82 FR 16644 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing To (1) Implement the Margin Proxy and (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 64 (April 5, 2017)
Federal Register Volume 82, Issue 64 (April 5, 2017)
| Page Range | 16644-16647 | |
| FR Document | 2017-06682 |
[Federal Register Volume 82, Number 64 (Wednesday, April 5, 2017)] [Notices] [Pages 16644-16647] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-06682] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-80341; File No. SR-FICC-2017-801] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing To (1) Implement the Margin Proxy and (2) Modify the Calculation of the Coverage Charge in Circumstances Where the Margin Proxy Applies March 30, 2017. Fixed Income Clearing Corporation (``FICC'') filed with the U.S. Securities and Exchange Commission (``Commission'') on February 2, 2017 the advance notice SR-FICC-2017-801 (``Advance Notice'') pursuant to Section 806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 (``Clearing Supervision Act'') \1\ and Rule 19b-4(n)(1)(i) \2\ under the Securities Exchange Act of 1934 (``Exchange Act''). The Advance Notice was published for comment in the Federal Register on March 8, 2017.\3\ Although the Commission received no comments to the Advance Notice, it received three comment letters \4\ to the Proposed Rule Change, of which parts pertinent to the Advance Notice are discussed below.\5\ This publication serves as notice of no objection to the Advance Notice. --------------------------------------------------------------------------- \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight Council designated FICC a systemically important financial market utility on July 18, 2012. See Financial Stability Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, FICC is required to comply with the Payment, Clearing and Settlement Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). \2\ 17 CFR 240.19b-4(n)(1)(i). \3\ Securities Exchange Act Release No. 80139 (March 2, 2017), 82 FR 13026 (March 8, 2017) (SR-FICC-2017-801) (``Notice''). FICC also filed a related proposed rule change (SR-FICC-2017-001) (``Proposed Rule Change'') with the Commission pursuant to Section 19(b)(1) of the Exchange Act and Rule 19b-4 thereunder, seeking approval of changes to its rules necessary to implement the Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The Proposed Rule Change was published in the Federal Register on February 9, 2017. Securities Exchange Act Release No. 79958 (February 3, 2017), 82 FR 10117 (February 9, 2017) (SR-FICC-2017- 001). \4\ See letter from Robert E. Pooler, Chief Financial Officer, Ronin Capital LLC (``Ronin''), dated February 24, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (``Ronin Letter''); letter from Alan Levy, Managing Director, Industrial and Commercial Bank of China Financial Services LLC (``ICBCFS''), dated February 24, 2017, to Commission (``ICBCFS Letter''); and Timothy J. Cuddihy, Managing Director, FICC, dated March 8, 2017, to Eduardo A. Aleman, Assistant Secretary, Commission (``FICC Letter'') available at https://www.sec.gov/comments/sr-ficc-2017-001/ficc2017001.htm. \5\ Because the proposal contained in the Advance Notice was also filed as the Proposed Rule Change, see supra note 3, the Commission is considering any comment received on the Proposed Rule Change also to be a comment on the Advance Notice. --------------------------------------------------------------------------- I. Description of the Advance Notice The Advance Notice proposes several amendments to the FICC Government Securities Division (``GSD'') Rulebook (``GSD Rules'') designed to provide FICC with a supplemental means to calculate the VaR Charge component of its GSD Netting Members' (``Netting Members'') daily margin requirement, known as the ``Required Fund Deposit.'' Specifically, under the proposal, FICC would include a minimum volatility calculation for a Netting Member's VaR Charge called the ``Margin Proxy.'' FICC represents that the Margin Proxy would enhance the risk-based model and parameters that FICC uses to establish Netting Members' Required Fund Deposits by enabling FICC to better identify the risk posed by a Netting Member's unsettled portfolio. A. Overview of the Required Fund Deposit According to FICC, a key tool it uses to manage market risk is the daily calculation and collection of Required Fund Deposits from its Netting Members. The Required Fund Deposit is intended to mitigate potential losses to FICC associated with liquidation of such Netting Member's accounts at GSD that are used for margining purposes (``Margin Portfolio'') in the event that FICC ceases to act for such Netting Member (referred to as a Netting Member ``Default''). A Netting Member's Required Fund Deposit consists of several components, including the VaR Charge and the Coverage Charge. The VaR Charge comprises the largest portion of a Netting Member's Required Fund Deposit amount and is calculated using a risk-based margin methodology model that is intended to cover the market price risk associated with the securities in a Netting Member's Margin Portfolio. That risk-based margin methodology model, which FICC refers to as the ``Current Volatility Calculation,'' uses historical market moves to project the potential gains or losses that could occur in connection with the liquidation of a defaulting Netting Member's Margin Portfolio. The Coverage Charge is calculated based on the Netting Member's daily backtesting results conducted by FICC. Backtesting is used to determine the adequacy of each Netting Member's Required Fund Deposit and involves comparing the Required Fund Deposit for each Netting Member with actual price changes in the Netting Member's Margin Portfolio. The Coverage Charge is incorporated in the Required Fund Deposit for each Netting Member, and is equal to the amount necessary to increase that Netting Member's Required Fund Deposit so that the Netting Member's backtesting coverage may achieve the 99 percent confidence level required by FICC (i.e., two or fewer backtesting deficiency days in a rolling twelve-month period). B. Proposed Change to the Existing VaR Charge Calculation Under the proposal, FICC would create the Margin Proxy, a new, benchmarked volatility calculation of the VaR Charge. The Margin Proxy would act as alternative to the Current Volatility Calculation of the VaR Charge to provide a minimum volatility calculation for each Netting Member's VaR Charge. FICC proposes to use the Margin Proxy as the VaR Charge if doing so would result in a higher Required Fund Deposit for a Netting Member than using the Current Volatility Calculation as the VaR Charge. In addition, as described in more detail below, because FICC's testing shows that the Margin Proxy would, by itself, achieve a 99 percent confidence level for Netting Members' backtesting coverage when used in lieu of the Current Volatility Charge, in the event that FICC uses the Margin Proxy as the VaR Charge for a Netting Member, it would reduce the Coverage Charge for that Netting Member by a commensurate amount, as long as the Coverage Charge does not go below zero. According to FICC, during the fourth quarter of 2016, its Current Volatility Calculation did not respond effectively to the level of market volatility at that time, and its VaR Charge amounts (calculated using the profit and loss scenarios generated by the Current Volatility Calculation) did not achieve backtesting coverage at a 99 percent [[Page 16645]] confidence level,\6\ which resulted in backtesting deficiencies for the Required Fund Deposit beyond FICC's risk tolerance.\7\ FICC's calculation of the Margin Proxy is designed to avoid such deficiencies. The Margin Proxy provides FICC with an alternative calculation of the VaR Charge to the Current Volatility Calculation of the VaR Charge. In particular, the Margin Proxy is likely to be used when the Current Volatility Calculation is lower than volatility from certain benchmarks (i.e., market price volatility from corresponding U.S. Treasury and to- be-announced (``TBA'') \8\ securities benchmarks.\9\ The Margin Proxy separately calculates U.S. Treasury securities and agency pass-through mortgage backed securities (``MBS''). According to FICC, the historical price changes of these two asset classes are different due to market factors such as credit spreads and prepayment risk.\10\ This would allow FICC to monitor the performance of each of those asset classes individually.\11\ By using separate calculations for the two asset classes, the Margin Proxy would cover the historical market prices of each of those asset classes, on a standalone basis, to a 99 percent confidence level. --------------------------------------------------------------------------- \6\ Notice, 82 FR at 13029. \7\ Id. \8\ FICC states that specified pool trades are mapped to the corresponding positions in TBA securities for determining the VaR Charge. \9\ Notice, 82 FR at 13029. \10\ Id. \11\ Id. --------------------------------------------------------------------------- The Margin Proxy would be calculated per Netting Member, and each security in a Netting Member's Margin Portfolio would be mapped to a respective benchmark based on the security's asset class and maturity.\12\ All securities within each benchmark would be aggregated into a net exposure.\13\ Once the net exposure is determined, FICC would apply an applicable haircut \14\ to each benchmark's net exposure to determine the net price risk for each benchmark (``Net Price Risk''). Finally, FICC would separately determine the asset class price risk (``Asset Class Price Risk'') for U.S. Treasury and MBS benchmarks by aggregating the respective Net Price Risk for each benchmark. To provide risk diversification across tenor buckets for the U.S. Treasury benchmarks, the Asset Class Price Risk calculation includes a correlation adjustment that has been historically observed across the U.S. Treasury benchmarks. According to FICC, the Margin Proxy would thereby represent the sum of the U.S. Treasury and MBS Asset Class Price Risk.\15\ FICC would compare the Margin Proxy to the Current Volatility Calculation for each asset class and then apply whichever is greater as the VaR Charge for each Netting Member's Margin Portfolio. --------------------------------------------------------------------------- \12\ According to FICC, U.S. Treasury and agency securities would be mapped to a U.S. Treasury benchmark security/index, while MBS would be mapped to a TBA security/index. \13\ Net exposure is the aggregate market value of securities to be purchased by the Netting Member minus the aggregate market value of securities to be sold by the Netting Member. \14\ The haircut is calculated using historical market price changes of the respective benchmark to cover the expected market price volatility at 99 percent confidence level. \15\ Notice, 82 FR 13029. --------------------------------------------------------------------------- FICC expresses confidence that this proposal would provide the adequate VaR Charge for each Netting Member because its calculations show that including the Margin Proxy results in backtesting coverage above the 99 percent confidence level for the past four years.\16\ Additionally, FICC asserts that, by using industry-standard benchmarks that can be observed by Netting Members, the Margin Proxy would be transparent to Netting Members.\17\ --------------------------------------------------------------------------- \16\ Id. \17\ Id. --------------------------------------------------------------------------- FICC further asserts that the Margin Proxy methodology would be subject to performance reviews by FICC. Specifically, FICC would monitor each Netting Member's Required Fund Deposit and the aggregate FICC GSD clearing fund (``Clearing Fund'') requirements and compare them to the requirements calculated by the Margin Proxy. Consistent with the current GSD Rules,\18\ FICC would review the robustness of the Margin Proxy by comparing the results versus the three-day profit and loss of each Netting Member's Margin Portfolio based on actual market price moves. If the Margin Proxy's backtesting results do not meet FICC's 99 percent confidence level, FICC states that it would consider adjustments to the Margin Proxy, including increasing the look-back period and/or applying a historical stressed period to the Margin Proxy calibration, as appropriate.\19\ --------------------------------------------------------------------------- \18\ See definition of VaR Charge in GSD Rule 1, Definitions, supra note 4. \19\ Notice, 82 FR at 13029. --------------------------------------------------------------------------- C. Proposed Modification to the Coverage Charge When the Margin Proxy Is Applied FICC also proposes to modify the calculation of the Coverage Charge when the Margin Proxy is applied as the VaR Charge. Specifically, FICC would reduce the Coverage Charge by the amount that the Margin Proxy exceeds the sum of the Current Volatility Calculation and Coverage Charge, but not by an amount greater than the total Coverage Charge. FICC states that its backtesting analysis demonstrates that the Margin Proxy, on its own, achieves the 99 percent confidence level without the inclusion of the Coverage Charge \20\ FICC would not modify the Coverage Charge if the Margin Proxy is not applied as the VaR Charge. --------------------------------------------------------------------------- \20\ Id. at 13029. Future adjustments to the Margin Proxy could require the filing of a new proposed rule change. --------------------------------------------------------------------------- II. Summary of Comments Received The Commission received three comment letters in response to the proposal.\21\ Two comment letters--the Ronin Letter and the ICBCFS Letter--raise concerns with respect to the proposal's design,\22\ while the third comment letter is FICC's response to those concerns. The Commission has reviewed and taken into consideration each of the comments received and addresses the comments below insofar as they relate to the standard of review for an advance notice. --------------------------------------------------------------------------- \21\ As noted above, all three comment letters were submitted to the file for the related Proposed Rule Change, not the Advance Notice; however, because the Proposed Rule Change and Advance Notice are substantially the same proposal, this notice addresses the relevant comments. See supra note 4. \22\ See Ronin Letter at 1-10; ICBCFS Letter at 1-3. Ronin and ICBCFS also raised concerns with respect to transparency and implementation period. Specifically, Ronin and ICBCFS (i) argue that there is a lack of transparency with respect to the development of the Margin Proxy; and (ii) disapprove of FICC's request for an accelerated regulatory review process. In addition, Ronin argues that the proposal imposes a burden on competition because it may cause Ronin to pay more margin. These issues are relevant to the Commission's review and evaluation of the Proposed Rule Change, which is conducted under the Exchange Act, but not to the Commission's evaluation of the Advance Notice, which, as discussed below in Section III, is conducted under the Clearing Supervision Act and generally considers whether the proposal will mitigate systemic risk and promote financial stability. Accordingly, these concerns will be addressed in the Commission's review of the related Proposed Rule Change, as applicable under the Exchange Act. --------------------------------------------------------------------------- Specifically, Ronin questions the justification for imposing the Margin Proxy, particularly (i) the need for the VaR Charge to address idiosyncratic risk (referencing the 2016 U.S. presidential election), and (ii) if the volatility around the 2016 U.S. presidential election was sufficiently extreme to warrant the creation of the Margin Proxy.\23\ In response, FICC reiterates that the Margin Proxy's primary goal is to achieve a 99 percent backtesting confidence level for all members.\24\ FICC observes that, while recent dates from the fourth quarter of 2016 (including the 2016 U.S. Presidential [[Page 16646]] election) indicate that the VaR Charge, on its own, is not always sufficient to ensure that the 99 percent coverage threshold is met,\25\ inclusion of the Margin Proxy results in a backtesting confidence level above 99 percent for the past four years, demonstrating that the Margin Proxy accomplishes its primary goal.\26\ --------------------------------------------------------------------------- \23\ Ronin Letter at 1, 6. \24\ See FICC Letter at 4. \25\ See id. at 2. \26\ Id. at 4. --------------------------------------------------------------------------- ICBCFS disagrees with certain technical aspects of the proposal. In particular, it: (i) Questions the inclusion of ten years of pricing data in the proposed Margin Proxy calculation, including the 2007-2009 period; (ii) disagrees with the Margin Proxy's netting of both sides of a repurchase transaction; and (iii) raises concerns on how the proposed Margin Proxy groups securities in a Netting Member's Margin Portfolio in a way that could increase its margin.\27\ In response to the questions regarding the inclusion of ten years of pricing data, FICC states that using the proposed look-back period would help to ensure that the Margin Proxy, and as a result, the VaR Charge, does not either (i) decrease as quickly during intervals of low volatility, or (ii) increase as sharply in crisis periods, resulting in more stable VaR estimates that adequately reflect extreme market moves.\28\ With respect to ICBCFS's concerns with offsetting positions in transaction, FICC notes that the Margin Proxy uses a similar approach for offsetting positions as in the Current Volatility Calculation.\29\ In response to ICBCFS' concerns about increased margin due to the Margin Proxy's benchmarking, FICC responds that the circumstance that ICBCFS cited would not result in a higher margin, as the Margin Proxy would benchmark securities within the same asset class and maturity (and long and short positions within such benchmarks would be offset).\30\ --------------------------------------------------------------------------- \27\ ICBCFS Letter at 2. \28\ FICC Letter at 4. \29\ Id. \30\ Id. --------------------------------------------------------------------------- III. Discussion and Commission Findings Although the Clearing Supervision Act does not specify a standard of review for an advance notice, its stated purpose is instructive: To mitigate systemic risk in the financial system and promote financial stability by, among other things, promoting uniform risk management standards for systemically important financial market utilities and strengthening the liquidity of systemically important financial market utilities.\31\ Section 805(a)(2) of the Clearing Supervision Act authorizes the Commission to prescribe risk management standards for the payment, clearing, and settlement activities of designated clearing entities and financial institutions engaged in designated activities for which it is the supervisory agency or the appropriate financial regulator. Section 805(b) of the Clearing Supervision Act \32\ states that the objectives and principles for the risk management standards prescribed under Section 805(a) shall be to: --------------------------------------------------------------------------- \31\ 12 U.S.C. 5461(b). \32\ 12 U.S.C. 5464(b). ---------------------------------------------------------------------------Promote robust risk management; promote safety and soundness; reduce systemic risks; and support the stability of the broader financial system.\33\ --------------------------------------------------------------------------- \33\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act \34\ and Section 17A of the Exchange Act (``Clearing Agency Standards'').\35\ The 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.\36\ Therefore, it is appropriate for the Commission to review changes proposed in advance notices against these Clearing Agency Standards and the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act.\37\ --------------------------------------------------------------------------- \34\ 12 U.S.C. 5464(a)(2). \35\ See 17 CFR 240.17Ad-22; Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). \36\ Id. \37\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- A. Consistency With Section 805(b) of the Clearing Supervision Act The Commission believes that the changes proposed in the Advance Notice are consistent with the objectives and principles described in Section 805(b) of the Clearing Supervision Act.\38\ --------------------------------------------------------------------------- \38\ Id. --------------------------------------------------------------------------- First, the Commission believes that the proposed changes promote robust risk management by giving FICC the ability to better cover the exposure to potential default presented by GSD Netting Members' portfolios. In light of the VaR model deficiencies revealed through backtesting, FICC has taken appropriate steps to improve its ability to assess a sufficient VaR Charge for each Netting Member, and thereby help ensure that it has sufficient financial resources in its Clearing Fund. More specifically, the Margin Proxy would serve as a minimum volatility calculation, enabling FICC to adjust the GSD VaR Charge when the Margin Proxy calculation is greater than the current VaR model calculation. Such an adjustment would enable FICC to more effectively assess for the overall market risks associated with a possible default of a GSD Member. Second, the Commission believes that each of the Margin Proxy mechanisms discussed above--the longer look back period, use of position offsets, and treatment of when-issued Treasury securities--are designed to help FICC to better manage market risk. The Commission agrees that a longer look-back period typically produces more stable VaR estimates.\39\ By using the proposed look back period, including the 2007-2009 period, FICC will help ensure that the VaR Charge does not either decrease as quickly during intervals of low volatility or increase as sharply in crisis periods. This should allow FICC to manage market risk more effectively by having a more stable VaR Charge, as well as by incorporating periods of recent market volatility. The Commission also agrees that, by using position offsets within and across tenor buckets, the Margin Proxy will reflect historical observations across the U.S. Treasury benchmarks, and therefore help FICC monitor market risk. Finally, the Commission also believes that the Margin Proxy's proposed treatment of when-issued Treasury securities is appropriate. As FICC notes, the Margin Proxy ensures that when-issued Treasury securities correspond to the same maturity bucket as the new issue, therefore the VaR Charge will not be impacted by grouping of similar ``when-issued'' securities in different maturity buckets. In sum, the Commission believes that these mechanisms are designed to enable FICC to reduce its exposure to Netting Members, the Commission believes it is consistent with promoting robust risk management as contemplated in Section 805(a) of the Act. --------------------------------------------------------------------------- \39\ FICC Letter at 4. --------------------------------------------------------------------------- Third, the Commission believes that the proposed changes promote safety and soundness at FICC, which, in turn, should reduce systemic risk and support the stability of the broader financial system. By providing for a supplemental means to calculate a Netting Member's VaR Charge, especially in light of known deficiencies with the current calculation, the proposal would help [[Page 16647]] ensure that FICC collects a VaR Charge that better addresses the risk exposure presented by the portfolio of the Netting Member. By better limiting exposure to Netting Members, the proposal is designed to help ensure that, in the event of a member default, GSD's operations would not be disrupted and non-defaulting Netting Members would limit their exposure to losses that they cannot anticipate or control. Accordingly, the Commission believes that the proposal will help to promote safety and soundness at FICC, which in turn will help to reduce systemic risk and support the stability of the broader financial system, consistent with Section 805(b) of the Act.\40\ --------------------------------------------------------------------------- \40\ Id. --------------------------------------------------------------------------- B. Consistency With Rule 17Ad-22(b)(1) and (b)(2) Under the Exchange Act The Commission believes that the proposed changes associated with the Margin Proxy are consistent with the requirements of Rules 17Ad- 22(b)(1) and (b)(2) under the Exchange Act.\41\ --------------------------------------------------------------------------- \41\ 17 CFR 240.17Ad-22(b)(1) and (b)(2). --------------------------------------------------------------------------- Rule 17Ad-22(b)(1) under the Exchange Act requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to measure its credit exposures to its participants at least once a day and limit its exposures to potential losses from defaults by its participants under normal market conditions so that the operations of the clearing agency would not be disrupted and non-defaulting participants would not be exposed to losses that they cannot anticipate or control.\42\ The proposed Margin Proxy would be used daily to help measure FICC's credit exposure to Netting Members. While ICBCFS raises concerns about including the 2007-2009 period, as noted above, the Commission agrees that this look back period should help FICC better monitor the credit exposures presented by its Netting Members by including volatile periods. It should also enhance FICC's overall risk-based margining framework by helping to ensure that the calculation of each GSD Netting Member's Required Fund Deposit would be sufficient to allow FICC to use the defaulting member's own Required Fund Deposit to limit its exposures to potential losses associated with the liquidation of such member's portfolio in the event of a GSD Netting Member default under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad-22(b)(1).\43\ --------------------------------------------------------------------------- \42\ 17 CFR 240.17Ad-22(b)(1). \43\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(2) under the Exchange Act requires a registered clearing agency that performs central counterparty services to establish, implement, maintain, and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements and review such margin requirements and the related risk-based models and parameters at least monthly.\44\ The proposed changes would enhance the risk-based model and parameters that establish daily margin requirements for Netting Members by enabling FICC to better identify the risk posed by a Netting Member's unsettled portfolio and to quickly adjust and collect additional deposits as needed to cover those risks. Because the proposed changes are designed to calculate each Netting Member's Required Fund Deposit at a 99 percent confidence level, the proposal also should help mitigate losses to FICC and its members, in the event that such Netting Member defaults under normal market conditions. Therefore, the Commission believes that the proposal is consistent with the requirements of Rule 17Ad-22(b)(2).\45\ --------------------------------------------------------------------------- \44\ 17 CFR 240.17Ad-22(b)(2). \45\ Id. --------------------------------------------------------------------------- IV. Conclusion It is therefore noticed, pursuant to Section 806(e)(1)(I) of the Clearing Supervision Act,\46\ that the Commission does not object to the Advance Notice (SR-FICC-2017-801) and that FICC be hereby is authorized to implement the change as of the date of this notice or the date of an order by the Commission approving the Proposed Rule Change (SR-FICC-2017-001) that reflects the changes that are consistent with this Advance Notice, whichever is later. --------------------------------------------------------------------------- \46\ 12 U.S.C. 5465(e)(1)(I). By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-06682 Filed 4-4-17; 8:45 am] BILLING CODE 8011-01-P
![16644 Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices
designates May 18, 2017, as the date by the Advance Notice, it received three price risk associated with the securities
which the Commission shall either comment letters 4 to the Proposed Rule in a Netting Member’s Margin Portfolio.
approve or disapprove, or institute Change, of which parts pertinent to the That risk-based margin methodology
proceedings to determine whether to Advance Notice are discussed below.5 model, which FICC refers to as the
disapprove, the proposed rule change, This publication serves as notice of no ‘‘Current Volatility Calculation,’’ uses
as modified by Amendment No. 1 (File objection to the Advance Notice. historical market moves to project the
No. SR–NYSEArca–2017–09). potential gains or losses that could
I. Description of the Advance Notice occur in connection with the liquidation
For the Commission, by the Division of
Trading and Markets, pursuant to delegated The Advance Notice proposes several of a defaulting Netting Member’s Margin
authority.7 amendments to the FICC Government Portfolio.
Eduardo A. Aleman, Securities Division (‘‘GSD’’) Rulebook The Coverage Charge is calculated
(‘‘GSD Rules’’) designed to provide FICC based on the Netting Member’s daily
Assistant Secretary.
with a supplemental means to calculate backtesting results conducted by FICC.
[FR Doc. 2017–06683 Filed 4–4–17; 8:45 am]
the VaR Charge component of its GSD Backtesting is used to determine the
BILLING CODE 8011–01–P adequacy of each Netting Member’s
Netting Members’ (‘‘Netting Members’’)
daily margin requirement, known as the Required Fund Deposit and involves
‘‘Required Fund Deposit.’’ Specifically, comparing the Required Fund Deposit
SECURITIES AND EXCHANGE for each Netting Member with actual
COMMISSION under the proposal, FICC would include
a minimum volatility calculation for a price changes in the Netting Member’s
[Release No. 34–80341; File No. SR–FICC– Netting Member’s VaR Charge called the Margin Portfolio. The Coverage Charge
2017–801] ‘‘Margin Proxy.’’ FICC represents that is incorporated in the Required Fund
the Margin Proxy would enhance the Deposit for each Netting Member, and is
Self-Regulatory Organizations; Fixed risk-based model and parameters that equal to the amount necessary to
Income Clearing Corporation; Notice of FICC uses to establish Netting Members’ increase that Netting Member’s
No Objection to Advance Notice Filing Required Fund Deposits by enabling Required Fund Deposit so that the
To (1) Implement the Margin Proxy and FICC to better identify the risk posed by Netting Member’s backtesting coverage
(2) Modify the Calculation of the a Netting Member’s unsettled portfolio. may achieve the 99 percent confidence
Coverage Charge in Circumstances level required by FICC (i.e., two or fewer
Where the Margin Proxy Applies A. Overview of the Required Fund backtesting deficiency days in a rolling
Deposit twelve-month period).
March 30, 2017.
Fixed Income Clearing Corporation According to FICC, a key tool it uses B. Proposed Change to the Existing VaR
(‘‘FICC’’) filed with the U.S. Securities to manage market risk is the daily Charge Calculation
and Exchange Commission calculation and collection of Required
Fund Deposits from its Netting Under the proposal, FICC would
(‘‘Commission’’) on February 2, 2017 the create the Margin Proxy, a new,
advance notice SR–FICC–2017–801 Members. The Required Fund Deposit is
intended to mitigate potential losses to benchmarked volatility calculation of
(‘‘Advance Notice’’) pursuant to Section the VaR Charge. The Margin Proxy
806(e)(1) of the Payment, Clearing, and FICC associated with liquidation of such
Netting Member’s accounts at GSD that would act as alternative to the Current
Settlement Supervision Act of 2010 Volatility Calculation of the VaR Charge
(‘‘Clearing Supervision Act’’) 1 and Rule are used for margining purposes
(‘‘Margin Portfolio’’) in the event that to provide a minimum volatility
19b–4(n)(1)(i) 2 under the Securities calculation for each Netting Member’s
Exchange Act of 1934 (‘‘Exchange Act’’). FICC ceases to act for such Netting
VaR Charge. FICC proposes to use the
The Advance Notice was published for Member (referred to as a Netting
Margin Proxy as the VaR Charge if doing
comment in the Federal Register on Member ‘‘Default’’).
so would result in a higher Required
March 8, 2017.3 Although the A Netting Member’s Required Fund
Fund Deposit for a Netting Member than
Commission received no comments to Deposit consists of several components,
using the Current Volatility Calculation
including the VaR Charge and the
as the VaR Charge. In addition, as
7 17 CFR 200.30–3(a)(31). Coverage Charge. The VaR Charge
described in more detail below, because
1 12 U.S.C. 5465(e)(1). The Financial Stability comprises the largest portion of a
FICC’s testing shows that the Margin
Oversight Council designated FICC a systemically Netting Member’s Required Fund
important financial market utility on July 18, 2012. Proxy would, by itself, achieve a 99
Deposit amount and is calculated using
See Financial Stability Oversight Council 2012 percent confidence level for Netting
a risk-based margin methodology model
Annual Report, Appendix A, http:// Members’ backtesting coverage when
www.treasury.gov/initiatives/fsoc/Documents/ that is intended to cover the market
used in lieu of the Current Volatility
2012%20Annual%20Report.pdf. Therefore, FICC is
required to comply with the Payment, Clearing and 4 See letter from Robert E. Pooler, Chief Financial
Charge, in the event that FICC uses the
Settlement Supervision Act and file advance Officer, Ronin Capital LLC (‘‘Ronin’’), dated Margin Proxy as the VaR Charge for a
notices with the Commission. See 12 U.S.C. February 24, 2017, to Eduardo A. Aleman, Assistant Netting Member, it would reduce the
5465(e). Secretary, Commission (‘‘Ronin Letter’’); letter from Coverage Charge for that Netting
2 17 CFR 240.19b–4(n)(1)(i). Alan Levy, Managing Director, Industrial and
3 Securities Exchange Act Release No. 80139 Commercial Bank of China Financial Services LLC
Member by a commensurate amount, as
(March 2, 2017), 82 FR 13026 (March 8, 2017) (SR– (‘‘ICBCFS’’), dated February 24, 2017, to long as the Coverage Charge does not go
FICC–2017–801) (‘‘Notice’’). FICC also filed a Commission (‘‘ICBCFS Letter’’); and Timothy J. below zero.
related proposed rule change (SR–FICC–2017–001) Cuddihy, Managing Director, FICC, dated March 8, According to FICC, during the fourth
(‘‘Proposed Rule Change’’) with the Commission 2017, to Eduardo A. Aleman, Assistant Secretary, quarter of 2016, its Current Volatility
jstallworth on DSK7TPTVN1PROD with NOTICES
pursuant to Section 19(b)(1) of the Exchange Act Commission (‘‘FICC Letter’’) available at https://
and Rule 19b–4 thereunder, seeking approval of www.sec.gov/comments/sr-ficc-2017-001/ Calculation did not respond effectively
changes to its rules necessary to implement the ficc2017001.htm. to the level of market volatility at that
Advance Notice. 15 U.S.C. 78s(b)(1) and 17 CFR 5 Because the proposal contained in the Advance time, and its VaR Charge amounts
240.19b–4, respectively. The Proposed Rule Change Notice was also filed as the Proposed Rule Change, (calculated using the profit and loss
was published in the Federal Register on February see supra note 3, the Commission is considering
9, 2017. Securities Exchange Act Release No. 79958 any comment received on the Proposed Rule
scenarios generated by the Current
(February 3, 2017), 82 FR 10117 (February 9, 2017) Change also to be a comment on the Advance Volatility Calculation) did not achieve
(SR–FICC–2017–001). Notice. backtesting coverage at a 99 percent
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![Federal Register / Vol. 82, No. 64 / Wednesday, April 5, 2017 / Notices 16647
ensure that FICC collects a VaR Charge the proposal is consistent with the SECURITIES AND EXCHANGE
that better addresses the risk exposure requirements of Rule 17Ad–22(b)(1).43 COMMISSION
presented by the portfolio of the Netting Rule 17Ad–22(b)(2) under the
Member. By better limiting exposure to Exchange Act requires a registered [Release No. 34–80350; File No. SR–
Netting Members, the proposal is clearing agency that performs central BatsBZX–2017–07]
designed to help ensure that, in the
counterparty services to establish,
event of a member default, GSD’s Self-Regulatory Organizations; Bats
implement, maintain, and enforce
operations would not be disrupted and BZX Exchange, Inc.; Notice of
non-defaulting Netting Members would written policies and procedures
Designation of a Longer Period for
limit their exposure to losses that they reasonably designed to use margin Commission Action on Proposed Rule
cannot anticipate or control. requirements to limit its credit Change, as Modified by Amendment
Accordingly, the Commission believes exposures to participants under normal No. 1, To List and Trade Under BZX
that the proposal will help to promote market conditions and use risk-based Rule 14.11(c)(4) the Shares of the
safety and soundness at FICC, which in models and parameters to set margin VanEck Vectors AMT-Free National
turn will help to reduce systemic risk requirements and review such margin Municipal Index ETF of VanEck
and support the stability of the broader requirements and the related risk-based Vectors ETF Trust
financial system, consistent with models and parameters at least
Section 805(b) of the Act.40 monthly.44 The proposed changes March 30, 2017.
would enhance the risk-based model On January 27, 2017, Bats BZX
B. Consistency With Rule 17Ad–22(b)(1) Exchange, Inc. (‘‘Exchange’’) filed with
and parameters that establish daily
and (b)(2) Under the Exchange Act the Securities and Exchange
margin requirements for Netting
The Commission believes that the Members by enabling FICC to better Commission (‘‘Commission’’), pursuant
proposed changes associated with the identify the risk posed by a Netting to Section 19(b)(1) of the Securities
Margin Proxy are consistent with the Member’s unsettled portfolio and to Exchange Act of 1934 (‘‘Act’’) 1 and Rule
requirements of Rules 17Ad–22(b)(1) quickly adjust and collect additional 19b–4 thereunder,2 a proposed rule
and (b)(2) under the Exchange Act.41 deposits as needed to cover those risks. change to list and trade under BZX Rule
Rule 17Ad–22(b)(1) under the Because the proposed changes are 14.11(c)(4) the shares of the VanEck
Exchange Act requires a registered designed to calculate each Netting Vectors AMT-Free National Municipal
clearing agency that performs central Member’s Required Fund Deposit at a Index ETF of VanEck Vectors ETF Trust.
counterparty services to establish, The proposed rule change was
99 percent confidence level, the
implement, maintain, and enforce published for comment in the Federal
proposal also should help mitigate
written policies and procedures Register on February 14, 2017.3 On
losses to FICC and its members, in the March 10, 2017, the Exchange filed
reasonably designed to measure its event that such Netting Member defaults
credit exposures to its participants at Amendment No. 1 to the proposed rule
under normal market conditions. change.4 The Commission has received
least once a day and limit its exposures Therefore, the Commission believes that
to potential losses from defaults by its no comment letters on the proposed rule
the proposal is consistent with the change.
participants under normal market requirements of Rule 17Ad–22(b)(2).45
conditions so that the operations of the Section 19(b)(2) of the Act 5 provides
clearing agency would not be disrupted IV. Conclusion that, within 45 days of the publication
and non-defaulting participants would of notice of the filing of a proposed rule
not be exposed to losses that they It is therefore noticed, pursuant to change, or within such longer period up
cannot anticipate or control.42 The Section 806(e)(1)(I) of the Clearing to 90 days as the Commission may
proposed Margin Proxy would be used Supervision Act,46 that the Commission designate if it finds such longer period
daily to help measure FICC’s credit does not object to the Advance Notice to be appropriate and publishes its
exposure to Netting Members. While (SR–FICC–2017–801) and that FICC be reasons for so finding or as to which the
ICBCFS raises concerns about including hereby is authorized to implement the self-regulatory organization consents,
the 2007–2009 period, as noted above, change as of the date of this notice or the Commission shall either approve the
the Commission agrees that this look the date of an order by the Commission proposed rule change, disapprove the
back period should help FICC better approving the Proposed Rule Change proposed rule change, or institute
monitor the credit exposures presented (SR–FICC–2017–001) that reflects the proceedings to determine whether the
by its Netting Members by including changes that are consistent with this proposed rule change should be
volatile periods. It should also enhance Advance Notice, whichever is later. disapproved. The 45th day after
FICC’s overall risk-based margining publication of the notice for this
By the Commission. proposed rule change is March 31, 2017.
framework by helping to ensure that the
calculation of each GSD Netting Eduardo A. Aleman, The Commission is extending this 45-
Member’s Required Fund Deposit would Assistant Secretary. day time period. The Commission finds
be sufficient to allow FICC to use the [FR Doc. 2017–06682 Filed 4–4–17; 8:45 am] that it is appropriate to designate a
defaulting member’s own Required BILLING CODE 8011–01–P
longer period within which to take
Fund Deposit to limit its exposures to action on the proposed rule change so
potential losses associated with the that it has sufficient time to consider the
jstallworth on DSK7TPTVN1PROD with NOTICES
liquidation of such member’s portfolio
in the event of a GSD Netting Member 1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
default under normal market conditions.
3 See Securities Exchange Act Release No. 79989
Therefore, the Commission believes that
43 Id.
(February 8, 2017), 82 FR 10615.
4 Amendment No. 1 is available at: https://
40 Id. 44 17 CFR 240.17Ad–22(b)(2). www.sec.gov/comments/sr-batsbzx-2017-07/
41 17 45 Id.
CFR 240.17Ad–22(b)(1) and (b)(2). batsbzx201707-1667531-148997.pdf.
42 17 CFR 240.17Ad–22(b)(1). 46 12 U.S.C. 5465(e)(1)(I). 5 15 U.S.C. 78s(b)(2).
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Document Created: 2018-02-01 14:47:27
Document Modified: 2018-02-01 14:47:27
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 82 FR 16644 |
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