Submission of Rule Filing SR-FICC-2023-012 – Margin Liquidity Adjustment (MLA) Charge. FICC has [REDACTED] the Margin Liquidity Adjustment Model Document and has filed it separately with the SEC.

SR-FICC-2023-012:

Wut Mean?:

FICC is proposing three main changes:

1. Better Calculations for Sponsored Members: For members sponsored by multiple entities, FICC wants to improve how they calculate a specific charge (MLA Charge) to better address the risks of these members possibly not fulfilling their obligations. This includes an additional charge (MLA Excess Amount) to cover costs if these members default.
2. Asset Group Descriptions: FICC plans to update how they describe and classify different asset groups used to determine the MLA Charge. Instead of having fixed categories in the rules, FICC will have the flexibility to set and adjust these categories as needed.
3. Clarifications and Technical Updates: FICC aims to clarify the wording in their rules about how they calculate the MLA Charge and will also make a technical update in their guidelines.

Wut Mean?:

• FICC acts as a central party to oversee transactions in the U.S. government and mortgage-backed securities markets.

To manage the risks associated with this role, FICC requires its members to make a "Required Fund Deposit" to a "Clearing Fund."

• This deposit is like a security deposit for each member.
• Its purpose is to cover any potential losses if a member doesn't fulfill its obligations.
• If a member defaults and their deposit isn't enough to cover the losses, the Clearing Fund, which is the total of all members' deposits, is used.
• One part of this deposit is the "MLA Charge," which considers the risk from large unsettled deals in specific types of securities.

Wut Mean?:

• GSD Rule 22A & MBSD Rule 17: In case a Member defaults, these rules empower FICC to quickly manage and close out the defaulted Member's positions and use their collateral. Closing out typically means buying or selling securities the Member was supposed to deliver or receive from FICC.
• Risks and Costs: Liquidating a defaulted Member's unsettled positions can lead to higher transaction costs for FICC due to the unique features of that Member's portfolio. Market impact costs, especially, increase when the portfolio has a concentration of securities with similar risk or transaction type.
• MLA Charge: This charge is introduced to handle the potential market impact costs that might arise when liquidating a defaulted Member's positions. It’s specifically focused on portfolios with large unsettled positions that could reduce the marketability of those securities.
• MLA Charge Calculation: The charge takes into account the total market value of unsettled positions compared to the available trading volume for that type of asset. If the value is large in comparison to the available volume, FICC could face higher market impact costs when liquidating those positions.
• Asset Groupings: Securities are grouped based on risk profiles and, in some cases, maturity. For instance, U.S. Treasury securities are grouped based on their maturity timeline. These groupings help in determining the MLA Charge.
• How the Charge is Applied: FICC calculates potential market impact costs for each asset group. If the calculated cost is greater than a set threshold compared to a part of the VaR Charge, the MLA Charge is applied. This charge is updated daily and is part of the Member's required deposits.
• Special Cases for Sponsored Members: FICC also accounts for Sponsored Members (those who clear through a single or multiple Sponsoring Members). They have an "MLA Excess Amount" charge applied if the combined portfolio's MLA Charge is more than the sum of individual accounts' charges. The purpose is to capture additional market impact costs that might arise if the Sponsored Member defaults and multiple Sponsoring Members have to liquidate positions.
• Proposed Changes: FICC wants to modify its approach for Sponsored Members with multiple accounts to better reflect market impact costs. Additionally, they plan to adjust how asset groups/subgroups are used for the MLA Charge, allowing for more flexibility in how these groups are defined and used.
• Clarifications and Technical Adjustments: FICC is suggesting changes to clarify how the MLA Charge is calculated and determined, emphasizing that calculations are done for each asset group, not individual positions.

Wut Mean?:

Enhanced MLA Charge Calculation:

• Instead of charging an MLA Excess Amount, the calculation of the MLA Charge will be adjusted for Sponsored Members clearing through multiple accounts sponsored by various Sponsoring Members.
• The goal is to align with the potential market impact cost incurred when the Sponsored Member defaults and the Sponsoring Members liquidate unsettled positions.

MLA Charge will be calculated for each asset group/subgroup in both:

• An account on a standalone basis.
• Part of a consolidated portfolio. The higher of these two will be applied.

For consolidated portfolios, market impact cost will be calculated for each asset group/subgroup based on aggregate net unsettled positions.

• This cost will be allocated pro rata to each account based on market impact cost.

The allocated cost will be compared to the VaR Charge's portion.

• If the ratio exceeds a certain threshold, an MLA Charge will apply.
• The MLA Charge for a consolidated portfolio will be calculated considering the ratio of the allocated market impact cost and a portion of the VaR Charge.
• The highest MLA Charge, when comparing standalone and consolidated portfolio calculations, will be applied. All MLA Charges will be combined to get a total MLA Charge for that Sponsored Member's account.
• There are proposed amendments to GSD Rule 1 to change the description of the MLA Charge and to remove the MLA Excess Amount.

Revise Asset Groups/Subgroups Language in the GSD and MBSD Rules:

• FICC wants to frequently adjust asset groupings due to fluctuating market conditions without needing to file a proposed rule change with the Commission.
• FICC proposes to eliminate specific maturity groupings in the GSD Rules related to the MLA Charge calculation. Instead, schedules of asset groups and subgroups will be published on FICC's website.

Changes in the MLA Charge definition in GSD Rule 1 and MBSD Rule 1 will categorize net unsettled positions in different asset groups and subgroups.

• Members are responsible for retrieving the schedule from FICC's website, and FICC will notify Members at least 5 business days before any change to the schedule.

Clarifying and Technical Changes:

• Language modifications are proposed in the GSD and MBSD Rules to provide clarity on how the MLA Charge is calculated.
• Changes will emphasize that the MLA Charge is first calculated for each asset group/subgroup and then combined to derive one MLA Charge for each Member portfolio.
• Clarifications indicate that market impact cost calculation is for combined net unsettled positions in each asset group/subgroup, not individual positions.
• Technical changes are proposed in the GSD Rules for correct term usage, specifically in the definition of the Margin Liquidity Adjustment Charge.

FICC has [REDACTED] the MLA Model Document and has filed it separately with the SEC.

FICC has not received or solicited any written comments relating to this proposal:

How to comment:

Caution: They won't edit out personal identifying details from comments.

• Only submit what you're comfortable sharing publicly, such as name, email, etc.

How to Submit:

• Follow the Commission's instructions at https://www.sec.gov/regulatory-actions/how-to-submitcomments.
• Or, email comments to [email protected] with "SR-FICC-2023-012" in the subject line.

TLDRS:

• Submission of Rule Filing SR-FICC-2023-012 – Margin Liquidity Adjustment (MLA) Charge.
• FICC has [REDACTED] the MLA Model Document and has filed it separately with the SEC.
• FICC is proposing three main changes:

1. Better Calculations for Sponsored Members: For members sponsored by multiple entities, FICC wants to improve how they calculate a specific charge (MLA Charge) to better address the risks of these members possibly not fulfilling their obligations. This includes an additional charge (MLA Excess Amount) to cover costs if these members default.
2. Asset Group Descriptions: FICC plans to update how they describe and classify different asset groups used to determine the MLA Charge. Instead of having fixed categories in the rules, FICC will have the flexibility to set and adjust these categories as needed.
3. Clarifications and Technical Updates: FICC aims to clarify the wording in their rules about how they calculate the MLA Charge and will also make a technical update in their guidelines.

• FICC has not received or solicited any written comments relating to this proposal.
• Follow the Commission's instructions at https://www.sec.gov/regulatory-actions/how-to-submitcomments.
• Or, email comments to [email protected] with "SR-FICC-2023-012" in the subject line.

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