[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Notices]
[Pages 10395-10401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03875]



[[Page 10395]]

=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94273; File No. SR-DTC-2022-001]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change 
To Amend the Clearing Agency Model Risk Management Framework

February 17, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 11, 2022, The Depository Trust Company (``DTC'') 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 the clearing agency. DTC filed the proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to the Clearing 
Agency Model Risk Management Framework (``Framework'') of DTC and its 
affiliates that are central counterparties, National Securities 
Clearing Corporation (``NSCC'') and Fixed Income Clearing Corporation 
(``FICC,'' and together with NSCC, the ``CCPs,'' and the CCPs together 
with DTC, the ``Clearing Agencies'').\5\ The Framework has been adopted 
by the Clearing Agencies to support their compliance with Rule 17Ad-
22(e) (the ``Covered Clearing Agency Standards'') under the Act,\6\ 
and, in this regard, applies solely to models \7\ utilized by the 
Clearing Agencies that are subject to the model risk management 
requirements set forth in Rules 17Ad-22(e)(4), (e)(6), and (e)(7) under 
the Act.\8\
---------------------------------------------------------------------------

    \5\ The Framework sets forth the model risk management practices 
that the Clearing Agencies follow to identify, measure, monitor, and 
manage the risks associated with the design, development, 
implementation, use, and validation of quantitative models. The 
Framework is filed as a rule of the Clearing Agencies. See 
Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 FR 
41433 (August 31, 2017) (File Nos. SR-DTC-2017-008, SR-FICC-2017-
014, SR-NSCC-2017-008) (``2017 Notice''); 88911 (May 20, 2020), 85 
FR 31828 (May 27, 2020) (File Nos. SR-DTC-2020-008, SR-FICC-2020-
004, SR-NSCC-2020-008); and 92379 (July 13, 2021), 86 FR 38143 (July 
19, 2021) (File No. SR-DTC-2021-013), 92381 (July 13, 2021), 86 FR 
38163 (July 19, 2021) (File No. SR-NSCC-2021-008), and 92380 (July 
13, 2021), 86 FR 38140 (July 19, 2021) (File No. SR-FICC-2021-006) 
(collectively, the ``MRMF Filings'').
    \6\ 17 CFR 240.17Ad-22(e). Each of DTC, NSCC and FICC is a 
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and 
must comply with Rule 17Ad-22(e).
    \7\ Pursuant to Section 3.1 of the Framework, the Clearing 
Agencies have adopted the following definition of ``model'': 
``[M]odel'' refers to a quantitative method, system, or approach 
that applies statistical, economic, financial, or mathematical 
theories, techniques, and assumptions to process input data into 
quantitative estimates. A ``model'' consists of three components: 
(i) An information input component, which delivers assumptions and 
data to the model; (ii) a processing component, which transforms 
inputs into estimates; and (iii) a reporting component, which 
translates the estimates into useful business information. The 
definition of model also covers quantitative approaches whose inputs 
are partially or wholly qualitative or based on expert judgment, 
provided that the output is quantitative in nature. See 2017 Notice, 
supra note 5. See also Supervisory Guidance on Model Risk 
Management, SR Letter 11-7 Attachment, dated April 4, 2011, issued 
by the Board of Governors of the Federal Reserve System and the 
Office of the Comptroller of the Currency, available at https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf, page 
3.
    \8\ 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References to 
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only 
and not to DTC because DTC is not a central counterparty.
---------------------------------------------------------------------------

    The proposed rule change would amend the Framework \9\ to (i) 
harmonize the terminology used in the Framework relating to model 
validation, with the definition used by the Covered Clearing Agency 
Standards, by deleting ``full'' where it appears as a modifier to 
``model validation'' in the Framework; (ii) provide that provisional 
approvals of models may be extended if approved by the Managing 
Director of Model Risk Management (``MRM'') and notice thereof is given 
to the Group Chief Risk Officer; however, in no event shall any 
provisional approval, together with any extension(s) granted, exceed 
one year and (iii) make other technical and clarifying changes to the 
text, as described below.
---------------------------------------------------------------------------

    \9\ Amending the Framework does not require any changes to the 
Rules, By-Laws and Organization Certificate of DTC (available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf) (the ``DTC Rules''), the Rulebook of the Government 
Securities Division of FICC (available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf) (the ``GSD 
Rules''), the Clearing Rules of the Mortgage-Backed Securities 
Division of FICC (available at http://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf) (the ``MBSD Rules''), or 
the Rules & Procedures of NSCC (available at http://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf) (the ``NSCC 
Rules,'' and collectively with the DTC Rules, GSD Rules, and MBSD 
Rules, the ``Rules''), because the Framework is a standalone 
document. See MRMF Filings, supra note 5.
---------------------------------------------------------------------------

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

    In its filing with the Commission, the clearing agency 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. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The proposed rule change would amend the Framework to (i) harmonize 
the terminology used in the Framework relating to model validation, 
with the definition used by the Covered Clearing Agency Standards, by 
deleting ``full'' where it appears as a modifier to ``model 
validation'' in the Framework; (ii) provide that provisional approvals 
of models may be extended if approved by the Managing Director of MRM 
and notice thereof is given to the Group Chief Risk Officer; however, 
in no event shall any provisional approval, together with any 
extension(s) granted, exceed one year and (iii) make other technical 
and clarifying changes to the text, as described below.
Background
    The Covered Clearing Agency Standards require that the Clearing 
Agencies take steps to manage the models that they employ in 
identifying, measuring, monitoring, and managing their respective 
credit exposures and liquidity risks, including that the Clearing 
Agencies conduct daily backtesting of model performance, periodic 
sensitivity analyses of models, and annual validation of models.\10\ 
The Framework is maintained by the Clearing Agencies to support their 
compliance with the requirements of the Covered Clearing Agency 
Standards relating to model risk management.
---------------------------------------------------------------------------

    \10\ See 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References 
to Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs 
only and not to DTC.
---------------------------------------------------------------------------

    The Framework outlines the applicable regulatory requirements 
mentioned above, describes the risks that the Clearing Agencies' model 
risk management program are designed to mitigate, and sets forth 
specific model risk management practices and requirements adopted by 
the Clearing

[[Page 10396]]

Agencies to ensure compliance with the Covered Clearing Agency 
Standards. These practices and requirements include, among other 
things, the maintenance of a model inventory (``Model Inventory''), a 
process for rating model materiality and complexity, processes for 
performing model validations and resolving findings identified during 
model validation, and processes for model performance monitoring, 
including backtesting and sensitivity analyses. The Framework also 
describes applicable internal ownership and governance 
requirements.\11\
---------------------------------------------------------------------------

    \11\ See MRMF Filings, supra note 5, for additional information 
on the contents of the Framework.
---------------------------------------------------------------------------

    The proposed rule change would harmonize the terminology used in 
the Framework relating to model validation, with the definition used by 
the Covered Clearing Agency Standards, by deleting ``full'' where it 
appears as a modifier to ``model validation'' in the Framework. The 
proposed rule change would also amend the Framework to provide the 
Clearing Agencies with the ability to make limited time extensions for 
provisional approvals of models. In this regard, the proposed rule 
change is designed to facilitate the Clearing Agencies' ability to 
prudently manage contingencies relating to events or changes of 
circumstance that may impact the Clearing Agencies' management of 
credit risk, margin, and liquidity risk management models, in 
accordance with the Framework. Additionally, the proposed rule change 
would make technical and clarifying changes to the text of the 
Framework, as described below.
Proposed Rule Change
Eliminate References to ``Full'' Model Validation
    With respect to model validation, the Covered Clearing Agency 
Standards refer to the term simply as ``model validation,'' as defined 
by Rule 17Ad-22(a)(9) under the Act.\12\ However, the Framework refers 
to model validation both as a ``full model validation'' and ``model 
validation,'' and as an undefined and defined term depending on usage. 
For example, Section 1 (Executive Summary) of the Framework describes 
Section 3 (Model Risk Management Framework), among other things, as 
including a discussion on ``full model validation.'' Yet, ``Model 
Validation'' is first defined in Section 3 as the definition used by 
the Covered Clearing Agency Standards, which does not use the modifier 
``full.'' Moreover, references to full model validation and model 
validation in the Framework have the same meaning, as the Framework 
does not distinguish between the two.
---------------------------------------------------------------------------

    \12\ The term ``model validation'' means an evaluation of the 
performance of each material risk management model used by a covered 
clearing agency (and the related parameters and assumptions 
associated with such models), including initial margin models, 
liquidity risk models, and models used to generate clearing or 
guaranty fund requirements, performed by a qualified person who is 
free from influence from the persons responsible for the development 
or operation of the models or policies being validated. 17 CFR 
240.17Ad-22(a)(9).
---------------------------------------------------------------------------

    To address these unnecessary variations, the Clearing Agencies 
propose to harmonize the terminology used in the Framework relating to 
model validation, with the applicable term used in the Covered Clearing 
Agency Standards, by deleting ``full'' in all instances where it 
appears as a modifier to ``model validation'' in the Framework. In this 
regard, the word ``full'' preceding ``model validation'' would be 
deleted from the Framework in all instances where it appears, including 
(i) from the reference in Section 1 of the Framework, mentioned above, 
(ii) renaming Section 3.3 of the Framework, named Full Model 
Validation, as ``Model Validation,'' and (iii) deleting four 
appearances of the word ``full'' before ``Model Validation'' in the 
text of Section 3.
Extension of Provisional Approvals of Models
    The Covered Clearing Agency Standards require that the Clearing 
Agencies identify, measure, monitor, and manage their respective credit 
exposures and liquidity risks by performing model validations of their 
respective credit risk and liquidity risk models not less than annually 
or more frequently as may be contemplated by the applicable Clearing 
Agency's established risk management framework.\13\ A covered clearing 
agency that is a central counterparty must perform a model validation 
for its margin system and related models not less than annually or more 
frequently as may be contemplated by such central counterparty's risk 
management framework.\14\
---------------------------------------------------------------------------

    \13\ See 17 CFR 240.17Ad-22(e)(4)(vii) and (e)(7)(vii).
    \14\ See 17 CFR 240.17Ad-22(e)(6)(vii).
---------------------------------------------------------------------------

    Section 3.6 of the Framework (Model Approval and Control) provides 
that new models, and material changes to existing models, shall undergo 
model validation by MRM and then be approved by MRM prior to business 
use.
    In the absence of a Model Validation, provisional approvals with 
respect to new models and material changes to existing models may be 
issued to allow a model to be used for urgent business purposes prior 
to the completion of MRM's Model Validation. Such provisional approval 
requests must be presented by the applicable Model Owner \15\ to MRM, 
which may provisionally approve the model for a limited period not to 
exceed six months.
---------------------------------------------------------------------------

    \15\ Pursuant to Section 3.1 of the Framework, the ``Model 
Owner'' is the person designated by the applicable business area or 
support function to be responsible for a particular model. The Model 
Owner is recorded in the Model Inventory.
---------------------------------------------------------------------------

    The Framework does not provide for extensions of this six-month 
provisional approval period. However, MRM has observed, over time and 
since the Framework was initially filed,\16\ that it could take longer 
than six months to complete a model validation in accordance with the 
timeframe set forth in Section 3.3 of the Framework. For example, a 
model that has been provisionally approved and put into use while 
undergoing further modification and/or enhancement by a third-party 
developer, cannot undergo validation by MRM until such time as the 
developer has completed its process and made the enhanced model 
available to the Clearing Agencies. Considering the amount of time it 
may take for the developer to complete and deliver the modification 
and/or enhancement to the Clearing Agencies, as well as MRM's 
validation process itself, it may be necessary for the model to operate 
under provisional approval for a period greater than six months.
---------------------------------------------------------------------------

    \16\ Supra note 5.
---------------------------------------------------------------------------

    Therefore, pursuant to the proposed rule change, the Clearing 
Agencies would amend Section 3.6 of the Framework to provide that 
provisional approvals of models may be extended if approved by the 
Managing Director of MRM and notice thereof is given to the Group Chief 
Risk Officer; however, in accordance with the Covered Clearing Agency 
Standards requirements that credit, liquidity and margin models, as 
applicable, be validated at least annually,\17\ in no event shall any 
provisional approval, together with any extension(s) granted, exceed 
one year. In this regard, the proposed rule change would accommodate 
the incorporation of any modifications and enhancements identified by a 
developer into a provisionally approved model prior to model 
validation, and still allow the model validation to be completed within 
a timeframe that would be consistent with the requirements of both

[[Page 10397]]

the Framework and the Covered Clearing Agency Standards.
---------------------------------------------------------------------------

    \17\ See 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and 
(e)(7)(vii).
---------------------------------------------------------------------------

Technical and Clarifying Changes
Section 1 (Executive Summary)
    A sentence in Footnote 8 under Section 1 (Executive Summary) of the 
Framework would be revised for clarity and grammatical usage. The 
footnote describes the Model Risk Tolerance Statement and the Market 
Risk Tolerance Statement, which are listed in Section 1 among a series 
of documents used by the Clearing Agencies to support their execution 
of the Framework. In describing the Market Risk Tolerance Statement, 
the footnote states: ``. . . the Market Risk Tolerance Statement, which 
articulates, among other things, risk tolerance levels covering margin 
backtests covering backtest coverage and stress tests covering exposure 
to extreme market moves.'' The proposed rule change would eliminate 
certain repetitive usage of ``covering'' and ``coverage'' in the text 
quoted above such that the applicable text would read as follows: ``. . 
. the Market Risk Tolerance Statement, which articulates, among other 
things, risk tolerance levels covering margin backtests and stress 
tests related to exposure to extreme market moves.''
Section 2 (Model Risk Management Requirements)
    The first paragraph of Section 2 is intended by the Clearing 
Agencies to describe that in compliance with Rules 17Ad-
22(e)(4)(vii),\18\ and (e)(7)(vii) \19\ of the Covered Clearing Agency 
Standards, each Clearing Agency is required to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to perform model validations on its credit risk models and 
liquidity risk models not less than annually or more frequently as may 
be contemplated by the Clearing Agency's risk management framework 
established pursuant to Rule 17Ad-22(e)(3).\20\ The main text of the 
paragraph contains typographical errors, in that in place of the 
reference to section (e) in each of the three rules citied in the 
paragraph, it instead includes an erroneous reference to a section (C). 
However, the footnotes to these references contain the correct 
citations. The Clearing Agencies would revise the main text of the 
paragraph to correct the erroneous references to section (C) to instead 
refer to section (e).
---------------------------------------------------------------------------

    \18\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \19\ 17 CFR 240.17Ad-22(e)(7)(vii).
    \20\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------

Section 3.1 (Model Inventory)
    Section 3.1 (Model Inventory) (i) sets forth the definition of 
model adopted by the Clearing Agencies,\21\ (ii) defines MRM as 
responsible for model risk management as a second-line function that is 
charged with determining whether any proposed method, system, or 
approach designed for Clearing Agency use meets the definition of 
model, (iii) provides a definition of Model Inventory as the definitive 
list of models subject to the Framework, (iv) describes a model 
inventory survey that is conducted at least annually across the 
Clearing Agencies to confirm that the Model Inventory is current, and 
(v) describes that all models subject to the Framework are validated, 
as described in the Framework.
---------------------------------------------------------------------------

    \21\ See supra note 7.
---------------------------------------------------------------------------

    The proposed rule change would make technical and clarifying 
changes to the second paragraph of this section, which states:

    The Model unit within the Group Chief Risk Office that is 
responsible for model risk management as a second-line function 
(``MRM'') is charged with determining whether any proposed method, 
system, or approach designed for Clearing Agency use meets the above 
definition. All models subject to this Framework will be added to 
the definitive list of models (``Model Inventory'') and tracked by 
MRM. A Model Inventory Survey is conducted at least annually across 
the Clearing Agencies to confirm the Model Inventory is current 
(``Annual Model Inventory Survey''). During the Annual Model 
Inventory Survey, any business area or support function intending to 
have a model developed for Clearing Agency use will submit materials 
relevant to such proposed model for MRM to review and assess whether 
such proposed model will be added to the Model Inventory. The person 
designated by the applicable business area or support function to be 
responsible for a particular model (``Model Owner'') is recorded as 
the Model Owner for such model by MRM in the Model Inventory.

    First, for enhanced clarity, the first sentence of the paragraph 
would be revised to replace the initial reference to ``The Model'' with 
``Model Risk Management'' and define the term as ``MRM'' directly after 
it is mentioned, rather than after additional descriptive text that 
follows in the sentence. The proposed rule change would also eliminate 
the reference to MRM as a ``unit'' because this reference is redundant 
given the context describing the functionality of MRM implies that it 
is a unit or group. Conforming grammatical changes would also be made 
to delete ``that'' after ``Group Chief Risk Office'' and add ``and'' 
after ``second-line function.'' The third sentence of the paragraph 
would be revised to make the initial letters in the words ``Model 
Inventory Survey'' lower case (i.e., ``model inventory survey'') as the 
term is not defined, but rather the reference is part of the 
description of the defined term ``Annual Model Inventory Survey'' that 
appears at the end of the sentence. The fourth sentence of the 
paragraph would be revised for consistency by replacing ``business area 
or support function'' with ``business line or functional unit,'' as the 
latter reflects usage of text in underlying MRM internal procedures.
    Second, the Clearing Agencies believe that adding to the Model 
Inventory certain methodologies used to implement configuration choices 
made by the Clearing Agencies, such as data sources, model parameters, 
and model performance monitoring, including but not limited to 
backtesting, that are not inherent to model selection or design and 
that do not materially impact a model's results, and are not models 
subject to this Framework, may provide benefits for the Clearing 
Agencies in terms of monitoring and tracking of such methodologies. In 
this regard, the Clearing Agencies would add text to reflect that such 
methodologies may be added to the Model Inventory at MRM's discretion.
    Finally, in the third paragraph of this section, the Clearing 
Agencies would change a reference to ``risk management standards'' to 
``Standards'' to conform to the defined term for the Covered Clearing 
Agency Standards used throughout the Framework.
Section 3.2 (Model Materiality and Complexity)
    Section 3.2 of the Framework describes that a model's output can 
affect decision making (e.g., decisions with respect to Clearing Fund/
Participants Fund, backtesting, and stress testing measures), which may 
have a material impact on the Clearing Agency, and that each model 
subject to the Framework is assigned a materiality/complexity rating in 
this regard. The section states that ``[m]ateriality/complexity index 
assignments are made at the time the applicable model is added to the 
Model Inventory and are used by MRM for Model Validation 
prioritization. All model materiality/complexity index assignments are 
reviewed at least annually by MRM, as well as by the Model Risk 
Governance Council (``MRGC''), the forum for review of model risk 
matters.'' Pursuant to the proposed rule change, the Clearing Agencies 
would replace both appearances of the words ``index assignments'' in 
these two sentences

[[Page 10398]]

with ``scores.'' This change would align the text of the Framework with 
MRM's practice, whereby MRM reviews materiality and complexity scores 
of a model, which directly determine the applicable materiality/
complexity rating, at least annually.\22\
---------------------------------------------------------------------------

    \22\ Specifically, the Clearing Agencies use the ``DTCC Model 
Development Standards,'' which is a document describing that 
materiality and complexity scores for a model, which scores are 
based on certain factors, underlie the determination of the 
materiality/complexity rating of the model. In accordance with the 
DTCC Model Development Standards, factors relating to the 
materiality score include model usage, model hierarchy and model 
exposure. The factors relating to the complexity score include 
structural complexity, and data availability and treatment.
---------------------------------------------------------------------------

Section 3.3 (Full Model Validation)
    In addition to deleting ``full'' where it appears as a modifier to 
``model validation'' in Section 3.3 of the Framework, as described 
above, including in the title of the section, the proposed rule change 
would make other technical and clarifying changes to this section.
    In a paragraph that describes Model Validation activities performed 
for new models:

    (i) A reference to ``model development documentation and 
testing'' would be changed to ``model documentation and development 
testing'';
    (ii) a reference to ``evaluation of data inputs and parameters'' 
would be changed to ``evaluation of model inputs and parameters'';
    (iii) a reference to ``review of numerical implementation 
(including replication for certain key model components, which will 
vary from model to model)'' would be changed to ``review of model 
implementation for consistency with documentation'';
    (iv) a reference to ``independent testing: sensitivity analysis, 
stress testing, and benchmarking, as appropriate'' would be changed 
to ``independent testing: model output evaluation, backtesting, 
sensitivity analysis, stress testing, and benchmarking, as 
appropriate''; and
    (v) a reference to ``evaluation of model outputs, model 
performance, and back testing'' would be changed to ``evaluation of 
model performance monitoring (or ``MPM'') plan and results.'' 
Similarly, a reference to ``model performance monitoring reports'' 
in Section 3.8 of the Framework (Model Performance Monitoring) would 
be revised to consider the definition of the term MPM described 
above. In this regard, this reference in Section 3.8 would be 
revised to instead refer to ``MPM reports.''

    In the second paragraph of this section, the third sentence states: 
``The Application Development Department for the Clearing Agencies will 
perform certain production release quality assurance checks (e.g., user 
acceptance testing/systems integration testing (UAT/SAT)).'' Pursuant 
to the proposed rule change, this sentence would be revised to delete 
``Application Development Department for the'' and ``(UAT/SAT)''. This 
change would generalize the text to eliminate the need to revise the 
document in the event the name of the area that performs such testing 
changes.
    The Clearing Agencies would also revise this paragraph with respect 
to text relating to ratings assigned to a model upon validation. In 
this regard, the Framework currently describes that the result of each 
Model Validation is a model validation report prepared by MRM (``Model 
Validation Report''), a key section of which is the summary of all 
findings and recommendations ranked according to the findings' severity 
level, inclusive of any identified model limitations and compensating 
controls for the model. This text would be revised to remove the 
reference to recommendations as part of the Model Validation Report 
because, pursuant to MRM's procedures, while the Model Validation 
Report includes findings, it does not include recommendations. In 
addition, the severity level of the findings is described in this 
section to be classified as H, M or L, which the Clearing Agencies 
intend as abbreviations for ``High,'' ``Medium,'' and ``Low.'' However, 
as these abbreviations are not otherwise defined in the Framework, the 
Clearing Agencies would replace the abbreviations with the full 
spelling of the classifications, such that the instances in the text of 
``H,'' ``M,'' and ``L'' would be replaced with ``High,'' ``Medium,'' 
and ``Low,'' respectively.
    This paragraph also describes that MRM will provide an overall 
assessment for each model having undergone a Model Validation (``Model 
Grade'').\23\ The Clearing Agencies propose to clarify this text such 
that it describes each model that has been approved, as being rated (in 
the form of a Model Grade) by MRM, rather than providing an overall 
assessment.
---------------------------------------------------------------------------

    \23\ The Clearing Agencies' current grading scale consists of 
three grades--``A,'' ``B,'' and ``C.'' Any Clearing Agency may add 
or remove grading levels in its discretion, the parameters of which 
shall be reflected in written procedures established by such 
Clearing Agency.
---------------------------------------------------------------------------

    This paragraph states further that the Model Grade, together with 
the model materiality/complexity index assignment, serves to provide 
context for MRM's overall assessment of the model's suitability and 
performance for its intended purpose. As with the revision described 
immediately above, the Clearing Agencies would remove the reference to 
a Model Grade as representing an overall assessment of the model. In 
its place, the proposed rule change would provide a description that 
the Model Grade outlines the overall assessed quality of the model 
developer's efforts to develop the model and the extent to which the 
model developer has effectively reduced model risk during model 
development.
    In addition, it is the Model Grade that rates these development 
quality considerations and risk factors, and the Model Grade does not 
depend on the model materiality/complexity index assignment and is not 
intended to signify the overall suitability of the model for its 
intended purpose. Therefore, the Clearing Agencies would clarify this 
point to remove the reference to model materiality and complexity as 
being a factor in determining the Model Grade, as well as delete text 
that indicates the Model Grade reflects the suitability of a model for 
its intended purpose.
Section 3.4 (Periodic Model Validation)
    Section 3.4 of the Framework describes that MRM shall perform a 
Model Validation for each model subject to this Framework that is 
approved for use in production not less than annually (or more 
frequently as may be contemplated by such Clearing Agency's established 
risk management framework), including each credit risk model,\24\ each 
liquidity risk model,\25\ and each CCP's margin systems and related 
models,\26\ as required by the risk management standards set forth in 
the Framework. This type of Model Validation is referred to generally 
in the Framework as ``periodic'' Model Validation. In this regard, for 
the sake of clarity, the Clearing Agencies would insert the word 
``periodic'' as a modifier for Model Validation in the first sentence 
of the first paragraph of this section.
---------------------------------------------------------------------------

    \24\ See 17 CFR 240.17Ad-22(e)(4)(vii).
    \25\ See 17 CFR 240.17Ad-22(e)(7)(vii).
    \26\ See 17 CFR 240.17Ad-22(e)(6)(vii).
---------------------------------------------------------------------------

    In addition, the Clearing Agencies would delete a paragraph from 
this section that states: ``Periodic Model Validations follow full 
Model Validation standards. In certain cases, MRM may determine extra 
Model Validation activities are warranted based on previous Model 
Validation work and findings, changes in market conditions, or because 
performance monitoring of a particular model warrants extra 
validation.'' This text would be deleted because, as noted above, the 
Framework recognizes one definition of Model Validation and the 
provisions relating to how Model Validation is conducted apply to all

[[Page 10399]]

models regardless of timing, and it is unnecessary to state that 
periodic Model Validation follows the same standards as ``full'' Model 
Validation since there is only one concept of Model Validation. In 
addition, the reference to extra Model Validation activities is 
duplicative as the Framework contains other text indicating that Model 
Validations may be performed for a given model more frequently than on 
the minimum annual basis.
Section 3.5 (Model Change Management)
    Section 3.5 of the Framework describes provisions relating to 
changes in models. The text of this section refers to a ``version 
change'' of a model in describing changes to third-party models. The 
section is intended to apply to any changes to a model and it is 
unnecessary to modify the word change, including with ``version.'' 
Therefore, the Clearing Agencies would delete the word ``version'' 
where it appears before ``change'' in this section.
Section 3.6 (Model Approval and Control)
    In addition to the proposed change described above to extend the 
period allowable for a provisional approval to remain in effect, the 
Clearing Agencies would revise a sentence in Section 3.6 of the 
Framework that states: ``Provisional approval requests along with 
appropriate control measures must be presented by the applicable Model 
Owner to MRM.'' The sentence as written is duplicative as the first 
paragraph of Section 3.6 states that models must be submitted to MRM 
for approval. However, given the focus of this section on the approval 
of models, the Clearing Agencies believe that the section should more 
clearly state where the approval authority resides for provisional 
models. As stated above, it is MRM's responsibility to approve models. 
Therefore, the Clearing Agencies would revise the sentence described 
above to read: ``Provisional approval requests along with appropriate 
control measures must be approved by MRM.''
    A sentence that states: ``All new models, and all material changes 
to existing models, shall undergo Model Validation by MRM and then be 
approved by MRM prior to business use'' would be revised to replace the 
word ``then'' with ``must'' to clarify the requirement that a model 
must be approved by MRM prior to use.
Section 3.7 (Resolution of Model Validation Findings)
    Consistent with the proposed change described above to remove the 
description of a group within the Group Chief Risk Office as a 
``unit,'' the Clearing Agencies would revise a reference to ``the 
Operational Risk Management unit'' to delete the word ``unit'' from 
this reference. Also, the Clearing Agencies would delete the word 
``the'' before ``Operational Risk'' because it would not be 
grammatically correct when ``unit'' is deleted. In addition, the group 
name of ``Operational Risk Management,'' as set forth in this 
reference, would be revised to ``Operational Risk'' to reflect a recent 
name change of this group from Operational Risk Management to 
Operational Risk. In connection with this name change, the term ``ORM'' 
that is used in this section to define ``Operational Risk Management'' 
would be deleted. Also, in this regard, two subsequent references to 
ORM in the Framework, which appear in Section 3.7 and Section 4.2, 
respectively, would be removed and replaced with ``Operational Risk.''
Section 3.8 (Model Performance and Monitoring)
    In addition to a change relating to the definition of MRM described 
above, the Clearing Agencies would revise a footnote in Section 3.8 of 
the Framework. The footnote 29 describes the role Quantitative Risk 
Management (``QRM'') performs with respect to the CCPs' margin models. 
A sentence within the note states that a representative of QRM self-
elects as the owner of a margin model. In fact, the CCPs' procedures 
would require the representative to be appointed as the owner of a 
model. Therefore, the Clearing Agencies would revise this footnote to 
reflect that a representative of QRM is appointed as the owner of a 
model.
    This section also contains a statement that MRM is responsible for 
providing oversight of model performance monitoring activities by 
setting organizational standards and providing critical analysis for 
identifying model issues and/or limitations. This statement has a 
footnote that states the organizational standards apply to DTCC's \27\ 
subsidiaries, as applicable. This footnote is unnecessary because the 
Framework applies only to the Clearing Agencies and no other 
subsidiaries of DTCC, and the mention to DTCC's subsidiaries in general 
is extraneous. Therefore, pursuant to the proposed rule change, the 
Clearing Agencies would delete this footnote.
---------------------------------------------------------------------------

    \27\ The Depository Trust & Clearing Corporation (``DTCC'') is 
the parent company of the Clearing Agencies.
---------------------------------------------------------------------------

Section 3.9 (Backtesting)
    Section 3.9 of the Framework contains a description of backtesting 
performed by the Clearing Agencies. Pursuant to the proposed rule 
change, this section would be revised to delete references to 
backtesting performed by DTC and related text, including applicable 
metrics and thresholds, and a related footnote that describes the 
designation of DTC account families by DTC Participants for purposes of 
managing Collateral Monitor and Net Debit Cap. The proposed change 
would be consistent with the Covered Clearing Agency Standards, which 
pursuant to Rule 17Ad-22(e)(6) \28\ requires certain backtesting to be 
performed by the CCPs. As indicated above, this rule does not apply to 
DTC.\29\ In this regard, a reference to a backtesting metric 
(Collateral Group Collateral Monitor Coverage) mentioned in Section 4.2 
of the Framework (Escalation) would also be deleted.
---------------------------------------------------------------------------

    \28\ See 17 CFR 240.17Ad-22(e)(6).
    \29\ See supra note 8.
---------------------------------------------------------------------------

Section 4.2 (Escalation)
    A paragraph within Section 4.2 of the Framework states: ``On at 
least a monthly basis, the key metrics identified in Section 3.9 are 
reviewed by the Market and Liquidity Risk Management unit within the 
Group Chief Risk Office and reported to the MRC \30\ by the group 
within the Group Chief Risk Office responsible for risk reporting. 
Threshold breaches will be reviewed by the Managing Directors within 
the Financial Risk Management area (including the Market and Liquidity 
Risk Management unit) of the Group Chief Risk Office, and in the case 
of CFR Coverage breaches by the CCPs and Collateral Group Collateral 
Monitor Coverage by DTC, escalated to the BRC in accordance with the 
applicable Risk Tolerance Statement.''
---------------------------------------------------------------------------

    \30\ MRC refers to the Management Risk Committee of the Boards 
of Directors of the Clearing Agencies.
---------------------------------------------------------------------------

    Pursuant to the proposed rule change, first, the reference to a 
Market and Liquidity Risk Management unit would be revised to reflect 
only the Market Risk Management unit. Today, the Market Risk Management 
and Liquidity Risk Management areas are under separate management, and 
Market Risk Management is the area that performs the review of key 
metrics described in the paragraph.

[[Page 10400]]

    Second, the Clearing Agencies would revise the paragraph to remove 
the parenthetical that states, ``including the Market and Liquidity 
Risk Management unit,'' after a reference to the Financial Risk 
Management area's role in the review of threshold breaches of key 
metrics, as both units are part of Financial Risk Management, and 
therefore the parenthetical is unnecessary. In this regard, the 
proposed modification would enhance readability.
    Third, the Clearing Agencies would remove the text ``by the group 
within the Group Chief Risk Office responsible for risk reporting'' as 
it is unnecessary since it can be inferred that reports would be 
provided by the group responsible for such reporting.
2. Statutory Basis
    The Clearing Agencies believe that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act,\31\ as well as Rules 
17Ad-22(e)(4), (e)(6), and (e)(7) thereunder,\32\ for the reasons 
described below.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
    \32\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to 
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only 
and not to DTC.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act \33\ requires, inter alia, that the 
rules of a clearing agency be designed 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. As described above, the 
proposed rule change enhances (i) the Clearing Agencies' ability to 
complete modifications to a provisionally approved model prior to the 
performance of a model validation and (ii) the text of the Framework to 
facilitate clarity for the areas within the Clearing Agencies that 
perform responsibilities with regard to model risk management and 
compliance with the Framework. By enhancing the Framework in this 
regard, the proposed rule change supports the Clearing Agencies' 
performance of their responsibilities under the Framework, including 
but not limited to assuring that models developed function as intended 
to support the Clearing Agencies in identifying, measuring, monitoring, 
and managing their respective credit exposures, liquidity risks and, as 
applicable, the maintenance of sufficient margin to cover these risks. 
In this regard, the proposed rule change would promote the safeguarding 
of securities and funds which are in the custody or control of the 
Clearing Agencies or for which they are responsible, by promoting the 
ability of the Clearing Agencies to manage credit exposures and 
liquidity risk that may impact the safeguarding of those funds and 
securities.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(4), (e)(6), and (e)(7) under the Act \34\ require, 
inter alia, that a covered clearing agency establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to manage risks associated with its credit risk management 
models, margin models, and liquidity risk management models, 
respectively, as applicable. As discussed above, the proposed rule 
change enhances (i) the Clearing Agencies' ability to complete 
modifications to a provisionally approved model prior to the 
performance of a model validation and (ii) the text of the Framework to 
facilitate clarity for the areas within the Clearing Agencies that 
perform responsibilities with regard model risk management and 
compliance with the Framework. By enhancing the Framework in this 
regard, the proposed rule change supports the Clearing Agencies' 
performance of their responsibilities under the Framework, including 
but not limited to assuring that models developed function as intended 
to support the Clearing Agencies in identifying, measuring, monitoring, 
and managing their respective credit exposures, liquidity risks and, as 
applicable, the maintenance of sufficient margin to cover these risks. 
Therefore, the Clearing Agencies believe that the proposed changes to 
the Framework are consistent with Rules 17Ad-22(e)(4), (e)(6), and 
(e)(7).\35\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to 
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only 
and not to DTC.
    \35\ Id.
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

    The Clearing Agencies do not believe that the proposed rule change 
would have any impact, or impose any burden, on competition because the 
proposed rule change simply modifies the Framework governing the 
management of model risk by the Clearing Agencies and (a) would not 
effectuate any changes to the Clearing Agencies' model risk management 
tools as they apply to their respective Members or Participants and (b) 
would not have an effect with respect to the obligations of 
participants utilizing Clearing Agency services.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    The Clearing Agencies have not received or solicited any written 
comments relating to this proposal. If any written comments are 
received, they will be publicly filed as an Exhibit 2 to this filing, 
as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
Commission's Division of Trading and Markets at 
[email protected] or 202-551-5777.
    The Clearing Agencies reserve the right to not respond to any 
comments received.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:

    (i) Significantly affect the protection of investors or the 
public interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \36\ and 
Rule 19b-4(f)(6) thereunder.\37\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(3)(A).
    \37\ 17 CFR 240.19b-4(f)(6).

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

[[Page 10401]]

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 [email protected]. Please include 
File Number SR-DTC-2022-001 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-DTC-2022-001. 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 the filing also will be available for inspection 
and copying at the principal office of DTC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). 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-DTC-2022-001 and should be submitted on 
or before March 17, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03875 Filed 2-23-22; 8:45 am]
BILLING CODE 8011-01-P


