[Federal Register Volume 84, Number 171 (Wednesday, September 4, 2019)]
[Notices]
[Pages 46573-46575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18997]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86782; File No. SR-ICEEU-2019-017]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 
1, Relating to the ICE Clear Europe CDS Clearing Back-Testing Policy 
(the ``Back-Testing Policy'').

August 28, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 19, 2019, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been substantially prepared 
by ICE Clear Europe. On August 27, 2019, ICE Clear Europe filed Partial 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as modified by Partial Amendment No. 1 (hereafter referred to as 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.
    \3\ Partial Amendment No. 1 corrected an inaccurate statement in 
the initial proposed rule change but did not make any changes to the 
substance of the filing or the text of the proposed rule change.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing 
House'') proposes to revise its Back-Testing Policy to make certain 
clarifications, correct certain typographical errors and update 
governance processes.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

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

(a) Purpose
    ICE Clear Europe is proposing to modify, update and reorganize 
certain provisions of its Back-Testing Policy to clarify certain test 
strategies, procedures and methodologies, correct certain typographical 
errors and update governance processes.
    The amendments to the Back-Testing Policy principally include 
various clarifications to the daily, weekly and monthly back-testing 
performed by the Clearing House. As discussed herein, the amendments 
would generally align the Back-Testing Policy with the Clearing House's 
current back-testing practices, and accordingly the amendments are not 
intended to result in significant changes in back-testing practices. 
ICE Clear Europe is thus proposing to make these changes in order to 
make the policy more accurate, clear and precise, in line with 
regulatory requirements applicable to back-margin back-testing and 
related suggestions of its regulators. Certain amendments will in 
particular clarify that back-testing is done at the Clearing Member 
account level,\4\ replacing existing references to testing at the 
portfolio level (which was a less precise description).
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    \4\ Account for this purpose has the meaning specified in the 
Rules.
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    The amendments would reorganize the requirements of the policy with 
respect to daily back-testing, but would not substantially change 
existing processes. As noted above, the amendments would provide for 
daily back-testing at the Clearing Member account level. The amendments 
would also provide that back-testing results would be reported to the 
Model Oversight Committee and CDS Risk Committee on a monthly basis, 
including an exceedance summary, an example of which would be included 
in the Back-Testing Policy.
    The provisions of the Back-Testing Policy setting out portfolio 
construction for back-testing the production margin model using special 
strategy portfolios would be amended to add an additional strategy and 
also update strategy names and clarify the use of bought and sold 
protection positions in the back-testing process. The portfolio 
construction of the additional strategy, iTraxx Senior Financial 5Y.OTR 
Arb, would be the same as the construction of the existing special 
strategies but would relate only to the iTraxx Senior Financials 5Y 
index. ICE Clear Europe regularly back tests using this additional 
strategy in practice and is adding it to the policy to reflect this 
practice. The amendments would provide that with respect to each 
specified strategy, for completeness, the opposite strategy would be 
taken into consideration. The other amendments are also generally 
intended to better reflect current practice.
    The provisions of the policy relating to back testing of the Monte 
Carlo (``MC') model would be revised to clarify that back-tests are 
performed daily on the Spread Response component of the Initial Margin 
using ICE Clear Europe's MC model rather than the worst among the 
scenario based spread response approaches and the MC approach. The 
back-test would be performed on individual Clearing Member accounts 
using the risk approach for the Spread Response Initial Margin (and 
accordingly references to specific quantiles for testing have been 
removed). The back-tested risk measures would include the sum of the MC 
VaR and the basis risk, interest rate and recovery rate quantities. 
This amendment is intended to clarify what is meant in the policy by 
``Monte Carlo back-testing'', which is back-testing only the MC model 
and not the stress based model. There would be no change to the current 
practice with respect to MC model back testing. The amendments would 
also remove an unnecessary distinction depending on

[[Page 46574]]

whether the indices are decomposed. In ICE Clear Europe's view, this 
change would improve the readability of the policy by clarifying that 
the basis risk initial margin component is part of the back-tested 
initial margin components. This amendment would not change current 
practices.
    The section regarding the full period back-testing results setting 
out the manner in which the back-tested component of initial margin and 
the profit and loss results for every back-tested day are reported for 
each Clearing Member for daily portfolio back-testing would be removed 
as the reporting requirements have been consolidated into a different 
section of the policy.
    The amendments would make certain changes to the Basel Traffic 
Light System exceedance summaries. Pursuant to the amendments, back-
testing results of the production model for each Clearing Member's 
account, special-strategy back-testing results of the production model 
and back-testing results of the MC model for each Clearing Member's 
account would be reported at least monthly to align the frequency of 
the reporting to the relevant regulatory requirement under Commission 
Rule 17Ad-22(b)(2).\5\
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    \5\ Such change would not preclude ICE Clear Europe from sharing 
relevant reports with regulators more frequently as under current 
practice.
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    Various other changes would also be made to correct typographical 
and similar errors and to clarify use of certain defined terms and 
references. Certain outdated references to testing quantiles of 99% and 
99.25% would be removed, as they are lower than the minimum 99.5% 
quantile prescribed by the European Market Infrastructure Regulation 
(EMIR) for over the counter (OTC) contracts.
(b) Statutory Basis
    ICE Clear Europe believes that the changes described herein are 
consistent with the requirements of Section 17A of the Act \6\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \7\ in particular requires, among other things, that the rules of 
the 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 in the custody or 
control of the clearing agency or for which it is responsible and the 
protection of investors, and, in general, protect investors and the 
public interest. The proposed amendments are designed to modify the 
Back-Testing Policy to clarify certain risk management practices for 
CDS Contracts including back-testing strategies, the application of the 
Monte Carlo method, and the frequency of back-testing and reporting of 
results. The amendments would also adopt various enhancements to the 
review and governance processes for those policies. In ICE Clear 
Europe's view, the amendments will not result in a significant change 
in its back-testing practices, but will improve the accuracy and 
clarity of the Back-Testing Policy. As such, the amendments are 
consistent with the continued overall risk management of the Clearing 
House, and with the prompt and accurate clearance of transactions and 
the public interest in sound operation of clearing agencies, within the 
meaning of Section 17A(b)(3)(F).\8\ As the amendments would enhance the 
Back-Testing Policy as its relates to Clearing House margin models, the 
amendments would also be consistent with requirements relating to 
safeguarding of funds and securities in the custody or control of the 
Clearing House or for which it is responsible, within the meaning of 
that section. Accordingly, the amendments satisfy the requirements of 
Section 17A(b)(3)(F).\9\
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    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    ICE Clear Europe also believes that the amendments for similar 
reasons are consistent with specific requirements of Rule 17Ad-22.\10\ 
Through providing additional details and examples and enhancing overall 
clarity of the Back-Testing Policy, the amendments are consistent with 
Rule 17Ad-22(e)(3)(i),\11\ which requires clearing agencies to have 
reasonably designed policies and procedures that, at a minimum, include 
risk management policies, procedures, and systems designed to identify, 
measure, monitor, and manage the range of risks that arise in or are 
borne by a clearing agency.
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    \10\ 17 CFR 240.17Ad-22.
    \11\ 17 CFR 240.17 Ad-22(e)(3)(i). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (3) Maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, 
general business, investment, custody, and other risks that arise in 
or are borne by the covered clearing agency, which:
    (i) Includes risk management policies, procedures, and systems 
designed to identify, measure, monitor, and manage the range of 
risks that arise in or are borne by the covered clearing agency, 
that are subject to review on a specified periodic basis and 
approved by the board of directors annually''.
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    Rule 17Ad-22(e)(6)(vi)(A) \12\ specifically requires clearing 
agencies to implement reasonably designed policies and procedures to 
conduct back-testing of their margin model at least once each day using 
standard predetermined parameters and assumptions. In compliance with 
these requirements, proposed amendments to the Back-Testing Policy 
specify that ICE Clear Europe must perform daily portfolio-level back-
testing analysis at a 99.5% quantile based on the individual Clearing 
Member accounts as of the back-testing date. Back-testing results would 
also reviewed on a daily basis by the Clearing Risk Department.
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    \12\ 17 CFR 240.17Ad-22(e)(6)(vi)(A). The rule states that 
``[e]ach covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable:
    (6) Cover, if the covered clearing agency provides central 
counterparty services, its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum:
    (vi) Is monitored by management on an ongoing basis and is 
regularly reviewed, tested, and verified by:
    A. Conducting backtests of its margin model at least once each 
day using standard predetermined parameters and assumptions''.
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    Pursuant to Rule 17Ad-22(e)(6)(vi)(B) \13\ a clearing agency must 
have policies and procedures reasonably designed to review its 
parameters and assumptions for back-testing its margin model on at 
least a monthly basis. The proposed amendments to the Back-Testing 
Policy, as discussed above, are consistent with these requirements, as 
they provide that reviews of the back-test results must be reported to 
the Model Oversight Committee and CDS Risk Committee on a monthly 
basis. As a result, ICE Clear Europe believes that these amendments to 
the Back-Testing Policy are in compliance with Rule 17Ad-
22(e)(6)(vi)(B).\14\
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    \13\ 17 CFR 240.17Ad-22(e)(6)(vi)(B). The rule states that 
``[e]ach covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable:
    (6) Cover, if the covered clearing agency provides central 
counterparty services, its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum:
    (vi) Is monitored by management on an ongoing basis and is 
regularly reviewed, tested, and verified by:
    B. Conducting a sensitivity analysis of its margin model and a 
review of its parameters and assumptions for backtesting on at least 
a monthly basis, and considering modifications to ensure the 
backtesting practices are appropriate for determining the adequacy 
of the covered clearing agency's margin resources''.
    \14\ 17 CFR 240.17Ad-22(e)(6)(vi)(B).
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    Rule 17Ad-22(e)(2) \15\ requires clearing agencies to establish 
reasonably

[[Page 46575]]

designed policies and procedures to provide for governance arrangements 
that are clear and transparent and specify clear and direct lines of 
responsibility. To facilitate compliance with this requirement, the 
proposed amendments to the Back-Testing Policy more clearly define the 
roles and responsibilities of the CDS Risk Committee and Model 
Oversight Committee to receive back-testing results.
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    \15\ 17 CFR 240.17 Ad-22(e)(2). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (2) Provide for governance arrangements that:
    (i) Are clear and transparent;
    (ii) Clearly prioritize the safety and efficiency of the covered 
clearing agency;
    (iii) Support the public interest requirements in Section 17A of 
the Act (15 U.S.C. 78q-1) applicable to clearing agencies, and the 
objectives of owners and participants;
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities;
    (v) Specify clear and direct lines of responsibility; and
    (vi) Consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of 
the covered clearing agency.''
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The amendments to 
the Back-Testing Policy apply to all CDS Contracts and are intended to 
strengthen risk management relating to these products. ICE Clear Europe 
does not believe the amendments will have any direct effect on Clearing 
Members, other market participants or the market for cleared products 
generally. As a result, ICE Clear Europe does not believe the 
amendments will materially affect the cost of, or access to, clearing. 
To the extent the amendments may have any impact on margin levels, ICE 
Clear Europe believes such changes will be appropriate in furtherance 
of the risk management of the Clearing House. Therefore, ICE Clear 
Europe does not believe the proposed rule changes impose 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 amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any written comments received with respect to the 
proposed rule change.

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 the 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-ICEEU-2019-017 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICEEU-2019-017. 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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/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-ICEEU-2019-017 and should be 
submitted on or before September 25, 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. 2019-18997 Filed 9-3-19; 8:45 am]
 BILLING CODE 8011-01-P