[Federal Register Volume 84, Number 36 (Friday, February 22, 2019)]
[Notices]
[Pages 5748-5752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-03038]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85157; File No. SR-ICC-2019-002]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to ICC's Risk Parameter Setting 
and Review Policy

February 15, 2019.
    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 February 6, 
2019, ICE Clear Credit LLC (``ICC'') filed with the Securities and 
Exchange Commission the proposed rule change as described in Items I, 
II and III below, which Items have been prepared by ICC. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 Risk Parameter Setting and Review Policy (``Risk Parameter 
Policy''). 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 to formalize the Risk Parameter Policy that describes 
the process of setting and reviewing the risk management model 
(``model'') core parameters and the performance of sensitivity analyses 
related to certain parameter settings. ICC proposes to formalize the 
Risk Parameter Policy following Commission approval of the proposed 
rule change.
Parameter Setting and Calibration
    ICC's Risk Parameter Policy discusses the process of setting and 
reviewing the model core parameters and their underlying assumptions. 
The model requirements include bid/offer (``BO'') requirements, large 
position requirements, Jump-To-Default (``JTD'') requirements, interest 
rate (``IR'') sensitivity requirements, basis risk requirements, and 
integrated spread response (``iSR'') requirements. The parameters that 
are associated with the model requirements are listed in a table 
containing various parameter-related information, including the methods 
used to review parameter settings; the frequency of the reviews; and 
the groups involved in the review process (``reviewers''), such as the 
ICC Risk Management Department (``ICC Risk''), the Risk Working Group 
(``RWG''), or the Risk Committee. The parameters are described in more 
detail as follows.

[[Page 5749]]

    The Risk Parameter Policy explains the process of setting and 
reviewing the liquidity charge parameters. The liquidity charge 
parameters are associated with BO requirements, also referred to as 
liquidity charges, which incorporate the transaction costs associated 
with liquidating the portfolio of a defaulting Clearing Participant 
(``CP''). With respect to index instruments, the Risk Parameter Policy 
specifies how ICC Risk estimates the BO Widths (``BOWs'') for indices 
across volatile and extreme market conditions, in addition to how ICC 
Risk recognizes long-short benefits when computing portfolio-level 
index liquidity charges. In reference to single-name (``SN'') 
instruments, the Risk Parameter Policy introduces certain parameters to 
incorporate a price-based BOW component and a spread-based BOW 
component into the liquidity charge. The Risk Parameter Policy requires 
ICC to estimate and review the liquidity charge parameters at least 
monthly and summarizes the associated governance process, including the 
reviewers and any prerequisites to the implementation of parameter 
updates (e.g., review by the RWG or ``no objection'' ruling by the Risk 
Committee).
    The Risk Parameter Policy discusses the estimation and the review 
of the concentration charge parameters, which are related to large 
position requirements. Large position requirements, also referred to as 
concentration charges, apply to positions that exceed a predefined 
notional amount threshold and increase as the amount above the 
threshold increases. The Risk Parameter Policy details how ICC Risk 
establishes series-specific or SN-specific concentration charge 
threshold levels for each index or SN Risk Factor (``RF''),\3\ and how 
ICC Risk estimates concentration charge growth rates that determine how 
quickly concentration charges increase with position size. The Risk 
Parameter Policy directs ICC to estimate and review the concentration 
charge parameters at least monthly and provides information on the 
corresponding governance process, stating the reviewers and any 
prerequisites to implementing parameter updates.
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    \3\ ICC deems each index, sub-index, or underlying SN reference 
entity a separate RF.
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    The parameters impacting the JTD requirement are categorized as 
either Loss-Given-Default (``LGD'') or Wrong-Way Risk (``WWR'') 
parameters. ICC's risk management methodology incorporates 
considerations of idiosyncratic credit events and the associated 
potential losses. These credit event losses are termed LGD, and the 
Risk Parameter Policy discusses the determination and review of the 
associated LGD parameters. Specifically, the Risk Parameter Policy 
explains how, in order to measure credit event losses, ICC Risk 
constructs JTD scenarios in terms of anticipated recovery rate (``RR'') 
levels (``RR scenarios''). The Risk Parameter Policy references RR 
scenarios and estimations for corporate SNs, sectors, and sovereign 
reference entities, and notes foreign exchange rate risk considerations 
with respect to sovereign reference entities. Additionally, the LGD 
computations at the RF Group (``RFG'') \4\ level depend on certain RFG-
related parameters, which are specified in the Risk Parameter Policy. 
The Risk Parameter Policy requires ICC to estimate and review the LGD 
parameters at least monthly and describes the associated governance 
process, noting the reviewers and any prerequisites to the 
implementation of parameter updates.
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    \4\ ICC deems a set of SN RFs related by a common parental 
ownership structure a RFG.
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    The Risk Parameter Policy details the process of setting and 
reviewing the WWR parameters. WWR arises when there is a strong adverse 
correlation between a CP's default risk and the occurrence of large 
losses in a CP's portfolio. ICC considers three types of WWR: Specific 
WWR (``SWWR'') results from self-referencing trades; General WWR 
(``GWWR'') results from trades that involve RFs within the sovereign 
and banking sectors that are highly correlated with the CP, or with an 
entity that is guaranteed by, or affiliated with the CP; and Contagion 
WWR results from portfolio level aggregation of WWR exposure beyond a 
portfolio level WWR threshold. The Risk Parameter Policy contains 
information regarding the parameters that are used to quantify WWR 
dependence, compute WWR JTD requirements, and determine the level of 
WWR collateralization. The Risk Parameter Policy details the thresholds 
that are established as parameters for each RF generating WWR exposure, 
beyond which the increased level of WWR collateralization applies. 
Additionally, ICC estimates, reviews, and performs sensitivity analyses 
on the WWR parameters at least monthly, and the Risk Parameter Policy 
discusses the associated governance process, including the reviewers 
and any prerequisites to implementing parameter updates.
    The Risk Parameter Policy contains information on the estimation 
and the review of the parameters that serve as inputs to the IR 
sensitivity requirement. The IR sensitivity requirement accounts for 
the risk associated with changes in the default-free discount term 
structure used to price CDS instruments. With respect to the IR 
sensitivity requirement parameters, the Risk Parameter Policy specifies 
how ICC Risk estimates the up and down parallel shifts for the US 
Dollar and Euro default-free discount term structures. The Risk 
Parameter Policy directs ICC to estimate and review the IR sensitivity 
requirement parameters at least monthly and specifies the corresponding 
governance process, noting the reviewers and any prerequisites to the 
implementation of parameter updates.
    The Risk Parameter Policy discusses the setting and calibration of 
the parameters that are associated with the basis risk requirement. As 
index-derived SN positions and opposite ``outright'' SN positions are 
offset, the basis risk requirement is introduced to capture the 
differences between the trading characteristics of index instruments 
and their replicating baskets of SN constituents. In reference to the 
basis risk requirement parameters, the Risk Parameter Policy discusses 
how ICC Risk estimates the basis between index spreads for each index 
family and the basis attributable to the fact that the index and the 
SNs may have different coupons. ICC estimates and reviews the basis 
risk requirement parameters at least monthly, and the Risk Parameter 
Policy details the corresponding governance process, specifying the 
reviewers and any prerequisites to implementing parameter updates.
    The parameters impacting the iSR requirement, which captures credit 
spread and RR fluctuations, are classified as either univariate or 
multivariate level. The standardized distributions that describe the 
behavior of credit spread log-returns are characterized by certain 
univariate level iSR parameters that are specified in the Risk 
Parameter Policy. Moreover, the Risk Parameter Policy discusses the 
estimation of the univariate level iSR parameters, including by 
considering time series analysis of credit spread log-returns. The Risk 
Parameter Policy explains how different mean absolute deviation 
(``MAD'') estimates are obtained for each time series. In addition, the 
Risk Parameter Policy references the setting of the exponentially 
weighted moving average (``EWMA'') decay rate (``EWMA factor''), along 
with the estimation of certain RF-specific parameters describing the SN 
RR distributions. The Risk Parameter Policy requires ICC to estimate, 
review, and perform sensitivity analyses on the univariate level iSR 
parameters at least

[[Page 5750]]

monthly and specifies the associated governance process, including the 
reviewers and any prerequisites to the implementation of parameter 
updates.
    The Risk Parameter Policy contains information regarding the 
process of determining and reviewing the multivariate level iSR 
parameters. Using a simulation framework, ICC generates spread and RR 
scenarios by means of copulas to connect the univariate distributions 
that describe spread and RR fluctuations. The Risk Parameter Policy 
describes the multivariate parameters that serve as inputs to the 
copula simulations. Namely, the Risk Parameter Policy specifies the 
setting of a certain parameter to reflect tail dependence, a concept 
indicating the probability of extreme values occurring jointly. The 
Risk Parameter Policy also references the estimation of the Kendall tau 
rank-order correlations for the copula simulations. ICC estimates and 
reviews the multivariate level iSR parameters at least monthly, and the 
Risk Parameter Policy notes the corresponding governance process, 
including the reviewers.
Sensitivity Analysis
    The Risk Parameter Policy details the sensitivity analyses that ICC 
Risk performs to explore the sensitivity of the risk management 
system's outputs to certain model core parameters that are calibrated 
on an ad-hoc basis and to alternative data analyses and parameter 
estimation techniques.
    ICC conducts a sensitivity analysis on the univariate level iSR 
parameters by utilizing alternative techniques to estimate the 
parameters that fit the standardized distributions to the observed 
credit spread log-return data. The Risk Parameter Policy also considers 
the impact of the alternatively estimated parameters. This sensitivity 
analysis is reviewed with the RWG monthly and provides information if a 
change to the current estimation technique is considered. Further, the 
Risk Parameter Policy distinguishes two levels of sensitivity analyses, 
those that include a clearinghouse-wide portfolio impact study and 
those, such as this one, that do not include a portfolio impact study.
    ICC performs a sensitivity analysis, which does not include a 
portfolio impact study, by introducing different values for the EWMA 
factor. The Risk Parameter Policy discusses the impact of using 
different values for this univariate level iSR parameter and requires 
ICC to review this sensitivity analysis monthly with the RWG.
    Under the Risk Parameter Policy, ICC carries out a sensitivity 
analysis on the routinely updated parameters. The Risk Parameter Policy 
identifies certain parameters that are updated routinely (i.e., daily 
or monthly) and are subject to a sensitivity analysis with a 
clearinghouse-wide portfolio impact study. The Risk Parameter Policy 
requires that the results of the proposed parameter updates are 
reviewed with the RWG prior to implementation and notes that this 
sensitivity analysis provides information regarding potential risk 
requirement changes due to routine parameter updates.
    The portfolio benefits parameters are subject to a sensitivity 
analysis that includes a clearinghouse-wide portfolio impact study. 
Namely, ICC Risk estimates certain risk measures at pre-defined 
quantile levels by incorporating different dependence structures in 
order to guide ICC Risk in situations where back-testing results 
indicate excessive portfolio benefits. Under the Risk Parameter Policy, 
this sensitivity analysis is reviewed with the Risk Committee monthly.
    Since the model allows the level of SWWR collateralization to be 
controlled by a model threshold, ICC conducts a sensitivity analysis 
for the SWWR threshold. ICC explores the maximum SWWR charges by 
requiring full collateralization of index-derived SWWR. This 
sensitivity analysis includes a clearinghouse-wide portfolio impact 
study and guides ICC Risk when there is a decision to fully 
collateralize SWWR. Under the Risk Parameter Policy, this sensitivity 
analysis is reviewed with the Risk Committee monthly.
    ICC performs a sensitivity analysis on MAD levels by shifting all 
MAD estimates to their stress levels to provide information about the 
response of risk requirements to potential volatility shifts and to 
assess the viability of certain parameter-setting assumptions. This 
sensitivity analysis includes a clearinghouse-wide portfolio impact 
study and is reviewed monthly with the Risk Committee.
    ICC Risk performs a sensitivity analysis for the Guaranty Fund 
(``GF'') JTD configuration. ICC's GF model aims to establish financial 
resources that are sufficient to cover hypothetical losses associated 
with simultaneous credit events where up to five SN RFGs are impacted. 
In that, two of the selected SN RFGs are CP SN RFGs (i.e., Cover-2 GF 
sizing) and the other three SN RFGs are non-CP RFGs. ICC considers an 
alternative where three of the selected SN RFGs are CP SN RFGs (i.e., 
Cover-3 GF sizing) and the other two are non-CP SN RFGs. This 
sensitivity analysis includes a clearinghouse-wide portfolio impact 
study, provides information when a change to the GF JTD configuration 
is considered, and is reviewed with the Risk Committee monthly.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \5\ 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; to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible; in general, to protect investors and the public interest; 
and to comply with the provisions of the Act and the rules and 
regulations thereunder. ICC believes that the proposed rule change is 
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),\6\ because ICC believes that the proposed rule change 
to formalize the Risk Parameter Policy promotes the soundness of ICC's 
model. The Risk Parameter Policy describes ICC's process of setting and 
reviewing the model core parameters, in addition to the details 
surrounding ICC's performance of sensitivity analyses. The Risk 
Parameter Policy provides assurances as to the appropriateness of model 
core parameter settings and, accordingly, the appropriateness of margin 
requirements, thereby facilitating ICC's ability to promptly and 
accurately clear and settle its cleared CDS contracts; enhancing ICC's 
ability to assure the safeguarding of securities and funds which are in 
the custody or control of ICC or for which it is responsible; and 
protecting investors and the public interest. Moreover, ICC believes 
that having policies and procedures that clearly and accurately 
document ICC's process of setting and reviewing the model core 
parameters, along with ICC's performance of sensitivity analyses, is an 
important component to the effectiveness of ICC's risk management 
system, which promotes the prompt and accurate clearance and settlement 
of securities transactions, derivatives agreements, contracts, and 
transactions; the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible; and the 
protection of investors and the public interest. As such, the proposed

[[Page 5751]]

rule change is designed to promote the prompt and accurate clearance 
and settlement of securities transactions, derivatives agreements, 
contracts, and transactions; to contribute to the safeguarding of 
securities and funds associated with security-based swap transactions 
in ICC's custody or control, or for which ICC is responsible; and, in 
general, to protect investors and the public interest within the 
meaning of Section 17A(b)(3)(F) of the Act.\7\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ Id.
    \7\ Id.
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    In addition, the proposed rule change is consistent with the 
relevant requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(b)(2) \9\ 
requires ICC to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to use margin requirements 
to limit its credit exposures to participants under normal market 
conditions and use risk-based models and parameters to set margin 
requirements and review such margin requirements and the related risk-
based models and parameters at least monthly. Under the Risk Parameter 
Policy, ICC estimates and reviews the model core parameter settings at 
least monthly and performs and reviews sensitivity analyses related to 
certain parameter settings monthly. Such procedures serve to promote 
the soundness of ICC's model and to ensure that ICC's risk management 
system is effective and appropriate in addressing the risks associated 
with clearing security based swap-related portfolios. Namely, by 
requiring that ICC regularly review the model core parameter settings 
and sensitivity analyses related to certain parameter settings, the 
Risk Parameter Policy promotes ICC's use of margin requirements to 
limit its credit exposures to participants under normal market 
conditions and ICC's use of risk-based models and parameters to set 
margin requirements and review such margin requirements and the related 
risk-based models and parameters at least monthly, consistent with Rule 
17Ad-22(b)(2).\10\
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    \8\ 17 CFR 240.17Ad-22.
    \9\ 17 CFR 240.17Ad-22(b)(2).
    \10\ Id.
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    Rule 17Ad-22(b)(3) \11\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources to withstand, at a 
minimum, a default by the two CP families to which it has the largest 
exposures in extreme but plausible market conditions. The Risk 
Parameter Policy assures the appropriateness of model core parameter 
settings through a regular review process involving various reviewers, 
which supports ICC's ability to maintain sufficient margin requirements 
and enhances ICC's approach to identifying potential weaknesses, 
thereby ensuring that ICC continues to maintain sufficient financial 
resources to withstand, at a minimum, a default by the two CP families 
to which it has the largest exposures in extreme but plausible market 
conditions, consistent with the requirements of Rule 17Ad-22(b)(3).\12\
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    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ Id.
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    Rule 17Ad-22(d)(8) \13\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have governance arrangements that are clear and transparent 
to fulfill the public interest requirements in Section 17A of the 
Act.\14\ The Risk Parameter Policy clearly assigns and documents 
responsibility and accountability for the estimation and review of the 
model core parameters and the performance of sensitivity analyses. 
Moreover, the Risk Parameter Policy describes the methods used to 
review parameter settings and perform sensitivity analyses, the 
frequency of the reviews, the groups involved in the review process, 
and any prerequisites to implementing parameter updates. These 
governance arrangements are clear and transparent, such that 
information relating to the assignment of responsibilities and the 
requisite involvement of ICC Risk, the RWG, and the Risk Committee is 
clearly documented, consistent with the requirements of Rule 17Ad-
22(d)(8).\15\
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    \13\ 17 CFR 240.17Ad-22(d)(8).
    \14\ 15 U.S.C. 78q-1.
    \15\ 17 CFR 240.17Ad-22(d)(8).
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed change to 
formalize the Risk Parameter Policy will apply uniformly across all 
market participants. Therefore, ICC does not believe the proposed rule 
change imposes 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 Change 
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-2019-002 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ICC-2019-002. 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 website (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 website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of

[[Page 5752]]

10:00 a.m. and 3:00 p.m. Copies of such filings will also be available 
for inspection and copying at the principal office of ICE Clear Credit 
and on ICE Clear Credit's website at https://www.theice.com/clear-credit/regulation.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICC-2019-002 and should be 
submitted on or before March 15, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-03038 Filed 2-21-19; 8:45 am]
 BILLING CODE 8011-01-P