[Federal Register Volume 89, Number 157 (Wednesday, August 14, 2024)]
[Notices]
[Pages 66154-66156]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-18077]



[[Page 66154]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100679; File No. SR-ICC-2024-008]


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

August 8, 2024.
    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 July 30, 2024, ICE Clear Credit LLC (``ICC'') 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 primarily by ICC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to revise the 
ICE CDS Clearing: Back-Testing Framework (``Back-Testing Framework''). 
These revisions do not require any changes to the ICC Clearing Rules 
(the ``Rules'').

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

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

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

(a) Purpose
    ICC proposes revising the Back-Testing Framework, which describes 
ICC's back-testing approach and procedures and includes guidelines for 
remediating poor back-testing results. The proposed amendments enhance 
how credit default swap index options that expire in-the-money--within 
the margin period of risk, are treated for profit or loss purposes in 
back-testing and other clarifications. ICC believes that such revisions 
will facilitate the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts, and 
transactions for which it is responsible. ICC proposes to make such 
changes effective following Commission approval of the proposed rule 
change. The proposed revisions are described in detail as follows.
    ICC proposes to enhance Subsection 2.4. of the Back-Testing 
Framework by adding a detailed description on how in-the-money 
(``ITM'') expiring credit default swap (``CDS'') index option (``Index 
Swaption'') positions, within the margin period of risk (``MPOR''),\3\ 
are treated in back-testing. Specifically, the proposed revisions 
enhance how Index Swaptions that expire ITM within the MPOR, are 
treated for profit or loss (``P/L'') purposes in back-testing. The 
proposed revisions provide that with respect to Index Swaptions that 
expire ITM within the MPOR, for back-testing calculation purposes, the 
mark to market (``MTM'') value of the expired ITM Index Swaption 
positions are replaced with their corresponding intrinsic values 
(``IV'') \4\ of such Index Swaptions based on their corresponding 
underlying CDS index's end-of-day price at the given back-testing day. 
The ITM Index Swaption position, with a positive IV, results in an 
option exercise on the expiration date and reflects the positive value 
to the option holder of buying/selling the underlying CDS index 
position at the fixed option strike price and selling/buying the 
underlying CDS index position at the end-of-day price for a profit. 
Likewise, the sold ITM Index Swaption position, with negative IV, 
results in the assignment of an underlying CDS index position to the 
seller of the option on the expiration date, where the assigned 
underlying CDS index position could be bought or sold protection 
position depending on the type of the sold option instrument. The 
unrealized P/L for the exercised/assigned ITM Swaption positions, 
within the MPOR, are computed against the underlying MTM, after the ITM 
Index Swaptions expiration date, for back-testing purposes.
---------------------------------------------------------------------------

    \3\ Margin-period-of-risk or MPOR for back testing purposes 
reflects the greatest considered risk horizon used for ICC's initial 
margin requirements.
    \4\ In the context of ITM Index Swaptions, intrinsic value or IV 
is the difference between the current price of the underlying CDS 
index and the Swaption's exercise price.
---------------------------------------------------------------------------

    Also, ICC proposes the addition of Table 5, `Minimum 5-Day P/L 
Detail for Expiring Options Positions' to Subsection 2.4. Table 5 
provides an illustrative example of the computation of MTM and 
unrealized P/L for back-testing purposes for an ITM Index Swaption 
position that expires within the MPOR. The example calculation provided 
in Table 5 is intended to provide further transparency of ICC's back-
testing P/L treatment of ITM Index Swaptions that expire within the 
MPOR.
    ICC proposes additional clarifications to the Back-Testing 
Framework. The proposed amendments include the addition of footnote 1 
in Subsection 1.1 that clarifies `Net Asset Value' is also referred to 
and is equivalent to `Mark to Market.' Also, ICC proposes to change 
references from ``P&L'' in Table 3 and Table 4 to ``P/L'' to 
consistently refer to `profit or loss' throughout the Back-Testing 
Framework.
    Lastly, ICC proposes to update Section 6, ``Revision History''.
(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \5\ and the regulations 
thereunder applicable to it, including the applicable standards under 
Rule 17Ad-22.\6\ In particular, Section 17A(b)(3)(F) of the Act \7\ 
requires, in part, that the rules of ICC (as a registered clearing 
agency) promote the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts and 
transactions cleared by ICC, assure the safeguarding of securities and 
funds in the custody or control of ICC or for which it is responsible, 
and protect investors and the public interest. The proposed amendments 
include enhancements on how expiring Index Swaptions are valued in 
back-testing. The additional revisions further ensure clarity and 
transparency with respect to ICC's back-testing approach, procedures, 
and guidelines for remediating poor back-testing results. As such, ICC 
believes that the proposed rule change would help assure the soundness 
of the model by ensuring that back-testing analysis is conducted 
properly to assess the performance of the model. The proposed rule 
change is therefore consistent with the prompt and accurate clearing 
and settlement of the contracts cleared by ICC, the safeguarding of 
securities and funds in the custody or control of ICC or for which it 
is responsible, and the protection of investors and the public 
interest, within

[[Page 66155]]

the meaning of Section 17A(b)(3)(F) of the Act.\8\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1.
    \6\ 17 CFR 240.17Ad-22.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ Id.
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(2)(i) and (v) \9\ require each covered clearing 
agency 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. ICC's Back-Testing Framework clearly 
assigns and documents responsibility and accountability for performing 
back-testing analyses and remediating poor back-testing results. The 
enhancements on how expiring Index Swaptions are treated in back-
testing, the Back-Testing Framework would continue to ensure that ICC 
maintains clear and transparent governance procedures and arrangements 
with respect to the performance, review, and reporting of back-testing 
results and the remediation of poor back-testing results. As such, in 
ICC's view, the proposed rule change continues to 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 Rules 17Ad-
22(e)(2)(i) and (v).\10\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \10\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(ii) \11\ requires 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, including 
by maintaining additional financial resources at the minimum to enable 
it to cover a wide range of foreseeable stress scenarios that include, 
but are not limited to, the default of the two participant families 
that would potentially cause the largest aggregate credit exposure for 
the covered clearing agency in extreme but plausible market conditions. 
As discussed above, the proposed revisions would enhance how expiring 
Index Swaptions are treated in back-testing. The additional revisions 
enhance the clarity and transparency of the Back-Testing Framework, 
which would strengthen the documentation and ensure that it remains up-
to-date, clear, and transparent. ICC believes that the proposed changes 
would enhance ICC's ability to manage risks and maintain appropriate 
financial resources, including by ensuring that back-testing analysis 
is conducted properly to assess the performance of the model. As such, 
the proposed amendments would strengthen ICC's ability to maintain its 
financial resources and withstand the pressures of defaults, consistent 
with the requirements of Rule 17Ad-22(e)(4)(ii).\12\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \12\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(6)(vi) \13\ requires each covered clearing agency 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, is monitored by management on an ongoing basis and is 
regularly reviewed, tested, and verified by (A) conducting back-tests 
of its margin model at least once each day using standard predetermined 
parameters and assumptions; and (B) conducting a sensitivity analysis 
of its margin model and a review of its parameters and assumptions for 
back-testing on at least a monthly basis, and considering modifications 
to ensure the back-testing practices are appropriate for determining 
the adequacy of ICC's margin resources. The Back-Testing Framework 
continues to require the performance of daily, weekly, monthly, and 
quarterly portfolio-level back-testing analyses, and the remediation of 
poor-back-testing results. The proposed amendments consist of 
enhancements to the treatment of expiring Index Swaptions for back-
testing purposes, and other clarifications to the Back-Testing 
Framework. These procedures in the Back-Testing Framework continue to 
promote the soundness of ICC's model and ensure that ICC's risk 
management system is effective and appropriate in addressing the risks 
associated with discharging its responsibilities. The proposed changes 
are thus consistent with the requirements of Rule 17Ad-
22(e)(6)(vi).\14\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22(e)(6)(vi).
    \14\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed changes to 
ICC's Back-Testing Framework will apply uniformly across all market 
participants. Therefore, ICC does not believe the proposed rule change 
imposes any burden on competition that is inappropriate in furtherance 
of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking); 
or
     Send an email to [email protected]. Please include 
file number SR-ICC-2024-008 on the subject line.

Paper Comments

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

All submissions should refer to file number SR-ICC-2024-008. 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 (https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking). 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

[[Page 66156]]

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 
a.m. and 3 p.m. Copies of such filings will also be available for 
inspection and copying at the principal office of ICE Clear Credit and 
on ICE Clear Credit's website at https://www.ice.com/clear-credit/regulation.
    Do not include personal identifiable information in submissions; 
you should submit only information that you wish to make available 
publicly. We may redact in part or withhold entirely from publication 
submitted material that is obscene or subject to copyright protection. 
All submissions should refer to file number SR-ICC-2024-008 and should 
be submitted on or before September 4, 2024.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-18077 Filed 8-13-24; 8:45 am]
BILLING CODE 8011-01-P