82 FR 8780 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To Implement a Change to the Methodology Used in the MBSD VaR Model
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 82, Issue 18 (January 30, 2017)
Federal Register Volume 82, Issue 18 (January 30, 2017)
| Page Range | 8780-8784 | |
| FR Document | 2017-01895 |
[Federal Register Volume 82, Number 18 (Monday, January 30, 2017)] [Notices] [Pages 8780-8784] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2017-01895] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79868; File No. SR-FICC-2016-007] Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving a Proposed Rule Change To Implement a Change to the Methodology Used in the MBSD VaR Model January 24, 2017. On November 23, 2016, the Fixed Income Clearing Corporation filed with the Securities and Exchange Commission (``Commission'') the proposed rule change SR-FICC-2016-007 pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The proposed rule change was published for comment in the Federal Register on December 13, 2016.\3\ The Commission did not receive any comments on the proposed rule change. This order approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4. FICC also filed this proposal as an advance notice pursuant to Section 802(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 2010 and Rule 19b- 4(n)(1) under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR 240.19b- 4(n)(1). The advance notice was published for comment in the Federal Register on December 28, 2016. See Securities Exchange Act Release No. 79643 (December 21, 2016), 81 FR 95669 (December 28, 2016) (SR- FICC-2016-801). The Commission did not receive any comments on the advance notice. \3\ Securities Exchange Act Release No. 79491 (December 7, 2016), 81 FR 90001 (December 13, 2016) (SR-FICC-2016-007) (``Notice''). --------------------------------------------------------------------------- [[Page 8781]] I. Description As described by FICC in the proposed rule change, 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 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. --------------------------------------------------------------------------- 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 90002. --------------------------------------------------------------------------- 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 90002-03. \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 [[Page 8782]] attributes,\18\ which would then be incorporated by FICC into its model to calculate the VaR Charge.\19\ --------------------------------------------------------------------------- \17\ See Notice, 81 FR at 90003. \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 90003. \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 90004. --------------------------------------------------------------------------- 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 90003. \21\ See Notice, 81 FR at 90004. \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 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 90004. \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 [[Page 8783]] 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 (``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 Section 19(b)(2)(C) of the Act \33\ directs the Commission to approve a proposed rule change of a self-regulatory organization if it finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to such organization. --------------------------------------------------------------------------- \33\ 15 U.S.C. 78s(b)(2)(C). --------------------------------------------------------------------------- The Commission finds that the proposed rule change described above is consistent with the Act, in particular Section 17A(b)(3)(F) of the Act,\34\ and Rules 17Ad-22(b)(1) \35\ and (b)(2) under the Act.\36\ --------------------------------------------------------------------------- \34\ 15 U.S.C. 78q-1(b)(3)(F). \35\ 17 CFR 240.17Ad-22(b)(1). \36\ 17 CFR 240.17Ad-22(b)(2). --------------------------------------------------------------------------- Section 17A(b)(3)(F) of the Act \37\ requires that the rules of a registered clearing agency must be designed to, among other things, assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible. 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 designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible because they are designed to enable FICC to better limit its exposure to Clearing Members in the event of Clearing Member default. --------------------------------------------------------------------------- \37\ 15 U.S.C. 78q-1(b)(3)(F). --------------------------------------------------------------------------- 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 [[Page 8784]] 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 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. 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. In this way, the proposed rules are designed to assure the safeguarding of securities and funds which are in the custody or control of FICC or for which it is responsible and are therefore consistent with Section 17A(b)(3)(F) of the Act.\38\ --------------------------------------------------------------------------- \38\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(1) under the Act \39\ 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 Act.\40\ --------------------------------------------------------------------------- \39\ 17 CFR 240.17Ad-22(b)(1). \40\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(2) under the Act \41\ 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 Act.\42\ --------------------------------------------------------------------------- \41\ 17 CFR 240.17Ad-22(b)(2). \42\ Id. --------------------------------------------------------------------------- III. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act and the rules and regulations thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\43\ that the proposed rule change (SR-FICC-2016-007) be, and it hereby is, approved as of the date of this order or the date of a notice by the Commission authorizing FICC to implement FICC's advance notice proposal (SR-FICC-2016-801) that is consistent with this proposed rule change, whichever is later.\44\ --------------------------------------------------------------------------- \43\ 15 U.S.C. 78s(b)(2). \44\ In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\45\ --------------------------------------------------------------------------- \45\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2017-01895 Filed 1-27-17; 8:45 am] BILLING CODE 8011-01-P
![8780 Federal Register / Vol. 82, No. 18 / Monday, January 30, 2017 / Notices
subadvisers without shareholder Agreement’’).1 The Adviser is public interest and consistent with the
approval. responsible for the overall management protection of investors and purposes
of the Funds’ business affairs and fairly intended by the policy and
APPLICANTS: Aspiration Funds (the selecting investments according to each provisions of the Act. Applicants
‘‘Trust’’), a Delaware statutory trust Fund’s respective investment objective, believe that the requested relief meets
registered under the Act as an open-end policies, and restrictions, subject to the this standard because, as further
management investment company with oversight and authority of each Fund’s explained in the application, the
multiple series, and Aspiration Fund board of trustees (‘‘Board’’). The Advisory Agreements will remain
Adviser, LLC, a Delaware limited Advisory Agreement permits the subject to shareholder approval, while
liability company registered as an Adviser, subject to the approval of the the role of the Subadvisers is
investment adviser under the Board, to delegate to one or more substantially similar to that of
Investment Advisers Act of 1940 (the subadvisers (each, a ‘‘Subadviser’’ and individual portfolio managers, so that
‘‘Adviser,’’ and, collectively with the collectively, the ‘‘Subadvisers’’) the requiring shareholder approval of
Trust, the ‘‘Applicants’’). responsibility to provide the day-to-day Subadvisory Agreements would impose
FILING DATES: The application was filed portfolio investment management of unnecessary delays and expenses on the
November 25, 2014, and amended on each Fund, subject to the supervision Funds.
March 7, 2016, August 30, 2016 and and direction of the Adviser. The
For the Commission, by the Division of
January 6, 2017. primary responsibility for managing the Investment Management, under delegated
Funds will remain vested in the authority.
HEARING OR NOTIFICATION OF HEARING:
Adviser. The Adviser will hire, Eduardo A. Aleman,
An order granting the application will evaluate, allocate assets to and oversee
be issued unless the Commission orders Assistant Secretary.
the Subadvisers, including determining
a hearing. Interested persons may whether a Subadviser should be [FR Doc. 2017–01897 Filed 1–27–17; 8:45 am]
request a hearing by writing to the terminated, at all times subject to the BILLING CODE 8011–01–P
Commission’s Secretary and serving authority of the Board.
Applicants with a copy of the request, 2. Applicants request an exemption to
personally or by mail. Hearing requests permit the Adviser, subject to Board SECURITIES AND EXCHANGE
should be received by the Commission approval, to hire certain Subadvisers COMMISSION
by 5:30 p.m. on February 21, 2017, and pursuant to Subadvisory Agreements
should be accompanied by proof of and materially amend existing [Release No. 34–79868; File No. SR–FICC–
service on the Applicants, in the form Subadvisory Agreements without 2016–007]
of an affidavit or, for lawyers, a obtaining the shareholder approval
certificate of service. Pursuant to rule required under section 15(a) of the Act Self-Regulatory Organizations; Fixed
0–5 under the Act, hearing requests and rule 18f–2 under the Act.2 Income Clearing Corporation; Order
should state the nature of the writer’s 3. Applicants agree that any order Approving a Proposed Rule Change To
interest, any facts bearing upon the granting the requested relief will be Implement a Change to the
desirability of a hearing on the matter, subject to the terms and conditions Methodology Used in the MBSD VaR
the reason for the request, and the issues stated in the application. Such terms Model
contested. Persons who wish to be and conditions provide for, among other January 24, 2017.
notified of a hearing may request safeguards, appropriate disclosure to On November 23, 2016, the Fixed
notification by writing to the Fund shareholders and notification Income Clearing Corporation filed with
Commission’s Secretary. about sub-advisory changes and the Securities and Exchange
ADDRESSES: Secretary, U.S. Securities enhanced Board oversight to protect the
Commission (‘‘Commission’’) the
and Exchange Commission, 100 F Street interests of the Funds’ shareholders.
proposed rule change SR–FICC–2016–
NE., Washington, DC 20549–1090. 4. Section 6(c) of the Act provides that
the Commission may exempt any 007 pursuant to Section 19(b)(1) of the
Applicants: 4640 Admiralty Way, Securities Exchange Act of 1934
Marina Del Rey, CA 90292. person, security, or transaction or any
class or classes of persons, securities, or (‘‘Act’’) 1 and Rule 19b–4 thereunder.2
FOR FURTHER INFORMATION CONTACT: The proposed rule change was
transactions from any provisions of the
Barbara T. Heussler, Senior Counsel, at Act, or any rule thereunder, if such published for comment in the Federal
(202) 551–6990, or Mary Kay Frech, relief is necessary or appropriate in the Register on December 13, 2016.3 The
Branch Chief, at (202) 551–6821 Commission did not receive any
(Division of Investment Management, 1 Applicants request relief with respect to any comments on the proposed rule change.
Chief Counsel’s Office). existing or future series of the Trust and any other This order approves the proposed rule
SUPPLEMENTARY INFORMATION: The existing or future registered open-end management change.
investment company or series thereof that: (a) Is
following is a summary of the advised by the Adviser, including any entity
application. The complete application controlling, controlled by, or under common
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4. FICC also filed this proposal
may be obtained via the Commission’s control with the Adviser or its successors (each,
also an ‘‘Adviser’’); (b) uses the manager of as an advance notice pursuant to Section 802(e)(1)
Web site by searching for the file of the Payment, Clearing, and Settlement
managers structure described in the application;
number, or an applicant using the and (c) complies with the terms and conditions of Supervision Act of 2010 and Rule 19b–4(n)(1)
Company name box, at http:// the application (any such series, a ‘‘Fund’’ and under the Act. 15 U.S.C. 5465(e)(1) and 17 CFR
www.sec.gov/search/search.htm or by collectively, the ‘‘Funds’’). For purposes of the 240.19b–4(n)(1). The advance notice was published
mstockstill on DSK3G9T082PROD with NOTICES
requested order, ‘‘successor’’ is limited to an entity for comment in the Federal Register on December
calling (202) 551–8090. that results from a reorganization into another 28, 2016. See Securities Exchange Act Release No.
Summary of the Application jurisdiction or a change in the type of business 79643 (December 21, 2016), 81 FR 95669 (December
organization. 28, 2016) (SR–FICC–2016–801). The Commission
1. The Adviser serves as the 2 The requested relief will not extend to any did not receive any comments on the advance
investment adviser to the Funds subadviser that is an affiliated person, as defined in notice.
section 2(a)(3) of the Act, of the Trust, a Fund or 3 Securities Exchange Act Release No. 79491
pursuant to an investment advisory the Adviser, other than by reason of serving as a (December 7, 2016), 81 FR 90001 (December 13,
agreement with the Trust (the ‘‘Advisory subadviser to one or more of the Funds. 2016) (SR–FICC–2016–007) (‘‘Notice’’).
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![8784 Federal Register / Vol. 82, No. 18 / Monday, January 30, 2017 / Notices
sensitivity approach would enable FICC manage data disruption. The VaR Floor 007) be, and it hereby is, approved as of
to better limit its exposure to Clearing would ensure FICC collects at least a the date of this order or the date of a
Members by helping ensure that FICC minimum VaR Charge. The haircut notice by the Commission authorizing
could continue to calculate each method would better capture the risk FICC to implement FICC’s advance
Clearing Member’s VaR Charge in the profile of securities with inadequate notice proposal (SR–FICC–2016–801)
event that FICC experiences a data historical pricing data. Finally, that is consistent with this proposed
disruption with the vendor that supplies removing the Coverage Charge and MRD rule change, whichever is later.44
the sensitivity data. Third, FICC’s would help ensure the Clearing Fund For the Commission, by the Division of
proposal to implement the VaR Floor is calculation would not include Trading and Markets, pursuant to delegated
designed to enable FICC to better limit unnecessary components that may not authority.45
its exposure to Clearing Members in the be indicative of a Clearing Member’s Eduardo A. Aleman,
event that the proposed sensitivity VaR current risk profile. By better limiting its Assistant Secretary.
model calculates too low of a VaR exposures to potential losses from [FR Doc. 2017–01895 Filed 1–27–17; 8:45 am]
Charge for portfolios where the model defaults by its participants under BILLING CODE 8011–01–P
applies substantial offsets from certain normal market conditions, the proposed
offsetting long and short positions. changes are designed to ensure that the
Fourth, the proposed change to operations of the clearing agency would
implement a haircut method for DEPARTMENT OF STATE
not be disrupted and non-defaulting
securities with inadequate historical participants would not be exposed to [Public Notice: 9869]
pricing data would enable FICC to better losses that they cannot anticipate or
limit its exposure to Clearing Members control. Therefore, the Commission Notice of Determinations; Culturally
by better capturing the risk profile of the believes this proposal is consistent with Significant Objects Imported for
securities. Finally, FICC’s proposal to Rule 17Ad–22(b)(1) under the Act.40 Exhibition Determinations: ‘‘Age of
remove the Coverage Charge and MRD Rule 17Ad–22(b)(2) under the Act 41 Empires: Chinese Art of the Qin and
components would enable FICC to requires a registered clearing agency Han Dynasties (221 B.C.–A.D. 200)’’
remove unnecessary components from that performs central counterparty Exhibition
the Clearing Fund calculation that may services to establish, implement, Notice is hereby given of the
not be indicative of a Clearing Member’s maintain and enforce written policies following determinations: Pursuant to
current risk profile. and procedures reasonably designed to, the authority vested in me by the Act of
By better limiting exposure to among other things, use margin October 19, 1965 (79 Stat. 985; 22 U.S.C.
Clearing Members, the proposed requirements to limit its credit 2459), E.O. 12047 of March 27, 1978, the
changes are designed to ensure that, in exposures to participants under normal Foreign Affairs Reform and
the event of Clearing Member default, market conditions and use risk-based Restructuring Act of 1998 (112 Stat.
MBSD’s operations would not be models and parameters to set margin 2681, et seq.; 22 U.S.C. 6501 note, et
disrupted and non-defaulting Clearing requirements. The Required Fund seq.), Delegation of Authority No. 234 of
Members would not be exposed to Deposits are the margin requirements October 1, 1999, Delegation of Authority
losses that they cannot anticipate or that FICC collects to limit its credit No. 236–3 of August 28, 2000 (and, as
control. In this way, the proposed rules exposures to participants under normal appropriate, Delegation of Authority No.
are designed to assure the safeguarding market conditions. Additionally, FICC’s 257–1 of December 11, 2015), I hereby
of securities and funds which are in the proposed changes use a risk-based determine that the objects to be
custody or control of FICC or for which model (i.e., the sensitivity approach) included in the exhibition ‘‘Age of
it is responsible and are therefore and parameters (e.g., the VaR Floor and Empires: Chinese Art of the Qin and
consistent with Section 17A(b)(3)(F) of Margin Proxy) to set margin Han Dynasties (221 B.C.–A.D. 200),’’
the Act.38 requirements. The proposed changes are imported from abroad for temporary
Rule 17Ad–22(b)(1) under the Act 39 designed to improve FICC’s margin exhibition within the United States, are
requires a registered clearing agency requirements to better limit FICC’s of cultural significance. The objects are
that performs central counterparty credit exposures to Clearing Members, imported pursuant to a loan agreement
services to establish, implement, in the event of default, under normal with the foreign owner or custodians. I
maintain and enforce written policies market conditions. Therefore, the also determine that the exhibition or
and procedures reasonably designed to,
Commission believes this proposal is display of the exhibit objects at The
among other things, limit its exposures
consistent with Rule 17Ad–22(b)(2) Metropolitan Museum of Art, New York,
to potential losses from defaults by its
under the Act.42 New York, from on or about April 3,
participants under normal market
2017, until on or about July 16, 2017,
conditions so that the operations of the III. Conclusion
and at possible additional exhibitions or
clearing agency would not be disrupted On the basis of the foregoing, the venues yet to be determined, is in the
and non-defaulting participants would Commission finds that the proposal is national interest. I have ordered that
not be exposed to losses that they consistent with the requirements of the Public Notice of these Determinations
cannot anticipate or control. FICC’s Act and in particular with the be published in the Federal Register.
proposal would enable FICC to better requirements of Section 17A of the Act FOR FURTHER INFORMATION CONTACT: For
limit its exposure to potential losses and the rules and regulations
from defaults by its Clearing Members further information, including a list of
thereunder. the imported objects, contact the Office
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under normal market conditions. As It is therefore ordered, pursuant to
discussed above, the sensitivity of Public Diplomacy and Public Affairs
Section 19(b)(2) of the Act,43 that the in the Office of the Legal Adviser, U.S.
approach would enable FICC to view proposed rule change (SR–FICC–2016–
and respond more effectively to market 44 In approving this proposed rule change, the
volatility. The Margin Proxy would help 40 Id.
Commission has considered the proposed rule’s
41 17 CFR 240.17Ad–22(b)(2). impact on efficiency, competition, and capital
38 Id. 42 Id. formation. See 15 U.S.C. 78c(f).
39 17 CFR 240.17Ad–22(b)(1). 43 15 U.S.C. 78s(b)(2). 45 17 CFR 200.30–3(a)(12).
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Document Created: 2017-01-28 01:26:03
Document Modified: 2017-01-28 01:26:03
| 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 8780 |
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