[Federal Register Volume 89, Number 113 (Tuesday, June 11, 2024)]
[Notices]
[Pages 49252-49254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12686]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100274; File No. SR-ICC-2024-003]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Collateral Risk 
Management Framework

June 5, 2024.

I. Introduction

    On April 16, 2024, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(2) of the Securities Exchange Act of 1934 (the ``Act'') 
\1\ and Rule19b-4 thereunder,\2\ a proposed rule change to revise its 
Collateral Risk Management Framework (``CRMF''). The proposed rule 
change was published for comment in the Federal Register on April 26, 
2024.\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; Exchange Act Release No. 100008 (Apr. 22, 
2024), 89 FR 32496 (Apr. 26, 2024) (File No. SR-ICC-2024-003) 
(``Notice'').
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II. Description of the Proposed Rule Change

    ICC is registered with the Commission as a clearing agency for the 
purpose of clearing credit default swaps (``CDS'') contracts. The CRMF 
describes ICC's risk management methodology for the collateral it 
accepts from Clearing Participants to collateralize their individual 
credit exposure to ICC, including a description of ICC's quantitative 
risk management approach that accounts for the risk associated with 
fluctuations of collateral asset prices (i.e., ``haircuts''). 
Collateral used to cover obligations are subject to a ``haircut'' 
assessment, where the assets are priced and posted at a discount to 
account for certain market risks. The current CRMF contemplates two 
risk measures for the haircut model approach--a 2-day 99.9% Value-at-
Risk (``VaR'') and a 5-day Expected Shortfall (``ES'')--and requires 
ICC to use the measure that produces the more conservative result. 
Based on a comprehensive review of its risk calculations and data, ICC 
has determined that VaR has never produced the more conservative 
measurement and, therefore, ICC has always used the ES measurement 
instead of VaR.\4\ These risk calculations and data also show that ES 
will continue to produce more conservative results compared to VaR in 
essentially all circumstances going forward.
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    \4\ See Notice, supra note 3, at 32496. ICC has provided 
responses to Commission requests for collateral risk data and 
analysis as part of its confidential Exhibit 3 to File No. SR-ICC-
2024-003. The confidential collateral risk data that ICC provided to 
the Commission as part of this filing shows the risk calculations 
conducted by ICC.
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    Based on these results, the purpose of the proposed rule change is 
to amend ICC's CRMF to permit ICC to rely solely on the ES to establish 
its haircut factors for the purposes of pricing and posting collateral. 
To do so, the proposed rule change would remove all references to the 
VaR from the CRMF.
    The proposed rule change also would remove, renumber, and revise 
certain figures in the CRMF. The current CRMF contains various charts, 
graphs, and other figures (collectively, ``Figures'') by which ICC 
displays the data used to establish the relevant measurements, 
including Figures relevant to both the VaR and ES measurements. To 
effectively remove all references to VaR from the CRMF, the proposed 
rule change also would remove and revise certain Figures as necessary 
to effectuate the removal of VaR from the CRMF. Specifically, in 
connection with the deletion of the 2-day 99.9% VaR risk measure, the 
proposed rule change

[[Page 49253]]

would remove Figures 11, 12, 26, 27, 28, 29, 38, and 39 because those 
figures relate to the VaR risk measure, including 1-day 99.9% VaR which 
was used to calculate the VaR risk measure. As a consequence of 
deleting those figures, the proposed rule change would renumber the 
remaining figures.
    ICC has further determined that altering certain Figures within the 
CRMF would better illustrate the data used to establish the remaining 
applicable ES risk measure. As discussed below, the changes are 
consistent with the current practice of the ICC under its current CRMF, 
or are being amended for illustrative purposes, and therefore will have 
no practical impact.
    Therefore, the proposed rule change would revise certain figures to 
correct the label on the y-axis from percentage to bps and to make 
other typographical fixes, specifically Figures 16, 17, 20, 21, 28 and 
30 (as renumbered). It would also correct the label on the x-axis in 
certain figures. Specifically, the proposed rule change would revise 
Figures 12, 13, and 26 (as renumbered), to correct the label on the x-
axis from percentage to bps. In doing so, the proposed rule change 
would re-scale those figures to reflect the change from percentage to 
bps. While the change from percentage to bps does not affect the data 
underlying the figures, the change affects the presentation of these 
figures because the scale will be larger as 1 bps equals 1/100 of a 
percentage point.
    The proposed rule change would similarly re-scale Figure 5 to make 
the x-axis bps and would also adjust the bin size of Figure 5, which 
relates, illustratively, to the thickness of the bars in the figure. 
The phrase ``bin size'' in risk data refers to the width of intervals 
used to group similar data points when analyzing risk. A change in bin 
size, while not changing the data, can apportion the data more widely 
or more narrowly across a figure within newly created intervals. As the 
distributions change, so could the trend lines across the intervals 
change.
    Finally, ICC has corrected certain other deficiencies by updating a 
footnote to a current link on its website, and in correcting small 
typographical errors elsewhere in the CRMF.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\5\ Under the Commission's Rules of Practice, the ``burden 
to demonstrate that a proposed rule change is consistent with the 
Exchange Act and the rules and regulations issued thereunder . . . is 
on the self-regulatory organization [`SRO'] that proposed the rule 
change.'' \6\
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    \5\ 15 U.S.C. 78s(b)(2)(C).
    \6\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\7\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\8\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\9\
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    \7\ Id.
    \8\ Id.
    \9\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    After carefully considering the proposed rule change, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to ICC. More specifically, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \10\ and Rules 17Ad-22(e)(5) thereunder.\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(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 and, to the extent 
applicable, derivative agreements, contracts, and transactions.\12\ 
Based on the review of the record, and for the reasons described below, 
ICC's proposed updates in the manner described above are consistent 
with the prompt and accurate clearance and settlement of securities 
transactions, derivatives agreements, contracts, and transactions.
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change is consistent with Section 17A(b)(3)(F) of 
the Act because it would clarify the CRMF by eliminating an unnecessary 
risk measurement. The use of ES as a risk measurement to establish 
haircut factors for pricing collateral is already a part of ICC's risk 
methodology, and ICC has determined that this calculation will always 
be more conservative than, and thus always used in lieu of, a VaR risk 
measurement. The confidential risk calculations and data provided by 
ICC and reviewed by the Commission demonstrate that ES has always been 
the most conservative methodology for setting collateral haircut 
factors when compared to VaR and that it is reasonable to expect that, 
going forward, ES will continue to be the most conservative methodology 
for setting collateral haircut factors in essentially all 
circumstances. Therefore, there would be no actual change in the actual 
haircut calculation when ICC applies its risk methodology after the 
proposed rule change is effectuated. Removing VaR as a risk measurement 
would help avoid the impression that ICC uses both VaR and ES, and 
therefore would make the CRMF clearer and easier to apply in practice.
    Having policies and procedures that clearly and accurately document 
the way ICC measures risk associated with fluctuations of collateral 
asset prices is an important component to the effectiveness of ICC's 
risk management system and supports ICC's ability to maintain adequate 
financial resources and collateral management resources. The proposed 
rule change is, consequently, consistent with the prompt and accurate 
clearance and settlement of securities transactions, derivatives 
agreements, contracts, and transactions, within the meaning of Section 
17A(b)(3)(F) of the Act.\13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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b. Consistency With Rule 17Ad-22(e)(5) of the Act

    Rule 17Ad-22(e)(5) under the Act 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 it 
requires collateral to manage its or its participants' credit 
exposure.\14\ Based on the review of the record, and for the reasons 
described below, ICC's

[[Page 49254]]

proposed revisions are consistent with Rule 17Ad-22(e)(5).
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    \14\ 17 CFR 240.17Ad-22(e)(5).
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    As noted above, while ICC's current CRMF indicates that it will use 
either VaR or ES to establish haircut factors for the purposes of 
pricing and posting collateral, in practice ES has always produced the 
more conservative results and therefore ICC has never utilized VaR to 
set and enforce the haircut factors it uses to price collateral. By 
removing VaR from CRMF and definitively identifying ES as the exclusive 
risk methodology that ICC will use to set and enforce the haircut 
factors it uses to price collateral going forward, the proposed 
revisions will make the CRMF more clear and transparent as a risk 
management framework and help facilitate ICC's efficient and effective 
pricing of Clearing Member collateral. Adjusting the Figures in the 
CRMF to better illustrate the data used by ICC will likewise enhance 
the clarity and transparency of ICC's risk methodology, and improve 
ICC's ability to communicate and explain its risk for establishing 
haircut factors for the purposes of pricing and posting collateral.
    Accordingly, the proposed rule change is consistent with the 
requirements of Rule 17Ad-22(e)(5) under the Act.\15\
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    \15\ 17 CFR 240.17Ad-22(e)(5).
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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) \16\ 
of the Act and Rule 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)(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-2024-003), 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-12686 Filed 6-10-24; 8:45 am]
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