[Federal Register Volume 82, Number 168 (Thursday, August 31, 2017)]
[Notices]
[Pages 41454-41457]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-18449]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81486; File No. SR-ICC-2017-012]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to ICC's Liquidity Risk 
Management Framework and ICC's Stress Testing Framework

August 25, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
\1\ and Rule 19b-4,\2\ notice is hereby given that on August 22, 2017, 
ICE Clear Credit LLC (``ICC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change described in Items 
I, II, and III below, which Items have been primarily prepared by ICC. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to revise the 
ICC Liquidity Risk Management Framework and the ICC Stress Testing 
Framework. These revisions do not require any changes to the ICC 
Clearing Rules (``Rules'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. ICC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of these 
statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICC proposes revisions to its Stress Testing Framework and its 
Liquidity Risk Management Framework. Specifically, ICC proposes changes 
to enhance ICC's stress testing and liquidity stress testing practices 
following the clearing of Single Name (``SN'') credit default swaps 
(``CDS'') referencing ICC Clearing Participants

[[Page 41455]]

(``CPs''). ICC also proposes changes to the Stress Testing Framework to 
enhance compliance with U.S. Commodity Futures Trading Commission 
(``CFTC'') regulations including 17 CFR 39.36. ICC believes such 
revisions will facilitate the prompt and accurate clearance and 
settlement of securities transactions and derivative agreements, 
contracts, and transactions for which it is responsible. The proposed 
revisions are described in detail as follows.
Stress Testing Framework
    ICC proposes changes to its Stress Testing Framework following 
clearing of SN CDS referencing ICC CPs. ICC proposes amendments to the 
`Predefined Scenarios' section of the Stress Testing Framework to amend 
scenarios classified as Hypothetically Constructed (Forward Looking) 
Extreme but Plausible Market Scenarios to incorporate additional losses 
related to the Expected Loss-Given-Default (``ELGD'') of all names not 
explicitly assumed to enter a state of default in a CP's portfolio, and 
not limited to those in the Banking or Sovereign sectors. The ELGD 
amount will accumulate the LGD of all of the SNs in the portfolio that 
do not explicitly enter a state of default, weighted by the market 
observed 1-year end-of-day Default Probability.\3\
---------------------------------------------------------------------------

    \3\ ``Default Probability'' as referenced throughout the ICC 
Stress Testing Framework and ICC Liquidity Risk Management Framework 
is calculated using the Open Source ISDA CDS Standard Model 
(available at http://www.cdsmodel.com/cdsmodel/).
---------------------------------------------------------------------------

    ICC proposes to incorporate an enhanced analysis into the `General 
Wrong Way Risk and Contagion Stress Tests' section of the Stress 
Testing Framework that estimates profits and losses (``P/L'') arising 
from general wrong way risk (``GWWR'') generated by index and SN RFs 
that exhibit high degree of association with CPs. All positions in the 
index and SN instruments are used to construct for each CP a 
hypothetical sub-portfolio subject to an additional stress test 
analysis. Under the proposed analysis, if the constructed sub-portfolio 
presents GWWR stemming from positions in SN Risk Factors (``RFs'') that 
belong to the Banking and Sovereign Sections, additional GWWR related 
stress losses, deemed to be `extreme but plausible, will be added. 
These additional GWWR losses are computed as the product of the 
correlation-weighted uncollateralized LGDs and the SN-specific Default 
Probabilities. The proposed analysis is based on ICC's current GWWR P/L 
calculation, but assumes that the GWWR Kendall-Tau correlation 
(currently the greatest of the estimate from the full historical time 
series, the immediate 250 observations prior to the analysis date, or 
the 250 observations associated with a relevant stress period) of each 
CP-Sovereign or Banking RF pair are assumed to approach one, modeling 
the simultaneous occurrence of losses. The Default Probabilities 
utilized under the proposed approach will reflect the greater of the 
average 1-year CP SN Default Probability and the Default Probability 
implied by a 500-bp spread level at the 1-year tenor.
    Further, ICC proposes moving the current contagion GWWR P/L 
calculation from the `Methodology' section to the `General Wrong Way 
Risk and Contagion Stress Tests' section of the framework. ICC proposes 
adding language to the description of the current contagion GWWR P/L 
calculation, consisting of the correlation-weighted uncollateralized 
LGDs, to clarify that such scenario is considered extreme (as opposed 
to extreme but plausible). The extreme scenario is for information 
purposes only.
    ICC proposes adding a new `Guaranty Fund Sizing Sensitivity 
Analysis' section to the Stress Testing Framework, which describes 
ICC's approach to Guaranty Fund (``GF'') sizing. ICC's GF model aims to 
establish financial resources that are sufficient to cover hypothetical 
losses associated with the simultaneous credit events where up to five 
SNs are impacted. Currently, two of the selected SNs are CP SNs (i.e., 
``cover-2'' GF sizing) and the other three SNs are non-CP SNs. ICC 
proposes amending the framework to add an additional combination of 
impacted five SNs, for monitoring and comparison purposes. 
Specifically, ICC proposes analyzing three CP SNs (i.e., ``cover-3'' GF 
sizing) and two non-CP SNs. This alternative combination analysis is 
intended to provide guidance to the ICC Risk Department and ICC Risk 
Committee in situations when changes to the GF sizing approach are 
considered. For example, if a cover-2 deficiency is observed under the 
current GF size configuration, ICC will analyze the results from the 
cover-3 analysis as a potential remedy to address the cover-2 
deficiency. Monthly summary reports detailing the analysis will be 
provided to the ICC Risk Committee.
    ICC also proposes changes to the Stress Testing Framework to ensure 
compliance with CFTC Regulation 17 CFR 39.36. Specifically, ICC 
proposes adding an `Interest Rate Sensitivity Analysis' section to the 
Stress Testing Framework to ensure compliance with CFTC Regulation 17 
CFR 39.36(b). Under the proposed analysis, ICC would shock the Euro and 
USD interest rate curves up and down to see which scenario lead to 
further erosion of the GF under the two worst spread based stress test 
scenarios. The addition of the interest rate sensitivity analysis will 
have no impact on ICC's GF sizing methodology. ICC also proposes 
changes to the `Methodology' section of the Stress Testing Framework 
related to the calculation of the P/L attributable to sequential or 
simultaneous defaults, to ensure compliance with 17 CFR 39.36(a). Under 
the current framework, for each CP Affiliate Group (``AG''), the 
Specific Wrong Way Risk (``SWWR'') P/L shows losses associated with 
positions that are self referencing to that CP AG; the remaining GF is 
then calculated for each CP AG. Under the proposed changes, the SWWR P/
L will be expanded to also reflect the accumulation of losses 
associated with defaulted CP specific exposure and re-labeled ``CP-WWR 
P/L'', where the new CP-WWR P/L for each CP AG will include losses 
associated with exposure to itself, i.e., SWWR P/L, as well as on 
previously defaulted CP AG(s). Finally, ICC proposes edits to the 
`Portfolio Selection' section of the Stress Testing Framework, to 
incorporate a description of ICC's current client stress testing 
practices. There are no changes being proposed to ICC's client stress 
testing practices; rather the proposed edits are designed to explicitly 
state and document ICC's current client stress testing practices. 
Specifically, ICC applies the stress test scenarios to all currently 
cleared portfolios consisting of a CP's House and/or Client accounts. 
ICC executes individual client legal entity stress testing at least 
monthly, and the results are reported on a monthly basis to the Risk 
Committee. The clients selected for analysis exhibit the largest stress 
loss over financial resources being tested for each of the top Futures 
Commission Merchants (``FCMs'') and Broker Dealers (``BDs'') with the 
largest client Initial Margin. This selection is designed to capture 
the clients with the largest risk exposure, who are deemed to be 
``large traders.''
Liquidity Risk Management Framework
    ICC proposes revisions to its Liquidity Risk Management Framework 
to ensure unification of the stress testing scenarios in the Liquidity 
Risk Management Framework and the Stress Testing Framework. ICC 
operates its stress testing and liquidity stress testing on a unified 
set of stress testing scenarios and system. As such, revisions to the 
liquidity stress testing scenarios are

[[Page 41456]]

necessary to ensure scenario unification, in light of the proposed 
changes to the stress testing scenarios related to ICC's clearing of SN 
CDS on its CPs.
    Specifically, ICC proposes to revise the ``Hypothetically 
Constructed (Forward Looking) Extreme but Plausible Market Scenarios'' 
to ensure consistency with the proposed changes to the Stress Testing 
Framework to incorporate additional losses related to the ELGD of all 
names in a CP's portfolio, not limited to those in the Banking or 
Sovereign sectors. The ELGD amount will accumulate the LGD of all of 
the SNs in the portfolio that do not explicitly enter a state of 
default, weighted by the market observed 1-year end-of-day Default 
Probability.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \4\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and 
to the extent applicable, derivative agreements, contracts and 
transactions and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule changes 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, to Section 
17(A)(b)(3)(F),\5\ because ICC believes that the proposed rule changes 
will promote the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions. ICC's Stress Testing Framework describes ICC's stress 
testing practices, which are designed to ensure the adequacy of 
systemic risk protections. The Stress Testing Framework sets forth the 
methodology by which ICC evaluates potential portfolio profits/losses, 
compared to the Initial Margin and GF funds maintained, in order to 
identify any potential weakness in the risk methodology. The proposed 
changes to the Stress Testing Framework enhance ICC's approach to 
identifying potential weaknesses in the risk methodology. As such, the 
proposed rule changes are designed to promote the prompt and accurate 
clearance and settlement of securities transactions, derivatives 
agreements, contracts, and transactions within the meaning of Section 
17A(b)(3)(F) \6\ of the Act. The proposed changes will also satisfy the 
requirements of Rule 17Ad-22.\7\ In particular, the proposed changes to 
the stress testing practices set forth in the Stress Testing Framework 
ensure that ICC maintains sufficient financial resources to withstand a 
default by the CP family to which it has the largest exposure in 
extreme but plausible market conditions, consistent with the 
requirements of Rule 17Ad-22(b)(3).\8\ Finally, the proposed changes to 
the Stress Testing Framework ensure regulatory compliance with CFTC 
regulations, including 17 CFR 39.36.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1(b)(3)(F).
    \5\ Id.
    \6\ Id.
    \7\ 17 CFR 240.17Ad-22.
    \8\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    Further, the changes to the Liquidity Risk Management Framework to 
unify the liquidity stress testing scenarios with the stress testing 
scenarios set forth in Stress Testing Framework are necessary given the 
proposed changes to the Stress Testing Framework, as ICC operates its 
stress testing and liquidity stress testing on a unified set of stress 
testing scenarios and system. ICC's liquidity stress testing practices 
will continue to ensure the sufficiency of ICC's liquidity resources. 
As such, the proposed rule changes are designed to promote the prompt 
and accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions within the meaning 
of Section 17A(b)(3)(F) \9\ of the Act.
---------------------------------------------------------------------------

    \9\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule changes would have any 
impact, or impose any burden, on competition. To the extent the Stress 
Testing Framework and Liquidity Risk Management Framework changes 
impact CPs, the Stress Testing Framework and Liquidity Risk Management 
Framework apply uniformly across all CPs. Therefore, ICC does not 
believe the proposed rule changes impose any burden on competition that 
is inappropriate in furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule 
Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-ICC-2017-012 on the subject line.

Paper Comments

    Send paper comments in triplicate to Secretary, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2017-012. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street 
NE., Washington, DC 20549, on official business days between the hours 
of 10:00 a.m. and 3:00 p.m. Copies of such filings will also be 
available for

[[Page 41457]]

inspection and copying at the principal office of ICE Clear Credit and 
on ICE Clear Credit's Web site at https://www.theice.com/clear-credit/regulation.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICC-2017-012 
and should be submitted on or before September 21, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-18449 Filed 8-30-17; 8:45 am]
BILLING CODE 8011-01-P