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

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-103941; File No. SR-FICC-2025-017]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving of Proposed Rule Change To Revise the Definition of the Backtesting Charge</SUBJECT> <DATE>September 10, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On July 23, 2025, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”), 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/> proposed rule change SR-FICC-2025-017 (“Proposed Rule Change”) to make changes to FICC's Government Securities Division (“GSD”) Rule Book to revise the definition of the Backtesting Charge. The Proposed Rule Change was published for comment in the <E T="04">Federal Register</E> on August 5, 2025. <SU>3</SU> <FTREF/> The Commission has received no comments on the Proposed Rule Change. For the reasons discussed below, the Commission is approving the Proposed Rule Change. <SU>4</SU> <FTREF/> <FTNT> <SU>1</SU>  15 U.S.C. 78s(b)(1). </FTNT> <FTNT> <SU>2</SU>  17 CFR 240.19b-4. </FTNT> <FTNT> <SU>3</SU>   <E T="03">See</E> Securities Exchange Act Release No. 103602 (July 31, 2025), 90 FR 37608 (Aug. 5, 2025) (File No. SR-FICC-2025-017) (“Notice of Filing”). </FTNT> <FTNT> <SU>4</SU>  Capitalized terms not defined herein shall have the meanings ascribed to them in the GSD Rules, <E T="03">available at https://www.dtcc.com/legal/rules-and-procedures.aspx.</E> </FTNT> <HD SOURCE="HD1">II. Background</HD> FICC is a central counterparty (“CCP”), which means it interposes itself as the buyer to every seller and seller to every buyer for the financial transactions it clears. FICC's GSD provides trade comparison, netting, risk management, settlement, and central counterparty services for the U.S. Government securities market. <SU>5</SU> <FTREF/> As such, FICC is exposed to the risk that one or more of its members may fail to make a payment or to deliver securities. <FTNT> <SU>5</SU>  FICC's Mortgage-Backed Securities Division provides similar services for mortgage-backed securities. For purposes of this Order, “FICC” refers to GSD. </FTNT> A key tool that FICC uses to manage its credit exposures to its members is determining the appropriate margin to collect from members and monitoring its sufficiency. A member's Required Fund Deposit (or Segregated Customer Margin, when applicable), which serves as margin, is designed to mitigate potential losses associated with liquidation of the member's portfolio in the event of that member's default. The aggregated amount of all GSD members' Required Fund Deposits constitutes 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. <SU>6</SU> <FTREF/> Similarly, FICC would be able to access Segregated Customer Margin in the event of the default of the Segregated Indirect Participant for which that margin is held. <SU>7</SU> <FTREF/> <FTNT> <SU>6</SU>   <E T="03">See</E> GSD Rule 4 (Clearing Fund and Loss Allocation), <E T="03">supra</E> note 4. </FTNT> <FTNT> <SU>7</SU>   <E T="03">See</E> GSD Rule 4, Section 1a, <E T="03">id.</E> </FTNT> Each member's Required Fund Deposit or Segregated Customer Margin amount consists of a number of applicable components, each of which is calculated to address specific risks faced by FICC. <SU>8</SU> <FTREF/> FICC employs daily backtesting to determine the adequacy of each member's margin amount, comparing the Required Fund Deposit or Segregated Customer Margin with the simulated liquidation gains/losses using the actual positions in the member's portfolio and the actual historical returns. <SU>9</SU> <FTREF/> FICC performs this backtesting both for internal reporting and in connection with the calculation of the Backtesting Charge margin component, which is discussed further below. <SU>10</SU> <FTREF/> FICC investigates the cause of any backtesting deficiencies, particularly 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 any identifiable cause of repeat deficiencies or a same underlying reason for multiple members' backtesting deficiencies. <SU>11</SU> <FTREF/> <FTNT> <SU>8</SU>   <E T="03">See</E> GSD Rules (Margin Component Schedule), <E T="03">supra</E> note 4. 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. </FTNT> <FTNT> <SU>9</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 37609. Backtesting is an ex-post comparison of actual outcomes ( <E T="03">i.e.,</E> the actual margin collected) with expected outcomes derived from the use of margin models. <E T="03">See</E> 17 CFR 240.17Ad-22(a)(1). </FTNT> <FTNT> <SU>10</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>11</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 37609. </FTNT> The Backtesting Charge is an additional charge that may be added to a Required Fund Deposit or Segregated Customer Margin requirement for start of day and/or intraday margin collection. <SU>12</SU> <FTREF/> FICC may assess the Backtesting Charge if the firm has a 12-month trailing backtesting coverage below the 99 percent backtesting coverage target. <SU>13</SU> <FTREF/> If assessed, the Backtesting Charge is generally equal to the firm's third largest deficiency that occurred during the previous 12 months, but FICC may adjust it to an amount that FICC determines is more appropriate for maintaining that firm's backtesting results above the 99 percent coverage threshold. <SU>14</SU> <FTREF/> FICC calculates the Backtesting Charge at least monthly and, based on those calculations, may impose a new Backtesting Charge, remove an existing Backtesting Charge, or either increase or decrease an existing Backtesting Charge as necessary to maintain its target backtesting coverage. <SU>15</SU> <FTREF/> <FTNT> <SU>12</SU>  GSD Rules (Margin Component Schedule), Section 5, <E T="03">supra</E> note 4. </FTNT> <FTNT> <SU>13</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>14</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>15</SU>   <E T="03">Id.</E> </FTNT> <HD SOURCE="HD1">III. Description of the Proposed Rule Change</HD> FICC is proposing to revise the definition of the Backtesting Charge in the Margin Component Schedule of the GSD Rules to clarify the current calculation of that charge and adopt a change to the calculation. First, FICC is proposing clarifications to the definition of Backtesting Charge to reflect FICC's current practice. The Proposed Rule Change would explicitly state that the backtesting coverage calculated in connection with the Backtesting Charge and the calculation of that charge do not include amounts already collected from that member as a Backtesting Charge. FICC states that by excluding amounts already collected as a Backtesting Charge from this calculation, FICC is able to more accurately evaluate a firm's historical backtesting deficiencies to determine any appropriate Backtesting Charge amount to maintain that firm's backtesting coverage above the 99 percent confidence threshold. <SU>16</SU> <FTREF/> <FTNT> <SU>16</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 37609. </FTNT> The Proposed Rule Change would also clarify that the backtesting coverage calculation described in the definition is the coverage “calculated for purposes of calculating the Backtesting Charge,” distinguishing it from backtesting that FICC performs for other purposes which may use a different methodology. FICC states that because methodologies may differ, this aspect of the Proposed Rule Change would preclude confusion between the different coverage calculations. <SU>17</SU> <FTREF/> The Proposed Rule Change would also remove the defined terms for “Intraday Backtesting Charge” and “Regular Backtesting Charge” from the definition, but continue to state that the Backtesting Charge may be calculated on both the start of day and intraday portfolio of members. FICC states that because the Backtesting Charge that is calculated and collected at the start of day and intraday are otherwise identical, the two separate defined terms are not necessary. <SU>18</SU> <FTREF/> <FTNT> <SU>17</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>18</SU>   <E T="03">Id.</E> </FTNT> Second, the Proposed Rule Change would revise the calculation of the backtesting coverage calculated in connection with the Backtesting Charge and the calculation of that charge by excluding from the calculation other margin amounts already collected intraday from the member. FICC states that this aspect of the Proposed Rule Change would remove from these calculations an assumption that FICC would collect all intraday margin requirements before the member defaults, because this assumption could underestimate the potential losses that FICC may experience if the member defaults prior to funding its intraday margin calls. <SU>19</SU> <FTREF/> FICC states that similar to excluding amounts already collected as a Backtesting Charge, as is the current practice described above, excluding other margin collected intraday would make it less likely for FICC to undercount potential backtesting deficiencies. <SU>20</SU> <FTREF ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 22k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━