FICC Alert! Proposed rule to amend the Mortgage-Backed Securities Division Clearing Rules to move certain Deterministic Risk Component items (Mark-to-Market items, cash obligation items and accrued principal and interest) from the Required Fund Deposit calculation to Cash Settlement, and more.

by Dismal-Jellyfish

This looks, to my non-lawyer brain, to be a way to reduce the member’s margin requirement. These mark-to-market items and others are moved from “Required Fund Deposit” so they won’t count against the margin requirement, as stated here:

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The Required Fund Deposit serves as each Clearing Member’s margin. The objective of the Required Fund Deposit is to mitigate potential losses to FICC associated with liquidation of the Clearing Member’s portfolio in the event that FICC ceases to act for a Clearing Member (hereinafter referred to as a “default”). Pursuant to the MBSD Rules, each Clearing Member’s Required Fund Deposit amount currently consists of the greater of (i) the Minimum Charge or (ii) the sum of the following components: the VaR Charge, the DRC, a special charge (to the extent determined to be appropriate), and, if applicable, the Backtesting Charge, Holiday Charge, Intraday Mark-to-Market Charge and the Margin Liquidity Adjustment Charge. Of these components, the VaR Charge typically comprises the largest portion of a Clearing Member’s Required Fund Deposit amount.

So basically it looks like they don’t want to trigger Clearing Member’s default and are willing to take on more risk to help their buddies out, perhaps?



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