[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
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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
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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