FICC is proposing a rule to collect MORE margin via a Portfolio Differential Charge that would be calculated twice a day. FICC's impact study shows that even with the PD Charge, 30 Members would still be un-margined during periods.
This charge needs to be MORE!
Wut mean?:
- FICC is introducing a new component, the PD Charge, to improve how it calculates the necessary deposit for the GSD Clearing Fund.
- This change aims to reduce risks from the variations in a Member’s Margin Portfolio(s) that can happen between the times deposits are collected.
- FICC employs daily backtesting to determine the adequacy of each Member’s Required Fund Deposit.
Pursuant to the GSD Rules, each Member’s Required Fund Deposit amount consists of a number of applicable components, each of which is calculated to address specific risks faced by FICC, as identified within the GSD Rules.
- These components include the VaR Charge, Blackout Period Exposure Adjustment, Backtesting Charge, Holiday Charge, Margin Liquidity Adjustment Charge, and special charge.
- The VaR Charge generally comprises the largest portion of a Member’s Required Fund Deposit amount.
- FICC's VaR Charge is based on the potential price volatility of unsettled positions using a sensitivity-based Value-at-Risk (VaR) methodology.
The VaR methodology provides an estimate of the possible losses for a given portfolio based on:
- (1) confidence level,
- (2) a time horizon and
- (3) historical market volatility.
The VaR methodology is intended to capture the risks related to market price that is associated with the Net Unsettled Positions in a Member’s Margin Portfolios.
- What does this mean? It tries to predict how much one could lose due to normal market fluctuations for these positions.
- This risk-based margin methodology is designed to project the potential losses that could occur in connection with the liquidation of a defaulting Member’s Margin Portfolio, assuming a Margin Portfolio would take three days to liquidate in normal market conditions.
The projected liquidation gains or losses are used to determine the amount of the VaR Charge to each Margin Portfolio, which is calculated to capture the market price risk12 associated with each Member’s Margin Portfolio(s) at a 99% confidence level (Meaning there's a 1% chance that the actual loss could be greater than the estimated risk.)
- The start-of-day VaR component of the Required Fund Deposit addresses the risk presented by a Member’s start-of-day positions.
- GSD also calculates VaR for intraday collection, which reflects the changes in a Member’s positions and risk profile due to the submission of new trades and completed settlement activity from the start-of-day to noon.
Wut Mean?:
- The value and risk profile of a Member's set of assets (Margin Portfolio) can change a lot during the day as they make more trades.
- When these trades are approved and guaranteed by FICC as soon as they're matched (novated and compared), there's a risk to FICC. This is because the trades might cause significant changes in the portfolio's value or risk that aren't immediately covered by the funds set aside to manage risks (margins).
- This delay in updating the required funds (or margin) to cover the new risks might lead to a temporary coverage gap. In other words, for a certain period, the member might not have enough funds set aside to cover potential losses from their trades.
- This mismatch between actual risks and covered risks can lead to backtesting deficiencies, which means when you look back (or "backtest") at past trades and risks, you find that the funds set aside wouldn't have been sufficient to cover potential losses.
- The PD Charge is introduced to address this risk. It's an additional charge or amount of money that members need to keep on hand to cover these potential temporary gaps in risk coverage.
The PD Charge will increase Members’ Required Fund Deposits and is supposed to handle variability in daily clearing activity at GSD.
- It's based on each Member’s historical trading.
The PD Charge is proposed to be calculated twice daily and added to each Member’s Required Fund Deposit.
- The calculation considers historical changes between the start-of-day and intraday, and intraday to end-of-day VaR components of the Member’s deposit over a minimum of 100 days.
- This calculation uses the exponentially weighted moving average (EWMA) of the changes, with a multiplier ranging between 1 and 3 set by FICC.
- This method emphasizes more recent trading activities in the PD Charge calculation.
- FICC believes the PD Charge addresses and manages the risks FICC faces due to the fluctuations in a Member’s portfolio during trading that aren't immediately covered by margins:
Too bad if you have to pay more to cover margin, FICC sees it as necessary and appropriate.
Impact Study:
Wut Mean?:
Effects of the proposed PD Charge over a period from November 2021 to March 2023. Based on FICC's findings:
Average Daily PD Charge Per Member:
- For the start-of-day margin calculation: Each Member would have an average daily PD Charge of roughly $5.4 million, equivalent to 2.2% of the average daily Clearing Fund deposit per Member.
- For the noon margin calculation: The average PD Charge would be around $6.9 million per Member, equivalent to 2.9% of the daily Clearing Fund deposit per Member.
Largest Daily PD Charges for Members:
- For the start-of-day margin calculation: The top three Members would have PD Charges of $41.09 million (3.22% of its deposit), $31.50 million (8.14% of its deposit), and $26.40 million (5.90% of its deposit).
- For the noon margin calculation: The highest three PD Charges would be $104.06 million (4.55% of its deposit), $62.47 million (7.46% of its deposit), and $52.15 million (6.38% of its deposit).
Largest Daily PD Charges as Percentages:
- For the start-of-day margin calculation: The three Members with the largest PD Charges in terms of percentage of their average daily Clearing Fund deposit would be charged 16.74% ($1.42 million), 15.76% ($3.64 million), and 13.87% ($7.74 million).
- For the noon margin calculation: These percentages increase substantially, with the top three charges being 39.76% ($15.55 million), 26.16% ($0.43 million), and 22.47% ($21.42 million).
Overall:
- If the PD Charge had been applied during this period, the average daily PD Charge in the morning (start-of-day) would have been about $660 million. This represents 2.2% of the average daily Clearing Fund deposit at the start of the day.
- For the midday (noon) margin calculation, the average daily PD Charge would have been about $839 million, or 2.9% of the average daily Clearing Fund deposit at noon.
- The Clearing Fund requirement's backtesting coverage ratio would have increased slightly by 0.25% (or 25 basis points), moving from 98.37% to 98.62%.
- If the PD Charge had been active during this period, backtesting deficiencies (instances where the margin collected was insufficient to cover the realized losses) would have reduced by 15%, dropping from 498 to 421 instances.
This improved backtesting performance would have positively affected 44 Members, representing about 34% of the GSD membership.
- Importantly, 14 of these Members, who previously had a coverage below 99% (which means their margins were insufficient in covering their potential losses 99% of the time or more) , would now have exceeded this threshold due to the PD Charge.
HOWEVER, 30 members would still not have reached the 99% coverage threshold even with the new PD Charge!
It needs to be more!
How to Comment:
Electronic Comments:
- Use the Commission's comment form
- Or email: [email protected] (Include "File Number SR-FICC-2023-011" in the subject line).
Paper Comments:
- Mail (in triplicate) to: Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.
Important Notes:
- Always refer to "File Number SR-FICC-2023-011".
- Only use one method to comment.
- All comments will be posted on the Commission's website.
- Submissions are public. Avoid including personal details or copyrighted material.
- Submit comments up to 21 days after the proposal's publication in the Federal Register.
TLDRS:
- FICC is looking to collect more margin to cover its risk from its members via a PD Charge.
- If the PD Charge had been active during the impact study period period (November 2021-March 2023), backtesting deficiencies (instances where the margin collected was insufficient to cover the realized losses) would have reduced by 15%, dropping from 498 to 421 instances.
- This improved backtesting performance would have positively affected 44 Members, representing about 34% of the GSD membership.
- Importantly, 14 of these Members, who previously had a coverage below 99% (which means their margins were insufficient in covering their potential losses 99% of the time or more) , would now have exceeded this threshold due to the PD Charge.
- HOWEVER, 30 members would still not have reached the 99% coverage threshold even with the new PD Charge!
- It needs to be more!
- Please consider commenting saying so!
