
[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Notices]
[Pages 20058-20060]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08455]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74685; File No. SR-ICC-2014-24]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Granting Approval of Proposed Rule Change To Revise the ICC Risk 
Management Framework

April 8, 2015.

I. Introduction

    On December 22, 2014, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change SR-ICC-2014-24 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
proposed rule change was published for comment in the Federal Register 
on January 9, 2015.\3\ On February 20, 2015, the Commission extended 
the time period in which to either approve, disapprove, or institute 
proceedings to determine whether to disapprove the proposed rule change 
to April 9, 2015.\4\ The Commission received no comment letters 
regarding the proposed change. For the reasons discussed below, the 
Commission is granting approval of 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. 34-73980 (Jan. 5, 2015), 
80 FR 1466 (Jan. 9, 2015) (SR-ICC-2014-24).
    \4\ Securities Exchange Act Release No. 34-74341 (Feb. 20, 
2015), 80 FR 10551 (Feb. 26, 2015) (SR-ICC-2014-24).

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[[Page 20059]]

II. Description of the Proposed Rule Change

    ICC proposes revising the ICC Risk Management Framework to 
incorporate risk model enhancements related to Recovery Rate 
Sensitivity Requirements (``RRSR''), anti-procyclicality, and ICC's 
Guaranty Fund (``GF'') allocation methodology. ICC also proposes 
revisions which are intended to remove obsolete references and ensure 
consistency.
    ICC proposes revising its Risk Management Framework to incorporate 
risk model parameter estimation enhancements related to the RRSR 
computations. ICC states that under its current ICC Risk Management 
Framework, recovery rate stress scenarios are explicitly incorporated 
in the RRSR computations and for Jump-to-Default (``JTD'') 
considerations. The quantity RRSR is designed to capture fluctuations 
due to potential changes of the market expected recovery rates. In 
calculating the RRSR, all instruments belonging to a Risk Factor 
(``RF'') or Risk Sub-Factor (``RSF'') are subjected to Recovery Rate 
(``RR'') stress scenarios to obtain resulting Profit/Loss (``P/L'') 
responses, and the worst scenario response is chosen for the estimation 
of the RF/RSF RRSR. The JTD analysis is designed to capture the 
unexpected potential losses associated with credit events for assumed 
single-name-specific set of RR stress values. The JTD responses are 
determined by using minimum and maximum RR levels. Currently, the RRSR 
and JTD computations use the same RR stress levels.
    ICC proposes separating the RR stress levels for these two 
computations in order to introduce more dynamic and appropriate 
estimations of the RR stress levels for RRSR purposes. According to 
ICC, the RR levels for RRSR purposes will reflect a 5-day 99% Expected 
Shortfall (``ES'') equivalent risk measure associated with RR 
fluctuations. The proposal will also, as stated by ICC, eliminate index 
RRSR, as index RRs are not subject to market uncertainty, but rather 
driven by market conventions. ICC states that the dynamic feature of 
the RR stress level estimations is achieved by analyzing historical 
time series of RRs in order to calibrate a statistical model with a 
time varying volatility. Under this approach, ICC calculates, the RRSR 
will capture the exposure to RR fluctuations over a 5-day risk horizon 
described by 99% ES equivalent risk measure.
    Additionally, ICC proposes revising its Risk Management Framework 
to incorporate a portfolio level anti-procyclicality analysis that 
features price changes observed during and immediately after the Lehman 
Brothers (``LB'') default. In order to achieve an anti-procyclicality 
of Spread Response requirements, ICC proposes consideration of explicit 
price scenarios derived from the greatest price decrease and increase 
during and immediately after the LB default. According to ICC, these 
scenarios capture the default of a major participant in the credit 
market and the market response to the event. The introduced scenarios 
are defined in price space to maintain the stress severity during 
periods of low credit spread levels and high price when the Spread 
Response requirements computed under the current framework are expected 
to be lower.
    Further, as explained by ICC, the price scenarios derived from the 
greatest price decrease and increase during and immediately after the 
LB default are explicitly incorporated into the GF sizing to ensure an 
anti-procyclical GF size behavior. ICC states that this enhancement 
also addresses a regulatory requirement as described in Article 30 of 
the Regulatory Technical Standards,\5\ European Market Infrastructure 
Regulations.
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    \5\ Commission Delegated Regulation (EU) No. 153/2013 of 19 
December 2012 Supplementing Regulation (EU) No. 648/2012 of the 
European Parliament and of the Council with regard to Regulatory 
Technical Standards on Requirements for Central Counterparties (the 
``Regulatory Technical Standards'').
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    Furthermore, ICC proposes enhancements to its GF allocation 
methodology. Currently, ICC states that the GF allocations reflect a 
risk ``silo'' approach, which separates each GF risk component. Under 
the current methodology, the allocation of GF reflects the Clearing 
Participants' (``CPs'') own riskiness in proportion to each GF risk 
component size and the increase or decrease of the ``silo'' size. 
Therefore, GF allocations can significantly fluctuate in response to 
position changes in the portfolios of the CPs that drive the GF size. 
ICC proposes modifying its methodology so that the GF allocations 
reflect the CPs' total uncollateralized losses across all GF risk 
components. According to ICC, under the proposed approach, the GF 
allocations are independent of the distribution of the uncollateralized 
losses across various GF risk components or ``silos'' and the 
fluctuation of each CP's uncollateralized losses within various GF risk 
components or ``silos.'' Additionally, ICC added clarifying language 
regarding how the GF computations are performed with explicit currency 
dependent expressions.
    ICC also proposes certain non-substantive changes to the Risk 
Management Framework to address CFTC recommendations. Specifically, ICC 
proposes amending the Risk Management Framework to reflect ICC's 
current approach towards portfolio diversification, by unifying 
diversification and hedge thresholds and explicitly setting both to be 
equal to the lowest estimated sector Kendall Tau correlation 
coefficient. ICC also proposes clarifying language regarding how ICC 
meets its liquidity requirements.
    Additionally, ICC proposes non-substantive changes throughout the 
framework to correct obsolete references. Specifically, ICC is removing 
language stating that the Chief Risk Officer is a dual employee of both 
ICC and its sister company, The Clearing Corporation. ICC is also 
removing language stating that The Clearing Corporation is the provider 
of risk management services to ICC. Furthermore, ICC is removing 
references to the ``U.K. Financial Services Authority'' and replacing 
with references to the ``U.K. Prudential Regulatory Authority.'' 
Finally, ICC is adding ``The European Securities and Markets 
Authority'' to the sample list of competent authorities for capital 
adequacy regulation listed in the framework.
    ICC also proposes non-substantive changes throughout the Risk 
Management Framework to ensure consistency. ICC is updating the mission 
statement contained within the document to be consistent with ICC's 
Board-approved mission statement. Also, ICC is modifying the frequency 
by which the Risk Department monitors various risk metrics from a 
quarterly basis to a monthly basis to reflect actual business 
practices.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \6\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such self-regulatory organization. Section 17A(b)(3)(F) 
of the Act \7\ requires, among other things, that the rules of a 
clearing agency are designed to promote the prompt and accurate 
clearance and

[[Page 20060]]

settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts, and transactions and, in general, to 
protect investors and the public interest.
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A of the Act \8\ and the rules thereunder applicable to 
ICC, including the requirements of Rule 17Ad-22.\9\ The Commission 
believes that the part of the proposal separating the RR stress levels 
for the JTD and RRSR computations would use a more robust and 
quantitative driven approach for establishing the RR stress scenarios, 
resulting in more dynamic and appropriate estimations of the RR stress 
levels for RRSR purposes. The Commission finds that the incorporation 
of the Lehman Brothers default price scenarios into the computation of 
the Spread Response requirements enhances the anti-procyclical feature 
of ICC's risk methodology. The Commission further finds that the 
proposed rule change that modifies the current GF allocation 
methodology to reflect the CPs' total uncollateralized losses across 
all GF components regardless of the fluctuation of the CPs' 
uncollateralized losses with respect to each GF component would result 
in more stable attributions of GF contributions to individual CP/client 
portfolios. Finally, the Commission finds that the proposed non-
substantive and clarification changes are each designed to more 
accurately reflect ICC's current practices.
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    \8\ 15 U.S.C. 78q-1.
    \9\ 17 CFR 240.17Ad-22.
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    Therefore, the Commission believes that the proposal is designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and derivative agreements, contracts and transactions 
cleared by ICC and, in general, to protect investors and the public 
interest, consistent with Section 17A(b)(3)(F) of the Act \10\ and 
Rules 17Ad-22(b)(1), (2) and (3).\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(1), (2) and (3).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \12\ and the 
rules and regulations thereunder.
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    \12\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-ICC-2014-24) be, 
and hereby is, approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08455 Filed 4-13-15; 8:45 am]
 BILLING CODE 8011-01-P


