
[Federal Register Volume 84, Number 27 (Friday, February 8, 2019)]
[Notices]
[Pages 2938-2941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01553]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85047; File No. SR-ICC-2019-001]


Self-Regulatory Organizations; ICE Clear Credit LLC; Proposed 
Rule Change Relating to the ICE CDS Clearing: Back-Testing Framework

February 4, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on January 28, 
2019, 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 
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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to revise the 
ICE CDS Clearing: Back-Testing Framework (``Back-Testing Framework''). 
These revisions do not require any changes to the ICC Clearing Rules 
(``Rules'').

II. Clearing Agency'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) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICC proposes to update and formalize the Back-Testing Framework 
that describes ICC's back-testing approach, back-testing procedures, 
and guidelines for remediating poor back-testing results. ICC proposes 
to formalize the Back-Testing Framework following Commission approval 
of the proposed rule change.
    ICC's Back-Testing Framework includes a discussion of ICC's back-
testing approach to verify that the number of actual losses is 
consistent with the number of projected losses. Generally, ICC's back-
testing analysis counts the number of occurrences, also referred to as 
exceedances, when the observed portfolio loss for a given horizon is 
greater than the model projected risk measure, defined as the sum of 
the selected initial margin components. The total number of exceedances 
is evaluated against the desired risk quantile and the model is 
considered well calibrated if the number of exceedances is consistent 
with the chosen risk quantile. The Back-Testing Framework also 
addresses multi-currency portfolios by accounting for the foreign 
exchange risk exposure and summarizes the associated back-testing 
analysis, which is performed in the clearinghouse base currency (i.e., 
U.S. Dollar).
    ICC utilizes the Basel Traffic Light System (``BTLS'') to assess 
the soundness of its risk management model (``model''). The Back-
Testing Framework contains a summary of the BTLS, including 
descriptions and calculations associated with each zone of the BTLS. 
The BTLS is based on three zones: Green, yellow, and red. Each zone is 
defined by the maximum number of acceptable exceedances. In practice, 
the more portfolios that fall within the green zone, the sounder the 
model. The BTLS does not penalize the model for conservativeness.
    The Back-Testing Framework contains ICC's procedures for performing 
back-testing analyses. The ICC Risk Management Department (``ICC 
Risk'') performs daily, weekly, monthly, and quarterly portfolio-level 
back-testing analyses. The Back-Testing Framework sets forth ICC's 
calculation of the observed loss, which is referred to as the N-day 
worst unrealized profit/loss (``P/L''), using the changes in portfolio 
net asset values (``NAVs''). The initial margin risk horizon is 
reflected as ``N-day'' where N>=5 is the initial margin risk horizon or 
the Margin Period of Risk (``MPOR''). The back-testing analysis is 
based on the greatest MPOR, rounded up to the nearest integer, for 
instruments in the considered portfolio. For example, if an instrument 
is subject to 5.5-day MPOR estimations, then the back-testing analysis 
is performed by comparing the model projected risk measure to the N-day 
worst unrealized P/L with N=6. The model projected risk measure, which 
is subject to back-testing, is the sum of the following selected 
initial margin components: Integrated spread response, basis risk, and 
interest rate sensitivity (``back-tested components''). Under the Back-

[[Page 2939]]

Testing Framework, the remaining components of initial margin are 
excluded because they are not always market observed and statistically 
modeled.
    ICC back-tests its model with Clearing Participant (``CP'') 
portfolios and a hypothetical set of portfolios (``special strategy 
portfolios'') at the 99.5% risk quantile. Under the Back-Testing 
Framework, back-testing analysis is performed for the model at the 
99.5% risk quantile for all CP-related portfolios. The Back-Testing 
Framework also includes a sample set of special strategy portfolios, 
which allow ICC to consider a range of hypothetical but realistic 
portfolios in its back-testing analysis. Back-testing results for the 
special strategy portfolios are reviewed periodically to identify and 
assess potential weaknesses in model assumptions.
    The Back-Testing Framework describes ICC's procedures for reporting 
back-testing results. Daily portfolio back-testing results are reported 
on a periodic basis for each CP based on the appropriate MPOR. The 
Back-Testing Framework provides example computations for a sample MPOR 
of 5 days (i.e., all instruments in the considered portfolio are 
subject to a 5-day MPOR). For each day in the back-testing period, all 
components of initial margin are provided, and the back-tested 
components and non-back-tested components are identified. The sum of 
the back-tested components is given alongside the unrealized P/L and 
the associated shortfall. An exceedance summary shows the total number 
of exceedances in the period and states the maximum number of 
exceedances that satisfy each zone in the BTLS. Back-testing results 
for the full period are also reported, and the back-tested components 
and the N-day P/L results for every back-tested day are computed for 
each portfolio associated with a given CP.
    The Back-Testing Framework discusses the exceedance summaries that 
are provided when ICC back-tests its model with CP and special strategy 
portfolios at the 99.5% risk quantile. The Back-Testing Framework notes 
the reporting frequency, along with the information that is delivered 
as part of an exceedance summary, such as the number of observations 
and exceedances for the set of back-testing results and the maximum 
number of exceedances allowed in each zone in the BTLS. Moreover, in 
addition to assessing the model's performance by back-testing, the 
Back-Testing Framework directs ICC Risk to conduct monthly parameter 
reviews and parameter sensitivity analyses.
    ICC Risk also periodically reports univariate back-testing results, 
namely, instrument and Risk Factor \3\ (``RF'') back-testing results, 
depending on market conditions. The Back-Testing Framework discusses 
how back-testing results are computed and reported for SN RFs and index 
instruments. As noted above, the back-testing analysis is performed for 
the model at the 99.5% risk quantile and exceedance summary results are 
generated. The Back-Testing Framework defines the model projected risk 
measure with respect to univariate back-testing as the sum of the 
integrated spread response and the interest rate sensitivity 
(``univariate back-tested components'') and directs ICC Risk to perform 
several analyses if an exceedance is observed, which include, among 
others, an analysis of the spread and recovery rate changes. The Back-
Testing Framework also contains information regarding ICC Risk's 
performance of univariate back-testing analysis in spread log-return 
space, including the utilization of different mean absolute deviation 
estimates and an indication of when such analysis may be performed.
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    \3\ ICC deems each index, sub-index, or underlying single name 
(``SN'') reference entity a separate RF.
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    The Back-Testing Framework provides guidelines for remediating poor 
back-testing results. Back-testing results are identified as poor if 
the number of observed exceedances at the portfolio level falls in the 
red zone of the BTLS. The Back-Testing Framework discusses various 
actions to be taken upon the identification of poor back-testing 
results, which include seeking feedback from the Risk Working Group 
(``RWG'') \4\ and consulting with the Risk Committee on any necessary 
remedial action. The Back-Testing Framework describes an instance where 
the number of exceedances falls in the red zone but may not be 
indicative of poor back-testing results, namely, where overlapping 
back-testing periods are involved and the effects of one adverse 
observation are responsible for a cluster of exceedances. The Back-
Testing Framework provides the Chief Risk Officer and Risk Oversight 
Officer with the responsibility and the authority to determine whether 
the number of exceedances is indicative of poor back-testing results. 
The Back-Testing Framework also notes the actions to be taken if the 
number of exceedances falls in the yellow zone, including a review by 
ICC Risk to determine the cause of the model's worsened performance 
and, if necessary, a complimentary back-testing analysis without 
overlapping back-testing periods.
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    \4\ The RWG consists of risk personnel from CPs and provides 
input to help ensure ICC's risk management framework is robust.
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    Under the Back-Testing Framework, if poor back-testing results are 
identified at the portfolio level, individual RF back-testing results 
are further analyzed. The Back-Testing Framework contains information 
regarding the analysis if poor back-testing results are identified for 
certain RFs, including analysis on the spread log-return statistical 
model assumptions, estimation techniques, and estimated parameters.
    To remediate poor back-testing results, the Back-Testing Framework 
provides ICC Risk with the authority to take various actions depending 
on the situation, including updating statistical parameters (i.e., 
parameters estimated by statistical analysis of data sets) and 
increasing the frequency of parameter updates. The Back-Testing 
Framework references several situations that may lead to poor back-
testing results, along with the actions that ICC Risk may take for 
remediation, including poor back-testing results associated with 
distressed SN RFs, poor performance at the portfolio level driven by 
improper portfolio benefits, and poor back-testing results due to 
recent changes in the dependence structure among RFs. Under the Back-
Testing Framework, ICC Risk may apply additional initial margin while 
investigating the model's poor performance and, if needed, recommend 
model enhancements to the Risk Committee and the Board.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \5\ 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; in general, to protect investors and the public interest; 
and to comply with the provisions of the Act and the rules and 
regulations thereunder. ICC believes that the proposed rule change is 
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),\6\ because ICC believes that the proposed rule change 
to formalize the Back-Testing

[[Page 2940]]

Framework promotes the soundness of ICC's risk management model. The 
Back-Testing Framework describes ICC's back-testing approach, back-
testing procedures, and guidelines for remediating poor back-testing 
results. The various elements set forth in the Back-Testing Framework 
assess the ability of the model to reliably forecast risk at the 
selected risk quantile and ensure that ICC takes appropriate remedial 
action upon the identification of poor back-testing results. The Back-
Testing Framework provides assurances as to the appropriateness of the 
model, including the appropriateness of margin requirements, thereby 
facilitating ICC's ability to promptly and accurately clear and settle 
its cleared CDS contracts; enhancing ICC's ability to assure the 
safeguarding of securities and funds which are in the custody or 
control of ICC or for which it is responsible; and protecting investors 
and the public interest. Moreover, ICC believes that having policies 
and procedures that clearly and accurately document ICC's back-testing 
procedures are an important component to the effectiveness of ICC's 
risk management system, which promotes the prompt and accurate 
clearance and settlement of securities transactions, derivatives 
agreements, contracts, and transactions; the safeguarding of securities 
and funds which are in the custody or control of ICC or for which it is 
responsible; and the protection of investors and the public interest. 
As such, the proposed rule change is designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions; to contribute to 
the safeguarding of securities and funds associated with security-based 
swap transactions in ICC's custody or control, or for which ICC is 
responsible; and, in general, to protect investors and the public 
interest within the meaning of Section 17A(b)(3)(F) of the Act.\7\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ Id.
    \7\ Id.
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    In addition, the proposed rule change is consistent with the 
relevant requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(b)(2) \9\ 
requires ICC to establish, implement, maintain and enforce written 
policies and procedures reasonably designed to use margin requirements 
to limit its credit 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. The Back-Testing 
Framework requires the remediation of poor-back-testing results; the 
performance of daily, weekly, monthly, and quarterly portfolio-level 
back-testing analyses; and the performance of monthly parameter reviews 
and parameter sensitivity analyses. Such procedures serve to promote 
the soundness of ICC's risk management model and to ensure that ICC's 
risk management system is effective and appropriate in addressing the 
risks associated with clearing security based swap-related portfolios. 
Namely, by requiring that ICC review and improve the model, the Back-
Testing Framework promotes ICC's use of margin requirements to limit 
its credit exposures to participants under normal market conditions and 
ICC's use of 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, consistent with Rule 
17Ad-22(b)(2).\10\
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    \8\ 17 CFR 240.17Ad-22.
    \9\ 17 CFR 240.17Ad-22(b)(2).
    \10\ Id.
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    Rule 17Ad-22(b)(3)\11\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources 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. The Back-Testing 
Framework supports ICC's ability to maintain sufficient margin 
requirements and enhances ICC's approach to identifying potential 
weaknesses in the risk methodology by measuring the quality of its 
model using the BTLS, thereby ensuring that ICC continues to maintain 
sufficient financial resources 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, consistent with the requirements of 
Rule 17Ad-22(b)(3).\12\
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    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ Id.
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    Rule 17Ad-22(d)(8) \13\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have governance arrangements that are clear and transparent 
to fulfill the public interest requirements in Section 17A of the 
Act.\14\ The Back-Testing Framework clearly assigns and documents 
responsibility and accountability for performing back-testing analyses 
and remediating poor back-testing results. These governance 
arrangements are clear and transparent, such that information relating 
to the assignment of responsibilities and the requisite involvement of 
the Chief Risk Officer, the Risk Oversight Officer, ICC Risk, the RWG, 
the Risk Committee, and the Board is clearly documented, consistent 
with the requirements of Rule 17Ad-22(d)(8).\15\
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    \13\ 17 CFR 240.17Ad-22(d)(8).
    \14\ 15 U.S.C. 78q-1.
    \15\ 17 CFR 240.17Ad-22(d)(8).
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(B) Clearing Agency's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The proposed change to 
formalize the Back-Testing Framework will apply uniformly across all 
market participants. Therefore, ICC does not believe the proposed rule 
change imposes any burden on competition that is inappropriate in 
furtherance of the purposes of the Act.

(C) Clearing Agency'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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate 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-2019-001 on the subject line.

[[Page 2941]]

Paper Comments

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

All submissions should refer to File Number SR-ICC-2019-001. 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 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 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 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 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-2019-001 and should be 
submitted on or before March 1, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-01553 Filed 2-7-19; 8:45 am]
 BILLING CODE 8011-01-P


