[Federal Register Volume 85, Number 156 (Wednesday, August 12, 2020)]
[Notices]
[Pages 48741-48743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17557]



[[Page 48741]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89491; File No. SR-ICC-2020-010]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to the ICC Risk Management 
Model Description

August 6, 2020.
    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 July 29, 
2020, ICE Clear Credit LLC (``ICC'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
primarily by ICC. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed rule change is to make 
changes to ICC's Risk Management Model Description. These revisions do 
not require any changes to the ICC Clearing Rules (the ``Rules'').\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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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 revise its Risk Management Model Description in 
connection with its proposed launch of the clearing of credit default 
index swaptions (``Index Swaptions'').\4\ ICC has previously filed with 
the Commission changes to certain other policies and procedures related 
to the clearing of Index Swaptions (the ``Swaption Rule Filings'').\5\ 
As set out in the Swaption Rule Filings, ICC intends to adopt or amend 
certain related policies and procedures in preparation for the launch 
of clearing of Index Swaptions and does not intend to commence clearing 
of Index Swaptions until all such policies and procedures have been 
approved by the Commission or otherwise become effective. Accordingly, 
ICC proposes to make such changes to the Risk Management Model 
Description effective following the approval of all such policies and 
procedures and the completion of the ICC governance process surrounding 
the Index Swaptions product expansion.
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    \4\ Index Swaptions are also referred to herein and in the Risk 
Management Model Description as ``index options'' or ``index CDS 
options'', or in similar terms.
    \5\ SEC Release No. 34-87297 (Oct. 15, 2019) (approval), 84 FR 
56270 (Oct. 21, 2019) (SR-ICC-2019-007); SEC Release No. 34-89142 
(June 24, 2020) (approval), 85 FR 39226 (June 30, 2020) (SR-ICC-
2020-002); SEC Release No. 34-89072 (June 16, 2020) (notice), 85 FR 
37483 (June 22, 2020) (SR-ICC-2020-008).
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    As discussed in the Swaption Rule Filings, pursuant to an Index 
Swaption, one party (the ``Swaption Buyer'') has the right (but not the 
obligation) to cause the other party (the ``Swaption Seller'') to enter 
into an index credit default swap transaction at a pre-determined 
strike price on a specified expiration date on specified terms. In the 
case of Index Swaptions that would be cleared by ICC, the underlying 
index credit default swap would be limited to certain CDX and iTraxx 
Europe index credit default swaps that are accepted for clearing by 
ICC, and which would be automatically cleared by ICC upon exercise of 
the Index Swaption by the Swaption Buyer in accordance with its terms.
    The proposed changes amend the Risk Management Model Description to 
incorporate a stochastic implied mean absolute deviation (``MAD'') 
feature in connection with the proposed launch of the clearing of Index 
Swaptions and make certain other minor clarification changes. The 
proposed amendments would modify Section VII of the Risk Management 
Model Description to add a subsection on stochastic implied MAD 
modeling. In the Swaption Rule Filings, ICC proposed to modify the 
integrated spread response component of the margin model to incorporate 
an options-implied credit spread distribution, which includes a scale 
parameter related to the MAD implied from swaption prices (``implied 
MAD'').\6\ ICC proposes enhancements to its approach to feature a 
stochastic implied MAD, which presents a more advanced risk modeling 
technique for option instruments in rapidly changing market conditions 
and high-volatility market environments. Currently, the model assumes a 
static implied MAD formulation where the implied MAD scale does not 
change in response to the simulated underlying index levels.
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    \6\ SEC Release No. 34-89142 (June 24, 2020) (approval), 85 FR 
39226 (June 30, 2020) (SR-ICC-2020-002).
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    Under the proposed changes, the risk methodology for clearing Index 
Swaptions would consider the risk arising from the joint fluctuations 
of the underlying index levels and the options implied MAD scales in 
proposed Subsection VII.3. ICC would identify and describe the 
distribution that the changes of the implied MAD scales associated with 
each option expiry follow. ICC would also discuss and provide the 
rationale for its selected parameter estimation approach. Specifically, 
ICC would set out how the distribution parameters are estimated for a 
set of implied MAD changes. The proposed changes further explain how 
ICC models the joint fluctuations of the underlying index levels and 
the options implied MAD scales. Proposed Figure 12 illustrates the 
simulation approach and is thus intended to replace Figure 11 in 
Subsection VII.2.2 that ICC proposes to remove. Relatedly, in 
Subsection VII.5.1.1 with respect to instrument profit/loss (``P/L'') 
estimations for Index Swaptions, ICC proposes to add reference to 
notations related to the stochastic implied MAD from proposed 
Subsection VII.3.
    ICC also proposes other minor clarification changes to the Risk 
Management Model Description. ICC propose to reference the 
clearinghouse in Subsection III.6 when describing where certain data is 
obtained and to abbreviate a term in Subsection VI.2. Given the 
addition of Subsection VII.3, ICC proposes to renumber the subsections 
in Section VII accordingly. ICC further proposes clarifications to a 
formula and its notes in Subsection VII.5.1.2 regarding risk factor P/L 
estimations, including with respect to the description of an 
alternative option position P/L computation, subsequent risk 
estimations and the addition of certain payments to portfolio 
requirements.
(b) Statutory Basis
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act \7\ and the regulations 
thereunder applicable to it, including the applicable

[[Page 48742]]

standards under Rule 17Ad-22.\8\ In particular, Section 17A(b)(3)(F) of 
the Act \9\ requires that the rule change be consistent with the prompt 
and accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICC, the 
safeguarding of securities and funds in the custody or control of ICC 
or for which it is responsible, and the protection of investors and the 
public interest. The proposed rule change would enable a stochastic 
implied MAD feature in the Risk Management Model Description in 
connection with the proposed launch of the clearing of Index Swaptions. 
In contrast to the static implied MAD formulation where the implied MAD 
scale does not change in response to the simulated underlying index 
levels, the stochastic implied MAD approach considers the joint 
fluctuations of the underlying index levels and the options implied MAD 
scales in proposed Subsection VII.3. Such feature presents a more 
advanced risk modeling technique for option instruments in rapidly 
changing market conditions and high-volatility market environments. The 
proposed clarification changes would further ensure readability and 
transparency with respect to ICC's risk methodology and practices in 
the Risk Management Model Description to ensure that it remains up-to-
date, clear, and transparent to support the effectiveness of ICC's risk 
management system. ICC's view, these changes will enhance its risk 
model and thus enhance its ability to manage the participant default 
risk, including with respect to Index Swaptions. The proposed rule 
change is therefore consistent with the prompt and accurate clearing 
and settlement of the contracts cleared by ICC, including Index 
Swaptions, the safeguarding of securities and funds in the custody or 
control of ICC or for which it is responsible, and the protection of 
investors and the public interest, within the meaning of Section 
17A(b)(3)(F) of the Act.\10\
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    \7\ 15 U.S.C. 78q-1.
    \8\ 17 CFR 240.17Ad-22.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ Id.
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    The amendments would also satisfy relevant requirements of Rule 
17Ad-22.\11\ Rule 17Ad-22(e)(2)(i), (iii), and (v) \12\ requires each 
covered clearing agency to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to provide for 
governance arrangements that are clear and transparent; support the 
public interest requirements of Section 17A of the Act \13\ applicable 
to clearing agencies, and the objectives of owners and participants; 
and specify clear and direct lines of responsibility. ICC's Risk 
Management Model Description clearly assigns and documents 
responsibility and accountability for risk decisions and requires 
consultation or approval from relevant parties. ICC determined to 
incorporate a stochastic implied MAD feature in the Risk Management 
Model Description in accordance with its governance process, which 
included review and/or approval by the ICC Risk Committee and Board of 
the determination to enable the stochastic implied MAD feature of the 
model and the corresponding changes to the Risk Management Model 
Description. In ICC's view, the proposed rule change continues to 
ensure that ICC maintains policies and procedures that are reasonably 
designed to provide for clear and transparent governance arrangements 
that support the public interest requirements of Section 17A of the Act 
\14\ applicable to clearing agencies, and the objectives of owners and 
participants, and specify clear and direct lines of responsibility, 
consistent with Rule 17Ad-22(e)(2)(i), (iii), and (v).\15\
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    \11\ 17 CFR 240.17Ad-22.
    \12\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
    \13\ 15 U.S.C. 78q-1.
    \14\ Id.
    \15\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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    Rule 17Ad-22(e)(4)(ii) \16\ requires each covered clearing agency 
to establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to effectively identify, measure, 
monitor, and manage its credit exposures to participants and those 
arising from its payment, clearing, and settlement processes, including 
by maintaining additional financial resources at the minimum to enable 
it to cover a wide range of foreseeable stress scenarios that include, 
but are not limited to, the default of the two participant families 
that would potentially cause the largest aggregate credit exposure for 
the covered clearing agency in extreme but plausible market conditions. 
As discussed above, ICC proposes to modify the Risk Management Model 
Description to add a subsection on stochastic implied MAD modeling. 
Under the proposed changes, the risk methodology for clearing Index 
Swaptions would consider the risk arising from the joint fluctuations 
of the underlying index levels and the options implied MAD scales. ICC 
believes that the proposed changes support and enhance its ability to 
manage its financial resources as such feature presents a more advanced 
risk modeling technique for option instruments in rapidly changing 
market conditions and high-volatility market environments. 
Additionally, the proposed clarification changes provide further 
clarity and transparency regarding ICC's risk management practices to 
strengthen the documentation surrounding ICC's risk methodology, 
including the incorporation of a reference to the clearinghouse in 
Subsection III.6 when describing where certain data is obtained and the 
clarifications to a formula and its notes in Subsection VII.5.1.2. As 
such, the proposed amendments would strengthen ICC's ability to 
maintain its financial resources and withstand the pressures of 
defaults, consistent with the requirements of Rule 17Ad-
22(e)(4)(ii).\17\
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    \16\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \17\ Id.
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    Rule 17Ad-22(e)(6)(i) \18\ requires each covered clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to cover its credit exposures to its 
participants by establishing a risk-based margin system that, at a 
minimum, considers, and produces margin levels commensurate with, the 
risks and particular attributes of each relevant product, portfolio, 
and market. ICC proposes to modify the Initial Margin Methodology 
section of the Risk Management Model Description to enable a stochastic 
implied MAD feature of the model in connection with the clearing of 
Index Swaptions. As described above, this feature considers the 
relationship between the underlying index levels and the implied MAD 
scales and presents a more advanced risk modeling technique for option 
instruments in rapidly changing market conditions and high-volatility 
market environments. ICC believes that such feature enhances its margin 
methodology, which considers and produces margin levels commensurate 
with the risks and particular attributes of each relevant product, 
portfolio, and market, consistent with the requirements of Rule 17Ad-
22(e)(6)(i).\19\
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    \18\ 17 CFR 240.17Ad-22(e)(6)(i).
    \19\ Id.
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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 not necessary or 
appropriate in furtherance of the purpose of the Act. The proposed rule 
change would amend the Risk Management Model Description to add

[[Page 48743]]

a subsection on stochastic implied MAD modeling in connection with the 
proposed launch of the clearing of Index Swaptions and make certain 
other minor clarification changes. The proposed rule change will apply 
uniformly across all market participants. ICC does not believe 
acceptance of Index Swaptions for clearing would adversely affect the 
trading markets for such contracts, and in fact acceptance of such 
contracts by ICC would provide market participants with the additional 
flexibility to have their Index Swaptions cleared. Acceptance of Index 
Swaptions for clearing will not, in ICC's view, adversely affect 
clearing of any other currently cleared product. ICC does not believe 
the amendments would adversely affect the ability of Participants, 
their customers or other market participants to continue to clear 
contracts, including CDS Contracts. ICC also does not believe the 
enhancements would adversely affect the cost of clearing or otherwise 
limit market participants' choices for selecting clearing services in 
Index Swaptions, credit default swaps or other products. Accordingly, 
ICC does not believe the amendments would impose any burden on 
competition not necessary or appropriate in furtherance of the purpose 
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 and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period 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-2020-010 on the subject line.

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-2020-010. 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-2020-010 and should be 
submitted on or before September 2, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17557 Filed 8-11-20; 8:45 am]
BILLING CODE 8011-01-P


