[Federal Register Volume 83, Number 98 (Monday, May 21, 2018)]
[Notices]
[Pages 23506-23509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-10710]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83243; File No. SR-ICEEU-2018-001]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to Amendments to the ICE Clear 
Europe CDS Clearing Stress Testing Policy

May 15, 2018.

I. Introduction

    On February 6, 2018, ICE Clear Europe Limited (``ICE Clear 
Europe'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and rule 19b-4 thereunder,\2\ a 
proposed rule change (SR-ICEEU-2018-001) to revise its CDS Clearing 
Stress-Testing Policy (``Stress Testing Policy'') to, among other 
things: (i) Re-categorize its CDS stress testing scenarios; (ii) add 
provisions addressing specific wrong way risk; (iii) implement new 
forward-looking credit event scenarios; and (iv) make certain 
clarifications and enhancements. The proposed rule change was published 
for comment in the Federal Register on February 16, 2018.\3\ The 
Commission did not receive comments on the proposed rule change. On 
April 2, 2018, the Commission designated a longer period for Commission 
action on the proposed rule change.\4\ For the reasons discussed below, 
the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-82692 (February 12, 
2018), 83 FR 7096 (February 16, 2018) (SR-ICEEU-2018-001) 
(``Notice'').
    \4\ Securities Exchange Act Release No. 34-82978 (April 2, 
2018), 83 FR 14901 (April 6, 2018) (SR-ICEEU-2018-001).
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II. Description of the Proposed Rule Change

    As currently constructed, ICE Clear Europe's Stress Testing Policy 
contains a number of stress testing scenarios. These stress testing 
scenarios are applied to portfolios of positions as part of ICE Clear 
Europe's risk management processes for its credit default swap 
(``CDS'') product class.\5\ Under the

[[Page 23507]]

proposed amendments, ICE Clear Europe would re-categorize the current 
stress testing scenarios included in its Stress Testing Policy from the 
three standard categories currently used into two broad categories: (i) 
Extreme but plausible market scenarios; and (ii) extreme market 
scenarios.\6\ Included in the extreme but plausible market scenarios 
category would be both historical scenarios (for example, scenarios 
based on the 2008/2009 credit crisis, and the Lehman Brothers default, 
among others) and certain hypothetical scenarios (for example, 
hypothetical inversion or steepening of credit spread curves, or the 
opposite of a historical scenario).\7\ Included in the extreme market 
scenarios category would be extreme but plausible scenarios, but with 
higher magnitudes of spread widening or tightening incorporated into 
the scenario.\8\ In addition, the Stress Testing Policy would be 
amended to clarify the approach used for scaling the spread widening or 
tightening with respect to the extreme market scenarios category.\9\
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    \5\ Notice, 83 FR at 7096.
    \6\ Id.
    \7\ Id. at 7096-97.
    \8\ Notice, 83 FR at 7097.
    \9\ Id.
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    In addition to re-categorizing existing stress scenarios, ICE Clear 
Europe also proposes to add a new set of stress testing scenarios, 
which would be included in the extreme but plausible category of market 
scenarios. These new scenarios would be forward-looking and based on 
historical extreme but plausible stress scenarios, but would 
incorporate the occurrence of specified adverse credit events involving 
both Clearing Member and non-Clearing Member reference entities. ICE 
Clear Europe also proposes to incorporate a new ``Opposite Lehman 
Brothers'' scenario into its Stress Testing Policy.\10\ This new 
scenario would be included in the extreme market scenarios category and 
derived from a Lehman Brothers scenario that is part of the current 
Stress Testing Framework.
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    \10\ Notice, 83 FR at 7097.
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    The current ICE Clear Europe Stress Testing Policy does not address 
specific wrong way risk.\11\ Under the proposed amendments, ICE Clear 
Europe would amend the Stress Testing Policy to provide that, where a 
portfolio that is subject to stress testing presents specific wrong way 
risk, the calculation of hypothetical losses will take into account the 
full uncollateralized loss given default.\12\
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    \11\ ICE Clear Europe defines specific wrong way risk as the 
risk arising where a Clearing Member has provided credit protection 
on itself or an affiliate. See Notice, 83 FR at 7097.
    \12\ Id.
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    In addition to addressing specific wrong way risk, ICE Clear Europe 
also proposes to amend its Stress Testing Policy to add a section that 
discusses the overall Board risk appetite framework to align the Stress 
Testing Policy with other policy documents that also contain discussion 
of the Board risk appetite framework.\13\ Currently, the Stress Testing 
Policy does not contain a discussion of ICE Clear Europe's Board risk 
appetite framework.
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    \13\ Notice, 83 FR at 7097.
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    The section of the Stress Testing Policy dealing with guaranty fund 
adequacy currently provides for an analysis of positions constituting 
Clearing Member sold protection. Under the proposed amendments, ICE 
Clear Europe would amend this section of the Stress Testing Policy to 
provide that stress testing will be performed on both Clearing Member 
sold and bought credit protection positions to test the primary risk 
drivers of Clearing Member Portfolios that would result in the guaranty 
fund being depleted.
    In addition, the proposed changes to this section would provide 
that the maximum level for hypothetical spread realizations used in the 
guaranty fund adequacy analysis will be set such that the stress test 
loss will result in full depletion of the guaranty fund.\14\ Currently, 
the Stress Testing Policy does not explicitly provide a set maximum 
that the hypothetical spread realizations will reach, but instead 
provides that certain ICE Clear Europe personnel are to determine the 
extent to which hypothetical spread realizations widen.
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    \14\ Id.
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    ICE Clear Europe also proposes to revise the Stress Testing Policy 
by adding a new section that addresses the validation of the models 
underlying the Stress Testing Policy, as well providing for review of 
the Stress Testing Policy by ICE Clear Europe personnel, the CDS Risk 
Committee, and the Board Risk Committee. Currently, the Stress Testing 
Policy does not contain provisions explicitly addressing validation of 
the models set forth in the Stress Testing Policy. Similarly, while the 
Stress Testing Policy contains provisions regarding review of the 
result of the stress tests, it does not currently contain provisions 
regarding review of the policy itself. The new section of the Stress 
Testing Policy would provide for certain routine review, notification, 
and escalation processes on the part of designated ICE Clear Europe 
personnel, the CDS Risk Committee, and the Board Risk Committee in the 
event relevant thresholds are breached.\15\ Specifically, these review 
requirements would require that the Stress Testing Policy be kept up-
to-date, as well as provide for an annual review by ICE Clear Europe's 
CDS Risk Committee and the Board Risk Committee. Additionally, the 
proposed rule change would implement a notification and escalation 
process in the event that certain established thresholds are breached. 
Depending on the extent of the breach, the notification and escalation 
process may require a particular response and review of the response by 
the Executive Risk Committee or the Board Risk Committee
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    \15\ Notice, 83 FR at 7097.
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    Finally, ICE Clear Europe proposes certain clarifying edits 
including providing for updated references to ICE Clear Europe 
personnel titles, management structures, and governance policies, and 
to also provide greater detail surrounding the scaling approach used 
for spread tightening or widening in connection with the extreme market 
scenarios. ICE Clear Europe also proposes to remove from the Stress 
Testing Policy certain tables that describe specific scenarios because 
such tables are unnecessary in light of the revised organizational 
structure described above.\16\
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    \16\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule changes of a self-regulatory organization if it finds 
that such proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to such 
organization.\17\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\18\ and Rules 17Ad-22(e)(4)(vi)(A) through (D) and 17Ad-
22(e)(4)(vii) thereunder.\19\
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    \17\ 15 U.S.C. 78s(b)(2)(C).
    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(4)(vi)(A)-(D), (e)(4)(vii).
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A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a registered 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 assure the safeguarding of securities and funds 
which are in the custody or

[[Page 23508]]

control of the clearing agency or for which it is responsible.\20\ The 
proposed rule change would re-categorize ICE Clear Europe's existing 
stress testing scenarios while adding a new set of forward-looking 
stress testing scenarios that incorporate adverse credit events 
involving Clearing Member and non-Clearing Member reference entities, 
as well as the Opposite Lehman Brothers stress testing scenario. The 
proposed rule change also would address specific wrong way risk, and 
would test the guaranty fund for full depletion.
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    \20\ 15 U.S.C. 78q-1(b)(3)(F).
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    By (i) adopting the new forward-looking stress testing scenarios, 
as well as the Opposite Lehman Brothers scenario, (ii) incorporating 
the uncollateralized loss given default for portfolios exhibiting 
specific wrong way risk, and (iii) testing the guaranty fund for full 
depletion, the Commission believes that ICE Clear Europe will be able 
to obtain additional information from the results of the new stress 
testing scenarios that it would not otherwise have, and this additional 
information will be relevant to determining the appropriate level of 
risk management resources that ICE Clear Europe should maintain. As a 
result, the Commission believes that ICE Clear Europe will be better 
able to calculate and collect such resources, which in turn will 
improve ICE Clear Europe`s ability to promote the prompt and accurate 
clearance and settlement of derivatives agreements, contracts, and 
transactions, and to assure the safeguarding of securities and funds 
which are in the custody or control of ICE Clear Europe or for which it 
is responsible. Therefore, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 17A(b)(3)(F) of 
the Act.\21\
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(vi)(A)

    Rule 17Ad-22(e)(4)(vi)(A) requires, in relevant part, that a 
covered clearing agency establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to test the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) 
through (iii) by conducting stress testing of its total financial 
resources once each day using standard predetermined parameters and 
assumptions.\22\ As noted above, the proposed rule change would add a 
set of new standardized stress testing scenarios (forward-looking 
scenarios based on historical stress testing scenarios and the Opposite 
Lehman Brothers scenario), and also would implement a hypothetical 
spread widening level that would result in depletion of the guaranty 
fund. These standardized stress testing scenarios and related 
assumptions would be incorporated into ICE Clear Europe's existing 
Stress Testing Policy, which it uses to conduct daily stress testing of 
its risk management financial resources.
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    \22\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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    Based on a review and analysis of the Notice and the Stress Testing 
Policy, the Commission finds that the proposed rule change will add 
standardized stress scenarios that are relevant to the products that 
ICE Clear Europe clears, including security-based swaps, and that these 
additions will allow ICE Clear Europe to obtain from the results of the 
new stress testing scenarios additional information that will be 
relevant to determining the sufficiency of its total financial 
resources on a daily basis. Therefore, the Commission finds that the 
proposed rule change is consistent with the requirements of Rule 17Ad-
22(e)(4)(vi)(A).\23\
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    \23\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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C. Consistency With Rule 17Ad-22(e)(4)(vi)(B) Through (D)

    Rules 17Ad-22(e)(4)(vi)(B) through (D) require, in relevant part, 
that a covered clearing agency establish, implement, maintain and 
enforce written policies and procedures reasonably designed to: (i) 
Conduct a comprehensive analysis on at least a monthly basis of the 
existing stress testing scenarios, models, and underlying parameters 
and assumptions, and consider modifications to ensure they are 
appropriate for determining the covered clearing agency's required 
level of default protection in light of current and evolving market 
conditions; (ii) conduct a comprehensive analysis of stress testing 
scenarios, models, and underlying parameters and assumptions more 
frequently than monthly when the products cleared or markets served 
display high volatility or become less liquid, or when the size or 
concentration of positions held by the covered clearing agency's 
participants increases significantly; and (iii) report the results of 
the analyses described above to appropriate decision makers at the 
covered clearing agency, including but not limited to, its risk 
management committee or board of directors.\24\
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    \24\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D).
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    The proposed rule change would implement certain requirements 
regarding the routine review of the Stress Testing Policy, including, 
as described above, a requirement that the Stress Testing Policy be 
kept up-to-date, an annual review by ICE Clear Europe's CDS Risk 
Committee and the Board Risk Committee, and implementation of a 
notification and escalation process in the event that certain 
established thresholds are breached that could, depending on the extent 
of the breach, require a particular response and review of the response 
by the Executive Risk Committee or the Board Risk Committee.
    The Commission believes that these proposed changes, in combination 
with existing provisions in the Stress Testing Policy requiring 
detailed analysis of stress testing results on a monthly basis, or more 
frequent analysis in stressed market conditions, will enhance ICE Clear 
Europe's processes for review of its Stress Testing Policy and stress 
testing results, and will also result in improved oversight by ICE 
Clear Europe's Executive Risk Committee and Board Risk Committee. As a 
result, the Commission finds that the proposed rule changes are 
consistent with the requirements of Rules 17Ad-22(e)(4)(vi)(B) through 
(D).\25\
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    \25\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D).
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D. Consistency With Rule 17Ad-22(e)(4)(vii)

    Rule 17Ad-22(e)(4)(vii) requires, in relevant part, a covered 
clearing agency to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to perform a model 
validation for its credit risk models not less than annually.\26\ The 
Commission finds that, because the proposed rule change would amend the 
Stress Testing Policy to provide for an annual independent model 
validation, it is consistent with the requirements of Rule 17Ad-
22(e)(4)(vii).\27\
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    \26\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \27\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act,\28\ and 
Rules 17Ad-22(e)(4)(vi)(A) through (D),\29\ and 17Ad-22(e)(4)(vii) \30\ 
thereunder.
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    \28\ 15 U.S.C. 78q-1.
    \29\ 17 CFR 240.17Ad-22(e)(4)(vi)(A)-(D).
    \30\ 17 CFR 240.17Ad-22(e)(4)(vii).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\31\ that the

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proposed rule change (ICEEU-2018-001) be, and hereby is, approved.\32\
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    \31\ 15. U.S.C. 78s(b)(2).
    \32\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-10710 Filed 5-18-18; 8:45 am]
 BILLING CODE 8011-01-P