[Federal Register Volume 84, Number 206 (Thursday, October 24, 2019)]
[Notices]
[Pages 57100-57102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-23157]



[[Page 57100]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87360 ; File No. SR-ICEEU-2019-017]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change, as Modified by Partial Amendment No. 1, 
Relating to Amendments to the ICE Clear Europe CDS Clearing Back-
Testing Policy

October 18, 2019.

I. Introduction

    On August 19, 2019, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
revise its CDS Clearing Back-Testing Policy (``Back-Testing Policy''). 
On August 27, 2019, ICE Clear Europe filed Partial Amendment No. 1 to 
the proposed rule change.\3\ The proposed rule change was published for 
comment in the Federal Register on September 4, 2019.\4\ The Commission 
did not receive comments on the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change, 
as modified by Partial Amendment No. 1 (hereafter referred to as the 
``proposed rule change'').
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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.
    \4\ Securities Exchange Act Release No. 34-86782 (August 28, 
2019), 84 FR 46573 (September 4, 2019) (SR-ICEEU-2019-017) 
(``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would amend the Back-Testing Policy to 
update the description of ICE Clear Europe's back-testing process, 
including the level at which ICE Clear Europe performs back-testing, 
and the back-testing of ICE Clear Europe's special strategy portfolios 
and Monte Carlo (``MC'') model.\5\ The proposed rule change would also 
update the reporting requirements of back-testing results, including 
the frequency of reporting of exceedance summaries. Finally, the 
proposed rule change would make technical corrections and updates to 
the Back-Testing Policy.
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    \5\ This description is substantially excerpted from the Notice, 
84 FR at 46573. Capitalized terms not otherwise defined have the 
meanings assigned to them in the Back-Testing Policy or ICE Clear 
Europe rulebook.
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A. Back-Testing Process

    The proposed rule change would amend the Back-Testing Policy to 
state that ICE Clear Europe performs back-testing at the Clearing 
Member account level, rather than at the portfolio level, on a daily 
basis. The proposed rule change would move the section on Detailed 
Daily Portfolio Back-Testing Results from section 3.4 into a new 
section numbered 3.1 and update the description in that section to 
reflect back-testing at the Clearing Member account level. This 
proposed change is intended to make the description of ICE Clear 
Europe's back-testing more precise and consistent with ICE Clear 
Europe's current practice.
    The proposed rule change would also update the description of ICE 
Clear Europe's performance of back-testing using special strategy 
portfolios. As explained in the Back-Testing Policy, ICE Clear Europe 
performs daily back-testing for the model using a specific set of 
special strategy portfolios at 99.5% and 99.75% quantiles. The proposed 
rule change would add to this set of special strategy portfolios an 
additional strategy, iTraxx Senior Financial 5Y.OTR Arb. This new 
strategy would be constructed in the same manner as the existing 
strategies but would relate only to the iTraxx Senior Financials 5Y 
index. Because ICE Clear Europe regularly back tests using this 
strategy, ICE Clear Europe is adding this strategy to the Back-Testing 
Policy to reflect its current practice.
    The proposed rule change would also amend the description of the 
other special strategies to better reflect ICE Clear Europe's practices 
in employing the special strategies. For example, the proposed rule 
change would update the names of the special strategies; change the use 
of the terms ``short'' and ``long'' to ``bought'' and ``sold''; and 
specify that, for the sake of completeness, ICE Clear Europe also 
considers the opposite strategy when back-testing a special strategy 
(e.g., for one sold protection position in the on-the-run iTraxx Europe 
Main 5Y index, the opposite strategy would be one bought protection 
position in each of the single name constituents of the index, weighted 
by notional).
    The proposed rule change would amend the description of the back-
testing of ICE Clear Europe's MC model to make a number of 
clarifications. This amendment is intended only 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. First, the proposed rule change would clarify that back-tests 
are performed daily on the Spread Response component of the Initial 
Margin using ICE Clear Europe's MC model and is specific to that model, 
rather than the combined Spread Response approach which uses the worst 
loss estimated between either the scenario-based approach or the Monte 
Carlo approach. Second, the proposed rule change would clarify that ICE 
Clear Europe performs the MC back-test on individual Clearing Member 
accounts using the risk approach for the Spread Response Initial 
Margin, rather than at the portfolio level. As part of this change, the 
proposed rule change would remove specific references to the risk 
quantiles. Third, the proposed rule change would clarify that the back-
tested risk measure includes the sum of the following quantities: MC 
value-at-risk, interest rate, recovery rate, and basis risk. The 
current Back-Testing Policy does not include a specific reference to 
``basis risk'', but rather to the ``portfolio'' quantity. This would 
clarify that the basis risk initial margin component is part of the 
back-tested initial margin components. Fourth, the proposed rule change 
would remove an unnecessary distinction depending on whether the 
indices are decomposed, which is not applicable using the MC approach. 
In ICE Clear Europe's view, these changes would improve the readability 
of the policy and better reflect current ICE Clear Europe practices, 
but would not alter such practices.
    ICE Clear Europe represents that these changes, as a whole, clarify 
that, with respect to MC back-testing, ICE Clear Europe is back-testing 
only the MC model and not the stress-based model.

B. Reporting

    With respect to reporting of back-testing results, the proposed 
rule change would require that the Clearing Risk department report the 
CDS back testing results and analysis to the CDS Product Risk Committee 
and the Model Oversight Committee on a monthly basis. Currently, the 
Back-Testing Policy only requires reporting to the CDS Product Risk 
Committee (on a monthly basis). Similarly, the proposed rule change 
would require that the Clearing Risk department provide an exceedance 
summary to the CDS Product Risk Committee and the Model Oversight 
Committee monthly, while currently the Back-Testing Policy only 
requires that the Clearing Risk department provide an exceedance 
summary to the CDS

[[Page 57101]]

Product Risk Committee. Finally, the proposed rule change would clarify 
that the Clearing Risk Department reviews back-testing results on a 
daily basis, consistent with current practice.
    With respect to the Basel Traffic Light System (``BTLS'') 
Exceedance Summaries, the proposed rule change would move the 
description of the exceedance summary from Section [**] into new 
Section 3.2, which is labeled Back-Testing the Production Model with 
Clearing Members Accounts. Additionally, in Section 3.5, the proposed 
rule change would clarify that BTLS Exceedance Summaries are provided 
for back-testing at the Clearing Member account level, as discussed 
above. The proposed rule change also would revise the frequency of 
reporting to state that, at least monthly, BTLS Exceedance Summaries 
are reported using the production model for each Clearing Member's 
account, special-strategies, and the MC model. Currently the CDS 
Clearing Back-Testing Policy specifies that BTLS Exceedance Summaries 
are reported [insert current frequency]. ICE Clear Europe represents 
that this would align the frequency of the reporting to the relevant 
regulatory requirement under Commission Rule 17Ad-22(b)(2).

C. Technical Amendments

    The proposed rule change would remove specific references to 
testing quantiles of 99% and 99.25%, because ICE Clear Europe no longer 
tests at those specific quantiles given that they are lower than the 
minimum 99.5% quantile used by ICE Clear Europe and prescribed by the 
European Market Infrastructure Regulation.
    Finally, the proposed rule change would correct typographical 
errors and update defined terms and references as needed.

III. 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.\6\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \7\ and Rules 17Ad-22(e)(2)(i) and (v), and (e)(6)(vi) 
thereunder.\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions, as well as to assure the safeguarding of securities and 
funds which are in the custody or control of ICE Clear Europe or for 
which it is responsible, and, in general, to protect investors and the 
public interest.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed in detail below, the Commission believes that the 
changes described above, taken as a whole, would help to improve ICE 
Clear Europe's back-testing, which in turn would help improve ICE Clear 
Europe's ability to avoid losses that could disrupt ICE Clear Europe's 
ability to promptly and accurately clear security based swap 
transactions, and therefore would help promote the prompt and accurate 
clearance and settlement of securities transactions.
    First, in providing that ICE Clear Europe conducts back-testing at 
the Clearing Member account level, rather than at the portfolio level, 
the Commission believes that the proposed rule change would help to 
improve ICE Clear Europe's back-testing by making the description of 
ICE Clear Europe's process more precise and ensuring that the 
description is consistent with ICE Clear Europe's current practice. 
Moreover, by adding a new special strategy portfolio for iTraxx Senior 
Financial 5Y.OTR Arb, the Commission believes that the proposed rule 
change would help ensure that ICE Clear Europe back-tests using this 
strategy, which could offer ICE Clear Europe additional insight and 
data by providing a new strategy to test. Similarly, the Commission 
believes that the proposed rule change, in amending the description of 
the other strategies to better reflect ICE Clear Europe's practices in 
employing the strategies, would help to ensure that ICE Clear Europe's 
back-testing of the special strategies is consistent with ICE Clear 
Europe's current practices and uniform among different back-tests. In 
making the changes described above to the MC back-testing, to clarify 
that ICE Clear Europe is back-testing only the MC model and not the 
stress based model, the Commission similarly believes that the proposed 
rule change would help to ensure that ICE Clear Europe's back-testing 
of the MC Model is consistent with ICE Clear Europe's current practices 
and uniform among different back-tests. Finally, in removing references 
to testing quantiles that ICE Clear Europe no longer employs, and 
correcting typographical errors and updating defined terms and 
references, the Commission believes that the proposed rule change would 
eliminate unnecessary terms and errors in the Back-Testing Policy which 
could lead to erroneous application of ICE Clear Europe's back-testing 
process. The Commission believes that all of these changes, taken as a 
whole, would help to improve the quality of ICE Clear Europe's back-
testing.
    Moreover, the Commission believes that the changes described above 
with respect to reporting of back-testing results would help improve 
ICE Clear Europe's use of the information generated by back-testing. 
Specifically, in requiring that the Clearing Risk department report 
back-testing results and an exceedance summary to the Model Oversight 
Committee, in addition to the Product Risk Committee, the Commission 
believes that the proposed rule change would help to ensure that the 
Model Oversight Committee has back-testing information which it could 
use to help improve ICE Clear Europe's margin model. Similarly, in 
requiring that the Clearing Risk Department review back-testing results 
on a daily basis, the Commission believes that the proposed rule change 
would help to ensure that any deficiencies or problems revealed by 
back-testing are taken into consideration without delay. Finally, in 
amending the reporting of the BTLS Exceedance Summaries, the Commission 
believes that the proposed rule change would help to provide a better 
representation of the results of back-testing against the BTLS.
    Finally, because back-testing can help reveal inadequacies in ICE 
Clear Europe's margin requirements and the models that support those 
requirements, the Commission believes that the proposed rule change 
would help to ensure that ICE Clear Europe maintains effective margin 
requirements. Given that an effective margin system is necessary to 
manage ICE Clear Europe's credit exposures to its Clearing Members and 
the risks associated with clearing security based swap-related 
portfolios, the Commission believes that the proposed rule change would 
help improve ICE Clear Europe's ability to avoid losses that could 
result from the mismanagement of such credit exposures and risks. 
Because such losses could disrupt ICE Clear Europe's ability to 
promptly and accurately clear

[[Page 57102]]

security based swap transactions, by making the above-described 
improvements to ICE Clear Europe's back-testing, the Commission 
believes that the proposed rule change would help promote the prompt 
and accurate clearance and settlement of securities transactions. 
Similarly, given that such losses could threaten ICE Clear Europe's 
access to securities and funds in ICE Clear Europe's control, by making 
the above-described improvements to ICE Clear Europe's back-testing, 
the Commission believes that the proposed rule change would help assure 
the safeguarding of securities and funds which are in the custody or 
control of ICE Clear Europe or for which it is responsible. Finally, 
for both of these reasons, the Commission believes the proposed rule 
change is consistent with protecting investors and the public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in ICE 
Clear Europe's custody and control, and, in general, protect investors 
and the public interest, consistent with the Section 17A(b)(3)(F) of 
the Act.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i) and (v)

    Rules 17Ad-22(e)(2)(i) and (v) require that ICE Clear Europe 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to provide for governance arrangements 
that are clear and transparent and specify clear and direct lines of 
responsibility.\11\
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    \11\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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    As discussed above, the proposed rule change would revise the Back-
Testing Policy by requiring that that the Clearing Risk department 
report the CDS back-testing results and analysis and provide an 
exceedance summary to the Model Oversight Committee as well as to the 
CDS Product Risk Committee. The Commission believes that this change 
would improve the transparency of ICE Clear Europe's governance 
arrangements by clarifying the role played by the Model Oversight 
Committee in reviewing the results of back-testing. Similarly, in 
requiring that the Clearing Risk Department review back-testing results 
on a daily basis, the Commission believes that the proposed rule change 
would help clearly define the responsibility of the Clearing Risk 
Department in reviewing the results of back-testing.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rules 17Ad-22(e)(2)(i) and 
(v).\12\
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    \12\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(vi)

    Rule 17Ad-22(e)(6)(vi) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum is 
monitored by management on an ongoing basis and is regularly reviewed, 
tested, and verified by, among other things, conducting back-tests of 
its margin model at least once each day using standard predetermined 
parameters and assumptions.\13\
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    \13\ 17 CFR 240.17Ad-22(e)(6)(vi).
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    As discussed above, the proposed rule change would amend the Back-
Testing Policy to state that ICE Clear Europe performs back-testing at 
the Clearing Member account level on a daily basis. The proposed rule 
change also would require that the Clearing Risk Department review 
back-testing results on a daily basis. The Commission believes that 
both of these changes would to ensure that ICE Clear Europe conducts 
back-testing at least once each day.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(e)(6)(vi).\14\
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    \14\ Id.
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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(e)(2)(i) and (v), and (e)(6)(vi) 
thereunder.\16\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\17\ that the proposed rule change (SR-ICEEU-2019-017) 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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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-23157 Filed 10-23-19; 8:45 am]
BILLING CODE 8011-01-P