Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Adopt an Intraday Mark-to-Market Charge at GSD

<NOTICE> SECURITIES AND EXCHANGE COMMISSION <DEPDOC>[Release No. 34-104009; File No. SR-FICC-2025-005]</DEPDOC> <SUBJECT>Self-Regulatory Organizations; Fixed Income Clearing Corporation; Order Approving Proposed Rule Change To Adopt an Intraday Mark-to-Market Charge at GSD</SUBJECT> <DATE>September 22, 2025.</DATE> <HD SOURCE="HD1">I. Introduction</HD> On March 14, 2025, Fixed Income Clearing Corporation (“FICC”) filed with the Securities and Exchange Commission (“Commission”) proposed rule change SR-FICC-2025-005 (“Proposed Rule Change”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  thereunder to modify FICC's Government Securities Division (“GSD”) Rulebook (“GSD Rules”) to adopt an Intraday Mark-to-Market Charge. The Proposed Rule Change was published for comment in the <E T="04">Federal Register</E> on March 27, 2025. <SU>3</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. 102705 (Mar. 21, 2025), 90 FR 13965 (Mar. 27, 2025) (File No. SR-FICC-2025-005) (“Notice of Filing”). </FTNT> On May 9, 2025, pursuant to Section 19(b)(2) of the Act, <SU>4</SU> <FTREF/> the Commission designated a longer period within which to approve, disapprove, or institute proceedings to determine whether to approve or disapprove the Proposed Rule Change. <SU>5</SU> <FTREF/> On June 26, 2025, the Commission instituted proceedings to determine whether to approve or disapprove the Proposed Rule Change. <SU>6</SU> <FTREF/> The Commission has received comments on the changes proposed. <SU>7</SU> <FTREF/> <FTNT> <SU>4</SU>  15 U.S.C. 78s(b)(2). </FTNT> <FTNT> <SU>5</SU>   <E T="03">See</E> Securities Exchange Act Release No. 102986 (May 5, 2025), 90 FR 19755 (May 9, 2025) (File No. SR-FICC-2025-005). </FTNT> <FTNT> <SU>6</SU>   <E T="03">See</E> Securities Exchange Act Release No. 103299 (June 23, 2025), 90 FR 27354 (June 26, 2025) (SR-FICC-2025-005). </FTNT> <FTNT> <SU>7</SU>  Comments on the Proposed Rule Change are available at <E T="03">https://www.sec.gov/comments/sr-ficc-2025-005/srficc2025005.htm</E> . </FTNT> For the reasons discussed below, the Commission is approving the Proposed Rule Change. <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 CCP services for the U.S. Government securities market. <SU>8</SU> <FTREF/> As such, FICC is exposed to the risk that one of more of its Members or indirect participants may fail to make a payment or to deliver securities. <FTNT> <SU>8</SU>  The GSD Rules are available at <E T="03">https://www.dtcc.com/~/media/Files/Downloads/legal/rules/ficc_gov_rules.pdf</E> . Capitalized terms not otherwise defined herein are defined in the GSD Rules. </FTNT> A tool that FICC uses to manage its credit exposure to its Members is the daily collection of margin. Margin is designed to mitigate potential losses associated with the liquidation of a Netting Member or Segregated Indirect Participant's portfolio in the event of their default. The aggregated amount of all Netting Members' margin constitutes the Clearing Fund, which FICC would be able to access should a defaulted Netting Member's own margin be insufficient to satisfy losses to FICC caused by the liquidation of that Netting Member's portfolio. <SU>9</SU> <FTREF/> <FTNT> <SU>9</SU>   <E T="03">See</E> GSD Rule 4 (Clearing Fund and Loss Allocation), <E T="03">supra</E> note 8. </FTNT> FICC's Rules refer to margin in two ways, depending on the types of Members and accounts involved. First, the Required Fund Deposit is the sum of each Netting Member's proprietary accounts and all indirect participant accounts not designated as Segregated Indirect Participant Accounts. <SU>10</SU> <FTREF/> Second, the Segregated Customer Margin Requirement is the sum of the Netting Member's Sponsoring Member Omnibus Accounts and Agent Clearing Member Omnibus Accounts designated as Segregated Indirect Participant Accounts. <SU>11</SU> <FTREF/> Included within the Required Fund Deposit and Segregated Customer Margin Requirement is the VaR Charge, a calculation of the volatility of specified Net Unsettled Positions at the time of such calculation. <SU>12</SU> <FTREF/> <FTNT> <SU>10</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>11</SU>   <E T="03">Id.</E> </FTNT> <FTNT> <SU>12</SU>  Each member's margin consists of several components, each of which is calculated to address specific risks faced by FICC arising out of its members' trading activity. <E T="03">See</E> GSD Rule Book, Margin Component Schedule, Sections 2 and 5, <E T="03">supra</E> note 8. </FTNT> Apart from collecting margin, FICC currently runs a mark-to-market calculation twice each business day to reflect the difference between the contract value of a trade and the current market value of the security. After these twice daily calculations, each Member is required to pay (or entitled to collect) a Funds-Only Settlement Amount across all CUSIPs in which it has outstanding positions. The funds-only settlement process is a cash pass-through process, meaning that those Members which are in a debit position submit payments to FICC that are then used by FICC to pay Members in a credit position. This amount includes, among other payments, a mark-to-market amount for every net settlement position (positions to settle on the next business day), every forward net settlement position (open positions), and every position that was scheduled to settle and has not yet settled (failed positions). <SU>13</SU> <FTREF/> <FTNT> <SU>13</SU>   <E T="03">See</E> GSD Rule 13, Section 1, <E T="03">supra</E> note 8. <E T="03">See also</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 13966. </FTNT> During each trading day, a Member's exposure may change due to the settlement of existing transactions and new trade activities. In addition, the value of the Member's portfolio may change due to market moves. Currently, the mark-to-market component of the Funds-Only Settlement Amount covers FICC's exposure to a Member due to market moves and/or trading and settlement activity by bringing the Member's portfolio of outstanding positions up to the market value at noon and end of day. <SU>14</SU> <FTREF/> <FTNT> <SU>14</SU>  FICC currently collects Funds-Only Settlement Amounts at 10 a.m. based on the end-of-day position from the previous business day, and at 4:30 p.m. based on the Member's noon positions. <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR 13966. </FTNT> However, because the start of day and intraday mark-to-market components of the Funds-Only Settlement Amount are calculated using the end of prior day and noon of current day positions and prices, respectively, they do not cover a Member's risk exposure arising out of changes in position and market value in the Member's portfolio which occur between the collections. FICC is proposing to adopt an Intraday Mark-to-Market Charge to mitigate such risk. <HD SOURCE="HD1">III. Description of the Proposed Rule Change</HD> The Proposed Rule Change would add the “Intraday Mark-to-Market Charge” as an additional charge in calculating the Required Fund Deposit and Segregated Customer Margin Requirement in the Margin Component Schedule. <SU>15</SU> <FTREF/> Specifically, the Intraday Mark-to-Market Charge is defined as “an additional charge that is collected from a Member or Segregated Indirect Participant (unless waived or decreased . . .)  <SU>16</SU> <FTREF/> to mitigate FICC's exposures that may arise due to intraday changes in the size, composition and constituent security prices of such Member's Margin Portfolio or Segregated Indirect Participant's portfolio, including when certain risk thresholds are breached or when the products cleared or markets served display elevated volatility.”  <SU>17</SU> <FTREF/> The Intraday Mark-to-Market Charge would equal the difference between (a) the mark-to-market amount reflected either in the last Funds-Only Settlement Amount or Intraday Mark-to-Market Charge, as applicable, for the Margin Portfolio or Segregated Indirect Participant's portfolio, and (b) such Margin Portfolio's or Segregated Indirect Participant's portfolio marked to the most recently observed System Price for such positions and shall be recalculated intraday, each Business Day, at the times and frequencies established by FICC for this purpose, which times and frequencies shall be communicated to Members and Segregated Indirect Participants on FICC's public website. <FTNT> <SU>15</SU>  Specifically, the Proposed Rule Change would amend the GSD Rulebook to add a definition of “Intraday Mark-to-Market Charge” to GSD Rule 1 (Definitions) and to define it in the Margin Component Schedule. </FTNT> <FTNT> <SU>16</SU>  FICC's proposed waiver procedures are discussed in Section 3, <E T="03">infra.</E> </FTNT> <FTNT> <SU>17</SU>   <E T="03">See</E> Notice of Filing, <E T="03">supra</E> note 3, 90 FR at 13969. </FTNT> The Proposed Rule Change outlines three “Parameter Breaks,” <E T="03">i.e.,</E> risk thresholds, for the imposition of an Intraday Mark-to-Market Charge. The Intraday Mark-to-Market Charge would apply to a Member that has breached all three Parameter Breaks (that is, that has met all three thresholds). FICC states that the objective of these thresholds is to ensure that FICC is able to limit exposure to intraday mark-to-market fluctuations that (a) are of a large dollar amount ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 40k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━