FICC-GOV Alert! Implementation of [REDACTED] SR-FICC-2023-003 set for 7/3/23. Revises the description of the stressed period used to calculate VaR Charge, amend the GSD QRM Methodology

https://www.dtcc.com/-/media/Files/pdf/2023/6/15/GOV1494-23.pdf

Before going any further:The VaR is the most important calculation, apparently, in determining the clearing fund deposit requirement (which in simple terms is just a fraction of customer buys).

• This is literally the reason why the buy button was hidden in January and early February 2021.

REMEMBER, the Exhibit 5 filed with this proposal (you know detailing what they are doing) was entirely redacted!

SR-FICC-2023-003

34-97342

Purpose

FICC has observed significant volatility in the U.S. government securities market due to tightening monetary policy, increasing inflation, and recession fears. The significant volatility has led to greater risk exposures for FICC. In order to mitigate the increased risk exposures, FICC has to quickly and timely respond to rapidly changing market conditions. For example, in order to respond to rapidly changing market conditions, FICC may need to quickly and timely adjust the look-back period that FICC uses for purposes of calculating the VaR Charge with an appropriate stressed period, as needed, to enable FICC to calculate and collect adequate margin from members. Accordingly, FICC is proposing to amend the QRM Methodology Documents by revising the description of the stressed period used to calculate the VaR Charge in order to enable FICC to quickly and timely adjust the look-back period used for calculating the VaR Charge with an appropriate stressed period, as needed. Adjustments to the look-back period could affect the amount of the VaR Charge that GSD Members are assessed by either increasing or decreasing such charge to reflect the level of risk the activities of the GSD Members presented to FICC.

FICC is also proposing to amend the GSD QRM Methodology Document in order to clarify the language describing the floor parameters used for the calculation of the VaR Floor. In addition, FICC is proposing to amend the QRM Methodology Documents to make certain technical changes.

FICC, through GSD and MBSD, serves as a central counterparty (“CCP”) and provider of clearance and settlement services for the U.S. government securities and mortgage-backed securities markets. A key tool that FICC uses to manage its credit exposures to its members is the daily collection of margin from each member. The aggregated amount of all GSD and MBSD members’ margin constitutes the GSD Clearing Fund and MBSD Clearing Fund (collectively referred to herein as the “Clearing Fund”), which FICC would be able to access should a defaulted member’s own margin be insufficient to satisfy losses to FICC caused by the liquidation of that member’s portfolio. Each member’s margin consists of a number of applicable components, including a value-at-risk (“VaR”) charge (“VaR Charge”) designed to capture the potential market price risk associated with the securities in a member’s portfolio. The VaR Charge is typically the largest component of a member’s margin requirement. The VaR Charge is designed to cover FICC’s projected liquidation losses with respect to a defaulted member’s portfolio at a 99% confidence level.

FICC calculates VaR Charge by using a methodology referred to as the sensitivity approach. The sensitivity approach leverages external vendor expertise in supplying the market risk attributes, which would then be incorporated by FICC into the GSD and MBSD models to calculate the VaR Charge. Specifically, FICC sources security-level risk sensitivity data and relevant historical risk factor time series from an external vendor for all eligible securities. The sensitivity data is generated by a vendor based on its econometric, risk and pricing models.

What does the above mean?

The Fixed Income Clearing Corporation (FICC) has been experiencing increased volatility in the U.S. government securities market due to a confluence of factors including tightening monetary policy, rising inflation, and fears of recession.

• This volatility has led to heightened risk exposure for the FICC, necessitating rapid response to changing market conditions.

To effectively manage this, FICC is proposing amendments to its Quantitative Risk Management (QRM) Methodology Documents.

• Specifically, they want to alter the description of the stressed period used in calculating the Value-at-Risk (VaR) Charge, which is designed to cover FICC's projected liquidation losses at a 99% confidence level.
• The idea is to enable FICC to adjust the look-back period used for VaR Charge calculation, thereby reflecting an appropriate stressed period as needed.
• This could potentially increase or decrease the VaR Charge assessed on Government Securities Division (GSD) members based on the risk level they present to FICC.
• FICC is also proposing to revise the language detailing the floor parameters used for VaR Floor calculation in the GSD QRM Methodology Document, alongside some technical changes.

As a central counterparty (CCP) and provider of clearance and settlement services for the U.S. government securities and mortgage-backed securities markets, FICC uses daily margin collection from members as a key tool for managing credit exposure.

• This margin constitutes the GSD and Mortgage-Backed Securities Division (MBSD) Clearing Funds.
• In case of member default, these funds would be used to cover losses to FICC from liquidating that member's portfolio.
• The largest component of a member's margin requirement is typically the VaR Charge. FICC calculates this charge using a sensitivity approach, sourcing security-level risk sensitivity data from an external vendor.

Previous posts:

• https://www.reddit.com/r/Superstonk/comments/12zh2vh/ficc_alert_ficc_approves_changes_to_the/
• https://www.reddit.com/r/Superstonk/comments/12uaqx6/ficc_alert_ficc_approves_rule_change_to_revise/

WhatCanIMakeToday with DD: https://www.reddit.com/r/Superstonk/comments/11kjge8/is_this_the_ficc_asking_the_sec_for_permission_to/

TLDRS:

• FICC approves rule change to Revise the Description of the Stressed Period Used to Calculate the Value-at-Risk Charge.
• It was completely redacted!
• The VaR is the most important calculation, apparently, in determining the clearing fund deposit requirement. This is the reason why the buy button was hidden in January and early February 2021.
• FICC represents that, in order to mitigate the increased risk exposures, FICC has to quickly and timely respond to rapidly changing market conditions.
• The implemented change to the description of the stressed period should help FICC collect sufficient margin from members, thereby limiting non-defaulting members’ exposure to mutualized losses in the event of a member default.
• The Commission believes that by helping to limit the exposure of FICC’s non-defaulting members to mutualized losses, the proposed changes should help FICC assure the safeguarding of securities and funds which are in its custody or control, consistent with Section 17A(b)(3)(F) of the Act.
• The results of the Impact Study indicate that, if a stressed period of 1.5 years had been in place for GSD, the GSD’s rolling 12-month VaR model backtesting coverage ratio would have improved by 29 bps (from 98.52% to 98.81%) as of October 2022 and the associated VaR Charge increase for GSD would be approximately $387 million (or 2.1%) on average during that period.
• The Impact Study further indicated that the three GSD Members with the largest average daily VaR Charge increases in dollar amount during the Impact Study period would have had increases of approximately $43.7 million, $43.24 million, and $39.55 million, representing an average daily increase for such Members of 3.4%, 4.4%, and 2.8%, respectively.
• The three GSD Members with the largest average daily VaR Charge increases as a percentage of VaR Charges paid by such Members during the Impact Study period would have had an average daily increase of 16.6%, 15.7% and 12.7%, respectively, had the contemplated stressed period been in place.

Reddit Post