[Federal Register Volume 85, Number 188 (Monday, September 28, 2020)]
[Notices]
[Pages 60845-60847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21269]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89948; File No. SR-ICC-2020-010]


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

September 22, 2020.

I. Introduction

    On July 29, 2020, 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 (the 
``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to make changes 
to ICC's Risk Management Model Description.\3\ The proposed rule change 
was published for comment in the Federal Register on August 12, 
2020.\4\

[[Page 60846]]

The Commission did not receive comments regarding the proposed rule 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Proposed Rule Change Relating to the ICC Risk Management Model 
Description, Exchange Act Release No. 89491 (August 6, 2020); 85 FR 
48741 (August 12, 2020) (SR-ICC-2020-010) (``Notice).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    ICC is proposing to make changes to its Risk Management Model 
Description in connection with its proposed launch of the clearing of 
credit default index swaptions (``Index Swaptions'').\5\ 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'') in order to adopt or amend certain related 
policies and procedures in preparation for the launch of clearing of 
Index Swaptions.\6\ The Swaption Rule Filings describe an Index 
Swaption as when 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. As also described in the Swaption Rule Filings, ICC would 
not commence clearing of Index Swaptions until all such policies and 
procedures have been approved by the Commission or otherwise become 
effective. As such, ICC filed the proposed rule change as part of ICC's 
larger effort to adopt the necessary policies and procedures prior to 
the eventual launch of the clearing of Index Swaptions.
---------------------------------------------------------------------------

    \5\ The description herein is substantially excerpted from the 
Notice.
    \6\ SEC Release No. 34-87297 (Oct. 15, 2019), 84 FR 56270 (Oct. 
21, 2019) (SR-ICC-2019-007); SEC Release No. 34-89142 (June 24, 
2020), 85 FR 39226 (June 30, 2020) (SR-ICC-2020-002); SEC Release 
No. 34-89436 (July 31, 2020), 85 FR 47827 (Aug. 6, 2020) (SR-ICC-
2020-008).
---------------------------------------------------------------------------

    The proposed changes would 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. Specifically, the proposed amendments would modify Section VII 
of the Risk Management Model Description to add a subsection on 
stochastic implied MAD modeling. In ICC-2020-002, which is one of the 
Swaption Rule Filings, ICC modified 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'').\7\ In the current 
proposed rule change, ICC proposes enhancements to its approach to 
feature a stochastic implied MAD, which would present 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.
---------------------------------------------------------------------------

    \7\ SEC Release No. 34-89142 (June 24, 2020), 85 FR 39226 (June 
30, 2020) (SR-ICC-2020-002).
---------------------------------------------------------------------------

    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.
    The rule proposal would also make minor clarification changes to 
the Risk Management Model Description. Specifically, the proposal would 
reference the clearinghouse in Subsection III.6 when describing from 
where certain data is obtained and to abbreviate the term `mean 
absolute deviation' in Subsection VI.2. Because of the addition of 
Subsection VII.3, the proposal would therefore renumber the subsections 
in Section VII accordingly. Additionally, the proposal would make 
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.

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.\8\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \9\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i) 
thereunder.\10\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17 CFR 240.17Ad-
22(e)(6)(i).
---------------------------------------------------------------------------

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.\11\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As noted above, 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. 
The stochastic implied MAD approach considers the joint fluctuations of 
the underlying index levels and the options implied MAD scales, which 
is 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 Commission believes that by adjusting its risk modeling to 
account for rapidly changing and highly volatile markets, ICC will 
enhance its ability to manage the participant default risk by taking 
into account changing market environments. The Commission also believes 
that the clarification updates foster more clear and up to date

[[Page 60847]]

documentation, which will also enhance ICC's ability to manage risk.
    The Commission believes that such enhancements to ICC's ability to 
manage default risk combined with more up to date documentation will 
consequently enhance its financial position by facilitating the 
collection of margin more precisely tailored to the risks of the 
relevant products and, therefore, promote its ability to manage the 
applicable credit exposures, thereby helping to ensure ICC's continued 
operations in the event of a default and to promote the prompt and 
accurate clearance and settlement of transactions. Similarly, the 
Commission believes that the more precisely tailored margin could, in 
turn, help reduce the amount of credit losses that would potentially be 
charged to non-defaulting members in the event of a default, thereby 
helping to ensure that ICC is able to safeguard securities and funds in 
its custody and control. Therefore, the Commission believes that the 
proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act.\12\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(e)(4)(ii)

    Rule 17Ad-22(e)(4)(ii) 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.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 240.17Ad-22(e)(4)(ii).
---------------------------------------------------------------------------

    As noted above, the proposed rule change would modify the Risk 
Management Model Description to add a subsection on stochastic implied 
MAD modeling in which 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. The 
Commission believes that by incorporating these changes, ICC will be in 
a better position to anticipate risks in these products under more 
dynamic and volatile market conditions for the underlying indexes, 
thereby enhancing its ability to collect the appropriate margin and 
consequently 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. For these reasons, the Commission believes that the 
proposed rule change is consistent with Rule 17Ad-22(e)(4)(ii).\14\
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) 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. As noted above, the proposed rule change 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. The Commission believes that by taking into 
account the market dynamics of the underlying index levels, the 
proposed change will enable ICC to produces margin levels commensurate 
with the risks and attributes of Index Swaptions. The Commission 
believes that the proposed rule change is therefore consistent with 
Rule 17Ad-22(e)(6)(i).\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 240.17Ad-22(e)(6)(i).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act \16\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i) 
thereunder.\17\
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17 CFR 240.17Ad-
22(e)(6)(i).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-ICC-2020-010) be, and hereby is, 
approved.\19\
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(2).
    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-21269 Filed 9-25-20; 8:45 am]
BILLING CODE 8011-01-P


