# SEC Filing: FICC Proposes New Basis Risk Haircut to Strengthen Mortgage-Backed Securities Margining
## Introduction
On **August 26, 2025**, the U.S. Securities and Exchange Commission (SEC) published a filing from the **Fixed Income Clearing Corporation (FICC)**, a subsidiary of the Depository Trust & Clearing Corporation (DTCC). The proposal seeks to introduce a **basis risk haircut charge** into its margining framework for mortgage-backed securities (MBS) positions. This technical change—filed under Release No. 34-103780; File No. SR-FICC-2025-018—may sound niche, but it touches on some of the most critical questions in post-crisis market regulation:
– How do clearing houses safeguard the financial system from counterparty defaults?
– How can risk models keep pace with the evolving structure of fixed income markets?
– And what trade-offs exist between stability and competition when margin requirements increase?
This article unpacks the filing, explains the mechanics of the proposed rule change, and assesses its likely implications for clearing members, investors, and systemic stability.
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## Background: The Role of FICC
The **FICC Government Securities Division (GSD)** is the central counterparty (CCP) for U.S. Treasury securities and related repo markets. As a CCP, FICC steps between buyers and sellers, guaranteeing settlement even if one side defaults. To manage this exposure, FICC requires members to post a **Required Fund Deposit**, commonly known as margin.
Margin levels are determined by a variety of models:
1. **Value-at-Risk (VaR) model** – sensitivity-based methodology projecting potential liquidation losses at a 99% confidence level.
2. **Minimum Margin Amount (MMA)** – a safeguard against VaR underestimating risks in extreme conditions.
3. **Margin Proxy model** – a backup volatility measure used if vendor data for VaR becomes unavailable.
These models are designed to capture different types of market risk. However, the treatment of **basis risk**—the difference in performance between two closely related instruments—has been incomplete when it comes to MBS.
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## What Is Basis Risk in MBS?
In the mortgage-backed securities market, a large portion of trading occurs via **to-be-announced (TBA)** contracts. TBAs are standardized forward contracts where the exact pool of mortgages is not specified until settlement. By contrast, **MBS pools** represent actual collections of loans with specific characteristics.
While MBS pools and TBAs are linked, their returns are not identical. Differences arise due to coupon mismatches, prepayment behavior, liquidity variations, and structural nuances. This divergence—known as the **MBS pool/TBA basis spread**—creates risk that can undermine margin accuracy if left unaccounted for.
Until now, FICC’s **sensitivity VaR** model has incorporated a haircut adjustment for basis risk. But other models—the **MBS haircut model**, **MMA**, and **Margin Proxy**—have not. This inconsistency left potential blind spots in stress scenarios, particularly for pools that cannot be mapped directly to TBAs, such as **adjustable-rate mortgage (ARM) pools**.
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## The Proposed Rule Change
FICC proposes to incorporate a **basis risk haircut charge** into:
– **MBS Haircut Model** – currently applies flat haircuts to pools unmapped to TBAs, but does not reflect basis spread risk.
– **MMA Model** – adds a margin floor to address deviations between historical volatility and present conditions.
– **Margin Proxy Model** – ensures continuity of risk coverage if primary VaR data sources fail.
In practice, this means FICC would introduce additional parameters, update formulas, and amend tables in its **Quantitative Risk Management (QRM) Methodology Document** to include explicit adjustments for basis risk.
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## Results of the Impact Study
To assess the consequences of this change, FICC conducted an **impact study covering April 2024 to March 2025**.
Key findings include:
1. **Baseline VaR**
– Aggregate daily start-of-day (SOD) VaR charges would have risen by **$56.31 million** (about **0.12%**).
– Model backtesting coverage remained steady at **99.72%**, meaning the enhancement did not materially change statistical accuracy.
2. **Margin Proxy (if deployed)**
– VaR charges would have increased by **$2.13 billion** (around **4.94%**).
– Backtesting coverage would have improved slightly, reducing deficiencies by **11 cases** (an **8.5% improvement**).
3. **Member-level effects**
– Average increase in member margin portfolios: **0.31%** ($270,000).
– Largest percentage rise: **35.15%** ($340,000).
– Largest dollar increase: **$8.33 million** (0.19%).
– Under Margin Proxy deployment, one member would have seen a staggering **110.5% increase** ($175.3 million).
These results underscore that while the average effect is modest, **individual firms could face significant increases** depending on their portfolio composition.
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## Legal and Regulatory Basis
The proposal is grounded in **Section 17A(b)(3)(F) of the Securities Exchange Act of 1934**, which requires clearing agencies to safeguard securities and funds under their control.
It also aligns with **Rule 17ad-22(e)**, which mandates:
– **Credit risk management**: maintaining sufficient financial resources with high confidence.
– **Risk-based margining**: setting requirements commensurate with the risk profile of portfolios and products.
By explicitly capturing MBS basis spread risk, the rule change strengthens FICC’s ability to meet these statutory obligations.
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## Competitive Impact
FICC acknowledges that higher margin requirements could **burden competition**, especially for firms with tighter capital constraints. Participants facing sharp increases in Required Fund Deposits might see reduced liquidity or higher financing costs.
However, the clearing house argues that such burdens are **“necessary and appropriate”**. Margin increases would be proportional to the risks presented by each portfolio, ensuring fairness across participants.
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## Why This Matters for Markets
1. **Systemic Stability**
– CCPs like FICC are systemic nodes. A default by a large dealer in U.S. Treasuries or MBS could destabilize the broader financial system. Enhanced margining reduces that tail risk.
2. **Mortgage Market Integrity**
– By better capturing risks in mortgage-backed products, the proposal may enhance confidence in an asset class that was at the heart of the **2008 financial crisis**.
3. **Liquidity Costs**
– Higher margin calls may tie up capital. For smaller firms, this could reduce participation in repo and MBS markets, potentially concentrating activity among larger players.
4. **Regulatory Precedent**
– Other clearing agencies may follow suit, integrating more granular basis risk charges across asset classes like corporate bonds or credit default swaps.
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## Critical View: Balancing Prudence and Proportionality
While the SEC and FICC frame this change as a **technical adjustment**, its implications are non-trivial.
– On one hand, basis spread risk is real and can spike in stress periods—as seen in March 2020 when MBS spreads widened dramatically. Ignoring it in margin models would be irresponsible.
– On the other hand, margin increases—even modest system-wide—can amplify **liquidity strains** in stressed markets. If participants withdraw from MBS trading due to collateral pressures, volatility could increase, ironically feeding back into the very risks the model seeks to control.
This tension between **prudence** (collecting enough margin to ensure safety) and **proportionality** (not overburdening participants) is at the heart of clearinghouse governance.
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## Implementation and Next Steps
If approved, FICC would implement the changes within **60 business days**. The effective date will be communicated via an **Important Notice** on the DTCC website.
Market participants now have a **comment window** to submit feedback to the SEC, which will weigh industry concerns before final approval.
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## Conclusion
The FICC’s proposed addition of an **MBS pool/TBA basis risk haircut charge** may appear highly technical, but it represents a significant step in refining risk management at the heart of U.S. fixed income markets.
The filing reflects a broader post-crisis reality: clearing houses are no longer passive utilities but **active regulators of collateral and liquidity**. By tightening the link between portfolio composition and margin requirements, FICC aims to ensure that risks are accurately captured and fairly allocated.
For dealers, hedge funds, and asset managers active in MBS, the message is clear: **basis risk now carries a cost**. Those with sophisticated risk management systems may absorb the change smoothly. Others may find participation more expensive, reshaping competitive dynamics in one of the most important markets in global finance.
Ultimately, the SEC’s decision on this proposal will help determine whether U.S. clearing infrastructure continues to evolve toward ever more resilient—if sometimes more costly—models of systemic protection.
