[Federal Register Volume 83, Number 207 (Thursday, October 25, 2018)]
[Notices]
[Pages 53917-53922]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-23279]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84457; File No. SR-ICC-2018-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Amendment No. 1 and Order Granting Accelerated Approval of 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to ICC's 
Risk Management Model Description Document and ICC's Risk Management 
Framework

October 19, 2018.
    On July 5, 2018, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') a proposed rule 
change to transition from a stress-based methodology to a Monte Carlo-
based methodology for the spread-response and recovery-rate-
sensitivity-response components of the initial margin model (SR-ICC-
2018-008), 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 July 24, 
2018.\3\ On September 5, 2018, the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
approve or disapprove the proposed rule change.\4\ The Commission did 
not receive any comments on the Proposed Rule Change. On October 12, 
2018, ICC filed Amendment No 1 to the proposed rule change.\5\ The 
Commission is publishing this notice to solicit comment on Amendment 
No. 1 from interested persons and is approving the proposed rule 
change, as modified by Amendment No. 1 (hereinafter, ``Proposed Rule 
Change'') on an accelerated basis.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 83662 (July 18, 2018), 
83 FR 35033 (July 24, 2018) (SR-ICC-2018-008) (``Notice'').
    \4\ Securities Exchange Act Release No. 84032 (September 5, 
2018), 83 FR 46000 (September 11, 2018) (SR-ICC-2018-008).
    \5\ In Amendment No. 1 to the proposed rule change, ICC provided 
additional details and analyses surrounding the proposed rule change 
in the form of a confidential Exhibit 3.
    \6\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the ICE Clear Europe Clearing Rules, which 
is available at https://www.theice.com/publicdocs/clear_europe/rulebooks/rules/Clearing_Rules.pdf.
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I. Description of the Proposed Rule Change

    ICC's current approach uses a stress-based approach for the spread-
response and recovery-rate (``RR'') sensitivity-response components of 
the initial margin model. Specifically, to derive the spread-response 
component, the current approach considers a set of hypothetical 
``tightening'' and ``widening'' credit-spread scenarios from which it 
computes instrument Profit/Loss (``P/L'') responses for every Risk 
Factor (``RF'') scenario.\7\ All instrument P/L responses for a 
scenario are aggregated to obtain the portfolio P/L response for that 
scenario.\8\ Because the set of scenarios does not reflect the joint 
distribution of the considered RFs, offsets between P/Ls are applied to 
provide some portfolio benefits.\9\ To derive the RR sensitivity-
response component, all instruments belonging to a RF or Risk Sub-
Factor (``RSF'') are subjected to RR stress scenarios to obtain the 
resulting P/L responses, and the worst-scenario response is chosen for 
the estimation of the RF/RSF RR sensitivity-response component.\10\
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    \7\ Id.
    \8\ Id.
    \9\ Id.
    \10\ Id.
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    ICC's current stress-based approach generates a limited number of 
stress scenarios that may not capture the risk of portfolios with more 
complex, non-linear instruments.\11\ Additionally, the current approach 
does not provide for a consistent estimation of the portfolio-level 
spread response based on a defined risk measure (e.g., Value-at-Risk 
(``VaR'')) and quantile (e.g., 99%).\12\ To alleviate the problem, the 
Proposed Rule Change would revise ICC's Risk Management Model 
Description Document and its Risk Management Framework to a Monte 
Carlo-based methodology for the spread-response and recovery-rate-
sensitivity-response (``RR'') components of ICC's initial margin model.
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    \11\ Notice, 83 FR at 35033.
    \12\ Id.
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    The proposed Monte Carlo-based methodology would utilize standard 
tools in modeling dependence, which can be seen as a means for 
constructing multivariate distributions with different univariate 
distributions and with desired dependence structures, to generate the 
spread and RR scenarios.\13\ It also would provide flexibility in 
modeling tail dependence, an important concept in risk management that 
provides information about how frequently extreme values are expected 
to occur, and that ICC considers particularly suitable for implementing 
its Monte Carlo framework.\14\
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    \13\ Id.
    \14\ Id.
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    Specifically, under the Monte Carlo approach, the ``integrated 
spread response'' component would replace the spread-response and RR-
sensitivity-response components.\15\ This component would be computed 
by creating P/L distributions from a set of jointly-simulated 
hypothetical (forward looking) spread and RR scenarios.\16\ ICC would 
not change the univariate RF distribution assumptions under the 
proposed Monte Carlo-based methodology.\17\ ICC would utilize the 
simulated scenarios to derive the hypothetical spread and RR levels at 
which each instrument is repriced in order to generate a scenario 
instrument P/L based on post-index-decomposition positions.\18\ ICC 
would create P/L distributions from the set of jointly-simulated 
hypothetical (forward looking) credit spread and RR scenarios to 
compute the integrated spread-response component.\19\ The P/L 
distributions for each instrument would allow ICC to decompose 
portfolio level P/L at the RF level and to estimate RF-level risk 
measures.\20\ The proposed model would utilize the 5-day 99.5% VaR 
measure and allow ICC to be compliant with the European Market 
Infrastructure Regulation (``EMIR'') as applied to Over-The-Counter 
instruments.\21\
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    \15\ Id.
    \16\ Id.
    \17\ Notice, 83 FR at 35033-34.
    \18\ Notice, 83 FR at 35034.
    \19\ Id.
    \20\ Id.
    \21\ Id.

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[[Page 53918]]

Revisions to the `Initial Margin Methodology' Section of the Risk 
Management Model Description Document

    ICC proposes revisions to the `Initial Margin Methodology' section 
of the Risk Management Model Description Document to reflect its 
transition to a Monte Carlo-based methodology for the spread-response 
and RR-sensitivity-response components.\22\ ICC also proposes to 
clarify its initial margin model to note that it features stress loss 
considerations and a P/L distribution analysis at selected quantile 
levels that are 99% or higher.\23\ The proposed changes would further 
include a description of each of the initial margin model components, 
which would be separated into statistically calibrated components and 
stress-based add-on components.\24\ The statistically calibrated 
components (i.e., spread and RR dynamics, interest rate dynamics, and 
index/single-name (``SN'') basis dynamics) would reflect fluctuations 
in market observed or implied quantities, and their direct P/L 
impacts.\25\ The stress-based add-on components (i.e., idiosyncratic 
loss given default (``LGD''), wrong-way-risk (``WWR'') LGD, bid/offer 
width risk, and concentration risk) would reflect the risk associated 
with low probability events with limited information sets.\26\
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    \22\ Id.
    \23\ Id.
    \24\ Id.
    \25\ Id.
    \26\ Id.
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    First, ICC proposes certain minor updates to terminology in the 
`LGD Risk Analysis' section consistent with the transition to the Monte 
Carlo approach.\27\ Specifically, the proposed revisions would clarify 
that the LGD calculation considers RSF-specific RR level scenarios and 
that the Jump-To-Default (``JTD'') RR stress levels would be updated if 
needed. ICC proposes to update the Profit/Loss-Given-Default (``P/
LGD'') calculation at the RSF level to indicate the association between 
the JTD and the RR level scenarios.\28\ ICC proposes to remove a 
reference to the stress levels noted in the current `RR Sensitivity 
Risk Analysis' section. ICC proposes to move the RF level P/LGD 
calculation ahead of the Risk Factor Group (``RFG'') LGD calculations 
to avoid disrupting the grouping of RFG LGD calculations.\29\
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    \27\ ICC also proposes to reorganize the `Initial Margin 
Methodology' section to begin with the `LGD Risk Analysis' section. 
Id.
    \28\ Id.
    \29\ Id.
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    Second, ICC proposes amendments to the `JTD Risk Analysis' 
section.\30\ The proposed revisions to the Uncollateralized LGD 
(``ULGD'') calculation would incorporate the integrated spread-response 
component described above and remove reference to the current RR-
sensitivity-response component.\31\ ICC also proposes, for clarity, to 
shorten a description in the WWR JTD calculation and to move details 
regarding the Kendall tau rank-order correlation to follow the WWR JTD 
calculation as such details are associated with the WWR JTD 
calculation.\32\ ICC proposes to include this information, which is 
currently located in a source in a footnote, within the text to provide 
further description of the source in the footnote.\33\ ICC also 
proposes minor structural updates to its description of specific WWR 
(``SWWR'') to enhance readability.\34\
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    \30\ Id.
    \31\ Id.
    \32\ Id. The details regarding the Kendall tau rank-order 
correlation would remain unchanged, except for the addition of 
clarifying language referencing regulatory guidance with respect to 
RFs deemed highly correlated. Id.
    \33\ Id.
    \34\ Id.
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    Third, ICC proposes to add clarifying language to the `Interest 
Rate Sensitivity Risk Analysis' section to note that the interest rate 
sensitivity component is a statistically calibrated initial margin 
component.\35\ ICC also proposes to correct a notation to reflect an 
inverse distribution function.\36\
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    \35\ Id.
    \36\ Id.
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    Fourth, ICC proposes a number of structural changes to the `Basis 
Risk Analysis' section, which consist of moving certain descriptions 
within the section and making changes to conform such descriptions to 
the proposed new Monte Carlo based approach. Specifically, ICC proposes 
moving the description in the current `Long-Short Benefits among RFs 
with Common Basis' subsection to the proposed `Index Decomposition and 
Long-Short Offsets' subsection and making conforming changes.\37\ 
Similarly, ICC proposes moving the description in the current 
`Portfolio Benefits Hierarchy Summary' subsection to the proposed 
`Long/Short Offset Hierarchy' subsection and making conforming 
changes.\38\ ICC also proposes moving the analysis in the current 
`Basis Risk Analysis' section to the proposed `Index-Basis Risk 
Estimation' subsection and making conforming changes.\39\
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    \37\ Id.
    \38\ Id.
    \39\ Id.
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    Fifth, ICC proposes to combine the current `Spread Risk Analysis' 
and `RR Sensitivity Risk Analysis' sections into the proposed `Spread 
and RR Risk Analysis' section to reflect the transition to a Monte 
Carlo-based methodology for the spread-response and RR-sensitivity-
response components.\40\ Under the proposed approach, ICC would utilize 
credit spreads and RR distributions to jointly simulate scenarios to 
estimate portfolio risk measures.\41\ Accordingly, ICC proposes to 
combine the `Spread Risk Analysis' and `RR Sensitivity Risk Analysis' 
sections into the `Spread and RR Risk Analysis' section given their 
interrelation under the proposed approach, in which the integrated 
spread response would be computed by creating P/L distributions from a 
set of jointly-simulated hypothetical (forward looking) spread and RR 
scenarios.\42\
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    \40\ Id.
    \41\ Id.
    \42\ Id.
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    In the amended `Spread Risk Analysis' section, ICC proposes to 
remove details regarding the current stress-based approach and to 
describe how ICC generates credit spread scenarios using Monte Carlo 
techniques.\43\ As described above, the spread-response component is 
derived in terms of a set of hypothetical ``tightening'' and 
``widening'' credit spread scenarios under the current stress-based 
approach.\44\ The analysis of the univariate characteristics of credit 
spread log-returns to arrive at credit spread scenarios would not 
change under the Monte Carlo-based methodology.\45\
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    \43\ Notice, 83 FR at 35034-35.
    \44\ Notice, 83 FR at 35035.
    \45\ Id.
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    The univariate RF distribution assumptions would not change under 
the Monte Carlo-based methodology, and thus the `Distribution of the 
Credit Spreads' subsection of the amended `Spread Risk Analysis' 
section remains largely the same with some clarifying changes to 
language included.\46\
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    \46\ Id.
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    ICC proposes to describe the implementation of the Monte Carlo-
based methodology in the new `Multivariate Statistical Approach via 
Copulas' subsection. ICC proposes to include a discussion on the 
construction and application of the standard tools in modeling 
dependence, including the review of their theoretical background, in 
the new `Copulas' subsection.\47\
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    \47\ Id.
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    ICC proposes the new `Tail Dependence' subsection to provide a 
description of the concept of tail

[[Page 53919]]

dependence, given its relevancy as it indicates the probability of 
extreme values occurring jointly.\48\ The proposed subsection would 
provide additional support behind ICC's conclusion that the tools for 
modeling dependence would be particularly suitable for connecting the 
various univariate distributions in a multivariate setting as they 
provide flexibility in modeling tail dependence.\49\
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    \48\ Id.
    \49\ Id.
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    In the proposed `Copula Simulation' subsection, ICC would describe 
its Monte Carlo-based simulation approach.\50\ The proposed approach is 
based on first generating for all SN RF/RSF and On The Run indices Most 
Actively Traded Tenor (``MATT'') scenarios using the stochastic 
representation of the selected multivariate distribution under 
consideration.\51\ The conditional simulation approach would then be 
utilized to generate individual RF/tenor-specific scenarios.\52\ ICC 
also proposes to describe the block simulation approach that it would 
utilize in generating scenarios, which departs from an approach where 
all tenors for all SNs are simulated together. Instead, specific blocks 
of the correlation matrix would be considered through the stepwise 
block simulation approach.\53\
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    \50\ Id.
    \51\ Id.
    \52\ Id.
    \53\ Id.
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    ICC would discuss the estimation of a new parameter in the proposed 
`Copula Parameter Estimation' subsection.\54\ The new subsection would 
include a description of two methods that can be used for parameter 
estimation, namely the ``quasi Maximum Likelihood'' approach and the 
``Canonical Maximum Likelihood'' method.\55\ ICC proposes to set the 
value at which this parameter is set conservatively and to explain that 
the value reflects strong tail dependence within the simulation 
framework, which is important because ICC estimates that tail 
dependence would increase in stressed market conditions.\56\
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    \54\ Id.
    \55\ Id.
    \56\ Id.
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    Sixth, ICC proposes certain amendments to the `RR Risk Analysis' 
section to remove details regarding the current stress-based approach 
for the RR-sensitivity-response component and to describe how ICC 
jointly simulates credit spread and RR scenarios using Monte Carlo 
techniques.\57\ As discussed above, under the current stress-based 
approach, the RR-sensitivity-response component is computed in terms of 
RR stress scenarios and incorporates potential losses associated with 
changes in the market implied RR.\58\ The proposed Monte Carlo-based 
methodology would consider the risk arising from fluctuations in the 
market implied RRs of each SN RF and/or RSF jointly with the 
fluctuations in the curves of credit spreads.\59\
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    \57\ Id.
    \58\ Id.
    \59\ Id.
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    The proposed `Distribution of RRs' subsection would contain much of 
the relevant analysis under the current `RR Sensitivity Risk Analysis' 
section because the univariate RR distribution assumptions would not 
change under the Monte Carlo-based methodology. ICC proposes some 
additional clarifying language to further specify that the RR stress-
based sensitivity requirement transitioned to a Monte Carlo simulation-
based methodology.\60\ Specifically, ICC proposes to note the 
assumption regarding the analysis of each SN RF/RSF that includes the 
description located under the current `Beta Distribution' subsection as 
the integrated spread response also assumes a Beta distribution 
describing the behavior of the RRs.\61\
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    \60\ Id.
    \61\ Id.
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    The amended `Parameter Estimation' subsection would discuss the 
parameter calibration necessary to simulate RR scenarios and is largely 
the same.\62\ The proposed revisions would remove or replace 
terminology associated with the stress-based approach with terminology 
associated with the Monte Carlo-based approach.\63\
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    \62\ Id.
    \63\ Id.
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    The proposed `Spread-Recovery-Rate Bivariate Model' subsection 
would describe the use of credit spread and RR distributions to jointly 
simulate scenarios to estimate portfolio risk measures under the Monte 
Carlo-based methodology.\64\ Namely, ICC proposes to discuss the use of 
the conditional simulation approach to jointly simulate SN RF/RSF-
specific RR scenarios with SN RF/RSF MATT spread log-return 
scenarios.\65\ ICC proposes to note several assumptions under this 
model, along with an explanation of how it generates the individual SN 
RF/RSF-specific RR scenarios and the tenor-specific spread scenarios 
using copulas.\66\
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    \64\ Id.
    \65\ Id.
    \66\ Id.
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    ICC proposes moving the `Arbitrage-Free Modeling' subsection, which 
is currently located in the `Spread Risk Analysis' section, to the 
`Spread and RR Risk Analysis' section.\67\ The analysis would remain 
largely the same with some language clarifications, including 
references to simulated spread levels in conjunction with simulated RR 
levels within the text and within formulas to ensure consistency with 
the proposed `Spread and RR Risk Analysis' section.\68\ ICC proposes 
further revisions to terminology, such as removing terminology 
associated with the stress-based approach and incorporating the Monte 
Carlo simulation based methodology described above to ensure 
consistency with the proposed `Spread and RR Risk Analysis' 
section.\69\ ICC also proposes replacing specific references to the 
current most actively traded tenor with references to the more general 
concept of ``most actively traded tenor'' to account for a situation in 
which the referenced most actively traded tenor is different.\70\
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    \67\ Id.
    \68\ Id.
    \69\ Id.
    \70\ Id.
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    Seventh, in the proposed `Risk Estimations' subsection, ICC would 
describe the computation of the integrated spread-response 
component.\71\ Once the Monte Carlo scenarios would be simulated, all 
instruments would be repriced, and the respective instrument P/L 
responses would be computed.\72\ Upon consideration of the instrument 
positions in each portfolio along with the instrument P/L responses, 
portfolio risk estimations would be performed and the integrated 
spread-response component would be established.\73\
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    \71\ Id.
    \72\ Id.
    \73\ Id.
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    ICC proposes to discuss its calculation of P/Ls for instruments, 
RFs, common currency sub-portfolios, and multi-currency sub-portfolios 
under the new `RF and Sub-Portfolio Level Integrated Spread Response' 
subsection.\74\ ICC proposes to retain the use of sub-portfolios as is 
currently done today.\75\ However, the portfolio benefits across sub-
portfolios would be limited.\76\ This enhancement would allow ICC to 
decompose portfolio level P/L at the sub-portfolio level and to 
estimate sub-portfolio level risk measures.\77\
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    \74\ Id.
    \75\ Id.
    \76\ Id.
    \77\ Id.
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    In the proposed `Instrument P/L Estimations' subsection, ICC would 
describe the calculation of instrument P/Ls. Namely, ICC would reprice 
all instruments at the hypothetical spread

[[Page 53920]]

and RR levels, which would be derived from the simulated spread and RR 
scenarios, and take the difference between the prices of the 
instruments at the simulated scenarios and the current end-of-day 
(``EOD'') prices.\78\ ICC would utilize the instrument-related P/L 
distribution to estimate the instrument-specific integrated spread 
response as the 99.5% VaR measure in the currency of the 
instrument.\79\
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    \78\ Notice, 83 FR at 35035-36.
    \79\ Notice, 83 FR at 35036.
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    ICC would describe the calculation of RF P/Ls in the proposed `RF 
P/L Estimations' subsection.\80\ ICC would utilize the simulated P/L 
scenarios, combined with the post-index-decomposition positions related 
to a given RF, to generate a currency-specific RF P/L distribution.\81\ 
ICC would utilize this RF-related P/L distribution to estimate the RF-
specific integrated spread response as the 99.5% VaR measure in the 
currency of the considered RF.\82\
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    \80\ Id.
    \81\ Id.
    \82\ Id.
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    In the proposed `Common Currency Sub-Portfolio P/L Estimations' 
subsection, ICC would describe the calculation of common currency sub-
portfolio P/Ls.\83\ For a currency specific sub-portfolio, ICC would 
extract the relevant risk measures from sub-portfolio level P/L 
distributions, which would be obtained from the aggregation of common 
currency RF P/L distributions.\84\
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    \83\ Id.
    \84\ Id.
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    In the proposed `Multi-Currency Sub-Portfolio P/L Estimations' 
subsection, ICC would add clarifying language describing the 
calculation of multi-currency sub-portfolio P/Ls. ICC proposes to 
extend multi-currency portfolio benefits to RFs with similar market 
characteristics, where the RFs and their respective instruments would 
be denominated in different currencies.\85\ Under the proposed 
approach, long-short integrated spread response benefits would be 
provided between Corporate RFs that are denominated in different 
currencies.\86\ ICC proposes to retain the multi-currency risk 
aggregation approach, which involves obtaining U.S. Dollar (``USD'') 
and Euro (``EUR'') denominated sub-portfolio P/L distributions, to RFs 
within the North American Corporate and European Corporate sub-
portfolios denominated in USD and EUR, respectively.\87\
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    \85\ Id.
    \86\ Id.
    \87\ Id.
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    ICC proposes to include its calculation for the portfolio level 
integrated spread-response component in the `Portfolio level Integrated 
Spread Response' subsection.\88\ The calculation would include the sub-
portfolio-specific integrated spread response after any potential 
multicurrency benefits and the RF-specific integrated spread 
response.\89\ ICC proposes the new `RF Attributed Integrated Spread 
Response Requirements' subsection to describe the calculation of the RF 
attributed integrated spread-response component for each RF in the 
considered portfolio.\90\
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    \88\ Id.
    \89\ Id.
    \90\ Id.
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    ICC proposes minor revisions to the `Anti-Procyclicality Measures' 
subsection to replace terminology associated with the stress-based 
approach with terminology associated with the Monte Carlo-based 
approach.\91\ ICC also proposes to update calculation descriptions 
relating to portfolio responses to note that certain amounts would be 
converted to or represented in USD using the EOD established foreign 
exchange (``FX'') rate.\92\
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    \91\ Id.
    \92\ Id.
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    Eighth, ICC proposes updates to the `Multi-Currency Portfolio 
Treatment' section to incorporate the proposed integrated spread-
response component.\93\ ICC proposes to clarify that it implements a 
multi-currency portfolio treatment methodology for portfolios with 
instruments that are denominated in different currencies.\94\ The 
proposed changes would also remove references to the current spread-
response component.\95\
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    \93\ Id.
    \94\ Id.
    \95\ Id.
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    Finally, ICC also proposes minor edits to the `Portfolio Loss 
Boundary Condition' section to remove or replace references to the 
current spread-response and RR-sensitivity-response components with 
references to the proposed integrated spread-response component within 
the text and within formulas to ensure consistency with the proposed 
`Spread and RR Risk Analysis' section, specifically the `Portfolio 
Level Integrated SR' subsection.\96\ Moreover, ICC proposes to 
reference, for clarity, the total number of RFs within the considered 
sub-portfolio in its calculations of the maximum portfolio loss and the 
maximum portfolio integrated spread response to ensure consistency with 
the proposed `Spread and RR Risk Analysis' section, specifically the 
`Portfolio Level Integrated SR' subsection.\97\
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    \96\ Id.
    \97\ Id.
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Other Revisions to the Risk Management Model Description Document

    ICC proposes minor changes to the `Guaranty Fund (``GF'') 
Methodology' section of the Risk Management Model Description 
Document.\98\ The proposed changes would move the descriptions 
associated with the credit spread curve shape scenarios (i.e., Uniform 
Scaling, Pivoting, and Tenor Specific) from the current `Spread Risk 
Analysis' section to the `Unconditional Uncollateralized Exposures' 
subsection.\99\ Although the credit spread curve shape scenarios are 
currently considered as part of the spread-response component, ICC 
proposes to only use them for GF purposes.\100\ The descriptions and 
calculations associated with the credit spread curve shape scenarios 
would remain largely the same with some clarifying changes, including 
the substitution of a variable for the simulation quantile in the 
calculations to reflect consistency with the GF risk measure, and 
structural changes to the descriptions to enhance readability.\101\ 
Additionally, the proposed changes would include reference to the 
integrated spread response in place of the spread response in the 
calculations describing the GF stress spread response.
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    \98\ Id.
    \99\ Id.
    \100\ Id.
    \101\ Id.
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    ICC also proposes other non-material changes to the Risk Management 
Model Description Document, including minor grammatical, typographical, 
and structural changes to enhance readability and minor updates to 
calculations to update symbol notations.\102\
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    \102\ Id.
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Risk Management Framework

    ICC proposes conforming revisions to its Risk Management Framework 
to reflect the transition to a Monte Carlo-based methodology for the 
spread response and RR-sensitivity-response components of the initial 
margin model.\103\ The proposed revisions are described in detail as 
follows.
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    \103\ Id.
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    ICC proposes changes to the `Waterfall Level 2: Initial Margin' 
section to combine the spread response and the RR sensitivity 
components into the proposed integrated spread-response component.\104\ 
The proposed revisions would introduce the integrated spread-

[[Page 53921]]

response component under the amended `Integrated Spread Response 
Requirements' section and replace all references to the spread response 
with references to the integrated spread response.\105\ ICC proposes 
conforming changes throughout the framework.\106\ Currently, the 
spread-response component is obtained by estimating scenario P/L for a 
set of hypothetical ``tightening'' and ``widening'' credit spread 
scenarios and by considering the largest loss.\107\ Under the proposed 
revisions, the integrated spread response would be computed by creating 
P/L distributions from a set of jointly-simulated hypothetical (forward 
looking) credit spread and RR scenarios.\108\ The proposed changes 
would provide an updated calculation of the instrument scenario P/L, 
note the mappings between spread and RR levels and prices are performed 
by means of the International Swap and Derivatives Association 
(``ISDA'') standard conversion convention, and specify that the 
hypothetical prices are forward looking.\109\ ICC also proposes to 
state that the integrated spread response approach would assume a 
distribution that would describe the behavior of the RRs.\110\
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    \104\ Id.
    \105\ Id.
    \106\ Id.
    \107\ Id.
    \108\ Id.
    \109\ Id.
    \110\ Id.
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    ICC proposes the new `Index Decomposition Approach' subsection, 
which would contain the analysis under the current `Index Decomposition 
Benefits between Index RFs and SN RSFs' subsection without any material 
changes.\111\ ICC also proposes the new `Portfolio Approach' subsection 
to describe the Monte Carlo simulation framework, which would replace 
the current stress-based approach noted above.\112\ ICC proposes to 
utilize Monte Carlo techniques to generate spread and RR 
scenarios.\113\ ICC would utilize the simulated scenarios to derive the 
hypothetical spread and RR levels, at which each instrument is repriced 
in order to generate a scenario instrument P/L based on post-index-
decomposition positions.\114\ For each scenario, instrument P/Ls would 
aggregated to obtain RF and sub-portfolio P/Ls, which represent the RF 
and sub-portfolio P/L distributions that would be used to estimate the 
RF and sub-portfolio 99.5% VaR measures at a risk horizon that is at 
least 5 days.\115\ The portfolio level integrated spread response would 
be estimated as a weighted sum of RF and sub-portfolio 99.5% VaR 
measures.\116\ ICC also proposes to move its analysis related to 
achieving anti pro-cyclicality to the amended `Integrated Spread 
Response Requirements' section without any material changes.\117\
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    \111\ Notice, 83 FR at 35036-37.
    \112\ Notice, 83 FR at 35037.
    \113\ Id.
    \114\ Id.
    \115\ Id.
    \116\ Id.
    \117\ Id.
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Notice of Filing of Amendment No. 1

    ICC submitted Amendment No. 1 to provide Commission with additional 
details and analyses surrounding ICC's proposed transition to a Monte 
Carlo-based methodology for certain components of the initial margin 
model. Amendment No. 1 included additional information, which was 
submitted as Exhibit 3, related to the Filing. Exhibit 3 contains a 
correlation sensitivity analysis on portfolios using the proposed Monte 
Carlo-based methodology for the first half of 2018 and a back-testing 
analysis of the IM components of the proposed Monte Carlo-based 
methodology spanning 2015 through 2018 and including periods of 
stressed market conditions.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\118\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act 
\119\ and Rule 17Ad-22(b)(2) thereunder.\120\
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    \118\ 15 U.S.C. 78s(b)(2)(C).
    \119\ 15 U.S.C. 78q-1(b)(3)(F).
    \120\ 17 CFR 240.17Ad-22(b)(2).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act \121\ requires, among other things, 
that the rules of ICC 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 ICC or for which it is responsible; and to comply 
with the provisions of the Act and the rules and regulations 
thereunder.
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    \121\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the Proposed Rule Change would make a variety 
of changes to ICC's initial margin model, and the documentation 
thereof, to transition ICC from the current stress-based approach to a 
Monte Carlo-based methodology for the spread-response and recovery-
rate-sensitivity-response components of the model. The current approach 
faces certain limitations, in that it produces a limited number of 
stress scenarios that may not capture the risk of portfolios with more 
complex, non-linear instruments, and that it does not provide for a 
consistent estimation of the portfolio level spread response based on a 
defined risk measure (e.g., Value-at-Risk) and quantile (e.g., 99%). 
The methodology reflected in the Proposed Rule Change is designed to 
address these limitations. Specifically, the Monte Carlo-based 
methodology should help ICC to consider a large set of scenarios to 
more appropriately capture portfolio risk, including the risk of more 
complex, non-linear instruments, and produce consistent quantile-based 
portfolio risk measures.
    Thus, the Commission believes that the proposed Monte Carlo-based 
methodology should enhance ICC's initial margin model by improving its 
ability to determine the amount of initial margin that ICC should 
collect and, therefore, to manage financial risk exposures that may 
arise in the course of its ongoing clearance and settlement activities. 
The Commission also believes that the improved ability to determine 
initial margin should better allow ICC to complete the clearance and 
settlement process in the event of a member default. For these reasons, 
the Commission believes that Proposed Rule Change should help promote 
the prompt and accurate clearance and settlement of securities 
transactions, derivative agreements, contracts, and transactions. 
Similarly, the Proposed Rule Change should enhance ICC's ability to 
help assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible because the 
enhanced initial margin model should better allow ICC to determine the 
amount of initial margin it needs to collect and hold to address 
potential loss exposures. Finally, for both of these reasons, the 
Commission believes the Proposed Rule Change should, in general, 
protect investors and the public interest.

B. Consistency With Rule 17Ad-22(b)(2)

    Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit

[[Page 53922]]

exposures to participants under normal market conditions and use risk-
based models and parameters to set margin requirements and review such 
margin requirements and the related risk-based models and parameters at 
least monthly.\122\
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    \122\ 17 CFR 240.17Ad-22(b)(2).
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    As described above, the Proposed Rule Change would transition ICC 
to a Monte Carlo-based methodology for the spread-response and 
recovery-rate-sensitivity-response components of the initial margin 
model. The Commission believes that the Proposed Rule Change should 
enhance ICC's ability to establish margin requirements that are better 
able to capture portfolio risk, including the risk of more complex, 
non-linear instruments, and ensure that ICC establishes margin 
requirements that are commensurate with the risks and characteristics 
of each portfolio. Taken together, the Commission believes that these 
aspects of the Proposed Rule Change should improve ICC's use of risk-
based models and parameters to set margin requirements, which, in turn, 
should improve ICC's use of margin requirements to limit its credit 
exposures to participants under normal market conditions.
    The Proposed Rule Change includes numerous changes to the 
descriptions of ICC's initial margin methodology in its Risk Management 
Model Description and its Risk Management Framework to reflect this 
transition to the proposed methodology. The Commission therefore 
believes that the proposed rule change should help ICC establish 
written procedures reasonably designed to use risk-based models and 
parameters to set margin requirements.
    Therefore, for the above reasons the Commission finds that the 
Proposed Rule Change is consistent with Rule 17Ad-22(b)(2).\123\
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    \123\ Id.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment No. 1 
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 [email protected]. Please include 
File Number SR-ICC-2018-008 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-2018-008. 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 website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change, security-based 
swap submission, or advance notice that are filed with the Commission, 
and all written communications relating to the proposed rule change, 
security-based swap submission, or advance notice 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 website 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 the 
filing also will be available for inspection and copying at the 
principal office of ICE Clear Credit and on ICE Clear Credit's website 
at https://www.theice.com/clear-credit/regulation. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ICC-2018-008 and should be submitted on 
or before November 15, 2018.

IV. Accelerated Approval of the Proposed Rule Change

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\124\ to approve the Proposed Rule Change prior to the 30th day 
after the date of publication of Amendment No. 1 in the Federal 
Register. As discussed above, Amendment No. 1 provides additional 
details and analyses surrounding ICC's proposed transition to a Monte 
Carlo-based methodology for certain components of the initial margin 
model.
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    \124\ 15 U.S.C. 78s(b)(2).
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    By providing the additional information, Amendment No. 1 provides 
for a more clear and comprehensive understanding of the estimated 
impact of the Proposed Rule Change, which helps to improve the 
Commission's review of the Proposed Rule Change for consistency with 
the Act. Specifically, the information helps to ensure that ICC's risk 
management system appropriately and effectively addresses the risks 
associated with clearing security based swap-related portfolios by 
providing an estimated impact of the proposed Monte Carlo-based 
methodology.
    For similar reasons as discussed above, the Commission finds that 
Amendment No. 1 is designed to help assure the safeguarding of 
securities and funds which are in the custody or control of ICC, 
consistent with Section 17A(b)(3)(F) of the Act.\125\ Accordingly, the 
Commission finds good cause for approving the Proposed Rule Change, as 
modified by Amendment No. 1, on an accelerated basis, pursuant to 
Section 19(b)(2) of the Exchange Act.\126\
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    \125\ 15 U.S.C. 78q-1(b)(3)(F).
    \126\ 15 U.S.C. 78s(b)(2).
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V. 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(b)(3)(F) of the Act 
\127\ and Rule 17Ad-22(b)(2) thereunder.\128\
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    \127\ 15 U.S.C. 78q-1(b)(3)(F).
    \128\ 17 CFR 240.17Ad-22(b)(2).
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    IT IS THEREFORE ORDERED pursuant to Section 19(b)(2) of the Act 
\129\ that the proposed rule change, as modified by Amendment No. 1, 
(SR-ICC-2018-008) be, and hereby is, approved on an accelerated 
basis.\130\ 
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    \129\ 15 U.S.C. 78s(b)(2).
    \130\ 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).
    \131\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\131\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-23279 Filed 10-24-18; 8:45 am]
BILLING CODE 8011-01-P


