
[Federal Register Volume 80, Number 249 (Tuesday, December 29, 2015)]
[Notices]
[Pages 81384-81386]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32649]



[[Page 81384]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76733; File No. SR-ICC-2015-017]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change To Revise the ICC Risk Management 
Framework and ICC Treasury Operations Policies and Procedures, and 
Adopt the ICC Risk Management Model Description Document

December 22, 2015.

I. Introduction

    On October 20, 2015, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19b(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change (SR-ICC-2015-017) to 
reorganize the ICC Risk Management Framework (``RMF'') in response to a 
recommendation from the Commodity Futures Trading Commission (``CFTC'') 
regarding improvements related to the governance of ICC's risk 
management documentation. The proposed rule change was published for 
comment in the Federal Register on November 9, 2015.\3\ The Commission 
did not receive comments on the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-76331 (Nov. 3, 2015), 
80 FR 69261 (Nov. 9, 2015) (SR-ICC-2015-017).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    ICC has proposed reorganizing the RMF in response to a 
recommendation from the CFTC regarding improvements to the governance 
of ICC's risk management documentation. Specifically, ICC has proposed 
organizational and clarifying edits to the RMF and the Treasury 
Operations Policies and Procedures, and has proposed adopting a new 
Risk Management Model Description Document. ICC has represented that 
these revisions do not require any changes to the ICC Clearing Rules 
(``Rules'').
    ICC will move the Collateral Assets Risk Management Framework 
appendix from the RMF to the Treasury Operations Policies and 
Procedures. Accordingly, ICC will update references throughout the RMF 
to the Collateral Assets Risk Management Framework appendix to refer 
instead to the Treasury Operations Policies and Procedures. ICC will 
move appendices containing technical risk management information 
(formerly, RMF Appendices 3-5) to the new ICC Risk Management Model 
Description Document. Accordingly, ICC will update references 
throughout the RMF to these appendices to refer to the Risk Management 
Model Description Document.
    ICC will also make general updates and edits throughout the RMF for 
clarity and consistency. Such edits will include correcting verb 
tenses, adopting consistent abbreviations, and adjusting sentence order 
to assure logical presentation and word flow, and using more succinct 
language. ICC has represented that the edits are not substantive and do 
not affect the nature of ICC's risk management program.
    Within the Overview section of the RMF, ICC will refine the 
Business Overview details to more accurately describe the business 
operations of Intercontinental Exchange, Inc. and ICC.
    ICC will edit the Governance and Organization section of the RMF to 
more fully describe which topics the Risk Committee is responsible to 
advise the Board. The list of documents reviewed by the Risk Committee 
on at least an annual basis will be revised to include the ICC Risk 
Management Model Description Document, the ICC Treasury Operations 
Policies and Procedures, and the ICC Liquidity Risk Management 
Framework. The Risk Working Group (``RWG'') description will be updated 
to note that the group consists of risk personnel from ICC Clearing 
Participants (``CPs''), and to clarify that the RWG is responsible for 
reviewing ICC's risk philosophy and recommending changes to ICC's RMF. 
The validation function of the risk philosophy and tolerance will be 
removed from the list of RWG responsibilities as, according to ICC, 
such functions are the ultimate responsibility of the Board. The 
Advisory Committee description will be updated to note that the 
committee is comprised of representatives of up to twelve clients/
customers of ICC CPs (ICC has represented that currently there are 
twelve client/customer members). The CDS Default Committee description 
will be updated to note that the committee is comprised of 
representatives from ICC CPs on a rotating basis and to remove 
reference to a duty to provide feedback on ICC's RMF and parameters 
because the CDS Default Committee is only convened upon the declaration 
of a default. The committee description will be enhanced to note that, 
as the CDS Default Committee assists ICC in determining and managing 
Minimum Target Prices for auctioned portfolios related to a default, 
the committee oversees necessary auction(s) as well as the process to 
re-establish a matched book. The Risk Management Organization section 
will be updated to remove outdated language stating that the Risk 
Management Department conducts an annual review of ICC's Risk 
Management Framework Policy Statement and submits proposed changes to 
the RWG, Risk Committee, and Board. Further, the section will be 
updated to remove reference to the Risk Management Department being 
responsible for ICC's intellectual capital and personnel, while 
creating, implementing and maintaining ICC's risk management policies.
    ICC will make edits to the Product Summary section of the RMF. ICC 
will clarify language to refer to Index CDS Instruments (as opposed to 
Index Products), Single Name CDS Instruments (as opposed to Single Name 
CDS), and reference entities (as opposed to companies). The Index CDS 
instruments section will be revised to remove reference to the 
International Index Company. The Single Name CDS Instruments section 
will be modified to refine language concerning what constitutes a 
credit event. The list of attributes defining a CDS contract will be 
enhanced to include Maturity, as well as reference Notional Amount, as 
opposed to Notional Principal. Reference to the terms of the contracts 
being prescribed by the ICC Rules and Participant Agreement will be 
removed. The Risk Factors, Risk Sub-Factors and Instruments section 
will be revised to enhance the definition of Risk Sub-Factor to refer 
to a specific single name reference obligation seniority and doc clause 
combination.
    ICC will make edits to the Systemic Risk Management Approach 
section of the RMF, which includes Waterfall Levels 1 through 5. ICC 
will revise Waterfall Level 1: Membership Criteria to remove reference, 
within the Operational Criteria, to employee participation on industry 
committees (e.g. ISDA, DTCC, etc.). Furthermore, the ongoing monitoring 
of participants section will be enhanced to state: (i) intraday 
monitoring includes intraday CDS market levels and potential equity 
price movements, as well as news from Bloomberg and other information 
sources; and (ii) daily monitoring and analysis includes prior day's 
final pays by CPs, daily change in Initial Margin (``IM''), margin 
deficits, unrealized intraday profits/losses for cleared portfolios, 
risk impact of new intraday

[[Page 81385]]

trades on cleared portfolios, daily end-of-day (``EOD'') levels, CPs' 
Guaranty Fund (``GF'') obligations, CPs' day-over-day change in GF 
requirements relative to each firms prior day levels, and CPs' day-
over-day change in GF requirements relative to the total GF balance. 
ICC will remove from the ongoing monitoring of participants section 
review the following components: Daily prices and spreads (including 
missed EOD submissions), daily EOD prices (including missed prices), 
prior day's and intraday total IM as a percentage of CP's or CP's 
guarantor's capital, collateral pricing report for missing prices, and 
collateral deposits no longer in compliance with ICC's acceptable 
collateral policy. ICC asserts that such elements are included in the 
enhanced daily monitoring and analysis section or have been deemed no 
longer relevant to the monitoring process. Further, ICC will clarify 
that the Risk Management Department reviews weekly stress test results 
for extreme risk event scenarios to ensure sufficient margin cover 
under market conditions, as opposed to drastic market conditions. The 
Participant Withdrawal subsection will be revised to remove reference 
to ICC's right of One Time Assessment and instead refer more generally 
to ICC's power of assessment.
    ICC will revise the Waterfall Level 2: Initial Margin description 
to clarify that ICC's IM requirements consist of a set of individual 
components that account for various risks and that the methodology 
includes consideration of hypothetical scenarios for those components. 
ICC will add language to the Spread Response Requirements section to 
note that the hypothetical prices used in calculating the instrument 
spread response risk IM requirement reflect the time-to-maturity 
horizon reduced by one day. ICC will revise the distributions and 
related parameters subsection to refer to the more specific feature 
Mean Absolute Deviation (``MAD'') as opposed to the more general term 
``scale.'' ICC will remove reference to a set Exponentially Weighted 
Moving Average decay factor, as ICC asserts the factor is dynamic, 
subject to review and changed by the Risk Department in consultation 
with the Risk Committee. ICC will also remove outdated language 
regarding the initial setting of Auto Regressive process for first 
order parameters.
    ICC will revise the description of the considered scenarios to 
provide a mathematical description of how the considered scenarios are 
constructed based on statistical analysis of historical time series. 
The term structure scenario construction will now be clearly defined in 
terms of 99% Value-at-Risk equivalent risk measures for different 
tenors, and the cross-tenor correlation structure will be estimated 
from time series analysis. ICC will revise the term ``contracting'' to 
``tightening'' in the context of spread behavior to, according to ICC, 
provide conformity to more commonly used credit market terminology.
    Within the Recovery Rate (``RR'') Sensitivity Requirements 
subsection, ICC will clarify that two additional single name-specific 
stress-test RRs are considered in determining the requirements.
    ICC will revise Waterfall Level 3: Mark-to-Market Margin 
description. Specifically, ICC will revise the methodology section to 
remove specific calculations regarding the methodology and instead 
refer to the ICC EOD Price Discovery Policies and Procedures, which ICC 
asserts contain a more fulsome methodology description.
    ICC will revise Waterfall Level 4: Intra-day Risk Monitoring/
Special Margin Call Execution to clarify language describing the 
calculation of prices to determine the adequacy of collected IM 
intraday. Specifically, as part of the calculation, ICC will utilize 
bid-offer quotes which will be automatically fed into the ICC risk 
management intraday monitoring system.
    ICC will revise Waterfall Level 5: Guaranty Fund description. The 
ICC GF is designed to provide adequate funds to cover losses associated 
with the default of the two CPs, as well as any affiliated CPs (i.e. 
any other CP that owns, is owned by, or is under common ownership with 
such a CP) with the greatest potential uncollateralized losses. ICC 
will add language to note that the set of all affiliated CPs is 
considered as a CP affiliate group. Within the Waterfall Level 5 
description, ICC will revise language to reinforce this CP affiliate 
group concept. Within the Guaranty Fund Calculation for Clearing 
Participants subsection, ICC will remove reference to summary concepts 
of uncollateralized loss given default, uncollateralized spread 
response losses, uncollateralized basis risk losses, and 
uncollateralized interest rate losses, previously used in describing 
the computations of the stress scenario losses. ICC will more precisely 
define the factors considered within the GF calculation and related 
stress test scenarios as the following: occurrence of multiple credit 
events, uncollateralized loss-given-default from self-referencing 
positions, adverse spread scenarios, adverse index-single-name basis 
widening, adverse interest rate scenarios, and anti procyclicality.
    ICC will add language to the Guaranty Fund Allocation subsection of 
the RMF to state that the CP's total uncollateralized GF stress loss is 
the difference between the sum of the stress loss given default, GF 
stress spread response, GF stress basis risk and interest rate losses 
and the sum of the IM idiosyncratic jump-to-default requirements, IM 
spread response requirement, IM basis and interest risk requirement.
    ICC will revise the General Wrong Way Risk and Contagion Measures 
subsection to remove technical information that was moved to the Risk 
Management Model Description Document.
    ICC will revise the Position Concentration Limits subsection of the 
Risk Limits and Controls section to clarify that ICC's concentration 
charge is designed to increase a CP's IM requirement toward the risk of 
maximum loss and ultimately, at the extreme, toward the full expected 
notional amount of liability of the sold protection or the present 
value of the amount of coupon payments for bought protection. ICC will 
summarize language referring to the notional liability of the 
protection sold or the full value of coupon payments to refer more 
generally to loss associated with the portfolio. ICC will revise the 
Model Time Horizon subsection to note that the standard risk horizon 
can be increased by the ICC Risk Management Department during banking 
holiday periods to reflect ICC's limited ability to execute margin 
calls without Risk Committee consultation. ICC will further revise the 
Position Concentration Thresholds subsection to clarify that, if at any 
point, either the margin requirements or concentration charges grow to 
be a concern, ICC has the authority to execute special or intraday 
margin calls, and/or to increase the rate at which the concentration 
charges grow.
    ICC will revise the Stress Testing subsection of the Back Testing 
and Stress Testing section to remove specific assumptions associated 
with the various stress scenarios used in the daily risk management 
process. For proprietary reasons, these specific assumptions will now 
be included in ICC's Stress Testing Framework. ICC will also clarify 
that the Risk Management Department presents stress results at the 
monthly Risk Committee meetings, as well as recommendations about next 
steps and recommendations to add or retire stress tests.
    ICC will make edits to the Default Treatment section to remove 
outdated language stating that ICC seconds

[[Page 81386]]

traders eligible to serve on the ICE Clear Europe Default Management 
Committee. ICC will remove language regarding the auctioning of multi-
currency portfolios for stylistic reasons, as the following sentences 
provide the information in a more accessible format.
    ICC will revise the Cash Settlement subsection of the Settlement 
section to remove outdated language stating that ICC will evaluate a 
transition to a central bank model for U.S. cash if available.
    ICC will make edits to the Market Investment Risk Management 
section of the RMF. Specifically, ICC will delete redundant language 
regarding ICC's investment policy that can be found in the ICC Treasury 
Operations Policies and Procedures.
    ICC will enhance the ICC Clearing Participant Risk Management 
Questionnaire appendix to add more specific details that better capture 
the intent of the questions contained within.
    ICC will revise the Overview section of the Clearing Participant 
Default Management Procedures appendix to refer more generally to ICC's 
default management procedures, as opposed to offering specific details 
provided elsewhere within the appendix. ICC will also revise the CDS 
Default Committee subsection to remove language stating that the CDS 
Default Committee Members are responsible for determining and adjusting 
minimum target prices for auctions. ICC will add language to the 
Hedging and Liquidation subsection to note that the CDS Default 
Committee is responsible for assisting ICC with respect to liquidating 
and hedging positions with the Non-Defaulting CPs, in consultation with 
the Chief Risk Officer. ICC will clarify the Auction Procedures/
Competitive Bidding section to state that the auction bidding process 
will be open for an ICC specified minute window, as opposed to a 
specific 15-minute window.
    ICC will remove the Collateral Assets Risk Management Framework 
Appendix 7 from the RMF and add it as an appendix to the ICC Treasury 
Operations Policies and Procedures. Accordingly, references within the 
Treasury Operations Policies and Procedures to the RMF will be updated. 
Additionally, ICC will update its list of banking relationships 
contained within the document. ICC will also make conforming and non-
material edits to the document.
    Finally, ICC will create the Risk Management Model Description 
Document, which includes the technical risk information previously 
included in Appendices 3 to 5 of the RMF as well as information 
previously included in explanatory risk documents. Technical risk 
information, previously included in explanatory risk documents, will be 
incorporated consistently throughout the new Risk Management Model 
Description Document. The inclusion of such information does not 
constitute a substantive change to the RMF, as it serves to enhance the 
transparency of the technical details of the current implementation 
described in the previous RMF. In the Risk Management Model Description 
Document, ICC will provide additional technical information to improve 
the understanding and/or replication of the models. ICC will also 
provide improved logical connections among all model components, which, 
ICC asserts, should contribute to developing a general intuition for 
ICC's risk approach.
    ICC represents that material changes to the Risk Management Model 
Description Document will be approved by ICC's Board of Managers and 
submitted, in the appropriate form to regulators consistent with other 
documents constituting ICC's RMF. The Risk Management Model Description 
Document will include a technical description of ICC's Initial Margin 
methodology (Recovery Rate Sensitivity Risk Analysis; Loss Given 
Default Risk Analysis; Liquidity Risk Analysis; Large Position Risk 
Analysis; Jump-To-Default Risk Analysis; Interest Rate Sensitivity Risk 
Analysis; Basic Risk Analysis; Spread Risk Analysis; Multi-Currency 
Portfolio Treatment; and Portfolio Loss Boundary Condition) and ICC's 
Guaranty Fund methodology (Guaranty Fund Size Estimation; Guaranty Fund 
Requirements and Periodic Adjustments; and General Wrong Way Risk and 
Contagion Stress Tests). Within the Spread Risk Analysis section, where 
ICC previously had listed explicit risk factors within the RMF, ICC 
will replace such explicit risk factors with the underlying formulas 
used in deriving such factors.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \4\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that the 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 \5\ requires, among other things, that the rules of a 
clearing agency are designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78s(b)(2)(C).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 17A of the Act \6\ and the rules and 
regulations thereunder applicable to ICC. The proposed rule change is 
designed to clarify ICC's risk management policies through the proposed 
revisions to the RMF and associated changes to the Treasury Operations 
Policies and Procedures. Additionally, the Risk Management Model 
Description Document should reflect the consolidation of certain 
technical risk documents into one singular document, further clarifying 
these technical issues. The Commission therefore believes that the 
proposed revisions to the RMF and Treasury Operations Policies and 
Procedures, as well as creation of the Risk Management Model 
Description Document, are designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivatives agreements, contracts, and transactions in 
accordance with Section 17A(b)(3)(F) of the Act.\7\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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 \8\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-ICC-2015-017) be, 
and hereby is, approved.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 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.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-32649 Filed 12-28-15; 8:45 am]
 BILLING CODE 8011-01-P


