[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Notices]
[Pages 21227-21230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-07623]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94607; File No. SR-ICEEU-2022-004]


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

April 5, 2022.

I. Introduction

    On February 10, 2022, ICE Clear Europe Limited (``ICE Clear 
Europe'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend its CDS Clearing Back-Testing Policy 
(``CDS Back-Testing Policy'') and CDS Clearing Stress-Testing Policy 
(``CDS Stress-Testing Policy''). The proposed rule change was published 
for comment in the Federal Register on February 25, 2022.\3\ The 
Commission did not receive comments regarding the proposed rule change. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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, Exchange Act Release No. 94280 (Feb. 
18, 2022); 87 FR 10878 (Feb. 25, 2022) (SR-ICEEU-2022-004) 
(``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The proposed rule change would amend the CDS Clearing Back-Testing 
Policy and CDS Clearing Stress-Testing Policy to remediate the findings 
of an independent validation. The discussion below describes the 
proposed amendments in the order they appear in each policy.

i. CDS Back-Testing Policy

    The proposed rule change first would correct the capitalization of 
the title of Section 2.1. In that section, the proposed rule change 
also would correct a typographical error by replacing the word 
``follow'' with ``follows.'' In addition to those typographical 
corrections, the proposed rule change would add new language at the end 
of the section. This new language would explain that ICE Clear Europe 
conducts several types of backtests and that ICE Clear Europe adopts 
all the available reliable and validated data for each backtest in 
order to assess the model performance over a long period, where stress 
market conditions and idiosyncratic events are likely to have 
manifested.
    Next, the proposed rule change would add a new Section 2.2 and re-
number the remaining sections accordingly. New Section 2.2 would 
explain that ICE Clear Europe backtests the CDS risk model with 
overlapping data and non-overlapping data. This section also would 
explain that ICE Clear Europe prefers to backtest with non-overlapping 
data for static portfolios. Because the CDS risk model covers a multi-
days risk horizon, the lack of sufficiently long data sets limits ICE 
Clear Europe's ability to use non-overlapping data, however. ICE Clear 
Europe would address this limitation by using overlapping data to make 
a statistically significant sample.
    This new Section 2.2, as well as the new language at the end of 
Section 2.1, would document ICE Clear Europe's existing practice of 
backtesting using overlapping data and non-overlapping data, and, in 
doing so, using all the available reliable and validated data for each 
backtest in order to assess the model performance over a long period.

[[Page 21228]]

Backtesting using overlapping data potentially double-counts 
exceedances if the exceedances occur when data overlap. Because of this 
possible double-counting, backtesting with non-overlapping data is the 
preferred approach, but ICE Clear Europe still conducts backtesting 
with overlapping data, using all available reliable and validated data, 
to ensure it has an appropriate sample size.
    The proposed rule change next would amend re-numbered Section 2.4 
(currently Section 2.2), which describes the Basel Traffic Light System 
(``BTLS'').\4\ The proposed rule change would explain how ICE Clear 
Europe addresses one of the main assumptions of the BTLS, which is that 
excessive losses are time independent. As described above, ICE Clear 
Europe relies on overlapping data as necessary to ensure sufficiently 
long backtesting data sets. Conducting backtests with overlapping data 
could double-count exceedances if the exceedances occur when the data 
overlap. Because the BTLS assumes that exceedances are time 
independent, however, ICE Clear Europe corrects the number of 
consecutive exceedances within the risk time horizon.
---------------------------------------------------------------------------

    \4\ For a general description of the BTLS, see BIS, revisions to 
market risk disclosure requirements, available at https://www.bis.org/bcbs/publ/d484.htm.
---------------------------------------------------------------------------

    The proposed rule change would re-number current Section 2.3 to 
Section 3.1, and add a title for a new Section 3 immediately before re-
numbered Section 3.1. The proposed rule change would change the title 
of re-numbered Section 3.1 to Multi-days horizon backtesting. Within 
re-numbered Section 3.1, the proposed rule change would make four 
clarifications. First, the proposed rule change would specify that the 
observed loss is the minimum net asset value change over 5 days for 
house accounts, as distinct from 7 days for client accounts. Second, 
the proposed rule change would specify that the difference between the 
maximum observed unrealized loss and the backtested component of 
initial margin is also known as the ``back-test exceedances.'' Third, 
the proposed rule change would clarify that the maximum observed 
unrealized loss is also known as the ``worst N-days P&L.'' \5\ Finally, 
the proposed rule change would explain that ICE Clear Europe's use of 
the worst N-days P&L may lead to multiple consecutive backtest 
exceedances following one large market move in the overlapping 
backtesting approach.
---------------------------------------------------------------------------

    \5\ The proposed rule change would make similar updates to these 
terms throughout the CDS Back-Testing Policy.
---------------------------------------------------------------------------

    Next, the proposed rule change would correct the capitalization of 
the title of Section 3.2 (re-numbered from Section 2.4). In that 
section the proposed rule change also would explain that the last two 
examples in Table 2 could be the 4-days P/L or 3-days P/L.\6\
---------------------------------------------------------------------------

    \6\ ICE Clear Europe calculates daily back-testing results for 
each Clearing Member's account for each of the 5 business days 
beginning 10 business days prior to the reporting date for house 
accounts (or 7 business days beginning 14 business days prior to the 
reporting period for client accounts). For each backtested day, ICE 
Clear Europe calculates the maximum observed unrealized loss with 
positions from the relevant Clearing Member's accounts as of that 
day. Table 2 shows an example of this reporting.
---------------------------------------------------------------------------

    In Section 3.3 (re-numbered from Section 2.5), the proposed rule 
change would clarify that a minimum of one year of observations is 
required to define the statistical significance of backtesting results.
    The proposed rule change would correct the capitalization of the 
title of Section 3.4 (re-numbered from Section 2.6). In that section 
the proposed rule change also would describe how ICE Clear Europe 
backtests special strategy portfolios. ICE Clear Europe backtests 
special strategy portfolios that cover certain trading strategies, such 
as Index arbitrage. The proposed rule change also would specify that 
the Clearing Risk Department reviews backtest results at the 99.5% 
quantile monthly, while backtest results at the 99.75% quantile would 
be reviewed on an ad-hoc basis, when there is a large market move. 
Finally, the proposed rule change would delete a table showing 
portfolio construction for special strategy backtesting because it is 
unnecessary in light of the new detail added to Section 3.4.
    The proposed rule change would correct the capitalization of the 
title of Section 3.5 (re-numbered from Section 2.7).
    The proposed rule would add a new section numbered 3.6 to explain 
how ICE Clear Europe backtests stylized portfolios. Stylized portfolios 
are portfolios that replicate certain trading strategies. This new 
section would explain that the Clearing Risk Department backtests a 
series of stylized portfolios when ICE Clear Europe clears a new risk 
factor.\7\ ICE Clear Europe backtests these portfolios, which replicate 
trading strategies, to assess the CDS risk model's treatment of the new 
risk factors. ICE Clear Europe also backtests risk factors that have 
the largest open interest. ICE Clear Europe represents that these 
changes reflect current backtesting practice and are intended to more 
clearly document such practices in the CDS Back-Testing Policy.\8\
---------------------------------------------------------------------------

    \7\ As explained in ICE Clear Europe's CDS Risk Model 
Description, the term risk factor refers to a CDS index, sub-index, 
or single-name. See Self-Regulatory Organizations; ICE Clear Europe 
Limited; Order Approving Proposed Rule Change Relating to the ICE 
Clear Europe CDS Clearing Stress Testing Policy, CDS End of Day 
Price Discovery Policy, CDS Risk Model Description and CDS Risk 
Policy and CDS Parameters Review Procedures, Exchange Act Release 
No. 91586 (Apr. 16, 2021); 86 FR 21418 (Apr. 22, 2021) (SR-ICEEU-
2021-006).
    \8\ Notice, 87 FR at 10879.
---------------------------------------------------------------------------

    The proposed rule change would correct the capitalization of the 
title of Section 3.7 (re-numbered from Section 2.8).
    Finally, the proposed rule change would amend Section 4 (re-
numbered from Section 3). Section 4 would describe ICE Clear Europe's 
univariate backtesting. The proposed rule change would clarify that the 
Clearing Risk Department reviews backtest results at the 99.5% quantile 
monthly and reports these results to the Model Oversight Committee 
monthly. Backtest results at the 99.75% quantile would be reviewed ad-
hoc, when stress market conditions might cause breaches at the 99.5% 
quantile.

ii. CDS Stress-Testing Policy

    The proposed rule change would make one change to the CDS Stress-
Testing Policy. In Section 4.1.2 the proposed rule change would add the 
words ``and hypothetical'' to a paragraph describing forward-looking 
credit events scenarios. The change would clarify that the described 
forward-looking credit events scenarios are based on both historically 
observed and hypothetical extreme but plausible market scenarios. ICE 
Clear Europe represents that this change reflects current stress-
testing practice.\9\
---------------------------------------------------------------------------

    \9\ Notice, 87 FR at 10880.
---------------------------------------------------------------------------

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.\10\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\11\ and Rules

[[Page 21229]]

17Ad-22(e)(4)(vi)(A) and 17Ad-22(e)(6)(vi)(A) thereunder.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(4)(vi)(A) and 17 CFR 240.17Ad-
22(e)(6)(vi)(A).
---------------------------------------------------------------------------

i. 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 ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.\13\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes the proposed changes 
to the CDS Back-Testing Policy and CDS Stress-Testing Policy are 
consistent with the promotion of the prompt and accurate clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change would make 
the CDS Back-Testing Policy and CDS Stress-Testing Policy easier to use 
and apply. One way it would do so is by explaining ICE Clear Europe's 
backtesting and stress testing practices. These practices would 
include: A preference for backtesting using non-overlapping data; 
corrections to exceedances in overlapping data to conform to the 
assumption from the BTLS that losses are time-independent; the 
requirement of a minimum of one year of observations to define the 
statistical significance of backtesting results; use of all available 
reliable and validated data for each backtest; and, with respect to the 
CDS Stress-Testing Policy, that forward-looking credit event scenarios 
are based on both historically observed and hypothetical extreme but 
plausible market scenarios. The Commission believes that documenting 
these practices in ICE Clear Europe's policies should facilitate more 
consistent and predictable backtesting and stress testing.
    Another way the proposed rule change would make the CDS Back-
Testing Policy easier to use and apply is by explaining how ICE Clear 
Europe backtests special strategy portfolios. The proposed rule change 
would describe the set of portfolios used in backtesting of special 
strategy portfolios, and also would explain how ICE Clear Europe 
reviews and reports results at 99.5% quantiles and 99.75% quantiles for 
special strategy portfolios and univariate backtesting. The proposed 
rule change also would explain how ICE Clear Europe backtests stylized 
portfolios when it clears a new risk factor. The Commission believes 
that documenting such additional explanations would help to clarify how 
ICE Clear Europe backtests portfolios that use special trading 
strategies and reports the results of those backtests.
    The proposed rule change also would make the CDS Back-Testing 
Policy easier to use and apply by clarifying certain terminology used 
in the policy and by correcting typographical errors. For example, the 
proposed rule change would clarify that the shortfall between the 
maximum observed unrealized loss and the backtested component of 
initial margin is also known as ``back-test exceedances'' and that the 
maximum observed unrealized loss is also known as ``worst N-days P&L.'' 
The proposed rule also would clarify that the observed loss is 
calculated as the minimum net asset value change over 5 days for house 
accounts as distinct from 7 days for client accounts, and that the last 
two examples in Table 2 could be the 4-days P/L or 3-days P/L. In 
addition to these clarifications, the proposed rule change would 
correct typographical errors and re-number sections. The Commission 
believes these particular changes would help to increase the clarity 
and accuracy of the CDS Back-Testing Policy.
    Because ICE Clear Europe backtests and stress tests the CDS risk 
model using the CDS Back-Testing Policy and CDS Stress-Testing Policy, 
the Commission believes that these improvements to the policies would 
improve ICE Clear Europe's backtesting and stress testing. Improved 
backtesting and stress testing should help ICE Clear Europe to find 
deficiencies in, and correct, the CDS risk model. Better risk models 
should, in turn, increase the likelihood that ICE Clear Europe will 
have sufficient financial resources in excess of margin to address 
losses that could arise from the default of a Clearing Member. The 
Commission believes that by increasing the likelihood that ICE Clear 
Europe will have sufficient financial resources, the proposed rule 
change would enhance ICE Clear Europe's ability to continue to promptly 
and accurately clear and settle securities transactions during periods 
of market stress, consistent with Section 17A(b)(3)(F) of the Act.\14\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\15\
---------------------------------------------------------------------------

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

ii. Consistency With Rule 17Ad-22(e)(4)(vi)(A) Under the Act

    Rule 17Ad-22(e)(4)(vi)(A) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by testing the 
sufficiency of its total financial resources available to meet the 
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i) 
through (iii),\16\ as applicable, by conducting stress testing of its 
total financial resources once each day using standard predetermined 
parameters and assumptions.\17\ As discussed above, the Commission 
believes the proposed rule change should improve ICE Clear Europe's CDS 
Stress-Testing Policy by clarifying that the forward-looking credit 
events scenarios are based on both historically observed and 
hypothetical extreme but plausible market scenarios. Because ICE Clear 
Europe uses the CDS Stress-Testing Policy and the forward-looking 
credit event scenarios to conduct daily stress testing of its total 
financial resources, the Commission believes this aspect of the 
proposed rule change should help to ensure that ICE Clear Europe 
conducts stress testing of its total financial resources once each day 
using standard predetermined parameters and assumptions, including 
forward-looking credit event scenarios that are based on both 
historically observed and hypothetical extreme but plausible market 
scenarios.\18\
---------------------------------------------------------------------------

    \16\ 17 CFR 240.17Ad-22(e)(4)(i)-(iii).
    \17\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
    \18\ The CDS Stress-Testing Policy requires that ICE Clear 
Europe conduct stress testing daily. See Self-Regulatory 
Organizations; ICE Clear Europe Limited; Order Approving Proposed 
Rule Change Relating to Amendments to the ICE Clear Europe CDS Risk 
Policy (the ``CDS Risk Policy''), CDS Clearing Back-Testing Policy 
(the ``Back-Testing Policy'') and CDS Stress-Testing Policy (the 
``Stress-Testing Policy'') (Collectively, the ``CDS Policies''), 
Exchange Act Release No. 85236 (Mar. 1, 2019); 84 FR 8348 (Mar. 7, 
2019) (SR-ICEEU-2018-010).
---------------------------------------------------------------------------

    Therefore, the Commission finds that this aspect of the proposed 
rule change is consistent with Rule 17Ad-22(e)(4)(vi)(A).\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
---------------------------------------------------------------------------

iii. Consistency With Rule 17Ad-22(e)(6)(vi)(A) Under the Act

    Rule 17Ad-22(e)(6)(vi)(A) requires that ICE Clear Europe establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to cover its credit exposures to its participants 
by establishing a risk-based margin system that, at a minimum, is 
monitored by management on an ongoing basis and is regularly reviewed, 
tested, and verified

[[Page 21230]]

by conducting backtests of its margin model at least once each day 
using standard predetermined parameters and assumptions.\20\ As 
discussed above, the Commission believes the changes to the CDS Back-
Testing Policy would overall make the policy easier to use and apply. 
Because ICE Clear Europe uses the CDS Back-Testing Policy to conduct 
daily backtests of its margin model, the Commission believes these 
aspects of the proposed rule change should help to ensure that ICE 
Clear Europe conducts backtests of its margin model at least once each 
day using standard predetermined parameters and assumptions.\21\ 
Therefore, the Commission finds that this aspect of the proposed rule 
change is consistent with Rule 17Ad-22(e)(6)(vi)(A).\22\
---------------------------------------------------------------------------

    \20\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
    \21\ The CDS Back-Testing Policy requires that ICE Clear Europe 
conduct back-testing daily. See Self-Regulatory Organizations; ICE 
Clear Europe Limited; Order Approving Proposed Rule Change Relating 
to Amendments to the ICE Clear Europe CDS Risk Policy (the ``CDS 
Risk Policy''), CDS Clearing Back-Testing Policy (the ``Back-Testing 
Policy'') and CDS Stress-Testing Policy (the ``Stress-Testing 
Policy'') (Collectively, the ``CDS Policies''), Exchange Act Release 
No. 85236 (Mar. 1, 2019); 84 FR 8348 (Mar. 7, 2019) (SR-ICEEU-2018-
010).
    \22\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act,\23\ and Rules 17Ad-22(e)(4)(vi)(A) and 17Ad-22(e)(6)(vi)(A) 
thereunder.\24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 17 CFR 240.17Ad-22(e)(4)(vi)(A) and 17 CFR 240.17Ad-
22(e)(6)(vi)(A).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\25\ that the proposed rule change (SR-ICEEU-2022-004) be, and hereby 
is, approved.\26\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78s(b)(2).
    \26\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-07623 Filed 4-8-22; 8:45 am]
BILLING CODE 8011-01-P


