82 FR 8555 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing To Implement a Change to the Methodology Used in the MBSD VaR Model
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 16 (January 26, 2017)
Federal Register Volume 82, Issue 16 (January 26, 2017)
| Page Range | 8555-8559 | |
| FR Document | 2017-01716 |
[Federal Register Volume 82, Number 16 (Thursday, January 26, 2017)] [Notices] [Pages 8555-8559] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-01716] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79843; File No. SR-FICC-2016-801] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of No Objection to Advance Notice Filing To Implement a Change to the Methodology Used in the MBSD VaR Model January 19, 2017. On November 23, 2016, the Fixed Income Clearing Corporation (``FICC'') filed with the Securities and Exchange Commission (``Commission'') the advance notice SR-FICC-2016-801 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) under the Securities Exchange Act of 1934 (``Exchange Act'').\2\ The advance notice was published for comment in the Federal Register on December 28, 2016.\3\ The Commission did not receive any comments on the advance notice. This publication serves as notice that the Commission does not object to the changes set forth in 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 Clearing Supervision Act and file advance notices with the Commission. See 12 U.S.C. 5465(e). \2\ 17 CFR 240.19b-4(n)(1)(i). \3\ Securities Exchange Act Release No. 79643 (December 21, 2016), 81 FR 95669 (December 28, 2016) (SR-FICC-2016-801) (``Notice''). FICC also filed a 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 proposal. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4, respectively. The proposed rule change was published for comment in the Federal Register on December 13, 2016. Securities Exchange Act Release No. 79491 (December 7, 2016), 81 FR 90001 (December 13, 2016) (SR-FICC-2016-007). The Commission did not receive any comments on the proposed rule change. --------------------------------------------------------------------------- I. Description of the Advance Notice As described by FICC in the advance notice, FICC proposes to change the methodology that it currently uses in the Mortgage-Backed Securities Division's (``MBSD'') value-at-risk (``VaR'') model from one that employs a full revaluation approach to one that would employ a sensitivity approach.\4\ In connection with this change, FICC also proposes to amend the MBSD Clearing Rules (``MBSD Rules'') to: (i) Amend the definition of VaR Charge \5\ to reference an alternative volatility calculation (``Margin Proxy'') that FICC would use in the event that data used for the sensitivity approach is unavailable for an extended period of time; \6\ (ii) revise the definition of VaR Charge to include a VaR floor that FICC would use as an alternative to the amount calculated by the proposed VaR model for portfolios where the VaR floor would be greater than the model-based charge amount (``VaR Floor''); (iii) eliminate two components from the Required Fund Deposit \7\ calculation that would no longer be necessary following implementation of the proposed VaR Charge; and (iv) change the margining approach that FICC may use for certain securities with inadequate historical pricing data from one that calculates charges using a historic index volatility model to one that would use a haircut method. --------------------------------------------------------------------------- \4\ The proposed sensitivity approach methodology would be reflected in the Methodology and Model Operations Document--MBSD Quantitative Risk Model (``QRM Methodology''). FICC requested confidential treatment of the QRM Methodology and filed it separately with the Secretary of the Commission, pursuant to Rule 24b-2 under the Exchange Act. See 17 CFR 240.24b-2. \5\ The term ``VaR Charge'' means, with respect to each margin portfolio, a calculation of the volatility of specified net unsettled positions of an MBSD clearing member, as of the time of such calculation. See MBSD Rule 1. \6\ Details of the Margin Proxy methodology would be reflected in the QRM Methodology. \7\ The term ``Required Fund Deposit'' means the amount an MBSD clearing member is required to deposit to the Clearing Fund pursuant to MBSD Rule 4. See MBSD Rule 1 and MBSD Rule 4 Section 2. --------------------------------------------------------------------------- [[Page 8556]] A. Overview of the Required Fund Deposit and Clearing Fund Calculation A key tool that FICC uses to manage market risk is the daily calculation and collection of Required Fund Deposits from MBSD clearing members (``Clearing Members'').\8\ The Required Fund Deposit serves as each Clearing Member's margin. The aggregate of all Clearing Members' Required Fund Deposits constitutes the Clearing Fund \9\ of MBSD, which FICC would access should a defaulting Clearing Member's own Required Fund Deposit be insufficient to satisfy losses to FICC caused by the liquidation of that Clearing Member's portfolio. --------------------------------------------------------------------------- \8\ The term ``Clearing Member'' means any entity admitted into membership pursuant to MBSD Rule 2A. See MBSD Rule 1. \9\ The term ``Clearing Fund'' means the Clearing Fund established by FICC pursuant to MBSD Rules, which shall be comprised of the aggregate of all Required Fund Deposits and all other deposits, including cross-guaranty repayment deposits. See MBSD Rule 1. --------------------------------------------------------------------------- According to FICC, the objective of a Clearing Member's Required Fund Deposit is to mitigate potential losses to FICC associated with liquidation of such Clearing Member's portfolio in the event that FICC ceases to act for such Clearing Member (i.e., a ``default'').\10\ Pursuant to MBSD Rules, each Clearing Member's Required Fund Deposit amount consists of multiple components. Of all of the components, the VaR Charge comprises the largest portion of a Clearing Member's Required Fund Deposit amount. --------------------------------------------------------------------------- \10\ See Notice, 81 FR at 95670. --------------------------------------------------------------------------- Generally, the VaR Charge is calculated using a risk-based margin methodology that is intended to capture the market price risk associated with the securities in a Clearing Member's portfolio. More specifically, FICC calculates the VaR Charge using a methodology referred to as the full revaluation approach. The full revaluation approach uses a historical simulation method to fully re-price each security in a Clearing Member's portfolio. According to FICC, the methodology is designed to project the potential gains or losses that could occur in connection with the liquidation of a defaulting Clearing Member's portfolio, assuming that a portfolio would take three days to hedge or liquidate in normal market conditions.\11\ The projected liquidation gains or losses are used to determine the amount of the VaR Charge, which is calculated to cover projected liquidation losses at a 99 percent confidence level.\12\ --------------------------------------------------------------------------- \11\ Id. \12\ The 99 percent confidence level does not apply to unregistered investment pool clearing members, which are subject to a VaR Charge with a higher minimum targeted confidence level assumption of 99.5 percent. --------------------------------------------------------------------------- If FICC determines that a security's price history is incomplete and the market price risk cannot be calculated by the VaR model, then FICC applies the Margin Proxy until such security's trading history and pricing reflects market risk factors that can be appropriately calibrated from the security's historical data.\13\ --------------------------------------------------------------------------- \13\ See MBSD Rule 4 Section 2(c). --------------------------------------------------------------------------- B. Proposed Changes to the VaR Charge Calculation According to FICC, during the volatile market period that occurred during the second and third quarters of 2013, FICC's full revaluation approach did not respond effectively to the levels of market volatility at that time, and the model did not achieve a 99 percent confidence level.\14\ This prompted FICC to employ the Margin Proxy--a supplemental risk charge to ensure that each Clearing Member's VaR Charge would achieve a minimum 99 percent confidence level.\15\ --------------------------------------------------------------------------- \14\ See Notice, 81 FR at 95670. \15\ The Margin Proxy is currently used to provide supplemental coverage to the VaR Charge; however, under this proposed change, the Margin Proxy would only be used as an alternative volatility calculation in the event that the requisite data used for the sensitivity approach is unavailable for an extended period of time. --------------------------------------------------------------------------- FICC reviewed the existing model's deficiencies, examined the root causes of the deficiencies, and considered options that would remediate the model weaknesses. As a result of this review, FICC now proposes to change MBSD's methodology for calculating the VaR Charge by: (i) Replacing the full revaluation approach with the sensitivity approach; (ii) using the Margin Proxy as an alternative volatility calculation in the event that the data used for the sensitivity approach is unavailable for an extended period of time; and (iii) establishing a VaR Floor to address a circumstance where the proposed VaR model yields a VaR Charge amount that is lower than 5 basis points of the market value of a Clearing Member's gross unsettled positions.\16\ --------------------------------------------------------------------------- \16\ Assuming the market value of gross unsettled positions of $500,000,000, the VaR Floor calculation would be .0005 multiplied by $500,000,000 = $250,000. If the VaR model charge is less than $250,000, then the VaR Floor calculation of $250,000 would be set as the VaR Charge. --------------------------------------------------------------------------- (i) Proposed Sensitivity Approach FICC's current full revaluation method uses valuation algorithms to fully re-price each security in a Clearing Member's portfolio over a range of historically simulated scenarios. While there are benefits to this method, according to FICC, its deficiencies are that it requires significant historical market data inputs, calibration of various model parameters, and extensive quantitative support for price simulations.\17\ FICC believes that the proposed sensitivity approach would address these deficiencies because it would leverage external vendor expertise in supplying the market risk attributes,\18\ which would then be incorporated by FICC into its model to calculate the VaR Charge.\19\ --------------------------------------------------------------------------- \17\ See Notice, 81 FR at 95670. \18\ The risk factors that would be incorporated into MBSD's proposed VaR methodology are key rate, convexity, spread, volatility, mortgage basis and time, as more fully described in the Notice. See Notice, 81 FR at 95671. \19\ FICC states that by leveraging external vendor expertise, FICC would not need to develop such expertise in-house to supply the market risk attributes that would then be incorporated by FICC into its model to calculate the VaR Charge. See Notice, 81 FR at 95671. --------------------------------------------------------------------------- Because data quality 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. According to FICC, it 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, and it states that it understands and is comfortable with the vendor's controls, governance process, and data quality standards.\20\ Additionally, FICC would conduct an independent review of the vendor's release of a new version of the model. To the extent that the vendor changes its model and methodologies that produce the risk factors and risk sensitivities, FICC would review the effects (if any) of these changes on FICC's proposed sensitivity approach. Moreover, according to FICC, it does not believe that engaging the vendor would present a conflict of interest to FICC because the vendor is not an existing Clearing Member nor are any of the vendor's affiliates existing Clearing Members.\21\ To the extent that the vendor or any of its affiliates submit an application to become a Clearing Member, FICC states that it will negotiate an appropriate information barrier with the applicant in an effort to prevent a conflict of interest from arising.\22\ --------------------------------------------------------------------------- \20\ See Notice, 81 FR at 95671. \21\ See Notice, 81 FR at 95672. \22\ The Commission understands that FICC will address any potential conflicts of interest. --------------------------------------------------------------------------- According to FICC, the sensitivity approach would provide three key benefits.\23\ First, the sensitivity [[Page 8557]] approach would incorporate both historical data and current risk factor sensitivities while the full revaluation approach is calibrated with only historical data. According to FICC, the integration of both observed risk factor changes and current market conditions would enable the model to more effectively respond to current market price moves that may not be reflected in the historical price moves.\24\ FICC performed backtesting to validate the performance of the proposed model and determine the impact on the VaR Charge. According to FICC, the backtesting results and impact study show that the sensitivity approach provides better coverage on volatile days and a material improvement in margin coverage, while not significantly increasing the overall Clearing Fund.\25\ FICC believes that the proposed sensitivity approach would be more responsive to changing market dynamics and would not negatively impact FICC or its Clearing Members.\26\ --------------------------------------------------------------------------- \23\ See Notice, 81 FR at 95671. \24\ Id. \25\ Id. \26\ Id. --------------------------------------------------------------------------- Second, FICC states that the proposed sensitivity approach would provide more transparency to Clearing Members. Since Clearing Members typically use risk factor analysis for their own risk and financial reporting, these Clearing Members would have comparable data and analysis to assess the variation in their VaR Charges based on changes in the market value of their portfolios. Therefore, Clearing Members would be able to simulate the VaR Charge to a closer degree than under the existing VaR model. Third, FICC states that the proposed sensitivity approach would better provide FICC with the ability to increase the look-back period used to generate the risk scenarios from one year to 10 years plus an additional stressed period, as determined necessary by FICC.\27\ The extended look-back period would be used to ensure that the historical simulation is inclusive of stressed market periods. While FICC could extend the one-year look-back period in the existing full revaluation approach to a 10-year look-back period, 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 method 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 would involve significant model development. --------------------------------------------------------------------------- \27\ 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 (e.g., from September 2018 onward), 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. On an annual basis, FICC would assess whether an additional stressed period should be included. This assessment would include a review of: (i) The largest moves in the dominating market risk factor of the proposed VaR model; (ii) the impact analyses resulting from the removal and/or addition of a stressed period; and (iii) the backtesting results of the proposed look-back period. --------------------------------------------------------------------------- (ii) Proposed Margin Proxy In connection with FICC's proposal to source data for the proposed sensitivity approach from an external vendor, FICC is also proposing procedures that would govern in the event that the vendor fails to provide sensitivity data and risk factor 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.\28\ If it is determined that the vendor will resume providing data within five business days, 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, as described below. If it is determined that the data disruption will extend beyond five business days, the Margin Proxy would be applied. --------------------------------------------------------------------------- \28\ FICC states it has existing policies and procedures in accordance with Regulation Systems Compliance and Integrity (``SCI''), 17 CFR 242.1001(c)(1) (``Regulation SCI''), to determine whether a disruption to, or significant downgrade of, the normal operation of FICC's risk management system has occurred as defined under Regulation SCI. In the event that the vendor fails to provide the requisite sensitivity data and risk factor data, the responsible SCI personnel at FICC would determine whether an SCI event has occurred, and FICC would fulfill its obligations with respect to the SCI event. --------------------------------------------------------------------------- FICC would calculate the Margin Proxy on a daily basis, and the Margin Proxy method would be subject to monthly performance review. FICC would monitor the performance of the calculation on a monthly basis to ensure that it could be used in the circumstance described above. Specifically, FICC would monitor each Clearing 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 VaR model, or if the Margin Proxy's backtesting results do not meet FICC's 99 percent confidence level, management may recommend remedial actions, such as increasing the look-back period and/or applying an appropriate historical stressed period to the Margin Proxy calibration. (iii) Proposed Change To Establish a VaR Floor FICC proposes to amend the definition of VaR Charge to include a VaR Floor. The VaR Floor would be used as an alternative to the amount calculated by the proposed model for portfolios where the VaR Floor would be greater than the model-based charge amount. FICC's proposal to establish a VaR Floor seeks to address the risk that the proposed VaR model may calculate too low a VaR Charge for certain portfolios where the VaR model applies substantial risk offsets among long and short positions in different classes of mortgage-backed securities that have a high degree of historical price correlation. According to FICC, because this high degree of historical price correlation may not apply in future changing market conditions,\29\ it is prudent to apply a VaR Floor that is based upon the market value of the gross unsettled positions in the Clearing Member's portfolio to protect FICC against such risk in the event that FICC is required to liquidate a large mortgage-backed securities portfolio in stressed market conditions. --------------------------------------------------------------------------- \29\ According to FICC, for example, and without limitation, certain classes of mortgage-backed securities may have highly correlated historical price returns despite having different coupons. However, if future mortgage market conditions were to generate substantially greater prepayment activity for some but not all such classes, these historical correlations could break down, leading to model-generated offsets that would not adequately capture a portfolio's risk. --------------------------------------------------------------------------- C. Proposed Change to Eliminate the Coverage Charge and the Margin Requirement Differential FICC proposes to eliminate two components of the Required Fund Deposit--the Coverage Charge \30\ and the Margin Requirement Differential [[Page 8558]] (``MRD'') \31\--that FICC believes would become unnecessary with the proposed changes to the VaR Charge. Both components are based on historical portfolio activity, which may not be indicative of a Clearing Member's current risk profile, but were determined by FICC to be appropriate to address potential shortfalls in margin charges under the existing VaR model. --------------------------------------------------------------------------- \30\ The Coverage Charge is an additional charge to help bring a Clearing Member's margin coverage to a targeted confidence level by preemptively increasing the Required Fund Deposit by an amount calculated to forecast potential deficiencies in the margin coverage. See MBSD Rule 1. \31\ The MRD is designed to help mitigate the risks posed to FICC by day-over-day fluctuations in a Clearing Member's portfolio. It does this by forecasting future changes in a Clearing Member's portfolio based on a historical look-back of each portfolio over a given time period. See MBSD Rule 4 Section 2. --------------------------------------------------------------------------- According to FICC, as part of the development and assessment of the sensitivity approach for the proposed VaR model, FICC obtained an independent validation of the proposed model by an external party, 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 Clearing Member's portfolio composition coverage than the existing model. The model validation and backtesting analysis also demonstrated that the proposed sensitivity model would provide sufficient margin coverage on a standalone basis. Because testing and validation of MBSD's proposed VaR model show a material improvement in margin coverage, FICC believes that the Coverage Charge and MRD components are no longer necessary. D. Proposed Change To Replace the Historic Index Volatility Model With a Haircut Method According to FICC, occasionally, portfolios contain classes of securities that reflect market price changes not consistently related to historical risk factors. The value of these securities is often uncertain because the securities' market volume varies widely, which limits their price histories. Since 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, MBSD Rule 4 provides that FICC may use a historic index volatility model to calculate the VaR component of the Required Fund Deposit for these classes of securities.\32\ FICC is proposing to amend MBSD Rule 4 to replace the historic index volatility model with a haircut method. FICC believes that the haircut method would better capture the risk profile of these securities because the lack of adequate historical data makes it difficult to map such securities to a historic index volatility model. --------------------------------------------------------------------------- \32\ See MBSD Rule 4 Section 2(c). --------------------------------------------------------------------------- FICC proposes to calculate the component of the Required Fund Deposit applicable to these securities by applying a fixed haircut level to the gross market value of the positions. FICC has selected an initial haircut of one percent based on its analysis of a five-year historical study of three-day returns during a period that such securities were traded. This percentage would be reviewed annually or more frequently if market conditions warrant and updated, if necessary, to ensure sufficient coverage. II. 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.\33\ Section 805(a)(2) of the Clearing Supervision Act \34\ 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 \35\ states that the objectives and principles for the risk management standards prescribed under Section 805(a) shall be to: --------------------------------------------------------------------------- \33\ See 12 U.S.C. 5461(b). \34\ 12 U.S.C. 5464(a)(2). \35\ 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. The Commission has adopted risk management standards under Section 805(a)(2) of the Clearing Supervision Act \36\ and Section 17A of the Exchange Act (``Clearing Agency Standards'').\37\ 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.\38\ Therefore, it is appropriate for the Commission to review proposed changes in advance notices against the objectives and principles of these risk management standards as described in Section 805(b) of the Clearing Supervision Act and in the Clearing Agency Standards. --------------------------------------------------------------------------- \36\ 12 U.S.C. 5464(a)(2). \37\ See 17 CFR 240.17Ad-22. Securities Exchange Act Release No. 68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). \38\ Id. --------------------------------------------------------------------------- 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.\39\ --------------------------------------------------------------------------- \39\ 12 U.S.C. 5464(b). --------------------------------------------------------------------------- As discussed above, FICC is proposing a number of changes to the way it calculates its Required Fund Deposits--a key tool that FICC uses to mitigate potential losses to FICC associated with liquidating a Clearing Member's portfolio in the event of Clearing Member default. The Commission believes that the proposed changes are consistent with promoting robust risk management because they are designed to enable FICC to better limit its exposure to Clearing Members in the event of Clearing Member default. First, FICC proposes to implement the sensitivity approach to its VaR Charge calculation. The change would enable FICC to better limit its exposure to Clearing Members by correcting deficiencies in MBSD's existing VaR methodology by leveraging an external vendor's expertise in supplying market risk attributes used to calculate the VaR Charge in the proposed sensitivity approach. In turn, the sensitivity approach would enable FICC to view and respond more effectively to market volatility by allowing FICC to attribute market price moves to various risk factors such as key rates. Second, the proposal to implement the Margin Proxy as a back-up methodology to the sensitivity approach would enable FICC to better limit its exposure to Clearing Members by helping ensure that FICC could continue to calculate each Clearing Member's VaR Charge in the event that FICC experiences a data disruption with the vendor that supplies the sensitivity data. Third, FICC's proposal to implement the VaR Floor is designed to enable FICC to better limit its exposure to Clearing Members in the event that the proposed sensitivity VaR model calculates too low of a VaR Charge for portfolios where the model applies substantial offsets from certain offsetting long and short positions. Fourth, the proposed change to [[Page 8559]] implement a haircut method for securities with inadequate historical pricing data would enable FICC to better limit its exposure to Clearing Members by better capturing the risk profile of the securities. Finally, FICC's proposal to remove the Coverage Charge and MRD components would enable FICC to remove unnecessary components from the Clearing Fund calculation that may not be indicative of a Clearing Member's current risk profile. Therefore, because the proposal is designed to enable FICC to better limit its exposure to Clearing Members in the manner described above, the Commission believes it is consistent with promoting robust risk management. Furthermore, the Commission believes that the changes proposed in the 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.\40\ The proposed changes are designed to better limit FICC's exposure to Clearing Members in the event of Clearing Member default. As discussed above, the sensitivity approach would enable FICC to view and respond more effectively to market volatility. The Margin Proxy would help manage data disruption. The VaR Floor would ensure FICC collects at least a minimum VaR Charge. The haircut method would better capture the risk profile of securities with inadequate historical pricing data. Finally, removing the Coverage Charge and MRD would help ensure the Clearing Fund calculation would not include unnecessary components that may not be indicative of a Clearing Member's current risk profile. By better limiting exposure to Clearing Members, the proposed changes are designed to ensure that, in the event of Clearing Member default, MBSD's operations would not be disrupted and non-defaulting Clearing Members would not be exposed to losses that they cannot anticipate or control. This is consistent with promoting safety and soundness, which in turn, is consistent with reducing systemic risks and supporting the stability of the broader financial system. --------------------------------------------------------------------------- \40\ Id. --------------------------------------------------------------------------- B. Consistency with Rule 17Ad-22(b)(1) and (b)(2) Under the Exchange Act The Commission believes that FICC's proposal is consistent with Clearing Agency Standards, in particular, Rules 17Ad-22(b)(1) and (b)(2) under the Exchange Act.\41\ Rule 17Ad-22(b)(1) under the Exchange Act \42\ requires a registered clearing agency that performs central counterparty services to establish, implement, maintain and enforce written policies and procedures reasonably designed to, among other things, 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. FICC's proposal would enable FICC to better limit its exposure to potential losses from defaults by its Clearing Members under normal market conditions. As discussed above, the sensitivity approach would enable FICC to view and respond more effectively to market volatility. The Margin Proxy would help manage data disruption. The VaR Floor would ensure FICC collects at least a minimum VaR Charge. The haircut method would better capture the risk profile of securities with inadequate historical pricing data. Finally, removing the Coverage Charge and MRD would help ensure the Clearing Fund calculation would not include unnecessary components that may not be indicative of a Clearing Member's current risk profile. By better limiting its exposures to potential losses from defaults by its participants under normal market conditions, the proposed changes are designed to ensure 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. Therefore, the Commission believes this proposal is consistent with Rule 17Ad-22(b)(1) under the Exchange Act.\43\ --------------------------------------------------------------------------- \41\ 17 CFR 240.17Ad-22(b)(1) and (b)(2). \42\ 17 CFR 240.17Ad-22(b)(1). \43\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(2) under the Exchange Act \44\ requires a registered clearing agency that performs central counterparty services to establish, implement, maintain and enforce written policies and procedures reasonably designed to, among other things, 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. The Required Fund Deposits are the margin requirements that FICC collects to limit its credit exposures to participants under normal market conditions. Additionally, FICC's proposed changes use a risk-based model (i.e., the sensitivity approach) and parameters (e.g., the VaR Floor and Margin Proxy) to set margin requirements. The proposed changes are designed to improve FICC's margin requirements to better limit FICC's credit exposures to Clearing Members, in the event of default, under normal market conditions. Therefore, the Commission believes this proposal is consistent with Rule 17Ad-22(b)(2) under the Exchange Act \45\ --------------------------------------------------------------------------- \44\ 17 CFR 240.17Ad-22(b)(2). \45\ Id. --------------------------------------------------------------------------- For these reasons, the Commission does not object to the advance notice. III. 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 this advance notice proposal (SR-FICC-2016-801) and that FICC is authorized to implement the proposal as of the date of this notice or the date of an order by the Commission approving a proposed rule change that reflects rule changes that are consistent with this advance notice proposal (SR-FICC-2016-007), whichever is later. --------------------------------------------------------------------------- \46\ 12 U.S.C. 5465(e)(1)(I). By the Commission. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-01716 Filed 1-25-17; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 82, No. 16 / Thursday, January 26, 2017 / Notices 8555
III. Date of Effectiveness of the Washington, DC 20549, on official did not receive any comments on the
Proposed Rule Change and Timing for business days between the hours of advance notice. This publication serves
Commission Action 10:00 a.m. and 3:00 p.m. Copies of the as notice that the Commission does not
The foregoing rule change has become filing also will be available for object to the changes set forth in the
effective pursuant to Section inspection and copying at the principal advance notice.
office of the Exchange. All comments
19(b)(3)(A)(ii) of the Act.8 I. Description of the Advance Notice
received will be posted without change;
At any time within 60 days of the
the Commission does not edit personal
filing of the proposed rule change, the As described by FICC in the advance
identifying information from
Commission summarily may notice, FICC proposes to change the
submissions. You should submit only
temporarily suspend such rule change if methodology that it currently uses in
information that you wish to make
it appears to the Commission that such the Mortgage-Backed Securities
available publicly. All submissions
action is: (i) Necessary or appropriate in Division’s (‘‘MBSD’’) value-at-risk
should refer to File Number SR–
the public interest; (ii) for the protection (‘‘VaR’’) model from one that employs a
NASDAQ–2017–005 and should be
of investors; or (iii) otherwise in full revaluation approach to one that
submitted on or before February 16,
furtherance of the purposes of the Act. 2017. would employ a sensitivity approach.4
If the Commission takes such action, the In connection with this change, FICC
Commission shall institute proceedings For the Commission, by the Division of
Trading and Markets, pursuant to delegated also proposes to amend the MBSD
to determine whether the proposed rule
authority.9 Clearing Rules (‘‘MBSD Rules’’) to: (i)
should be approved or disapproved.
Eduardo A. Aleman, Amend the definition of VaR Charge 5 to
IV. Solicitation of Comments Assistant Secretary. reference an alternative volatility
Interested persons are invited to [FR Doc. 2017–01719 Filed 1–25–17; 8:45 am] calculation (‘‘Margin Proxy’’) that FICC
submit written data, views and BILLING CODE 8011–01–P would use in the event that data used
arguments concerning the foregoing, for the sensitivity approach is
including whether the proposed rule unavailable for an extended period of
change is consistent with the Act. SECURITIES AND EXCHANGE time; 6 (ii) revise the definition of VaR
Comments may be submitted by any of COMMISSION Charge to include a VaR floor that FICC
the following methods: [Release No. 34–79843; File No. SR–FICC– would use as an alternative to the
2016–801] amount calculated by the proposed VaR
Electronic Comments
model for portfolios where the VaR floor
• Use the Commission’s Internet Self-Regulatory Organizations; Fixed would be greater than the model-based
comment form (http://www.sec.gov/ Income Clearing Corporation; Notice of charge amount (‘‘VaR Floor’’); (iii)
rules/sro.shtml); or No Objection to Advance Notice Filing eliminate two components from the
• Send an email to rule-comments@ To Implement a Change to the Required Fund Deposit 7 calculation
sec.gov. Please include File Number SR– Methodology Used in the MBSD VaR that would no longer be necessary
NASDAQ–2017–005 on the subject line. Model
following implementation of the
Paper Comments January 19, 2017. proposed VaR Charge; and (iv) change
On November 23, 2016, the Fixed the margining approach that FICC may
• Send paper comments in triplicate
to Secretary, Securities and Exchange Income Clearing Corporation (‘‘FICC’’) use for certain securities with
Commission, 100 F Street NE., filed with the Securities and Exchange inadequate historical pricing data from
Washington, DC 20549–1090. Commission (‘‘Commission’’) the one that calculates charges using a
advance notice SR–FICC–2016–801 historic index volatility model to one
All submissions should refer to File pursuant to Section 806(e)(1) of the that would use a haircut method.
Number SR–NASDAQ–2017–005. This Payment, Clearing, and Settlement
file number should be included on the Supervision Act of 2010 (‘‘Clearing proposal. 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b–
subject line if email is used. To help the Supervision Act’’) 1 and Rule 19b– 4, respectively. The proposed rule change was
Commission process and review your 4(n)(1)(i) under the Securities Exchange published for comment in the Federal Register on
comments more efficiently, please use Act of 1934 (‘‘Exchange Act’’).2 The December 13, 2016. Securities Exchange Act
only one method. The Commission will advance notice was published for Release No. 79491 (December 7, 2016), 81 FR 90001
post all comments on the Commission’s (December 13, 2016) (SR–FICC–2016–007). The
comment in the Federal Register on Commission did not receive any comments on the
Internet Web site (http://www.sec.gov/ December 28, 2016.3 The Commission proposed rule change.
rules/sro.shtml). Copies of the 4 The proposed sensitivity approach methodology
submission, all subsequent 9 17 CFR 200.30–3(a)(12). would be reflected in the Methodology and Model
amendments, all written statements 1 12 U.S.C. 5465(e)(1). The Financial Stability Operations Document—MBSD Quantitative Risk
Model (‘‘QRM Methodology’’). FICC requested
with respect to the proposed rule Oversight Council designated FICC a systemically
confidential treatment of the QRM Methodology
change that are filed with the important financial market utility on July 18, 2012.
See Financial Stability Oversight Council 2012 and filed it separately with the Secretary of the
Commission, and all written Annual Report, Appendix A, http:// Commission, pursuant to Rule 24b–2 under the
communications relating to the www.treasury.gov/initiatives/fsoc/Documents/ Exchange Act. See 17 CFR 240.24b–2.
5 The term ‘‘VaR Charge’’ means, with respect to
proposed rule change between the 2012%20Annual%20Report.pdf. Therefore, FICC is
required to comply with the Clearing Supervision each margin portfolio, a calculation of the volatility
Commission and any person, other than of specified net unsettled positions of an MBSD
Act and file advance notices with the Commission.
jstallworth on DSK7TPTVN1PROD with NOTICES
those that may be withheld from the See 12 U.S.C. 5465(e). clearing member, as of the time of such calculation.
public in accordance with the 2 17 CFR 240.19b–4(n)(1)(i). See MBSD Rule 1.
provisions of 5 U.S.C. 552, will be 3 Securities Exchange Act Release No. 79643 6 Details of the Margin Proxy methodology would
available for Web site viewing and (December 21, 2016), 81 FR 95669 (December 28, be reflected in the QRM Methodology.
2016) (SR–FICC–2016–801) (‘‘Notice’’). FICC also 7 The term ‘‘Required Fund Deposit’’ means the
printing in the Commission’s Public
filed a proposed rule change with the Commission amount an MBSD clearing member is required to
Reference Room, 100 F Street NE., pursuant to Section 19(b)(1) of the Exchange Act deposit to the Clearing Fund pursuant to MBSD
and Rule 19b–4 thereunder, seeking approval of Rule 4. See MBSD Rule 1 and MBSD Rule 4 Section
8 15 U.S.C. 78s(b)(3)(A)(ii). changes to its rules necessary to implement the 2.
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![Federal Register / Vol. 82, No. 16 / Thursday, January 26, 2017 / Notices 8559
implement a haircut method for Exchange Act.41 Rule 17Ad–22(b)(1) use a risk-based model (i.e., the
securities with inadequate historical under the Exchange Act 42 requires a sensitivity approach) and parameters
pricing data would enable FICC to better registered clearing agency that performs (e.g., the VaR Floor and Margin Proxy)
limit its exposure to Clearing Members central counterparty services to to set margin requirements. The
by better capturing the risk profile of the establish, implement, maintain and proposed changes are designed to
securities. Finally, FICC’s proposal to enforce written policies and procedures improve FICC’s margin requirements to
remove the Coverage Charge and MRD reasonably designed to, among other better limit FICC’s credit exposures to
components would enable FICC to things, limit its exposures to potential Clearing Members, in the event of
remove unnecessary components from losses from defaults by its participants default, under normal market
the Clearing Fund calculation that may under normal market conditions so that conditions. Therefore, the Commission
not be indicative of a Clearing Member’s the operations of the clearing agency believes this proposal is consistent with
current risk profile. would not be disrupted and non- Rule 17Ad–22(b)(2) under the Exchange
Therefore, because the proposal is defaulting participants would not be Act 45
designed to enable FICC to better limit exposed to losses that they cannot For these reasons, the Commission
its exposure to Clearing Members in the anticipate or control. FICC’s proposal does not object to the advance notice.
manner described above, the would enable FICC to better limit its
Commission believes it is consistent exposure to potential losses from III. Conclusion
with promoting robust risk defaults by its Clearing Members under It is therefore noticed, pursuant to
management. normal market conditions. As discussed Section 806(e)(1)(I) of the Clearing
Furthermore, the Commission above, the sensitivity approach would Supervision Act,46 that the Commission
believes that the changes proposed in enable FICC to view and respond more does not object to this advance notice
the advance notice are consistent with effectively to market volatility. The proposal (SR–FICC–2016–801) and that
promoting safety and soundness, which, Margin Proxy would help manage data FICC is authorized to implement the
in turn, is consistent with reducing disruption. The VaR Floor would ensure proposal as of the date of this notice or
systemic risks and supporting the FICC collects at least a minimum VaR the date of an order by the Commission
stability of the broader financial system, Charge. The haircut method would approving a proposed rule change that
consistent with Section 805(b) of the better capture the risk profile of reflects rule changes that are consistent
Clearing Supervision Act.40 The securities with inadequate historical with this advance notice proposal (SR–
proposed changes are designed to better pricing data. Finally, removing the FICC–2016–007), whichever is later.
limit FICC’s exposure to Clearing Coverage Charge and MRD would help By the Commission.
Members in the event of Clearing ensure the Clearing Fund calculation
Member default. As discussed above, Eduardo A. Aleman,
would not include unnecessary
the sensitivity approach would enable Assistant Secretary.
components that may not be indicative
FICC to view and respond more of a Clearing Member’s current risk [FR Doc. 2017–01716 Filed 1–25–17; 8:45 am]
effectively to market volatility. The profile. By better limiting its exposures BILLING CODE 8011–01–P
Margin Proxy would help manage data to potential losses from defaults by its
disruption. The VaR Floor would ensure participants under normal market
FICC collects at least a minimum VaR conditions, the proposed changes are SELECTIVE SERVICE SYSTEM
Charge. The haircut method would designed to ensure that the operations of
better capture the risk profile of the clearing agency would not be Forms Submitted to the Office of
securities with inadequate historical disrupted and non-defaulting Management and Budget for Extension
pricing data. Finally, removing the participants would not be exposed to of Clearance
Coverage Charge and MRD would help losses that they cannot anticipate or AGENCY: Selective Service System.
ensure the Clearing Fund calculation control. Therefore, the Commission
would not include unnecessary ACTION: Notice.
believes this proposal is consistent with
components that may not be indicative Rule 17Ad–22(b)(1) under the Exchange The following forms have been
of a Clearing Member’s current risk Act.43 submitted to the Office of Management
profile. By better limiting exposure to Rule 17Ad–22(b)(2) under the and Budget (OMB) for extension of
Clearing Members, the proposed Exchange Act 44 requires a registered clearance in compliance with the
changes are designed to ensure that, in clearing agency that performs central Paperwork Reduction Act (44 U.S.C.
the event of Clearing Member default, counterparty services to establish, Chapter 35):
MBSD’s operations would not be implement, maintain and enforce
disrupted and non-defaulting Clearing written policies and procedures SSS Form—402
Members would not be exposed to reasonably designed to, among other Title: Uncompensated Registrar
losses that they cannot anticipate or things, use margin requirements to limit Appointment Form.
control. This is consistent with its credit exposures to participants Purpose: Is used to verify the official
promoting safety and soundness, which under normal market conditions and status of applicants for the position of
in turn, is consistent with reducing use risk-based models and parameters to Uncompensated Registrars and to
systemic risks and supporting the set margin requirements. The Required establish authority for those appointed
stability of the broader financial system. Fund Deposits are the margin to perform as Selective Service System
B. Consistency with Rule 17Ad–22(b)(1) requirements that FICC collects to limit Registrars.
jstallworth on DSK7TPTVN1PROD with NOTICES
its credit exposures to participants Respondents: United States citizens
and (b)(2) Under the Exchange Act
under normal market conditions. over the age of 18.
The Commission believes that FICC’s Additionally, FICC’s proposed changes Frequency: One time.
proposal is consistent with Clearing Burden: The reporting burden is three
Agency Standards, in particular, Rules 41 17 CFR 240.17Ad–22(b)(1) and (b)(2). minutes or less per respondent.
17Ad–22(b)(1) and (b)(2) under the 42 17 CFR 240.17Ad–22(b)(1).
43 Id. 45 Id.
40 Id. 44 17 CFR 240.17Ad–22(b)(2). 46 12 U.S.C. 5465(e)(1)(I).
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Document Created: 2017-01-26 00:05:00
Document Modified: 2017-01-26 00:05:00
| 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 8555 |
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