FR 2020-29251

Understanding SEC's Review of FICC's New Margin Calculation Proposal

The Securities and Exchange Commission (SEC) has been presented with a proposal from the Fixed Income Clearing Corporation (FICC) concerning a change in how it calculates a crucial financial measure known as the VaR, or Value at Risk, Floor for its Mortgage-Backed Securities Division. This change is significant as it introduces a "Minimum Margin Amount" designed to bolster the organization's ability to manage risk, particularly during times of market volatility like those experienced during the COVID-19 pandemic.

Key Issues and Concerns

The document is laden with intricate financial and legal terminology, which could make it challenging for non-specialists to grasp fully. This complexity could hinder the general public from engaging effectively with the content, potentially limiting their input on how these regulatory changes might affect them. Moreover, the proposal suggests increasing the charges applied to measure investment risks, using methods that may inherently benefit certain stakeholders more than others, particularly government-sponsored institutions involved in mortgage securities.

A central concern is that this proposal might be perceived more as a corrective action due to past events rather than a proactive measure to mitigate future risks. This reactive stance could spark debate about the adequacy and foresight of current financial risk management strategies.

Impact on the Public and Stakeholders

For the general public, particularly those involved indirectly through mortgage investments or consumer-backed securities, these changes could lead to shifts in market stability and security pricing. A well-managed risk by the FICC can ultimately protect the broader financial ecosystem, which in turn benefits consumers, but it could also drive up costs if clearing members pass on higher charges to end-users.

Specific stakeholders, such as large financial institutions, particularly those dealing with government-backed mortgage securities, could see direct impacts. On the one hand, they might benefit from more stable risk assessments and possibly improved market confidence in mortgage-backed securities. On the other hand, smaller entities or those not closely aligned with the proposed benchmark securities could face increased compliance costs and operational challenges, potentially disadvantaging them compared to larger, more established institutions.

Process and Participation

The SEC has opened up a period for public comments, aiming to gather various perspectives on the proposal. However, the process of soliciting feedback could be perceived as less accessible due to the complexity of the issues and the technical nature of the proposal. Additionally, there's uncertainty regarding when these changes will take effect, which might cause apprehension among stakeholders planning their financial strategies.

In conclusion, while the proposal by the FICC aims to enhance risk management processes and ensure financial stability, it encompasses complex issues that could have broad implications. It's essential for both the public and industry stakeholders to scrutinize these changes thoroughly to understand their potential effects on the market and individual investments. The SEC's initiative to invite comments represents an opportunity for stakeholders to voice concerns and contribute to shaping financial regulations that best serve the entire market ecosystem.

In reviewing the Federal Register document related to changes in the calculation of the VaR Floor by the Fixed Income Clearing Corporation (FICC), several financial references are noteworthy. These references are critical to understanding the potential economic impact of the proposed changes and how they might affect various stakeholders.

Summary of Financial References

The document discusses the potential financial impact of a new proposal to modify the calculation of the VaR (Value-at-Risk) Floor by incorporating a "Minimum Margin Amount." The analysis reveals that if these proposed changes had been in effect during the specified impact study period from February 3, 2020, through June 30, 2020, the aggregate average daily VaR Charges would have increased by approximately $2.2 billion or 42%. Concurrently, the aggregate average daily Backtesting Charges would have decreased by about $450 million or 53%.

At the level of individual Clearing Members, the introduction of the Minimum Margin Amount would have led to an average increase in the VaR Charge by $27 million over the study period. Notably, the largest percentage increase in VaR Charge for a single Clearing Member was projected to be 146%, equating to $22 million. The greatest absolute dollar increase for any Clearing Member would have been $333 million, marking a 37% rise in the VaR Charge.

Implications of Financial Changes

The projected increase in VaR Charges has significant implications for Clearing Members. These include the potential need for members to maintain more considerable financial reserves to comply with the new margin requirements. This requirement may create a disparity, where smaller Clearing Members might find it challenging to meet the heightened demands compared to larger members with more substantial financial resources. Such a shift could inadvertently favor larger, more financially robust entities.

Additionally, the anticipated decrease in Backtesting Charges suggests an improvement in the model's precision in accounting for risk, particularly during periods of heightened market volatility. The document indicates that better margin backtesting coverage, improving from approximately 97.3% to 98.5%, may enhance the system's resilience to economic instability.

Addressing Identified Issues

The financial allocations highlighted in the document address the issue of ensuring adequate margin levels during times of market volatility and economic uncertainty. By increasing the VaR Charges, the proposal aims to offer more robust protection against potential losses stemming from market anomalies similar to those experienced during the COVID-19 pandemic-related volatility in March and April 2020.

The proposed revisions underscore the importance of maintaining financial stability within the mortgage-backed securities market, though they may appear reactive to past events rather than proactively mitigating future risks. The focus on government-sponsored enterprises benchmarks may also introduce questions about preferential treatment toward particular market segments.

Lastly, it is crucial for stakeholders to have transparent access to the commenting process, as the potential financial burden these changes could impose may necessitate input from all affected parties. Clarity on the implementation timing and framework will be essential to mitigate uncertainties for firms preparing for these regulatory modifications.