[Federal Register Volume 85, Number 166 (Wednesday, August 26, 2020)]
[Notices]
[Pages 52650-52654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18684]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89621; File No. SR-ICEEU-2020-008]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change Relating
to Amendments to the ICE Clear Europe Futures and Options Stress
Testing Policy and the Adoption of the Futures and Options Stress
Testing Methodology Document
August 20, 2020.
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 6, 2020, 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 prepared by ICE Clear
Europe. ICE Clear Europe filed the proposed rule change pursuant to
Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(4)(ii)
thereunder,\4\ so that the proposal was immediately effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The principal purpose of the proposed amendments is for ICE Clear
Europe to modify its Futures and Options Stress Testing Policy (the
``F&O Stress Testing Policy'' or ``Policy'') to update its F&O market
stress scenarios to ensure all relevant products are covered and to
make certain other updates and clarifications to be consistent with
other ICE Clear Europe policies. In furtherance of these changes, ICE
Clear Europe also proposes to adopt a Futures and Options Stress
Testing Methodology Document (``F&O Stress Testing Methodology
Document'') which describes ICE Clear Europe's methodology for
systematically applying the F&O Stress Testing Policy in situations
where the required historical price data is not available. The
revisions to the F&O Stress Testing Policy and the adoption of the F&O
Stress Testing Methodology Document do not involve any changes to the
ICE Clear Europe Clearing Rules or Procedures.\5\
---------------------------------------------------------------------------
\5\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules.
---------------------------------------------------------------------------
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 amend its F&O Stress Testing
Policy as follows: (i) With respect to historical stress-testing
scenarios, to update the methodology to include additional product
groups, benchmark contracts and default shock values, in order to
ensure that every cleared instrument is covered in the historical
scenarios; (ii) with respect to theoretical stress-testing scenarios,
to improve scenario implementations to ensure appropriate coverage of
all relevant instruments; (iii) to update provisions relating to policy
reviews and breach management; and (iv) to make various drafting
clarifications and improvements. ICE Clear Europe is also proposing to
adopt an F&O Stress Testing Methodology Document which would provide
further detail with respect to the methodology applied to the stress-
testing scenarios, particularly the historical stress-testing
scenarios.
I. F&O Stress Testing Policy
General Drafting Clarifications and Improvements
By way of general drafting clarification and improvements, the
amendments to the F&O Stress Testing Policy would remove the background
description of the board risk appetite and the limit appetite as these
are addressed in other ICE Clear Europe documentation. Certain
terminology would be updated throughout the F&O Stress Testing Policy:
Original Margin would be updated to Initial Margin. Reference to the
F&O Risk Committee would be updated to the F&O Product Risk Committee.
Product Groups would
[[Page 52651]]
be referred to as Stress Groups. References to certain specific EMIR
standards and provisions would be removed and the appendices relating
to the existing stress testing methodology would be removed (as
relevant detail would be instead contained in the F&O Stress Testing
Methodology Document).
Stress Testing and Guaranty Fund
The overall description of the method of testing the size of the
Guaranty Fund would be simplified and clarified to state that stress
tests are designed to cover the worst price moves over the last 30
years (historical scenarios) and extreme, but as yet unobserved price
moves based on potential future events or market moves to a confidence
level of 99.9% (theoretical scenarios). A clarification would be added
that historical scenarios that are more than 30 years old can only be
decommissioned following the standard governance provisions for removal
of any scenario. The description of the utilization of the Guaranty
Fund would be removed as unnecessary for purposes of this policy. In
addition, a diagram illustrating the existing stress testing
methodology would be deleted as unnecessary.
The calculation principles relating to stress testing would be
amended as described below. Amendments would clarify that historical
stress shocks would be calibrated using the official settlement prices
history from ICE as well as external market sources. If such market
data does not exist, then ICE Clear Europe would calculate shocks using
the waterfall proxy methodology which is described in the F&O Stress
Testing Methodology Document. The amendments would delete the statement
that option pricing model calculations would assume theta decay over
the holding period (as unnecessarily specific for purposes of the
Policy).
The amendments would further clarify that stress scenarios would
use risk factor moves over stress periods of risk (``SPOR'') that take
into account the time horizon for the relevant liquidation period
(rather than a one or two day period under the current policy). The F&O
Stress Testing Policy would note that where risk factor moves across
periods shorter than the liquidation period time horizon are more
extreme due to market reversion, it may be more conservative and
appropriate to apply a shorter SPOR. With respect to historical data,
the amendments would provide that where a risk factor does not have an
internal or external data, ICE Clear Europe would rely on proxy
mappings (which may vary depending on the scenario) to calibrate the
stress shocks for instruments where historical data is not available or
reliable. Such proxy mappings are proposed by the Clearing House's
Credit Risk Department and require approval from the Clearing House's
Model Oversight Committee. The proxy mappings would be addressed in
further detail in the F&O Stress Testing Methodology Document. The
amendments would also supplement the table of risk factors to address
certain limitations of expiry-specific scenarios.
With respect to Stress Groups (formerly referred to as Product
Groups), the criteria for choosing such groups and their constituents
would be expanded to include the fundamental relationships between
products.
Stress Scenarios
Pursuant to the proposed amendments, the definition of the two
broad categories of historical scenarios would be clarified: (i)
Historical Type A, which would replicate as accurately as possible the
historical event; and (ii) Historical Type B which would reflect the
intention of the historical stress events, but adjust the market
movements either to make them plausible under current market
conditions, better capture the stress period moves across different
asset classes, or more appropriately reflect the existing risk factor
exposures of the Clearing House. The description of historical stress
scenarios would be amended to move certain additional scenarios
regarding the energy segment and certain assumptions used to examine
potential losses from significant changes in correlation relationships
from the Policy to the F&O Stress Testing Methodology Document. The
amended Policy would also remove certain general discussions of the use
of proxies for particular markets, such as single stock equity futures
products; proxy methodology would instead be discussed in the F&O
Stress Testing Methodology Document.
With respect to theoretical scenarios, ICE Clear Europe proposes to
clarify that scenario implementations include a variety of approaches
to create extreme but plausible scenarios that are not contained within
the set of historical scenarios and which may utilize expert judgement
in their construction. Theoretical scenarios may also include
narrative-driven macro or idiosyncratic scenarios driven by broad
macroeconomic or specific technical events. Regulatory-driven scenarios
from prior supervisory stress testing exercises can also be included.
The revised policy would remove a further definition of some
theoretical scenarios as ``hypothetical'' (such that all scenarios
would be categorized as either historical or theoretical). The
amendments would provide that theoretical scenarios can be targeted and
only shock certain instruments relevant to the design of the scenario
(rather than all contracts).
The provisions related to reverse stress testing would be revised
to remove statements that reverse stress scenarios are generated on a
daily basis and that the Clearing House runs daily reverse stress test
reports. Under the revised Policy, reverse stress testing results would
be presented to the F&O Product Risk Committee every other month,
rather than monthly. ICE Clear Europe nonetheless believes the revised
approach provides for sufficient reverse stress testing and internal
review of the results of such testing, consistent with relevant
regulatory requirements.
The amendments would add a new section stating that the
uncollateralized stress-testing losses would be compared to the segment
of the Guaranty Fund that is relevant to that particular stress
scenario. A scenario can be defined against the whole F&O Guaranty Fund
or a particular segment (e.g., energy or financials and softs).
Governance
ICE Clear Europe is also proposing to amend the F&O Stress Testing
Policy to reflect changes to the Clearing House's document governance
and exception handling, specifically to provide that (i) the document
owner is responsible for ensuring that documents remain up-to-date and
are reviewed in accordance with the Clearing House's governance
processes, (ii) the document owner (as maintained in other relevant ICE
Clear Europe internal policies) will report material breaches or
unapproved deviations from the F&O Stress Testing Policy to their Head
of Department, the Chief Risk Officer and the Head of Compliance (or
their delegates) who will determine if further escalation will be made,
and (iii) exceptions to the F&O Stress Testing Policy would be approved
in accordance with the Clearing House's governance process for the
approval of changes to such document.
II. F&O Stress Testing Methodology Document
ICE Clear Europe is proposing to adopt the F&O Stress Testing
Methodology Document in order to comprehensively describe ICE Clear
Europe's methodology for applying the F&O Stress Testing Policy in
situations where the required historical price data is not available,
typically because the
[[Page 52652]]
products that exist currently did not exist on those historical dates
and therefore do not have historical price data for those dates. This
approach will permit the extension of historical stress testing
scenarios to all products.
The F&O Stress Testing Methodology Document would provide an
overview of the stress testing approach, consistent with the F&O Stress
Testing Policy, and include descriptions of the historical and
theoretical stress scenarios. The methodology document would provide
that ICE Clear Europe ensures product coverage for historical scenarios
under the following approach:
(i) Where input returns for a futures product or implied volatility
for an options product are not available in a scenario, by using the
same stress shock as the proxy benchmark such scenario has been mapped
to;
(ii) where the proxy benchmark does not have an input return in a
scenario, by using the input return from that benchmark's proxy
benchmark and such proxy process is repeated through the proxy
waterfall until a benchmark with an input return is found;
(iii) if, at the end of the proxy waterfall, the benchmark has no
input returns to use, by using a default value for the return which is
derived from the long term expected value of historical returns of the
benchmark product (this default value would then be used for all
products that ultimately proxy to that benchmark in that scenario); and
(iv) where a default value is used in a historical scenario,
running two variants of such scenario, one in which all the default
prices are assumed to move up and the other all down, and in both, ICE
Clear Europe would assume the default values of option volatility to
move up given the lack of correlations between the stress groups.
Default values would be recalibrated on at least an annual basis.
The F&O Stress Testing Methodology Document would describe in
further detail the proxy waterfall methodology referenced in the F&O
Stress Testing Policy. The methodology would describe the techniques
used to create price and volatility shocks for historical scenarios in
situations where there is no reliable data for that price or volatility
shock in the relevant historical period. The waterfall would be based
on a series of proxy relationships based on proximity to the relevant
products. For any product that does not have historical data required
to define its shock under the given base scenario, the relevant proxy
would be used instead. Should that proxy not have data, the proxy's
proxy would be used, in recursive fashion, until reaching the terminal
benchmarks. If there is no data available for the terminal benchmarks,
a default value shock would be used. The methodology document would set
out calculation of the risk returns used to stress test particular
instruments, based on the SPOR, the relevant maturity and a series of
price data. The document also sets out the default value calculation
and explains the application of the shock for all products under each
scenario using the proxy waterfall.
The F&O Stress Testing Methodology Document would identify certain
assumptions and limitations that ICE Clear Europe has identified with
respect to the proxy waterfall mechanism and default values.
The F&O Stress Methodology Document would also describe the
governance and oversight responsibilities relating to the Policy and
stress scenarios of each of the Board, the Client Risk Committee and
the Model Oversight Committee. All changes to the Policy and the
overall framework and methodology are subject to the approval of the
Board, as are significant changes to the design, scope or definition of
scenarios and the decommissioning of scenarios. The methodology
document also addresses procedures for periodic ``business as usual''
recalibration of parameters for existing scenarios, and further
provides that scenario recalibration will be done quarterly rather than
semi-annually, but that default shocks which are predicated on average
value over the long history would be subject to less frequent
calibration
Finally, the appendices to the F&O Stress Testing Methodology
Document would include: (i) A list of the sources of data that ICE
Clear Europe inputs into the stress testing methodology; (ii) a list of
the Stress Groups used in the Policy and the methodology document;
(iii) a list of the terminal benchmark products applied at the end of
the proxy waterfall; (iv) the detailed proxy waterfall algorithm; and
(v) a worked example of the Clearing House's historical scenario
coverage process.
ICE Clear Europe has evaluated the overall impact of the amended
Policy and new framework documentation on its financial resources. ICE
Clear Europe does not believe that the amendments would have a material
impact on its total pre-funded resources or Guaranty Fund size. On
average, ICE Clear Europe expects a non-material decrease in total pre-
funded resources, largely due to the expanded product coverage covering
certain risk reducing trades that may not have been covered previously.
On average, ICE Clear Europe expects that a small number of F&O
Clearing Members may experience an increase in their Guaranty Fund
requirements; although most would see a non-material decrease in
requirements, on average.
(b) Statutory Basis
ICE Clear Europe believes that the proposed amendments to the F&O
Stress Testing Policy and the adoption of the F&O Stress Testing
Methodology Document are consistent with the requirements of Section
17A of the Act \6\ and the regulations thereunder applicable to it. In
particular, Section 17A(b)(3)(F) of the Act \7\ 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, 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 the public interest.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78q-1.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The proposed changes to the F&O Stress Testing Policy and the
adoption of the F&O Stress Testing Methodology Document are designed to
strengthen the ICE Clear Europe's stress testing methodology by
updating the market stress scenarios to ensure that all of the relevant
products are covered in each stress scenario. Specifically, the
amendments would (i) update the stress shock calibration to include
additional product groups for historical scenarios, (ii) improve
scenario implementations for theoretical scenarios and (iii)
systematically set out ICE Clear Europe's methodology for applying
historical stress testing in situations where historical price data is
not available. The clarification and other changes to the F&O Stress
Testing Policy also enhance readability and ensure that the F&O Stress
Testing Policy remains clear and up-to-date. ICE Clear Europe believes
that the Policy as so amended and the adoption of the F&O Stress
Testing Methodology Document will help ICE Clear Europe ensure that it
maintains adequate financial resources to support its F&O clearing
operations, enhance the stability of the Clearing House and thereby
promote the prompt and accurate clearance and settlement of securities
transactions and, derivative agreements, contracts, and transactions,
the safeguarding of securities and funds in ICE Clear Europe's custody
or control or for which ICE Clear Europe is responsible, and the public
interest in the sound operation of clearing
[[Page 52653]]
agencies. Accordingly, the amendments satisfy the requirements of
Section 17A(b)(3)(F).\8\
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In addition, ICE Clear Europe believes that the proposed revisions
to the F&O Stress Testing Policy and the adoption of the F&O Stress
Testing Methodology Document are consistent with the relevant
requirements of Rule 17Ad-22.\9\ Rule 17Ad-22(e)(4)(vi) \10\ requires
ICE Clear Europe to identify, measure, monitor and manage its credit
exposures to participants and those arising from its payment, clearing,
and settlement processes, including by testing the sufficiency of its
total financial resources available to meet the minimum financial
resource requirements, including by conducting a comprehensive analysis
of stress testing scenarios, models and underlying parameters and
assumptions. The proposed changes to ICE Clear Europe's stress testing
methodology amend the market stress scenarios to ensure that all of the
relevant products are covered in each stress scenario, through
including additional product groups for historical scenarios and
improving scenario implementations for theoretical scenarios. Although
adjustments are not expected to have an immediate material impact on
required financial resources, ICE Clear Europe believes that the
amendments will better calibrate its financial resource requirements to
the particular risks of cleared positions and better adapt to evolving
market conditions. The proposed revisions also improve the Clearing
House's stress testing framework by providing a backup methodology for
use of historical scenarios where market data is unavailable,
increasing the coverage of its stress testing. Taken together the
amendments further ensure that ICE Clearing House identifies, measures,
monitors and manages its credit exposures, consistent with the
requirements of Rule 17Ad-22(e)(4)(vi).\11\
---------------------------------------------------------------------------
\9\ 17 CFR 240.17Ad-22.
\10\ 17 CFR 240.17Ad-22(e)(4)(vi).
\11\ 17 CFR 240.17Ad-22(e)(4)(vi).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(3)(i) \12\ requires clearing agencies to maintain a
sound risk management framework that identifies, measures, monitors and
manages the range of risks that it faces. The amendments to the F&O
Stress Testing Policy and the adoption of the F&O Stress Testing
Methodology Document are intended to better calibrate financial
resources held by ICE Clear Europe to the risks faced by the Clearing
House through improvements to the stress testing methodology. In ICE
Clear Europe's view, the amendments are therefore consistent with the
requirements of Rule 17Ad-22(e)(3)(i).\13\
---------------------------------------------------------------------------
\12\ 17 CFR 240.17 Ad-22(e)(3)(i).
\13\ 17 CFR 240.17 Ad-22(e)(3)(i).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(2) \14\ requires clearing agencies to establish
reasonably designed policies and procedures to provide for governance
arrangements that are clear and transparent and specify clear and
direct lines of responsibility. The proposed amendments to the F&O
Stress Testing Policy more clearly define the roles and
responsibilities of the document owner, the Head of Department, the
senior members of the Risk Oversight Department and the senior members
of the Compliance Department. The proposed F&O Stress Testing
Methodology Document describes the governance and oversight role of
each of the Board, the Client Risk Committee and the Model Oversight
Committee with respect to the F&O Stress Testing Policy and stress
scenarios thereto. ICE Clear Europe believes that the amendments to the
F&O Stress Testing Policy and the adoption of the F&O Stress Testing
Methodology Document are therefore consistent with the requirements of
Rule 17Ad-22(e)(2).\15\
---------------------------------------------------------------------------
\14\ 17 CFR 240.17 Ad-22(e)(2).
\15\ 17 CFR 240.17 Ad-22(e)(2).
---------------------------------------------------------------------------
(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The amendments
are being adopted to further strengthen ICE Clear Europe F&O stress
testing methodology and would apply to all F&O Clearing Members. The
proposed amendments are not expected to materially change F&O Guaranty
Fund Contribution requirements for F&O Clearing Members (on average, it
is expected that most Clearing Members would see a non-material
decrease in requirements; while a few Clearing Members may see a non-
material increase). Although the change could thus modestly increase
the costs of clearing for certain Clearing Members, ICE Clear Europe
believes any such additional cost is appropriately tailored to the
risks relating to the products being cleared by those Clearing Members,
as illustrated through the revised stress testing policy. ICE Clear
Europe does not otherwise believe the amendments would affect the costs
of clearing, the ability to market participants to access clearing, or
the market for clearing services generally. Therefore, ICE Clear Europe
does not believe the proposed rule change imposes 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
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \16\ and paragraph (f) of Rule 19b-4 \17\
thereunder. At any time within 60 days of the filing of the proposed
rule change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------
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 rule-comments@sec.gov. Please include
File Number SR-ICEEU-2020-008 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-2020-008. 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/
[[Page 52654]]
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/notices/Notices.shtml?regulatoryFilings. 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-2020-008 and should be submitted
on or before September 16, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\18\
---------------------------------------------------------------------------
\18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18684 Filed 8-25-20; 8:45 am]
BILLING CODE 8011-01-P