[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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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'').
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \4\ This description summarizes the description found in the 
Notice, 84 FR at 25311-25312.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \9\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \10\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \11\ Id.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1.
    \13\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \14\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-15340 Filed 7-18-19; 8:45 am]
 BILLING CODE 8011-01-P