Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise the Definition of the Backtesting Charge

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-103602; File No. SR-FICC-2025-017]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing of Proposed Rule Change To Revise the Definition of the Backtesting Charge</SUBJECT> <DATE>July 31, 2025.</DATE> Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  <SU>1</SU> <FTREF/> and Rule 19b-4 thereunder, <SU>2</SU> <FTREF/> 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. <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <HD SOURCE="HD1">I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change</HD> The proposed rule change consists of modifications to FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”)  <SU>3</SU> <FTREF/> 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. <FTNT> <SU>3</SU>  Terms not defined herein are defined in the GSD Rules, <E T="03">available at www.dtcc.com/legal/rules-and-procedures.</E> </FTNT> <HD SOURCE="HD1">II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> 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. <HD SOURCE="HD2">(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change</HD> <HD SOURCE="HD3">1. Purpose</HD> 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. <SU>4</SU> <FTREF/> <FTNT> <SU>4</SU>  17 CFR 240.17ad-22(e)(6)(i). </FTNT> <HD SOURCE="HD3">Background</HD> 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. <SU>5</SU> <FTREF/> As part of its market risk management strategy, <SU>6</SU> <FTREF/> 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. <SU>7</SU> <FTREF/> Required Fund Deposits and Segregated Customer Margin deposits serve as margin. <FTNT> <SU>5</SU>  GSD also clears and settles certain transactions on securities issued or guaranteed by U.S. government agencies and government sponsored enterprises. </FTNT> <FTNT> <SU>6</SU>  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). </FTNT> <FTNT> <SU>7</SU>   <E T="03">See</E> GSD Rule 4 (Clearing Fund and Loss Allocation), <E T="03">supra</E> 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. <E T="03">See</E> GSD Rule 1 (Definitions), <E T="03">id.</E> </FTNT> 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”). <FTREF/> <SU>8</SU> The aggregate amount of all Members' Required Fund Deposits constitutes the Clearing Fund, and FICC would access the Clearing Fund should a defaulting Member's own Required Fund Deposit be insufficient to satisfy losses to FICC caused by the liquidation of that Member's portfolio. <FTNT> <SU>8</SU>  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. <E T="03">See</E> GSD Rule 21 (Restrictions on Access to Services), <E T="03">id.</E> </FTNT> 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. <SU>9</SU> <FTREF/> 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. <SU>10</SU> <FTREF/> <FTNT> <SU>9</SU>   <E T="03">See</E> GSD Rules (Margin Component Schedule), <E T="03">id.</E> </FTNT> <FTNT> <SU>10</SU>   <E T="03">Id.</E> </FTNT> 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  <SU>11</SU> <FTREF/> 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 ( <E T="03">i.e.,</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. <FTNT> <SU>11</SU>  For backtesting comparisons, FICC uses the Required Fund Deposit amount without regard to the actual collateral posted by the Member. </FTNT> 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. <SU>12</SU> <FTREF/> 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. <SU>13</SU> <FTREF/> 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 cove ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 31k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━