[Federal Register Volume 87, Number 248 (Wednesday, December 28, 2022)]
[Notices]
[Pages 79922-79924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-28195]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96557; File No. SR-ICC-2022-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Collateral Risk 
Management Framework, ICC Treasury Operations Policies and Procedures, 
and ICC Liquidity Risk Management Framework

December 21, 2022.

I. Introduction

    On October 24, 2022, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
formalize the Collateral Risk Management Framework (``CRMF'') and to 
amend both its Treasury Operations Policies and Procedures (``Treasury 
Policy'') and its Liquidity Risk Management Framework (``LRMF''). The 
proposed rule change was published for comment in the Federal Register 
on November 10, 2022.\3\ The Commission did not receive comments 
regarding the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Collateral 
Risk Management Framework, ICC Treasury Options Policies and 
Procedures, and the ICC Liquidity Risk Management Framework; 
Exchange Act Release No. 96237 (Nov. 4, 2022); 87 FR 67982 (Nov. 10, 
2022) (File No. SR-ICC-2022-013) (``Notice'').
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II. Description of the Proposed Rule Change

Background

    ICC's Clearing Participants provide collateral to ICC to satisfy 
their margin and Guaranty Fund requirements. To manage the risk 
associated with fluctuations in the value of this collateral, ICC 
applies haircuts to the collateral that it accepts. These haircuts 
reduce the value of the collateral for ICC's risk management purposes. 
Overall, the haircuts are designed to account for potential decline in 
asset liquidation value during stressed market conditions. The CRMF 
would describe, in a quantitative manner, how ICC derives the 
collateral haircuts.
    The overall purpose of the proposed rule change is to move the 
CRMF, the substance of which is currently found in Appendix 6 to 
Treasury Policy, into a separate, standalone document. Making the CRMF 
a separate, standalone document would allow ICC to treat the CRMF as a 
separate risk management model, subject to review and validation like 
ICC's other risk management models.
    To accomplish this objective, the proposed rule change would: (i) 
delete Appendix 6 to the Treasury Policy; (ii) move the substance of 
the information found in Appendix 6 to a standalone document entitled 
the CRMF; and (iii) update references in the Treasury Policy and LRMF 
to refer to the CRMF, rather than Appendix 6 to the Treasury Policy. 
The changes are discussed for each of the Treasury Policy, CRMF, and 
LRMF as follows.

Treasury Policy

    As discussed above, Appendix 6 to the Treasury Policy currently has 
information that the proposed rule change would move into the CRMF. 
Thus the proposed rule change would first delete Appendix 6 from the 
Treasury Policy and would move this information to the CRMF (as 
discussed below).

CRMF

    The CRMF would describe, in a quantitative manner, how ICC derives 
collateral haircuts, which ICC uses to manage the risk of fluctuations 
in the prices of collateral posted by Clearing Participants. As 
discussed above, the CRMF would include the substance of

[[Page 79923]]

the information that is currently found in Appendix 6 of the Treasury 
Policy.\4\ The proposed rule change would move this information into 
Sections I and III of the CRMF, with minor updates to reflect the re-
formatting of the CRMF as a standalone document.
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    \4\ See Notice, 87 FR 67982 at 67983 (detailing where components 
of Appendix 6 to the Treasury Policy would be relocated to within 
the CRMP).
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    In addition to this information from Appendix 6 of the Treasury 
Policy, the CRMF would include other information related to collateral 
risk management that is not currently found in Appendix 6. For example, 
Section IV would contain examples of how ICC would apply the 
methodology set out in the CRMF to arrive at haircuts for various types 
of collateral. Section V would present a list of referenced 
publications, which is also information not currently found in Appendix 
6.
    Because the CRMF would contain additional information that is not 
currently found in Appendix 6, and because the Commission is approving 
the CRMF as a separate document for the first time, the CRMF is 
described in its entirety as follows.
    The CRMF is divided into six sections. Section I describes in 
general how ICC computes collateral haircuts. To compute collateral 
haircuts, ICC estimates both the 5-day 99% expected shortfall and the 
2-day 99.9% Value-at-Risk, using the same time series. Of the two, ICC 
chooses the more conservative risk measure to establish the haircut 
factors that capture potential collateral value losses.
    Section I further contains three subsections. Subsections I.a and 
I.b describe in more detail how ICC derives haircuts for collateral 
that is denominated in foreign currencies and for collateral that is 
sovereign debt. Subsection I.a describes a two-stage approach to 
account for the risk associated with fluctuations of collateral asset 
prices denominated in foreign currencies and the corresponding time 
series is used for collateral denominated in foreign currencies.\5\ 
Subsection I.b describes how the fluctuations of the time to maturity 
yield rates are considered and how its corresponding time series are 
used for sovereign debt collateral. Subsection I.c describes how ICC 
arrives at a final haircut value, a process which includes rounding up 
to ensure stability and conservative bias.
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    \5\ Id.
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    Section II details one of the main components ICC's collateral risk 
model: the distribution that describes the realizations of the risk 
factor that in turn determines the price of a particular item of 
collateral.\6\ For example, as is described in the CRMF, for FX 
markets, the actual FX rate is the determining risk factor, whereas for 
government bonds the determining risk factor is the implied yield. 
Section II in turn has five subsections that further describe the model 
framework and this distribution.
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    \6\ See Notice, 87 FR 67982 at 67983.
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    Subsection II.a details certain distribution assumptions 
appropriate for foreign exchange (``FX'') and fixed income (``FI'') 
assets on which the haircut methodology is based. Subsection II.b 
describes how parameter estimates are obtained and used to compute 
multi-day risk measures. Subsection II.c details how the variability of 
a risk factor is described for risk management purposes and presents 
the selected measure of variability for all considered time series. 
Subsection II.d portrays multi-period forecasting, which includes the 
analysis that is performed to extend one-day forecasts to multi-period 
forecasts. Subsection II.e details the methods to obtain risk measures 
that are used for haircut purposes.
    Section III describes governance procedures relevant to the CRMF as 
well as a summary of the associated governance process. Upon the daily 
executions of collateral haircut factors, the Risk Department reviews 
the results, which are updated no less than monthly and the ICC Chief 
Risk Officer (``CRO'') has the discretion to update the haircut factors 
more often. The Risk Department would also conduct back-testing, at 
least quarterly, to review the statistical performance of the 
collateral haircut model. If the back-testing results show exceedances 
beyond the more conservative risk measure, then ICC's CRO and Risk 
Oversight Officer will determine whether to trigger subsequent remedial 
steps and consultations.
    Section IV provides examples of the application of the methodology 
to FX and FI instruments. Overall these examples demonstrate the 
viability of the provide examples of the modeling approaches to various 
assets. Each of the examples documents a three-stage approach to 
estimate risk measures and corresponding haircut factors.
    The final two sections, Section V and Section VI, provide 
referential background related to the document itself. Section V has a 
list of references and Section VI adds a revision history.

LRMF

    The LRMF changes would be the most minor of the changes of the 
three policies subject to this rule change. More specifically, instead 
of referencing the Treasury Policy Appendix 6, the amended LRMF would 
reference the CRMF.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\7\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \8\ and Rules 17Ad-22(e)(2)(i), 17Ad-22(e)(2)(v), and 17Ad-
22(e)(5) thereunder.\9\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(2)(v), and (e)(5).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\10\ Based on its 
review of the record, and for the reasons discussed below, the 
Commission believes the proposed rule change is consistent with the 
promotion of the prompt and accurate clearance and settlement of 
securities transactions at ICC because it would promote transparency 
and effective operation of the collateral assets risk management model.
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that unifying information on ICC's 
collateral assets risk management methodology in one document with more 
detail will improve transparency while promoting effective operation of 
the model. The CRMF would include information from Appendix 6 of the 
Treasury Policy but also would expand on it. Duplicative information 
would be removed from the Treasury Policy and references in the 
Treasury Policy and the LRMF would be updated to the CRMF as needed. 
Additional information would be provided regarding the collateral 
assets risk management model and methodology that would facilitate 
replication and validation by third parties. Additional information 
would be included on relevant parameters, computations, equations, 
definitions, and figures to describe relevant processes, which the 
Commission believes would help ensure responsible parties effectively 
complete their

[[Page 79924]]

assigned duties. The Commission believes that the proposed 
clarifications to ICC's rules would improve transparency and 
readability by avoiding unnecessary repetition and duplication in the 
Treasury Policy, which could help avoid confusion and potential future 
inconsistencies between policies. The Commission therefore believes 
that, by unifying and expanding the detail in the CRMF for the 
collateral assets risk management methodology in the CRMF, the proposed 
rule change would promote the prompt and accurate clearance and 
settlement of securities transactions, consistent with Section 
17A(b)(3)(F) of the Act.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)(i) and (v)

    Rules 17Ad-22(e)(2)(i) and (v) \12\ require 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. As discussed above, the proposed changes strengthen the 
governance procedures related to ICC's collateral assets risk 
management approach by memorializing associated governance processes 
and procedures in the CRMF. The CRMF details governance procedures 
associated with haircut factor updates, implementation, and review, 
including the responsible ICC personnel, department, group, or 
committee. The Commission therefore believes the proposed rule change 
should help ensure 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).\13\
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    \12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \13\ Id.
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C. Consistency With Rule 17Ad-22(e)(5)

    Rule 17Ad-22(e)(5) \14\ requires ICC to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to limit the assets it accepts as collateral to those with low 
credit, liquidity, and market risks, and set and enforce appropriately 
conservative haircuts and concentration limits if the covered clearing 
agency requires collateral to manage its or its participants' credit 
exposure; and require a review of the sufficiency of its collateral 
haircuts and concentration limits to be performed not less than 
annually. ICC's proposed changes would not change which assets it 
accepts as collateral. In addition to ICC's existing collateral 
requirements, the CRMF would provide a framework for setting and 
enforcing collateral haircuts. The Commission believes the additional 
procedures defined in Section III of the CRMF would help ensure that 
ICC establishes, reviews, and updates haircuts within defined 
intervals, and more frequently if deemed necessary. As described above, 
collateral haircut factor estimations are executed daily, and the ICC 
Risk Department reviews the results and determines at least monthly 
whether it will made any updates to collateral haircuts. Haircut 
factors can be updated more frequently at the discretion of the CRO or 
designee. The Commission therefore finds the proposed rule change is 
consistent with Rule 17Ad-22(e)(5).\15\
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    \14\ 17 CFR 240.17Ad-22(e)(5).
    \15\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act \16\ and Rules 17Ad-22(e)(2)(i) and (v) and 17Ad-22(e)(5) 
thereunder.\17\
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(2)(v), and (e)(5).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-ICC-2022-013), be, and hereby 
is, approved.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28195 Filed 12-27-22; 8:45 am]
BILLING CODE 8011-01-P