[Federal Register Volume 84, Number 68 (Tuesday, April 9, 2019)]
[Notices]
[Pages 14158-14161]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06927]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85495; File No. SR-ICC-2019-002]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Risk Parameter 
Setting and Review Policy

April 3, 2019.

I. Introduction

    On February 6, 2019, ICE Clear Credit LLC (``ICC'') 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 (SR-ICC-2019-002) 
to formalize the ICC Risk Parameter Setting and Review Policy (``Risk 
Parameter Policy'').\3\ The proposed rule change was published in the 
Federal Register on February 22, 2019.\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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the ICC Rules or the Risk Parameter Policy. 
Available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf.
    \4\ Securities Exchange Act Release No. 34-85157 (Feb. 15, 
2019), 84 FR 5748 (Feb. 22, 2019) (SR-ICC-2019-002) (``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would formalize the Risk Parameter Policy. 
The Risk Parameter Policy would explain ICC's process for setting and 
calibrating the core parameters of, and reviewing the assumptions 
underlying, the ICC Risk Management Model (the ``Model''). The Risk 
Parameter Policy would also explain the analyses that ICC performs to 
explore the sensitivity of the Model's outputs to certain core 
parameters.

A. Parameter Setting and Calibration

    The Risk Parameter Policy would discuss the process of setting and 
reviewing the Model's core parameters and their underlying 
assumptions.\5\ The Risk Parameter Policy would first list each of the 
Model's parameters and then summarize (i) the method used to review and 
set the parameter; (ii) the frequency of review; (iii) the group within 
ICC responsible for the review (Risk Management Department (``ICC 
Risk''), Risk Working Group (``RWG''), or Risk Committee (``RC''); and 
(iv) whether the review is statistical or non-statistical. The Risk 
Parameter Policy would then explain in detail the process for setting 
and reviewing the parameters, with the parameters categorized according 
to their associated component of the Model: (i) Liquidity charge; (ii) 
concentration charge; (iii) jump-to-default; (iv) interest rate 
sensitivity; (v) basis risk; and (vi) integrated spread response.
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    \5\ Notice, 84 FR at 5748.
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    For the parameters associated with the liquidity charge, the Risk 
Parameter Policy would describe the parameters associated with index 
instruments and single-name instruments.\6\ With respect to index 
instruments, the Risk Parameter Policy would specify how ICC Risk 
estimates the Bid Offer Widths (``BOWs'') for indices across volatile 
and extreme market conditions, in addition to how ICC Risk recognizes 
long-short benefits when computing portfolio-level index liquidity 
charges. With respect to single-name instruments, the Risk Parameter 
Policy would explain the parameters that ICC uses to incorporate a 
price-based BOW component and a spread-based BOW component into the 
liquidity charge. The Risk Parameter Policy would require ICC Risk to 
estimate and review the liquidity charge parameters and their 
underlying assumptions at least monthly and present the analysis and 
any proposed changes to the RWG for review.
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    \6\ Notice, 84 FR at 5749.
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    For the parameters associated with the concentration charge, the 
Risk Parameter Policy would explain how ICC Risk establishes specific 
threshold levels for each index or SN Risk Factor (``RF'').\7\ The 
thresholds would reflect the market depth and liquidity for the 
considered RFs. The concentration charges would apply to positions that

[[Page 14159]]

exceed those thresholds and would increase as the amount above the 
threshold increases. The Risk Parameter Policy would require ICC Risk 
to estimate and review the concentration charge parameters and their 
underlying assumptions at least monthly and present the analysis and 
any proposed changes to the RWG for review. Moreover, the Risk 
Parameter Policy would require ICC Risk to consult the RC if the review 
and analysis results in a proposed change that could impact total 
initial margin requirements by more than 5%. In that case, ICC Risk 
could not implement the proposed change without first obtaining a no-
objection from the RC.
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    \7\ Notice, 84 FR at 5749. ICC deems each index, sub-index, or 
underlying SN reference entity a separate RF.
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    For the parameters associated with jump-to-default, the Risk 
Parameter Policy would categorize the parameters as either Loss-Given-
Default (``LGD'') or Wrong-Way Risk (``WWR'').\8\ LGD would consider 
possible loss resulting from a default while WWR would consider the 
strong adverse correlation between a default risk and the occurrence of 
large losses in a Clearing Participant's (``CP'') portfolio. The LGD 
parameters would measure losses associated with various credit events 
by constructing scenarios for anticipated recovery rates associated 
with those credit events. The Risk Parameter Policy would explain these 
scenarios and estimations and further explain computations for RF 
groups (``RFG'') \9\ and related parameters. The Risk Parameter Policy 
would also explain the parameters used to quantify WWR, compute WWR 
jump-to-default requirements, and determine the level of collateral 
necessary to cover WWR. The Risk Parameter Policy would further explain 
the thresholds that are established as parameters for each RF 
generating exposure to WWR. Exposure to WWR beyond these thresholds 
would increase the amount of collateral needed to cover that exposure. 
The Risk Parameter Policy would require ICC Risk to estimate and review 
at least monthly the LGD and WWR parameters and their underlying 
assumptions and present the analysis and any proposed changes to the 
RWG for review. Moreover, the Risk Parameter Policy would require ICC 
Risk to consult the RC if the review and analysis results in a proposed 
change that could impact total initial margin requirements by more than 
5%. In that case, ICC Risk could not implement the proposed change 
without first obtaining a no-objection from the RC.
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    \8\ Notice, 84 FR at 5749.
    \9\ ICC deems a set of SN RFs related by a common parental 
ownership structure a RFG.
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    For the parameters associated with interest rate sensitivity, the 
Risk Parameter Policy would specify how ICC Risk estimates the up and 
down parallel shifts for the US Dollar and Euro default-free discount 
term structures.\10\ The interest rate sensitivity aspect of the Model 
would account for the risk associated with changes in the default-free 
discount term structure used to price CDS instruments. The Risk 
Parameter Policy would require ICC Risk to estimate and review the 
interest rate sensitivity parameters and their underlying assumptions 
at least monthly and present the analysis and any proposed changes to 
the RWG for review.
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    \10\ Notice, 84 FR at 5749.
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    For the parameters associated with basis risk, the Risk Parameter 
Policy would explain how ICC Risk estimates the risk associated with 
the differences between the index instruments and their replicating 
baskets of single-name constituents.\11\ As index-derived single-name 
positions and opposite single-name positions are offset, the Model 
would use the basis risk requirement to capture the differences between 
the trading characteristics of index instruments and their replicating 
baskets of single-name constituents. The Risk Parameter Policy would 
require ICC Risk to estimate and review the interest rate sensitivity 
parameters and their underlying assumptions at least monthly and 
present the analysis and any proposed changes to the RWG for review.
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    \11\ Notice, 84 FR at 5749.
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    For the parameters associated with integrated spread response, the 
Risk Parameter Policy would classify them as either univariate or 
multivariate.\12\ The Risk Parameter Policy would describe the 
estimation of the univariate parameters, including the consideration of 
time series analysis of credit spread log-returns. The Risk Parameter 
Policy would further explain how different mean absolute deviation 
estimates are obtained for each time series and explain the setting of 
the exponentially weighted moving average decay rate. The Risk 
Parameter Policy would also explain how ICC determines and reviews the 
multivariate parameters. Using a simulation framework, ICC would 
generate spread and recovery rate scenarios by means of copulas to 
integrate the univariate distributions that describe spread and RR 
fluctuations. The Risk Parameter Policy would describe the multivariate 
parameters that serve as inputs to the copula simulations. The Risk 
Parameter Policy would require ICC Risk to estimate and review the 
integrated spread response parameters and their underlying assumptions 
at least monthly and present the analysis and any proposed changes to 
the RWG for review.
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    \12\ Notice, 84 FR at 5749-5750.
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B. Sensitivity Analysis

    The Risk Parameter Policy would explain the analyses that ICC Risk 
performs to explore the sensitivity of the Model's outputs to certain 
core parameters.\13\ The Risk Parameter Policy would divide sensitivity 
analyses into those that would include an ICC-wide portfolio impact 
study and those that would not. Moreover, the Risk Parameter Policy 
would require monthly summary reports to the RC or the RWG, depending 
on the parameter analyzed.
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    \13\ Notice, 84 FR at 5750.
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    The Risk Parameter Policy would specify which parameters would be 
subject to a sensitivity analysis.\14\ First, the Risk Parameter Policy 
would require a sensitivity analysis on those parameters that are 
calibrated on an ad-hoc basis rather than using a purely statistical 
approach. For example, the Risk Parameter Policy would describe how ICC 
conducts a sensitivity analysis on the univariate level integrated 
spread response parameters through alternative techniques to estimate 
the parameters that fit the standardized distributions to the observed 
credit spread log-return data. Second, the Risk Parameter Policy would 
require a sensitivity analysis for routine updates to statistical 
parameters, which occur daily or monthly. Finally, the Risk Parameter 
Policy would require a sensitivity analysis of other specific 
parameters, including portfolio benefits, WWR thresholds, and log-
return mean absolute deviation estimates.
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    \14\ Id.
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III. 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.\15\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act 
\16\ and Rules 17Ad-22(b)(2),

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17Ad-22(b)(3), and 17Ad-22(d)(8) thereunder.\17\
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(8).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act 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, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\18\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would formalize ICC's 
Risk Parameter Policy. The Commission believes that, in general, the 
Risk Parameter Policy would help ensure the sound operation of ICC's 
Model. Specifically, the Commission believes that the Risk Parameter 
Policy, in describing in detail ICC's process for setting and reviewing 
the parameters of, and assumptions underlying, the Model, would help 
assure the soundness of the Model by ensuring that ICC has in place a 
standardized process for setting and reviewing the Model's parameters. 
Because the Model's parameters affect the output of the Model--ICC's 
margin requirements--the Commission believes that reviewing and setting 
the parameters and underlying assumptions is important to ensure the 
effective operation of the ICC's margin system. The Commission further 
believes that the Risk Parameter Policy, in requiring monthly parameter 
reviews and sensitivity analyses, and setting out the requirements for 
reporting the results of such reviews to the RWG and/or RC, would help 
assure that ICC personnel are informed of the results of such reviews 
and therefore able to take action to correct any issues with the 
Model's parameters or assumptions.
    By helping to assure the sound operation of the Model and ICC's 
margin requirements, which ICC uses to manage the credit exposures 
associated with clearing security based swap transactions, the 
Commission believes that the proposed rule change would help improve 
ICC's ability to avoid the losses that could result from the 
miscalculation of ICC's credit exposures. Because such losses could 
disrupt ICC's ability to operate and thus promptly and accurately clear 
and settle security based swap transactions, the Commission finds the 
proposed rule change would promote the prompt and accurate clearance 
and settlement of securities transactions. Because such losses could 
also threaten access to securities and funds in ICC's control, the 
Commission finds the proposed rule change would help assure the 
safeguarding of securities and funds that are in the custody or control 
of ICC or for which it is responsible. Likewise, for both of these 
reasons, the Commission finds the proposed rule change would, in 
general, help protect investors and the public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in ICC's 
custody and control, and, in general, protect investors and the public 
interest, consistent with the Section 17A(b)(3)(F) of the Act.\19\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(b)(2) and 17Ad-22(b)(3)

    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 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.\20\ Rule 
17Ad-22(b)(3) requires that ICC 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 participant families to which it has the largest exposures in 
extreme but plausible market conditions.\21\
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    \20\ 17 CFR 240.17Ad-22(b)(2).
    \21\ 17 CFR 240.17Ad-22(b)(3).
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    As discussed above, the Commission believes that the proposed rule 
change would help ensure the soundness of the Model by formalizing 
ICC's process for setting and reviewing the Model's parameters and 
underlying assumptions. The Commission believes that the proposed rule 
change would therefore help ICC to maintain margin requirements to 
limit its credit exposures to participants under normal market 
conditions. Moreover, as discussed above, the Risk Parameter Policy 
would also require that ICC Risk conduct parameter reviews and 
sensitivity analyses monthly, consistent with the requirement of Rule 
17Ad-22(b)(2).\22\ Finally, as discussed above, the Risk Parameter 
Policy would also require that ICC Risk report the results of its 
reviews to the RWG and/or RC and, in some cases, receive no-objection 
from the RC prior to making changes to the parameters or assumptions. 
The Commission believes that this aspect of the Risk Parameter Policy 
would help ICC to use risk-based models and parameters to set margin 
requirements by providing the RWG and/or RC an opportunity to correct 
any issues with the Model's parameters or assumptions. The Commission 
therefore finds that the proposed rule is consistent with is consistent 
with Rule 17Ad-22(b)(2).\23\
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    \22\ 17 CFR 240.17Ad-22(b)(2).
    \23\ Id.
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    Moreover, the amount a CP must contribute to ICC's Guaranty Fund is 
equal to the expected losses to ICC associated with the default of that 
CP, calculated using ICC's stress test methodology, and taking into 
account, among other things, the loss after application of initial 
margin.\24\ Thus, ICC's guaranty fund is based on the initial margin 
requirements. The Commission therefore believes that, in helping to 
maintain the soundness of ICC's Model, and therefore ICC's margin 
requirements, the proposed rule change would also help ICC to maintain 
sufficient financial resources 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. The Commission therefore finds 
that the proposed rule is consistent with is consistent with Rule 17Ad-
22(b)(3).\25\
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    \24\ See ICC Rule 801(a).
    \25\ 17 CFR 240.17Ad-22(b)(3).
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    Therefore, for these reasons, the Commission finds that the 
proposed rule change is consistent with Rules 17Ad-22(b)(2) and 17Ad-
22(b)(3).\26\
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    \26\ 17 CFR 240.17Ad-22(b)(2), (b)(3).
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C. Consistency With Rule 17Ad-22(d)(8)

    Rule 17Ad-22(d)(8) requires that ICC 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 and to promote 
the effectiveness of ICC's risk management procedures.\27\
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    \27\ 17 CFR 240.17Ad-22(d)(8).
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    As described above, the proposed rule change would make ICC Risk 
responsible for conducting parameter reviews and sensitivity analyses 
on a monthly basis. ICC Risk would in turn consult with the RWG. For 
certain parameters, ICC risk would also consult

[[Page 14161]]

the RC if the review and analysis results in a proposed change that 
could impact total initial margin requirements by more than 5%. In that 
case, ICC Risk could not implement the proposed change without first 
obtaining a no-objection from the RC. Finally, the Risk Parameter 
Policy would also require monthly summary reports of sensitivity 
analyses to the RC or the RWG, depending on the parameter analyzed.
    The Commission believes that in assigning these responsibilities, 
the proposed rule change would establish governance arrangements 
relating to the Risk Parameter Policy that are clear and transparent to 
fulfill the public interest requirements in Section 17A of the Act by 
clearly assigning and documenting responsibilities for reporting and 
acting on the results of the reviews of the Model's parameters and 
assumptions. Moreover, the Commission believes that by ensuring the RWG 
and RC are informed of the results of reviews, the Risk Parameter 
Policy would help promote the effectiveness of ICC's risk management 
procedures in thereby providing the RC and RWG an opportunity to 
correct any issues with the Model's parameters and underlying 
assumptions.
    Therefore, for this reason, the Commission finds that the proposed 
rule change is consistent with Rule 17Ad-22(d)(8).\28\
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    \28\ 17 CFR 240.17Ad-22(d)(8).
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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(b)(3)(F) of the Act 
\29\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(d)(8) 
thereunder.\30\
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
    \30\ 17 CFR 240.17Ad-22(b)(2), (b)(3), and (d)(8).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\31\ that the proposed rule change (SR-ICC-2019-002) be, and hereby is, 
approved.\32\
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    \31\ 15 U.S.C. 78s(b)(2).
    \32\ 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).
    \33\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06927 Filed 4-8-19; 8:45 am]
 BILLING CODE 8011-01-P


