[Federal Register Volume 86, Number 204 (Tuesday, October 26, 2021)]
[Notices]
[Pages 59258-59261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93388; File No. SR-ICC-2021-018]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Back-Testing 
Framework

October 20, 2021.

I. Introduction

    On August 24, 2021, 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-2021-018) 
to revise the ICE CDS Clearing: Back-Testing Framework (``Back-Testing 
Framework'') to include additional description on the lookback period 
for back-testing and other

[[Page 59259]]

clarifications.\3\ The proposed rule change was published in the 
Federal Register on September 14, 2021.\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 Back-Testing 
Framework.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Back-Testing 
Framework, Exchange Act Release No. 92893 (Sept. 8, 2021); 86 FR 
51204 (Sept. 14, 2021) (SR-ICC-2021-018) (``Notice'').
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II. Description of the Proposed Rule Change

    The Back-Testing Framework discusses ICC's back-testing approach 
and analysis to verify that the number of actual losses is consistent 
with the number of projected losses, and includes guidelines for 
remediating poor back-testing results. ICC proposes revising the Back-
Testing Framework to include additional description on the lookback 
period for back-testing, which refers to the maximum back-testing 
sample size, and other clarifications. The proposed revisions to the 
Back-Testing Framework are described in detail as follows.\5\
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    \5\ The following description of the proposed rule change is 
substantially excerpted from the Notice.
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    ICC proposes a clarification change in Subsection 1.2 to specify 
that the ICC Risk Management Department (``ICC Risk'') may consider 
back-testing analysis based on alternative statistical tests to assess 
the performance of its models in terms of statistical reliability, in 
addition to its current consideration of clustering of exceedances, 
which refers to excessive losses.
    ICC proposes new Subsection 2.1 (Lookback Period for Back-Testing 
of the Production Model with Clearing Participant Portfolios) to 
include additional description of the lookback period for back-testing, 
which refers to the maximum back-testing sample size. ICC represents 
that proposed Subsection 2.1 would not change its methodology.\6\ 
Specifically, proposed Subsection 2.1 defines back-testing as 
statistics-based hypothesis testing, and clarifies that the larger the 
sample size is, the more reliable the inference is from such testing. 
Proposed Subsection 2.1 describes the performance of production model 
back-testing analysis for Clearing Participant (``CP'') related 
portfolios reflecting all available observations over periods of 
various market conditions. The proposed language also describes the 
maximum back-testing sample size, or the lookback period, and the 
benefit of allowing for a greater sample size that would incorporate 
observations from various market regimes to assess model performance 
and thus ensure more reliable inferences from back-testing. The 
proposed language also analyzes short lookback periods, which may 
exclude extreme stress market conditions, in combination with high risk 
quantile estimates (e.g., greater than 99%). ICC also proposes to 
introduce an alternative statistical test and describe how the model is 
considered to pass or fail such test. Proposed Figure 1 provides an 
illustration under the alternative statistical test across different 
sample sizes and risk quantiles. Following proposed Figure 1, ICC would 
explain its rationale for establishing the minimum back-testing window 
length for the initial margin risk horizon, or the Margin Period of 
Risk (``MPOR'') model analysis. Proposed Subsection 2.1 also references 
the performance of additional analyses, as described in Section 4 of 
the Back-Testing Framework which contain guidelines to remediate poor 
back-testing results. Proposed Subsection 2.1 includes language 
concerning the reporting of back-testing results for portfolios, 
including those with an insufficient number of observations. Given the 
proposed addition of new Subsection 2.1, ICC proposes to renumber the 
subsequent subsections of the Back-Testing Framework document.
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    \6\ See Notice at 51205.
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    ICC proposes additional clarifications to the Back-Testing 
Framework. The proposed amendments include a footnote in amended 
Subsection 2.6 (BTLS Exceedance Summaries) that references a relevant 
Commodity Futures Trading Commission (``CFTC'') regulation with respect 
to ICC's performance of production model 99% back-testing analysis for 
all CP related portfolios. ICC also proposes amendments to Section 4 
(Guidelines to Remediate Poor Back-Testing Results). Currently, poor 
back-testing results require a peer review of the risk models by the 
Risk Working Group (``RWG''), which is comprised of risk 
representatives from ICC's CPs, and remedial actions to improve model 
performance. Section 4 currently states that model performance analysis 
along with the model assumptions are presented to the RWG for review 
and discussions. In addition to the model assumptions, the proposed 
change would include the number of observations for the RWG's review 
and discussions. Section 4 also currently states that a back-testing 
analysis without overlapping periods will be performed in order to 
confirm poor-backing results if the number of observed exceedances 
falls in the ``red zone'' of the so-called Basel Traffic Light System 
(BTLS) of the Basel Committee Supervisory Framework. The proposed rule 
change would amend such statement to include the RWG's assessment of 
the sufficiency of the number of observations in performing the 
portfolio-level back-testing analysis, thus supplementing the current 
complementary back-testing analysis without overlapping periods. ICC 
also proposes to update Section 5, containing a list of references, to 
include a reference to the alternative statistical test described above 
in the proposed new Subsection 2.1.

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.\7\ For the reasons given below, the Commission finds that 
the proposal is consistent with Section 17A(b)(3)(F) of the Act \8\ and 
Rules 17Ad-22(e)(2)(i) and (v), and 17Ad-22(e)(6)(vi) thereunder.\9\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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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.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would revise the Back-
Testing Framework to include additional description of the lookback 
period for back-testing and other clarifications. For the specific 
reasons discussed below, the Commission believes that, in general, the 
proposed rule change would help ensure the sound operation of the Back-
Testing Framework that should enhance the overall risk management and 
financial stability of ICC, and thereby promote ICC's prompt and 
accurate clearance and settlement of

[[Page 59260]]

credit default swap (``CDS'') transactions, and help assure the 
safeguarding of securities and funds which are in ICC's custody or 
control or for which ICC is responsible.
    First, the Commission believes that the proposed clarification in 
Subsection 1.2, in specifying that ICC Risk may use alternative 
statistical tests to assess the performance of its risk models for 
statistical reliability, would strengthen its back-testing approach and 
analysis by supplementing its consideration of the clustering of 
exceedances or excessive losses.
    Second, as discussed above, the proposed rule change also would 
introduce a new Subsection 2.1 that provides additional detail and 
explanation regarding the lookback period for its back-testing analysis 
methodology. Specifically, the Commission believes that proposed 
Subsection 2.1, in clarifying that back-testing is statistics-based 
hypothesis testing and that a larger sample size enhances the 
reliability of the inferences from such testing, would establish a 
clear risk management rationale for ICC's methodology to assess the 
performance of production model back-testing analysis for CP related 
portfolios reflecting all available observations over periods of 
various market conditions. The Commission also believes that proposed 
Subsection 2.1, in analyzing short lookback periods and describing in 
detail an alternative statistical test by illustrating its application 
across different sample sizes and risk quantiles, would provide a 
transparent, risk-based explanation for setting the minimum back-
testing window length for ICC's MPOR model analysis. The Commission 
also believes that proposed Subsection 2.1, in referencing additional 
analyses described in Section 4 (Guidelines to Remediate Poor Back-
Testing Results), and describing the reporting of back-testing results 
for portfolios, including those with an insufficient number of 
observations, would enhance the clarity and transparency of ICC's back-
testing procedures and contribute to the effective implementation of 
its overall back-testing approach. The Commission also believes that 
the proposed renumbering of sections that follow proposed new 
Subsection 2.1 will provide further clarity and enhance the readability 
of the Back-Testing Framework document.
    Third, as discussed above, ICC proposes additional clarifications 
to the Back-Testing Framework that the Commission believes, taken 
together, will enhance the clarity of its back-testing approach, 
procedures, and guidelines for remediating poor back-testing results. 
Specifically, the proposed amendments to Subsection 2.6 (BTLS 
Exceedance Summaries), in clearly referencing a relevant CFTC 
regulation with respect to ICC's performance of production model 99% 
back-testing analysis for all CP related portfolios, would help assure 
continued compliance with such regulation. The proposed amendments to 
Section 4 (Guidelines to Remediate Poor Back-Testing Results), in 
specifying that the RWG will review and discuss the number of 
observations in conducting its risk model performance analysis, and 
also assess the sufficiency of the number of observations on the 
portfolio level back-testing analysis without overlapping periods, 
would strengthen the RWG's analysis and better inform remedial actions. 
Finally, the proposed amendment to Section 5, in including a clear 
reference to the alternative statistical test described above in the 
proposed new Subsection 2.1, would assure that the RWG and relevant ICC 
Risk personnel have access to further details in using such test.
    By helping to assure the sound operation of the Back-Testing 
Framework, which ICC uses to manage the credit exposures associated 
with clearing CDS 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 and margin requirements for such transactions. Because such 
losses could disrupt ICC's ability to operate and thus clear and settle 
CDS transactions, the Commission finds the proposed rule change, by 
helping to enhance ICC's overall risk management and financial 
stability, would promote the prompt and accurate clearance and 
settlement of securities and derivative 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.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions and derivative agreements, contracts, and transactions, 
and assure the safeguarding of securities and funds in ICC's custody 
and control or for which ICC is responsible, consistent with Section 
17A(b)(3)(F) of the Act.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i) and (v) Under the Act

    Rules 17Ad-22(e)(2)(i) and (v) require that ICC establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent and specify clear and direct lines of 
responsibility, respectively.\12\ As discussed above, the Commission 
believes that the proposed rule change, in specifying that ICC Risk may 
use alternative statistical tests to assess the performance of its risk 
models for statistical reliability, would provide ICC Risk with 
procedural clarity in conducting its back-testing analysis of risk 
models. The Commission believes that the proposed amendments in Section 
4, in specifying that the RWG will review and discuss the number of 
observations in conducting its risk model performance analysis, and 
also assess the sufficiency of the number of observations on the 
portfolio level back-testing analysis without overlapping periods, 
would clarify the scope of the RWG's responsibility in reviewing poor 
back-testing results and would help the RWG to take more fully informed 
remedial actions, such as making risk model enhancements or introducing 
ad-hoc parameter values to achieve an increased conservative bias of 
the risk models. Finally, the proposed amendment to Section 5, in 
including a clear reference to the alternative statistical test 
described above in the proposed new Subsection 2.1, would assure that 
the RWG and relevant ICC Risk personnel have the correct source 
document to govern the ongoing use of such test for verifying the 
accuracy of risk management models.
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    \12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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    The Commission believes that these aspects of proposed rule change 
would clearly assign and document the respective roles and 
responsibilities of ICC Risk and the RWG in implementing the Back-
Testing Framework, and thereby improving the related governance 
arrangements for performing the appropriate scope of back-testing 
analysis and taking remedial actions if poor back-testing results 
warrant such action. The Commission therefore finds that the proposed 
rule change is consistent with Rules 17Ad-22(e)(2)(i) and (v).\13\
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    \13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(6)(vi) Under the Act

    Rule 17Ad-22(e)(6)(vi) requires that ICC establish, implement, 
maintain and enforce written policies and procedures

[[Page 59261]]

reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum, is 
monitored by management on an ongoing basis and is regularly reviewed, 
tested, and verified by, among other things: (A) Conducting backtests 
of its margin model at least once each day using standard predetermined 
parameters and assumptions; and (B) conducting a sensitivity analysis 
of its margin model and a review of its parameters and assumptions for 
backtesting on at least a monthly basis, and considering modifications 
to ensure the backtesting practices are appropriate for determining the 
adequacy of ICC's margin resources.\14\
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    \14\ 17 CFR 240.17Ad-22(e)(6)(vi).
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    Consistent with such back-testing requirements, the proposed rule 
change would not modify ICC Risk's current back-testing practices of 
performing daily, weekly, monthly, and quarterly portfolio-level back-
testing analyses, performing monthly parameter reviews and parameter 
sensitivity analyses, and remediating poor back-testing results under 
the Back-Testing Framework.\15\ For the reasons discussed below, the 
Commission finds that the proposed rule change would enhance such back-
testing practices to help ICC monitor its credit exposures to its 
clearing participants and maintain the ongoing effectiveness of its 
risk-based margin system and overall risk management framework. As 
described above, proposed new Subsection 2.1 (Lookback Period for Back-
Testing of the Production Model with Clearing Participant Portfolios), 
in adding a detailed description of the maximum back-testing sample 
size, or lookback period, and an alternative statistical test for 
enhanced analysis and verification of the accuracy of risk model 
performance, would clarify and strengthen ICC's back-testing analysis 
for CP related portfolios. Proposed Subsection 2.1, in establishing the 
minimum back-testing window length for the Margin Period of Risk (MPOR) 
model analysis, subjecting the MPOR model to the performance of 
additional analyses for portfolios with an insufficient number of 
available observations, and clarifying the reporting of back-testing 
results for such portfolios, would help ensure that the back-testing 
practices for MPOR models are appropriate for determining the accuracy 
of ICC's margin resources. If red-zone results appear from overlapping 
back-testing periods, Section 4, as amended, would require ICC Risk to 
assess the sufficiency of the number of observations on the portfolio-
level back-testing analysis, which would supplement its complementary 
back-testing analysis without overlapping periods. The Commission 
therefore finds that these aspects of the proposed rule change, taken 
together, are consistent with Rule 17Ad-22(e)(6)(vi).\16\
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    \15\ See Notice at 51205.
    \16\ 17 CFR 240.17Ad-22(e)(6)(vi).
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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 
\17\ and Rules 17Ad-22(e)(2)(i) and (v), and 17Ad-22(e)(6)(vi) 
thereunder.\18\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\19\ that the proposed rule change (SR-ICC-2021-018) be, and hereby is, 
approved.\20\
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 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).
    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23258 Filed 10-25-21; 8:45 am]
BILLING CODE 8011-01-P


