[Federal Register Volume 84, Number 78 (Tuesday, April 23, 2019)]
[Notices]
[Pages 16900-16903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08107]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-85673; File No. SR-ICC-2019-004]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice Relating to ICC's Model Validation Framework
April 17, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 5, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission the proposed rule change, security-
based swap submission, or advance notice 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,
security-based swap submission, or advance notice 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, Security-Based Swap Submission, or Advance Notice
The principal purpose of the proposed rule change is to revise the
ICC Model Validation 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, Security-Based Swap Submission, or
Advance Notice
In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. 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),
[[Page 16901]]
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, Security-Based Swap Submission, or
Advance Notice
(a) Purpose
ICC proposes revisions to its Model Validation Framework. 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.
The Model Validation Framework sets forth ICC's model validation
procedures. Through the model validation procedures, ICC determines the
appropriateness of changes to the risk modeling components (``Model
Components'') of ICC's risk management system and the appropriateness
of the configuration and calibration of ICC's risk management system.
ICC's proposed changes consist of clarification updates related to the
classification of Model Components, documentation requirements, the
priority scale used by independent validators, and the annual
validation of Model Components and related practices. ICC proposes to
make such changes effective following Commission approval of the
proposed rule change.
ICC proposes to revise the `Risk Management System Models' section
to account for Model Components that are no longer utilized. Currently,
the Model Validation Framework notes new Model Components, which
consider risk drivers that are not currently included in the risk
management system, and enhancements to Model Components, which improve
upon the methodologies used by the risk management system to consider a
given risk driver or drivers (collectively, ``Model Change''). ICC
proposes to amend the Model Validation Framework to also consider
retired Model Components, which are no longer utilized in the risk
management system.
In the `Model Change Qualification and Materiality' section, ICC
proposes to include a quantitative measure to define certain Model
Changes. ICC classifies Model Changes as either Materiality A or
Materiality B, depending on how substantially the Model Change affects
the risk management system's assessment of risk for the related risk
driver or drivers. ICC proposes to characterize any Model Change that
leads to a decrease/increase of the total pre-funded financial
resources over a certain percentage as a Materiality A Model Change.
The proposed revisions to the `Documentation Requirements' section
relate to the Model Inventory, which is maintained by the ICC Risk
Department and contains key information about all Model Components and
Model Changes. The Model Validation Framework specifies documentation
requirements for the type of information maintained in the Model
Inventory. ICC proposes updates to the documentation requirements to
include retired Model Components and to remove information considered
not relevant for purposes of the Model Inventory.
The proposed updates to the `Independent Initial Validation'
section relate to the priority scale used by independent validators.
The Model Validation Framework requires independent initial validators
to classify their findings based on a priority scale, consisting of
high, medium, and low priority ratings. ICC proposes to amend the low
priority rating to allow ICC, in consultation with the Risk Committee,
to take no action with respect to the corresponding item if it does not
reflect a potential deficiency.
ICC proposes clarifying changes to the `Independent Periodic
Review' section. ICC proposes to include additional information
regarding how it tracks the annual validation of Model Components and
related practices. The proposed changes specify that independent
validators perform periodic reviews of Model Components and related
practices at least every twelve months and that ICC relies on the date
of the engagement letter to track this twelve month requirement. As
part of the independent periodic review, the Model Validation Framework
also directs independent validators to classify their findings based on
the priority scale. ICC proposes amendments to the low priority rating
to note that corresponding items may reflect deficiencies that create
immaterial risks and that ICC, in consultation with the Risk Committee,
may take no action with respect to the corresponding item if it does
not reflect a potential deficiency.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \3\ 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; 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) \4\, because ICC believes that the proposed rule change
will promote the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions, and 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. The Model Validation
Framework provides assurances as to the suitability of changes to Model
Components and the appropriateness of the configuration and calibration
of ICC's risk management system, including the appropriateness of risk
requirements. The proposed changes to the Model Validation Framework
provide additional detail and transparency regarding ICC's model
validation procedures, which enhance ICC's approach to identifying
potential weaknesses in ICC's risk management system by providing a
process for reviewing and enhancing ICC's risk management system.
Moreover, ICC believes that having policies and procedures that clearly
and accurately document ICC's model validation procedures are 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 and the safeguarding of securities and funds which are in
the custody or control of ICC or for which it is responsible. As such,
the proposed rule change is designed to promote the prompt and accurate
clearance and settlement of securities transactions, derivatives
agreements, contracts, and transactions and 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 within the meaning of Section 17A(b)(3)(F) of the Act.\5\
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\3\ 15 U.S.C. 78q-1(b)(3)(F).
\4\ Id.
\5\ Id.
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In addition, the proposed rule change is consistent with the
relevant requirements of Rule 17Ad-22.\6\ Rule
[[Page 16902]]
17Ad-22(b)(2) \7\ 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. As described
above, the Model Validation Framework sets forth ICC's model validation
procedures, which provide assurances as to the appropriateness of
changes to Model Components; the appropriateness of the configuration
and calibration of ICC's risk management system, including through
ongoing monitoring and validation; and the use of independent initial
and annual validations. Such procedures serve to promote the soundness
of Model Components 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, the Model
Validation Framework provides a process for continually reviewing and
enhancing ICC's risk management system, including risk requirements,
thereby promoting 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).\8\
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\6\ 17 CFR 240.17Ad-22.
\7\ 17 CFR 240.17Ad-22(b)(2).
\8\ Id.
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Rule 17Ad-22(b)(3) \9\ 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 Clearing Participant (``CP'') families to
which it has the largest exposures in extreme but plausible market
conditions. The Model Validation Framework supports ICC's ability to
maintain sufficient risk requirements and enhances ICC's approach to
identifying potential weaknesses in the risk management system by
requiring ICC to review and improve its risk management system,
including through the use of independent initial and annual
validations, 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).\10\
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\9\ 17 CFR 240.17Ad-22(b)(3).
\10\ Id.
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Rule 17Ad-22(b)(4) \11\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to provide for an annual model validation consisting of
evaluating the performance of the clearing agency's margin models and
the related parameters and assumptions associated with such models by a
qualified person who is free from influence from the persons
responsible for the development or operation of the models being
validated. The proposed changes to the Model Validation Framework
require independent validators to perform periodic reviews of Model
Components and related practices at least every twelve months and
include additional detail regarding tracking the annual validation of
Model Components and related practices, thereby ensuring that ICC
provide for an annual model validation consisting of evaluating the
performance of ICC's margin models and the related parameters and
assumptions associated with such models by a qualified person who is
free from influence from the persons responsible for the development or
operation of the models being validated, consistent with Rule 17Ad-
22(b)(4).\12\
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\11\ 17 CFR 240.17Ad-22(b)(4).
\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 Model Validation Framework clearly assigns and documents
responsibility and accountability for oversight of the Model Validation
Framework and the performance of model validation procedures. The
proposed revisions allow ICC, in consultation with the Risk Committee,
to take no action with respect to certain items from independent
validator reports. As such, the governance arrangements in the Model
Validation Framework are clear and transparent, such that information
relating to the assignment of responsibilities and the requisite
involvement of ICC personnel, ICC departments, the Risk Committee, and
the Board 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 changes to
ICC's Model Validation Framework 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, Security-Based Swap Submission, or Advance Notice 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, Security-Based
Swap Submission, or Advance Notice 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, security-based swap submission, or advance notice 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-2019-004 on the subject line.
[[Page 16903]]
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-2019-004. 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, security-based
swap submission, or advance notice that are filed with the Commission,
and all written communications relating to the proposed rule change,
security-based swap submission, or advance notice 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 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-2019-004 and should be submitted on
or before May 14, 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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Jill M. Peterson,
Assistant Secretary .
[FR Doc. 2019-08107 Filed 4-22-19; 8:45 am]
BILLING CODE 8011-01-P