\ Id.
    \67\ Id.
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    Second, FICC proposes to amend the implementation date for the
remainder of the proposed changes contained in the Proposed Rule
Change.\68\ Specifically, FICC proposes that such remaining changes
would become operative on the Implementation Date, as opposed to the
originally proposed 45 business days after the later of the
Commission's order approving the Proposed Rule Change, as modified by
Amendment No. 1, or notice of no objection to the related Advance
Notice, as modified by Amendment No. 1.\69\ FICC states that it is
proposing this amendment because FICC is primarily concerned that the
look-back period that is currently used in calculating the VaR Charge
under the Margin Proxy may not calculate sufficient margin amounts to
cover GSD's exposure to a defaulting Member.\70\
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    \68\ Id.
    \69\ Id.
    \70\ Id.
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    Third, FICC proposes to correct an incorrect description of the
calculation of the Excess Capital Premium that appears once in the
narrative to the Proposed Rule Change, as well as in the corresponding
location in the Exhibit 1A to the Proposed Rule Change.\71\
Specifically, FICC proposes to change the term ``Required Fund
Deposit'' to ``VaR Charge'' in the description at issue, as ``Required
Fund Deposit'' was incorrectly used in that instance.\72\
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    \71\ Id.
    \72\ Id.
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III. Solicitation of Comments on Amendment No. 1

    Interested persons are invited to submit written data, views and
arguments concerning whether Amendment No. 1 is consistent with the
Exchange 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-2018-001 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2018-001. 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-2018-001
and should be submitted on or before June 22, 2018.

IV. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Exchange Act \73\ directs the Commission
to approve a proposed rule change of a self-regulatory organization if
it finds that the proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to such organization. After carefully considering
the Proposed Rule Change, as modified by Amendment No. 1, and all
comments received, the Commission finds that the Proposed Rule Change,
as modified by Amendment No. 1, is consistent with the Exchange Act and
the rules and regulations thereunder applicable to FICC.\74\ In
particular, as discussed below, the Commission finds that the Proposed
Rule Change, as modified by Amendment No. 1, is consistent with
Sections 17A(b)(3)(F) \75\ and (I) of the Exchange Act,\76\ as well as
Rules 17Ad-22(e)(4)(i),\77\ (6)(i),\78\ (ii),\79\ (iv),\80\ (v),\81\
(vi)(B),\82\ and (23)(ii) under the Exchange Act.\83\
---------------------------------------------------------------------------

    \73\ 15 U.S.C. 78s(b)(2)(C).
    \74\ In approving this Proposed Rule Change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f). The Commission
addresses comments about economic effects of the Proposed Rule
Change, including competitive effects, below.
    \75\ 15 U.S.C. 78q-1(b)(3)(F).
    \76\ 15 U.S.C. 78q-1(b)(3)(I).
    \77\ 17 CFR 240.17Ad-22(e)(4)(i).
    \78\ 17 CFR 240.17Ad-22(e)(6)(i).
    \79\ 17 CFR 240.17Ad-22(e)(6)(ii).
    \80\ 17 CFR 240.17Ad-22(e)(6)(iv).
    \81\ 17 CFR 240.17Ad-22(e)(6)(v).
    \82\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
    \83\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Exchange Act

    Section 17A(b)(3)(F) of the Exchange Act requires, in part, that
the rules of a clearing agency be designed to, among other things,
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible.\84\
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes that the changes proposed in the Proposed
Rule Change, as modified by Amendment No. 1, are 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,
consistent with Section 17A(b)(3)(F) of the Exchange Act.\85\ First, as
described above, FICC currently calculates the VaR Charge component of
each Member's margin using a VaR Charge calculation that relies on a
full revaluation approach. FICC proposes to instead implement a
sensitivity approach to its VaR Charge calculation, with, at minimum,
an evenly-weighted 10-year look-back period. The proposed sensitivity
approach would leverage an external vendor's expertise in supplying
market risk attributes (i.e., sensitivity data) used to calculate the
VaR Charge. Relying on such sensitivity data with a 10-year look-back
period would help correct deficiencies in FICC's existing VaR Charge
calculation, thus enabling FICC to better account for market risk in
calculating the VaR Charge and better limit its credit exposure to
Members.
---------------------------------------------------------------------------

    \85\ Id.
---------------------------------------------------------------------------

    Second, as described above, FICC proposes to implement the existing
Margin Proxy as a back-up methodology to the proposed sensitivity
approach to the VaR Charge calculation. This proposed change would help
FICC to better limit its credit exposure to Members by continuing to
calculate each Member's VaR Charge in the event that FICC experiences a
data disruption with the vendor that supplies the sensitivity data.
    Third, as described above, FICC proposes to eliminate the augmented
volatility adjustment multiplier from its current VaR Charge
calculation. This proposed change would enable FICC to remove a
component from the VaR Charge calculation that would no longer be
needed on account of the proposed 10-year look-back period that has the
option of an additional stress period.
    Fourth, as described above, FICC proposes to implement a haircut
method for securities with inadequate historical pricing data and,
thus, lack sufficient data to generate a historical simulation that
adequately reflects the risk profile of such securities under the
proposed sensitivity approach to FICC's VaR Charge calculation.
Employing a haircut on such securities would help FICC limit its credit
exposure to Members that transact in the securities by establishing a
way to better capture their risk profile.
    Fifth, as described above, FICC proposes to implement a VaR Floor.
The proposed VaR Floor would be triggered in the event that the
proposed sensitivity VaR model calculates a VaR Charge that is too low
because of offsets applied by the model from certain offsetting long
and short positions. In other words, the VaR Floor would serve as a
backstop to the proposed sensitivity approach to FICC's VaR Charge
calculation, which would help ensure that FICC continues to limit its
credit exposure to Members. Altogether, these proposed changes to the
VaR Charge component of the margin calculation would enable FICC to
view and respond more effectively to market volatility by attributing
market price moves to various risk factors and more effectively
limiting FICC's credit exposure to Members in market conditions that
reflect a rapid decrease in market price volatility levels.
    In addition to these changes to the VaR Charge component of the
margin calculation, FICC proposes to make a number of changes to other
components of the margin calculation. Specifically, as described above,
FICC proposes to (1) add the Blackout Period Exposure Adjustment
component to FICC's margin calculation to help address risks that could
result from overstated values of mortgage-backed securities that are
pledged as collateral for GCF Repo Transactions during a Blackout
Period; (2) make changes to the existing Backtesting Charge component
to help ensure that the charge will apply to (i) all Members that
experience backtesting deficiencies attributable to the Member's GCF
Repo Transactions that are collateralized with mortgage-backed
securities during the Blackout Period, and (ii) all Members that
experience backtesting deficiencies during the trading day because of
such Member's intraday trading activities; (3) provide more detail in
the GSD Rules regarding FICC's calculation of the existing Intraday
Supplemental Fund Deposit charge and its determination of whether to
assess the charge; and (4) remove the Coverage Charge and Blackout
Period Exposure Charge components because the risk these components
addressed would be addressed by the other proposed changes to the
margin calculation, specifically the proposed

sensitivity approach to FICC's VaR Charge calculation and the proposed
Blackout Period Exposure Adjustment component, respectively.
    In Amendment No. 1, as described above, FICC proposes to (1)
stagger the implementation of the proposed Blackout Period Exposure
Adjustment and the proposed removal of the Blackout Period Exposure
Charge in response to commenters; (2) accelerate the implementation
date for the remainder of the proposed changes contained in the
Proposed Rule Change, in order address concerns with the existing VaR
Charge calculation sooner; and (3) correct an incorrect description of
the calculation of the Excess Capital Premium in the originally filed
materials.
    Taken together, the above mentioned proposed changes to the
components of the margin calculation would enhance FICC's current
method for calculating each Member's margin. This enhancement, in turn,
would enable FICC to produce margin levels more commensurate with the
risks associated with its Members' portfolios in a broader range of
scenarios and market conditions, and, thus, more effectively cover its
credit exposure to its Members. In addition, the Proposed Rule Change
is designed to help FICC mitigate losses that Member default could
cause to FICC and its non-defaulting Members.
    By better limiting FICC's credit exposure to Members, the proposed
changes are designed to help ensure that, in the event of a Member
default, FICC has collected sufficient margin from the defaulted Member
to manage the default, so that non-defaulting Members would not be
exposed to mutualized losses as a result of the default. By helping to
limit non-defaulting Members' exposure to mutualized losses, the
proposal is designed to help assure the safeguarding of securities and
funds that are in FICC's custody or control. As such, the Proposed Rule
Change, as modified by Amendment No. 1, is designed to help promote the
safeguarding of securities and funds in FICC's custody and control.
Therefore, the Commission believes that the Proposed Rule Change, as
modified by Amendment No. 1, is consistent with Section 17A(b)(3)(F) of
the Exchange Act.\86\
---------------------------------------------------------------------------

    \86\ Id.
---------------------------------------------------------------------------

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

    Section 17A(b)(3)(I) of the Exchange Act requires that the rules of
a clearing agency do not impose any burden on competition not necessary
or appropriate in furtherance of the purposes of the Exchange Act.\87\
As discussed above, FICC is proposing a number of changes to the way it
calculates margin collected from Members--a key tool that FICC uses to
mitigate potential losses to FICC associated with liquidating a
Member's portfolio in the event of a Member default. FICC states that
the proposed changes are designed to assure the safeguarding of
securities and funds that are in the custody or control of FICC,
consistent with Section 17A(b)(3)(F) of the Exchange Act,\88\ because
the proposed changes would enable FICC to better limit its credit
exposure to Members arising out of the activity in Members'
portfolios.\89\ FICC states that the proposed changes would
collectively work to help ensure that FICC calculates and collects
adequate margin from its Members.\90\
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78q-1(b)(3)(I).
    \88\ See 15 U.S.C. 78q-1(b)(3)(F).
    \89\ Notice, supra note 3, at 4698.
    \90\ Id.
---------------------------------------------------------------------------

    However, several commenters stated that some, if not all, of the
proposed changes would impose an undue burden on competition.
Specifically, Ronin states that the proposed sensitivity VaR model
requires more margin of its Members than is necessary, and thus, would
unduly impose a competitive burden on Members that have higher costs of
capital.\91\ Ronin further states that over-margining also unfairly
exposes smaller Members to greater potential risk of loss should one of
the largest Members' default.\92\ Ronin also states the proposed
changes would make it less economic for non-bank Members to participate
in centralized clearing.\93\
---------------------------------------------------------------------------

    \91\ Ronin Letter at 5.
    \92\ Id.
    \93\ Id.
---------------------------------------------------------------------------

    Similarly, IDTA states that that the proposed changes would
disproportionately result in greater increases in margin for non-Bank
Members on a percentage basis and consequently would impose an
unnecessary burden on competition.\94\ Specifically, IDTA states the
proposed changes would result in a material increase to some Members'
margin due to the proposed change to the VaR Charge and also due to the
compounding effect the new VaR Charge has on other components of the
margin calculation.\95\ IDTA notes that FICC illustrates that the
statistical impact of the Proposed Rule Change resulted in 40 percent
of Members having a net reduction to margin and 31 percent of Members
having between no change and a 10 percent increase in margin.\96\ IDTA
states that the remaining 29 percent of Members therefore saw an
increase of over 10 percent to the margin.\97\ IDTA adds that six
members of the IDTA that submitted data saw, on average, an 85 percent
increase under the proposed changes compared to the existing FICC
margin calculation.\98\ IDTA states that this disproportionality places
competitive and financial burdens on non-Bank Members that have a
higher cost of funds and access to fewer pools of liquidity than those
available to Bank Members.\99\ IDTA also states it is possible that
these burdens could adversely affect the diversity of liquidity across
fixed income markets during times when both market participants and
regulators want this diversity.\100\
---------------------------------------------------------------------------

    \94\ IDTA Letter at 14.
    \95\ IDTA Letter at 3.
    \96\ Id.
    \97\ Id.
    \98\ Id.
    \99\ IDTA Letter at 1.
    \100\ Id.
---------------------------------------------------------------------------

    Two commenters state that not utilizing cross-margining in the GSD
margin calculation creates a burden on competition.\101\ Specifically,
Amherst states that the lack of cross-margining inflates the margin
requirements and that the ``inflation, in turn, could distort the
liquidity profile'' of Members.\102\ Additionally, KGS states that not
having a cross-margining process for positions in GSD and MBSD will
have a distortive effect on GSD's margining system, producing
``burdensome double charges.'' \103\ KGS also states that the absence
of cross-margining will impose a disproportionate and adverse impact on
all GSD members other than ``the very largest banks and dealers'' and
that the burdens on competition that would be imposed are
significant.\104\ Finally, KGS states that absent cross-margining for
common Members of GSD and MBSD, ``markets that are free and open to all
competitors with the greatest spreading of risk'' cannot be achieved.''
\105\
---------------------------------------------------------------------------

    \101\ See Amherst Letter II; KGS Letter.
    \102\ Amherst Letter II at 4.
    \103\ KGS Letter at 2.
    \104\ Id.
    \105\ Id.
---------------------------------------------------------------------------

    Two commenters state that FICC's use of a 10-year look-back period
and an additional stressed period in the VaR Charge calculation would
impose a burden on competition.\106\ Ronin first notes that FICC
acknowledges that the proposed changes might impose a competitive
burden.\107\ Ronin then

states that the overall effect of this proposed rule change is to
``treat every day as if the market was in the midst of a financial
crisis'' and to require more margin from Members at all times.\108\
Ronin contends that this ``blunt approach'' of requiring more margin by
utilizing ``statistical bias is discriminatory and imposes an undue
competitive burden on firms with a higher cost of capital.'' \109\
Similarly, IDTA states that the 10-year look-back period and additional
stressed period result in the unnecessary collection of margin, which
creates harmful costs that disproportionately burden non-Bank Members
as compared to larger Bank Members.\110\
---------------------------------------------------------------------------

    \106\ See Ronin Letter; IDTA Letter.
    \107\ Ronin Letter at 5.
    \108\ Id.
    \109\ Id.
    \110\ IDTA Letter at 7, 11.
---------------------------------------------------------------------------

    Two commenters state that the proposed Excess Capital Premium
charge would impose a burden on competition.\111\ Specifically, Amherst
states that broker-dealer Members would see a material impact from the
adoption of the proposed sensitivity approach because it would
significantly increase the numerator in the formula and, thereby,
increase the likelihood of triggering the Excess Capital Premium
charge.\112\ Similarly, IDTA states that the proposed use of Net
Capital in the denominator in the Excess Capital Premium would result
in a discriminatory change that arbitrarily penalizes Dealer Members as
many Members who currently do not have an Excess Capital Premium charge
would end up having the charge if the Proposed Rule Change is
approved.\113\
---------------------------------------------------------------------------

    \111\ See Amherst Letter; IDTA Letter.
    \112\ Amherst Letter II at 4.
    \113\ IDTA Letter at 9.
---------------------------------------------------------------------------

    Amherst further states that the Excess Capital Premium calculation
would impose an additional competitive burden on broker-dealer Members,
as non broker-dealer Member's Excess Capital used in the measurement of
any Excess Capital Premium may not be based on net worth after
reductions for haircuts or other non-allowable asset deductions similar
to broker-dealer Member requirements.\114\ Similarly, IDTA states that
using Net Capital as the Excess Capital figure also would result in
discrimination against Dealer Members as compared to Bank Members
because Bank Members' Excess Capital is based on equity without any
reduction for positions, while Dealer Members are required to use Net
Capital, a measure of net worth after reductions for haircuts on
positions.\115\
---------------------------------------------------------------------------

    \114\ Amherst Letter II at 4.
    \115\ IDTA Letter at 9.
---------------------------------------------------------------------------

    One commenter states that the Blackout Period Exposure Adjustment
would result in a burden on competition.\116\ Specifically, IDTA states
that serious flaws exist in the current Blackout Period Exposure Charge
and the proposed Blackout Period Exposure Adjustment would result in
both an inaccurate measurement of risk and excessive margin charges
that are harmful to Members, particularly non-Bank Members that have a
relative higher cost of funds than other Members.\117\ IDTA states that
the proposed Blackout Period Exposure Adjustment assumes 100 percent
probability of a GCF Repo Service counterparty default across all
Members. IDTA states that it does not believe a credit risk model would
account for such a high probability of loss and suggests applying a
credit risk weighting to the Blackout Period Exposure Adjustment.\118\
---------------------------------------------------------------------------

    \116\ Id. at 12.
    \117\ Id.
    \118\ Id. at 13.
---------------------------------------------------------------------------

    In response to commenters concerns, generally, FICC states that the
proposed changes are necessary to ensure that its margin methodology
would appropriately address the risks presented by Members' clearing
portfolios.\119\ Specifically, in response to concerns regarding the
proposed sensitivity approach, FICC states that the proposed
sensitivity approach integrates observed risk factor changes over
current and historical market conditions to more effectively respond to
current market price moves that may not be adequately reflected in the
current methodology for calculating the VaR Charge as supplemented by
the Margin Proxy.\120\ With this in mind, FICC states that Ronin's
assertion that the proposed sensitivity approach ``simply requires
increased margin from Members'' is inaccurate.\121\ FICC notes it
proposes to eliminate the augmented volatility adjustment multiplier
and Coverage Component because these components would have the effect
of unnecessarily increasing margin amounts.\122\ Additionally, FICC
notes that its impact study reveals that the proposed methodology does
not simply increase the margin requirements and the impacts vary based
on Members' clearing portfolios and the market volatility that exists
at that time.\123\ Statistically, FICC states that 71 percent of all
Members will have a 10 percent or less increase in margin under the
proposed changes and 40 percent of all Members will have no
increase.\124\
---------------------------------------------------------------------------

    \119\ FICC Letter I at 4.
    \120\ Id. at 3.
    \121\ Id.
    \122\ Id.
    \123\ Id.
    \124\ Id.
---------------------------------------------------------------------------

    In response to Ronin and IDTA concerns, discussed above, that
smaller, non-bank Members would see greater increases in margin as a
result of the proposed changes, FICC states that the proposed
sensitivity approach is based on a risk factor approach for securities
in a Member's portfolio to calculate such Member's VaR Charge.\125\
FICC states that if Members have similar portfolios, the impact of the
proposed VaR Charge calculation, together with the other proposed
changes to the margin calculation, would be similar.\126\ FICC further
states that the largest impact of the proposal is for those Members
with mortgage-backed securities (``MBS'') concentrations.\127\ FICC
acknowledges that while smaller Members with MBS concentrations would
be impacted more, many of these Members have less diversified
portfolios; thus, the effect of the margin calculation on conventional
MBS would be more pronounced.\128\ FICC notes that the impact of the
proposal would be determined by a Member's portfolio composition rather
than a Member ``type,'' as a result, Members with lower MBS
concentrations would experience smaller impacts from the proposal.\129\
Therefore, FICC believes that the proposal does not create a burden on
any particular size or type of Member, such as non-bank Members, that
does not result from the necessary and appropriate risk mitigation of
the underlying securities in each Member's portfolio.\130\
---------------------------------------------------------------------------

    \125\ Id.
    \126\ Id.
    \127\ FICC Letter II at 5.
    \128\ Id. at 6.
    \129\ Id.
    \130\ Id.
---------------------------------------------------------------------------

    In response to the commenters concerns, discussed above, regarding
the need for utilizing cross-margining in the GSD margin calculation,
FICC notes that it operates under two divisions--GSD and MBSD--and each
has its own rules and members.\131\ FICC states that as a registered
clearing agency, it is subject to the requirements that are contained
in the Exchange Act and in the Commission's regulations and rules
thereunder.\132\ Further, FICC states it must ensure that the GSD Rules
and the MBSD Rules, individually, are consistent with the Exchange
Act.\133\ Therefore, FICC states that because it must comply with the
Exchange Act for

GSD and MBSD separately, FICC disagrees with Amherst's statement that
FICC's failure to implement a cross-margining arrangement would be
inconsistent with the requirements of Rule 17Ad-22(e)(6) under the
Exchange Act.\134\
---------------------------------------------------------------------------

    \131\ Id. at 12.
    \132\ Id.
    \133\ Id.
    \134\ Id.
---------------------------------------------------------------------------

    Nevertheless, FICC agrees that data sharing and cross-margining
arrangements would be beneficial to its membership.\135\ FICC notes it
has and will continue to explore data sharing and cross-margining
opportunities.\136\ FICC also states it will continue to develop a
framework with the Chicago Mercantile Exchange (``CME'') that will
enhance FICC's existing cross-margining arrangement with CME.\137\
---------------------------------------------------------------------------

    \135\ Id.
    \136\ Id.
    \137\ Id.
---------------------------------------------------------------------------

    In response to the commenters concerns, discussed above, suggesting
FICC's proposed use of a 10-year look-back period and an additional
stressed period in the VaR Charge calculation would be unnecessary and
biased, FICC states that the proposed changes to extend the look-back
period and add an additional stressed period would help to ensure that
the historical simulation contains a sufficient number of historical
market conditions (including but not limited to stressed market
conditions) that are necessary to calculate margin amounts that achieve
a 99 percent confidence level.\138\ FICC further states that because
VaR models typically rely on historical data to estimate the
probability distribution of potential market prices, FICC believes that
a longer look-back period will typically produce more stable VaR
estimates that adequately reflect extreme market moves.\139\ FICC notes
that, as part of its model validation report, FICC performed a
benchmark analysis of its calculation of the VaR Charge which included
the 10-year look-back period and two alternative look-back periods--a
five-year look-back period and a one-year look-back period.\140\ FICC
notes that the model validation report compared the rolling one-year
backtesting performance for the one-year, five-year, and 10-year look-
back periods using all Member portfolios for the period of January 1,
2013 through April 28, 2017.\141\ FICC states that the 10-year look-
back period (which included a stress period) provides backtesting
coverage above 99 percent while the five-year look-back period and the
one-year look-back period do not.\142\ Therefore, FICC states that the
proposed look-back period provides the appropriate margin coverage for
GSD's exposures.\143\
---------------------------------------------------------------------------

    \138\ FICC Letter I at 4.
    \139\ Id.
    \140\ FICC Letter II at 9.
    \141\ Id.
    \142\ Id.
    \143\ Id. at 10.
---------------------------------------------------------------------------

    In response to the commenters concerns, discussed above, regarding
the Excess Capital Premium, FICC states that for a majority of Members,
the proposed VaR Charge calculation would be higher than the current
VaR Charge calculation excluding the Margin Proxy and that the higher
VaR Charge could result in a higher Excess Capital Premium for some
Members.\144\ However, FICC believes that this increase is appropriate
for the exposure that the Excess Capital Premium is designed to
mitigate.\145\ FICC notes that even with the potential increase in the
proposed VaR Charge, the majority of Members would not incur the Excess
Capital Premium.\146\ Additionally, FICC believes that the proposed
change to Net Capital for the Excess Capital Premium would reduce the
impact to Members.\147\ Statistically, FICC states that, during a test
period, the proposed change to utilize Net Capital would reduce the
Excess Capital Premium from 188 to 159 instances.\148\ Further, FICC
states that as a result of the proposed change to utilize Net Capital
(instead of the existing practice of using the Excess Net Capital) in
the Excess Capital Premium calculation, the Member with the largest
number of instances would have had a 27 percent reduction in the number
of instances of Excess Capital Premium and, on average, an 82 percent
decrease in the dollar value of the charge on the days such Excess
Capital Premium occurred.\149\ Also, FICC believes that the proposed
change to the Excess Capital Premium would benefit a small set of
Members and potentially lower the Excess Capital Premium for Members
that exhibit fluctuations in their Excess Net Capital because the
proposed change would be based on Net Capital that may be more
predictable.\150\
---------------------------------------------------------------------------

    \144\ Id. at 11.
    \145\ Id.
    \146\ Id.
    \147\ Id.
    \148\ Id.
    \149\ Id.
    \150\ Id.
---------------------------------------------------------------------------

    In response to the commenters concerns, discussed above, regarding
the Blackout Period Exposure Adjustment, FICC states that the proposed
Blackout Period Exposure Adjustment is appropriate at the intraday
collection cycle on the last business day of the month to mitigate
exposure that begins on the first business day of the following
month.\151\ FICC believes that Blackout Period Exposure Adjustment
collections that occur after the MBS collateral pledge would not
mitigate the risk that a Member defaults after the collateral is
pledged but before such Member satisfies the next day's margin.\152\
FICC believes the proposed Blackout Period Exposure Adjustment is
necessary because it would help to ensure that FICC maintains a
sufficient margin that covers FICC's current and future exposure to
changes in MBS collateral from pay-down exposure from its Members, at a
99 percent confidence level.\153\ In response to IDTA's suggestion that
a probability of default approach would be more appropriate, FICC
states that such an approach would provide insufficient margin coverage
to maintain a 99 percent confidence level.\154\
---------------------------------------------------------------------------

    \151\ Id. at 12.
    \152\ Id. at 13.
    \153\ Id. at 14.
    \154\ Id. at 13.
---------------------------------------------------------------------------

    As a general matter, the Commission acknowledges that a proposal to
enhance FICC's VaR model, such as this proposal, could entail increased
margin charges to some Members that would be borne by those Members and
market participants more generally. The Commission understands that the
impact of the cost of meeting an increased margin requirement would
depend, in part, on each Member's specific business model and that some
Members could satisfy the increase at a lower cost than others. As a
result, the proposed changes contained in the Proposed Rule Change that
would result in an increased margin charge could impose higher costs on
some Members relative to others because of those Members' business
choices. These higher relative burdens may weaken certain Members'
competitive positions relative to other Members. However, as discussed
below, the Commission believes that any competitive burden imposed by
the proposed changes would not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\155\
---------------------------------------------------------------------------

    \155\ 15 U.S.C. 78q-1(b)(3)(I).
---------------------------------------------------------------------------

    As discussed above, during the fourth quarter of 2016, FICC's
current methodology for calculating the VaR Charge did not respond
effectively to the market volatility that existed at that time. As a
result, the VaR Charge did not achieve backtesting coverage at a 99
percent confidence level and, therefore, yielded backtesting
deficiencies beyond FICC's risk tolerance. To address this

issue, FICC has proposed the changes discussed herein, which are
designed to improve GSD's current VaR Charge calculation so that it
responds more effectively to market volatility and helps FICC achieve
backtesting coverage at a 99 percent confidence level. Although FICC
had previously implemented the Margin Proxy to help address the
issue,\156\ FICC is still concerned that the look-back period that is
currently used in calculating the VaR Charge under the Margin Proxy may
not calculate sufficient margin amounts to cover GSD's exposure to a
defaulting Member.\157\ Therefore, the Commission believes that the
Proposed Rule Change will help FICC better address this ongoing concern
of maintaining sufficient financial resources to cover its credit
exposure to each Member fully with a high degree of confidence. By
helping FICC to better manage its credit exposure, the proposed changes
would, in turn, help FICC better 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 Exchange Act to safeguard the securities
and funds in FICC's custody or control, as discussed above.\158\
---------------------------------------------------------------------------

    \156\ Supra note 14.
    \157\ See Amendment No. 1, supra note 6. Based on information
learned from the Commission's general supervision of FICC, the
Commission agrees that FICC should address this concern.
    \158\ As described further in Sections IV.A, C, D, and G.
---------------------------------------------------------------------------

    While the proposed changes contained in the Proposed Rule Change
may raise the costs that certain Members incur to cover the risks
associated with their portfolios, the Commission believes that these
costs reflect the risks that these Members present to FICC, as the
proposal is tailored to the different risk factors presented by each
Member's portfolio, as described above. Specifically, the proposal to
(1) move to a sensitivity approach to the VaR Charge calculation would
enable the VaR Charge calculation to respond more effectively to market
volatility by allowing FICC to attribute market price moves to various
risk factors; (2) establish an evenly-weighted 10-year look-back
period, with the option to add an additional stress period, would help
FICC to ensure that the proposed sensitivity VaR Charge calculation
contains a sufficient number of historical market conditions, to
include stressed market conditions; (3) use the existing Margin Proxy
as a back-up methodology system would help ensure FICC is able to
calculate a VaR Charge for Members despite not being able to receive
sensitivity data; (4) to implement a haircut method for securities with
insufficient sensitivity data would help ensure that FICC is able to
capture the risk profile of the securities; (5) establish the VaR Floor
would help ensure that FICC assesses a VaR Charge where the proposed
sensitivity calculation has produce too low of a VaR Charge; (6)
establish the Blackout Period Exposure Adjustment component would
enable FICC to address risks that could result from overstated values
of mortgage-backed securities that are pledged as collateral for GCF
Repo Transactions during a Blackout Period; (7) adjust the existing
Backtesting Charge component would enable FICC to ensure that the
charge applies to all Members, as appropriate, and to Members intraday
trading activities that could pose a risk to FICC in the event that
such Members default during the trading day; and (8) eliminate the
Blackout Period Exposure Charge, Coverage Charge, and augmented
volatility adjustment multiplier components would ensure that FICC did
not maintain elements of the prior margin calculation that would
unnecessarily increase Members' margin under the proposed margin
calculation. Therefore, the Commission believes that each of the above
proposed changes is tailored to the different risk factors presented by
Members' portfolios. Tailoring the proposed changes to the different
risk factors presented would, in turn, help FICC better mitigate the
potential losses to FICC and its Members associated with liquidating a
Member's portfolio in the event of a Member default. Specifically, such
tailoring would help ensure that FICC collects adequate margin to
offset the specific risks associated with each Member's portfolio, in
furtherance of FICC's obligations under Section 17A(b)(3)(F) of the
Exchange Act to safeguard the securities and funds in FICC's custody or
control, as discussed above.\159\
---------------------------------------------------------------------------

    \159\ As described further in Sections IV.A and C through G.
---------------------------------------------------------------------------

    In response to commenters' concerns, discussed above, that too much
margin would be collected, after reviewing the data provided by FICC in
Exhibit 3 to the Proposed Rule Change in conjunction with the
Commission's supervisory observations, the Commission believes that the
proposed changes would better enable FICC to collect margin
commensurate with the different levels of risk that Members pose to
FICC. Further, the Commission believes the amount of margin FICC would
collect under the proposed changes would help FICC better manage its
credit exposures to its Members and those exposures arising from its
payment, clearing, and settlement processes. The Commission also
believes, having reviewed Exhibit 3 to the Proposed Rule Change, that
not all Members' margin requirements would increase as a result of the
proposed changes and that the impact of the proposed changes vary based
on Members' clearing portfolios and the market volatility that exists
at that time. Further, the Commission believes that the proposed
changes to the VaR Charge would not necessarily result in higher margin
requirements in other components of the margin calculation where the
VaR Charge is used in calculating the component. The Commission also
notes that FICC proposes to eliminate the augmented volatility
adjustment multiplier and Coverage Component because these components
would have the effect of unnecessarily increasing margin amounts.
Therefore, the Commission is not persuaded by IDTA's generalized
statement that the proposed changes would have such a dramatic effect
as to limit the diversity of liquidity in the U.S. markets, such as by
causing Members to terminate their GSD membership. Rather, the
Commission believes that the proposed changes promote a margin
methodology that would appropriately address the risks presented by
Members' clearing portfolios, enabling FICC to better mitigate losses
that a Member default could cause to FICC and its non-defaulting
Members.
    Commenters expressed concerns, discussed above, that smaller, non-
bank Members would be overly burdened by the proposed changes. After
reviewing the data provided by FICC in Exhibit 3 to the Proposed Rule
Change in conjunction with the Commission's supervisory observations,
the Commission believes that the proposed sensitivity approach
appropriately calculates a Member's VaR Charge based on risk factors
presented by the securities held in a Member's portfolio and, thus,
that the impact of the proposed changes would be determined by a
Member's portfolio composition rather than a Member ``type.'' To the
extent a Member's VaR Charge would increase under the proposed changes,
it would be based on the securities held by the Member and FICC needing
to collect margin to appropriately address that risk.
    In response to the commenters concerns, discussed above, regarding
the need for utilizing cross-margining in

the GSD margin calculation, the Commission notes that the Proposed Rule
Change does not propose to establish or change any cross-margining
agreements, whether between GSD and MBSD or between GSD, MBSD, and
another clearing agency. As such, cross-margining is not one of the
proposed changes under the Commission's review. The Commission further
notes that GSD and MBSD have different members (although a member of
one could, and some do, apply and become a member of the other), offer
different services, and clear different products. To the extent there
is the potential to offset risk exposures present across the different
products, those products are still cleared by different services.
Accordingly, FICC maintains not only separate rulebooks for each
division but also separate liquidity resources. Therefore, the
Commission believes that the potential burden on Members that exists
absent a proposed change in the Proposed Rule Change to establish
cross-margining between GSD and MBSD, or to expanding cross-margining
between GSD and another clearing agency, does not mean that the
proposals are in and of themselves not necessary or not appropriate.
Rather, the Commission believes that the proposed changes to GSD's
margin calculation are tailored to the specific risks associated with
the products and services offered by GSD and that the proposed GSD
margin calculation is commensurate with the risks associated with
portfolios held by Members in GSD.
    The Commission also notes that certain other actions by FICC may
address some of the commenter concerns with respect to cross-margining.
For instance, FICC states that it has and will continue to explore data
sharing and cross-margining opportunities, and that FICC is in the
process of completing a proposal that would enable a margin reduction
for Members with MBS positions that offset between GSD and MBSD. FICC
has also committed to continuing to develop a framework with CME that
will enhance FICC's existing cross-margining arrangement with CME.
    In response to the commenters concerns, discussed above, regarding
the 10-year look-back period and an additional stressed period in the
VaR Charge calculation, the Commission believes that an evenly-weighted
10-year look-back period, plus an additional stress period, as needed,
would be an appropriate approach to help ensure that the proposed
sensitivity VaR Charge calculation accounts for historical market
observations of the securities cleared by GSD. Such a look-back period
would help enable FICC to be in a better position to maintain
backtesting coverage above 99 percent for GSD. As evidenced in FICC's
second comment letter, a 10-year look-back period that includes a
stress period would provide backtesting coverage above 99 percent,
while a five-year look-back period and a one-year look-back period
would not.\160\
---------------------------------------------------------------------------

    \160\ FICC Letter II at 9-10.
---------------------------------------------------------------------------

    In response to the commenters concerns, discussed above, regarding
the Excess Capital Premium, the Commission notes that this proposed
change would modify the denominator used in the calculation.
Specifically, the denominator would become larger, as the proposal to
use Net Capital (proposed denominator) is a larger amount than the
current use of Excess Net Capital (current denominator).\161\ The
effect, holding all else constant, would be to lower those Members'
Excess Capital Premium.
---------------------------------------------------------------------------

    \161\ See Form X-17A-5, line 3770, available at https://www.sec.gov/files/formx-17a-5_2.pdf.
---------------------------------------------------------------------------

    The Commission notes that under the Proposed Rule Change, FICC is
not proposing to amend the numerator, as the numerator used for
calculating the Excess Capital Premium would still be calculated using
the VaR Charge calculation. Of course, if the numerator in the
calculation (i.e., a Member's VaR Charge amount using the proposed
sensitivity approach) were to increase as a result of the other
proposed changes, then the Excess Capital Premium could increase.
Further, the numerator will not necessarily increase for every Member.
Data provided by FICC, which was filed with the Commission as Exhibit 3
to the Proposed Rule Change, shows that the numerator used for
calculating the Excess Capital Premium could increase or decrease
depending on the risks associated with a Member's portfolio.
    In response to the commenters concerns, discussed above, regarding
the calculation of the Blackout Period Exposure Adjustment, the
Commission agrees with FICC. Specifically, the Commission agrees that
(i) given the number of assumptions that one would need to make with
respect to the various factors that influence MBS pay-down rates, the
weighted-average approach would provide Members more transparency and
certainty around the charge; and (ii) a credit-risk weighting would not
likely produce a sufficient charge amount in the event of an actual
Member default, as the approach would assume something less than a 100
percent probability of default in calculating the charge. Furthermore,
in response to commenters' concerns regarding the Blackout Period
Exposure Adjustment collection cycle, the Commission notes the proposed
cycle follows the same cycle currently used for the Blackout Period
Exposure Charge, which FICC proposes to eliminate on account of the
proposed Blackout Period Exposure Adjustment. For both the current and
proposed cycle, the Commission understands, based on its experience and
expertise, that FICC's application of the charge on the last business
day of the month, as opposed to the first business day of the following
month, is an appropriate way to ensure that FICC collects the funds
before realizing the risk that the charge is intended to mitigate
(i.e., a Member defaults during the Blackout Period). Similarly, FICC's
extension of the charge through the end of the day on the Factor Date,
as opposed to releasing the charge during FICC's standard intraday
margin calculation on the Factor Date, also is an appropriate way to
mitigate the risk exposure to FICC because, operationally, the MBS are
not released and revalued with the update factors by the applicable
clearing bank until after FICC has already completed the intraday
margin calculation.
    Taken together, the Commission believes that the above discussed
proposed changes to the components of the margin calculation would
enhance FICC's current method for calculating each Member's margin.
This enhancement would enable FICC to produce margin levels more
commensurate with the risks associated with its Members' portfolios in
a broader range of scenarios and market conditions, and, thus, more
effectively cover its credit exposure to its Members.
    Therefore, for all of the above reasons, Commission believes that
the Proposed Rule Change is consistent with Section 17A(b)(3)(I) of the
Exchange Act, as the proposal would not impose a burden on competition
not necessary or appropriate in furtherance of the purposes of the
Exchange Act.

C. Consistency With Rule 17Ad-22(e)(4)(i) of the Exchange Act

    The Commission believes that the changes proposed in the Proposed
Rule Change are consistent with Rule 17Ad-22(e)(4)(i) under the
Exchange Act. Rule 17Ad-22(e)(4)(i) requires each covered clearing
agency \162\ 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 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.\163\
---------------------------------------------------------------------------

    \162\ A ``covered clearing agency'' means, among other things, a
clearing agency registered with the Commission under Section 17A of
the Exchange Act (15 U.S.C. 78q-1 et seq.) that is designated
systemically important by Financial Stability Oversight Council
(``FSOC'') pursuant to the Clearing Supervision Act (12 U.S.C. 5461
et seq.). See 17 CFR 240.17Ad-22(a)(5)-(6). Because FICC is a
registered clearing agency with the Commission that has been
designated systemically important by FSOC, FICC is a covered
clearing agency.
    \163\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    As described above, FICC proposes a number of changes to the way it
addresses credit exposure to its Members through its margin
calculation. Specifically, FICC proposes to (1) replace its existing
full revaluation VaR Charge calculation with a sensitivity approach to
the VaR Charge calculation that uses an evenly-weighted 10-year look-
back period; (2) utilize the existing Margin Proxy as a back-up VaR
Charge calculation to the proposed sensitivity approach in the event
that FICC experiences a data disruption with the third-party vendor;
(3) implement a haircut method for securities that are ineligible for
the sensitivity approach to FICC's VaR Charge calculation due to
inadequate historical pricing data; (4) establish the VaR Floor; (5)
establish the Blackout Period Exposure Adjustment component; (6) adjust
the existing Backtesting Charge component; and (7) use Net Capital
instead of Excess Capital when calculating the Excess Capital Premium,
as applicable, for broker Members, inter-dealer broker Members, and
dealer Members.
    Two commenters expressed concerns regarding the proposed change to
the Excess Capital Premium.\164\ IDTA states that FICC needs to provide
further clarification and justification for the Excess Capital Premium
because the Excess Capital Premium under the proposed sensitivity
approach to the VaR Charge calculation could result in additional
margin for some Members ``without sufficient explanation in the
proposed rule change.'' \165\ Additionally, IDTA states that the use of
Net Capital in the denominator of the Excess Capital Premium will
result in some additional Members being assessed the charge,
specifically Dealer Members.\166\ IDTA states that Dealer Members
should be able to use net worth, as compared to Net Capital, because a
bank Member's capital figure is based on assets without any haircut for
certain positions.\167\ In contrast, IDTA states that dealers must
include haircuts on certain positions before calculating Net
Capital.\168\ IDTA also states that FICC should allow dealer Members to
calculate Net Capital for purposes of the Excess Capital Premium to not
include a haircut on U.S. Government securities cleared at FICC.\169\
Finally, IDTA states that the Excess Capital Premium should instead be
used to trigger a credit review for Members because, in conjunction
with the other proposed changes, the Excess Capital Premium would not
be a ``sound measure'' of a Member's credit risk.\170\ Similarly,
Amherst notes that FICC should review further how it can allow dealer
Members to be compared similarly to bank Members for Excess Capital
Premium purposes to account for the haircut on assets that dealers must
account for in their Net Capital calculation.\171\
---------------------------------------------------------------------------

    \164\ IDTA Letter; Amherst Letter II.
    \165\ IDTA Letter at 9.
    \166\ Id.
    \167\ Id. at 10.
    \168\ Id. at 10.
    \169\ Id. at 10.
    \170\ Id.
    \171\ Amherst Letter II at 4.
---------------------------------------------------------------------------

    In response, FICC states that the Excess Capital Premium is used to
more effectively manage the risk posed by a Member whose activity
causes it to have a margin requirement that is greater than its excess
regulatory capital.\172\ FICC notes that for a majority of Members, the
proposed sensitivity VaR Charge calculation would be higher than the
current VaR Charge calculation, excluding the Margin Proxy, and that
the higher VaR Charge could result in a higher Excess Capital
Premium.\173\ Where there is an increase, FICC states that this
increase is appropriate for the exposure that the Excess Capital
Premium is designed to mitigate.\174\ However, FICC notes that even
with the potential increase in the proposed VaR Charge, the majority of
Members would not incur the Excess Capital Premium.\175\ Additionally,
FICC states that the proposed change to Net Capital for the Excess
Capital Premium would reduce the impact to Members.\176\ For example,
for period of December 18, 2017 through April 2, 2018, FICC states that
by using Net Capital instead of Excess Net Capital, the Member with the
largest number of instances of the Excess Capital Premium would have
had a 27 percent reduction in the number of instances and, on average,
an 82 percent decrease in the dollar value of the charge on the days
such Excess Capital Premium occurred.\177\
---------------------------------------------------------------------------

    \172\ FICC Letter II at 10,11; see Exchange Act Release No.
54457 (September 15, 2006), 71 FR 55239 (September 21, 2006) (SR-
FICC-2006-03).
    \173\ FICC Letter II at 11.
    \174\ Id.
    \175\ Id.
    \176\ Id.
    \177\ Id.
---------------------------------------------------------------------------

    Additionally, two commenters noted that the proposed sensitivity
approach to the VaR Charge calculation is not needed at this time
because the Margin Proxy \178\ is sufficient to cover any gaps in
margin requirements. Specifically, Amherst states that FICC has not
presented the Commission with the full impact analysis of the
supplemental Margin Proxy calculation and that the full analysis would
reveal that the current margining process, inclusive of the Margin
Proxy, has already significantly and materially increased Members'
margin amounts. Therefore, Amherst states that a full analysis of the
current supplemental Margin Proxy calculation would reveal that the
Margin Proxy enables FICC to collect adequate levels of margin to
protect itself during stressed periods.\179\ Similarly, IDTA states
that the Margin Proxy allows GSD to maintain its backtesting goal at
the 99 percent confidence level.\180\
---------------------------------------------------------------------------

    \178\ Supra note 12.
    \179\ Amherst II Letter at 2.
    \180\ IDTA Letter at 3-4.
---------------------------------------------------------------------------

    In response, FICC states that the Margin Proxy has historically
provided a more accurate VaR Charge calculation than the full valuation
approach, but the current VaR Charge as supplemented by the Margin
Proxy calculation reflects relatively low market price volatility that
has been present in the mortgage-backed securities market since the
beginning of 2017. As such, FICC states that this current approach
contains an insufficient amount of look-back data to ensure that the
backtesting will remain above 99 percent if volatility returns to
levels seen beyond the one-year look-back period that is currently used
to calibrate the Margin Proxy for MBS.\181\ Additionally, in order to
help ensure that it is calculating adequate margin, FICC filed
Amendment No. 1 to accelerate the implementation of all the proposed
changes, except for the proposed Blackout Period Exposure Adjustment
and the removal of the existing Blackout Period Exposure Charge, which
FICC proposes to implement in phases, through the remainder of 2018, in
response to commenters.
---------------------------------------------------------------------------

    \181\ FICC Letter II at 3.
---------------------------------------------------------------------------

    In Amendment No. 1, FICC states that it has been discussing the
proposed changes with Members since August 2017 in order to help
Members prepare for and understand why FICC proposed

the rule changes.\182\ FICC states that it is primarily concerned that
the look-back period that is currently used in calculating the VaR
Charge under the Margin Proxy may not calculate sufficient margin
amounts to cover GSD's exposure to a defaulting Member.\183\ Therefore,
FICC proposes to accelerate the implementation of all the proposed
changes, except for the proposed Blackout Period Exposure Adjustment
and the removal of the existing Blackout Period Exposure Charge.\184\
---------------------------------------------------------------------------

    \182\ Id.
    \183\ Id.
    \184\ Id.
---------------------------------------------------------------------------

    The Commission believes that these proposed changes are designed to
help FICC better identify, measure, monitor, and manage its credit
exposure to its Members by calculating more precisely the risk
presented by Members, which would enable FICC to assess a more reliable
VaR Charge. Specifically, FICC's proposed change to (1) switch to a
sensitivity approach to the VaR Charge calculation, with a 10-year
look-back period, would help the calculation respond more effectively
to market volatility by attributing market price moves to various risk
factors; (2) use the Margin Proxy as a back-up to the proposed
sensitivity calculation would help ensure that FICC is able to assess a
VaR Charge, even if its unable to receive sensitivity data from the
third-party vendor; (3) apply a haircut on securities that are
ineligible for the sensitivity VaR Charge calculation would enable FICC
to better account for the risk presented by such securities; (4)
establish the VaR Floor would enable FICC to better calculate a VaR
Charge for portfolios where the proposed sensitivity approach would
yield too low a VaR Charge; (5) establish the Blackout Period Exposure
Adjustment component would enable FICC to better address risks that
could result from overstated values of mortgage-backed securities that
are pledged as collateral for GCF Repo Transactions during a Blackout
Period; (6) adjust the existing Backtesting Charge component would
ensure that the charge applied to all Members, as appropriate, and to
Member's intraday trading activities; and (7) use Net Capital instead
of Excess Capital when calculating the Excess Capital Premium would
make the Excess Capital Premium calculation for broker Members, inter-
dealer broker Members, and dealer Members more consistent with the
equity capital measure that is used for other Members.
    In response to commenters concerns regarding the proposed change to
the Excess Capital Premium calculation, the Commission notes that this
proposed change would only modify the denominator used in the
calculation. Specifically, the denominator would become larger, as the
proposal to use Net Capital (proposed denominator) is a larger amount
than the current use of Excess Net Capital (current denominator).\185\
The effect, holding all else constant, would be to lower those Members'
Excess Capital Premium.
---------------------------------------------------------------------------

    \185\ See Form X-17A-5, line 3770, available at https://www.sec.gov/files/formx-17a-5_2.pdf.
---------------------------------------------------------------------------

    Of course, if the numerator in the calculation (i.e., a Member's
VaR Charge amount) would increase, then the Excess Capital Premium
could increase. However, FICC does not propose to change the numerator
used for calculating the Excess Capital Premium. The Commission notes
that under the Proposed Rule Change, the numerator used for calculating
the Excess Capital Premium would be calculated using the proposed
sensitivity approach to the VaR Charge calculation. As described
further below, the proposed sensitivity approach would calculate margin
commensurate with the risks associated with a Member's portfolio.
    In response to the comments that the proposed sensitivity approach
to the VaR Charge calculation is not necessary at this time in light of
the Margin Proxy, the Commission disagrees. In considering these
comments, the Commission thoroughly reviewed (i) the Proposed Rule
Change, including the supporting exhibits that provided confidential
information on the performance of the proposed sensitivity calculation,
impact analysis, and backtesting results; (ii) the comments received;
and (iii) the Commission's own understanding of the performance of the
current VaR Charge calculation, with which the Commission has
experience from its general supervision of FICC, compared to the
proposed sensitivity calculation. More specifically, the confidential
Exhibit 3 submitted by FICC includes (i) 12-month rolling coverage
backtesting results; (ii) intraday backtesting impact analysis; (iii) a
breakdown of coverage percentages and dollar amounts, for each Member,
under the current margin model with and without Margin Proxy and under
the proposed sensitivity model; and (iv) an impact study of the
proposed changes detailing the margin amounts required per Member
during Blackout Periods and non-Blackout Periods.
    On a Member basis, the Commission notes that there is not a
sizeable change in the amount of margin collected under the current
margin model, supplemented by the Margin Proxy, compared to the
proposed sensitivity model. The Commission also notes that the Margin
Proxy was implemented as a temporary solution to issues identified with
the current model, as it only has a one year look-back period.\186\
Additionally, the Commission believes that the sensitivity approach is
simpler and more accurate as it uses a broad spectrum of sensitivity
data that is tailored to the specific risks associated with Members'
portfolios. Ultimately, the Commission finds that the proposed
sensitivity approach, and the related implementation schedule proposed
in Amendment No. 1, would provide FICC with a more robust margin
calculation in FICC's efforts to meet the applicable regulatory
requirements for margin coverage.
---------------------------------------------------------------------------

    \186\ See supra note 15.
---------------------------------------------------------------------------

    Therefore, for the reasons discussed above, the Commission believes
that the changes proposed in the Proposed Rule Change are consistent
with Rule 17Ad-22(e)(4)(i) under the Exchange Act.\187\
---------------------------------------------------------------------------

    \187\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(e)(6)(i) of the Exchange Act

    The Commission believes that the changes proposed in the Proposed
Rule Change are consistent with Rule 17Ad-22(e)(6)(i) under the
Exchange Act. Rule 17Ad-22(e)(6)(i) requires each covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market.\188\
---------------------------------------------------------------------------

    \188\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

    As described above, FICC proposes a number of changes to how it
calculates Members' margin charge through a risk-based margin system
that considers the risks and attributes of securities that GSD clears.
Specifically, FICC proposes to (1) move to a sensitivity approach to
the VaR Charge calculation; (2) move from a front-weighted one-year
look-back period to an evenly-weighted 10-year look-back period with
the option for an additional stress period; (3) use the existing Margin
Proxy as a back-up methodology to the proposed sensitivity approach to
the VaR Charge calculation; (4) implement a haircut method for
securities with insufficient sensitivity data due to inadequate
historical pricing; (5) establish the VaR Floor; (6) establish the
Blackout Period Exposure

Adjustment component; (7) adjust the existing Backtesting Charge
component; and (8) eliminate the Blackout Period Exposure Charge,
Coverage Charge, and augmented volatility adjustment multiplier
components.
    Several commenters raised concerns that the proposed changes to the
margin calculation would not produce a margin charge commensurate with
the risks and particular attributes of Members' complete portfolios.
Specifically, Ronin states that the use of the proposed sensitivity
approach to the VaR Charge calculation only uses a subset of a Member's
entire portfolio (i.e., it does not incorporate data from other
clearing agencies) to calculate the Member's risk to FICC.\189\ Ronin
suggests that the implementation of data sharing and cross margining
between MBSD, GSD, and CME would provide FICC with a more accurate
representation of the risk associated with a Member's portfolio.\190\
Ronin also states that the existing cross-margin agreement between FICC
and CME needs an update to provide true cross-margin relief for all GSD
Members.\191\ Similarly, IDTA states that FICC cannot accurately
identify the risk associated with a Member's portfolio due to the lack
of incentive to share data with other clearing agencies.\192\ IDTA
suggests that FICC should develop cross-margining ability between GSD
and MBSD and improve cross-margining with CME.\193\ KGS and Amherst
make similar arguments. KGS states that in order to more effectively
analyze and address Members' portfolio risks, there should be cross
margining for Members that hold offsetting positions in GSD and MBSD,
stating that not having such an intra-DTCC cross-margining process will
have a distortive effect on GSD's margining system, forcing members to
reduce their use of GSD and reduce their positions cleared through GSD,
in effect reducing market liquidity.\194\ Amherst states that not
implementing cross-margin capabilities will inflate the margin
requirements and distort the liquidity profile of the Member.\195\
---------------------------------------------------------------------------

    \189\ Ronin Letter I at 1.
    \190\ Id. at 2.
    \191\ Ronin Letter II at 2.
    \192\ IDTA Letter at 11.
    \193\ Id.
    \194\ KGS Letter at 1.
    \195\ Amherst Letter II at 2.
---------------------------------------------------------------------------

    In response, FICC disagrees with Amherst's statement that FICC's
failure to implement a cross-margining arrangement would be
inconsistent with the requirements of Rule 17Ad-22(e)(6) under the
Exchange Act.\196\ FICC notes that it operates under two divisions, GSD
and MBSD, each of which has its own rules and members.\197\ As a
registered clearing agency, FICC notes that it is subject to the
requirements that are contained in the Exchange Act and in the
Commission's regulations and rules thereunder.\198\
---------------------------------------------------------------------------

    \196\ FICC Letter II at 12.
    \197\ Id.
    \198\ Id.
---------------------------------------------------------------------------

    Nevertheless, FICC states that it agrees with commenters that data
sharing and cross-margining would be beneficial to its Members and is
exploring data sharing and cross-margining opportunities outside of the
Proposed Rule Change.\199\ FICC states it is in the process of
completing a proposal that would enable a margin reduction for Members
with mortgage-backed securities (``MBS'') positions that offset between
GSD and MBSD.\200\ FICC also states it will continue to develop a
framework with CME that will enhance FICC's existing cross-margining
arrangement with CME.\201\ Finally, FICC notes that the proposed
changes to the GSD margin methodology are necessary because they
provide appropriate risk mitigation that must be in place before FICC
can fully evaluate potential cross-margining opportunities.\202\
---------------------------------------------------------------------------

    \199\ FICC Letter I at 5.
    \200\ FICC Letter II at 12.
    \201\ Id.
    \202\ Id.
---------------------------------------------------------------------------

    Separate from those comments, two commenters also raised concerns
with the proposed extended look-back period. Ronin states that FICC's
assumption of adding a continued stress period to the 10-year look-back
calculation is employing ``statistical bias'' because it treats every
day as if the market is in ``the midst of a financial crisis'' and
creates over margining.\203\ Similarly, IDTA states the addition of an
arbitrary year to the look-back period is statistically biased and
makes the ``most volatile day'' permanent and therefore, the
calculations are not addressing the actual risk of a portfolio.\204\
IDTA believes that a shorter look-back period of five years without an
additional stress period would sufficiently margin Members for the risk
of their portfolios.\205\
---------------------------------------------------------------------------

    \203\ Ronin Letter I at 4; Ronin Letter 2 at 5.
    \204\ IDTA Letter I at 7.
    \205\ Id.
---------------------------------------------------------------------------

    In response, FICC states that a longer look-back period will
produce a more stable VaR estimate that adequately reflects extreme
market moves ensuring the VaR Charge does not decrease as quickly
during periods of low volatility nor increase as sharply during periods
of a market crisis.\206\ Additionally, FICC states that an extended
look-back period including stressed market conditions are necessary to
calculate margin requirements that achieve a 99 percent confidence
level.\207\ As part of FICC's model validation report, FICC performed a
benchmark analysis of its calculation of the VaR Charge. FICC analyzed
a 10-year look-back period, a five-year look-back period, and a one-
year look-back period using all Member portfolios from January 1, 2013
through April 28, 2017.\208\ The results of FICC's analysis showed that
a 10-year look-back period, which included a stress period, provides
backtesting coverage above 99 percent while a five-year look-back
period and a one-year look-back period did not.\209\
---------------------------------------------------------------------------

    \206\ FICC Letter I at 4.
    \207\ Id.
    \208\ FICC Letter II at 9.
    \209\ Id.
---------------------------------------------------------------------------

    The Commission believes that these proposed changes are designed to
help FICC better cover its credit exposures to its Members, as the
changes would help establish a risk-based margin system that considers
and produces margin levels commensurate with the risks and particular
attributes of the products cleared in GSD. Specifically, the proposal
to (1) move to a sensitivity approach to the VaR Charge calculation
would enable the VaR Charge calculation to respond more effectively to
market volatility by allowing FICC to attribute market price moves to
various risk factors; (2) establish an evenly-weighted 10-year look-
back period, with the option to add an additional stress period, would
help FICC to ensure that the proposed sensitivity VaR Charge
calculation contains a sufficient number of historical market
conditions, to include stressed market conditions; (3) use the existing
Margin Proxy as a back-up methodology system would help ensure FICC is
able to calculate a VaR Charge for Members despite a not being able to
receive sensitivity date; (4) to implement a haircut method for
securities with insufficient sensitivity data would help ensure that
FICC is able to capture the risk profile of the securities; (5)
establish the VaR Floor would help ensure that FICC assesses a VaR
Charge where the proposed sensitivity calculation has produce too low
of a VaR Charge; (6) establish the Blackout Period Exposure Adjustment
component would enable FICC to address risks that could result from
overstated values of mortgage-backed securities that are pledged as
collateral for GCF Repo Transactions during a Blackout Period; (7)
adjust the existing Backtesting Charge component would enable FICC to
ensure that the charge applies to all Members, as appropriate,

and to Members' intraday trading activities that could pose a risk to
FICC in the event that such Members default during the trading day; and
(8) eliminate the Blackout Period Exposure Charge, Coverage Charge, and
augmented volatility adjustment multiplier components would ensure that
FICC did not maintain elements of the prior margin calculation that
would unnecessarily increase Members' margin under the proposed margin
calculation.
    In response to comments regarding cross-margining and its potential
impact upon membership levels and market liquidity, the Commission
notes that the Proposed Rule Change does not propose to establish or
change any cross-margining agreements, whether between GSD and MBSD or
between GSD, MBSD, and another clearing agency. As such, cross-
margining is not one of the proposed changes under the Commission's
review. The Commission further notes that GSD and MBSD have different
members (although a member of one could, and some may, apply and become
a member of the other), offer different services, and clear different
products. To the extent there is the potential to offset risk exposure
present across the different products, those products are still cleared
by different services. Accordingly, FICC maintains not only separate
rulebooks for each division but also separate liquidity resources.
    Therefore, the Commission believes that the absence of a proposal
in the Proposed Rule Change to establish cross-margining between GSD
and MBSD, or to expanding cross-margining between GSD and another
clearing agency, does not render the specific changes proposed in the
Proposed Rule Change for GSD inconsistent with the Clearing Supervision
Act or the applicable rules discussed herein. Rather, the Commission
believes that the proposed changes to GSD's margin calculation are
designed to be tailored to the specific risks associated with the
products and services offered by GSD and that the proposed GSD margin
calculation is commensurate with the risks associated with portfolios
held by Members in GSD.
    In response to comments about the proposed look-back period, the
Commission believes that an evenly-weighted 10-year look-back period,
plus an additional stress period, as needed, is an appropriate approach
to help ensure that the proposed sensitivity VaR Charge calculation
accounts for historical market observations of the securities cleared
by GSD. Such a look-back period would help enable FICC to be in a
better position to maintain backtesting coverage above 99 percent for
GSD. As evidenced in FICC's second comment letter, a 10-year look-back
period that includes a stress period would provide backtesting coverage
above 99 percent, while a five-year look-back period and a one-year
look-back period would not.\210\
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    \210\ Id. at 9-10.
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    Therefore, for the above discussed reasons, the Commission believes
that the changes proposed in the Proposed Rule Change are consistent
with Rule 17Ad-22(e)(6)(i) under the Exchange Act.\211\
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    \211\ 17 CFR 240.17Ad-22(e)(6)(i).
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E. Consistency With Rule 17Ad-22(e)(6)(ii) of the Exchange Act

    The Commission believes that the changes proposed in the Proposed
Rule Change are consistent with Rule 17Ad-22(e)(6)(ii) under the
Exchange Act. Rule 17Ad-22(e)(6)(ii) requires each 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, marks participant positions to market and collects margin,
including variation margin or equivalent charges if relevant, at least
daily and includes the authority and operational capacity to make
intraday margin calls in defined circumstances.\212\
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    \212\ 17 CFR 240.17Ad-22(e)(6)(ii).
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    As described above, FICC proposes to adjust the existing
Backtesting Charge component. Specifically, FICC proposes to collect
the charge from all Members on a daily basis, as applicable, as well as
from Members that have backtesting deficiencies during the trading day
due to large fluctuations of intraday trading activity that could pose
risk to FICC in the event that such Members default during the trading
day.
    The change is designed to help improve FICC's risk-based margin
system by authorizing FICC to assess this specific margin charge on all
Members at least daily, as needed, and on an intra-day basis, as
needed. Therefore, the Commission believes that the changes proposed in
the Proposed Rule Change are consistent with Rule 17Ad-22(e)(6)(ii)
under the Exchange Act.\213\
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    \213\ Id.
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F. Consistency With Rule 17Ad-22(e)(6)(iv) of the Exchange Act

    The Commission believes that the changes proposed in the Proposed
Rule Change are consistent with Rule 17Ad-22(e)(6)(iv) under the
Exchange Act. Rule 17Ad-22(e)(6)(iv) requires each 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, uses reliable sources of timely price data and procedures and
sound valuation models for addressing circumstances in which pricing
data are not readily available or reliable.\214\
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    \214\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    As described above, FICC proposes a number of changes to its margin
calculation that are designed to use reliable price data and address
circumstances in which pricing data may not be available or reliable.
Specifically, FICC proposes to (1) replace its existing full
revaluation VaR Charge calculation with the proposed sensitivity
approach that relies upon the expertise of a third-party vendor to
produce the needed sensitivity data; (2) utilize the existing Margin
Proxy as a back-up to the proposed sensitivity VaR Charge calculation
in the event that FICC experiences a data disruption with the third-
party vendor; (3) implement a haircut method for securities that are
ineligible for the proposed sensitivity approach to the VaR Charge
calculation due to inadequate historical pricing data; and (4)
establish the VaR Floor.
    The Commission believes that these proposed changes are designed to
help FICC better cover its credit exposures to its Members, as the
changes would help establish a risk-based margin system that uses
reliable sources of timely price data and procedures and sound
valuation models for addressing circumstances in which pricing data are
not readily available or reliable. Specifically, the proposal to (1)
move to a sensitivity approach to the VaR Charge calculation would not
only enable the VaR Charge calculation to respond more effectively to
market volatility by allowing FICC to attribute market price moves to
various risk factors but also would enable FICC to employ the expertise
of a third-party vendor to supply applicable sensitivity data; (2) use
the existing Margin Proxy as a back-up methodology system would help
ensure FICC is able to calculate a VaR Charge for Members despite any
difficulty in receiving sensitivity data from the third-party vendor;
(3) implement a haircut method for securities with insufficient
sensitivity data would help ensure that FICC is able to capture the
risk profile of the securities; and (4) establish the VaR Floor would
help ensure that FICC

assesses a VaR Charge where the proposed sensitivity VaR Charge
calculation produces too low of a VaR Charge.
    Therefore, for these reasons, the Commission believes that the
changes proposed in the Proposed Rule Change are consistent with Rule
17Ad-22(e)(6)(iv) under the Exchange Act.\215\
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    \215\ Id.
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G. Consistency With Rule 17Ad-22(e)(6)(v) of the Exchange Act

    The Commission believes that the changes proposed in the Proposed
Rule Change are consistent with Rule 17Ad-22(e)(6)(v) under the
Exchange Act. Rule 17Ad-22(e)(6)(v) requires each covered clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to use an appropriate method for
measuring credit exposure that accounts for relevant product risk
factors and portfolio effects across products.\216\
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    \216\ 17 CFR 240.17Ad-22(e)(6)(v).
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    As described above, FICC proposes a number of changes to its margin
calculation that are designed to help ensure that FICC accounts for the
relevant product risk factors and portfolio effects across GSD's
products when measuring its credit exposure to Members. Specifically,
FICC proposes to (1) replace its existing full revaluation VaR Charge
calculation with the proposed sensitivity approach to the VaR Charge
calculation; (2) implement a haircut method for securities that are
ineligible for the proposed sensitivity approach due to inadequate
historical pricing data; and (3) establish the Blackout Period Exposure
Adjustment component.
    Two commenters raised concerns regarding the Blackout Period
Exposure Adjustment.\217\ Specifically, IDTA states that that the
Blackout Period Exposure Adjustment results in an inaccurate
measurement of risk and excessive margin charges.\218\ First, IDTA
states that the Blackout Period should run from the first business day
of the current month to the morning of the fifth business day to more
accurately capture FICC's exposure.\219\ Second, IDTA states that the
Blackout Period Exposure Adjustment should be calculated using
historical pay-down rates for the MBS pools held in each Members'
portfolio, rather than historical pay-down rates for all active MBS
pools. Finally, IDTA states that FICC should apply a credit-risk
weighting to the Blackout Period Exposure Adjustment instead of
assuming a 100 percent probability of a GCF Repo Service counterparty
default across all Members.\220\
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    \217\ IDTA Letter; Amherst Letter II.
    \218\ IDTA Letter at 12.
    \219\ Id.
    \220\ Id.
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    Amherst similarly states that using historical pay-down rates for
all active MBS pools, rather than using historical pay-down rates for
the MBS pools held in each Members' portfolio, in calculating the
Blackout Period Exposure Adjustment would eliminate ``prudent risk and
position management'' that Members can undertake to reduce FICC's
exposure.\221\ Amherst states that FICC should retain its current
approach that provides incentives for Members to ``manage the prepay
characteristics of the mortgage-backed securities held within FICC.''
\222\
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    \221\ Amherst Letter II at 5.
    \222\ Id.
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    In response, FICC states that Blackout Period Exposure Adjustment
collections that occur after the MBS collateral pledge would not
mitigate the risk that a Member defaults after the collateral is
pledged but before such Member satisfies the next day's margin.\223\
Therefore, FICC states that IDTA's proposed change to the timing of the
Blackout Period Exposure Adjustment would be inconsistent with FICC's
requirements under the Exchange Act.\224\ Additionally, FICC states it
considered different approaches for determining the calculation of the
Blackout Period Exposure Adjustment that would ensure FICC has
sufficient backtesting coverage, and give Members transparency and the
ability to plan for the Blackout Period Exposure Adjustment
requirements.\225\ FICC notes that MBS pay-down rates are influenced by
several factors that can be projected at the loan level, however, such
projections would be dependent on several assumptions that may not be
predictable and transparent to Members.\226\ Thus, FICC states that the
proposed Blackout Period Exposure Adjustment applies weighted averages
of pay-down rates for all active mortgage pools of the related program
during the three most recent preceding months, and FICC believes that
this approach would allow Members to effectively plan for the Blackout
Period Exposure Adjustment.\227\ Finally, FICC disagrees with IDTA's
suggestion that a probability of default approach would be more
appropriate because a probability of default approach would provide
lower margin coverage than the current approach.\228\ FICC notes this
lower margin would not be sufficient to maintain the margin coverage at
a 99 percent confidence level.\229\
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    \223\ FICC Letter II at 13.
    \224\ Id.
    \225\ Id.
    \226\ Id.
    \227\ Id.
    \228\ Id.
    \229\ Id.
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    The Commission believes that these proposed changes are designed to
help FICC use an appropriate method for measuring credit exposure that
accounts for relevant product risk factors and portfolio effects across
products cleared by GSD. Specifically, the proposal to (1) move to a
sensitivity approach to the VaR Charge calculation would enable the VaR
Charge calculation to respond more effectively to market volatility by
allowing FICC to attribute market price moves to various risk factors;
(2) to implement a haircut method for securities with insufficient
sensitivity data would help ensure that FICC is able to capture the
risk profile of the securities; and (3) establish the Blackout Period
Exposure Adjustment component would enable FICC to address risks that
could result from overstated values of mortgage-backed securities that
are pledged as collateral for GCF Repo Transactions during a Blackout
Period.
    In response to commenters' concerns regarding the Blackout Period
Exposure Adjustment collection cycle, as stated above, the Commission
notes the proposed cycle follows the same cycle currently used for the
Blackout Period Exposure Charge, which FICC proposes to eliminate on
account of the proposed Blackout Period Exposure Adjustment. For both
the current and proposed cycle, the Commission understands, based on
its experience and expertise, that FICC's application of the charge on
the last business day of the month, as opposed to the first business
day of the following month, is an appropriate way to ensure that FICC
collects the funds before realizing the risk that the charge is
intended to mitigate (i.e., a Member defaults during the Blackout
Period). Similarly, FICC's extension of the charge through the end of
the day on the Factor Date, as opposed to releasing the charge during
FICC's standard intraday margin calculation on the Factor Date, also is
an appropriate way to mitigate the risk exposure to FICC because,
operationally, the MBS are not released and revalued with the update
factors by the applicable clearing bank until after FICC has already
completed the intraday margin calculation.
    In response to commenters' concerns regarding the calculation of
the Blackout Period Exposure Adjustment, the Commission agrees with
FICC. Specifically, the Commission agrees that (i) given the number
assumptions that

one would need to make with respect to the various factors that
influence MBS pay-down rates, the weighted-average approach would
provide Members more transparency and certainty around the charge; and
(ii) a credit-risk weighting would not likely produce a sufficient
charge amount in the event of an actual Member default, as the approach
would assume something less than a 100 percent probability of default
in calculating the charge.
    Therefore, for these reasons, the Commission believes that the
changes proposed in the Proposed Rule Change are consistent with Rule
17Ad-22(e)(6)(v) under the Exchange Act.\230\
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    \230\ 17 CFR 240.17Ad-22(e)(6)(v).
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H. Consistency With Rule 17Ad-22(e)(6)(vi)(B) of the Exchange Act

    Rule 17Ad-22(e)(6)(vi)(B) under the Exchange Act requires each
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, is monitored by management on an ongoing
basis and is regularly reviewed, tested, and verified by conducting a
sensitivity analysis \231\ of its margin model and a review of its
parameters and assumptions for backtesting on at least a monthly basis,
and considering modifications to ensure the backtesting practices are
appropriate for determining the adequacy of the covered clearing
agency's margin resources.\232\
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    \231\ Rule 17Ad-22(a)(16)(i) under the Exchange Act defines
sensitivity analysis to include an analysis that involves analyzing
the sensitivity model to its assumptions, parameters, and inputs
that consider the impact on the model of both moderate and extreme
changes in a wide range of inputs, parameters, and assumptions,
including correlations of price movements or returns if relevant,
which reflect a variety of historical and hypothetical market
conditions. 17 CFR 240.17Ad-22(a)(16)(i). Sensitivity analysis must
use actual portfolios and, where applicable, hypothetical portfolios
that reflect the characteristics of proprietary positions and
customer positions. Id.
    \232\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
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    Some of the commenters raise concerns that two of the presumptions
assumed by FICC for backtesting, in order to determine the adequacy of
the FICC's margin resources, are inaccurate.\233\ First, Ronin and IDTA
claim that FICC incorrectly assumes that it would take three days to
liquidate or hedge the portfolio of a defaulting Member in normal
market conditions. Specifically, Ronin states that FICC's assumption
that it would take three days to liquidate or hedge the portfolio of a
defaulted Member is incorrect because FICC incorrectly assumes that
liquidity needs following a default will be identical for all
Members.\234\ Ronin states that the three-day liquidation period
creates an ``arbitrary and extremely high hurdle'' for historical
backtesting by overestimating the closeout-period risk posed to FICC by
many of its Members by ``triple-counting'' a single event.\235\
Similarly, IDTA notes that it is arbitrary to apply the same
liquidation period across all Members because smaller Member portfolios
can be more easily liquidated or hedged in a short period of time.\236\
IDTA believes FICC should link the liquidation period to the portfolio
size of the Member.\237\
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    \233\ Ronin Letter I at 2-4; IDTA Letter at 6, 7.
    \234\ Ronin Letter I at 2-3; Ronin Letter II at 1.
    \235\ Ronin Letter I at 3.
    \236\ IDTA Letter at 6; Ronin Letter II at 2.
    \237\ Id.
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    In its response, FICC states that the three-day liquidation period
is an accurate assumption of the length of time it would take to
liquidate a portfolio given the volume and types of securities that can
be found in a Member's portfolio at any given time.\238\ Further, FICC
notes that it validates the three-day liquidation period, at least
annually, through FICC's simulated close-out, which is augmented with
statistical and economic analysis to reflect potential liquidation
costs of sample portfolios of various sizes.\239\ FICC also notes that
idiosyncratic exposures cannot be mitigated quickly and that the risk
associated with idiosyncratic exposures is present in large and small
portfolios.\240\ Finally, FICC states that although a single market
price shock will influence a three-day portfolio price return, the
mark-to-market calculation will vary daily based on the day's positions
and margin collection for each Member.\241\
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    \238\ FICC Letter I at 3.
    \239\ Id. at 3-4.
    \240\ Id. at 4.
    \241\ Id.
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    The Commission believes that FICC's assumption that it could take
three days to liquidate the portfolio of a defaulted Member, regardless
of the size of the portfolio or the type of Member, is appropriate. To
the extent there is a difference in the time required for FICC to