[Federal Register Volume 90, Number 87 (Wednesday, May 7, 2025)]
[Notices]
[Pages 19362-19366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2025-07911]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-102969; File No. SR-ICC-2025-001]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to ICC's Risk Parameter Setting
and Review Policy and the Risk Management Model Description
May 1, 2025.
I. Introduction
On March 12, 2025, 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 (``Act'') \1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to revise its Risk
Parameter Setting and Review Policy (``RPSRP'') and its Risk Management
Model Description (``RMMD'') (``Proposed Rule Change''). The Proposed
Rule Change was published for comment in the Federal Register on March
20, 2025.\3\ The
[[Page 19363]]
Commission has not received any comments on 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\ Securities Exchange Act Release No. 102679 (Mar. 14, 2025),
90 FR 13223 (Mar. 20, 2025) (File No. SR-ICC-2025-001) (``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 CDS contracts.\4\ As a clearing agency, one of
ICC's functions is to manage risks inherent to the clearance and
settlement of securities transactions. To help manage these risks, ICC
requires Clearing Participants to post initial margin and guaranty fund
payments. The RMMD describes ICC's quantitative risk models and the
associated methods and techniques used to help ICC determine its
initial margin and guaranty fund requirements.\5\ The calculations
described in the RMMD use certain parameters.\6\ In the RPSRP, ICC
describes how it sets and reviews these parameters, including how it
performs sensitivity analysis related to certain parameter settings.\7\
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in ICC's Clearing Rules, RPSRP, or the
RMMD, as applicable.
\5\ Notice, 90 FR at 13224.
\6\ Id. at 13223.
\7\ Id. Some parameters addressed in the RPSRP are used in
contexts other than calculating initial margin or guaranty fund
requirements. Additionally, some parameters addressed in the RPSRP
are used in calculations described in the ICC Risk Management
Framework. Id.
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ICC proposes changes to both the RPSRP and the RMMD to better
document its risk management methodology and processes.\8\ ICC's
proposed changes fall into four categories. First, ICC proposes changes
to the RPSRP to update the risk management mean absolute deviation
(``MAD'') parameters for CDS single name risk factors (``RFs'') daily
rather than monthly.\9\ Second, ICC proposes to enhance calibration
details and documentation related to the anti-procyclical condition
(``APC'') measure for CDS index options in the RPSRP and the RMMD.
Third, ICC proposes to update the calculation of the risk factor level
maximum loss (``MaxLoss'') in the RMMD. Fourth, ICC proposes minor
corrections, clarifications, and additions in both the RPSRP and the
RMMD.
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\8\ Id.
\9\ As described in the RMMD, ICC considers every CDS index,
sub-index, or single name to be a separate risk factor.
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1. Daily Updates to the Risk Management MAD Parameters
The RPSRP contains details related to parameters considered in
calculating the integrated spread response (``ISR''). The ISR is a risk
model component that captures the credit spread and recovery rate
fluctuations and is computed by creating profit/loss distributions from
a set of jointly simulated hypothetical credit spread and recovery rate
scenarios.\10\ This component helps ICC to determine the riskiness of
instrument positions in various hypothetical contexts.\11\ One of the
ISR parameters is the risk management MAD.\12\
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\10\ Id. at 13223 n.3.
\11\ Id. at 13224 n.7.
\12\ Id. at 13223.
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Currently, risk management MADs are updated at different times
depending on whether the risk management MADs are for indexes or single
names. The index RF level risk management MADs are automatically
updated daily in the risk management system.\13\ On the other hand, the
single-name RF level risk management MADs are reviewed and analyzed
prior to implementing any single-name RF level parameter updates into
the risk management system and at least monthly.\14\
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\13\ Id.
\14\ Id.
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ICC's proposal would change the RPSRP to automatically update the
single-name RF level risk management MADs daily rather than at least
monthly.\15\ To effect this change, ICC proposes editing language in
Section 1.7.1 of the RPSRP, which states that index RF level risk
management MADs are automatically updated daily in the RM system, to
note that single name RF level risk management MADs are automatically
updated daily too.\16\ For the same reason, the proposal would also
delete text in this section indicating that the single name RF level
risk management MADs are reviewed and analyzed (at least monthly) prior
to implementing any single name RF level parameter updates into the
risk management system.\17\
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\15\ Id.
\16\ Id.
\17\ Id.
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ICC proposes automatic daily updates for single name RF level risk
management MADs because these risk factors benefit from daily
updates.\18\ Specifically, market responses for single name RFs are
sensitive to rapidly changing single name risk factor-specific market
conditions.\19\ Automatic updates allow ICC to timely capture
significant MAD changes and minimize the cumulative effect of MAD
changes between two parameter updates, thereby reducing the level of
procyclicality.\20\ Currently, Section 1.7.1 of the RPSRP indicates
that automatic updates to the risk management MADs are more suitable
for index RFs than single-name RFs. Because automatic updates are
suitable for risk management MADs for both single names and indexes,
ICC proposes deleting the suitability comparison.\21\ The Proposed Rule
Change would instead indicate that single-name RFs also exhibit a
dynamic market response to rapidly changing single-name RF-specific
market conditions, suitable for and benefitting from automatic RM MAD
updates, consistent with the above described rationale for implementing
automatic daily updates for single name RF level risk management MADs.
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\18\ Id.
\19\ Id. at 13223 n.5.
\20\ Id. at 13225.
\21\ Id. at 13223.
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2. APC Measure for CDS Index Options
The Proposed Rule Change would also add more detail to the RPSRP's
and RMMD's discussion of anti-procyclicality (``APC'') parameters
related to the ISR. Procyclicality, in part, refers to the potential
for an increase in margin or guaranty fund requirements during periods
of economic stress to exacerbate financial distress. ICC has adopted
APC parameters to help mitigate procyclicality in the ISR.\22\ These
parameters function by considering instrument price changes during
extreme market events.\23\
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\22\ Id. at 13224.
\23\ Id.
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ICC proposes to add text to Section 1.7.3 of the RPSRP related to
the APC parameter for the ISR. Specifically, ICC proposes adding
calibration details describing how the APC measure accounts for
asynchronous hedging risk through use of asynchronous scenarios.
Asynchronous scenarios correspond to the dislocation of the underlying
CDS index versus CDS index option hedges in the event of a liquidation
auction.\24\ One example of where this could occur is when the CDS
index options sub-portfolio is auctioned at a different time from the
underlying CDS index sub-portfolio.\25\ In line with this definition,
the added calibration details would note that, for options instruments,
the asynchronous scenarios are constructed such that options prices are
not consistent with the CDS index price levels.\26\ ICC proposes these
changes to increase the clarity of, and provide additional detail for,
ICC's description of its parameter setting methodology, in line with
recommendations from an
[[Page 19364]]
independent validation report.\27\ To account for the added detail to
Section 1.7.3, ICC proposes amending a table that describes the
parameters used in ICC's risk model. ICC proposes adding to this table
a reference to this asynchronous parameter, which will be described as
the ``underlying price dislocation factors for options extreme
asynchronous price scenarios'' in a table containing ICC's core risk
model parameters.\28\
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\24\ Notice, 90 FR at 13224 n.8.
\25\ Id.
\26\ ICC also proposes adding calibration details to better
describe certain aspects of its asynchronous scenarios.
\27\ Notice, 90 FR at 13224.
\28\ Id. This table also includes additional columns describing
information including the review approach, review frequency,
reviewer, type, and name for the core risk model parameters.
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ICC also proposes changes to Section VII.5.3 of the RMMD, similar
to the changes to the RPSRP described above, to address independent
validation report recommendations.\29\ The Proposed Rule Change would
add text describing synchronous and asynchronous hedging risk for index
options as they relate to equations already included in the RMMD.\30\
The Proposed Rule Change would also add text describing the different
calculations that ICC performs for synchronous and asynchronous
scenarios, and where to find information related to the index RF-
specific price dislocation factor in the index option context. The
Proposed Rule Change would also add calibration details related to the
mechanics of ICC's use of asynchronous scenarios in the index option
context.
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\29\ Notice, 90 FR at 13224.
\30\ Synchronous hedging risk stress scenarios correspond to the
preservation of the underlying CDS index versus CDS index option
hedges in the event of a liquidation auction. Here index option
prices would directly reflect the observed underlying index levels.
Id. at 13224 n.8.
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ICC's proposal would also revise Section VII.5.3 of the RMMD to
make changes to how it determines the underlying price dislocation
factors used in asynchronous scenarios for index options. Currently,
the underlying price dislocation factors for asynchronous scenarios in
the index option context are set to a specific value in the RMMD. The
Proposed Rule Change would determine these underlying price dislocation
factors by considering a ratio between peak price decreases or
increases. ICC proposes these changes to potentially improve the
accuracy of the underlying price dislocation factors by using a
potentially shifting estimate, rather than a static number.\31\
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\31\ Id. at 13224-25.
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3. Risk Factor Level MaxLoss
ICC proposes changes to Section III.2 of the RMMD to make the CDS
index and CDS single name MaxLoss boundary condition more stable and
conservative.\32\ This boundary condition consists of the sum of all
applicable RF level maximum loss quantities. ICC considers this maximum
loss when calculating the final initial margin requirement for a
particular portfolio. ICC determines this maximum loss separately for
CDS index positions and CDS single name positions.
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\32\ Id. at 13224.
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With respect to CDS index positions, ICC currently considers (i)
the loss responses of a portfolio's CDS index positions alone and (ii)
the loss responses of a portfolio's CDS index positions and CDS index
option positions combined. The Proposed Rule Change would eliminate the
components of the MaxLoss boundary conditions that consider the loss
responses of a portfolio's CDS index positions alone. Instead, ICC
would consider the loss responses of a portfolio's CDS index positions
and CDS index option positions combined, as associated with extreme
price moves.\33\ Considering loss responses associated with extreme
price moves for a portfolio's CDS index and CDS index option positions
combined could potentially lead to larger losses for these sub-
portfolios, which would make the MaxLoss boundary condition more
conservative.\34\
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\33\ ICC would continue to consider loss responses accounting
for the liability associated with the defaulting net protection
buyers and sellers for the combined index and index option
positions.
\34\ Notice, 90 FR at 13224.
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With respect to single name positions, when determining the MaxLoss
boundary condition, there is no CDS single-name option for ICC to
consider.\35\ Accordingly, ICC does not propose any changes related to
considering options, as with CDS index positions. However, ICC proposes
to incorporate the extreme price moves described above. Currently, ICC
considers only the liability associated with defaulting net protection
buyers and sellers for a given single name. ICC proposes considering
portfolio responses to extreme price moves alongside this existing
liability. Similar to the changes to CDS index positions described
above, ICC is making this change to make the MaxLoss boundary condition
for single names more conservative as well.\36\
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\35\ ICC currently clears options on certain CDS indices only.
See https://www.ice.com/credit-derivatives/options.
\36\ Notice, 90 FR at 13224.
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4. Minor Corrections, Clarifications, and Additions
Finally, the Proposed Rule Change would also make minor
corrections, clarifications, and additions to the RPSRP and RMMD.
Currently, Section 1.7.1 of the RPSRP indicates that ICC estimates and
reviews the univariate single name ISR parameters and their assumptions
at least on a monthly basis. ICC proposes to remove the reference to
single names so that this provision indicates that ICC estimates and
reviews the univariate ISR parameters and their assumptions at least
monthly. Given that ICC's reviews encompass both single name and index
ISR parameters, it is unnecessary to specify single names here.\37\
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\37\ Id. at 13223.
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Section 1.7.1 of the RPSRP also currently indicates that, on a
monthly basis, ICC's Risk department presents to, and reviews with, the
ICC Risk Working Group the performed analysis (meaning the estimation
and review of the univariate ISR parameters and their assumptions), and
any proposed parameter updates. ICC's proposal would add language
indicating that ICC's Risk department presents any ``additional''
proposed parameter updates, rather than just any proposed parameter
updates, to the ICC Risk Working Group. ICC proposes this change to
clarify that ICC's Risk department presents to and reviews with the ICC
Risk Working Group not only the automatic parameter updates described
in the RPSRP, but also any proposed parameter updates beyond the
automatic parameter updates.\38\
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\38\ Id. at 13223-24.
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ICC's proposal would also create a revision history in the RMMD and
adjust the revision history in the RPSRP. The addition of a revision
history in the RMMD and the edits to the RPSRP revision history would
capture the proposed changes described above.
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.\39\ 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
[[Page 19365]]
the self-regulatory organization [`SRO'] that proposed the rule
change.'' \40\
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\39\ 15 U.S.C. 78s(b)(2)(C).
\40\ 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,\41\ 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.\42\ 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.\43\
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\41\ Id.
\42\ Id.
\43\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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After carefully considering the Proposed Rule Change, the
Commission finds that the Proposed Rule Change is consistent with
Section 17A(b)(3)(F) of the Act \44\ and Rule 17Ad-22(e)(6)(i) \45\
thereunder, as described in detail below.
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\44\ 15 U.S.C. 78q-1(b)(3)(F).
\45\ 17 CFR 240.17Ad-22(e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Under Section 17A(b)(3)(F) of the Act, ICC's rules, among other
things, must be ``designed to promote the prompt and accurate clearance
and settlement of securities transactions and . . . assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible . . . .''
\46\ Based on a review of the record, and for the reasons discussed
below, ICC's proposed rule change is consistent with Section
17A(b)(3)(F).
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\46\ 15 U.S.C. 78q-1(b)(3)(F).
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ICC proposes several changes that mitigate procyclicality. The
Proposed Rule Change would automatically update the risk management
mean absolute deviation parameters for CDS single name risk factors
daily rather than monthly. These automatic daily updates allow ICC to
timely capture significant MAD changes and minimize the cumulative
effect of MAD changes between two parameter updates, thereby reducing
the level of procyclicality.\47\
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\47\ Notice, 90 FR at 13225.
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ICC's proposal would also enhance calibration details and
documentation related to the anti-procyclical condition measure for CDS
index options. Specifically, ICC proposes to add details and
descriptions regarding how ICC addresses asynchronous and synchronous
scenarios in its APC measures. ICC also proposes adjusting how it
determines underlying price dislocation factors used in asynchronous
scenarios for index options to consider a ratio between peak price
decreases and increases rather than using a specific value. By more
completely addressing these asynchronous and synchronous scenarios--
particularly the asynchronous scenarios--and adjusting the method of
determining underlying price dislocation factors, ICC strengthens its
APC parameters.
The Proposed Rule Change would also update the calculation of the
risk factor level MaxLoss. Specifically, ICC would make the CDS index
and CDS single name MaxLoss boundary condition more stable and
conservative by adjusting these conditions to consider sub-portfolio
loss responses associated with extreme price moves and, in some cases,
eliminating the need to consider index-only portfolio loss responses.
These changes make the MaxLoss boundary conditions more conservative
because they potentially may lead to larger losses for sub-
portfolios.\48\
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\48\ Notice, 90 at 13224.
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Reducing the level of procyclicality helps to ensure that ICC
collects initial margin sufficient to cover its credit exposures to its
Clearing Participants without adding financial stress. This supports
Clearing Participants' ability to satisfy margin requirements, and
therefore ICC's ability to continue operating as a central counterparty
with the financial resources necessary to promptly and accurately clear
and settle CDS transactions and safeguard securities and funds. Thus,
these proposed changes are consistent with Section 17A(b)(3)(F) of the
Act.\49\
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\49\ 15 U.S.C. 78q-1(b)(3)(F).
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ICC also proposes changes to correct, clarify, and add to the RPSRP
and RMMD. ICC's proposal would clarify that the ICC Risk department's
estimates and reviews of univariate ISR parameters and their
assumptions encompass both single name and index ISR parameters. The
Proposed Rule Change would also add language indicating that the ICC
Risk Department presents to and reviews with the ICC Risk Working Group
not only the automatic parameter updates described in the RPSRP but
also any proposed parameter updates beyond the automatic parameter
updates. These proposed changes clarify what ICC personnel are
presenting and reviewing in certain situations, helping to ensure that
all relevant information is presented and reviewed as required. This
helps to ensure that individuals and groups at ICC are appropriately
informed, which enhances their ability to make decisions that allow ICC
to promptly and accurately clear and settle CDS transactions and
safeguard securities and funds.
Accordingly, the Proposed Rule Change is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\50\
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\50\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) requires ICC to ``establish, implement,
maintain and enforce written policies and procedures reasonably
designed to . . . cover, if the covered clearing agency provides
central counterparty services, its credit exposures to its participants
by establishing a risk-based margin system that, at a minimum
considers, and produces margin levels commensurate with, the risks and
particular attributes of each relevant product, portfolio, and market .
. . .'' \51\ Based on a review of the record, and for the reasons
discussed below, ICC's proposed rule change is consistent with Rule
17Ad-22(e)(6)(i).
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\51\ 17 CFR 240.17Ad-22(e)(6)(i).
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Among other things, in establishing policies and procedures for
margin, a covered clearing agency generally should consider whether its
margin model, to the extent practicable and prudent, limits the need
for destabilizing, procyclical changes.\52\ ICC's proposed changes make
its initial margin requirements less procyclical. For example, by
requiring automatic updates of the risk management MAD parameters for
CDS single name risk factors daily rather than monthly, ICC would
timely capture significant MAD changes and minimize the cumulative
effect of MAD changes between two parameter updates, thereby reducing
procyclicality.\53\ By more completely describing the APC measure for
index options and changing the price dislocation factor from a static
number to a ratio, ICC strengthens its APC measure and better addresses
procyclicality in its ISR and ultimately
[[Page 19366]]
its margin calculations.\54\ By adjusting the CDS index and CDS single
name MaxLoss boundary conditions to consider sub-portfolio loss
responses associated with extreme price moves and, in some cases,
eliminating the need to consider index-only portfolio loss responses,
ICC makes its MaxLoss boundary conditions more conservative. This
allows ICC to better avoid uneconomical portfolio level initial margin
requirements.\55\ Because these proposed changes work to minimize
procyclicality, their establishment is reasonably designed to establish
a risk-based margin system that covers ICC's credit exposures to its
participants and considers, and produces, margin levels commensurate
with, the risks and particular attributes of each relevant product,
portfolio, and market.
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\52\ Standards for Covered Clearing Agencies, Exchange Act
Release No. 78961 (Sept 28, 2016), 81 FR 70786, 70819 (Oct 13, 2016)
(S7-03-14).
\53\ Notice, 90 FR at 13225.
\54\ Id. at 13224.
\55\ ICC Risk Management Model Description, filed as
confidential Exhibit 5B.
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Accordingly, the Proposed Rule Change is consistent with the
requirements of Rule 17Ad-22(e)(6)(i).\56\
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\56\ 17 CFR 240.17Ad-22(e)(6)(i).
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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, Section 17A(b)(3)(F) of the Act \57\ and Rule 17Ad-
22(e)(6)(i).\58\
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\57\ 15 U.S.C. 78q-1(b)(3)(F).
\58\ 17 CFR 240.17Ad-22(e)(6)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
that the proposed rule change (SR-ICC-2025-001) be, and hereby is,
approved.\59\
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\59\ In approving the proposed rule change, the Commission
considered the proposal's impacts 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.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2025-07911 Filed 5-6-25; 8:45 am]
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