[Federal Register Volume 87, Number 38 (Friday, February 25, 2022)]
[Notices]
[Pages 10878-10881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03960]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94280; File No. SR-ICEEU-2022-004]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Relating to Amendments to the ICE 
Clear Europe CDS Clearing Stress Testing Policy and CDS Clearing Back-
Testing Policy

February 18, 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 10, 2022, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'')

[[Page 10879]]

the proposed rule changes described in Items I, II and III below, which 
Items have been prepared primarily by ICE Clear Europe. 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

    ICE Clear Europe proposes to modify certain provisions of its CDS 
Clearing Stress Testing Policy (``CDS Stress-Testing Policy'') and CDS 
Clearing Back-Testing Policy (``CDS Back-Testing Policy'') to make 
certain clarifications and updates.\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules and the 
CDS Clearing Stress Testing Policy and the CDS Clearing Back-Testing 
Policy (as applicable).
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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, ICE Clear Europe 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. ICE Clear Europe 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

(a) Purpose
    ICE Clear Europe is proposing to [sic] its CDS Back-Testing Policy 
and its CDS Stress-Testing Policy to describe more fully certain 
existing Clearing House practices, as discussed herein.
CDS Back-Testing Policy
    The amendments to the CDS Back-Testing Policy would generally 
clarify the types of back-testing the Clearing House performs of its 
CDS risk models. The amendments would also make minor terminology 
updates to conform uses of defined terms, make typographical 
corrections throughout the document, and add and/or update section 
names and numbering to improve organization and readability.
    The general discussion of the Clearing House's Back-testing 
approach would be amended to add a new paragraph which would specify 
that the Clearing House conducts several types of back-tests described 
in the CDS Back-Testing Policy and that the Clearing House adopts all 
the available reliable and validated data for each back-test in order 
to assess the model performance over a long period in which stressed 
market conditions and idiosyncratic events are likely to have occurred.
    A new section would be added (and numbering would be updated 
accordingly) to describe the use of overlapping and non-overlapping 
data in the back-testing of the CDS risk model performed by the 
Clearing House. The section would state explicitly that using non-
overlapping back-testing for static portfolios is the preferred 
approach because the CDS risk model is designed to cover a multi-days 
risk horizon, but that the lack of sufficiently long data sets may 
limit the use of the approach. Overlapping back-testing is used in 
order for the Clearing House to have a statistically significant 
sample, but the count of exceedances is artificially duplicated. The 
amendments also would discuss the ways the Clearing House addresses the 
problem of time dependent observations.
    The discussion of the implementation of the Basel Traffic Light 
System (BTLS) would be updated to state explicitly that one of the main 
assumptions of BTLS is that excessive losses are time independent. The 
amendments would describe how, because multi-horizon overlapping back-
testing is time dependent, the problem would be addressed by correcting 
the number of consecutive exceedances within the risk time horizon.
    The discussion of Multi-horizon back testing (renamed Multi-days 
horizon back-testing) would clarify that the observed loss is 
calculated as the minimum NAV change over 5 days for house accounts. 
Further clarificatory updates that would be made include specifying 
that shortfall is also known as ``back-test exceedances'' and that 
unrealized loss is also known as ``worst N-days P&L''. These updates 
would be made throughout the CDS Back-Testing Policy in order to be 
more descriptive and improve readability. The amendments would further 
reflect that the Clearing House's use of the worst N-days P&L may lead 
to multiple consecutive back-test exceedances following one large 
market move in the overlapping back-testing approach.
    The discussion of detailed daily back-testing results would be 
updated to include further explanations of the information presented in 
Table 2 (Example of the minimum 5-day P/L detail for daily back-
testing). Specifically, the amendments would provide that the last two 
examples in Table 2 shows the worst N-days P/L could be the 4-days P/L 
or 3-days P/L.
    The section relating to back-testing the production model with 
Clearing Members accounts would be amended to clarify that a minimum of 
one year of observations is required to define the statistical 
significance of back-testing results.
    Provisions relating to back-testing the production model with 
Special Strategy portfolios would be updated to describe that the set 
of portfolios tested include strategies like Index arbitrage portfolios 
with long Index and short Single Names constituent of the current 
Index. The strategies would refer to the main Indices where the 
Clearing House clears part of the underlying Single Names. 
Additionally, the amendments would provide that back-test results at 
the 99.5% quantile would be reviewed on at least a monthly basis, and 
that back-test results at the 99.75% quantile would be reviewed on an 
ad-hoc basis, when there is a large market move. A table showing 
portfolio reconstruction for special strategy back-testing would be 
removed as unnecessary detail now covered in the more general 
description of the special strategies.
    A new section addressing stylized portfolios back-testing would be 
added and would provide that the Clearing Risk Department would perform 
back-testing on a series of stylized portfolios when a new risk factor 
is introduced for clearing. Such stylized portfolios aim at replicating 
certain trading strategies in order to make sure that the risk related 
to the newly introduced risk factors can be managed through the current 
CDS risk model. Stylized portfolios back-testing may be carried out 
more frequently on the risk factors that [sic] the largest open 
interest at the Clearing House in order to provide further assurance 
regarding the CDS risk model performance. The changes reflect current 
back-testing practice, and are intended to more clearly document such 
practices in the Back-Testing Policy.
    The provisions relating to univariate back-testing would be updated 
to provide that back-testing results at 99.5% quantile would be 
reviewed on at least a monthly basis by the Clearing Risk Department 
and reported to the Model Oversight Committee on a monthly basis, which 
reflects current practice. Back-testing results at 99.75% quantile 
would be reviewed on ad-hoc basis, when stress market conditions might 
cause breaches at 99.5% quantile.
CDS Stress-Testing Policy
    In the CDS Stress-Testing Policy, the description of the use of 
Hypothetical Scenarios would be updated to clarify

[[Page 10880]]

that forward looking credit event scenarios are based on both 
historically observed and hypothetical extreme but plausible market 
scenarios. This update is intended to more clearly reflect current 
stress testing practice.
(b) Statutory Basis
    ICE Clear Europe believes that the amendments to the CDS Back-
Testing Policy and the CDS Stress-Testing Policy are consistent with 
the requirements of Section 17A of the Act \4\ and the regulations 
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the 
Act \5\ requires, among other things, that the rules of a clearing 
agency be designed to promote the prompt and accurate clearance and 
settlement of securities transactions and, to the extent applicable, 
derivative agreements, contracts, and transactions, the safeguarding of 
securities and funds in the custody or control of the clearing agency 
or for which it is responsible, and the protection of investors and the 
public interest.
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    \4\ 15 U.S.C. 78q-1.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    The amendments to the CDS Back-Testing Policy are generally 
designed to enhance and clarify the descriptions of back-testing 
performed on ICE Clear Europe CDS risk models. Although these changes 
are largely not intended to represent a change in current Clearing 
House practices, they are intended to more clearly reflect those 
practices and thereby enhance the ongoing implementation and monitoring 
of back-testing. In particular, the amendments clarify the use of 
overlapping and non-overlapping data sets, the back-testing of stylized 
portfolios when new risk factors are rolled out, assumptions around 
time independence of exceedances, and the review process for the 99.75% 
quantile back tests (including the frequency of review and the Clearing 
House committees responsible for review). The amendment to the CDS 
Stress-Testing Policy would clarify the use of hypothetical scenarios 
in constructing forward looking credit event scenarios in stress 
testing of the CDS risk model. Therefore, the amendments will help ICE 
Clear Europe ensure that its risk model will effectively measure credit 
exposures and default risks, and thus that the Clearing House 
adequately maintains adequate financial resources to support its CDS 
operations. The amendments will therefore enhance the stability of the 
Clearing House and overall promote the prompt and accurate clearance 
and settlement of securities transactions and, derivative agreements, 
contracts, and transactions, and the public interest in the sound 
operation of clearing agencies. Accordingly, the amendments are 
consistent with the requirements of Section 17A(b)(3)(F).\6\ (ICE Clear 
Europe does not believe the amendments will affect the safeguarding of 
securities and funds in ICE Clear Europe's custody or control or for 
which it is responsible.)
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    For similar reasons, the proposed amendments are also consistent 
with relevant requirements of Rule 17Ad-22. ICE Clear Europe believes 
that the proposed amendments are consistent with the relevant 
requirements of Rule 17Ad-22(e)(4)(vi)(A),\7\ which provides that 
``[e]ach covered clearing agency shall establish, implement, maintain 
and enforce written policies and procedures reasonable designed to, as 
applicable [. . .] effectively identify, measure, monitor and manage 
its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by [. . .] 
testing the sufficiency of its total financial resources available to 
meet the minimum financial resource requirements [. . .] by conducting 
stress testing of its total financial resources once each day using 
standard predetermined parameters and assumptions'', among other 
requirements. The amendments to the CDS Stress-Testing Policy clarify 
that construction of certain forward looking stress scenarios is based 
on hypothetical as well as historical scenarios. As amended, the CDS 
Stress-Testing Policy will facilitate the ongoing stress-testing of 
financial resources and effective management of credit exposures to CDS 
Clearing Members. As such, the amendments are consistent with the 
requirements of Rule 17Ad-22(e)(4)(vi)-(B) [sic].\8\
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    \7\ 17 CFR 240.17Ad-22.
    \8\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
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    Rule 17Ad-22(e)(6)(vi) \9\ provides that ``[e]ach covered clearing 
agency shall establish, implement, maintain and enforce written 
policies and procedures reasonable designed to, as applicable [. . .] 
cover, if the covered clearing agency provides central counterparty 
services, its credit exposures to its participants by establishing a 
risk-based margin system that, at a minimum [. . .] is monitored [sic] 
on an ongoing basis and is regularly reviewed, tested and verified by 
(A) conducting backtests of its margin model at least once each day 
using standard predetermined parameters and assumptions; (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 [its] margin resources; (C) 
conducting a sensitivity analysis of its margin model and a review of 
its parameters and assumptions for backtesting more frequently than 
monthly during periods of time when the products cleared or markets 
served display high volatility or become less liquid, or when the size 
or concentration of positions held by the covered clearing agency's 
participants increases or decreases significantly; and (D) reporting 
the results of its analyses . . . to appropriate decision makers . . . 
.''. The amendments to the CDS Back-Testing Policy will, as discussed 
above, enhance the framework for ICE Clear Europe to conduct back-
testing of CDS risk models by more clearly addressing the use of 
overlapping and non-overlapping back-testing data sets, the back-
testing of stylized portfolios when new risk factors are implemented, 
and assumptions around time independence of excessive losses, among 
other changes. The amendments also clarify the procedures for review of 
back-testing at certain quantiles (on a monthly or ad hoc basis, as 
appropriate). As such, ICE Clear Europe believes the amendments are 
consistent with the requirements of Rule 17Ad-22(e)(6)(vi).\10\
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    \9\ 17 CFR 240.17Ad-22(e)(6)(vi).
    \10\ 17 CFR 240.17Ad-22(e)(6)(vi).
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    Rules 17Ad-22(e)(2)(i) and (v) \11\ provides that ``[e]ach covered 
clearing agency shall establish, implement, maintain and enforce 
written policies and procedures reasonable designed to, as applicable 
[. . .] provide for governance arrangements that are clear and 
transparent [and] specify clear and direct lines of responsibility''. 
As described herein, references to the roles of certain committees and 
departments with respect to reviews and approvals throughout the CDS 
Back-Testing Policy have been updated to reflect existing practice with 
respect to the roles of groups. As such, the amendments provide 
additional clarity with respect to Clearing House governance and lines 
of responsibility consistent with Rules 17Ad-22(e)(2)(i) and (v).\12\
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    \11\ 17 CFR 240.17 Ad-22(e)(2)(i) and (v).
    \12\ 17 CFR 240.17 Ad-22(e)(2)(i) and (v).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the

[[Page 10881]]

purpose of the Act. In general, the amendments are intended to provide 
clarifications and additional details where necessary in order to 
reflect existing practices for CDS stress-testing and back-testing and 
are not intended to impose new requirements on Clearing Members. The 
terms of cleared CDS contracts and of clearing are not otherwise 
changing. As such, the amendments will apply to all CDS Clearing 
Members and are unlikely, in ICE Clear Europe's view, to materially 
affect the cost of clearing for CDS products or affect access to 
clearing for CDS products at ICE Clear Europe or the market for cleared 
services generally. To the extent the changes could lead to changes in 
margin rates, based on the results of stress-testing and/or back-
testing, ICE Clear Europe believes any such changes would be designed 
to appropriately reflect its credit risk from CDS Clearing Members with 
respect to cleared positions. Therefore, ICE Clear Europe does not 
believe the proposed rule changes impose any burden on competition that 
is inappropriate in furtherance of the purposes 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 amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any written comments received with respect to the 
proposed rule change.

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 [email protected]. Please include 
File Number SR-ICEEU-2022-004 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICEEU-2022-004. 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 Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/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-ICEEU-2022-004 and should be 
submitted on or before March 18, 2022.
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    \13\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03960 Filed 2-24-22; 8:45 am]
BILLING CODE 8011-01-P


