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Ask the Expert: How Does FICC Manage Risk?

By DTCC Connection Staff | 5 minute read | January 8, 2024

DTCC Managing Director Tim Hulse oversees various teams including stress testing, default management, and market risk management for each Systemically Important Financial Market Utility (SIFMU) under the DTCC umbrella. With the new Securities and Exchange Commission (SEC) rules announced for increased central clearing of U.S. Treasuries, DTCC’s Risk team has been steadily fielding inquiries from clients about the implications for their business, especially from firms that have never been required to access central clearing.

DTCC is committed to ensuring the most resilient and efficient markets possible and continues to assess the impact this new rule could have on operations, risk models and the tools provided.

“The U.S. Treasury market is the deepest, most liquid market in the world, and DTCC has long advocated for a greater use of central clearing,” Hulse said. “Greater adoption of central clearing in the U.S. Treasury market would significantly reduce risk and improve resiliency, efficiency, and transparency, which is critical to the strength and stability of the U.S. economy. We see this expansion to broaden participation in central clearing as a natural evolution that Fixed Income Clearing Corporation (FICC) is well-positioned to execute on.”

Related: Market Participants Gather to Discuss Expanded Treasury Centralized Clearing

DTCC Connection sat down with Hulse to learn more about how FICC manages risk and margins Treasury products.

DC: How Does FICC margin Treasury activity?

TH: FICC calculates and collects Required Fund Deposits to its Clearing Fund using a risk-based margin methodology that includes a sensitivity-based value-at-risk (VaR) approach.

All Netting Members of the Government Securities Division (GSD) of FICC – that is, direct, full service clearing members – are required to make and maintain deposits to the Clearing Fund on an ongoing basis. Netting Members that are Sponsoring Members are required to make separate deposits to the Clearing Fund for their Netting Member activity and Sponsoring Member activity. These deposits are designed to limit the risk exposures posed by Netting Members’ unsettled portfolio and to quickly adjust and collect additional deposits as needed to cover those risks.

At least twice daily, FICC-GSD calculates and collects a Netting Member’s Required Fund Deposits, which will vary based on its trading activity. Required Fund Deposits may be satisfied by depositing either cash, or a combination of cash and eligible securities (subject to haircuts and concentration limits). List of eligible securities and respective haircuts are available on the DTCC website.

DC: Where can I learn more about the Clearing Fund methodology? Does FICC offer tools to help estimate Clearing Fund requirements?

TH: The Clearing Fund Methodology contains descriptions and formulas for components of the Clearing Fund and is available on the FICC US Treasury microsite.

The VaR charge is the largest component at FICC, and FICC makes available to Netting Members a Value-at-Risk (VaR) calculator that can be used to estimate their Clearing Fund requirements based on proposed changes (i.e., addition or subtraction of positions) to their FICC-cleared portfolios. By using the VaR calculator, or a separate in-house implementation of sensitivity VaR using the provided parameters under the methodology document, it is possible to replicate the calculation and approximate margin requirements at FICC.

For market participants that do not have access to the VaR calculator, a schedule of indicative haircut and risk factor rates is available to approximate the VaR charge.

DC: Why is intraday margining necessary to reduce risk?

TH: Intraday margining limits FICC’s exposures to intraday market movements, trading activity and settlements. In the absence of intraday margining, FICC and its membership could be exposed to market risk until the next regular margin collection is completed.

DC: Are there guidelines around FICC’s investment of the Clearing Fund?

TH: Yes. The investment of cash deposits to the Clearing Fund is done in compliance with an investment policy, that has been filed with, and approved by, the SEC as a rule of FICC. Pursuant to that policy, cash deposits to the Clearing Fund are held at approved commercial banks that meet prescribed credit standards or at FICC’s cash deposit account at the Federal Reserve Bank of New York (FRBNY). All eligible Clearing Fund securities are held on deposit at a custodian bank for GSD.

DC: Why are FICC’s membership standards so rigorous?

TH: Consistent with its regulatory obligations, FICC has established clear and objective membership requirements for each category of membership. Its minimum membership standards are designed to provide fair and open access for firms seeking membership and are robust to allow FICC to manage the material risks presented from membership activities.

FICC has taken steps, wherever possible, to facilitate the ability of different types of market participants to access clearing at FICC through a wide array of direct and indirect participation models. The different access models allow market participants to tailor their clearing arrangements at FICC to their specific business and regulatory needs.

DC: Who is responsible for determining the profit and loss during a close-out by FICC of a defaulted member?

TH: FICC’s rules provide for FICC to calculate the amount owing on a close-out of a member as FICC’s profits or losses in conducting such close-out. Those profits or losses would be at FICC’s (i.e., the non-defaulting party’s) side of the market. The procedures FICC may take after it has ceased to act for a defaulting member, including the process for closing out unsettled, open positions of the defaulting Member, are provided for and described in Rule 22A of the GSD Rules, available on the DTCC website.

FICC’s default procedures are also described in public disclosures (see “Principle 13: Participant-default rules and procedures; CCAS 17Ad-22(e)(13)”) available on the DTCC website.

Tim Hulse
Tim Hulse

DTCC Managing Director, Market & Liquidity Risk

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