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SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-56837; File No. SR-FICC-2007-10]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY: Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Replace the Mortgage-Backed Securities Division Clearing Fund Calculation Methodology With a Yield- Driven Value-at-Risk Methodology
DOCUMENT SUMMARY: November 26, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 31, 2007, the Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') and on September 27, 2007, amended
the proposed rule change as described in Items I, II, and III below,
which items have been prepared primarily by FICC. The Commission is
publishing this notice to solicit comments on the proposed rule change from interested parties.
\1\ 15 U.S.C. 78s(b)(1).
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FICC is seeking to replace the MortgageBacked Securities Division
(``MBSD'') margin calculation methodology with a ValueatRisk (``VaR'') methodology.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FICC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these statements.\2\
\2\ The Commission has modified the text of the summaries prepared by FICC.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Clearing participants of MBSD are required to maintain participants' fund deposits. Each participant's required deposit is calculated daily to ensure enough funds are available to cover the risks associated with that participant's activities.
The purpose served by the participants fund is to have on deposit from each participant assets sufficient to satisfy any losses that may otherwise be incurred by MBSD participants as the result of the default by the participant and the resultant closeout of that participant's settlement positions.
FICC proposes to replace the current participants fund methodology, which uses haircuts and offsets, with a VaR model. FICC expects the VaR model to better reflect market volatility and to more thoroughly distinguish levels of risk presented by individual securities.
Specifically, FICC is proposing to replace the existing MBSD margin calculation with a yielddriven VaR model. VaR is defined to be the maximum amount of money that may be lost on a portfolio over a given period of time within a given level of confidence. With respect to the MBSD, FICC is proposing a 99 percent threeday VaR.
The changes to the components that comprise the current
participants fund calculation versus the proposed VaR calculation in
relation to the risks addressed by the components are summarized as follows:
Proposed
Existing methodology Risk addressed methodology
Market Margin Differential, Adjusting contract The sum of:
which is the greater of:. price to market (i) Markto
(i) the P&L Requirement or...... price and post market and
(ii) the Market Volatility marktomarket (ii) Interest
Requirement. fluctuations in rate or index
security prices. driven model, as
appropriate.\3\ [[Page 67771]]
Final margin requirement Additional Margin Requirement
generated for second processing exposure due to Differential
cycle.\4\. portfolio (``MRD'') to
variation. include intraday
portfolio
variations and
protection
regarding late
margin deficit
satisfaction.
Prefunding of certain debit cash Uncertainty of Prefunding of
obligation items through the whether a member certain debit
participants fund (no offset will satisfy its cash obligation
for credits). cash settlement items through the
obligation. participants fund
(offset for
credits).\5\
N/A............................. Potential loss in Coverage Component
unlikely (if necessary,
situations beyond applies
the model's additional charge
effective range. to bring coverage
to the applicable
confidence
level).
Minimum Market Margin Maintenance of a A minimum charge
Differential (currently minimum amount of of the greater
$250,000). collateral to of: (i) $100,000
support potential or (ii) a defined
counterparty percentage of
liquidation gross portfolio. losses.
\3\ FICC shall have the discretion to not apply the interest rate model
to classes of securities whose volatility is less amenable to
statistical analysis (e.g., the security has a lack of pricing
history). In lieu of such a calculation, the required charge with
respect to such positions would be determined based on an historic index volatility model.
\4\ The MBSD generates a preliminary margin report as part of a first
processing cycle at the close of the business day and calculates a
final margin requirement as part of a second processing cycle
completed at approximately 11:30 a.m. each business day. Upon the
implementation of the new VaR methodology, the MBSD would no longer
generate a margin requirement as part of the second cycle. Instead, a
final margin requirement would be established after the running of the first cycle at approximately 9:00 p.m.
\5\ Cash obligation item credits are retained by the MBSD and not passed
through to the participant. As a result, the MBSD has correspondingly
less risk vis[agrave]vis a firm with cash obligation credits and therefore requires less collateral in this regard.
In addition, FICC may include in a participant's participant fund calculation a ``special charge'' as determined by FICC from time to time in view of market conditions and the financial and operational capabilities of the participant. FICC will make any such determination based on such factors as it determines to be appropriate.
Because it would become obsolete upon approval of the proposed rule change, FICC also proposes to eliminate the provision in the MBSD rules requiring participants to maintain a Basic Deposit and Minimum Market Margin Differential Deposit with MBSD pursuant to Article IV, Rule 1 (Participants Fund), section 1(a) and (b).
FICC believes that the proposed rule change is consistent with the
requirements of section 17A of the Act \6\ and the rules and
regulations thereunder applicable to FICC because it should assure the
safeguarding of securities and funds in FICC's custody or control or
for which it is responsible by enabling FICC to more effectively manage risk presented by participants' activities.
\6\ 15 U.S.C. 78q1.
(B) SelfRegulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change would have any impact or impose any burden on competition.
(C) SelfRegulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments have not been solicited with respect to the
proposed rule change, and none have been received. FICC will notify the Commission of any written comments it receives.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within thirtyfive days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the selfregulatory organization consents, the Commission will:
(A) By order approve such proposed rule change or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Paper Comments
All submissions should refer to File Number SRFICC200710. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FICC and on FICC's Web site at http://www.ficc.com/gov/gov.docs.jsp?NSquery. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that
[[Page 67772]]
you wish to make available publicly. All submissions should refer to File Number SRFICC200710 and should be submitted on or before December 21, 2007.
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.\7\
\7\ 17 CFR 200.303(a)(12).
Nancy M. Morris,
Secretary.
[FR Doc. E723203 Filed 112907; 8:45 am]
BILLING CODE 801101P
SUMMARY: Fixed Income Clearing Corp.,
DOCUMENT BODY 2: November 26, 2007.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 31, 2007, the Fixed
Income Clearing Corporation (``FICC'') filed with the Securities and
Exchange Commission (``Commission'') and on September 27, 2007, amended
the proposed rule change as described in Items I, II, and III below,
which items have been prepared primarily by FICC. The Commission is
publishing this notice to solicit comments on the proposed rule change from interested parties.
\1\ 15 U.S.C. 78s(b)(1).
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
FICC is seeking to replace the MortgageBacked Securities Division
(``MBSD'') margin calculation methodology with a ValueatRisk (``VaR'') methodology.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FICC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these statements.\2\
\2\ The Commission has modified the text of the summaries prepared by FICC.
(A) SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Clearing participants of MBSD are required to maintain participants' fund deposits. Each participant's required deposit is calculated daily to ensure enough funds are available to cover the risks associated with that participant's activities.
The purpose served by the participants fund is to have on deposit from each participant assets sufficient to satisfy any losses that may otherwise be incurred by MBSD participants as the result of the default by the participant and the resultant closeout of that participant's settlement positions.
FICC proposes to replace the current participants fund methodology, which uses haircuts and offsets, with a VaR model. FICC expects the VaR model to better reflect market volatility and to more thoroughly distinguish levels of risk presented by individual securities.
Specifically, FICC is proposing to replace the existing MBSD margin calculation with a yielddriven VaR model. VaR is defined to be the maximum amount of money that may be lost on a portfolio over a given period of time within a given level of confidence. With respect to the MBSD, FICC is proposing a 99 percent threeday VaR.
The changes to the components that comprise the current
participants fund calculation versus the proposed VaR calculation in
relation to the risks addressed by the components are summarized as follows:
Proposed
Existing methodology Risk addressed methodology
Market Margin Differential, Adjusting contract The sum of:
which is the greater of:. price to market (i) Markto
(i) the P&L Requirement or...... price and post market and
(ii) the Market Volatility marktomarket (ii) Interest
Requirement. fluctuations in rate or index
security prices. driven model, as
appropriate.\3\ [[Page 67771]]
Final margin requirement Additional Margin Requirement
generated for second processing exposure due to Differential
cycle.\4\. portfolio (``MRD'') to
variation. include intraday
portfolio
variations and
protection
regarding late
margin deficit
satisfaction.
Prefunding of certain debit cash Uncertainty of Prefunding of
obligation items through the whether a member certain debit
participants fund (no offset will satisfy its cash obligation
for credits). cash settlement items through the
obligation. participants fund
(offset for
credits).\5\
N/A............................. Potential loss in Coverage Component
unlikely (if necessary,
situations beyond applies
the model's additional charge
effective range. to bring coverage
to the applicable
confidence
level).
Minimum Market Margin Maintenance of a A minimum charge
Differential (currently minimum amount of of the greater
$250,000). collateral to of: (i) $100,000
support potential or (ii) a defined
counterparty percentage of
liquidation gross portfolio. losses.
\3\ FICC shall have the discretion to not apply the interest rate model
to classes of securities whose volatility is less amenable to
statistical analysis (e.g., the security has a lack of pricing
history). In lieu of such a calculation, the required charge with
respect to such positions would be determined based on an historic index volatility model.
\4\ The MBSD generates a preliminary margin report as part of a first
processing cycle at the close of the business day and calculates a
final margin requirement as part of a second processing cycle
completed at approximately 11:30 a.m. each business day. Upon the
implementation of the new VaR methodology, the MBSD would no longer
generate a margin requirement as part of the second cycle. Instead, a
final margin requirement would be established after the running of the first cycle at approximately 9:00 p.m.
\5\ Cash obligation item credits are retained by the MBSD and not passed
through to the participant. As a result, the MBSD has correspondingly
less risk vis[agrave]vis a firm with cash obligation credits and therefore requires less collateral in this regard.
In addition, FICC may include in a participant's participant fund calculation a ``special charge'' as determined by FICC from time to time in view of market conditions and the financial and operational capabilities of the participant. FICC will make any such determination based on such factors as it determines to be appropriate.
Because it would become obsolete upon approval of the proposed rule change, FICC also proposes to eliminate the provision in the MBSD rules requiring participants to maintain a Basic Deposit and Minimum Market Margin Differential Deposit with MBSD pursuant to Article IV, Rule 1 (Participants Fund), section 1(a) and (b).
FICC believes that the proposed rule change is consistent with the
requirements of section 17A of the Act \6\ and the rules and
regulations thereunder applicable to FICC because it should assure the
safeguarding of securities and funds in FICC's custody or control or
for which it is responsible by enabling FICC to more effectively manage risk presented by participants' activities.
\6\ 15 U.S.C. 78q1.
(B) SelfRegulatory Organization's Statement on Burden on Competition
FICC does not believe that the proposed rule change would have any impact or impose any burden on competition.
(C) SelfRegulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Written comments have not been solicited with respect to the
proposed rule change, and none have been received. FICC will notify the Commission of any written comments it receives.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
Within thirtyfive days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the selfregulatory organization consents, the Commission will:
(A) By order approve such proposed rule change or
(B) institute proceedings to determine whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
Paper Comments
All submissions should refer to File Number SRFICC200710. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Section, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FICC and on FICC's Web site at http://www.ficc.com/gov/gov.docs.jsp?NSquery. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that
[[Page 67772]]
you wish to make available publicly. All submissions should refer to File Number SRFICC200710 and should be submitted on or before December 21, 2007.
For the Commission by the Division of Trading and Markets, pursuant to delegated authority.\7\
\7\ 17 CFR 200.303(a)(12).
Nancy M. Morris,
Secretary.
[FR Doc. E723203 Filed 112907; 8:45 am]
BILLING CODE 801101P
Common CFR Searches
14 CFR Part 39 40 CFR Part 52 14 CFR Part 71 33 CFR Part 165 50 CFR Part 679 26 CFR Part 1 40 CFR Part 180 47 CFR Part 73 50 CFR Part 17 33 CFR Part 117 44 CFR Part 67 50 CFR Part 648 14 CFR Part 97 33 CFR Part 100 40 CFR Part 63 50 CFR Part 622 26 CFR Part 301 39 CFR Part 111 40 CFR Part 300 50 CFR Part 660 44 CFR Part 65 40 CFR Parts 52 and 81 40 CFR Part 271 47 CFR Part 64 50 CFR Part 665 47 CFR Part 76 50 CFR Part 229 14 CFR Part 23 14 CFR Part 25 21 CFR Part 522