
[Federal Register Volume 81, Number 110 (Wednesday, June 8, 2016)]
[Notices]
[Pages 36979-36981]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13477]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77982; File No. SR-ICC-2016-005]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Amendment No. 1 and Order Approving Proposed Rule Change, as 
Modified by Amendment No. 1 Thereto, To Update and Formalize the ICC 
Stress Testing Framework

June 2, 2016.

I. Introduction

    On March 31, 2016, ICE Clear Credit LLC (``ICC'' or ``ICE Clear 
Credit'') 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 update and formalize ICC's stress testing 
framework. On April 20, 2016 ICC filed Amendment No. 1 to the 
proposal.\3\ The proposed rule change was published for comment in the 
Federal Register on April 21, 2016.\4\ The Commission did not receive 
comments on the proposed rule change. For the reasons discussed below, 
the Commission is approving the proposed rule change, as modified by 
Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ICE Clear Credit filed Amendment No. 1 to further revise the 
Stress Testing Framework to incorporate language regarding the 
treatment of unrated reference entities for the purposes of applying 
the stress scenarios. Under Amendment No. 1, ICC has clarified that 
unrated reference entities are treated as non-investment grade 
entities with respect to the application of stress scenarios. 
Amendment No. 1 is not subject to comment because it is a technical, 
clarifying amendment that does not alter the substance of the 
proposed rule change or raise any novel regulatory issues.
    \4\ Securities Exchange Act Release No. 34-77633 (April 15, 
2016), 81 FR 23531 (April 21, 2016) (SR-ICC-2016-005).
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II. Description of the Proposed Rule Change

    The principal purpose of the proposed rule change is to update and 
formalize ICC's Stress Testing Framework, which sets forth the stress 
testing practices instituted by ICC. The framework, according to ICC, 
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 states that the stress testing framework helps ICC identify 
potential weaknesses in the risk management methodology currently used 
and, as a result, allows 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.
    ICC represents that during the execution of stress testing, the ICC 
Risk Department (``Risk Department'') applies the standard set of pre-
defined Stress Test Scenarios against actual portfolios, sample 
portfolios derived from currently cleared positions, and expected 
future portfolios, as appropriate, to generate hypothetical profits or 
losses. According to ICC, 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. ICC states that, 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 represents that it 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''). ICC states that 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 asserts that it applies the Stress Test Scenarios to a variety 
of portfolios. Specifically, ICC applies the Stress Test Scenarios to 
all currently cleared portfolios. ICC states that its Risk Department 
may also apply the Stress Test Scenarios to sample portfolios obtained 
from currently cleared portfolios and may also apply the Stress Test 
Scenarios to staff-constructed, expected future portfolios, as ICC's 
Risk

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Department deems appropriate, to mimic expected future portfolios upon 
the launch of new services. In this case, ICC states that the stress 
test analysis is presented to and reviewed by ICC's Risk Committee 
prior to the launch of the new clearing services. ICC represents that 
it may design specific portfolio sets to test the validity of certain 
model/system assumptions. According to ICC, 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 states that it also designs stress test analysis directed 
toward the identification of wrong-way risk in cleared portfolios. For 
every cleared portfolio, ICC asserts that 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. According to ICC, 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 represents that it considers a 
combination of adverse price realizations and idiosyncratic credit 
events associated with reference obligations on which the stress tested 
CP sold protection. ICC's 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.
    ICC's framework also details how stress testing is utilized in 
ICC's governance process. ICC states that it maintains a framework to 
ensure that ICC's Risk Committee and Board are provided with 
transparency into the Risk Department's stress test results and 
contemplated methodology changes. According to ICC, stress testing 
results are reviewed, at a minimum, by ICC's Risk Department weekly. 
Additionally, ICC states that stress testing results are provided to 
ICC's 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 ICC's Chief Risk 
Officer.
    In the event of any deficiencies noted upon stress testing, ICC 
represents that its 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 states that ICC senior 
management and the Risk Committee will review and recommend any stress 
testing or risk methodology enhancements to the ICC Board, which is 
responsible for approval. ICC states that 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, which will recommend to the Board, 
which is responsible for approval.
    ICC asserts that 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, ICC 
claims that the Risk Department may wish to retire or modify the 
outdated scenario or portfolio, in which case, the Risk Department 
will, with ICC senior management: Conduct analysis to support a 
recommendation; discuss the analysis and obtain a recommendation from 
the Risk Committee; and present the final analysis to the Board for 
approval. ICC states that, in the interest of prudent risk management, 
the Risk Department may wish to add scenarios and/or portfolios to the 
standard set and that 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 ICC's 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. ICC states that, as it now has a 
fully developed approach, stress testing remains focused on data 
analysis and reporting results, which ICC claims are addressed at the 
Risk Committee and Board level. Thus, to reflect current governance 
practices, references to the Risk Working Group have been removed from 
its framework.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \5\ 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 \6\ 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, to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible and, in general, to protect investors and the public 
interest. In addition, Rule 17Ad-22(b)(3),\7\ requires registered 
clearing agencies to maintain, at a minimum, sufficient financial 
resources to withstand a default by the participant family to which it 
has the largest exposure in extreme but plausible market conditions, 
and for registered clearing agencies acting as a central counterparty 
for security-based swaps, to maintain additional financial resources 
sufficient to withstand, at a minimum, a default by the two participant 
families to which it has the largest exposures in extreme but plausible 
market conditions.
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    \5\ 15 U.S.C. 78s(b)(2)(C).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22(b)(3).
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    The Commission finds that the proposed rule change is consistent 
with the requirements of Section 17A of the Act \8\ and the rules and 
regulations thereunder applicable to ICC.
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    \8\ 15 U.S.C. 78q-1.
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    ICC's Stress Testing Framework establishes ICC's stress testing 
practices. These stress testing practices are designed, among other 
things, to ensure the adequacy of ICC's financial resources under 
applicable legal requirements, and set forth the methodology by which 
ICC evaluates potential portfolio profits and losses, compared to the 
Initial Margin and Guaranty Fund funds maintained, in order to identify 
any potential weakness in ICC's risk methodology. Such financial 
resources will facilitate ICC's continued operations in the event of a 
participant default. As such, the Commission believes that the proposed 
rule changes are designed to promote the prompt and accurate clearance 
and settlement of securities transactions,

[[Page 36981]]

derivatives agreements, contracts, and transactions within the meaning 
of Section 17A(b)(3)(F) \9\ of the Act.
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    \9\ Id.
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    The Commission also believes that the proposed changes will satisfy 
the applicable requirements of Rule 17Ad-22.\10\ 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 participant 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 maintains additional financial resources 
sufficient to withstand, at a minimum, a default by the two participant 
families to which it has the largest exposures in extreme but plausible 
market conditions, consistent with the requirements of Rule 17Ad-
22(b)(3).\11\
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    \10\ 17 CFR 240.17Ad-22.
    \11\ 17 CFR 240.17Ad-22(b)(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-2016-005) as 
modified by Amendment No. 1, 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. 2016-13477 Filed 6-7-16; 8:45 am]
 BILLING CODE 8011-01-P


