[Federal Register Volume 87, Number 107 (Friday, June 3, 2022)]
[Notices]
[Pages 33851-33854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11877]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95002; File No. SR-ICC-2022-006]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to the ICC Model Validation 
Framework

May 27, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on May 17, 2022, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (the ``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been prepared primarily by ICC. The Commission is publishing this 
notice to solicit comments on 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.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to revise the 
ICC Model Validation Framework (the ``Model Validation Framework'' or 
``Framework''). These revisions do not require any changes to the ICC 
Clearing Rules (the ``Rules'').

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

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. ICC has prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of these statements.

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

(a) Purpose
    ICC proposes revisions to the Model Validation Framework, which 
provides assurances that ICC models are performing as expected. The 
proposed amendments include clarifications on the scope and 
applicability of the Framework, responsibilities of relevant 
stakeholders, and other validation elements. Additional proposed 
changes reorganize certain portions of the Framework and make language 
clarifications to promote readability. ICC believes the proposed 
changes will facilitate the prompt and accurate clearance and 
settlement of securities transactions and derivative agreements, 
contracts, and transactions for which it is responsible. ICC proposes 
to make such changes following Commission approval of the proposed rule 
change. The proposed rule change is described in detail as follows.
    ICC proposes amendments to Section 1 containing the introduction. 
To introduce the purpose of the Framework more clearly, ICC proposes to 
begin the document with an overview in Subsection 1.1. The revision 
history of the Framework would be moved to the end of the document. 
Proposed new language in Subsection 1.1 describes ICC's clearing 
approach that utilizes various models as part of its risk processes. 
For clarity, the definition of a model and the purpose of validation is 
included. Relevant language from current Subsection 1.1 is accordingly 
moved to Subsection 1.2 and certain other language is removed as 
described below.
    Amended Subsection 1.2 applies the Framework to clearing house 
models, rather than risk management system models. ICC proposes these 
revisions to expand the scope of the Framework. The current language 
directly applies the Framework to ICC's risk management system models 
(i.e., those relating to financial resources and liquidity resources). 
The proposed revisions clarify that the Framework applies to all ICC 
models, which would include an additional model relating to 
counterparty credit. Accordingly, the changes frame the components that 
make up a model (``model components'') in terms of ICC's models rather 
than its risk management system. Information in current Subsection 1.1 
regarding risk drivers would be removed to avoid confusion as it is 
specific to risk management system models and not relevant elsewhere in 
the document. Detailed information regarding risk

[[Page 33852]]

drivers and ICC's risk management system is more appropriate in ICC's 
risk policies. ICC would continue to distinguish between new, enhanced, 
and retired model components (collectively, ``model change''). 
References to the risk management system are replaced with references 
to models in Section 1 and throughout the document. ICC's Model 
Inventory, which lists ICC models, is introduced in this subsection 
instead of later in the document. Additional procedures are 
incorporated for consulting with the Risk Committee regarding adding, 
enhancing, or retiring models or model components.
    Amended Subsection 1.3 includes language from current Subsection 
2.2 pertaining to materiality classifications of model changes. The 
language remains mostly the same with a small update to spell out an 
abbreviated term. Such language is more fitting in the introductory 
section, as it provides the foundation of how ICC views model changes 
in terms of materiality.
    New Subsection 1.4 contains language from current Subsection 1.2 
with certain clarifications. Specifically, Subsection 1.4 applies the 
development process set out in the document to new model and model 
change development rather than just model change development. This is 
intended to be a clarification and would not change how ICC develops 
new models. The development process continues to include design, 
implementation, user-acceptance testing, and deployment phases.
    ICC also proposes revisions to Section 2 containing information on 
Framework oversight. The Risk Oversight Officer (``ROO'') continues to 
be responsible for the operation and maintenance of the Framework under 
Subsection 2.1. Since language from Subsection 2.2 is moved, the 
following subsections are renumbered accordingly. Amended Subsection 
2.2 details how a team of independent validators meets the criteria for 
independence and technical expertise. Minor changes pertaining to the 
ROO's responsibilities are also included. In Subsection 2.3, a 
redundant statement is removed and minor language clarifications are 
made. In Subsection 2.4, ICC would specify that the Model Inventory 
holds key information about all ICC models, model components, and model 
changes. The Model Inventory is maintained by the ROO, who would review 
it with the ICC Risk Department.
    ICC further proposes amending Section 3 describing the Framework 
controls. Subsection 3.1 takes language (including Figure 1) from 
current Subsection 1.3, which provides an overview of the Framework 
controls. This information is more appropriate in Section 3, which 
covers Framework controls. The following subsections are renumbered 
accordingly and continue to describe the same four controls.
    Revisions regarding initial validations are made in Subsection 3.2. 
Subsection 3.2.2 specifies that an independent initial validation is 
required for all new models. Updates to part (a) and throughout the 
subsection clarify that the validation may consider new models or model 
change. Proposed language in part (b) describes the validation report 
deliverable in more detail, noting certain information the report 
should include. This is not a new requirement and is intended to 
reflect and memorialize current and good practices to ensure reports 
are effective. Amended part (c) includes minor changes regarding the 
presentation of the report to the Risk Committee, including the role of 
the ROO and the presentation scope, which are not new requirements and 
are intended to reflect current practices.
    Minor updates are included in Subsection 3.3. ICC proposes to more 
generally refer to certain policies in Subsection 3.3.1 and to remove 
references to specific policies in Subsection 3.3.3. ICC considers such 
references unnecessary, as the Framework is not intended to introduce 
other policies. ICC also proposes a clarification in Subsection 3.3.3 
that it performs several types of outcome analyses comparing model 
results to corresponding actual or hypothetical outcomes (e.g., stress 
testing and back testing).
    ICC proposes amending Subsection 3.5 related to independent 
periodic reviews. ICC proposes to begin by referencing applicable 
regulations on its requirement to perform independent periodic reviews. 
Information on the Chief Risk Officer's responsibilities is moved to 
the end. ICC continues to ensure that not more than twelve months 
passes between each independent periodic review. Additional references 
to the twelve-month period are referred to generally as the review 
cycle. For models that are not subject to the annual requirement, 
proposed language directs the ROO, in consultation with the Risk 
Committee, to set an established periodicity for independent periodic 
review. Currently, the ROO as the individual responsible for the 
operation and maintenance of the Framework determines the appropriate 
periodicity of review for models, in consultation with the Risk 
Committee. Such language is intended to memorialize current practices 
and formalize the requirement in the Framework. In Subsection 3.5.1, 
ICC proposes updates to an independent periodic review component, 
including when it is not applicable, to ensure that ICC adequately 
addresses any open items. In Subsection 3.5.2, ICC proposes to describe 
the independent periodic review report deliverable in more detail, 
noting certain information the report should include, to reflect and 
memorialize current and good practices to ensure reports are effective. 
ICC also proposes minor changes regarding the presentation of the 
report to the Risk Committee, including the role of the ROO and the 
presentation scope, which are not new requirements and are intended to 
reflect current practices. Additional information regarding remediation 
of items in the reports is proposed, including required consultations 
with the Risk Committee on remedial actions and timelines. Such updates 
ensure that ICC remediates high priority items as soon as possible and 
considers any applicable governance or regulatory actions or technology 
implementations in timelines for remedial actions. Currently, ICC 
consults with the Risk Committee on remedial action timelines and 
closure of items. The proposed language is intended to memorialize 
current practices and formalize the requirement in the Framework. New 
Subsection 3.5.3 proposes procedures for ad hoc reviews of 
methodologies that are not considered models under the Framework. 
Finally, ICC proposes an appendix that clearly sets out the current ICC 
models.
(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \3\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\4\ In particular, Section 17A(b)(3)(F) of the Act \5\ 
requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible, and the protection of investors and the 
public interest.
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    \3\ 15 U.S.C. 78q-1.
    \4\ 17 CFR 240.17Ad-22.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change is generally designed to enhance, clarify, 
and more clearly document ICC's model validation processes and 
procedures.

[[Page 33853]]

The changes clarify that the Framework applies to all ICC models, which 
would expand the scope of the Framework. Additional stakeholder 
responsibilities are included pertaining to the ROO, Risk Department, 
and Risk Committee. Further information regarding validation elements 
is proposed, such as applicable regulations, remedial actions and 
timelines, and procedures for ad hoc reviews of methodologies. Proposed 
language specifies that ICC remediate high priority items as soon as 
possible and consider applicable governance or regulatory actions or 
technology implementations in remedial action timelines. These 
amendments would strengthen the Framework to ensure that it 
appropriately provide assurances that all ICC models are performing as 
expected and that ICC remediates report items in an appropriate and 
timely manner. The proposed revisions also provide clarity, reflect 
current practices, and formalize certain requirements in the 
documentation to ensure that the Framework remains up-to-date, 
transparent, and effective. Furthermore, other proposed changes promote 
readability and understanding, including beginning the document with an 
overview, reorganizing text to follow section headings more closely, 
and making minor language clarifications, and will promote the 
successful maintenance and operation of the Framework. ICC believes 
that the proposed rule change would facilitate and enhance its ability 
to carry out its model validation procedures and fulfill its model 
validation requirements in respect of the models utilized as part of 
ICC's risk processes and thus promote overall risk management and 
stability of ICC. Accordingly, in ICC's view, the proposed rule change 
is consistent with the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions, the safeguarding of securities and funds in the custody 
or control of ICC or for which it is responsible, and the protection of 
investors and the public interest, within the meaning of Section 
17A(b)(3)(F) of the Act.\6\
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    \6\ Id.
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    The amendments would also satisfy relevant requirements of Rule 
17Ad-22.\7\ Rule 17Ad-22(b)(4) \8\ requires ICC to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for an annual model validation 
consisting of evaluating the performance of its margin models and the 
related parameters and assumptions associated with such models by a 
qualified person who is free from influence from the persons 
responsible for the development or operation of the models being 
validated. Rule 17Ad-22(e)(4)(vii) \9\ requires ICC to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by performing a 
model validation for its credit risk models not less than annually or 
more frequently as may be contemplated by its risk management 
framework. Rule 17Ad-22(e)(6)(vii) \10\ requires ICC to 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, among other things, 
requires a model validation for its margin system and related models to 
be performed not less than annually, or more frequently as may be 
contemplated by its risk management framework. Rule 17Ad-22(e)(7)(vii) 
\11\ requires ICC to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to effectively 
measure, monitor, and manage the liquidity risk that arises in or is 
borne by ICC, including measuring, monitoring, and managing its 
settlement and funding flows on an ongoing and timely basis, and its 
use of intraday liquidity by, among other things, performing a model 
validation of its liquidity risk models not less than annually or more 
frequently as may be contemplated by its risk management framework. As 
described above, the amendments clarify that the Framework applies to 
all ICC models, including an appendix to clearly set out current 
models. The amendments propose updates and specificity regarding the 
report deliverable and presentation as well as how a team of validators 
meets independence and technical expertise requirements. The amendments 
incorporate applicable regulatory requirements and procedures related 
to annual validation cycles and periodic reviews. ICC believes that 
such changes continue to ensure that ICC receives independent and 
effective model validations and that ICC continues to perform model 
validations in accordance with applicable regulations. Therefore, ICC 
believes the proposed rule change is consistent with the requirements 
of Rule 17ad-22(b)(4), (e)(4)(vii), (e)(6)(vii) and (e)(7)(vii).\12\
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    \7\ 17 CFR 240.17Ad-22.
    \8\ 17 CFR 240.17Ad-22(b)(4).
    \9\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \10\ 17 CFR 240.17Ad-22(e)(6)(vii).
    \11\ 17 CFR 240.17Ad-22(e)(7)(vii).
    \12\ 17 CFR 240.17Ad-22(b)(4), (e)(4)(vii), (e)(6)(vii) and 
(e)(7)(vii).
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    Rule 17Ad-22(e)(2)(i) and (v) \13\ requires ICC to 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. The Framework continues to describe the personnel 
responsible for, and the governance procedures associated with, the 
successful operation and maintenance of the Framework. Additional 
responsibilities of relevant stakeholders are included in the 
Framework. For instance, updates and procedures are incorporated for 
presenting reports to the Risk Committee and consulting with the Risk 
Committee to add, enhance, or retire models or model components and 
regarding remedial actions and timelines. The amendments more clearly 
set out the role of the ROO in the operation and maintenance of the 
Framework and the role of the Risk Department in reviewing the Model 
Inventory. Moreover, for models that are not subject to the annual 
requirement, proposed language directs the ROO, in consultation with 
the Risk Committee, to set an established periodicity for review. 
Memorializing additional detail and responsibilities, including to 
reflect current practices, would strengthen the Framework to ensure 
that responsible parties effectively carry out ICC's model validation 
procedures. As such, ICC believes that the proposed rule change ensures 
that ICC maintains policies and procedures that are reasonably designed 
to provide for clear and transparent governance arrangements and 
specify clear and direct lines of responsibility, consistent with Rule 
17Ad-22(e)(2)(i) and (v).\14\
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    \13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \14\ Id.
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    Rule 17Ad-22(e)(4)(ii) \15\ requires ICC to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining additional 
financial resources at the minimum to enable it to cover a wide range 
of foreseeable stress scenarios that include, but are not limited to, 
the default of the two participant families that would potentially 
cause the largest aggregate credit exposure for the covered clearing

[[Page 33854]]

agency in extreme but plausible market conditions. The Framework 
supports ICC's ability to maintain sufficient risk requirements and 
enhances ICC's approach to identifying potential weaknesses in the risk 
management system through the use of independent validations and 
periodic reviews. The amended Framework continues to provide a process 
for reviewing and enhancing the models that ICC utilizes as part of its 
risk processes. The changes strengthen the Framework and ensure 
completeness by expanding the scope to clearing house models, including 
procedures regarding ad hoc reviews of methodologies to ensure 
objective and effective review, and including procedures regarding 
remedial actions and timelines to ensure remediation of report items in 
an appropriate and timely manner. Additional changes ensure the 
Framework remains up-to-date, transparent, and focused on clearly 
articulating the policies and procedures used to support ICC's model 
validation efforts, including by reorganizing text, removing 
unnecessary references to policies, and specifying when an independent 
periodic review component is not applicable. In ICC's view, the 
proposed rule change would facilitate and enhance its ability to carry 
out its validation processes and procedures in respect of the models 
utilized as part of ICC's risk processes or other methodologies. As 
such, the proposed amendments would strengthen ICC's ability to 
maintain its financial resources and withstand the pressures of 
defaults, consistent with the requirements of Rule 17Ad-
22(e)(4)(ii).\16\
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    \15\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \16\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed changes to 
the Framework will apply uniformly across all market participants. They 
are generally designed to enhance, clarify, and more clearly document 
ICC's model validation processes and procedures and include 
clarifications on the scope and applicability of the Framework, 
responsibilities of relevant stakeholders, and other validation 
elements. ICC does not believe these amendments would affect the costs 
of clearing or the ability of market participants to access clearing. 
Therefore, ICC does not believe the proposed rule change would 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 rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

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 such 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-ICC-2022-006 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-ICC-2022-006. 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 Credit and on ICE 
Clear Credit's website at https://www.theice.com/clear-credit/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-ICC-2022-006 and should be 
submitted on or before June 24, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11877 Filed 6-2-22; 8:45 am]
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