[Federal Register Volume 83, Number 96 (Thursday, May 17, 2018)]
[Notices]
[Pages 23020-23032]
[FR Doc No: 2018-10513]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83223; File No. SR-FICC-2018-801]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing of Amendment No. 1 and Notice of No Objection To
Advance Notice Filing, as Modified by Amendment No. 1, To Implement
Changes to the Method of Calculating Netting Members' Margin in the
Government Securities Division Rulebook

May 11, 2018.
    The Fixed Income Clearing Corporation (``FICC'') filed with the
U.S. Securities and Exchange Commission (``Commission'') on January 12,
2018 advance notice SR-FICC-2018-801 (``Advance Notice'') pursuant to
Section 806(e)(1) of Title VIII of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\
and Rule 19b-4(n)(1)(i) under

the Securities Exchange Act of 1934 (``Exchange Act'').\2\ The Advance
Notice was published for comment in the Federal Register on March 2,
2018.\3\ The Commission extended the review period of the Advanced
Notice for an additional 60 days on March 7, 2018.\4\ The Commission
received eight comments on the proposal.\5\ On April 25, 2018, FICC
filed Amendment No. 1 to the Advance Notice (``Amendment No. 1'').\6\
The Commission is publishing this notice to solicit comment on
Amendment No. 1 from interested persons and to serve as written notice
that the Commission does not object to the changes set forth in the
Advance Notice, as modified by Amendment No. 1.
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight
Council (``FSOC'') designated FICC a systemically important
financial market utility on July 18, 2012. See Financial Stability
Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, FICC is required to comply
with the Clearing Supervision Act and file advance notices with the
Commission. See 12 U.S.C. 5465(e).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Securities Exchange Act Release No. 82779 (February 26,
2018), 83 FR 9055 (March 2, 2018) (SR-FICC-2018-801) (``Notice'').
FICC also filed a related proposed rule change (SR-FICC-2018-001)
with the Commission pursuant to Section 19(b)(1) of the Exchange Act
and Rule 19b-4 thereunder, seeking approval of changes to its rules
necessary to implement the Advance Notice (``Proposed Rule
Change''). 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively.
The Proposed Rule Change was published in the Federal Register on
February 1, 2018. Securities Exchange Act Release No. 82588 (January
26, 2018), 83 FR 4687 (February 1, 2018) (SR-FICC-2018-001). On
March 14, 2018, the Commission issued an order instituting
proceedings to determine whether to approve or disapprove the
Proposed Rule Change. 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.
    \4\ Securities Exchange Act Release No. 82820 (March 7, 2018),
83 FR 10761 (March 12, 2018) (SR-FICC-2018-801).
    \5\ 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 Advance Notice was also filed as a
Proposed Rule Change, supra note 3, 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.
    Several commenters state that some of the changes proposed in
the Advance Notice would impose an unfair burden on competition.
That issue is relevant to the Commission's evaluation of the related
Proposed Rule Change, which is conducted under the Exchange Act, but
not to the Commission's evaluation of the Advance Notice, which, as
discussed below in Section II, is conducted under the Clearing
Supervision Act and generally considers whether the proposal will
mitigate systemic risk and promote financial stability. Accordingly,
concerns regarding burden on competition are not discussed herein
but will be addressed in the Commission's review of the related
Proposed Rule Change, as applicable, under the Exchange Act.
    \6\ Available athttps://www/sec/gov/comments/sr-ficc-2018-801/
ficc2018801.htm . FICC filed related amendments to the related
Proposed Rule Change. Supra note 3.
---------------------------------------------------------------------------

I. Description of the Advance Notice

    FICC proposes to change the FICC GSD Rulebook (``GSD Rules'') \7\
to adjust GSD's method of calculating GSD 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
Counterparties during the Blackout Period, and (ii) give GSD the
ability to assess the Backtesting Charge on an intraday basis for all
Netting Members; and (5) adjust the calculation for determining the
existing Excess Capital Premium for Broker Members, Inter-Dealer Broker
Members, and Dealer Members.\9\ In addition, FICC proposes to provide
transparency with respect to GSD's existing authority to calculate and
assess Intraday Supplemental Fund Deposit amounts.\10\ The proposed QRM
Methodology document would reflect the proposed VaR Charge calculation
and the proposed Blackout Period Exposure Adjustment calculation.\11\
---------------------------------------------------------------------------

    \7\ Available at http://www.dtcc.com/legal/rules-and-procedures.
    \8\ Notice, supra note 3, at 9055.
    \9\ Id.
    \10\ 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 5.
    \11\ Id.
---------------------------------------------------------------------------

A. Changes to GSD's VaR Charge Component

    FICC states that the changes proposed in the Advance Notice are
designed to improve GSD's current VaR Charge so that it responds more
effectively to market volatility.\12\ Specifically, FICC proposes to
(1) replace GSD's current full revaluation approach with a sensitivity
approach; \13\ (2) employ the existing Margin Proxy as an alternative
(i.e., a back-up) VaR Charge calculation; \14\ (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.\15\
---------------------------------------------------------------------------

    \12\ Notice, supra note 3, at 9056. 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.
    \13\ Id. 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) and
Securities Exchange Act Release No. 79643 (December 21, 2016), 81 FR
95669 (December 28, 2016) (SR-FICC-2016-801).
    \14\ 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).
    \15\ Id.
---------------------------------------------------------------------------

    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. \16\ FICC would conduct independent

data checks to verify the accuracy and consistency of the data feed
received from the vendor.\17\ 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.\18\
---------------------------------------------------------------------------

    \16\ See Notice, supra note 3, at 9057. 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.
    \17\ See Notice, supra note 3, at 9058.
    \18\ See Notice, supra note 3, at 9059. 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.
---------------------------------------------------------------------------

    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.\19\ 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.\20\
---------------------------------------------------------------------------

    \19\ Notice, supra note 3, at 9059.
    \20\ Id.
---------------------------------------------------------------------------

    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.\21\ A statistical probability distribution would be formed
from the portfolio's market value changes, then the VaR calculation
would be calibrated to cover the projected liquidation losses at a 99
percent confidence level.\22\ 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.\23\
---------------------------------------------------------------------------

    \21\ Notice, supra note 3, at 9058.
    \22\ Id.
    \23\ Id.
---------------------------------------------------------------------------

    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.\24\
---------------------------------------------------------------------------

    \24\ Notice, supra note 3, at 9059.
---------------------------------------------------------------------------

    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.\25\
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.\26\ The proposed
haircut approach would be calculated separately for U.S. Treasury/
Agency securities and mortgage-backed securities.\27\
---------------------------------------------------------------------------

    \25\ Notice, supra note 3, at 9060.
    \26\ Id.
    \27\ Id.
---------------------------------------------------------------------------

    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.\28\ The VaR Floor would be calculated as the sum of (1) a U.S.
Treasury/Agency bond margin floor \29\ and (2) a mortgage-backed
securities margin floor.\30\
---------------------------------------------------------------------------

    \28\ Id.
    \29\ Notice, supra note 3, at 9061. 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.
    \30\ Id. 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.
---------------------------------------------------------------------------

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.\31\ 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
\32\ during a Blackout Period.\33\ 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.\34\ 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.\35\
---------------------------------------------------------------------------

    \31\ Id. 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.
    \32\ Id. GCF Repo Transactions refer to transactions made on
FICC's GCF Repo Service that enables 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.
    \33\ Notice, supra note 3, at 9061.
    \34\ 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.
    \35\ Id.
---------------------------------------------------------------------------

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.\36\ 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.\37\ 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.\38\
---------------------------------------------------------------------------

    \36\ Notice, supra note 3, at 9062.
    \37\ Id.
    \38\ Id.
---------------------------------------------------------------------------

    FICC also proposes to eliminate the existing Coverage Charge
component from GSD's margin calculation.\39\ 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.\40\
---------------------------------------------------------------------------

    \39\ Id.
    \40\ Id.
---------------------------------------------------------------------------

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.\41\
---------------------------------------------------------------------------

    \41\ Id.
---------------------------------------------------------------------------

    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.\42\ In
response to FICC's proposal to eliminate the Blackout Period Exposure
Charge, FICC proposes to adjust the applicability of the Backtesting
Charge.\43\ 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.\44\
---------------------------------------------------------------------------

    \42\ Id.
    \43\ Id.
    \44\ 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.
---------------------------------------------------------------------------

    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.\45\ 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.\46\
---------------------------------------------------------------------------

    \45\ Id.
    \46\ Notice, supra note 3, at 9063.
---------------------------------------------------------------------------

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.\47\ 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.\48\ 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.\49\ FICC proposes to move to a net
capital measure for broker Members, inter-dealer broker Members, and
dealer Members.\50\ 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.\51\
---------------------------------------------------------------------------

    \47\ Id. 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 5.
    \48\ See Notice, supra note 3, at 9063.
    \49\ Id.
    \50\ Id.
    \51\ Id.
---------------------------------------------------------------------------

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.\52\
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.\53\
---------------------------------------------------------------------------

    \52\ Id.
    \53\ See Notice, supra note 3, at 9064.
---------------------------------------------------------------------------

    FICC calculates the Intraday Supplemental Fund Deposit by tracking
three criteria for each Member.\54\ 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.\55\ 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.\56\ The third
criterion, the ``Coverage Target,'' evaluates whether a Member is
experiencing backtesting results below a 99 percent confidence
level.\57\ In the event that a Member's additional risk exposure
breaches all three criteria, FICC assess an Intraday Supplemental Fund
Deposit.\58\ FICC also assess 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.\59\
---------------------------------------------------------------------------

    \54\ Id.
    \55\ Id.
    \56\ Id.
    \57\ Id.
    \58\ Id.
    \59\ Id.
---------------------------------------------------------------------------

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.\60\ 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 calculation); (viii) the haircut methodology; (ix)
the Blackout Period Exposure Adjustment calculations; (x) intraday
margin calculation; and (xi) the Margin Proxy calculation.
---------------------------------------------------------------------------

    \60\ Id.
---------------------------------------------------------------------------

H. Description of Amendment No. 1

    In Amendment No. 1, FICC proposed three things. First, FICC
proposed to stagger the implementation of the proposed Blackout Period
Exposure Adjustment and the proposed removal of the Blackout Period
Exposure Charge.\61\ Specifically, on a date that is approximately
three weeks after the later of the Commission's notice of no objection
to the Advance Notice or its issuance of an order approving the related
Proposed Rule Change (``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.\62\ 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.\63\ 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.\64\ 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.\65\
---------------------------------------------------------------------------

    \61\ Amendment No. 1, supra note 6.
    \62\ Id.
    \63\ Id.
    \64\ Id.
    \65\ Id.
---------------------------------------------------------------------------

    Second, FICC proposes to amend the implementation date for the
remainder of the proposed changes in the Advance Notice.\66\
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 notice of
no objection to the Advance Notice or its issuance of an order
approving the related Proposed Rule Change.\67\ 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.\68\
---------------------------------------------------------------------------

    \66\ Id.
    \67\ Id.
    \68\ Id.
---------------------------------------------------------------------------

    Third, FICC proposes to correct an incorrect description of the
calculation of the Excess Capital Premium that appears once in the
narrative to the Advance Notice, as well as in the corresponding
location in the Exhibit 1A to the Advance Notice.\69\ 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.\70\
---------------------------------------------------------------------------

    \69\ Id.
    \70\ Id.
---------------------------------------------------------------------------

II. 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
Clearing Supervision Act. Comments may be submitted by any of the
following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include
File Number SR-FICC-2018-801 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FICC-2018-801. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the Advance Notice that are filed with the
Commission, and all written communications relating to the Advance
Notice between the Commission and any person, other than those that may
be withheld from the public in accordance with the provisions of 5
U.S.C. 552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received
will be posted without change. Persons submitting comments are
cautioned that we do not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-FICC-2018-801 and should be submitted on
or before June 1, 2018.

III. Discussion and Commission Findings

    Although the Clearing Supervision Act does not specify a standard
of review for an advance notice, its stated purpose is instructive: to
mitigate systemic risk in the financial system and promote financial
stability by, among other things, promoting uniform risk management
standards for systemically important financial market utilities and
strengthening the liquidity of systemically important financial market
utilities.\71\
---------------------------------------------------------------------------

    \71\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \72\ authorizes
the Commission to prescribe regulations containing risk-management
standards for the payment, clearing, and settlement activities of
designated clearing entities engaged in designated activities for which
the Commission is the supervisory agency. Section 805(b) of the
Clearing Supervision Act \73\ provides the following objectives and
principles for the Commission's risk-management standards prescribed
under Section 805(a):
---------------------------------------------------------------------------

    \72\ 12 U.S.C. 5464(a)(2).
    \73\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

     Promote robust risk management;
     promote safety and soundness;
     reduce systemic risks; and
     support the stability of the broader financial system.
    Section 805(c) of the Clearing Supervision Act provides, in
addition, that the Commission's risk-management standards may address
such areas as risk-management and default policies and procedures,
among others areas.\74\
---------------------------------------------------------------------------

    \74\ 12 U.S.C. 5464(c).
---------------------------------------------------------------------------

    The Commission has adopted risk-management standards under Section
805(a)(2) of the Clearing Supervision Act \75\ and Section 17A of the
Exchange Act (``Rule 17Ad-22'').\76\ Rule 17Ad-22 requires each covered
clearing agency, among other things, to establish, implement, maintain,
and enforce written policies and procedures that are reasonably
designed to meet certain minimum requirements for their operations and
risk-management practices on an ongoing basis.\77\ Therefore, it is
appropriate for the Commission to review proposed

changes in advance notices for consistency with the objectives and
principles of the risk-management standards described in Section 805(b)
of the Clearing Supervision Act \78\ and against Rule 17Ad-22.\79\
---------------------------------------------------------------------------

    \75\ 12 U.S.C. 5464(a)(2).
    \76\ 15 U.S.C. 78q-1.
    \77\ 17 CFR 240.17Ad-22.
    \78\ 12 U.S.C. 5464(b).
    \79\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice are consistent with each of the objectives and principles
described in Section 805(b) of the Clearing Supervision Act.\80\
Specifically, as discussed below, the Commission believes that the
changes proposed in the Advance Notice to the VaR Charge component of
the margin calculation and the proposed changes to other components of
the margin calculation are consistent with promoting robust risk
management in the area of credit risk and promoting safety and
soundness, which in turn, would help reduce systemic risk and support
the stability of the broader financial system.
---------------------------------------------------------------------------

    \80\ 12 U.S.C. 5464(b).
---------------------------------------------------------------------------

    First, as described above, FICC currently calculates the VaR Charge
component of each Member's margin using a VaR 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.
    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 under the proposed changes, specifically the addition 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 sensitivity data to apply the proposed
sensitivity approach to FICC's VaR 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 too low of a VaR Charge
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
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 that would promote robust risk
management at FICC. 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 calculation and the proposed Blackout Period Exposure
Adjustment component, respectively.
    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. The 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, the Commission believes that the
changes proposed in the Advance Notice would help promote robust risk
management, consistent with Section 805(b) of the Clearing Supervision
Act.\81\
---------------------------------------------------------------------------

    \81\ Id.
---------------------------------------------------------------------------

    The Commission also believes that the proposed changes would help
promote safety and soundness at FICC, which, in turn, would help reduce
systemic risk and support the stability of the broader financial
system. As described above, the proposed changes are designed to better
limit FICC's credit exposure to Members in the event of a Member
default through an enhanced VaR Charge calculation. By better limiting
credit exposure to its Members, FICC's proposed changes are designed to
help ensure that, in the event of a Member default, FICC's operations
would not be disrupted and non-defaulting Members would not be exposed
to losses that they cannot anticipate or control.
    Therefore, for the above reasons, the Commission believes that the
changes proposed in the Advance Notice would help promote safety and
soundness, which in turn, would help reduce systemic risks and support
the stability of the broader financial system, consistent with Section
805(b) of the Clearing Supervision Act.\82\
---------------------------------------------------------------------------

    \82\ Id.
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice are consistent with Rule 17Ad-22(e)(4)(i) under the Exchange
Act. Rule 17Ad-22(e)(4)(i) requires each covered

clearing agency \83\ 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.\84\
---------------------------------------------------------------------------

    \83\ 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 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, supra note
1, FICC is a covered clearing agency.
    \84\ 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 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 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.\85\ 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.'' \86\ 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.\87\ 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.\88\ On the other hand, IDTA states that dealers must
include haircuts on certain positions before calculating Net
Capital.\89\ 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.\90\
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.\91\ 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.\92\
---------------------------------------------------------------------------

    \85\ IDTA Letter and Amherst Letter II.
    \86\ IDTA Letter at 9.
    \87\ Id.
    \88\ Id. at 10.
    \89\ Id. at 10.
    \90\ Id. at 10.
    \91\ Id.
    \92\ 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.\93\ 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.\94\ Where there is an increase, FICC states that this increase
is appropriate for the exposure that the Excess Capital Premium is
designed to mitigate.\95\ 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.\96\ Additionally, FICC
states that the proposed change to Net Capital for the Excess Capital
Premium would reduce the impact to Members.\97\ 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.\98\
---------------------------------------------------------------------------

    \93\ 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).
    \94\ FICC Letter II at 11.
    \95\ Id.
    \96\ Id.
    \97\ Id.
    \98\ 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 \99\ 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 Netting Members' Required Fund
Deposit 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.\100\ Similarly, IDTA states
that the Margin Proxy allows GSD to maintain its backtesting goal at
the 99 percent confidence level.\101\
---------------------------------------------------------------------------

    \99\ Supra note 12.
    \100\ Amherst II Letter at 2.
    \101\ 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.\102\ 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. 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.\103\ 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.\104\ 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.\105\
---------------------------------------------------------------------------

    \102\ FICC Letter II at 3.
    \103\ Id.
    \104\ Id.
    \105\ 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).\106\
The effect, holding all else constant, would be to lower those Members'
Excess Capital Premium.
---------------------------------------------------------------------------

    \106\ 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 Advance Notice 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 Advance Notice,
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.\107\
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.
---------------------------------------------------------------------------

    \107\ See supra note 15.
---------------------------------------------------------------------------

    Therefore, for the reasons discussed above, the Commission believes
that the changes proposed in the Advance Notice are consistent with
Rule 17Ad-22(e)(4)(i) under the Exchange Act.\108\
---------------------------------------------------------------------------

    \108\ 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice 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.\109\
---------------------------------------------------------------------------

    \109\ 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.\110\ Ronin
suggests that the implementation of data sharing and cross margining
between FICC's Mortgaged-Backed Securities Division (``MBSD''), GSD,
and the Chicago Mercantile Exchange (``CME'') would provide FICC with a
more accurate representation of the risk associated with a Member's
portfolio.\111\ 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.\112\ 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.\113\ IDTA suggests that FICC should develop cross-
margining ability between GSD and MBSD and improve cross-margining with
CME.\114\ 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.\115\ Amherst states that not implementing cross-margin
capabilities will inflate the margin requirements and distort the
liquidity profile of the Member.\116\
---------------------------------------------------------------------------

    \110\ Ronin Letter I at 1.
    \111\ Id. at 2.
    \112\ Ronin Letter II at 2.
    \113\ IDTA Letter at 11.
    \114\ Id.
    \115\ KGS Letter at 1.
    \116\ 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.\117\ FICC notes that it operates under two divisions, GSD
and MBSD, each of which has its own rules and members.\118\ 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.\119\
---------------------------------------------------------------------------

    \117\ FICC Letter II at 12.
    \118\ Id.
    \119\ 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
Advance Notice.\120\ FICC states it is in the process of completing a
proposal that would enable a margin reduction for Members with
mortgaged-backed securities (``MBS'') positions that offset between GSD
and MBSD.\121\ FICC also states it will continue to develop a framework
with CME that will enhance FICC's existing cross-margining arrangement
with the CME.\122\ 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.\123\
---------------------------------------------------------------------------

    \120\ FICC Letter I at 5.
    \121\ FICC Letter II at 12.
    \122\ Id.
    \123\ 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.\124\ 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.\125\
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.\126\
---------------------------------------------------------------------------

    \124\ Ronin Letter I at 4 and Ronin Letter 2 at 5.
    \125\ IDTA Letter I at 7.
    \126\ 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.\127\ 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.\128\ 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 Netting Member portfolios from January
1, 2013 through April 28, 2017.\129\ 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.\130\
---------------------------------------------------------------------------

    \127\ FICC Letter I at 4.
    \128\ Id.
    \129\ FICC Letter II at 9.
    \130\ 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 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 assess 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 responses to comments regarding cross-margining and its
potential impact upon membership levels and market liquidity, the
Commission notes that the Advance Notice 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 have, apply and
become a member of the other), offer different services, and clear
different products. To the extent there is consistency in products, the
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 proposed
change in the Advance Notice 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
Advance Notice 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, so that FICC is in a better position to maintain backtesting
coverage above 99 percent for GSD.
    Therefore, for the above discussed reasons, the Commission believes
that the changes proposed in the Advance Notice are consistent with
Rule 17Ad-22(e)(6)(i) under the Exchange Act.\131\
---------------------------------------------------------------------------

    \131\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice 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.\132\
---------------------------------------------------------------------------

    \132\ 17 CFR 240.17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------

    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 defaults 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 Advance Notice are consistent with Rule 17Ad-22(e)(6)(ii) under the
Exchange Act.\133\
---------------------------------------------------------------------------

    \133\ Id.
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice 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.\134\
---------------------------------------------------------------------------

    \134\ 17 CFR 240.17Ad-22(e)(6)(iv).
---------------------------------------------------------------------------

    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 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 not only enable the VaR 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 assess 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 Advance Notice are

consistent with Rule 17Ad-22(e)(6)(iv) under the Exchange Act.\135\
---------------------------------------------------------------------------

    \135\ Id.
---------------------------------------------------------------------------

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

    The Commission believes that the changes proposed in the Advance
Notice 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.\136\
---------------------------------------------------------------------------

    \136\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

    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.\137\ Specifically, IDTA states that that the
Blackout Period Exposure Adjustment results in an inaccurate
measurement of risk and excessive margin charges.\138\ 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.\139\ 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 GCF counterparty default across
all Members.\140\
---------------------------------------------------------------------------

    \137\ IDTA Letter and Amherst Letter II.
    \138\ IDTA Letter at 12.
    \139\ Id.
    \140\ Id.
---------------------------------------------------------------------------

    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.\141\ Amherst states that FICC should retain its current
approach that provides incentives for Members to ``manage the prepay
characteristics of the mortgaged-backed securities held within FICC.''
\142\
---------------------------------------------------------------------------

    \141\ Amherst Letter II at 5.
    \142\ Id.
---------------------------------------------------------------------------

    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.\143\
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.\144\ 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.\145\ 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.\146\ 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.\147\ 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.\148\ FICC notes this
lower margin would not be sufficient to maintain the margin coverage at
a 99 percent confidence level.\149\
---------------------------------------------------------------------------

    \143\ FICC Letter II at 13.
    \144\ Id.
    \145\ Id.
    \146\ Id.
    \147\ Id.
    \148\ Id.
    \149\ Id.
---------------------------------------------------------------------------

    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
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, 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 Advance Notice are consistent with Rule 17Ad-
22(e)(6)(v) under the Exchange Act.\150\
---------------------------------------------------------------------------

    \150\ 17 CFR 240.17Ad-22(e)(6)(v).
---------------------------------------------------------------------------

G. 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 \151\ 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.\152\
---------------------------------------------------------------------------

    \151\ 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.
    \152\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
---------------------------------------------------------------------------

    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.\153\ 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.\154\ 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.\155\
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.\156\
IDTA believes FICC should link the liquidation period to the portfolio
size of the Member.\157\
---------------------------------------------------------------------------

    \153\ Ronin Letter I at 2-4 and IDTA Letter at 6, 7.
    \154\ Ronin Letter I at 2-3 and Ronin Letter II at 1.
    \155\ Ronin Letter I at 3.
    \156\ IDTA Letter at 6 and Ronin Letter II at 2.
    \157\ Id.
---------------------------------------------------------------------------

    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.\158\ 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.\159\ 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.\160\ 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.\161\
---------------------------------------------------------------------------

    \158\ FICC Letter I at 3.
    \159\ Id. at 3-4.
    \160\ Id. at 4.
    \161\ Id.
---------------------------------------------------------------------------

    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
liquidate various GSD products over a three-day period, the Commission
believes that such time is appropriate in order for FICC to focus on
the overall risk management of the defaulted Member without creating a
liquidation methodology that is overly complex and susceptible to
flaws.
    Therefore, the Commission believes that the Advance Notice is
consistent with Rule 17Ad-22(e)(6)(vi)(B) under the Exchange Act.\162\
---------------------------------------------------------------------------

    \162\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
---------------------------------------------------------------------------

H. Consistency With Rule 17Ad-22(e)(23)(ii) of the Exchange Act

    Rule 17Ad-22(e)(23)(ii) under the Exchange Act requires each
covered clearing agency to establish, implement, maintain and enforce
written policies and procedures reasonably designed to provide
sufficient information to enable participants to identify and evaluate
the risks, fees, and other material costs they incur by participating
in the covered clearing agency.\163\
---------------------------------------------------------------------------

    \163\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

    Three commenters expressed concerns regarding the limited time in
which Members have had to evaluate the data provided by FICC and the
effects of the proposed changes.\164\ IDTA states that the proposed
changes are complex and warrant adequate testing and transparency
between FICC and its Members.\165\ IDTA states that FICC has not
provided Members with adequate time to review and evaluate the
potential impacts of the proposed changes on a Member's portfolio.\166\
IDTA suggests that FICC (i) provide more time for Members to adapt to
the change, (ii) launch a calculator that enables Members to input
sample portfolios to determine the margin required, and (iii) provide
full disclosure of the methodology used.\167\
---------------------------------------------------------------------------

    \164\ See Amherst Letter II, IDTA Letter, and Ronin II Letter.
    \165\ IDTA Letter at 5.
    \166\ Id.
    \167\ Id.
---------------------------------------------------------------------------

    Similarly, Amherst states that the proposed changes should not be
implemented until Members have had the appropriate time and sufficient
information to complete a comparison between the current margin
methodology and the proposed changes.\168\ Amherst requests that FICC
provide the appropriate tools and information to replicate the new
sensitivity model in order to manage the risks to Members that may be
introduced as a result of the proposed changes.\169\ Amherst also
requests that FICC provide transparency surrounding the effects of the
Blackout Period Exposure Adjustment and the Excess Capital Premium
calculations in order to assess the impacts of the proposed
changes.\170\
---------------------------------------------------------------------------

    \168\ Amherst Letter II at 2.
    \169\ Id.
    \170\ Id, at 5, 6.
---------------------------------------------------------------------------

    Similarly, Ronin states that FICC has heavily relied on parallel
and historical studies when providing its Members with data, but
Members lack the necessary tools to conduct their own scenario
analysis.\171\ Ronin notes that when trading activity or market
conditions deviate from assumptions made under the various studies
conducted by the FICC, Members are forced to react rather than
proactively

manage capital needs.\172\ Ronin, therefore, states it is significantly
more difficult to manage the capital needs of a business when a
clearing agency does not provide appropriate tools for calculating
projected margin requirements in advance.\173\
---------------------------------------------------------------------------

    \171\ Ronin Letter II at 3.
    \172\ Id.
    \173\ Id.
---------------------------------------------------------------------------

    In response, FICC states that its Members have been provided with
sufficient time and information to assess the impact of the proposed
changes.\174\ FICC states that it has provided Members with numerous
opportunities to gather information including (i) holding customer
forums in August 2017, (ii) making individual impact studies available
in September 2017 and December 2017, (iii) providing parallel reporting
on a daily basis since December 18, 2017, and (iv) meeting and speaking
with Members on an individual basis and responding to request for
additional information since August 2017.\175\ Separately, FICC agrees
with commenters that launching a calculator that enables Members to
input sample portfolios to determine the margin required would be
beneficial to its Members and is exploring creating such a calculator
outside of the changes proposed in the Advance Notice.\176\
Additionally, in order to provide Members with more time, FICC filed
Amendment No. 1 to delay implementation of the Blackout Period Exposure
Adjustment and the removal of the Blackout Period Exposure Charge.\177\
Such changes now would be implemented in phases throughout the
remainder of 2018.\178\
---------------------------------------------------------------------------

    \174\ FICC Letter I at 5; FICC Letter II at 8-9.
    \175\ FICC Letter I at 5; FICC Letter II at 8-9.
    \176\ FICC Letter I at 5.
    \177\ Amendment No. 1, supra note 6.
    \178\ Id.
---------------------------------------------------------------------------

    In response to commenters, the Commission notes that the disclosure
requirements of Rule 17Ad-22(e)(23)(ii) under the Exchange Act \179\
should not be conflated with the filing requirements for advance
notices under Section 806(e)(1) of the Clearing Supervision Act \180\
and Rule 19b-4(n) under the Exchange Act.\181\ Section 806(e)(1)(A) of
the Clearing Supervision Act requires a designated clearing agency to
provide its Supervisory Agency (here, the Commission) 60 days advance
notice of any proposed change to its rules, procedures, or operations
that could material affect the nature or level of risks presented by
the clearing agency,\182\ which FICC did in this case.\183\ Meanwhile,
Rule 19b-4(n) under the Exchange Act not only states how a designated
clearing agency should make an advance notice filing with the
Commission,\184\ but it also requires the Commission to publish notice
of the advance notice,\185\ which the Commission did,\186\ and requires
the designated clearing agency to post the advance notice, and any
amendments thereto, on its website within two business days after
filing with the Commission,\187\ which FICC did in this case.\188\
---------------------------------------------------------------------------

    \179\ 17 CFR 240.17Ad-22(e)(23)(ii).
    \180\ 12 U.S.C. 5465(e)(1).
    \181\ 17 CFR 240.19b-4(n).
    \182\ 12 U.S.C. 5465(e)(1)(A).
    \183\ See Notice, supra note 3.
    \184\ See 17 CFR 240.19b-4(n)(1)(i).
    \185\ See id.
    \186\ See Notice, supra note 3.
    \187\ See 17 CFR 240.19b-4(n)(3).
    \188\ Available at http://www.dtcc.com/legal/sec-rule-filings.
---------------------------------------------------------------------------

    Until the Commission has not objected to the changes proposed in an
advance notice, either through written notice before the end of the
review period \189\ or through the expiration of the review
period,\190\ disclosure of the proposed changes under Rule 17Ad-
22(e)(23)(ii) is not yet applicable, as there would not yet be (and
there may not be if the Commission objects to the proposed changes) any
risks, fees, or other material costs incurred with respect to the
proposed changes. Nevertheless, the Commission notes that FICC has
conducted outreach to Members, as described above, and has proposed a
staggered implementation of the proposed Blackout Period Exposure
Adjustment and removal of the Blackout Period Exposure Charge in
response to commenters. The Commission believes that the absence of a
longer period of time to review the Advance Notice does not render the
proposed changes inconsistent with the Clearing Supervision Act or the
applicable rules discussed herein.
---------------------------------------------------------------------------

    \189\ 12 U.S.C. 5465(e)(1)(I).
    \190\ 12 U.S.C. 5465(e)(1)(G).
---------------------------------------------------------------------------

    Therefore, the Commission believes that the changes proposed in the
Advance Notice are consistent with Rule 17Ad-22(e)(23)(ii) under the
Exchange Act.\191\
---------------------------------------------------------------------------

    \191\ 17 CFR 240.17Ad-22(e)(23)(ii).
---------------------------------------------------------------------------

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(I) of the
Clearing Supervision Act,\192\ that the Commission does not object to
advance notice SR-FICC-2018-801, as modified by Amendment No. 1, and
that FICC is authorized to implement the proposed change as of the date
of this notice or the date of an order by the Commission approving
proposed rule change SR-FICC-2018-001, as modified by Amendment No. 1,
that reflects rule changes that are consistent with this Advance
Notice, as modified by Amendment No. 1, whichever is later.
---------------------------------------------------------------------------

    \192\ 12 U.S.C. 5465(e)(1)(I).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018-10513 Filed 5-16-18; 8:45 am]
BILLING CODE 8011-01-P