[Federal Register Volume 84, Number 139 (Friday, July 19, 2019)]
[Notices]
[Pages 34990-34992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15340]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86378; File No. SR-ICC-2019-005]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to ICC's Stress Testing
Framework
July 15, 2019.
I. Introduction
On May 16, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission pursuant to Section 19(b)(1) of the
Securities
[[Page 34991]]
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change (SR-ICC-2019-005) to revise the ICC Stress Testing
Framework. The proposed rule change was published in the Federal
Register on May 24, 2019.\3\ The Commission did not receive comments on
the proposed rule change. 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. 34-85938 (May 24, 2019),
84 FR 25310 (May 31, 2019) (SR-ICC-2019-005) (``Notice'').
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II. Description of the Proposed Rule Change
The proposed rule change would revise the ICC Stress Testing
Framework, which describes various stress tests executed by ICC and the
governance process surrounding these tests. The proposed changes relate
primarily to clarifications, updates, and clean-up changes to the
descriptions of stress scenarios and governance throughout the Stress
Testing Framework, as well as the removal of a section of the Stress
Testing Framework that is no longer relevant.\4\
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\4\ This description summarizes the description found in the
Notice, 84 FR at 25311-25312.
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A. Overall Clarifications and Updates
To foster clarity and enhance the readability and flow of the
Stress Testing Framework, The proposed rule change would reorganize the
Stress Testing Framework by moving various concepts and sections
throughout the document. For instance, ICC would introduce the cover-2
requirement, including related definitions, earlier in the document.
Specifically, the cover-2 requirement introduction will be moved from
the Guaranty Fund Sizing Sensitivity Analysis section of the Stress
Testing Framework to the Methodology section, which is an earlier
section of the Stress Testing Framework. ICC also proposes to introduce
the forward looking (hypothetically constructed) scenarios in the
Methodology section as well, and to 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 also proposes to move the General Wrong Way
Risk and Contagion Stress Test section from its current location
between the adequacy and sensitivity analysis sections of the Stress
Testing Framework to instead follow the Display of Discordant Behavior
among Instrument Groups section.
ICC is also proposing changes to terminology throughout the Stress
Testing Framework. For instance, it will refer to ``reference entity
group'' as ``Risk Factor Groups'' (``RFG'') throughout the document and
define a Clearing Participant RFG as a Clearing Participant Affiliate
Group. Other changes include specifying the reference entities in a RFG
for stress testing and the addition of language to further explain the
calculation of Loss-Given Default and Expected Loss-Given Default with
respect to the forward looking hypothetically constructed scenarios.
ICC will also make various grammatical changes.
Other proposed changes relate to clarifying edits, utilization of
bulleted lists, and cross-references to more clearly define scenarios
and explain concepts throughout the Stress Testing Framework. For
example, the proposed rule change would amend the `Predefined
Scenarios' section to 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 ``reference 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. With respect to stress test results, ICC will specify that
it considers hypothetical losses on a cover-2 basis and cross-reference
a section on the remediation of poor stress testing performance.
ICC also 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, references to the
Monte Carlo sensitivity analysis as a stress testing analysis in the
Stress Testing Framework are no longer relevant.
B. Governance Clarifications and Updates
ICC is proposing several clarification and update changes related
to the governance section of the Stress Testing Framework by making
clarifying changes related to frequency of review and governance roles.
Specifically, ICC proposes to clarify the frequency at which stress
testing results are reviewed and discussed, as well as the various
roles played by management in the governance of the Stress Testing
Framework, including the Risk Committee, Chief Risk Officer, Risk
Department, Risk Oversight Officer, and Risk Working Group.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change 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.\5\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \6\ and Rules 17Ad-22(b)(3) and 17Ad-22(d)(8) thereunder.\7\
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\5\ 15 U.S.C. 78s(b)(2)(C).
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 17 CFR 240.17Ad-22(b)(3) and 17 CFR 240.17Ad-22(d)(8).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act 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.\8\
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, the proposed changes to the Stress Testing
Framework would introduce certain core concepts earlier in the
document. The Commission believes that, by introducing ICC's cover-2
requirement in the Methodology section, which
[[Page 34992]]
would be earlier in the document than its current placement, the
proposed rule change would strengthen the documentation surrounding
ICC's stress testing methodology by highlighting and emphasizing to the
document's users, especially those involved in the daily risk
management process, that the methodology's scenarios establish whether
available financial resources are sufficient to cover hypothetical
losses of the two greatest clearing participant affiliate groups.
Additionally, the proposed rule change updates terminology and
makes other clarifying updates. Some examples of changes include: ``CP
AG'' used to reference clearing participants under a common parent,
``Lehman Brothers'' shortened to ``LB'', ``sum'' replaces ``total,''
utilization of a table to list reports associated with stress
scenarios, and minor placement and numbering changes to figures in the
document. The Commission believes that these clarification updates
enhance the readability of the Stress Testing Framework.
Further, as described above, the proposed rule change removes
information that is no longer relevant (such as the `Correlation
Sensitivity Analysis based on Monte Carlo Simulations' section) and
moves sections around (such as moving the `General Wrong Way Risk and
Contagion Stress Test' ahead of the adequacy and sensitivity analysis
sections rather than between these sections). The Commission believes
that these revisions enhance the documentation of the Stress Testing
Framework by ensuring that it contains only currently relevant
information and groups related sections in a non-disruptive manner
The Commission believes that by enhancing readability and ensuring
that the documentation of ICC's Stress Testing Framework remains up-to-
date, clear, and transparent, the clarification and clean-up changes
described above will promote the prompt and accurate clearance and
settlement of securities transactions and the safeguarding of
securities and funds within the meaning of Section 17A(b)(3)(F) of the
Act.\9\
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\9\ Id.
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B. Consistency With Rule 17Ad-22(b)(3)
Rule 17Ad-22(b)(3) 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 participant families to which it has the largest
exposure in extreme but plausible market conditions.\10\
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\10\ 17 CFR 240.17Ad-22(b)(3).
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The Commission believes that the proposed changes to the Stress
Testing Framework described above provide further clarity and
transparency regarding ICC's stress testing practices by strengthening
the documentation surrounding ICC's stress testing methodology through
the introduction of the cover-2 concepts earlier in the document,
updates to stress testing terminology to maintain uniformity, and
providing additional clarity on the reporting of stress testing
scenarios.
The Commission further believes that these proposed revisions
enhance ICC's approach to identifying potential weaknesses in the risk
management system with changes to procedures related to the
identification and remediation of poor stress testing performance.
Specifically, as described above, the proposed changes more clearly
define the scenarios corresponding to the Historically Observed and
Hypothetically Constructed Extreme but Plausible Scenarios and, with
respect to stress results, specify that it considers hypothetical
losses on a cover-2 basis and cross-references a section on remediation
of poor stress testing performance. The Commission therefore believes
that these proposed changes support ICC's ability 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).\11\
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\11\ Id.
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C. Consistency With Rule 17Ad-22(d)(8)
Rule 17Ad-22(d)(8) 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 \12\ applicable
to clearing agencies, to support the objectives of owners and
participants, and to promote the effectiveness of the clearing agency's
risk management procedures.\13\
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\12\ 15 U.S.C. 78q-1.
\13\ 17 CFR 240.17Ad-22(d)(8).
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As described above, the proposed changes clarify the frequency at
which stress testing results are reviewed and discussed as well as the
actions taken upon identification of poor testing results. Further, the
proposed changes describe the involvement of the Chief Risk Officer,
Risk Oversight Officer, Risk Department, Risk Working Group, the Risk
Committee, and the Board in addressing poor stress testing results. The
Commission believes that by making such clarifications, the proposed
changes strengthen the governance arrangements set forth in the Stress
Testing Framework by clearly documenting responsibility for the
identification and remediation of poor stress testing performance. As
such, the Commission believes that these governance arrangements are
consistent with the requirements of Rule 17Ad-22(d)(8).\14\
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\14\ 17 CFR 240.17Ad-22(d)(8).
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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(b)(3)(F) of the
Act \15\ and Rules 17Ad-22(b)(3) and 17Ad-22(d)(8) thereunder.\16\
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(b)(3) and 17 CFR 240.17Ad-22(d)(8).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\17\ that the proposed rule change (SR-ICC-2019-005) be, and hereby is,
approved.\18\
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\17\ 15 U.S.C. 78s(b)(2).
\18\ 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.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15340 Filed 7-18-19; 8:45 am]
BILLING CODE 8011-01-P