[Federal Register Volume 84, Number 105 (Friday, May 31, 2019)]
[Notices]
[Pages 25310-25313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85938; File No. SR-ICC-2019-005]


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

May 24, 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 May 16, 2019, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission the proposed rule change described 
in Items I, II, and III below, which Items have been prepared primarily 
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 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, 
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), and (C) below, of the most 
significant aspects of these statements.

[[Page 25311]]

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

(a) Purpose
    ICC proposes revising its Stress Testing 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.
    ICC proposes changes to the Stress Testing Framework to enhance 
ICC's stress testing practices. The proposed changes strengthen the 
documentation surrounding ICC's stress testing methodology, including 
by introducing certain core concepts earlier in the Stress Testing 
Framework, updating terminology to maintain uniformity in the document, 
and providing additional clarity on the construction and reporting of 
stress scenarios. The proposed changes also remove a section that is no 
longer relevant and strengthen governance arrangements related to the 
identification and remediation of poor stress testing performance. ICC 
further proposes clarification and clean-up changes throughout the 
document to enhance readability. ICC proposes to make such changes 
effective following Commission approval of the proposed rule change.
    ICC proposes changes to the `Methodology' section of the Stress 
Testing Framework. Under the proposed changes, ICC will introduce its 
Cover-2 requirement, including related definitions, earlier in the 
document, noting that it establishes if financial resources will cover 
hypothetical losses associated with the two greatest Clearing 
Participant (``CP'') Affiliate Group (``AG'') uncollateralized stress 
losses associated with extreme but plausible scenarios. ICC proposes 
terminology updates, such as utilizing ``CP AG'' to reference CPs under 
a common parent entity, replacing a phrase with an abbreviation that 
was previously introduced, and shortening ``Lehman Brothers'' to 
``LB''. ICC proposes conforming changes throughout the document. ICC 
also proposes a clarification edit to specify the basis for ICC's 
stress testing practices.
    In the `Methodology' section, ICC proposes to introduce the forward 
looking (hypothetically constructed) scenarios. Under the proposed 
revisions, ICC will add language describing the forward looking 
(hypothetically constructed) scenarios and move two paragraphs on their 
construction from the `Predefined Scenarios' section to the 
`Methodology' section. ICC proposes edits for clarity and uniformity to 
such paragraphs, including referring to ``reference entity groups'' as 
``Risk Factor Groups'' \3\ (``RFGs''), which ICC also proposes to do 
throughout the document; defining a CP RFG as a CP AG; specifying the 
reference entities in a RFG for stress testing; and adding definite 
article ``the'' in the phrase ``as well as the peak''. ICC proposes to 
add language further explaining the calculation of Loss-Given-Default 
(``LGD'') and Expected LGD (``ELGD'') with respect to the forward 
looking (hypothetically constructed) scenarios.
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    \3\ ICC deems each single name reference entity a Risk Factor. 
ICC deems a set of single name Risk Factors related by a common 
parental ownership structure a RFG.
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    The proposed changes amend the `Predefined Scenarios' section. The 
proposed revisions indicate which scenarios are not expected to be 
realized as market outcomes and utilize bulleted lists to more clearly 
define the scenarios corresponding to the Historically Observed Extreme 
but Plausible Market Scenarios and the Historically Observed Extreme 
but Plausible Market Scenarios reflecting a baseline credit event. ICC 
proposes to cross-reference relevant sections when noting information 
found in those sections and make corresponding changes throughout the 
document. In describing the Hypothetically Constructed (Forward 
Looking) Extreme but Plausible Market Scenarios, ICC proposes to 
specifically refer to ``references entities'' as ``Single Name Risk 
Factors''; incorporate language on the associated adverse credit event 
analysis; and utilize a bulleted list to more clearly define the 
scenarios corresponding to the Hypothetically Constructed (Forward 
Looking) Extreme but Plausible Market Scenarios. In discussing the 
Extreme Model Response Test Scenarios, ICC proposes to add the word 
``Market'' to the phrase ``Historically Observed Extreme but Plausible 
Market scenarios'' and to utilize a bulleted list to more clearly 
define the scenarios corresponding to the Extreme Model Response Test 
Scenarios.
    The proposed amendments move the `General Wrong Way Risk and 
Contagion Stress Tests' section ahead of the adequacy and sensitivity 
analysis sections. The `General Wrong Way Risk and Contagion Stress 
Tests' section is currently located between the adequacy and 
sensitivity analysis sections, and ICC proposes that it follow the 
`Display of Discordant Behavior among Instrument Groups' section to 
avoid disrupting the grouping of adequacy and sensitivity analyses.
    ICC proposes to remove the `Correlation Sensitivity Analysis based 
on Monte Carlo Simulations' section. Given the transition from a 
stress-based methodology to a Monte Carlo simulations-based methodology 
for certain components of the Initial Margin model (the ``model''),\4\ 
references to the Monte Carlo sensitivity analysis as a stress testing 
analysis in the Stress Testing Framework are no longer relevant. ICC 
considers a sensitivity analysis of risk parameters to be more fitting 
and incorporated such analysis in the ICC Risk Parameter Setting and 
Review Policy, which describes the process of setting and reviewing the 
model core parameters and the performance of sensitivity analyses 
related to certain parameter settings.\5\
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    \4\ See SR-ICC-2018-008 for a description of the transition from 
a stress-based approach to a Monte Carlo simulations-based 
methodology for the spread response and recovery rate sensitivity 
response components of the model.
    \5\ See SR-ICC-2019-002 for a description of the ICC Risk 
Parameter Setting and Review Policy.
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    ICC proposes a clarification update to indicate which scenarios 
generally yield the greatest consumption of the Guaranty Fund in the 
`Recovery Rate Sensitivity Analysis' section and the `Interest Rate 
Sensitivity Analysis' section.
    ICC proposes amendments to the `Interpretation of Results' section. 
ICC proposes to incorporate language that more clearly defines the 
scenarios corresponding to the Historically Observed and Hypothetically 
Constructed Extreme but Plausible Scenarios. Under the proposed 
revisions, the ICC reports that are associated with stress scenarios 
are listed in a table, along with the reporting frequency and 
classification (e.g., extreme but plausible, extreme and not expected 
to be realized, etc.), and a paragraph on hypothetical losses follows 
the table given its connection to the stress scenarios in the table. 
ICC proposes clarification edits to this paragraph, such as replacing 
``total'' with ``sum'', adding a parenthetical, and more generally 
referring to powers of assessment. Further, ICC proposes that a 
paragraph describing a figure in the document appear before, instead of 
after, the figure and that such figure is re-numbered given the 
addition of the proposed table. With respect to stress test results, 
ICC proposes to specify that it considers hypothetical losses on a 
Cover-2 basis and to cross-reference a section on the remediation of 
poor stress testing performance. The proposed

[[Page 25312]]

changes also note that the Risk Department conducts monthly parameter 
reviews and parameter sensitivity analyses.
    ICC proposes amendments to the `Post-Stress Testing Review & 
Governance Structure' section. ICC proposes to cross-reference the 
table from the `Interpretation of Results' section when noting 
information depicted in the table and make corresponding changes 
throughout the document. ICC proposes to clarify the frequency at which 
stress testing results are reviewed and risk results and issues are 
discussed. ICC proposes to note the Risk Committee's role in ad hoc 
reviews of stress testing results undertaken by the Chief Risk Officer 
(``CRO'') or designee and to more clearly state that ICC conducts 
certain ``periodic'' reporting on a weekly basis. Also, the proposed 
changes provide clarification and direction with respect to poor stress 
testing performance, including by indicating that ICC considers stress 
test deficiencies on a Cover-2 basis, specifying the Risk Department's 
role in identifying poor stress testing performance, and explaining how 
the Risk Department determines poor stress testing performance. 
Moreover, the proposed revisions specifically provide the CRO and Risk 
Oversight Officer (``ROO'') with authority to determine poor stress 
testing performance and describe the actions to take upon identifying 
poor stress testing performance, including by the Risk Working Group 
(``RWG'') and the Risk Department. In addition, ICC proposes to replace 
certain general references to the Risk Department with more specific 
references to the CRO, or designee.
    ICC proposes to update the `References' section with two ICC 
policies that provide further information on ICC Risk Department 
practices, including the calculation of LGD and ELGD and the 
performance of monthly parameter reviews and parameter sensitivity 
analyses.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \6\ 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),\7\ 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 proposed changes to 
the Stress Testing Framework strengthen the documentation surrounding 
ICC's stress testing methodology, including by introducing certain core 
concepts earlier in the document, updating terminology to maintain 
uniformity, and providing additional clarity on the construction and 
reporting of stress scenarios. The proposed changes remove information 
that is no longer relevant and strengthen governance arrangements 
related to the identification and remediation of poor stress testing 
performance, which serves to enhance ICC's approach to identifying 
potential weaknesses in the risk methodology. The clarification and 
clean-up changes that enhance readability further ensure that the 
documentation of ICC's Stress Testing Framework remains up-to-date, 
clear, and transparent. ICC believes that having policies and 
procedures that clearly and accurately document ICC's stress testing 
practices 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 associated with security-based swap transactions in ICC's custody 
or control, or for which ICC 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.\8\
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
    \8\ Id.
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    In addition, the proposed revisions to the Stress Testing Framework 
are consistent with the relevant requirements of Rule 17Ad-22.\9\ Rule 
17Ad-22(b)(3) \10\ 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 proposed changes to the Stress 
Testing Framework provide further clarity and transparency regarding 
ICC's stress testing practices, including by strengthening the 
documentation surrounding ICC's stress testing methodology through the 
introduction of certain core concepts earlier in the document, updates 
to stress testing terminology to maintain uniformity, and additional 
clarity on the construction and reporting of stress testing scenarios. 
The proposed revisions also support ICC's ability to maintain 
sufficient risk requirements and enhance ICC's approach to identifying 
potential weaknesses in the risk management system by incorporating 
additional procedures related to the identification and remediation of 
poor stress testing performance, thereby ensuring that ICC maintains 
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).\11\
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    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(b)(3).
    \11\ Id.
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    Rule 17Ad-22(d)(8) \12\ 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.\13\ The proposed changes strengthen the governance arrangements 
set forth in the Stress Testing Framework by clearly assigning and 
documenting responsibility and accountability for the identification 
and remediation of poor stress testing performance. As such, these 
governance arrangements are clear and transparent, such that 
information relating to the assignment of responsibilities and the 
requisite involvement of the CRO, ROO, Risk Department, RWG, the Risk 
Committee, and the Board is clearly documented, consistent with the 
requirements of Rule 17Ad-22(d)(8).\14\
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    \12\ 17 CFR 240.17Ad-22(d)(8).
    \13\ 15 U.S.C. 78q-1.
    \14\ 17 CFR 240.17Ad-22(d)(8).

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[[Page 25313]]

(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 Stress Testing 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 
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-2019-005 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-2019-005. 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 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-2019-005 and should be 
submitted on or before June 21, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-11340 Filed 5-30-19; 8:45 am]
BILLING CODE 8011-01-P