[Federal Register Volume 83, Number 42 (Friday, March 2, 2018)]
[Notices]
[Pages 9055-9071]
[FR Doc No: 2018-04236]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82779; File No. SR-FICC-2018-801]

Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Advance Notice Filing of Proposed Changes to the Method of
Calculating Netting Members' Margin in the Government Securities
Division Rulebook

February 26, 2018.
    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 as amended (``Act''),\2\ notice is hereby given
that on January 12, 2018, Fixed Income Clearing Corporation (``FICC'')
filed with the Securities and Exchange Commission (``Commission'') the
advance notice SR-FICC-2018-801 (``Advance Notice'') as described in
Items I, II and III below, which Items have been prepared by the
clearing agency.\3\ The Commission is publishing this notice to solicit
comments on the Advance Notice from interested persons.
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    \1\ 12 U.S.C. 5465(e)(1).
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ On January 12, 2018, FICC also filed a proposed rule change
(SR-FICC-2018-001) with the Commission pursuant to Section 19(b)(1)
of the Act, 15 U.S.C. 78s(b)(1), and Rule 19b-4, 17 CFR 240.19b-4,
seeking approval of changes to its rules necessary to implement the
proposal. A copy of the proposed rule change is available at http://www.dtcc.com/legal/sec-rule-filings.aspx.
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I. Clearing Agency's Statement of the Terms of Substance of the Advance
Notice

    This Advance Notice consists of amendments to FICC's Government
Securities Division (``GSD'') Rulebook (the ``GSD Rules'') \4\ in order
to propose changes to GSD's method of calculating Netting Members'
margin, referred to in the GSD Rules as the Required Fund Deposit
amount.\5\ Specifically, FICC is proposing to (1) change its method of
calculating the VaR Charge component, (2) add a new component referred
to as the ``Blackout Period Exposure Adjustment'' (as defined in Item
II.(B)I below), (3) eliminate the Blackout Period Exposure Charge and
the Coverage Charge components, (4) amend the Backtesting Charge
component to (i) include the backtesting deficiencies of certain GCF
Counterparties during the Blackout Period \6\ and (ii) give GSD the
ability to assess the Backtesting Charge on an intraday basis for all
Netting Members, and (5) amend the calculation for determining the
Excess Capital Premium for Broker Netting Members, Inter-Dealer Broker
Netting Members and Dealer Netting Members. In addition, FICC is
proposing to provide transparency with respect to GSD's existing
authority to calculate and assess Intraday Supplemental Fund Deposit
amounts.\7\
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    \4\ Available at DTCC's website, www.dtcc.com/legal/rules-and-procedures.aspx. Capitalized terms used herein and not defined shall
have the meaning assigned to such terms in the GSD Rules.
    \5\ Id. at GSD Rules 1 and 4.
    \6\ As further discussed in Item II.(B)I. below, the proposed
Backtesting Charge would consider a GCF Counterparty's backtesting
deficiencies that are attributable to GCF Repo Transactions
collateralized with mortgage-backed securities during the Blackout
Period.
    \7\ 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, Section 2a, supra note 4.
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    FICC has also provided the following documentation to the
Commission:
    1. Backtesting results that reflect FICC's comparison of the
aggregate Clearing Fund requirement (``CFR'') under GSD's current
methodology and the aggregate CFR under the proposed methodology (as
listed in the first paragraph above) to historical returns of end-of-
day snapshots of each Netting Member's portfolio for the period May
2016 through October 2017. The CFR backtesting results under the
proposed methodology were calculated in two ways for end-of-day
portfolios: One set of results included the proposed Blackout Period
Exposure Adjustment and the other set of results excluded the proposed
Blackout Period Exposure Adjustment.
    2. An impact study that shows the portfolio level VaR Charge under
the proposed methodology for the period January 3, 2013 through
December 30, 2016,\8\ and
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    \8\ This period includes market stress events such as the U.S.
presidential election, United Kingdom's vote to leave the European
Union, and the 2013 spike in U.S. Treasury yields which resulted
from the Federal Reserve's plans to reduce its balance sheet
purchases.
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    3. An impact study that shows the aggregate Required Fund Deposit
amount by Netting Member for the period May 1, 2017 through November
30, 2017.
    4. The GSD Initial Margin Model (the ``QRM Methodology'') which
would reflect the proposed methodology of the VaR Charge calculation
and the proposed Blackout Period Exposure Adjustment.
    FICC is requesting confidential treatment of the above-referenced
backtesting results, impact studies and QRM Methodology, and has filed
it separately with the Commission.\9\
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    \9\ See 17 CFR 240-24b-2.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Advance Notice

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

(A) Clearing Agency's Statement on Comments on the Advance Notice
Received From Members, Participants, or Others

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

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

I. Description of the Change

    The purpose of this filing is to amend the GSD Rules to propose
changes to GSD's method of calculating Netting Members' margin,
referred to in the GSD Rules as the Required Fund Deposit amount.
Specifically, FICC is proposing to (1) change its method of calculating
the VaR Charge component, (2) add the Blackout Period Exposure
Adjustment

as a new component, (3) eliminate the Blackout Period Exposure Charge
and the Coverage Charge components, (4) amend the Backtesting Charge to
(i) consider the backtesting deficiencies of certain GCF Counterparties
during the Blackout Period \10\ and (ii) give GSD the ability to assess
the Backtesting Charge on an intraday basis for all Netting Members,
and (5) amend the calculation for determining the Excess Capital
Premium for Broker Netting Members, Dealer Netting Members and Inter-
Dealer Broker Netting Members.
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    \10\ As further discussed below, the proposed Backtesting Charge
would consider a GCF Counterparty's backtesting deficiencies that
are attributable to GCF Repo Transactions collateralized with
mortgage-backed securities during the Blackout Period.
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    In addition, FICC is proposing to provide transparency with respect
to GSD's existing authority to calculate and assess Intraday
Supplemental Fund Deposit amounts.\11\
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    \11\ 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, Section 2a, supra note 4.
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    The proposed QRM Methodology would reflect the proposed methodology
of the VaR Charge calculation and the proposed Blackout Period Exposure
Adjustment calculation.

A. The Required Fund Deposit and Clearing Fund Calculation Overview

    GSD provides trade comparison, netting and settlement for the U.S.
Government securities marketplace. Pursuant to the GSD Rules, Netting
Members may process the following securities and transaction types
through GSD: (1) Buy-sell transactions in eligible U.S. Treasury and
Agency securities, (2) delivery versus payment repurchase agreement
(``repo'') transactions, where the underlying collateral must be U.S.
Treasury securities or Agency securities, and (3) GCF Repo
Transactions, where the underlying collateral must be U.S. Treasury
securities, Agency securities, or eligible mortgage-backed securities.
    A key tool that FICC uses to manage counterparty risk is the daily
calculation and collection of Required Fund Deposits from Netting
Members.\12\ The Required Fund Deposit serves as each Netting Member's
margin. Twice each business day, Netting Members are required to
satisfy their Required Fund Deposit by 9:30 a.m. (E.T.) (the ``AM
RFD'') and 2:45 p.m. (E.T.) (the ``PM RFD''). The aggregate of all
Netting Members' Required Fund Deposits constitutes the Clearing Fund
of GSD, which FICC would access should a defaulting Netting Member's
own Required Fund Deposit be insufficient to satisfy losses to GSD
caused by the liquidation of that Netting Member's portfolio. The
objective of a Netting Member's Required Fund Deposit is to mitigate
potential losses to GSD associated with liquidation of such Member's
portfolio in the event that FICC ceases to act for such Member
(hereinafter referred to as a ``default'').
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    \12\ See GSD Rules 1 and 4, supra note 4.
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    As discussed below, a Netting Member's Required Fund Deposit
currently consists of the VaR Charge and, to the extent applicable, the
Coverage Charge, the Blackout Period Exposure Charge, the Backtesting
Charge, the Excess Capital Premium, and other components.\13\
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    \13\ Pursuant to the GSD Rules, the Required Fund Deposit
calculation may include the following additional components: The
Holiday Charge, the Cross-Margining Reduction, the GCF Premium
Charge, the GCF Repo Event Premium, the Early Unwind Intraday Charge
and the Special Charge. See GSD Rules 1 and 4, supra note 4. FICC is
not proposing any changes to these components, thus a description of
these components is not included in this rule filing.
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1. GSD's Required Fund Deposit Calculation--The VaR Charge Component
    The VaR Charge generally comprises the largest portion of a Netting
Member's Required Fund Deposit amount. Currently, GSD uses a
methodology referred to as the ``full revaluation'' approach to capture
the market price risk associated with the securities in a Netting
Member's portfolio. The full revaluation approach uses valuation
algorithms to fully reprice each security in a Netting Member's
portfolio over a range of historically simulated scenarios. These
historical market moves are then used to project the potential gains or
losses that could occur in connection with the liquidation of a
defaulting Netting Member's portfolio to determine the amount of the
VaR Charge, which is calibrated to cover the projected liquidation
losses at a 99% confidence level.
    The VaR Charge provides an estimate of the possible losses for a
given portfolio based on a given confidence level over a particular
time horizon. The current VaR Charge is calibrated at a 99% confidence
level based on a front-weighted \14\ 1-year look-back period assuming a
three-day liquidation period.\15\ In the event that FICC determines
that certain classes of securities in a Netting Member's portfolio
(including, but not limited to, the repo rate for Term Repo
Transactions and Forward-Starting Repo Transactions) are less amenable
to statistical analysis,\16\ FICC may apply a historic index volatility
model rather than the VaR calculation.\17\
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    \14\ A fronted weighted approach means that GSD allows recently
observed market data to have more impact on the VaR Charge than
older historic market data.
    \15\ The three-day liquidation period is sometimes referred to
as the ``margin period of risk'' or ``closeout-period.'' This period
reflects the time between the most recent collection of the Required
Fund Deposit from a defaulting Netting Member and the liquidation of
such Netting Member's portfolio. FICC currently assumes that it
would take three days to liquidate or hedge a portfolio in normal
market conditions.
    \16\ Certain classes of securities are less amenable to
statistical analysis because FICC believes that it does not observe
sufficient historical market price data to reliably estimate the 99%
confidence level.
    \17\ See GSD Rule 4 Section 1b(a), supra note 4.
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    In addition to the full revaluation approach that GSD uses to
calculate the VaR Charge, GSD also utilizes ``implied volatility
indicators'' among the assumptions and other observable market data as
part of its volatility model. Specifically, GSD applies a multiplier
(also known as the ``augmented volatility adjustment multiplier'') to
calculate the VaR Charge. The multiplier is based on the levels of
change in current and implied volatility measures of market benchmarks.
    FICC also employs a supplemental risk charge referred to as the
Margin Proxy.\18\ The Margin Proxy is designed to help ensure that each
Netting Member's VaR Charge is adequate and, at the minimum, mirrors
historical price moves.
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    \18\ The Margin Proxy is currently used to provide supplemental
coverage to the VaR Charge, however, pursuant to this rule filing,
the Margin Proxy would only be used as an alternative volatility
calculation as described below in subsection B.3.--Proposed change
to implement the Margin Proxy as the VaR Charge during a vendor data
disruption.
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2. GSD's Required Fund Deposit Calculation--Other Components
    In addition to the VaR Charge, a Netting Member's Required Fund
Deposit calculation may include a number of other components including,
but not limited to, the Coverage Charge, the Blackout Period Exposure
Charge, and the Backtesting Charge.\19\ In addition, the Required Fund
Deposit may include an Excess Capital Premium charge.\20\
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    \19\ See supra note 13.
    \20\ See GSD Rules 1 and 3, Section 1, supra note 4.
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    The Coverage Charge is designed to address potential shortfalls
\21\ in the margin amount calculated by the existing VaR Charge and
Funds-Only

Settlement.\22\ Thus, the Coverage Charge is applied to supplement the
VaR Charge to help ensure that a Netting Member's backtesting coverage
achieves the 99% confidence level.
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    \21\ While multiple factors may contribute to a shortfall,
shortfalls could be observed based on the mark-to-market change on a
Netting Member's positions after the last margin collection.
    \22\ The Coverage Charge is calculated as the front-weighted
average of backtesting coverage deficiencies observed over the prior
100 days. The backtesting coverage deficiencies are determined by
comparing (x) the simulated liquidation profit and loss of a Netting
Member's portfolio (using actual positions in the Member's portfolio
and the actual historical returns on the security positions in the
portfolio) to (y) the sum of the VaR Charge and the Funds-Only
Settlement Amount (which is the mark-to-market amount) in order to
determine whether there would have been any shortfalls between the
amounts collected.
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    The Blackout Period Exposure Charge is applied when FICC determines
that a GCF Counterparty has experienced backtesting deficiencies due to
reductions in the notional value of the mortgage-backed securities used
to collateralize its GCF Repo Transactions during the monthly Blackout
Period. This charge is designed to mitigate FICC's exposure resulting
from potential decreases in the collateral value of mortgage-backed
securities that occur during the monthly Blackout Period.
    The Backtesting Charge is applied when FICC determines that a
Netting Member's portfolio has experienced backtesting deficiencies
over the prior 12-month period. The Backtesting Charge is designed to
mitigate exposures to GSD caused by settlement risks that may not be
adequately captured by GSD's Required Fund Deposit.
    The Excess Capital Premium is applied to a Netting Member's
Required Fund Deposit when its VaR Charge exceeds its Excess Capital.
The Excess Capital Premium is designed to more effectively manage a
Netting Member's credit risk to GSD that is caused because such Netting
Member's trading activity has resulted in a VaR Charge that is greater
than its excess regulatory capital.
3. GSD's Backtesting Process
    FICC employs daily backtesting to determine the adequacy of each
Netting Member's Required Fund Deposit. Backtesting compares the
Required Fund Deposit for each Netting Member with actual price changes
in the Netting Member's portfolio. The portfolio values are calculated
using the actual positions in a Netting Member's portfolio on a given
day and the observed security price changes over the following three
days. The backtesting results are reviewed by FICC as part of its
performance monitoring and assessment of the adequacy of each Netting
Member's Required Fund Deposit. As noted above, a Backtesting Charge
may be assessed if GSD determines that a Netting Member's Required Fund
Deposit may not fully address the projected liquidation losses
estimated from such Netting Member's settlement activity. Similarly,
the Coverage Charge may be assessed to address potential shortfalls in
the VaR Charge calculation. The Coverage Charge supplements the VaR
Charge to help ensure that the Netting Member's backtesting coverage
achieves the 99% confidence level. The Coverage Charge considers the
backtesting results of only the VaR Charge (including the augmented
volatility adjustment multiplier) and mark-to-market, while the
Backtesting Charge considers the total Required Fund Deposit amount.

B. Proposed Changes to GSD's Calculation of the VaR Charge

    FICC is proposing to amend 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. As a result, the VaR
Charge did not achieve backtesting coverage at a 99% confidence level
and therefore yielded backtesting deficiencies beyond FICC's risk
tolerance. In response, FICC implemented the Margin Proxy to help
ensure that each Netting Member's VaR Charge achieves a minimum 99%
confidence level and, at the minimum, mirrors historical price moves,
while FICC continued the development effort on the proposed sensitivity
based approach to remediate the observed model weaknesses.\23\
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    \23\ See supra note 18.
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    As a result of FICC's review of GSD's existing VaR model
deficiencies, FICC is proposing to: (1) Replace the full revaluation
approach with the sensitivity approach, (2) eliminate the augmented
volatility adjustment multiplier, (3) employ the Margin Proxy as an
alternative volatility calculation rather than as a minimum volatility
calculation, (4) utilize a haircut method for securities that lack
sufficient historical data, and (5) establish a minimum calculation,
referred to as the VaR Floor (as defined below in subsection 5), as the
minimum VaR Charge. These proposed changes are described in detail
below.
1. Proposed Change To Replace the Full Revaluation Approach With the
Sensitivity Approach
    FICC is proposing to address GSD's existing VaR model deficiencies
by replacing the full revaluation method with the sensitivity
approach.\24\ The current full revaluation approach uses valuation
algorithms to fully reprice each security in a Netting Member's
portfolio over a range of historically simulated scenarios. While there
are benefits to this method, some of its deficiencies are that it
requires significant historical market data inputs, calibration of
various model parameters and extensive quantitative support for price
simulations.
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    \24\ 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 MBSD's Clearing Rules, available at DTCC's website,
www.dtcc.com/legal/rules-and-procedures.aspx. 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).
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    FICC believes that the proposed sensitivity approach would address
these deficiencies because it would leverage external vendor \25\
expertise in supplying the market risk attributes, which would then be
incorporated by FICC into GSD's model to calculate the VaR Charge.
Specifically, FICC would source security-level risk sensitivity data
and relevant historical risk factor time series data from an external
vendor for all Eligible Securities.
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    \25\ FICC does not believe that its engagement of the vendor
would present a conflict of interest because the vendor is not an
existing Netting Member nor are any of the vendor's affiliates
existing Netting Members. To the extent that the vendor or any of
its affiliates submit an application to become a Netting Member,
FICC will negotiate an appropriate information barrier with the
applicant in an effort to prevent a conflict of interest from
arising. An affiliate of the vendor currently provides an existing
service to FICC; however, this arrangement does not present a
conflict of interest because the existing agreement between FICC and
the vendor, and the existing agreement between FICC and the vendor's
affiliate each contain provisions that limit the sharing of
confidential information.
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    The sensitivity data would be generated by a vendor based on its
econometric, risk and pricing models.\26\

Because the quality of this data is an important component of
calculating the VaR Charge, FICC would conduct independent data checks
to verify the accuracy and consistency of the data feed received from
the vendor. With respect to the historical risk factor time series
data, FICC has evaluated the historical price moves and determined
which risk factors primarily explain those price changes, a practice
commonly referred to as risk attribution.
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    \26\ 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.
    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.
    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.
    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. FICC would use the
following risk factors to model a TBA security: Key rates,
convexity, mortgage-backed securities spread, volatility, mortgage
basis, and time. To account for differences between mortgage-backed
securities and their corresponding TBA, FICC would apply an
additional basis risk adjustment.
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    FICC's proposal to use the vendor's risk analytics data requires
that FICC take steps to mitigate potential model risk. FICC has
reviewed a description of the vendor's calculation methodology and the
manner in which the market data is used to calibrate the vendor's
models. FICC understands and is comfortable with the vendor's controls,
governance process and data quality standards. FICC would conduct an
independent review of the vendor's release of a new version of its
model prior to using it in GSD's proposed sensitives approach
calculation. In the event that the vendor changes its model and
methodologies that produce the risk factors and risk sensitivities,
FICC would analyze the effect of the proposed changes on GSD's proposed
sensitivity approach. Future changes to the QRM Methodology would be
subject to a proposed rule change pursuant to Rule 19b-4 (``Rule 19b-
4'') \27\ of the Act and may be subject to an advance notice filing
pursuant to Section 806(e)(1) of the Clearing Supervision Act \28\ and
Rule 19b-4(n)(1)(I) under the Act.\29\ Modifications to the proposed
VaR Charge may be subject to a proposed rule change pursuant to Rule
19b-4 \30\ and/or an advance notice filing pursuant to Section
806(e)(1) of the Clearing Supervision Act \31\ and Rule 19b-4(n)(1)(I)
under the Act.\32\
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    \27\ See 17 CFR 240.19b-4.
    \28\ See 12 U.S.C. 5465(e)(1).
    \29\ See 17 CFR 240.19b-4(n)(1)(I).
    \30\ See 17 CFR 240.19b-4.
    \31\ See 12 U.S.C. 5465(e)(1).
    \32\ See 17 CFR 240.19b-4(n)(1)(I).
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    Under the proposed approach, a Netting Member's portfolio risk
sensitivities would be calculated by FICC as the aggregate of the
security level risk sensitivities weighted by the corresponding
position market values. More specifically, FICC would look at the
historical changes of the chosen risk factors during the look-back
period in order to generate risk scenarios to arrive at the market
value changes for a given portfolio. A statistical probability
distribution would be formed from the portfolio's market value changes,
which are then calibrated to cover the projected liquidation losses at
a 99% confidence level. 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 Netting Member.
    The proposed sensitivity approach differs from the current full
revaluation approach mainly in how the market value changes are
calculated. The full revaluation approach accounts for changes in
market variables and instrument specific characteristics of U.S.
Treasury/Agency securities and mortgage-backed securities by
incorporating certain historical data to calibrate a pricing model that
generates simulated prices. This data is used to create a distribution
of returns per each security. By comparison, the proposed sensitivity
approach would simulate the market value changes of a Netting Member's
portfolio under a given market scenario as the sum of the portfolio
risk factor exposures multiplied by the corresponding risk factor
movements.
    FICC believes that the sensitivity approach would provide three key
benefits. First, the sensitivity approach incorporates a broad range of
structured risk factors and a Netting Member portfolios' exposure to
these risk factors, while the full revaluation approach is calibrated
with only security level historical data that is supplemented by the
augmented volatility adjustment multiplier. The proposed sensitivity
approach integrates both observed risk factor changes and current
market conditions to more effectively respond to current market price
moves that may not be reflected in the historical price moves combined
with the augmented volatility adjustment multiplier. In this regard,
FICC has concluded, based on its assessment of the backtesting results
of the proposed sensitivity approach and its comparison of those
results to the backtesting results of the current full revaluation
approach \33\ that the proposed sensitivity approach would address the
deficiencies observed in the existing model because it would leverage
external vendor expertise, which FICC does not need to develop in-
house, in supplying the market risk attributes that would then be
incorporated by FICC into GSD's model to calculate the VaR Charge. With
respect to FICC's review of the backtesting results, FICC believes that
the calculation of the VaR Charge using the proposed sensitivity
approach would provide better coverage on volatile days while not
significantly increasing the overall Clearing Fund.\34\ In fact, the
calculation of the VaR Charge using the proposed sensitivity approach
would produce a VaR Charge amount that is consistent with the current
VaR Charge calculation, as supplemented by Margin Proxy.\35\
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    \33\ The backtesting results compared the aggregate CFR under
the current methodology and the aggregate CFR under the proposed
methodology to historical returns of end-of-day snapshots of each
Netting Member's portfolio for the period May 2016 through October
2017. The CFR backtesting results under the proposed methodology
were calculated in two ways for end-of-day portfolios: One set of
results included the proposed Blackout Period Exposure Adjustment
and the other set of results excluded the proposed Blackout Period
Exposure Adjustment.
    \34\ The CFR backtesting results under the proposed methodology
(both with and without Blackout Period Exposure Adjustment) indicate
that the proposed methodology provided better overall coverage
during the volatile period following the U.S. election than under
the current methodology. The CFR Backtesting results under the
proposed methodology were also more stable over the May 2016 through
October 2017 study period than the CFR backtesting results under the
existing methodology.
    \35\ FICC implemented the Margin Proxy at the end of April 2017.
As a result, the CFR backtesting coverage under the current
methodology increased in May 2017 and were more consistent with the
CFR backtesting results under the proposed methodology from May 2017
through October 2017. Based on data reflected in the impact study,
FICC observes that for the period May 1, 2017 to November 30, 2017
an approximate 7% increase in average aggregate AM RFD across all
Netting Members.
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    The second benefit of the proposed sensitivity approach is that it
would provide more transparency to Netting Members. Because Netting
Members typically use risk factor analysis for their own risk and
financial reporting, such Members would have comparable data and
analysis to assess the variation in their VaR Charge based on changes
in

the market value of their portfolios. Thus, Netting Members would be
able to simulate the VaR Charge to a closer degree than under the
existing full revaluation approach.
    The third benefit of the proposed sensitivity approach is that it
would provide FICC with the ability to adjust the look-back period that
FICC uses for purposes of calculating the VaR Charge. Specifically,
FICC would change the look-back period from a front-weighted \36\ 1-
year look-back (which is currently utilized today) to a 10-year look-
back period that is not front-weighted and would include, to the extent
applicable, an additional stressed period.\37\ The proposed extended
look-back period would help to ensure that the historical simulation
contains a sufficient number of historical market conditions (including
but not limited to stressed market conditions).
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    \36\ A front-weighted look-back period assigns more weight to
the most recent market observations thus effectively diminishing the
value of older market observations. The front-weighted approach is
based on the assumption that the most recent price history is more
relevant to current market volatility levels.
    \37\ Under the proposed model, the 10-year look-back period
would include the 2008/2009 financial crisis scenario. To the extent
that an equally or more stressed market period does not occur when
the 2008/2009 financial crisis period is phased out from the 10-year
look-back period (i.e., from September 2018 onward), pursuant to the
QRM methodology document, FICC would continue to include the 2008/
2009 financial crisis scenario in its historical scenarios. However,
if an equally or more stressed market period emerges in the future,
FICC may choose not to augment its 10-year historical scenarios with
those from the 2008/2009 financial crisis.
---------------------------------------------------------------------------

    While FICC could extend the 1-year look-back period in the existing
full revaluation approach to a 10-year look-back period, the
performance of the existing model could deteriorate if current market
conditions are materially different than indicated in the historical
data. Additionally, since the full revaluation approach requires FICC
to maintain in-house complex pricing models and mortgage prepayment
models, enhancing these models to extend the look-back period to
include 10 years of historical data involves significant model
development. The sensitivity approach, on the other hand, would
leverage external vendor data to incorporate a longer look-back period
of 10 years, which would allow the proposed model to capture periods of
historical volatility.
    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. The additional stress period is
a designed to be a continuous period (typically 1 year). FICC believes
that it is appropriate to assess on an annual basis whether an
additional stressed period should be included. This assessment, which
will only occur annually, would include a review of (1) the largest
moves in the dominating market risk factor of the proposed sensitivity
approach, (2) the impact analyses resulting from the removal and/or
addition of a stressed period, and (3) the backtesting results of the
proposed look-back period. As described in the QRM Methodology,
approval by DTCC's Model Risk Governance Committee (``MRGC'') and, to
the extent necessary, the Management Risk Committee (``MRC'') would be
required to determine when to apply an additional period of stressed
market conditions to the look-back period and the appropriate
historical stressed period to utilize if it is not within the current
10-year period.
2. Proposed Change To Amend the VaR Charge To Eliminate the Augmented
Volatility Adjustment Multiplier
    As described above, the augmented volatility adjustment multiplier
gives GSD the ability to adjust its volatility calculations as needed
to improve the performance of its VaR the model in periods of market
volatility. The augmented volatility adjustment multiplier was designed
to mitigate the effect of the 1-year look[hyphen]back period used in
the existing full revaluation approach because it allowed the model to
better react to conditions that may not have been within the recent
historical one-year period. FICC is proposing to eliminate the
augmented volatility adjustment multiplier because it would be no
longer necessary given that 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.
3. Proposed Change To Implement the Margin Proxy as the VaR Charge
During a Vendor Data Disruption
a. Vendor Data Disruption
    In connection with FICC's proposal to source data for the proposed
sensitivity approach, FICC is also proposing procedures that would
govern in the event that the vendor fails to provide risk analytics
data. If the vendor fails to provide any data or a significant portion
of the data timely, FICC would use the most recently available data on
the first day that such data disruption occurs. If it is determined
that the vendor will resume providing data within five (5) business
days, FICC's management would determine whether the VaR Charge should
continue to be calculated by using the most recently available data
along with an extended look-back period or whether the Margin Proxy
should be invoked, subject to the approval of DTCC's Group Chief Risk
Officer or his/her designee. If it is determined that the data
disruption will extend beyond five (5) business days, the Margin Proxy
would be applied as an alternative volatility calculation for the VaR
Charge subject to the proposed VaR Floor.\38\ FICC's proposed use of
the Margin Proxy would be subject to the approval of the MRC followed
by notification to FICC's Board Risk Committee. FICC would continue to
calculate the Margin Proxy on a daily basis and this calculation would
continue to reflect separate calculations for U.S. Treasury/Agency
securities and mortgage-backed securities.\39\ The Margin Proxy would
be subject to monthly performance review by the MRGC. FICC would
monitor the performance of the Margin Proxy calculation on a monthly
basis to ensure that it could be used in the circumstance described
above. Specifically, FICC would monitor each Netting Member's Required
Fund Deposit and the aggregate Clearing Fund requirements versus the
requirements calculated by Margin Proxy. FICC would also backtest the
Margin Proxy results versus the three-day profit and loss based on
actual market price moves. If FICC observes material differences
between the Margin Proxy calculations

and the aggregate Clearing Fund requirement calculated using the
proposed sensitivity approach, or if the Margin Proxy's backtesting
results do not meet FICC's 99% confidence level, FICC management may
recommend remedial actions to the MRGC, and to the extent necessary the
MRC, such as increasing the look-back period and/or applying an
appropriate historical stressed period to the Margin Proxy calibration.
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    \38\ The proposed VaR Floor is defined below in subsection B.5--
Proposed change to amend the VaR Charge calculation to establish a
VaR Floor.
    \39\ Currently, GSD conducts separate calculations in order to
cover the historical market prices of U.S. Treasury/Agency
securities and mortgage-backed securities, respectively, because the
historical price changes of these asset classes are different as a
result of market factors such as credit spreads and prepayment risk.
Separate calculations also provide FICC with the ability to monitor
the performance of each asset class individually. Each security in a
Netting Member's Margin Portfolio is mapped to a separate benchmark
based on the security's asset class and maturity. All securities
within each benchmark are then aggregated into a net exposure. FICC
then applies an applicable haircut to the net exposure per benchmark
to determine the net price risk for each benchmark. Finally, FICC
determines the asset class price risk (``Asset Class Price Risk'')
for U.S. Treasury/Agency securities and mortgage-backed securities
benchmarks separately by aggregating the respective net price risk.
For the U.S. Treasury benchmarks, the calculation includes a
correlation adjustment to provide risk diversification across tenor
buckets that has been historically observed across the U.S. Treasury
benchmarks. The Margin Proxy is the sum of the U.S. Treasury/Agency
securities and mortgage-backed securities Asset Class Price Risk. No
changes are being proposed to this calculation.
---------------------------------------------------------------------------

    As noted above, FICC intends to source certain sensitivity data and
risk factor data from a vendor. FICC's Quantitative Risk Management,
Vendor Risk Management, and Information Technology teams have conducted
due diligence of the vendor in order to evaluate its control framework
for managing key risks. FICC's due diligence included an assessment of
the vendor's technology risk, business continuity, regulatory
compliance, and privacy controls. FICC has existing policies and
procedures for data management that includes market data and analytical
data provided by vendors. These policies and procedures do not have to
be amended in connection with this proposed rule change. FICC also has
tools in place to assess the quality of the data that it receives from
vendors.
b. Regulation SCI Implications
    Rule 1001(c)(1) of Regulation Systems Compliance and Integrity
(``SCI'') requires FICC to establish, maintain, and enforce reasonably
designed written policies and procedures that include the criteria for
identifying responsible SCI personnel, the designation and
documentation of responsible SCI personnel, and escalation procedures
to quickly inform responsible SCI personnel of potential SCI
events.\40\ Further, pursuant to Rule 1002 of Regulation SCI, each
responsible SCI personnel determines when there is a reasonable basis
to conclude that a SCI event has occurred, which will trigger certain
obligations of a SCI entity with respect to such SCI events.\41\ FICC
has existing policies and procedures that reflect established criteria
that must be used by responsible SCI personnel to determine whether a
disruption to, or significantly downgrade of, the normal operation of
FICC's risk management system has occurred as defined under Regulation
SCI. These policies and procedures do not have to be amended in
connection with this proposed rule change. In the event that the vendor
fails to provide the requisite risk analytics data, the responsible SCI
personnel would determine whether a SCI event has occurred, and FICC
would fulfill its obligations with respect to the SCI event.
---------------------------------------------------------------------------

    \40\ See 17 CFR 242.1001(c)(1).
    \41\ See 17 CFR 242.1002.
---------------------------------------------------------------------------

4. Proposed Change To Utilize a Haircut Method To Measure the Risk
Exposure of Securities That Lack Historical Data
    Occasionally, portfolios contain classes of securities that reflect
market price changes that are not consistently related to historical
risk factors. The value of these securities is often uncertain because
the securities' market volume varies widely, thus the price histories
are limited. Because the volume and price information for such
securities is not robust, a historical simulation approach would not
generate VaR Charge amounts that adequately reflect the risk profile of
such securities. Currently, GSD Rule 4 provides that FICC may use a
historic index volatility model to calculate the VaR Charge for these
classes of securities.\42\ FICC is proposing to amend GSD Rule 4 to
utilize a haircut method based on a historic index volatility model for
any security that lack sufficient historical data to be incorporated
into the proposed sensitivity approach.
---------------------------------------------------------------------------

    \42\ See GSD Rule 4, supra note 4.
---------------------------------------------------------------------------

    FICC believes that the proposal to implement a haircut method for
securities that lack sufficient historical information would allow FICC
to use appropriate market data to estimate a margin at a 99% confident
level, thus helping to ensure that sufficient margin would be
calculated for portfolios that contain these securities. FICC would
continue to manage the market risk of clearing these securities by
conducting analysis on the type of securities that cannot be processed
by the proposed VaR model and engaging in periodic reviews of the
haircuts used for calculating margin for these types of securities.
    FICC is proposing 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. The proposed haircut
approach would be calculated separately for U.S. Treasury/Agency
securities (other than (x) treasury floating-rate notes and (y) term
repo rate volatility for Term Repo Transactions and Forward-Starting
Repo Transactions (including term and forward-starting GCF Repo
Transactions)) \43\ and mortgage-backed securities.
---------------------------------------------------------------------------

    \43\ GSD is not proposing any changes to its current approach to
calculating the VaR Charge for floating rate notes. Currently, GSD
uses a haircut approach with a constant discount margin movement
scenario. The discount margin movement scenario is based on the
current market condition of the floating rate note price movements.
This amount plus the calculated discount margin sensitivity of each
floating rate note issue's market price plus the formula provided by
the U.S. Department of Treasury equals the haircut of the floating
rate note portion of a Netting Member's portfolio. GSD is also not
proposing any change to its current approach to calculating the VaR
Charge for repo interest volatility, which is based on internally
constructed repo interest rate indices.
---------------------------------------------------------------------------

    Specifically, each security in a Netting Member's portfolio would
be mapped to a respective benchmark based on the security's asset class
and remaining maturity, then all securities within each benchmark would
be aggregated into a net exposure. FICC would apply an applicable
haircut to the net exposure per benchmark to determine the net price
risk for each benchmark. Finally, the net price risk would be
aggregated across all benchmarks (but separately for U.S. Treasury/
Agency securities and mortgage-backed securities) and a correlation
adjustment \44\ would be applied to securities mapped to the U.S.
Treasury benchmarks to provide risk diversification across tenor
buckets that were historically observed.
---------------------------------------------------------------------------

    \44\ The correlation adjustment is based on 3-day returns during
a 10-year look-back. It reflects the average amount that the 3-day
returns of each benchmark moves in relation to one another. The
correlation adjustment would only be applied for U.S. Treasury and
Agency indices with maturities greater than 1 year.
---------------------------------------------------------------------------

5. Proposed Change To Amend the VaR Charge Calculation To Establish a
VaR Floor
    FICC is proposing to amend the existing calculation of the VaR
Charge to include a minimum amount, which would be referred to as the
``VaR Floor.'' The proposed VaR Floor would be a calculated amount that
would be 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. FICC's proposal to establish a VaR Floor seeks
to address the risk that the proposed VaR model calculates a VaR Charge
that is erroneously low where the gross market value of unsettled
positions in the Netting Member's portfolio is high and the cost of
liquidation in the event of a Member default could also be high. This
would be likely to occur when the proposed VaR model applies
substantial risk offsets among long and short positions in different
classes of securities that have a high degree of historical price
correlation. Because this high degree of historical price correlation
may not apply in future changing market conditions,\45\ FICC believes
that it

would be prudent to apply a VaR Floor that is based upon the market
value of the gross unsettled positions in the Netting Member's
portfolio in order to protect FICC against such risk in the event that
FICC is required to liquidate a large Netting Member's portfolio in
stressed market conditions.
---------------------------------------------------------------------------

    \45\ For example, and without limitation, certain securities may
have highly correlated historical price returns, but if future
market conditions were to substantially change, these historical
correlations could break down, leading to model-generated offsets
that would not adequately capture a portfolio's risk.
---------------------------------------------------------------------------

    The VaR Floor would be calculated as the sum of the following two
components: (1) A U.S. Treasury/Agency bond margin floor and (2) a
mortgage-backed securities margin floor. 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. The
bond floor rate of each tenor bucket would be a fraction (which would
be initially set at 10%) of an index-based haircut rate for such tenor
bucket. 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 Netting Member's portfolio by a designated
amount, referred to as the pool floor rate, (which would be initially
set at 0.05%).\46\ GSD would evaluate the appropriateness of the
proposed initial floor rates (e.g., the 10% of the benchmark haircut
rate for U.S. Treasury/Agency securities and 0.05% for mortgage-backed
securities) at least annually based on backtesting performance and risk
tolerance considerations.
---------------------------------------------------------------------------

    \46\ For example, assume the pool floor rate is set to 0.05% and
the bond floor rate is set to 10% of haircut rates. Further assume
that a Netting Member has a portfolio with gross positions of $2
billion in mortgage-backed securities and gross positions of U.S.
Treasury/Agency securities that fall into two tenor buckets--$2
billion in tenor bucket ``A'' and $3 billion in tenor bucket ``B.''
If the haircut rate for tenor bucket ``A'' is 1% and the haircut
rate for tenor bucket ``B'' is 2%, then the bond floor rate would be
0.1% and 0.2%, respectively. Therefore, the resulting VaR Floor
would be $9 million (i.e., ([0.05%] * [$2 billion]) + [0.1%] * [$2
billion]) + ([0.2%] * [$3 billion])). If the VaR model charge is
less than $9 million, then the VaR Floor calculation of $9 million
would be set as the VaR Charge.
---------------------------------------------------------------------------

6. Mitigating Risks of Concentrated Positions
    For the reasons described above, FICC believes that the proposed
changes to GSD's VaR Charge calculation would allow it to better
measure and mitigate the risks presented by certain unsettled
positions, including the risk presented to FICC when those positions
are concentrated in a particular security.
    One of the risks presented by unsettled positions concentrated in
an asset class is that FICC may not be able to liquidate or hedge the
unsettled positions of a defaulted Netting Member in the assumed
timeframe at the market price in the event of such Netting Member's
default. Because FICC relies on external market data in connection with
monitoring exposures to its Members, the market data may not reflect
the market impact transaction costs associated with the potential
liquidation as the concentration risk of an unsettled position
increases. However, FICC believes that, through the proposed changes
and through existing risk management measures,\47\ it would be able to
effectively measure and mitigate risks presented when a Netting
Member's unsettled positions are concentrated in a particular security.
---------------------------------------------------------------------------

    \47\ For example, pursuant to existing authority under GSD Rule
4, FICC has the discretion to calculate an additional amount
(``special charge'') applicable to a Margin Portfolio as determined
by FICC from time to time in view of market conditions and other
financial and operational capabilities of the Netting Member. FICC
shall make any such determination based on such factors as FICC
determines to be appropriate from time to time. See GSD Rule 4,
supra note 4.
---------------------------------------------------------------------------

    FICC will continue to evaluate its exposures to these risks. Any
future proposed changes to the margin methodology to address such risks
would be subject to a separate proposed rule change pursuant Rule 19b-4
of the Act,\48\ and/or an advance notice pursuant to Section 806(e)(1)
of the Clearing Supervision Act \49\ and the rules thereunder.
---------------------------------------------------------------------------

    \48\ See 17 CFR 240.19b-4.
    \49\ See 12 U.S.C. 5465(e)(1).
---------------------------------------------------------------------------

C. Proposed Change To Establish the Blackout Period Exposure Adjustment
as a Component to the Required Fund Deposit Calculation

    FICC is proposing to add a new component to the Required Fund
Deposit calculation that would be applied to the VaR Charge for all GCF
Counterparties with GCF Repo Transactions collateralized with mortgage-
backed securities during the monthly Blackout Period (the ``Blackout
Period Exposure Adjustment''). FICC is proposing this new component
because it would better protect FICC and its Netting Members from
losses that could result from overstated values of mortgage-backed
securities pledged as collateral for GCF Repo Transactions during the
Blackout Period.
    The proposed Blackout Period Exposure Adjustment would be in the
form of a charge that is added to the VaR Charge or a credit that would
reduce the VaR Charge. The proposed Blackout Period Exposure Adjustment
would be calculated by (1) projecting an average pay-down rate 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 \50\ by the net
positions of mortgage-backed securities in the related program, and (3)
summing the results from each program. Because the projected pay-down
rate would be an average of the weighted averages of pay-down rates for
all active mortgage pools of the related program during the three most
recent preceding months, it is possible that the proposed Blackout
Period Exposure Adjustment could overestimate the amount for a GCF
Counterparty with a portfolio that primarily includes slower paying
mortgage-backed securities or underestimate the amount for a GCF
Counterparty with a portfolio that primarily includes faster paying
mortgage-backed securities. However, FICC believes that projecting the
pay-down rate separately for each program and weighting the results by
recently active pools would reduce instances of large under/over
estimation. FICC would continue to monitor the realized pay-down
against FICC's weighted average pay-down rates and its vendor's
projected pay-down rates as part of the model performance monitoring.
Further, in the event that a GCF Counterparty continues to experience
backtesting deficiencies, FICC would apply a Backtesting Charge, which
as described in section F below, would be amended to consider
backtesting deficiencies attributable to GCF Repo Transactions
collateralized with mortgage-backed securities during the Blackout
Period.\51\
---------------------------------------------------------------------------

    \50\ GSD would calculate the projected average pay-down rates
each month using historical pool factor pay-down rates that are
weighted by historical positions during each of the prior three
months. Specifically, the projected pay-down rate for a current
Blackout Period would be an average of the weighted averages of pay-
down rates for all active mortgage pools of the related program
during the three most recent preceding months.
    \51\ The proposed changes to the Backtesting Charge are
described below is section F--Proposed change to amend the
Backtesting Charge to (i) include backtesting deficiencies
attributed to GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period and (ii) give GSD the
authority to assess a Backtesting Charge on an intraday basis.
---------------------------------------------------------------------------

    The proposed Blackout Period Exposure Adjustment would only be
imposed during the Blackout Period and it would be applied as of the
morning Clearing Fund call on the Record Date through and including the
intraday Clearing Fund call on the Factor Date,

or until the Pool Factors \52\ have been updated to reflect the current
month's Pool Factors in the GCF Clearing Agent Bank's collateral
reports.
---------------------------------------------------------------------------

    \52\ Pursuant to the GSD Rules, the term ``Pool Factor'' means,
with respect to the Blackout Period, 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. See
GSD Rule 1, supra note 4.
---------------------------------------------------------------------------

D. Proposed Change To Eliminate the Existing Blackout Period Exposure
Charge

    FICC would eliminate the existing Blackout Period Exposure Charge
\53\ because the proposed Blackout Period Exposure Adjustment (which is
described in section C above) would be applied to all GCF
Counterparties with GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period. The existing Blackout
Period Exposure Charge, on the other hand, only applies to GCF
Counterparties that have two or more backtesting deficiencies during
the Blackout Period and whose overall 12-month trailing backtesting
coverage falls below the 99% coverage target.\54\ FICC believes that
the Blackout Period Exposure Charge would no longer be necessary
because the applicability of the proposed Blackout Period Exposure
Adjustment would better estimate potential changes to the GCF Repo
Transactions and help to ensure that GCF Counterparties' with GCF Repo
Transactions collateralized with mortgage-backed securities maintain a
backtesting coverage above the 99% confidence level. Further, in the
event that a GCF Counterparty continues to experience backtesting
deficiencies, FICC would apply a Backtesting Charge, which as described
in section F below, would be amended to consider backtesting
deficiencies attributable to GCF Repo Transactions collateralized with
mortgage-backed securities during the Blackout Period.\55\
---------------------------------------------------------------------------

    \53\ Pursuant to the GSD Rules, FICC imposes a Blackout Period
Exposure Charge when FICC determines, based on prior backtesting
deficiencies of a GCF Counterparty's Required Fund Deposit, that the
GCF Counterparty may experience a deficiency due to reductions in
the notional value of the mortgage-backed securities used by such
GCF Counterparty to collateralize its GCF Repo trading activity that
occur during the monthly Blackout Period. See GSD Rules 1 and 4,
supra note 4.
    \54\ See GSD Rules 1 and 4, supra note 4.
    \55\ The proposed changes to the Backtesting Charge are
described below is section F--Proposed change to amend the
Backtesting Charge to (i) include backtesting deficiencies
attributed to GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period and (ii) give GSD the
authority to assess a Backtesting Charge on an intraday basis.
---------------------------------------------------------------------------

E. Proposed Change To Eliminate the Coverage Charge Component From the
Required Fund Deposit Calculation

    FICC is proposing to eliminate the Coverage Charge component from
GSD's Required Fund Deposit calculation.\56\ The Coverage Charge
component is based on historical portfolio activity, which may not be
indicative of a Netting Member's current risk profile, but was
determined by FICC to be appropriate to address potential shortfalls in
margin charges under the current VaR model. FICC is proposing to
eliminate the Coverage Component because its analysis indicates that
the sensitivity approach would provide overall better margin coverage.
---------------------------------------------------------------------------

    \56\ See GSD Rules 1 and 4, supra note 4.
---------------------------------------------------------------------------

    As part of the development and assessment of the proposed VaR
Charge, FICC backtested the model's performance and analyzed the impact
of the margin changes. Results of the analysis indicated that the
proposed sensitivity approach would be more responsive to changing
market dynamics and a Netting Member's portfolio composition coverage
than the existing VaR model that utilizes the full revaluation
approach. The backtesting analysis also demonstrated that the proposed
sensitivity approach would provide sufficient margin coverage on a
standalone basis. Additionally, in the event that FICC observes
unexpected deficiencies in the backtesting of a Netting Member's
Required Fund Deposit, the Backtesting Charge would apply.\57\ Given
the above, FICC believes the Coverage Charge would no longer be
necessary.
---------------------------------------------------------------------------

    \57\ Similar to the Coverage Charge, the purpose of the
Backtesting Charge is to address potential shortfalls in margin
charges, however, the Coverage Charge considers the backtesting
results of only the VaR Charge (including the augmented volatility
adjustment multiplier) and mark-to-market.
---------------------------------------------------------------------------

F. Proposed Change To Amend the Backtesting Charge to (i) Include
Backtesting Deficiencies Attributable to GCF Repo Transactions
Collateralized with Mortgage-Backed Securities During the Blackout
Period and (ii) Give GSD the Authority To Asess a Backtesting Charge on
an Intraday Basis

    FICC is proposing to amend the Backtesting Charge to (i) include
backtesting deficiencies attributable to GCF Repo Transactions
collateralized with mortgage-backed securities during the Blackout
Period and (ii) give GSD the authority to assess a Backtesting Charge
on an intraday basis.
(i) Proposed Change To Amend the Backtesting Charge To Include
Backtesting Deficiencies Attributable to GCF Repo Transactions
Collateralized With Mortgage-Backed Securities During the Blackout
Period
    FICC is proposing to amend the Backtesting Charge to provide that
this charge would be applied to a GCF Counterparty that experiences
backtesting deficiencies that are attributed to GCF Repo Transactions
collateralized with mortgage-backed securities during the Blackout
Period. Currently, Backtesting Charges are not applied to GCF
Counterparties with collateralized mortgage-backed securities during
the Blackout Period because such counterparties may be subject to a
Blackout Period Exposure Charge. However, now that FICC is proposing to
eliminate the Blackout Period Exposure Charge, FICC is proposing to
amend the applicability of the Backtesting Charge in the circumstances
described above.
(ii) Proposed Change To Give GSD the Authority To Assess a Backtesting
Charge on an Intraday Basis
    FICC is also proposing to amend the Backtesting Charge to provide
that this charge may be assessed if a Netting Member is experiencing
backtesting deficiencies during the trading day (i.e., intraday)
because of such Netting Member's large fluctuations of intraday trading
activities. A Backtesting Charge that is imposed intraday would be
referred to as a ``Intraday Backtesting Charge.'' The Intraday
Backtesting Charge would be assessed on an intraday basis and it would
increase a Netting Member's Required Fund Deposit to help ensure that
its intraday backtesting coverage achieves the 99% confidence level.
    The proposed assessment of the Intraday Backtesting Charge differs
from the existing assessment of the Backtesting Charge because the
existing assessment is based on the backtesting results of a Netting
Member's PM RFD versus the historical returns of such Netting Member's
portfolio at the end of the trading day while the proposed Intraday
Backtesting Charge would be based on the most recent Required Fund
Deposit amount that was collected from a Netting Member versus the
historical returns of such Netting Member's portfolio intraday.
    In an effort to differentiate the proposed Intraday Backtesting
Charge from the existing Backtesting Charge, FICC is proposing to
change the name of the existing Backtesting Charge to ``Regular
Backtesting Charge.'' The

Intraday Backtesting Charge and the Regular Backtesting Charge would
collectively be referred to as the Backtesting Charge.
Calculation and Assessment of Intraday Backtesting Charges
    FICC would use a snapshot of each Netting Member's portfolio during
the trading day,\58\ and compare each Netting Member's AM RFD with the
simulated liquidation gains/losses using an intraday snapshot of the
actual positions in the Netting Member's portfolio, and the actual
historical security returns. FICC would review portfolios with intraday
backtesting deficiencies that bring the results for that Netting Member
below the 99% confidence level (i.e., greater than two intraday
backtesting deficiency days in a rolling twelve-month period) and
determine whether there is an identifiable cause of ongoing repeat
backtesting deficiencies. FICC would also evaluate whether multiple
Netting Members are experiencing backtesting deficiencies due to
similar underlying reasons.
---------------------------------------------------------------------------

    \58\ The snapshot would occur once a day. The timing of the
snapshot would be subject to change based upon market conditions
and/or settlement activity. This snapshot would be taken at the same
time for all Netting Members. All positions that have settled would
be excluded. FICC would take additional intraday snapshots and/or
change the time of the intraday snapshot based upon market
conditions. FICC would include the positions from the start-of-day
plus any additional positions up to that time.
---------------------------------------------------------------------------

    As is the case with the existing Backtesting Charge (which would be
referred to as the ``Regular Backtesting Charge''), the proposed
Intraday Backtesting Charge would be assessed on Netting Members with
portfolios that experience at least three intraday backtesting
deficiencies over the prior 12-month period. The proposed Intraday
Backtesting Charge would generally equal a Netting Member's third
largest historical intraday backtesting deficiency because FICC
believes that an Intraday Backtesting Charge equal to the third largest
historical intraday backtesting deficiency would bring the affected
Netting Member's historically observed intraday backtesting coverage
above the 99% confidence level.
    FICC would have the discretion to adjust the Intraday Backtesting
Charge to an amount that is more appropriate for maintaining such
Netting Member's intraday backtesting results above the 99% coverage
threshold.\59\
---------------------------------------------------------------------------

    \59\ For example, FICC may consider whether the affected Netting
Member would be likely to experience future intraday backtesting
deficiencies, the estimated size of such deficiencies, material
differences in the three largest intraday backtesting deficiencies
observed over the prior 12-month period, variabilities in its net
settlement activity subsequent to GSD's collection of the AM RFD,
seasonality in observed intraday backtesting deficiencies and
observed market price volatility in excess of its historical VaR
Charge.
---------------------------------------------------------------------------

    In the event that FICC determines that an Intraday Backtesting
Charge should apply in the circumstances described above, FICC would
notify the affected Netting Member prior to its assessment of the
charge. As is the case with the existing application of the Backtesting
Charge, FICC would notify Netting Members on or around the 25th
calendar day of the month.
    The proposed Intraday Backtesting Charge would be applied to the
affected Netting Member's Required Fund Deposit on a daily basis for a
one-month period. FICC would review the assessed Intraday Backtesting
Charge on a monthly basis to determine if the charge is still
applicable and that the amount charged continues to provide appropriate
coverage. In the event that an affected Netting Member's trailing 12-
month intraday backtesting coverage exceeds 99% (without taking into
account historically imposed Intraday Backtesting Charges), the
Intraday Backtesting Charge would be removed.

G. Proposed Change to the Excess Capital Premium Calculation for Broker
Netting Members, Inter-Dealer Broker Netting Members and Dealer Netting
Members

    FICC is proposing to move to a net capital measure for Broker
Netting Members, Inter-Dealer Broker Netting Members and Dealer Netting
Members that would align the Excess Capital Premium for such Members to
a measure that is consistent with the equity capital measure that is
used for Bank Netting Members in the Excess Capital Premium
calculation.
    Currently, the Excess Capital Premium is determined based on the
amount that a Netting Member's Required Fund Deposit exceeds its Excess
Capital.\60\ Only Netting Members that are brokers or dealers
registered under Section 15 of the Act are required to report Excess
Net Capital figures to FICC while other Netting Members report net
capital or equity capital. If a Netting Member is not a broker/dealer,
FICC would use net capital or equity capital, as applicable (based on
the type of regulation that such Netting Member is subject to) in order
to calculate its Excess Capital Premium.
---------------------------------------------------------------------------

    \60\ Pursuant to the GSD Rules, the term ``Excess Capital''
means Excess Net Capital, net assets or equity capital as
applicable, to a Netting Member based on its type of regulation. See
GSD Rule 1, supra note 4.
---------------------------------------------------------------------------

    FICC is proposing this change because of the Commission's
amendments to Rule 15c3-1 (the ``Net Capital Rule''), which were
adopted in 2013.\61\ The amendments are designed to promote a broker/
dealer's capital quality and require the maintenance of ``net capital''
(i.e., capital in excess of liabilities) in specified amounts as
determined by the type of business conducted. The Net Capital Rule is
designed to ensure the availability of funds and assets (including
securities) in the event that a broker/dealer's liquidation becomes
necessary. The Net Capital Rule represents a net worth perspective,
which is adjusted by unrealized profit or loss, deferred tax
provisions, and certain liabilities as detailed in the rule. It also
includes deductions and offsets, and requires that a broker/dealer
demonstrate compliance with the Net Capital Rule including maintaining
sufficient net capital at all times (including intraday).
---------------------------------------------------------------------------

    \61\ See 17 CFR 240.15c3-1. Securities Exchange Act Release No.
34-70072 (July 30, 2013), 78 FR 51823 (August 21, 2013) (File No.
S7-08-07).
---------------------------------------------------------------------------

    FICC believes that the Net Capital Rule is an effective process of
separating liquid and illiquid assets, and computing a broker/dealer's
regulatory net capital that should replace GSD's existing practice of
using Excess Net Capital (which is the difference between the Net
Capital and the minimum regulatory Net Capital) as the basis for the
Excess Capital Premium.

H. GSD's Existing Calculation and Assessment of Intraday Supplemental
Fund Deposit Amounts

    Separate and apart from the AM RFD and the PM RFD, the GSD Rules
give FICC the existing authority to collect Intraday Supplemental Fund
Deposits from Netting Members.\62\ Through this filing, FICC is
providing transparency with respect to GSD's existing calculation of
Intraday Supplemental Fund Deposit amounts.
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    \62\ As described above in section A.--The Required Fund Deposit
and Clearing Fund Calculation Overview, GSD calculates and collects
each Netting Member's Required Fund Deposit twice each business day.
The AM RFD is collected at 9:30 a.m. (E.T.) and is comprised of a
VaR Charge that is based on each Netting Member's portfolio at the
end of the trading day. The PM RFD is collected at 2:45 p.m. and is
comprised of a VaR Charge that is based on a snapshot of each
Netting Member's portfolio collected at noon and, if applicable, an
Intraday Supplemental Fund Deposit collected after noon.
---------------------------------------------------------------------------

    Pursuant to the GSD Rules, the Intraday Supplemental Fund Deposits
is determined based on GSD's observations of a Netting Member's
simulated VaR Charge as it is re-calculated throughout the trading day
based on the open positions of such Member's portfolio at designated
times

(the ``Intraday VaR Charge'').\63\ FICC is proposing to provide
transparency with respect to its existing authority to calculate and
assess the Intraday Supplemental Fund Deposit as described in further
detail below.
---------------------------------------------------------------------------

    \63\ See Rule 4 Section 2a, supra note 4.
---------------------------------------------------------------------------

    The Intraday Supplemental Fund Deposit is designed to mitigate
exposure to GSD that results from large fluctuations in a Netting
Member's portfolio due to new and settled trade activities that are not
otherwise covered by a Netting Member's recently collected Required
Fund Deposit. FICC determines whether to assess an Intraday
Supplemental Fund Deposit by tracking three criteria (each, a
``Parameter Break'') for each Netting Member. The first Parameter Break
evaluates whether a Netting Member's Intraday VaR Charge equals or
exceeds a set dollar amount (as determined by FICC from time to time)
when compared to the VaR Charge that was included in the most recently
collected Required Fund Deposit including, any subsequently collected
Intraday Supplemental Fund Deposit (the ``Dollar Threshold''). The
second Parameter Break evaluates whether the Intraday VaR Charge equals
or exceeds a percentage increase (as determined by FICC from time to
time) of the VaR Charge that was included in the most recently
collected Required Fund Deposit including, if applicable, any
subsequently collected Intraday Supplemental Fund Deposit (the
``Percentage Threshold''). The third Parameter Break evaluates whether
a Netting Member is experiencing backtesting results below the 99%
confidence level (the ``Coverage Target'').
(a) The Dollar Threshold
    The purpose of the Dollar Threshold is to identify Netting Members
with additional risk exposures that represent a substantial portion of
the Clearing Fund. FICC believes these Netting Members pose an
increased risk of loss to GSD because the coverage provided by the
Clearing Fund (which is designed to cover the aggregate losses of all
Netting Members' portfolios) would be substantially impacted by large
exposures. In other words, in the event that a Netting Member's
Required Fund Deposit is not sufficient to satisfy losses to GSD caused
by the liquidation of the defaulted Netting Member's portfolio, FICC
will use the Clearing Fund to satisfy such losses. However, because the
Clearing Fund must be available to satisfy potential losses that may
arise from any Netting Member's defaults, GSD will be exposed to a
significant risk of loss if a defaulted Netting Member's additional
risk exposure accounted for a substantial portion of the Clearing Fund.
    The Dollar Threshold is set to an amount that would help to ensure
that the aggregate additional risk exposure of all Netting Members does
not exceed 5% of the Clearing Fund. FICC believes that the availability
of at least 95% of the Clearing Fund to satisfy all other liquidation
losses caused by a defaulted Netting Member is sufficient to mitigate
risks posed to FICC by such losses.
    Currently, the Dollar Threshold equals a change in a Netting
Member's Intraday VaR Charge that equals or exceeds $1,000,000 when
compared to the VaR Charge that was included in the most recently
collected Required Fund Deposit including, if applicable, any
subsequently collected Intraday Supplemental Fund Deposit. On an annual
basis, FICC assesses the sufficiency of the Dollar Threshold, and may
adjust the Dollar Threshold if FICC determines that an adjustment is
necessary to provide GSD with reasonable coverage.
(b) The Percentage Threshold
    The purpose of the Percentage Threshold is to identify Netting
Members with Intraday VaR Charge amounts that reflect significant
changes when such amounts are compared to the VaR Charge that was
included as a component in such Netting Member's most recently
collected Required Fund Deposit. FICC believes that these Netting
Members pose an increased risk of loss to GSD because the most recently
collected VaR Charge (which is designed to cover estimated losses to a
portfolio over a three-day liquidation period at least 99% of the time)
may not adequately reflect a Netting Member's portfolio with such
Netting Member's significant intraday changes in additional risk
exposure. Thus, in the event that the Netting Member defaults during
the trading day the Netting Member's most recently collected Required
Fund Deposit may be insufficient to cover the liquidation of its
portfolio within a three-day liquidation period.
    Currently, the Percentage Threshold is equal to a Netting Member's
Intraday VaR Charge that equals or exceeds 100% of the most recently
calculated VaR Charge included in the most recently collected Required
Fund Deposit including, if applicable, any subsequently collected
Intraday Supplemental Fund Deposit. On an annual basis, FICC assesses
the sufficiency of the Percentage Threshold and may adjust the
Percentage Threshold if it determines that such adjustment is necessary
to provide GSD with reasonable coverage.
(c) The Coverage Target
    The purpose of the Coverage Target is to identify Netting Members
with backtesting results \64\ below the 99% confidence level (i.e.,
greater than two deficiency days in a rolling 12-month period) as
reported in the most current month. FICC believes that these Netting
Members pose an increased risk of loss to FICC because their
backtesting deficiencies demonstrate that GSD' risk-based margin model
has not performed as expected based on the Netting Member's trading
activity. Thus, the most recently collected Required Fund Deposit might
be insufficient to cover the liquidation of a Netting Member's
portfolio within a three-day liquidation period in the event that such
Member defaults during the trading day.
---------------------------------------------------------------------------

    \64\ The referenced backtesting results would only reflect the
Backtesting Charge if such charge is collected in the Required Fund
Deposit.
---------------------------------------------------------------------------

(d) Assessment and Collection of the Intraday Supplemental Fund
Deposits
    In the event that FICC determines that a Netting Member's
additional risk exposure breaches all three Parameter Breaks, FICC will
assess an Intraday Supplemental Fund Deposit. Should FICC determine
that certain market conditions exist \65\ FICC would impose an Intraday
Supplemental Fund Deposit if a Netting Member's Intraday VaR Charge
breaches the Dollar Amount threshold and the Percentage Threshold
notwithstanding the fact that the Coverage Target has not been breached
by such Netting Member.\66\ In addition, during such market conditions,
the Dollar Threshold and Percentage Threshold may be reduced if FICC
determines a Netting Member's portfolios may present relatively greater
risks to FICC since the most recently collected Required Fund Deposit.
Any such reduction will not cause the Dollar Threshold to be less than
$250,000 and the Percentage Threshold to be less than 5%.
---------------------------------------------------------------------------

    \65\ Examples include but are not limited to (i) sudden swings
in an equity index or (ii) movements in the U.S. Treasury yields and
mortgage-backed securities spreads that are outside of historically
observed market moves.
    \66\ In certain market condition, a Netting Member's backtesting
coverage may not accurately reflect the risks posed by such Netting
Member's portfolio. Therefore, FICC imposes the Intraday
Supplemental Fund on Netting Members that breach the Dollar
Threshold and Percentage Threshold, despite the fact that such
Member may not have breached the Coverage Target during certain
market conditions.

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

    FICC has the discretion to waive or change \67\ Intraday
Supplemental Fund Deposit amounts if it determines that a Netting
Member's additional risk exposure and/or breach of a Parameter Break
does not accurately reflect GSD's exposure to the fluctuations in the
Netting Member's portfolio.\68\ Given that there are numerous factors
that could result in a Netting Member's additional risk exposure and/or
breach of a Parameter Break, FICC believes that it is important to
maintain such discretion in order to help ensure that the Intraday
Supplemental Fund Deposit is imposed only on Netting Members with
additional risk exposures that pose a significant level of risk to
FICC.
---------------------------------------------------------------------------

    \67\ FICC will not reduce the Intraday Supplemental Fund Deposit
if such reduction will cause the Netting Member's most recently
collected Required Fund Deposit to decrease. In addition, FICC will
not increase the Intraday VaR Charge to an amount that is two times
more than a Netting Member's most recently collected Required Fund
Deposit.
    \68\ For example, a Netting Member's breach of the Coverage
Target could be due to a shortened backtesting look-back period and/
or large position fluctuations caused by trading errors.
---------------------------------------------------------------------------

I. Delayed Implementation of the Proposed Rule Change

    This proposed rule change would become operative 45 business days
after the later date of the Commission's notice of no objection to this
Advance Notice and its approval of the related proposed rule
change.\69\ The delayed implementation is designed to give Netting
Members the opportunity to assess the impact that the proposed rule
change would have on their Required Fund Deposit.
---------------------------------------------------------------------------

    \69\ See supra note 3.
---------------------------------------------------------------------------

    Prior to the effective date, FICC would add a legend to the GSD
Rules to state that the specified changes to the GSD Rules are approved
but not yet operative, and to provide the date such approved changes
would become operative. The legend would also include the file numbers
of the approved proposed rule change and Advance Notice Filing and
would state that once operative, the legend would automatically be
removed from the GSD Rules.

J. Description of the Proposed Changes to the Text of the GSD Rules

1. Proposed Changes to GSD Rule 1 (Definitions)
    FICC is proposing to amend the term ``Backtesting Charge'' to
provide that a GCF Counterparty's backtesting deficiencies attributable
to collateralized mortgage-backed securities during the Blackout Period
would be considered in FICC's assessment of the applicability of the
charge. FICC is also proposing to amend the definition of the term
``Backtesting Charge'' to provide that an Intraday Backtesting Charge
may be assessed based on the backtesting results of a Netting Member's
intraday portfolio. In order to differentiate the Intraday Backtesting
charge from the existing application of the Backtesting Charge, the
existing charge would be referred to as the ``Regular Backtesting
Charge.'' As a result of this proposed change, FICC would be permitted
to assess an Intraday Backtesting Charge based on a Netting Member's
intraday portfolio and a Regular Backtesting Charge based on a Netting
Member's end of day portfolio. As a result of this proposed change,
FICC's calculation of the Intraday Backtesting Charge and the Regular
Backtesting Charge could include deficiencies attributable to GCF Repo
Transactions collateralized with mortgage-backed securities during the
Blackout Period.
    FICC is proposing to add the new defined term ``Blackout Period
Exposure Adjustment'' to define a new component in the Required Fund
Deposit calculation. This component would apply to all GCF
Counterparties with exposure to mortgage-backed securities in their
portfolio during the Blackout Period.
    FICC is proposing to delete the term ``Blackout Period Exposure
Charge.'' This component would no longer be necessary because the
proposed Blackout Period Exposure Adjustment would be applied to all
GCF Counterparties with exposure to mortgage-backed securities in their
portfolio.
    FICC is proposing to delete the term ``Coverage Charge'' because
this component would be eliminated from the Required Fund Deposit
calculation.
    FICC is proposing to delete the term ``Excess Capital'' because
FICC is proposing to add the new defined term ``Netting Member
Capital.''
    FICC is proposing to amend the definition of the term ``Excess
Capital Ratio'' to reflect the replacement of ``Excess Capital'' with
``Netting Member Capital.''
    FICC is proposing to change the term ``Intraday Supplemental
Clearing Fund Deposit'' to ``Intraday Supplemental Fund Deposit''
because the latter is consistent with the term that is reflected in GSD
Rule 4.
    FICC is proposing to amend the term ``Margin Proxy'' to reflect
that the Margin Proxy would be used as an alternative volatility
calculation.
    FICC is proposing to add the new defined term ``Netting Member
Capital'' to reflect the change to the Net Capital for Broker Netting
Members', Inter-Broker Dealer Netting Members' and Dealer Netting
Members' calculation of the Excess Capital Ratio.
    FICC is proposing to amend the definition of the term ``VaR
Charge'' to establish that (1) the Margin Proxy would be utilized as an
alternative volatility calculation in the event that the requisite data
used to employ the sensitivity approach is unavailable, and (2) a VaR
Floor would be utilized as the VaR Charge in the event that the
proposed model based approach yields an amount that is lower than the
VaR Floor.
2. Proposed Changes to GSD Rule 4 (Clearing Fund and Loss Allocation)
Proposed Changes to Rule 4 Section 1b
    FICC is proposing to eliminate the reference to ``Coverage Charge''
because this component would no longer be included in the Required Fund
Deposit calculation.
    FICC is proposing to add the ``Blackout Period Exposure
Adjustment'' because this would be a new component included in the
Required Fund Deposit calculation.
    FICC is proposing to eliminate the reference to ``Blackout Period
Exposure Charge'' because this component would no longer be included in
the Required Fund Deposit calculation.
    FICC is proposing to renumber this section in order to accommodate
the above-referenced proposed changes.
    FICC is proposing to define ``Net Unsettled Position'' because it
is a defined term in GSD Rule 1.
    FICC is proposing to amend this section to state that a haircut
method would be utilized based on the historic index volatility model
for the purposes of calculating the VaR Charge for classes of
securities that cannot be handled by the VaR model's methodology.
    FICC is proposing to delete the paragraph relating to the Margin
Proxy because the Margin Proxy would no longer be used to supplement
the VaR Charge.

K. 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 Required Fund Deposit calculation.
The QRM Methodology document specifies (i) the model inputs,
parameters, assumptions and qualitative adjustments, (ii) the
calculation used to generate Required Fund Deposit 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.

II. Anticipated Effect on and Management of Risks

    FICC believes that the proposed change to the Required Fund Deposit
calculation, which consists of proposals to (1) change its method of
calculating the VaR Charge component, (2) add a new component referred
to as the Blackout Period Exposure Adjustment, (3) eliminate the
Blackout Period Exposure Charge and the Coverage Charge components, (4)
amend the 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) amend the calculation
for determining the Excess Capital Premium for Broker Netting Members,
Inter-Dealer Broker Netting Members and Dealer Netting Members, would
enable FICC to better limit its exposure to Netting Members arising out
of the activity in their portfolios.

A. Proposed Changes to GSD's Calculation of the VaR Charge

1. Proposed Change To Replace the Full Revaluation Approach With the
Sensitivity Approach
    FICC's proposal to change the existing VaR methodology from one
that employs a full revaluation approach to one that employs a
sensitivity approach would affect FICC's management of risk by
addressing the deficiencies observed in the current model by leveraging
external vendor expertise in supplying the market risk attributes that
would then be incorporated by FICC into its model to calculate the VaR
Charge to Members. The proposed methodology would enhance FICC's risk
management capabilities because it would enable sensitivity analysis of
key model parameters and assumptions. The sensitivity approach would
allow FICC to attribute market price moves to various risk factors
(such as key rates, agency spread, and mortgage basis) that would
enable FICC to view and respond more effectively to market volatility.
    As noted above, the proposed sensitivity approach would leverage
external vendor expertise in supplying the market risk attributes. FICC
would manage the risks associated with a potential data disruption by
using the most recently available data on the first day that a data
disruption occurs. If it is determined that the vendor would resume
providing data within five (5) business days, FICC management would
determine whether the VaR Charge should continue to be calculated by
using the most recently available data along with an extended look-back
period or whether the Margin Proxy should be invoked.
2. Proposed Change To Amend the VaR Charge To Eliminate the Augmented
Volatility Adjustment Multiplier
    FICC's proposal to eliminate the augmented volatility adjustment
multiplier would affect FICC's management of risk because the augmented
volatility adjustment multiplier would no longer be necessary given
that 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. As described in
Item II.(B)I. above, the proposed sensitivity approach would provide
FICC with the ability to leverage a 10-year look-back period plus, to
the extent applicable, an additional stressed period for purposes of
calculating the VaR Charge. FICC's ability to extend the look back
period would help to ensure that the historical simulation contains a
sufficient number of market conditions (including but not limited to
stressed market conditions), which would allow FICC to manage risks by
more effectively capturing the risk profile of Netting Members during
times of market stress.
3. Proposed Change To Implement the Margin Proxy as the VaR Charge
During a Vendor Data Disruption
    FICC's proposal to employ the Margin Proxy as an alternative
volatility calculation rather than as a minimum volatility calculation
would affect FICC's management of risk by helping to ensure that FICC
has a margin methodology in place that effectively measures FICC's
exposure to Netting Members in the event that a vendor data disruption
reduces the reliability of the margin amount calculated by the proposed
sensitivity-based VaR model.
    As described in Item II.(B)I. above, if the vendor fails to provide
any data or a significant portion of the data timely, FICC would use
the most recently available data on the first day that such data
disruption occurs. If it is determined that the vendor will resume
providing data within five (5) business days, FICC management would
determine whether the VaR Charge should continue to be calculated by
using the most recently available data along with an extended look-back
period or whether the Margin Proxy should be invoked, subject to the
approval of DTCC's Group Chief Risk Officer or his/her designee. If it
is determined that the data disruption will extend beyond five (5)
business days, the Margin Proxy would be applied, subject to the
approval of the MRC followed by notification to FICC's Board Risk
Committee.
4. Proposed Change To Utilize a Haircut Method To Measure the Risk
Exposure of Securities That Lack Historical Data
    FICC's proposal to implement a haircut method for securities that
lack sufficient historical information would affect FICC's management
of risk because the proposed change would better describe FICC's method
of capturing the risk profile of these securities, thus helping to
ensure that sufficient margin would be calculated for the related
portfolios. FICC would continue to manage the market risk of clearing
securities with inadequate historical data by conducting analysis on
the type of securities that do not fall within the historical look-back
period of the proposed VaR model and engaging in periodic reviews of
the haircuts used for calculating margin for these types of securities.
5. Proposed Change To Amend the VaR Charge Calculation To Establish a
VaR Floor
    FICC's proposal to implement the VaR Floor would affect FICC's
management of risk because the proposed VaR Floor would address a risk
that the proposed sensitivity approach could calculate a VaR Charge
that is too low in connection with certain portfolios where the
proposed VaR model applies substantial risk offsets among long and
short positions in different classes of securities that have historical
price correlation. Since this level of historical price correlation may
not apply in future changing market conditions, FICC believes that it
is prudent to apply a VaR Floor that is based upon the market value of
the gross of unsettled positions in the Netting Member's portfolio. The
VaR Floor would therefore provide GSD

with sufficient margin in the event that FICC is required to liquidate
in different market conditions.

B. Proposed Change To Establish the Blackout Period Exposure Adjustment
as a Component to the Required Fund Deposit Calculation

    FICC's proposal to establish the Blackout Period Exposure
Adjustment would affect FICC's management of risk because the Blackout
Period Exposure Adjustment would better protect GSD and its Netting
Members from losses that could result from overstated values of
mortgage-backed securities pledged as collateral for GCF Repo
Transactions during the Blackout Period. FICC believes that the
proposed adjustment would help to maintain GCF Counterparties'
backtesting coverage above the 99% confidence threshold because the
proposed Blackout Period Exposure Adjustment would be applied to the
VaR Charge for all GCF Counterparties with GCF Repo Transactions
collateralized with mortgage-backed securities during the monthly
Blackout Period. In the event that a GCF Counterparty continues to
experience backtesting deficiencies, FICC would apply the existing
Backtesting Charge pursuant to the GSD Rules, which would be amended to
consider deficiencies attributable to Blackout Period exposures during
the Blackout Period.

C. Proposed Change To Eliminate the Coverage Charge From the Required
Fund Deposit Calculation

    FICC's proposal to eliminate the Coverage Charge component from
GSD's Required Fund Deposit calculation would affect FICC's management
of risk because the proposed change would remove an unnecessary
component from the Required Fund Deposit calculation. As described
above, the Coverage Charge is based on historical portfolio activity,
which may not be indicative of a Netting Member's current risk profile
but was determined by FICC to be appropriate to address potential
shortfalls in margin charges under the current VaR model. As part of
FICC's development and assessment of the proposed VaR Charge, FICC
obtained an independent validation of the proposed model by an external
party, performed back testing to validate model performance, and
conducted analysis to determine the impact of the changes to Netting
Members. Results of the analysis indicate that the proposed sensitivity
approach would be more responsive to changing market dynamics and
provide better coverage than the existing full revaluation approach.
Given the proposed improvement in model coverage, FICC believes that
the Coverage Charge component would no longer be necessary.

D. Proposed Change To Eliminate the Existing Blackout Period Exposure
Charge

    The proposed Blackout Period Exposure Adjustment would allow GSD to
eliminate the existing Blackout Period Exposure Charge because the
proposed Blackout Period Exposure Adjustment would be applied to all
GCF Counterparties with GCF Repo Transactions collateralized with
mortgage-backed securities during the Blackout Period, while the
existing Blackout Period Exposure Charge only applies to GCF
Counterparties that have two or more backtesting deficiencies that
occurred during the Blackout Period and whose overall 12-month trailing
backtesting coverage falls below the 99% coverage target. FICC believes
that the proposed Blackout Period Exposure Adjustment would help to
maintain GCF Counterparties' backtesting coverage above the 99%
confidence threshold. In the event that a GCF Counterparty continues to
experience backtesting deficiencies, FICC would apply the existing
Backtesting Charge pursuant to the GSD Rules. As described below, the
Backtesting Charge would be amended to include deficiencies related to
Blackout Period Exposure during the Blackout Period. Given the proposed
Blackout Period Exposure Adjustment and the amendment of the
Backtesting Charge, FICC believes that the existing Blackout Period
Exposure Charge component would no longer be necessary.

E. Proposed Change To Expand GSD's Authority To Assess the Backtesting
Charge and Amend the Charge During the Blackout Period

    FICC's proposal to assess an Intraday Backtesting Charge on a
Netting Member's portfolio during the trading day would affect FICC's
management of risk because it would address the risk that a Netting
Member's most recently collect Required Fund Deposit may be
insufficient to cover its intraday trading activity. Thus, the proposed
change would give FICC the ability to better limit its credit exposures
to Netting Members on an intraday basis.
    FICC's proposal to amend the charge to consider deficiencies
attributable to Blackout Period exposures would be included only during
the Blackout Period would address the risk that a defaulted GCF
Counterparty's portfolio contains exposure to GCF Transactions
collateralized with mortgage-backed securities that is not adequately
captured by the GCF Counterparty's Required Fund Deposit. Thus, the
proposed change would allow FICC to continue to maintain coverage of
FICC's credit exposures to such GCF Repo Participant at a high degree
of confidence during the period when this risk regarding the valuation
of such GCF Transactions could exist.

F. Proposed Change to the Excess Capital Premium Calculation for Broker
Netting Members, Inter-Dealer Broker Netting Members and Dealer Netting

    FICC believes that the proposed change to move to a net capital
measure for Broker Netting Members, Inter-Dealer Broker Netting Members
and Dealer Netting Members would affect FICC's management of risk
because the proposed change would better align the Excess Capital
Premium for Broker Netting Members, Inter-Dealer Broker Netting Members
and Dealer Netting Members to a measure that would be consistent with
the equity capital measure that is currently used for Bank Netting
Members in the Excess Capital Premium calculation, while continuing to
provide an effective means to manage risks posed by a Netting Member
whose activity causes it to have VaR Charge that is greater than its
regulatory capital.

G. GSD's Existing Calculation and Assessment of Intraday Supplemental
Fund Deposit Amounts

    FICC's proposal to provide transparency with respect to GSD's
current practice of calculating Intraday Supplemental Fund Deposits
would affect FICC's management of risk because it would help Netting
Members understand the process and circumstances under which GSD may
collect Intraday Supplemental Fund Deposit from Netting Members. The
collection of Intraday Supplemental Fund Deposits is designed to
mitigate FICC's exposure resulting from large intraday fluctuations in
Netting Members' portfolios due to new and settled trade activities.

H. FICC's Outreach to GSD Netting Members

    FICC managed the effect of the overall proposal by conducting
extensive outreach with Netting Members regarding the proposed changes,
educating Netting Members on the reasons for these proposed changes,
and explaining the related risk management improvements. FICC invited
all Netting Members to customer forums in an effort to provide
transparency regarding the changes and the expected macro

impact across the membership. FICC also provided each Netting Member
with individual impact studies. In addition, prior to the
implementation of the proposed changes, FICC would run a parallel
period during which Netting Members would have the opportunity to
further review the possible impact.

III. Consistency With the Clearing Supervision Act

    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.\70\
---------------------------------------------------------------------------

    \70\ See 12 U.S.C. 5461(b).
---------------------------------------------------------------------------

    Section 805(a)(2) of the Clearing Supervision Act \71\ authorizes
the Commission to prescribe risk management standards for the payment,
clearing and settlement activities of designated clearing entities,
like FICC, and financial institutions engaged in designated activities
for which the Commission is the supervisory agency or the appropriate
financial regulator. Section 805(b) of the Clearing Supervision Act
\72\ states that the objectives and principles for the risk management
standards prescribed under Section 805(a) shall be to, among other
things, promote robust risk management, promote safety and soundness,
reduce systemic risks, and support the stability of the broader
financial system. The Commission has adopted risk management standards
under Section 805(a)(2) of the Clearing Supervision Act \73\ and
Section 17A of the Exchange Act (``Covered Clearing Agency
Standards'').\74\ The Covered Clearing Agency Standards require
registered clearing agencies 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.\75\
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    \71\ See 12 U.S.C. 5464(a)(2).
    \72\ See 12 U.S.C. 5464(b).
    \73\ See 12 U.S.C. 5464(a)(2).
    \74\ See 17 CFR 240.17Ad-22(e).
    \75\ Id.
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(i) Consistency With Section 805(b) of the Clearing Supervision Act

    For the reasons described below, FICC believes that the proposed
changes in this advance notice are consistent with the objectives and
principles of these risk management standards as described in Section
805(b) of the Clearing Supervision Act and in the Covered Clearing
Agency Standards.
    As discussed above, FICC is proposing a number of changes to GSD's
Required Fund Deposit calculation--a key tool that FICC uses to
mitigate potential losses to FICC associated with liquidating a Netting
Member's portfolio in the event of Netting Member default. FICC
believes the proposed changes are consistent with promoting robust risk
management because they are designed to enable FICC to better limit its
exposure to Members in the event of a Member default. Specifically, (1)
the proposed change to utilize the sensitivity approach would enable
FICC to better limit its exposure to Netting Members because the
sensitivity approach would incorporate a broad range of structured risk
factors as well as an extended look-back period that would calculate
better margin coverage for FICC, (2) the proposed use of the Margin
Proxy as an alternative volatility calculation would enable FICC to
better limit its exposure to Netting Members because it would help to
ensure that FICC has a margin methodology in place that effectively
measures FICC's exposure to Netting Members in the event that a vendor
data disruption reduces the reliability of the margin amount calculated
by the proposed sensitivity-based VaR model, (3) the proposed haircut
method would enable FICC to better limit its exposure to Netting
Members because it would provide a better assessment of the risks
associated with classes of securities with inadequate historical
pricing data, (4) the proposed VaR Floor would enable FICC to better
limit its exposure to Netting Members because it would help to ensure
that each Netting Member has a minimum VaR Charge in the event that the
proposed VaR model utilizing the sensitivity approach yields too low a
VaR Charge for such portfolios, (5) the proposal to add the proposed
Blackout Period Exposure Adjustment as a new component and the proposal
to amend the Backtesting Charge to consider backtesting deficiencies
attributable to GCF Repo Transactions collateralized with mortgage-
backed securities during the Blackout Period would enable FICC to
better limit its exposure to Netting Members because these changes
would help to ensure that FICC collects sufficient margin from GCF
Counterparties with GCF Repo Transactions collateralized mortgage-
backed securities with risk characteristics that are not effectively
captured by the Required Fund Deposit calculation during the Blackout
Period, (6) the proposed Intraday Backtesting Charge would enable FICC
to better limit its exposure to Netting Members because it would help
to ensure that FICC collects appropriate margin from Netting 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 Netting Members defaults during the trading day,
and (7) the proposed change to the Excess Capital Premium calculation
would enable FICC to better limit its exposure to Netting Members
because it would help to ensure that FICC does not unnecessarily
increase its calculation and collection of Required Fund Deposit
amounts for Broker Netting Members, Inter-Dealer Broker Netting Members
and Dealer Netting Members. Finally, FICC's proposal to eliminate the
Blackout Period Exposure Charge, Coverage Charge and augmented
volatility adjustment multiplier would enable FICC to eliminate
components that do not measure risk as accurately as the proposed and
existing risk management measures, as described above.
    Therefore, because the proposal is designed to enable FICC to
better limit its exposure to Netting Members in the manner described
above, FICC believes it is consistent with promoting robust risk
management.
    Furthermore, FICC believes that the changes proposed in this
advance notice are consistent with promoting safety and soundness,
which, in turn, is consistent with reducing systemic risks and
supporting the stability of the broader financial system, consistent
with Section 805(b) of the Clearing Supervision Act.\76\ As described
in the second paragraph above, the proposed changes are designed to
better limit FICC's exposures to Netting Members in the event of a
Netting Member default. FICC believes that by better limiting its
exposures to Netting Members in the event of a Netting Member's
default, the proposed changes are consistent with promoting safety and
soundness, which, in turn, is consistent with reducing systemic risks
and supporting the stability of the broader financial system.
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    \76\ See 12 U.S.C. 5464(b).
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(ii) Consistency With Rule 17Ad-22(e)(4)(i) and (e)(6)(i), (ii), (iii),
(iv) and (v) Under the Act

    FICC believes that the proposed changes listed above are consistent
with

Rules 17Ad-22(e)(4)(i) and (e)(6)(i), (ii), (iii), (iv) and (v) of the
Act.\77\
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    \77\ See 17 CFR 240.17Ad-22(e)(4)(i) and (e)(6)(i), (ii), (iii),
(iv) and (v).
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    Rule 17Ad-22(e)(4)(i) under the Act \78\ requires a clearing agency
to establish, implement, maintain and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
exposures arising from its payment, clearing, and settlement processes
by maintaining sufficient financial resources to cover its credit
exposure to each participant fully with a high degree of confidence.
---------------------------------------------------------------------------

    \78\ See 17 CFR 240.17Ad-22(e)(4)(i).
---------------------------------------------------------------------------

    FICC believes that the proposed changes described in Item II.(B) I.
above enhance FICC's ability to identify, measure, monitor and manage
its credit exposures to Netting Members and those exposures arising
from its payment, clearing, and settlement processes because the
proposed changes would collectively help to ensure that FICC maintains
sufficient financial resources to cover its credit exposure to each
Netting Member with a high degree of confidence.
    Because each of the proposed changes to FICC's Required Fund
Deposit calculation would provide FICC with a more effective measure of
the risks that these calculations were designed to assess, the proposed
changes would permit FICC to more effectively identify, measure,
monitor and manage its exposures to market price risk, and would enable
it to better limit its exposure to potential losses from Netting Member
default. Specifically, the proposed changes described in Item II.(B)I.
above are designed to help ensure that GSD appropriately calculates and
collects margin to cover its credit exposure to each Netting Member
with a high degree of confidence because (1) the proposed change to
utilize the sensitivity approach would provide better margin coverage
for FICC, (2) the proposed use of the Margin Proxy as an alternative
volatility calculation would help to ensure that FICC has a margin
methodology in place that effectively measures FICC's exposure to
Netting Members in the event that a vendor data disruption reduces the
reliability of the margin amount calculated by the proposed
sensitivity-based VaR model, (3) the proposed haircut method would
provide a better assessment of the risks associated with classes of
securities with inadequate historical pricing data, (4) the proposed
VaR Floor would limit FICC's credit exposures to Netting Members in the
event that the proposed VaR model utilizing the sensitivity approach
yields too low a VaR Charge for such portfolios, (5) the proposal
eliminates the Blackout Period Exposure, Coverage Charge and augmented
volatility adjustment multiplier because FICC should not maintain
elements of the prior model that would unnecessarily increase Netting
Members' Required Fund Deposits, (6) the proposal to add the proposed
Blackout Period Exposure Adjustment as a new component would limit
FICC's credit exposures during the Blackout Period caused by GCF Repo
Transactions collateralized mortgage-backed securities with risk
characteristics that are not effectively captured by the Required Fund
Deposit calculation, (7) the proposal to amend the Backtesting Charge
to consider backtesting deficiencies attributable to GCF Repo
Transactions collateralized with mortgage-backed securities during the
Blackout Period would help to ensure that FICC could cover credit
exposure to GCF Counterparties, (8) the proposed Intraday Backtesting
Charge would help to ensure that FICC collects appropriate margin from
Netting 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 Netting Members defaults
during the trading day, and (9) the proposed change to the Excess
Capital Premium calculation would help to ensure that FICC does not
unnecessarily increase its calculation and collection of Required Fund
Deposit amounts for Broker Netting Members, Inter-Dealer Broker Netting
Members and Dealer Netting Members.
    The proposed changes would continue to be subject to performance
reviews by FICC. In the event that FICC's backtesting process reveals
that the VaR Charge, Required Fund Deposit amounts and/or the Clearing
Fund do not meet FICC's 99% confidence level, FICC would review its
margin methodologies and assess whether any changes should be
considered. Therefore, FICC believes the proposed changes are
consistent with the requirements of Rule 17Ad-22(e)(4)(i) of the Act
cited above. Rule 17Ad-22(e)(6)(i) under the Act \79\ requires a
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.
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    \79\ See 17 CFR 240.17Ad-22(e)(6)(i).
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    FICC believes that the proposed changes referenced above in the
second paragraph of this section (each of which have been described in
detail in Item II.(B)I. above) are consistent with Rule 17Ad-
22(e)(6)(i) of the Act cited above because the proposed changes would
help to ensure that FICC calculates and collects adequate Required Fund
Deposit amounts, and that each Netting Member's amount is commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market. Specifically, (1) the proposed change to utilize
the sensitivity approach would provide better margin coverage for FICC,
(2) the proposed use of the Margin Proxy as an alternative volatility
calculation would help to ensure that FICC has a margin methodology in
place that effectively measures FICC's exposure to Netting Members in
the event that a vendor data disruption reduces the reliability of the
margin amount calculated by the proposed sensitivity-based VaR model,
(3) the proposed haircut method would provide a better assessment of
the risks associated with classes of securities with inadequate
historical pricing data, (4) the proposed VaR Floor would limit FICC's
credit exposures to Netting Members in the event that the proposed VaR
model utilizing the sensitivity approach yields too low a VaR Charge
for such portfolios, (5) the proposal eliminates the Blackout Period
Exposure, Coverage Charge and augmented volatility adjustment
multiplier because FICC should not maintain elements of the prior model
that would unnecessarily increase Netting Members' Required Fund
Deposits, (6) the proposal to add the proposed Blackout Period Exposure
Adjustment as a new component would limit FICC's credit exposures
during the Blackout Period caused by GCF Repo Transactions
collateralized mortgage-backed securities with risk characteristics
that are not effectively captured by the Required Fund Deposit
calculation, (7) the proposal to amend the Backtesting Charge to
consider backtesting deficiencies attributable to GCF Repo Transactions
collateralized with mortgage-backed securities during the Blackout
Period would help to ensure that FICC could cover credit exposure to
GCF Counterparties, (8) the proposed Intraday Backtesting Charge would
help to ensure that FICC collects appropriate margin from Netting
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 Netting Members defaults during the
trading day, and (9) the proposed change to the Excess Capital Premium
calculation would help to ensure that FICC does not unnecessarily
increase its calculation and collection of Required Fund Deposit
amounts for Broker Netting Members, Inter-Dealer Broker Netting Members
and Dealer Netting Members.
    Therefore, FICC believes that the proposed changes are consistent
with the requirements of Rule 17Ad-22(e)(6)(i) cited above because the
collective proposed rule changes would consider, and produce margin
levels commensurate with, the risks and particular attributes of each
relevant product, portfolio, and market.
    Rule 17Ad-22(e)(6)(ii) under the Act \80\ requires a 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.
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    \80\ See 17 CFR 240.17Ad-22(e)(6)(ii).
---------------------------------------------------------------------------

    FICC believes that the proposed changes are consistent Rule 17Ad-
22(e)(6)(ii) of the Act cited above because the proposed Intraday
Backtesting Charge would help to ensure that FICC collects appropriate
margin from Netting 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 Netting Members
defaults during the trading day. Therefore, FICC believes that the
proposed Intraday Backtesting Charge would provide GSD with the
authority and operational capacity to make intraday margin calls in a
manner that is consistent with Rule 17Ad-22(e)(6)(ii) of the Act cited
above.
    Rule 17Ad-22(e)(6)(iii) under the Act \81\ requires a clearing
agency to establish, implement, maintain and enforce written policies
and procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, calculates margin sufficient to cover its potential future
exposure to participants in the interval between the last margin
collection and the close out of positions following a participant
default.
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    \81\ See 17 CFR 240.17Ad-22(e)(6)(iii).
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    FICC believes that the proposed changes are consistent Rule 17Ad-
22(e)(6)(iii) of the Act cited above because the proposed changes are
designed to calculate Required Fund Deposit amounts that are sufficient
to cover FICC's potential future exposure to Netting Members in the
interval between the last margin collection and the close out of
positions following a participant default. Specifically, (1) the
proposed change to utilize the sensitivity approach would provide
better margin coverage for FICC, (2) the proposed use of the Margin
Proxy as an alternative volatility calculation would help to ensure
that FICC has a margin methodology in place that effectively measures
FICC's exposure to Netting Members in the event that a vendor data
disruption reduces the reliability of the margin amount calculated by
the proposed sensitivity-based VaR model, (3) the proposed haircut
method would provide a better assessment of the risks associated with
classes of securities with inadequate historical pricing data, (4) the