[Federal Register Volume 87, Number 225 (Wednesday, November 23, 2022)]
[Notices]
[Pages 71714-71719]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-25474]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96345; File Nos. SR-DTC-2022-006; SR-FICC-2022-004; SR-
NSCC-2022-006]


Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Corporation; 
Order Granting Proposed Rule Changes To Amend the Stress Testing 
Framework and Liquidity Risk Management Framework

November 17, 2022.
    On May 26, 2022, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC'') (each a ``Clearing Agency,'' and 
collectively, the ``Clearing Agencies''), filed with the Securities and 
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2022-
006, SR-FICC-2022-004, and SR-NSCC-2022-006 (the ``Proposed Rule 
Changes'') pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to amend the Stress 
Testing Framework and Liquidity Risk Management Framework adopted by 
the Clearing Agencies, as well as to update the FICC Mortgage-Backed 
Securities Division (``MBSD'') Rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Proposed Rule Changes were published for comment in the Federal 
Register on June 15, 2022.\3\ On July 14, 2022, the Commission 
published notices designating a longer period of time for Commission 
action and a longer period for public comment on the Proposed Rule 
Changes.\4\ On September 9, 2022, the Commission issued orders 
instituting proceedings on the Proposed Rule Changes.\5\ The Commission 
has received comments on the changes proposed therein.\6\ This order 
approves the Proposed Rule Changes.
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    \3\ Securities Exchange Act Release No. 95080 (June 9, 2022), 87 
FR 36191 (June 15, 2022) (File No. SR-DTC-2022-006) (``DTC 
Notice''); Securities Exchange Act Release No. 95079 (June 9, 2022), 
87 FR 36182 (June 15, 2022) (File No. SR-FICC-2022-004) (``FICC 
Notice''); Securities Exchange Act Release No. 95078 (June 10, 
2022), 87 FR 36158 (June 15, 2022) (File No. SR-NSCC-2022-006) 
(``NSCC Notice'').
    \4\ Securities Exchange Act Release No. 95282 (July 14, 2022), 
87 FR 43354 (July 20, 2022) (SR-DTC-006); Securities Exchange Act 
Release No. 95283 (July 14, 2022), 87 FR 43364 (July 20, 2022) (SR-
FICC-2022-004); Securities Exchange Act Release No. (July 14, 2022), 
87 FR 43354 (July 20, 2022) (SR-NSCC-2022-006).
    \5\ Securities Exchange Act Release No. 95729 (Sept. 9, 2022), 
87 FR 56733 (Sept. 15, 2022) (SR-DTC-2022-006); Securities Exchange 
Act Release No. 95724 (Sept. 9, 2022), 87 FR 56732 (Sept. 15, 2022) 
(SR-FICC-2022-004); Securities Exchange Act Release No. 95725 (Sept. 
9, 2022), 87 FR 56735 (Sept. 15, 2022) (SR-NSCC-2022-006).
    \6\ Specifically, the Commission received comments only on the 
DTC Notice, and the comment is available at https://www.sec.gov/comments/sr-dtc-2022-006/srdtc2022006.htm. The commenter raised a 
concern regarding the confidentiality of the proposed rule. Id. DTC 
asserted that the exhibits to the filing, including the proposed 
rule, were entitled to confidential treatment because, if released, 
they could cause harm to the Clearing Agencies and their 
participants. Under Section 23(a)(3) of the Exchange Act, the 
Commission is not required to make public statements filed with the 
Commission in connection with a proposed rule change of a self-
regulatory organization if the Commission could withhold the 
statements from the public in accordance with the Freedom of 
Information Act (``FOIA''), 5 U.S.C. 552. 15 U.S.C. 78w(a)(3). The 
Commission has reviewed the documents for which DTC requests 
confidential treatment and concludes that they could be withheld 
from the public under the FOIA. FOIA Exemption 4 protects 
confidential commercial or financial information. 5 U.S.C. 
552(b)(4). Under Exemption 4, information is confidential if it ``is 
both customarily and actually treated as private by its owner and 
provided to government under an assurance of privacy.'' Food 
Marketing Institute v. Argus Leader Media, 139 S. Ct. 2356, 2366 
(2019). The Commission understands that DTC has not disclosed the 
confidential exhibits to the public, and believes that the 
information is the type that would not customarily be disclosed to 
the public. In addition, by requesting confidential treatment, DTC 
had an assurance of privacy because the Commission generally 
protects information that can be withheld under Exemption 4. Thus, 
the Commission has determined to accord confidential treatment to 
the confidential exhibits.
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I. Description of the Proposed Rule Changes

A. Background and Overview of the Changes

    The Clearing Agencies adopted the Clearing Agency Stress Testing 
Framework (Market Risk) (``ST Framework'') to set forth the manner in 
which they identify, measure, monitor, and manage their 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.\7\ The ST Framework describes the 
stress testing activities of each of the Clearing Agencies. The 
Clearing Agencies adopted the Clearing Agency Liquidity Risk Management 
Framework (``LRM Framework,'' and, together with the ST Framework, the 
``Frameworks'') 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 each 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.\8\ The LRM Framework describes the 
liquidity risk management activities of each of the Clearing Agencies.
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    \7\ Securities Exchange Act Release No. 82368 (Dec. 19, 2017), 
82 FR 61082 (Dec. 26, 2017) (SR-DTC-2017-005; SR-FICC-2017-009; SR-
NSCC-2017-006) (``Initial ST Framework Order'').
    \8\ 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 
Order'').
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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,\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.
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    \9\ 17 CFR 240.17Ad-22(e)(7)(vi).
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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

[[Page 71715]]

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.
    Finally, the proposed changes would amend the MBSD Rules to remove 
duplicative disclosures regarding the stress testing program, as 
further described below.

B. Changes To Move Activities Related To Stress Testing Qualifying 
Liquid Resources From the LRM Framework to the ST Framework

    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. 
These activities are primarily performed by the Stress Testing Team 
within the Group Chief Risk Office (``GCRO'') of the Depository Trust 
and Clearing Corporation, which includes members of the Market Risk 
Management and the Liquidity Risk Management groups within the 
GCRO.\10\ The Clearing Agencies state that 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.\11\
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    \10\ DTCC is the parent company of the Clearing Agencies. 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 its subsidiaries, including the 
Clearing Agencies.
    \11\ DTC Notice, supra note 3, 87 FR at 36193; FICC Notice, 
supra note 3, 87 FR at 36184; NSCC Notice, supra note 3, 87 FR at 
36159.
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    The Clearing Agencies propose several amendments to both the ST 
Framework and the LRM Framework to incorporate these changes. 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.
    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. 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. Finally, the new Section 8.5 would address the regular 
escalation of the results of stress testing, including any concerns 
related to those results.
    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

[[Page 71716]]

Framework would be primarily drafting revisions, as the Clearing 
Agencies are not proposing changes to how they conduct liquidity stress 
testing.\12\
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    \12\ DTC Notice, supra note 3, 87 FR at 36192, 36193; FICC 
Notice, supra note 3, 87 FR at 36185; NSCC Notice, supra note 3, 87 
FR at 36160.
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    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 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).\13\
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    \13\ Initial LRM Framework Order, supra note 7, 82 FR at 61619.
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    The Clearing Agencies state that, while they continue to maintain a 
wide range of stress scenarios that are designed to comply with the 
requirements of Rules 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. The Clearing 
Agencies state that 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).\14\ Those revisions 
regarding the categorization of the liquidity stress scenarios would be 
reflected in Section 7 of the ST Framework.
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    \14\ DTC Notice, supra note 3, 87 FR at 36194; FICC Notice, 
supra note 3, 87 FR at 36184; NSCC Notice, supra note 3, 87 FR at 
36160.
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C. Proposed Amendments to the ST Framework

    The proposed changes would amend the ST Framework to (1) 
incorporate the use of 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, similar to the process currently used at MBSD, which is 
currently the case; (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 amend 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.\15\
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    \15\ See Securities Exchange Act Release No. 88382 (March 13, 
2020), 85 FR 15830 (March 19, 2020) (SR-FICC-2020-801).
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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).\16\ FICC now proposes to use at GSD the data set currently 
used in MBSD's stress testing program.
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    \16\ 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,\17\ 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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    \17\ These key components of stress testing are also described 
in the Initial ST Framework Filing. See supra note 6.
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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.\18\ 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.\19\
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    \18\ FICC Notice, supra note 3, 87 FR at 36185.
    \19\ Id.
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    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

[[Page 71717]]

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.
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 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.
    In addition, the proposed change would also revise the description 
of reverse stress testing to more clearly describe the goal and purpose 
of this testing.\20\ Specifically, reverse stress testing is used to 
identify tail risks by using extreme stress scenarios. In this way, 
reverse stress testing, which is conducted 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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    \20\ 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.\21\
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    \21\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice, 
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at 
36161.
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D. Proposed Amendments To Update and Clarify the LRM Framework

    In addition to removing descriptions of stress testing activities 
from the LRM Framework, as described in section I.A above, 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.\22\
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    \22\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice, 
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at 
36161.
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    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.\23\ 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.\24\
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    \23\ 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 Clearing Agency.
    \24\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice, 
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at 
36161-62.
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E. Proposed Amendments to MBSD Rules To Remove Stress Testing 
Descriptions

    Finally, the proposed rule change would remove descriptions of 
stress testing from the MBSD Rules, which would be duplicative of 
statements added to the ST Framework, described above. The Clearing 
Agencies do not believe that it is necessary to describe its stress 
testing program in multiple places in its rules, and that duplicative 
disclosures create a risk of inconsistencies. The ST Framework was 
designed to, among other things, describe the manner in which the 
Clearing Agencies test the sufficiency of their respective prefunded 
financial

[[Page 71718]]

resources through stress testing and, therefore, the Clearing Agencies 
believe this is the appropriate rule for these disclosures.\25\
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    \25\ FICC Notice, supra note 3, 87 FR at 36186-87.
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    As such, the proposed change would remove the duplicative 
descriptions of the MBSD stress testing program from the MBSD Rules by 
deleting the definition of ``Back-up Stress Testing Calculation'' from 
MBSD Rule 1 and Section 13 of MBSD Rule 4. As described in section 
II.C.1 above, the matters being removed from the MBSD Rules in this 
proposal would be addressed in the ST Framework.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \26\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. After carefully considering the Proposed Rule 
Change, the Commission finds that the Proposed Rule Change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to FICC. In particular, the 
Commission finds that the Proposed Rule Change is consistent with 
Sections 17A(b)(3)(F) \27\ of the Act and Rule 17Ad-22(e)(4) 
thereunder.\28\
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    \26\ 15 U.S.C. 78s(b)(2)(C).
    \27\ 15 U.S.C. 78q-1(b)(3)(F).
    \28\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \29\ requires the rules of a 
clearing agency to, among other things, (i) promote the prompt and 
accurate clearance and settlement of securities transactions, (ii) 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible, and (iii) protect investors and the public interest.
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above in sections I.B, I.C.2, I.C.3, I.D, and I.E, 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, as well as to simplify the 
categorization of the liquidity stress scenarios; (2) amend the ST 
Framework to reflect that the Stress Testing Team is primarily 
responsible for stress testing activities; (3) update and clarify 
descriptions within the ST Framework; (4) update and clarify 
descriptions within the LRM Framework; and (5) remove certain 
duplicative sections from the MBSD Rules, as described above. These 
proposed changes should assist the Clearing Agencies in carrying out 
their stress testing and liquidity risk management functions and 
improve the clarity of the Frameworks in describing the Clearing 
Agencies' processes and responsibilities. With respect to the ST 
Framework, as described in sections I.B, I.C.2, and I.C.3, these 
changes should help maintain the Clearing Agencies' ability to 
determine and evaluate the credit risk presented by Clearing Agencies' 
members by testing (i) the sufficiency of their credit resources in a 
variety of extreme but plausible scenarios, and (ii) the potential 
losses to the Clearing Agencies from a participant default. The 
continued ability to evaluate credit risk could, in turn, enable the 
Clearing Agencies to deploy their risk-management tools more 
effectively to manage the credit and market presented by such members. 
Through such preparation, the Framework could decrease the possibility 
of a member default. By enabling the Clearing Agencies to use their 
risk-management tools to monitor its credit and market more 
effectively, the proposed amendments to the ST Framework are designed 
to help mitigate the risk that the Clearing Agencies and their non-
defaulting members would suffer a loss from a member default.
    Similarly, with respect to the LRM Framework, as described in 
sections I.D, these changes should help continue the Clearing Agencies' 
ability to 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.
    In addition, moving the description of the Clearing Agencies' 
liquidity stress testing activities into the ST Framework, the proposed 
change should create a description of the Clearing Agencies' collective 
stress testing activities in one place. Moreover, based on its review 
of the Proposed Rule Changes and its supervisory knowledge, the 
Commission understands that the Clearing Agencies are not amending 
their stress testing program in a substantive manner, but instead are 
reorganizing the stress testing scenarios and Frameworks to avoid 
duplication and confusion.
    Therefore, the Commission finds that the proposed rule changes are 
designed to help promote prompt and accurate clearance and settlement, 
and assure the safeguarding of securities and funds which are in the 
custody or control of the Clearing Agencies or for which they are 
responsible, consistent with Section 17A(b)(3)(F) of the Act.\30\
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    \30\ 15 U.S.C. 78q-1(b)(3)(F).
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    Second, as described in Section I.C.1, FICC proposes to use vendor-
supplied data in GSD's stress testing program. The Commission believes 
that vendor-supplied data should allow FICC to identify and analyze 
risk exposures under a broad and varied range of stressed market 
conditions, which should, in turn, help FICC identify the amount of 
financial resources necessary to cover its credit exposure under stress 
scenarios in extreme but plausible market conditions. The Commission 
further believes that the use of vendor-supplied data should enable 
FICC to perform a robust assessment of the stress profits and losses 
calculation, identify and address potential risks with respect to 
specific Clearing Members and their affiliates, and in turn, should 
help FICC ensure that it is collecting adequate prefunded financial 
resources to cover its potential losses resulting from the default of 
clearing members and their affiliates under extreme but plausible 
market conditions.
    Moreover, as also described in Section I.C.1., FICC proposes to use 
a back-up calculation for the GSD stress testing program in the event 
the vendor fails to provide FICC with the vendor-sourced data. The 
Commission believes that the back-up calculation is designed to provide 
FICC with a reasonable alternative method for calculating stress 
profit-and-loss in the event of an interruption in the vendor-sourced 
data feed. By providing FICC with a reasonable alternative method for 
conducting stress testing, the

[[Page 71719]]

Commission believes that the proposed back-up calculation is designed 
to help FICC avoid gaps in assessing the sufficiency of its prefunded 
financial resources due to the inability to access the vendor-sourced 
data.
    Taken together, the Commission believes that these aspects of the 
proposed rule change, as described in section I.C.1, should better 
enable FICC to evaluate and manage the credit risk presented by its 
Clearing Members. The Commission believes that the proposed rule change 
is designed to improve FICC's ability to establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
maintain sufficient prefunded financial resources that, at a minimum, 
enable FICC to cover the default of the Clearing Member (including 
relevant affiliates) that would potentially cause the largest aggregate 
credit exposure for FICC in extreme but plausible conditions, as 
required under Rule 17Ad-22(e)(4)(iii).\31\ Accordingly, the Commission 
believes that the proposed rule change should help FICC to continue 
providing prompt and accurate clearance and settlement of securities 
transactions even in extreme but plausible historical and hypothetical 
stress scenarios, consistent with Section 17A(b)(3)(F) of the Act.\32\
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    \31\ 17 CFR 240.17Ad-22(e)(4).
    \32\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(iii) and (vi)

    Rule 17Ad-22(e)(4)(iii) requires, in part, each covered clearing 
agency 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, 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 participant family that would 
potentially cause the largest aggregate credit exposure for the covered 
clearing agency in extreme but plausible market conditions.\33\ Rule 
17Ad-22(e)(4)(vi) requires, in part, each covered clearing agency to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, by testing the sufficiency of its total financial 
resources available by conducting stress testing of its total financial 
resources once each day using standard predetermined parameters and 
assumptions.\34\
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    \33\ 17 CFR 240.17Ad-22(e)(4)(iii).
    \34\ 17 CFR 240.17Ad-22(e)(4)(vi).
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    As described above in Section I.C.1, FICC proposes to change its 
stress testing methodology to use vendor-supplied data in the GSD 
stress testing program and to incorporate a back-up calculation that it 
would utilize in the event of an interruption in the availability of 
that data. Taken together, these changes should allow FICC to identify 
and analyze risk exposures under a broader range of stressed market 
conditions covering a longer time period, which should, in turn, help 
FICC identify the amount of financial resources necessary to cover its 
credit exposure under stress scenarios in extreme but plausible market 
conditions.
    Accordingly, the Commission believes that FICC's proposed 
amendments to the ST Framework with respect to the GSD stress testing 
program set forth in section I.C.1 are consistent with Rule 17Ad-
22(e)(4)(iii) because it should better enable FICC to assess its 
ability to maintain sufficient financial resources to cover a wide 
range of foreseeable stress scenarios that include the default of the 
member (including relevant affiliates) that would potentially cause 
FICC's largest aggregate credit exposure in extreme but plausible 
conditions.\35\ Additionally, the Commission believes FICC's proposed 
amendments to the ST Framework set forth in section I.C.1 are 
consistent with Rule 17Ad-22(e)(4)(vi) because it should enable FICC to 
test the sufficiency of its minimum financial resources by conducting 
stress testing using standard predetermined parameters and 
assumptions.\36\
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    \35\ See 17 CFR 240.17Ad-22(e)(4)(iii).
    \36\ See 17 CFR 240.17Ad-22(e)(4)(vi).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
Proposed Rule Changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act \37\ 
and the rules and regulations promulgated thereunder.
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    \37\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\38\ that proposed rule changes SR-DTC-2022-006, SR-FICC-2022-004, and 
SR-NSCC-2022-006, be, and hereby are, approved.\39\
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    \38\ 15 U.S.C. 78s(b)(2).
    \39\ In approving the proposed rule change, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-25474 Filed 11-22-22; 8:45 am]
BILLING CODE 8011-01-P