[Federal Register Volume 87, Number 115 (Wednesday, June 15, 2022)]
[Notices]
[Pages 36191-36197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12843]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34- 95080; File No. SR-DTC-2022-006]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Amend the Stress Testing
Framework and Liquidity Risk Management Framework
June 9, 2022.
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 May 26, 2022, The Depository Trust Company (``DTC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II and III below, which Items have been
prepared by the clearing agency. 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 proposed rule change consists of amendments to the Clearing
Agency Stress Testing Framework (Market Risk) (``ST Framework'') and
the Clearing Agency Liquidity Risk Management Framework (``LRM
Framework,'' and, together with the ST Framework, the ``Frameworks'')
of DTC and its affiliates, National Securities Clearing Corporation
(``NSCC'') and Fixed Income Clearing Corporation (``FICC,'' and
together with NSCC and DTC, the ``Clearing Agencies''), as described
below.
First, the proposed changes would amend both the ST Framework and
the LRM Framework to move descriptions of the Clearing Agencies'
liquidity stress testing activities from the LRM Framework to the ST
Framework. In connection with this proposed change, the Clearing
Agencies are also proposing to recategorize the stress scenarios used
for liquidity risk management, such that
[[Page 36192]]
all such stress scenarios are described as either regulatory or
informational scenarios.
Second, the proposed changes would amend the ST Framework to (1)
enhance stress testing for the Government Securities Division of FICC
(``GSD'') to obtain certain data utilized in stress testing from
external vendors and implement a back-up stress testing calculation
that would be utilized in the event such data is not supplied by its
vendors, and amend the ST Framework to reflect these practices for both
GSD and the Mortgage-Backed Securities Division of FICC (``MBSD''); (2)
reflect that a stress testing team is primarily responsible for the
actions described in the ST Framework, and (3) make other revisions to
update and clarify the statements in the ST Framework, as further
described below.
Third, the proposed changes would amend the LRM Framework to update
and clarify the statements in the LRM Framework, as further described
below.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency 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. The clearing agency 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
1. Purpose
The Clearing Agencies adopted the ST Framework to set forth the
manner in which they identify, measure, monitor, and manage their
respective credit exposures to participants and those arising from
their respective payment, clearing, and settlement processes by, for
example, maintaining sufficient prefunded financial resources to cover
its credit exposures to each participant fully with a high degree of
confidence and testing the sufficiency of those prefunded financial
resources through stress testing.\3\ In this way, the ST Framework
describes the stress testing activities of each of the Clearing
Agencies and how the Clearing Agencies meet the applicable requirements
of Rule 17Ad-22(e)(4).\4\
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\3\ Securities Exchange Act Release No. 82368 (December 19,
2017), 82 FR 61082 (December 26, 2017) (SR-DTC-2017-005; SR-FICC-
2017-009; SR-NSCC-2017-006) (``Initial ST Framework Filing'').
\4\ 17 CFR 240.17Ad-22(e)(4).
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The Clearing Agencies adopted the LRM Framework to set forth the
manner in which they measure, monitor and manage the liquidity risks
that arise in or are borne by each of the Clearing Agencies by, for
example, (1) maintaining sufficient liquid resources to effect same-day
settlement of payment obligations with a high degree of confidence
under a wide range of foreseeable stress scenarios that includes, but
is not limited to, the default of the participant family that would
generate the largest aggregate payment obligation for the Clearing
Agency in extreme but plausible market conditions, and (2) determining
the amount and regularly testing the sufficiency of qualifying liquid
resources by conducting stress testing of those resources.\5\ In this
way, the LRM Framework describes the liquidity risk management
activities of each of the Clearing Agencies and how the Clearing
Agencies meet the applicable requirements of Rule 17Ad-22(e)(7).\6\
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\5\ Securities Exchange Act Release Nos. 82377 (December 21,
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004;
SR-FICC-2017-008; SR-NSCC-2017-005) (``Initial LRM Framework
Filing'').
\6\ 17 CFR 240.17Ad-22(e)(7).
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The Clearing Agencies currently utilize vendor-supplied data in
various aspects of the stress testing program for DTC, NSCC and MBSD.
In 2020, in connection with enhancing stress testing for MBSD to
utilize vendor-supplied data, FICC adopted changes to the MBSD Clearing
Rules to describe the key components of the stress testing program.\7\
These disclosures are redundant of the descriptions of stress testing
in the ST Framework and create a potential risk of having inconsistent
statements regarding the Clearing Agencies' stress testing program.
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\7\ See Securities Exchange Act Release No. 88382 (March 13,
2020), 85 FR 15830 (March 19, 2020) (SR-FICC-2020-801) (``MBSD
Stress Testing Filing'').
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The Clearing Agencies are proposing changes to the Frameworks,
described below, that would (1) enhance GSD stress testing, (2)
reorganize, update and clarify the statements and descriptions already
set forth in the Frameworks and (3) move all descriptions of stress
testing to the ST Framework. While the proposal would include certain
enhancements to the GSD stress testing, the Clearing Agencies are not
proposing any material changes to how they conduct stress testing,
manage credit exposures and liquidity risks, or otherwise comply with
the requirements of Rules 17Ad-22(e)(4) and (7).\8\
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\8\ 17 CFR 240.17Ad-22(e)(4) and (7).
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First, the proposed rule change would amend both the ST Framework
and the LRM Framework to move descriptions of the Clearing Agencies'
liquidity stress testing activities, which are designed to comply with
the requirements of Rule 17Ad-22(e)(7)(vi),\9\ from the LRM Framework
to the ST Framework. In connection with this proposed change, the
Clearing Agencies are also proposing to recategorize the liquidity
stress scenarios by removing the Level 1, Level 2 and Level 3 labels
and instead categorizing all stress scenarios as either regulatory or
informational. As described in greater detail below, this proposed
change is a change only to the categorization of these stress scenarios
and is not a change to how the Clearing Agencies conduct liquidity
stress testing or otherwise meet the requirements of Rule 17Ad-
22(e)(7)(vi)(A).\10\
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\9\ 17 CFR 240.17Ad-22(e)(7)(vi).
\10\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
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Second, the proposed changes would amend the ST Framework to (1)
enhance stress testing for GSD to obtain certain data utilized in
stress testing from external vendors and implement a back-up stress
testing calculation that would be utilized in the event such data is
not supplied by its vendors, and amend the ST Framework to reflect
these practices for both GSD and MBSD; (2) reflect that a stress
testing team is primarily responsible for the actions described in the
ST Framework, and (3) make other revisions to update and clarify the
statements in the ST Framework, as further described below.
Third, the proposed changes would amend the LRM Framework to update
and clarify the statements in the LRM Framework, as further described
below.
i. Proposed Amendments To Move Activities Related to Stress Testing
Qualifying Liquid Resources From the LRM Framework to the ST Framework
First, the proposed changes would amend both the ST Framework and
the LRM Framework to move descriptions of the Clearing Agencies'
liquidity stress testing activities, which are designed to comply with
the requirements of Rule 17Ad-22(e)(7)(vi),\11\ from the LRM Framework
to the ST Framework. These activities are primarily performed by the
Stress Testing Team within the Group Chief Risk Office of DTCC
(``GCRO''), which includes members of the Market Risk Management and
the Liquidity Risk Management groups within the
[[Page 36193]]
GCRO.\12\ The Stress Testing Team, which was previously responsible for
stress testing the Clearing Agencies' prefunded financial resources, as
part of the market risk management function, took over stress testing
of the Clearing Agencies liquidity resources related to liquidity risk
management in order to centralize stress testing activities and related
responsibilities under one team. By moving the description of the
Clearing Agencies' liquidity stress testing activities into the ST
Framework, the proposed change would create a clearer, simpler
description of the Clearing Agencies' collective stress testing
activities in one document and would reflect the consolidation of these
activities under the Stress Testing Team.
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\11\ 17 CFR 240.17Ad-22(e)(7)(vi).
\12\ The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies and
its other subsidiaries. Most corporate functions are established and
managed on an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that provides a relevant
service to a subsidiary, including the Clearing Agencies.
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In order to implement this proposed change, a number of drafting
changes are being proposed to both the ST Framework and the LRM
Framework. First, Section 1 (Executive Summary) and Section 4
(Liquidity Risk Management Regulatory Requirements) of the LRM
Framework would be amended to make clear that compliance with the
requirements of Rule 17Ad-22(e)(7)(vi) are not addressed in that
document, and are addressed in the ST Framework. Section 2 (Glossary of
Key Terms) of the LRM Framework would also be amended to include
definitions of ``Clearing Agency Stress Testing Framework'' and the
``Stress Testing Team,'' and to remove the definition of the Enterprise
Stress Testing Council, which is an internal forum that addresses
stress testing matters. Finally, Section 6 (Liquidity Risk Management)
of the LRM Framework would be amended to describe at a high-level the
activities related to stress testing of the Clearing Agencies'
qualifying liquid resources and to state that these activities are
described in greater detail in the ST Framework.
The proposed change would also require revisions throughout the ST
Framework to include descriptions of liquidity stress testing
activities that support the Clearing Agencies' compliance with the
requirements of Rule 17Ad-22(e)(7)(vi) within the existing sections of
the ST Framework. These proposed changes would include revisions to
Section 1 (Executive Summary) of the ST Framework to clarify that
stress testing related to liquidity risk management is described in
this document, and revisions to Section 2 (Glossary of Key Terms) to
include definitions related to these activities. These definitions
would include the Liquidity Risk Management group within GCRO and a
Clearing Agency Liquidity Risk Management Framework. Section 4 of the
ST Framework would be renamed ``Stress Testing Requirements'' and would
be amended to make clearer which requirements in Rules 17Ad-22(e)(4)
and (7) are addressed in the ST Framework, and to identify the
documents where the requirements not addressed in the ST Framework are
addressed.
The proposed changes to the ST Framework would create a new Section
6, which would be named ``Qualifying Liquid Resources--Liquidity Risk
Management,'' to describe at a high-level how each of the Clearing
Agencies determine the amount and regularly test the sufficiency of
their respective qualifying liquid resources. This new section would
include language that is substantially identical to language that would
be removed from Section 6 (Liquidity Risk Management) of the LRM
Framework.
The new Section 7 (Stress Testing Methodologies) (previously
numbered Section 6) of the ST Framework would be updated to include
descriptions of the methodologies used in liquidity stress testing.
Such methodologies would not change substantively, and the language
used in the revisions to this section would be substantively identical
to language that would be removed from Section 6 (Liquidity Risk
Management) of the LRM Framework. As described in greater detail below,
the Clearing Agencies are proposing to revise the categorization of the
liquidity stress scenarios, and those revisions would be reflected in
this Section 7 of the ST Framework.
Finally, the new Section 8 of the ST Framework (previously numbered
Section 7), which would be renamed ``Stress Testing Governance and
Escalation Procedures,'' would be amended to include matters related to
liquidity stress testing. More specifically, the new Section 8.1 would
address governance and oversight of stress testing, which is set forth
in a number of internal documents, and overseen by a stress testing
committee, the Management Risk Committee and the Risk Committee of the
Board of Directors of the Clearing Agencies. The new Section 8.2 would
describe the daily monitoring for threshold breaches and liquidity
shortfalls, and the escalations and actions that would follow those
breaches. More specifically, the Clearing Agencies monitor for breaches
of a ``Cover One Ratio,'' which is defined as the ratio of a family of
affiliated Members' deficiency over the total value of the applicable
Clearing Agencies' Clearing Fund or Participants Fund, excluding the
sum value of the applicable family's required deposit to the Clearing
Fund or Participants Fund, as applicable. With respect to liquidity
stress testing, the Clearing Agencies monitor daily for liquidity
shortfalls, which trigger a series of escalations and remediation
actions, which would be identified in this new Section 8.2.
The new Section 8.3 would address comprehensive analyses of stress
scenarios, which occur on at least a monthly basis and are designed to
comply with the requirements of Rules 17Ad-22(e)(4)(vi)(B) and (C), and
(7)(vi)(B) and (C). These analyses include (1) daily stress testing
results, model parameters, model assumptions, and model performance,
and (2) each stress scenario set for its comprehensiveness and
relevance, including any changes or updates to such scenarios for the
period. The new Section 8.4 would address the escalations and reporting
of the monthly analyses of stress scenarios, which are designed to
comply with the requirements of Rules 17Ad-22(e)(4)(vi)(D) and
(7)(vi)(D). Finally, the new Section 8.5 would address the regular
escalation of the results of stress testing, including any concerns
related to those results, which are also designed to comply with Rules
17Ad-22(e)(4)(vi)(D) and (7)(vi)(D).
Each of these subsections would address stress testing related to
market risk, using language that is currently in the ST Framework, and
would include language to address liquidity stress testing that would
be substantially similar to the language removed from the LRM
Framework. Revisions to the language removed from the LRM Framework
would be primarily drafting revisions, as the Clearing Agencies are not
proposing changes to how they conduct liquidity stress testing.
ii. Proposed Amendments To Re-Categorize the Stress Scenarios Used for
Liquidity Stress Testing
In connection with the changes described above, the proposed
amendments would also reflect the recategorization of liquidity stress
scenarios. Previously, liquidity stress scenarios were categorized as
Level 1, 2 and 3 scenarios. Level 1 scenarios described qualifying
liquid resources under normal market conditions and
[[Page 36194]]
were considered ``baseline'' scenarios. Level 2 scenarios assumed a
wide range of foreseeable stress scenarios that included, but were not
limited to, the default of the family of affiliated Members that would
generate the largest aggregate payment obligation for each Clearing
Agency in extreme but plausible market conditions. These scenarios were
designed to identify the qualifying liquid resources each Clearing
Agency should maintain to meet compliance with Rule 17Ad-22(e)(7)(i).
Finally, the Level 3 scenarios were divided into either (1) regulatory
scenarios, which were designed to meet the requirements of Rule 17Ad-
22(e)(7)(vi)(A), and (2) informational scenarios, which were designed
to be performed for informational and monitoring purposes using stress
scenarios that exceed the requirements of Rule 17Ad-22(e)(7)(vi)(A).
While the Clearing Agencies continue to maintain a wide range of
stress scenarios that are designed to comply with the requirements of
Rule 17Ad-22(e)(7), in order to simplify the descriptions of its
liquidity stress scenarios and align them with the categorization of
market risk stress scenarios, the Clearing Agencies have re-categorized
the liquidity stress scenarios and eliminated the Level 1, Level 2 and
Level 3 categories. Instead, all stress scenarios would be described in
Section 6 of the ST Framework as being either (1) regulatory stress
scenarios, which are designed to comply with the requirements of Rules
17Ad-22(e)(4)(i) and (vi)(A), and Rules 17Ad-22(e)(7)(i) and (vi)(A);
or (2) informational stress scenarios, which may utilize parameters and
assumptions that exceed the requirements of Rules 17Ad-22(e)(4)(vi)(A)
and (7)(vi)(A) and are utilized for informational, analytical and/or
monitoring purposes only.
iii. Proposed Amendments to the ST Framework
The proposed changes would amend the ST Framework to (1) enhance
stress testing for GSD to obtain certain data utilized in stress
testing from external vendors and implement a back-up stress testing
calculation that would be utilized in the event such data is not
supplied by its vendors, and amend the ST Framework to reflect these
practices for both GSD and MBSD; (2) reflect that a stress testing team
is primarily responsible for the actions described in the ST Framework,
and (3) make other revisions to update and clarify the statements in
the ST Framework, as further described below.
1. Enhance GSD Stress Testing To Use Vendor-Sourced Data
First, the proposed changes would enhance GSD stress testing to
utilize vendor-supplied historical risk factor time series data
(``Historical Data'') and vendor-supplied security-level risk
sensitivity data (``Security-Level Data'') in the stress testing
program. This proposed enhancement would be similar to the approach
utilized in MBSD stress testing.\13\
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\13\ See supra note 7.
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The vendor-sourced Historical Data would include data regarding (1)
interest rate, (2) implied inflation rate, (3) agency spread, (4)
mortgage option adjusted spread, (5) interest rate volatility, and (6)
mortgage basis. The vendor-sourced Security-Level Data would include
data regarding (1) sensitivity to interest rates, (2) implied inflation
rate, (3) agency spread, (4) convexity, (5) sensitivity to mortgage
option adjusted spread, (6) sensitivity to interest rate volatility,
and (7) sensitivity to mortgage basis. FICC currently utilizes the
Historical Data and Security-Level Data in GSD's value-at-risk
(``VaR'') model, which calculates the VaR Charge component of GSD's
Clearing Fund (referred to in the GSD Rulebook as Required Fund
Deposit).\14\ FICC would use this same data set in GSD's stress testing
program.
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\14\ GSD Rulebook, available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf.
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As described in greater detail in the ST Framework,\15\ stress
testing involves three key components: (1) risk identification, (2)
scenario development, which involves the construction of comprehensive
and relevant sets of extreme but plausible historical and hypothetical
stress scenarios; and (3) risk measurement and aggregation, in which
risk metrics are calculated to estimate the profits and losses in
connection with the hypothetical close out of a participant's portfolio
in certain stress scenarios.
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\15\ These key components of stress testing are also described
in the Initial ST Framework Filing. See supra note 3.
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FICC would utilize the vendor-sourced data in the development of
historical stress scenarios and in the risk measurement and aggregation
process of the GSD stress testing program. More specifically, the
Historical Data would be used to identify the largest historical
changes of risk factors that influence the pricing of product cleared
by GSD, in connection with the development of stress scenarios. The
vendor-sourced Historical Data would identify stress risk exposures
under broader and more varied market conditions than the data currently
available to FICC.
FICC would utilize both the Historical Data and the Security-Level
Data in the risk measurement and aggregation process of stress testing.
FICC believes that the vendor-sourced Security-Level Data is more
stable and robust than the data currently utilized by FICC for GSD
stress testing. Because the stress profits and losses calculation that
occur in connection with the risk measurement and aggregation process
in stress testing would include Security-Level Data, FICC believes that
the calculated results would be improved and would reflect results that
are closer to actual price changes for government securities during
larger market moves which are typical of stress testing scenarios.
Finally, the proposed changes to enhance GSD stress testing would
also implement a back-up calculation that GSD would utilize in the
event that the vendor fails to provide such data to GSD. Specifically,
if the vendor fails to provide any data or a significant portion of
data in accordance with the timeframes agreed to by FICC and the
vendor, FICC would use the most recently available data on the first
day that such disruption occurs in its stress testing calculations.
Subject to discussions with the vendor, if FICC determines that the
vendor would resume providing data within five (5) Business Days, FICC
would determine whether the daily stress testing calculation should
continue to be calculated by using the most recently available data or
whether the back-up calculation (as described below) should be invoked.
Subject to discussions with the vendor, if FICC determines that the
data disruption would extend beyond five (5) Business Days, the back-up
calculation would be employed for daily stress testing, subject to
appropriate internal governance.
The proposed back-up calculation would include the following
calculations: (1) calculate each Netting Member's portfolio net
exposures, (2) calculate the historical stress return, and (3)
calculate each Netting Member's stress profits and losses. FICC would
use publicly available indices as the data source for the stress return
calculations. This calculation would be referred to as the Back-up
Stress Testing Calculation in the ST Framework.
The Clearing Agencies would describe the use of vendor-sourced data
in stress testing for GSD and MBSD and the Back-up Stress Testing
Calculation, as described above, in a new Section 7.1 of the ST
Framework.
[[Page 36195]]
2. Identify the Stress Testing Team as Responsible for Stress Testing
As described above, stress testing for the Clearing Agencies is
primarily performed by the Stress Testing Team, which includes members
of both Market Risk Management and Liquidity Risk Management of DTCC
within GCRO. The Stress Testing Team took over stress testing
responsibilities related to liquidity risk management in late 2019 to
centralize stress testing and related responsibilities under one team.
Therefore, the Clearing Agencies are proposing to include a general
statement in Section 1 (Executive Summary) of the ST Framework that,
unless otherwise specified, actions in the ST Framework related to
stress testing are performed by the Stress Testing Team. The proposed
changes would also amend Section 3 (Framework Ownership and Change
Management) of the ST Framework to make it clear that the Stress
Testing Team owns and manages the ST Framework and is responsible for
reviewing the ST Framework no less frequently than annually.
In connection with this proposed change, the ST Framework would
also be updated to describe actions related to stress testing without
specifically identifying the group responsible for those actions. These
proposed changes would simplify the descriptions in the ST Framework,
while clarifying the team responsible for conducting these actions in a
general statement in the ST Framework.
3. Update and Clarify the ST Framework
Finally, the proposed changes would also make immaterial revisions
to update and clarify the ST Framework. For example, the proposed
changes would update the names of certain documents that support the ST
Framework to refer to the Clearing Agencies, rather than DTCC, in the
document titles. These documents were renamed to conform to internal
document naming conventions. The proposed changes would also amend
Section 2 (Glossary of Key Terms) of the ST Framework to clarify and
simplify the use of certain key terms. For example, the proposed
changes would move the definitions of ``Members'' and ``Participants''
from a footnote in Section 4 to this Section 2, and would update the
definition of ``BRC,'' which refers to the Risk Committee of the Boards
of Directors of the Clearing Agency, to be more descriptive.
The proposed amendments would update Section 4 (Stress Testing
Requirements) of the ST Framework to (1) more clearly state which
requirements under Rules 17Ad-22(e)(4) and (7) are addressed in the ST
Framework, (2) identify the separate documents that describe the
requirements that are not addressed in the ST Framework, and (3)
identify the requirements that are not applicable to the Clearing
Agencies and, therefore, not described in any document.
Finally, the proposed change would also revise the description of
reverse stress testing to more clearly describe the goal and purpose of
this testing.\16\ Specifically, reverse stress testing is used to
identify tail risks by using extreme stress scenarios. In this way,
reverse stress testing, which is conducting semi-annually, can be used
to inform regular stress testing activities. The proposed changes would
provide more transparency into the purpose of reverse stress testing
conducted by the Clearing Agencies.
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\16\ Tail risk generally refers to risks of outcomes that are
caused by extreme or rare events.
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None of these proposed changes would make substantive revisions to
the ST Framework or reflect material changes to how the Clearing
Agencies conduct the activities described in the ST Framework but would
update and clarify those descriptions.
iv. Proposed Amendments To Update and Clarify the LRM Framework
In addition to removing descriptions of stress testing activities
from the LRM Framework, the proposed changes would also make immaterial
revisions to update and clarify the LRM Framework. For example, the
proposed changes would update the name of the team within the GCRO that
is responsible for liquidity risk management from the Liquidity Product
Risk Unit, or LPRU, to Liquidity Risk Management. This proposed change
would reflect a recent organizational change to the name of this group.
Additionally, the proposed changes would update Section 10
(Liquidity Risk Tolerances) of the LRM Framework to state that an
officer in Liquidity Risk Management is responsible for reviewing the
Liquidity Risk Tolerance Statement.\17\ The LRM Framework currently
identifies the specific title of the individual who is responsible for
reviewing the Liquidity Risk Tolerance Statement on at least an annual
basis. The proposed change would provide the Clearing Agencies with
flexibility to change the title of the person responsible for this
review.
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\17\ The Liquidity Risk Tolerance Statement is liquidity risk
management control that, among other things, (1) defines liquidity
risk and describes how liquidity risk would materialize for each
Clearing Agency specifically, (2) sets forth how liquidity risk is
monitored by the Clearing Agencies, and (3) describes the various
risk tolerance levels and thresholds for each the Clearing Agency.
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v. Implementation Timeframe
Subject to approval by the Commission, the proposal to enhance GSD
stress testing to use vendor-sourced data would be implemented no later
than November 30, 2022. The remaining proposals would be implemented
upon approval by the Commission.
2. Statutory Basis
The Clearing Agencies believe that the proposed changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a registered clearing agency. In
particular, the Clearing Agencies believe that the proposed changes are
consistent with Section 17A(b)(3)(F) of the Act,\18\ and Rule 17Ad-
22(e)(4) under the Act,\19\ for the reasons described below.
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ 17 CFR 240.17Ad-22(e)(4).
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, and to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, for the reasons described below.\20\ As described above,
the proposed changes would (1) amend both the ST Framework and the LRM
Framework to move the descriptions of liquidity stress testing from the
LRM Framework to the ST Framework; (2) simplify the categorization of
the liquidity stress scenarios; (3) amend the ST Framework to reflect
that the Stress Testing Team is primarily responsible for stress
testing activities; (4) update and clarify descriptions within the ST
Framework; and (5) update and clarify descriptions within the LRM
Framework, as described above.
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\20\ Id.
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The ST Framework currently describes how each of the Clearing
Agencies carry out a market risk management strategy to maintain
sufficient prefunded financial resources to cover fully its exposures
to each participant fully with a high degree of confidence. As such,
the market risk management strategy of the Clearing Agencies addresses
their respective market risk exposures and allows them to continue the
prompt and accurate clearance and settlement of securities and can
continue to assure the safeguarding of securities and funds which are
in their custody or control or
[[Page 36196]]
for which they are responsible notwithstanding those risks.
The LRM Framework describes how each of the Clearing Agencies carry
out its liquidity risk management strategy such that, with respect to
FICC and NSCC, they maintain liquid resources sufficient to meet the
potential amount of funding required to settle outstanding transactions
of a defaulting participant or family of affiliated participants in a
timely manner, and with respect to DTC, it maintains sufficient
available liquid resources to complete system-wide settlement on each
business day, with a high degree of confidence and notwithstanding the
failure to settle of the participant or affiliated family of
participants with the largest settlement obligation. As such, the
Clearing Agencies' liquidity risk management strategies address the
Clearing Agencies' maintenance of sufficient liquid resources, which
allow them to continue the prompt and accurate clearance and settlement
of securities and can continue to assure the safeguarding of securities
and funds which are in their custody or control or for which they are
responsible notwithstanding the default of a participant or family of
affiliated participants.
The proposed changes to reorganize the Frameworks, simplify the
categorization of stress scenarios, and make other updates to improve
the clarity and accuracy of the descriptions within the Frameworks, as
described in this filing, would assist the Clearing Agencies in
carrying out their stress testing and liquidity risk management
functions. Therefore, the Clearing Agencies believe the proposed
changes are consistent with the requirements of Section 17A(b)(3)(F) of
the Act.\21\
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\21\ Id.
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The proposal to enhance the GSD stress testing to utilize vendor-
sourced data and implement a back-up stress testing calculation is
designed to be consistent with Rule 17Ad-22(e)(4) under the Act, which
requires, in part, that a covered clearing agency 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.\22\ Rule 17Ad-22(e)(4)(i) under the
Act requires that a covered clearing agency maintain sufficient
financial resources to cover its credit exposure to each participant
fully with a high degree of confidence.\23\
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\22\ 17 CFR 240.17Ad-22(e)(4).
\23\ 17 CFR 240.17Ad-22(e)(4)(i).
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FICC believes that the proposal to utilize Historical Data in the
development of historical stress scenarios would incorporate a broad
range of risk factors that enables GSD's model to better understand a
Member's exposure to these risk factors. FICC also believes that the
proposal to utilize Historical Data and Security-Level Data in the
calculation of stress profits and losses for Members' portfolios would
provide for calculated amounts that are closer to actual price changes
for securities cleared at GSD during larger market moves in an effort
to test the adequacy of GSD's prefunded resources. Lastly, FICC
believes that the proposal to use a back-up calculation would help to
ensure that FICC has a methodology in place that allows it to continue
to measure the adequacy of GSD's prefunded financial resources in the
event that the vendor fails to provide data. For these reasons, FICC
believes that the proposed changes to utilize the vendor-sourced
Historical Data and Security-Level Data in GSD stress testing would
improve GSD's stress testing program, which is used to test the
sufficiency of GSD's prefunded resources daily to support compliance
with Rule 17Ad-22(e)(4)(i).
Furthermore, the proposal to adopt a back-up stress testing
calculation in circumstances when the vendor-sourced data is
unavailable would support GSD's stress testing program by ensuring that
the program utilizes a predetermined calculation in the event of a
disruption to its data source.
As such, FICC believes that these proposed changes are designed to
be consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the
Act.\24\
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\24\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
The Clearing Agencies do not believe the proposed changes to the
Frameworks described above would have any impact, or impose any burden,
on competition. As described above, the proposed changes would
reorganize the Frameworks to improve the clarity regarding the Clearing
Agencies' stress testing activities and would make other updates and
enhancements that would improve the clarity and accuracy of the
descriptions of the Clearing Agencies' stress testing and liquidity
risk management functions. Therefore, the proposed changes are
technical and non-material in nature, relating mostly to the operation
of the Frameworks rather than the risk management functions described
therein.
Further, the proposed changes to enhance GSD stress testing to
utilize vendor-sourced data and establish a back-up stress testing
calculation would not have any impact, or impose any burden, on
competition because this proposal does not affect the respective rights
or obligations of Members that utilize GSD's services.
As such, the Clearing Agencies do not believe that the proposed
rule changes would have any impact on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
The Clearing Agencies have not received or solicited any written
comments relating to this proposal. If any written comments are
received, they will be publicly filed as an Exhibit 2 to this filing,
as required by Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
SEC's Division of Trading and Markets at [email protected] or
202-551-5777.
The Clearing Agencies reserve the right to not respond to any
comments received.
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.
[[Page 36197]]
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-DTC-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-DTC-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 the filing also will be available for inspection
and copying at the principal office of DTC and on DTCC's website
(http://dtcc.com/legal/sec-rule-filings.aspx). 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-DTC-2022-006 and should be submitted on
or before July 6, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12843 Filed 6-14-22; 8:45 am]
BILLING CODE 8011-01-P