
[Federal Register Volume 81, Number 77 (Thursday, April 21, 2016)]
[Notices]
[Pages 23531-23533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09205]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77633; File No. SR-ICC-2016-005]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change To Update and Formalize the ICC Stress 
Testing Framework

April 15, 2016.
    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 March 31, 2016, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The principal purpose of the proposed rule change is to update and 
formalize ICC's Stress Testing Framework.

II. Self-Regulatory Organization'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 and 
discussed any comments it received on the proposed rule change. 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. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    ICC proposes to update and formalize its Stress Testing Framework. 
The Stress Testing Framework sets forth stress testing practices 
instituted by ICC, which are focused on ensuring the adequacy of 
systemic risk protections. The framework is designed to: Articulate the 
types of stress tests executed and the main purpose of each type of 
test; describe how stress tests are conducted; define the actual test 
scenarios currently executed; outline the range of remedial actions 
available (which, depending on the results, may include enhancements to 
the risk methodology or certain Clearing Participant (``CP'') specific 
action); and explain how stress test results are used in the governance 
process.
    ICC continues to evolve its stress testing practices for many 
reasons, including an increase in the number and type of instruments 
eligible for clearing, and evolution of the CDS market and the cleared 
portfolios themselves. The stress testing framework helps ICC identify 
potential weaknesses in the risk management methodology currently used. 
As such, the framework allows

[[Page 23532]]

ICC to identify potential model enhancements to the Initial Margin and 
Guaranty Fund models, as well as identify the need to exercise short 
term remedies based upon specific CP positions and risk of exposure 
prior to introduction of model enhancements.
    The framework outlines the stress test methodology employed by ICC. 
During the execution of stress testing, the ICC Risk Department (``Risk 
Department'') applies the standard set of pre-defined Stress Test 
Scenarios (as defined on the next page) against actual portfolios, 
sample portfolios derived from currently cleared positions, and 
expected future portfolios, as appropriate, to generate hypothetical 
profits or losses. The Risk Department compares the hypothetical losses 
to the available funds from the Initial Margin requirements and 
Guaranty Fund contribution related to the selected portfolios. A 
scenario deficiency is identified in the event that the hypothetical 
loss exceeds the protection provided by the available collateral assets 
and mutualization funds. Depending on the plausibility of the stress 
scenarios and the frequency and severity of any resulting deficiencies, 
the Risk Department may recommend enhancements to the risk methodology.
    ICC utilizes certain predefined scenarios for its stress testing, 
which fall into three standard categories: (i) Historically observed 
extreme but plausible market scenarios; (ii) historically observed and 
hypothetically constructed (forward looking) extreme but plausible 
market scenarios with a baseline credit event; and (iii) extreme model 
response tests (collectively, ``Stress Test Scenarios''). Discordant 
scenarios (i.e. scenarios under which selected risk factors move in 
opposite directions; commonly the behavior deviates from historically 
observed behavior) are applied to certain instruments to account for 
discordant price moves.
    ICC applies the Stress Test Scenarios to a variety of portfolios. 
Specifically, ICC applies the Stress Test Scenarios to all currently 
cleared portfolios. The Risk Department may also apply the Stress Test 
Scenarios to sample portfolios obtained from currently cleared 
portfolios. The Risk Department may also apply the Stress Test 
Scenarios to staff-constructed, expected future portfolios, as 
appropriate, to mimic expected future portfolios upon the launch of new 
services. In this case, the stress test analysis is presented to and 
reviewed by the Risk Committee prior to the launch of the new clearing 
services. ICC may design specific portfolio sets to test the validity 
of certain model/system assumptions. The stress test results from such 
expected future portfolio executions are reviewed and analyzed 
internally, and may be used to support future model initiatives.
    ICC also designs stress test analysis directed toward the 
identification of wrong-way risk in cleared portfolios. For every 
cleared portfolio, all positions in index risk factors and single name 
risk factors that exhibit high degree of association with the 
considered CP are used to create a sub-portfolio which will be 
subjected to additional stress test analysis. The constructed sub-
portfolio is subjected to the same Stress Test Scenarios utilized by 
ICC.
    The framework also describes ICC's reverse stress testing (Guaranty 
Fund Adequacy Analysis) practices. The purpose of the adequacy analysis 
is to provide estimates for the level of protection achieved by the 
clearinghouse via its Initial Margin and Guaranty Fund models. In 
performing its analysis, ICC considers a combination of adverse price 
realizations and idiosyncratic credit events associated with reference 
obligations on which the stress tested CP sold protection. The Stress 
Testing Framework also describes the correlation sensitivity analysis 
performed by ICC, based on Monte Carlo simulations, as well as the 
additional recovery rate sensitivity analysis.
    The framework also details how stress testing is utilized in ICC's 
governance process. ICC maintains a framework to ensure that the Risk 
Committee and Board are provided the appropriate level of transparency 
into the Risk Department's stress test results and contemplated 
methodology changes. Stress testing results are reviewed, at a minimum, 
by the Risk Department weekly. Additionally, stress testing results are 
provided to the Risk Committee weekly and a report of such results is 
presented to the Risk Committee on a monthly basis. Ad hoc reviews of 
the stress testing results may be undertaken at the discretion of the 
Chief Risk Officer.
    In the event of any deficiencies noted upon stress testing, the 
Risk Department must report such deficiencies to ICC senior management 
and the Risk Committee, and either (a) provide analysis that the 
results do not highlight a significant weakness in the stress testing 
or risk methodology; or (b) recommend enhancements to the stress 
testing or risk methodology. ICC senior management and the Risk 
Committee will review and recommend any stress testing or risk 
methodology enhancements to the Board, who is responsible for approval. 
The Risk Department may also choose to add new scenarios and portfolios 
in response to deficiencies noted upon stress testing; in this case, 
the Risk Department will discuss with the Risk Committee, who will 
recommend to the Board, who is responsible for approval.
    The Risk Department maintains a standard set of Stress Scenarios 
and portfolios (namely actual portfolios, sample portfolios derived 
from currently cleared portfolios, and expected future portfolios) that 
are executed on a regular basis. In the event that a scenario or 
portfolio in the standard set is no longer applicable, or has been 
superseded by new scenarios or portfolios, the Risk Department may wish 
to retire or modify the outdated scenario or portfolio. In this case, 
the Risk Department consults with ICC senior management; conducts 
analysis to support the recommendation; discusses the analysis and 
obtains a recommendation from the Risk Committee; and presents the 
final analysis to the Board approval. In the interest of prudent risk 
management, the Risk Department may wish to add scenarios and/or 
portfolios to the standard set; Risk Committee or Board approval is not 
required unless such scenarios and/or portfolios are added in response 
to stress testing deficiencies, as described above.
    Previous versions of the framework included the Risk Working Group 
in the governance structure, as ICC consulted with the Risk Working 
Group as it worked to develop its initial stress testing approach and 
appropriate scenarios. As ICC now has a fully developed approach, 
stress testing remains focused on data analysis and reporting results, 
which are addressed at the Risk Committee and Board level. Thus, to 
reflect current governance practices, references to the Risk Working 
Group have been removed.
    Section 17A(b)(3)(F) of the Act \3\ requires, among other things, 
that the rules of a clearing agency be designed to promote the prompt 
and accurate clearance and settlement of securities transactions, and 
to the extent applicable, derivative agreements, contracts and 
transactions and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule changes 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, to Section 
17(A)(b)(3)(F), \4\ because ICC believes that the proposed rule changes

[[Page 23533]]

will promote the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions. ICC's Stress Testing Framework describes ICC's stress 
testing practices, which are designed to ensure the adequacy of 
systemic risk protections. The Stress Testing Framework sets forth the 
methodology by which ICC evaluates potential portfolio profits/losses, 
compared to the Initial Margin and Guaranty Fund funds maintained, in 
order to identify any potential weakness in the risk methodology. As 
such, the proposed rule changes are designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions within the meaning 
of Section 17A(b)(3)(F) \5\ of the Act. The proposed changes will also 
satisfy the requirements of Rule 17Ad-22.\6\ In particular, the Stress 
Testing Framework contains stress testing practices designed to ensure 
that ICE Clear Credit maintains sufficient financial resources to 
withstand a default by the CP family to which it has the largest 
exposure in extreme but plausible market conditions, and that as a 
registered clearing agency acting as a central counterparty for 
security-based swaps, ICC shall maintain additional financial resources 
sufficient to withstand, at a minimum, a default by the two CP families 
to which it has the largest exposures in extreme but plausible market 
conditions,\7\ consistent with the requirements of Rule 17Ad-
22(b)(3).\8\
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    \3\ 15 U.S.C. 78q-1(b)(3)(F).
    \4\ Id.
    \5\ Id.
    \6\ 17 CFR 240.17Ad-22.
    \7\ Pursuant to confirmation via email with ICC on April 13, 
2016, staff in the Division of Trading and Markets modified this 
sentence to add the reference to ICC maintaining sufficient 
financial resources to withstand, at a minimum, the default by the 
two CP families to which it has the largest exposures in extreme but 
plausible market conditions to conform to the requirements of Rule 
17Ad-22(b)(3).
    \8\ 17 CFR 240.17Ad-22(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed rule changes would have any 
impact, or impose any burden, on competition. To the extent the Stress 
Testing Framework impacts CPs, the Stress Testing Framework applies 
uniformly across all CPs. Therefore, ICC does not believe the proposed 
rule changes impose any burden on competition that is inappropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization'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 (i) as the Commission may 
designate up to 90 days of such date 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 (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-ICC-2016-005 on the subject line.

Paper Comments

    Send paper comments in triplicate to Secretary, Securities and 
Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2016-005. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 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 Web site 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 
10:00 a.m. and 3:00 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 Web site at https://www.theice.com/clear-credit/regulation.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICC-2016-005 
and should be submitted on or before May 12, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-09205 Filed 4-20-16; 8:45 am]
 BILLING CODE 8011-01-P


