Submission of Rule Filing SR-FICC-2023-011 Portfolio Differential Charge. FICC conducted a study from 11/2021 to 10/2022, had the PD Charge been implemented during this period, it would've averaged $661 million in the morning. & $822 million at noon.
Wut Mean?:
- FICC is introducing a new component, the PD Charge, to improve the way they calculate the GSD Clearing Fund's Required Fund Deposit.
- This will address the risks arising from fluctuations in a Member’s Margin Portfolio between the times of collecting their required deposits.
- FICC, using GSD, acts as the main intermediary for clearing and settling U.S. Treasury securities, including their buyback transactions.
To manage market risk, FICC oversees its credit risk to Members by setting and tracking an essential deposit called the Required Fund Deposit to the GSD Clearing Fund, as outlined in GSD rules.
- This deposit functions as a margin for each Member.
- The main goal of a Member's margin is to reduce potential losses for FICC when liquidating a Member's assets if they default.
The combined margins from all Members form the GSD Clearing Fund. If a defaulting Member's margin falls short, FICC taps into this fund to cover losses from the Member's portfolio liquidation.
- This deposit is recalculated at least twice daily.
- FICC consistently checks market and liquidity risks, ensuring margin amounts align with the risk levels of products and portfolios.
- They use daily backtesting to check the adequacy of these deposits, comparing them to potential liquidation outcomes.
- If the test shows a deposit is insufficient for potential losses, it indicates a risk of loss for FICC should a Member default.
- FICC examines the reasons for any backtesting shortfalls and checks if the same issues repeatedly arise. They also see if multiple Members have the same backtesting problems.
- GSD Rules dictate how each Member's Required Fund Deposit is determined, accounting for various risk components. These components cover specific risks and include items like the VaR Charge, Blackout Period Exposure Adjustment, and more.
The VaR Charge, a major part of the deposit, estimates potential losses using the Value-at-Risk (VaR) method, which considers confidence level, time, and past market volatility.
- This charge aims to predict potential losses from liquidating a defaulting Member's assets, assuming a three-day liquidation period in normal markets.
- This calculation aids in setting the VaR Charge for each portfolio, capturing the market price risk at a 99% confidence level.
- The start-of-day VaR looks at risks from a Member's beginning-of-day positions, while an intraday VaR considers position changes due to new trades and settlements until noon.
- FICC proposes adding the PD Charge to the Required Fund Deposit calculation after regularly reviewing its margin calculation's efficacy.
Wut Mean?:
- The proposed PD Charge aims to address the variability in the VaR Charge over a specific look-back period. It's designed to reduce risks from varying clearing activities throughout the day.
- A Member’s trading portfolio can change considerably during the day. As FICC generally guarantees these trades, there can be gaps in coverage due to significant intraday portfolio changes, which might only be offset when the Required Fund Deposit is made, either intraday or the next business day. This can lead to backtesting issues, which they hope the PD Charge addresses.
- The PD Charge will raise Members’ Required Fund Deposits to handle the variability of daily clearing activities based on past trading actions. This charge will be calculated twice daily and, if needed, will be included in each Member’s Required Fund Deposit.
- Specifically, the PD Charge will focus on historical changes in the VaR Charge of a Member over a minimum of 100 days. This calculation will consider recent changes more heavily and will be adjusted based on backtesting outcomes. By tackling these period-to-period changes in the VaR Charge, the PD Charge aims to reduce risks from un-margined fluctuations in a Member’s portfolio due to guaranteed trades during coverage gaps.
- The PD Charge will be calculated twice every Business Day, using the exponentially weighted moving average (EWMA) of historical increases in a Member's VaR Charge over at least a 100-day period. This calculation has specific boundaries for the decay factor and a multiplier, both set based on backtesting outcomes.
- FICC will inform Members at least 10 Business Days in advance about any changes in the calculation factors through an Important Notice.
- Moreover, FICC plans to modify GSD Rule 4, Section 1b, to incorporate the PD Charge in the calculation for each Member’s Required Fund Deposit.
Wut Mean?:
- FICC conducted a study from November 2021 to October 2022 to understand the impact of the proposed PD Charge.
Had the PD Charge been implemented during this period:
- The daily PD Charge would've averaged $661 million in the morning and $822 million at noon.
- The backtesting coverage ratio would've improved slightly from 98.47% to 98.83%.
- Backtesting deficiencies would've decreased by 107, improving coverage for 49 Members. 14 of these members with below 99% coverage would've been bumped up to above 99%.
- The average daily PD Charge per Member would be around $5.5 million in the morning and $6.8 million at noon.
- The three Members with the highest PD Charges would've seen charges ranging from around $28.80 million to $37.31 million in the morning and $41.95 million to $86.59 million at noon.
- In terms of percentages relative to each Member’s daily Clearing Fund deposit, the three highest PD Charges would've been 17.89%, 16.78%, and 16.70% in the morning, and 39.96%, 24.71%, and 24.64% at noon.
How to comment:
- Go to the Commission's comment form at http://www.sec.gov/rules/sro.shtml; or
- Email [email protected] with "SR-FICC-2023-011" in the subject line.
TLDRS:
- FICC is introducing a new component, the PD Charge, to improve the way they calculate the GSD Clearing Fund's Required Fund Deposit.
- This will address the risks arising from fluctuations in a Member’s Margin Portfolio between the times of collecting their required deposits.
- The proposed PD Charge aims to address the variability in the VaR Charge over a specific look-back period. It's designed to reduce risks from varying clearing activities throughout the day.
- A Member’s trading portfolio can change considerably during the day. As FICC generally guarantees these trades, there can be gaps in coverage due to significant intraday portfolio changes, which might only be offset when the Required Fund Deposit is made, either intraday or the next business day. This can lead to backtesting issues, which they hope the PD Charge addresses.
- The PD Charge will raise Members’ Required Fund Deposits to handle the variability of daily clearing activities based on past trading actions. This charge will be calculated twice daily and, if needed, will be included in each Member’s Required Fund Deposit.
- Specifically, the PD Charge will focus on historical changes in the VaR Charge of a Member over a minimum of 100 days. This calculation will consider recent changes more heavily and will be adjusted based on backtesting outcomes. By tackling these period-to-period changes in the VaR Charge, the PD Charge aims to reduce risks from un-margined fluctuations in a Member’s portfolio due to guaranteed trades during coverage gaps.
- FICC conducted a study from November 2021 to October 2022 to understand the impact of the proposed PD Charge.
Had the PD Charge been implemented during this period:
- The daily PD Charge would've averaged $661 million in the morning and $822 million at noon.
- The backtesting coverage ratio would've improved slightly from 98.47% to 98.83%.
- Backtesting deficiencies would've decreased by 107, improving coverage for 49 Members. 14 of these members with below 99% coverage would've been bumped up to above 99%.
- The average daily PD Charge per Member would be around $5.5 million in the morning and $6.8 million at noon.
- The three Members with the highest PD Charges would've seen charges ranging from around $28.80 million to $37.31 million in the morning and $41.95 million to $86.59 million at noon.
- In terms of percentages relative to each Member’s daily Clearing Fund deposit, the three highest PD Charges would've been 17.89%, 16.78%, and 16.70% in the morning, and 39.96%, 24.71%, and 24.64% at noon.
