90 FR 148 pgs. 37608-37612 - Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise the Definition of the Backtesting Charge
Type: NOTICEVolume: 90Number: 148Pages: 37608 - 37612
Pages: 37608, 37609, 37610, 37611, 37612Docket number: [Release No. 34-103602; File No. SR-FICC-2025-017]
FR document: [FR Doc. 2025-14753 Filed 8-4-25; 8:45 am]
Agency: Securities and Exchange Commission
Official PDF Version: PDF Version
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-103602; File No. SR-FICC-2025-017]
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise the Definition of the Backtesting Charge
July 31, 2025.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 ("Act")? 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on July 23, 2025, Fixed Income Clearing Corporation ("FICC") filed with the Securities and Exchange Commission ("Commission") the proposed rule change as described in Items I, II and III below, which Items have been prepared by the clearing agency. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
Footnotes:
1 ?15 U.S.C. 78s(b)(1).
2 ?17 CFR 240.19b-4.
I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change
The proposed rule change consists of modifications to FICC's Government Securities Division ("GSD") Rulebook ("GSD Rules")? 3 that would revise the definition of the Backtesting Charge to (1) clarify that the calculation of the backtesting coverage and any applicable Backtesting Charge does not include any amounts already collected as a Backtesting Charge; and (2) revise the calculation of both the backtesting coverage and any applicable Backtesting Charge to exclude all other margin amounts already collected intraday.
Footnotes:
3 ?Terms not defined herein are defined in the GSD Rules, available at www.dtcc.com/legal/rules-and-procedures.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
FICC is proposing to revise the definition of Backtesting Charge in the GSD Rules to clarify the current calculation of that charge and adopt a change to the calculation.
First, the proposed changes would clarify in the GSD Rules that the backtesting coverage calculated in connection with the Backtesting Charge and the calculation of that charge for a Netting Member or Segregated Indirect Participant do not include amounts collected from that Netting Member or Segregated Indirect Participant as a Backtesting Charge. This change, and other drafting changes to the definition of the Backtesting Charge described below, would reflect FICC's current practice and provide Members with a better understanding of the calculation of this margin component.
Second, the proposed changes would revise the calculation of the backtesting coverage calculated in connection with the Backtesting Charge and the calculation of that charge by excluding amounts already collected intraday from the Netting Member or Segregated Indirect Participant as another component of the Required Fund Deposit or Segregated Customer Margin, as applicable. This proposed change would remove from these calculations an assumption that FICC would collect all intraday margin requirements before the Netting Member or Segregated Indirect Participant defaults. Therefore, the proposal would enhance FICC's ability to produce margin levels commensurate with the risks presented by its Members, in compliance with the requirements of Rule 17ad-22(e)(6)(i) under the Act. 4
Footnotes:
4 ?17 CFR 240.17ad-22(e)(6)(i).
Background
FICC, through GSD, serves as a central counterparty and provider of clearance and settlement services for transactions in the U.S. government securities, as well as repurchase and reverse repurchase transactions involving U.S. government securities. 5 As part of its market risk management strategy, 6 FICC manages its credit exposure to Members by determining the appropriate Required Fund Deposit (or Segregated Customer Margin, when applicable) to the Clearing Fund and monitoring its sufficiency, as provided for in the GSD Rules. 7 Required Fund Deposits and Segregated Customer Margin deposits serve as margin.
Footnotes:
5 ?GSD also clears and settles certain transactions on securities issued or guaranteed by U.S. government agencies and government sponsored enterprises.
6 ?FICC's market risk management strategy is designed to comply with Rule 17ad-22(e)(4) under the Act, where these risks are referred to as "credit risks." 17 CFR 240.17ad-22(e)(4).
7 ? See GSD Rule 4 (Clearing Fund and Loss Allocation), supra note 3. Segregated Customer Margin is, generally, the margin that an Agent Clearing Member or Sponsoring Member is required to deposit with FICC to support the obligations of its Segregated Indirect Participants. See GSD Rule 1 (Definitions), id.
[top] The objective of a Member's Required Fund Deposits is to mitigate potential losses to FICC associated with liquidating a Member's portfolio in the event FICC ceases to act for that Member (hereinafter referred to as a "default"). 8
Footnotes:
8 ?The GSD Rules identify when FICC may cease to act for a Member and the types of actions FICC may take. For example, FICC may suspend a firm's membership with FICC, or prohibit or limit a Member's access to FICC's services, in the event that Member defaults on a financial or other obligation to FICC. See GSD Rule 21 (Restrictions on Access to Services), id.
Pursuant to the GSD Rules, each Member's Required Fund Deposit amount and each Segregated Indirect Participant's Segregated Customer Margin amount consists of a number of applicable components, each of which is calculated to address specific risks faced by FICC, as identified within the Margin Component Schedule in the GSD Rules. 9 These components include, as applicable, the VaR Charge, Blackout Period Exposure Adjustment, Backtesting Charge, Holiday Charge, Intraday Supplemental Fund Deposit, Margin Liquidity Adjustment Charge, and Portfolio Differential Charge. 10
Footnotes:
9 ? See GSD Rules (Margin Component Schedule), id.
10 ? Id.
FICC employs daily backtesting to determine the adequacy of each Member's Required Fund Deposit and Segregated Indirect Participant's Segregated Customer Margin. Backtesting is performed both for internal reporting and in connection with the calculation of the Backtesting Charge margin component. Through this backtesting, FICC compares the Required Fund Deposit? 11 for each Member with the simulated liquidation gains/losses using the actual positions in the Member's portfolio, and the actual historical security returns. FICC investigates the cause(s) of any backtesting deficiencies. As a part of this investigation, FICC pays particular attention to Members with backtesting deficiencies that bring the results for that Member below its 99 percent confidence target ( i.e., greater than two backtesting deficiency days in a rolling 12-month period) to determine if there is an identifiable cause of repeat backtesting deficiencies. FICC also evaluates whether multiple Members may experience backtesting deficiencies for the same underlying reason.
Footnotes:
11 ?For backtesting comparisons, FICC uses the Required Fund Deposit amount without regard to the actual collateral posted by the Member.
The Backtesting Charge is an additional charge that may be added to a Member's Required Fund Deposit or a Segregated Indirect Participant's Segregated Customer Margin at the start of the day and/or in an intraday margin collection. 12 As described in the Margin Component Schedule in the GSD Rules, FICC may assess a Backtesting Charge if a Member or Segregated Indirect Participant has a 12-month trailing backtesting coverage below the 99 percent backtesting coverage target. If assessed, the Backtesting Charge is generally equal to the Member's or Segregated Indirect Participant's third largest deficiency that occurred during the previous 12 months. 13 The GSD Rules provide FICC with the discretion to adjust the Backtesting Charge amount based on its assessment of the impact of other circumstances on the likelihood of, and estimated size of, future backtesting deficiencies for a Netting Member or Segregated Indirect Participant. Based on its assessment of the impact of these circumstances, FICC may, in its discretion, adjust the Backtesting Charge for a Netting Member or Segregated Indirect Participant in an amount that FICC determines to be more appropriate for maintaining such firm's backtesting results above the 99 percent coverage threshold (including a reasonable buffer). 14
Footnotes:
12 ?GSD Rules (Margin Component Schedule), supra note 3.
13 ? Id.
14 ?Such circumstances could include, for example, material differences in the three largest backtesting deficiencies observed over the prior 12-month period, variability in the net settlement activity after the collection of the Member's intraday Required Fund Deposit, seasonality in observed backtesting deficiencies and observed market price volatility in excess of the Member's historical VaR Charge(s).
The Backtesting Charge may be assessed on a Netting Member's or Segregated Indirect Participant's start of day portfolio (currently referred to in the GSD Rules as the "Regular Backtesting Charge") or on a Netting Member's or Segregated Indirect Participant's intraday portfolio (currently referred to in the GSD Rules as the "Intraday Backtesting Charge"). FICC calculates the Backtesting Charge at least monthly and, based on those calculations, may either impose a new Backtesting Charge or remove an existing Backtesting Charge, or FICC may either increase or decrease an existing Backtesting Charge as necessary to maintain its target backtesting coverage.
Proposed Changes to the Definition of the Backtesting Charge
FICC is proposing to make two changes to the definition of Backtesting Charge in the GSD Rules. The proposed changes would clarify FICC's existing practices in calculating this charge and reflect a change to that calculation.
First, the proposed rule changes would clarify FICC's current practices with respect to the Backtesting Charge. These changes would state that, in calculating a Netting Member's or Segregated Indirect Participant's backtesting coverage (for purposes of calculating the Backtesting Charge) and in calculating any applicable Backtesting Charge, FICC does not include amounts already collected as a Backtesting Charge from that Netting Member or Segregated Indirect Participant. As described above, the objective of the Backtesting Charge is to increase Required Fund Deposits for Netting Members and Segregated Indirect Participants that are likely to experience backtesting deficiencies by an amount sufficient to maintain such firm's backtesting coverage above the 99 percent confidence threshold. By excluding amounts already collected as a Backtesting Charge from this calculation, FICC is able to more accurately evaluate a firm's historical backtesting deficiencies to determine if any adjustment to its Backtesting Charge is appropriate.
FICC is also proposing to clarify in the definition of Backtesting Charge that the backtesting coverage calculation described therein is the coverage that is calculated for purposes of calculating the Backtesting Charge. FICC also performs backtesting for internal and regulatory reporting or other risk management purposes that may use a different methodology than the backtesting that is performed for purposes of calculating and assessing a Backtesting Charge. For example, FICC may include or exclude amounts already collected as a Backtesting Charge or as another margin component on an intraday basis in determining backtesting coverage for other risk management purposes. FICC's regulatory backtesting does not directly impact its Members and, therefore, is not described in the GSD Rules. However, because the two methodologies may differ, the proposed change would ensure no confusion between the different coverage calculations.
[top] The proposed changes would also remove the defined terms for Intraday Backtesting Charge and Regular Backtesting Charge from the definition of the Backtesting Charge. The definition would continue to state that the Backtesting Charges may be calculated on both the start of day and intraday portfolio of Netting Members and Segregated Indirect Participants. However, because the Backtesting Charge that is calculated and collected at the start of day and intraday
Together, these clarifications to the definition of Backtesting Charge would reflect FICC's current practice and provide Members with a better understanding of the calculation of this margin component.
Second, the proposed changes would revise the GSD Rules by excluding all other amounts that FICC has collected from a Netting Member or Segregated Indirect Participant intraday from the calculation of a Netting Member's or Segregated Indirect Participant's backtesting coverage (for purposes of calculating the Backtesting Charge) and in calculating any applicable Backtesting Charge. The rationale for this proposed change is the same as the rationale for excluding amounts already collected as a Backtesting Charge from the same calculations, as described above. Specifically, by excluding all margin resources that were collected intraday, the proposed change would make it less likely for FICC to undercount potential backtesting deficiencies. This change would remove from these calculations an assumption that FICC would collect all intraday margin requirements before the Netting Member or Segregated Indirect Participant default, because this assumption could underestimate the potential losses that FICC may experience if a Netting Member or Segregated Indirect Participant defaults prior to funding its intraday margin calls. Therefore, the proposal would enhance FICC's ability to produce margin levels commensurate with the risks presented by its Members, in compliance with the requirements of Rule 17ad-22(e)(6)(i) under the Act. 15
Footnotes:
15 ?17 CFR 240.17ad-22(e)(6)(i).
Proposed GSD Rule Changes
FICC would modify the definition of Backtesting Charge in the Margin Component Schedule of the GSD Rules by removing the defined terms for "Intraday Backtesting Charge" and "Regular Backtesting Charge". The proposed changes would also modify the description of the 12-month backtesting coverage that is used in determining when a Backtesting Charge may apply to a Netting Member or Segregated Indirect Participant by stating "as such [backtesting] coverage is calculated for purposes of calculating the Backtesting Charge".
Finally, the proposed changes would include a paragraph in the definition of Backtesting Charge that states "[i]n calculating a Netting Member's or Segregated Indirect Participant's backtesting coverage (for purposes of calculating the Backtesting Charge) and in calculating any applicable Backtesting Charge, the Corporation would not include amounts already collected from that Netting Member or Segregated Indirect Participant as (i) a Backtesting Charge, and (ii) other components of the Required Fund Deposit or Segregated Customer Margin, as applicable, on an intraday basis pursuant to this Margin Component Schedule." This proposed change would both clarify FICC's existing practice and reflect the proposed change to its calculation methodology described herein.
Impact Study
FICC performed an impact study on Backtesting Charges collected for the period beginning June 3, 2024, through May 30, 2025 ("Impact Study Period'). If the proposed change to exclude amounts collected intraday had been in place during the Impact Study Period, the aggregate average daily Backtesting Charges would have increased by approximately $166.61MM or 121.2% for the start of the day margin cycle and $137.41MM or 90.3% for the intraday margin cycle at GSD. The impact study also indicated that if the proposed change had been in place, overall margin would have increased by approximately $166.61MM or 0.30% for the start of the day margin cycle and $137.41MM or 0.25% for the intraday margin cycle at GSD during the Impact Study Period.
During the Impact Study Period, 29 Netting Members would have been impacted by the proposed changes to the charges applied to the start of the day margin cycle, and 19 Netting Members would have been impacted by the proposed changes to the charges applied to the intraday margin cycle. 16 On average, at the impacted Member level, the proposed changes would have increased the Backtesting Charge applied during the start of the day margin cycle by approximately $5.95MM or 8.6% of each impacted Netting Member's overall margin requirement, and by approximately $7.61MM or 17.4% of each impacted Netting Member's overall margin requirement for the Backtesting Charge applied during the intraday margin cycle.
Footnotes:
16 ?FICC did not have any Segregated Indirect Participants during the Impact Study Period.
The largest average percentage and dollar increases in the start of the day margin requirement for any Netting Member would have been approximately 91.8%, or $97.26MM (0.16% of the Netting Member's average Net Capital). 17 The largest average percentage increase in the intraday margin requirement for any Netting Member would have been approximately 58.9%, or $6.09MM (0.01% of the Netting Member's average Net Capital). The largest average dollar increase in the intraday margin requirement for any Netting Member would have been approximately $46.52MM, or 48.1% (16.21% of the Netting Member's average Net Capital).
Footnotes:
17 ?The term "Net Capital" means, as of a particular date, the amount equal to the net capital of a broker or dealer as defined in 17 CFR 240.15c3-1(c)(2), or any successor rule or regulation thereto. See GSD Rule 1 (Definitions), supra note 3.
Implementation Timeframe
FICC would implement the proposed rule change by no later than 60 Business Days after approval by the Commission. FICC would announce the effective date of the proposed changes by an Important Notice posted to its website.
2. Statutory Basis
FICC believes the proposed rule changes are consistent with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. In particular, FICC believes the proposed rule changes are consistent with Section 17A(b)(3)(F) of the Act, 18 and Rules 17ad-22(e)(6)(i) and (e)(23)(ii), promulgated under the Act, 19 for the reasons described below.
Footnotes:
18 ?15 U.S.C. 78q-1(b)(3)(F).
19 ?17 CFR 240.17ad-22(e)(6)(i) and (e)(23)(ii).
Section 17A(b)(3)(F) of the Act requires that the GSD Rules be designed to, among other things, promote the prompt and accurate clearance and settlement of securities transactions. 20 The proposed rule changes would provide Members with a clearer understanding of the methodology used to calculate the Backtesting Charge by including in the GSD Rules a clear description of the exclusion of both Backtesting Charges and other intraday margin components from that methodology. Members would be better able to anticipate their risk management obligations to FICC and, therefore, manage the risks their clearing activity presents to FICC when the GSD Rules are clearer and more transparent regarding the margin calculation methodology. FICC believes this result would promote the prompt and accurate clearance and settlement of securities transactions and, as such, the proposed changes would be consistent with Section 17A(b)(3)(F) of the Act. 21
Footnotes:
20 ?15 U.S.C. 78q-1(b)(3)(F).
21 ? Id.
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Rule 17ad-22(e)(6)(i) under the Act requires, in part, that FICC establish, implement, maintain and enforce written policies and procedures reasonably designed to cover its credit exposures to its participants by establishing a risk-based margin system that, at a minimum, considers, and produces margin levels commensurate with, the risks and particular attributes of each relevant product, portfolio, and market. 22 FICC is proposing to enhance the calculation methodology of the backtesting coverage used for purposes of calculating the Backtesting Charge and the calculation of the Backtesting Charge by excluding from those calculations other components of the Required Fund Deposit or Segregated Customer Margin, as applicable, that had been collected on an intraday basis. This revision to the calculation methodology would remove an assumption that FICC's Netting Members or Segregated Indirect Participants would only default after they had met those intraday margin requirements. In this way, the revised calculation methodology for the backtesting coverage and Backtesting Charge would better cover FICC's credit exposures to these participants, consistent with the requirements of Rule 17ad-22(e)(6)(i). 23
Footnotes:
22 ?17 CFR 240.17ad-22(e)(6)(i).
23 ? Id.
Rule 17ad-22(e)(23)(ii) under the Act requires that FICC establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for sufficient information to enable participants to identify and evaluate the risks, fees, and other material costs they incur by participating in the covered clearing agency. 24 The proposed rule change would enhance the definition of the Backtesting Charge by providing Members with a better understanding of the calculation methodology utilized for both the relevant backtesting coverage and the Backtesting Charge. The proposed rule change would also make revisions to that definition by removing unnecessary defined terms for "Intraday Backtesting Charge" and "Regular Backtesting Charge" in order to simplify the description of the Backtesting Charge. Finally, the proposed rule change would include additional clarification that the backtesting coverage referred to in the definition is the coverage that is a calculation for purposes of calculating the Backtesting Charge. These changes would collectively simplify the definition of the Backtesting Charge and provide Members with additional information regarding the related margin requirements. In this way, the proposal would enhance Members' ability to evaluate the risks and material costs they may incur by participating in FICC and, as such, FICC believes the proposed changes are consistent with the requirements of Rule 17ad-22(e)(23)(ii). 25
Footnotes:
24 ?17 CFR 240.17ad-22(e)(23)(ii).
25 ? Id.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of Act requires that the rules of a clearing agency do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. 26 FICC does not believe the proposed rule change would present any burden or have a material impact on competition.
Footnotes:
26 ?15 U.S.C. 78q-1(b)(3)(I).
First, the proposed changes are designed to ensure that the GSD Rules remain transparent, accurate and clear. The proposal would accomplish this by providing a clearer description of the calculation of the backtesting coverage and the Backtesting Charge, removing unnecessary defined terms for "Intraday Backtesting Charge" and "Regular Backtesting Charge" and clarifying in the GSD Rules that the backtesting coverage referenced therein is the coverage utilized in connection with calculating the Backtesting Charge. These proposed changes would not have an impact on competition.
Second, the proposed changes are intended to facilitate FICC's compliance with the requirements of the Act and the rules and regulations thereunder applicable to a registered clearing agency. Specifically, the proposal would enhance the calculation of the backtesting coverage and Backtesting Charge to exclude additional components of the Required Fund Deposit or Segregated Customer Margin, as applicable, that had been collected on an intraday basis. This proposed change would remove an assumption that FICC's Netting Members or Segregated Indirect Participants would only default after they had met those intraday margin requirements. While this change could result in an increase to Members' Backtesting Charges, when such charges are applicable, the change would apply equally to all Members and would not inhibit access to FICC's services or favor any particular Member over another. Furthermore, the proposed enhancement would result in a calculation of the backtesting coverage and Backtesting Charge that would better cover FICC's credit exposures to its Members and, as such, FICC believes this proposed change is necessary and appropriate to facilitate its compliance with requirements of Rule 17ad-22(e)(6)(i) under the Act. 27 Therefore, FICC does not believe that the proposed rule change would impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
Footnotes:
27 ?17 CFR 240.17ad-22(e)(6)(i).
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others
FICC has not received or solicited any written comments relating to this proposal. If any additional written comments are received, they will be publicly filed as an Exhibit 2 to this filing, as required by Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to Section IV (Solicitation of Comments) of the Exhibit 1A in the General Instructions to Form 19b-4, the Commission does not edit personal identifying information from comment submissions. Commenters should submit only information that they wish to make available publicly, including their name, email address, and any other identifying information.
All prospective commenters should follow the Commission's instructions on how to submit comments, available at www.sec.gov/rules-regulations/how-submit-comment. General questions regarding the rule filing process or logistical questions regarding this filing should be directed to the Main Office of the SEC's Division of Trading and Markets at tradingandmarkets@sec.gov or 202-551-5777.
FICC reserves the right to not respond to any comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for Commission Action
Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will:
(A) by order approve or disapprove such proposed rule change, or
[top] (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 is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
• Use the Commission's internet comment form ( https://www.sec.gov/rules/sro.shtml ); or
• Send an email to rule-comments@sec.gov. Please include file number SR-FICC-2025-017 on the subject line.
Paper Comments
• Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to file number SR-FICC-2025-017. 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 website ( https://www.sec.gov/rules/sro.shtml ). Copies of the filing will be available for inspection and copying at the principal office of FICC and on DTCC's website ( www.dtcc.com/legal/sec-rule-filings ). Do not include personal identifiable information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright protection. All submissions should refer to File Number SR-FICC-2025-017 and should be submitted on or before August 26, 2025.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 28
Footnotes:
28 ?17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-14753 Filed 8-4-25; 8:45 am]
BILLING CODE 8011-01-P