Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the ICC Back-Testing Framework

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

September 14, 2021

Issuing agencies

Securities and Exchange Commission

Full Text

<html>
<head>
<title>Federal Register, Volume 86 Issue 175 (Tuesday, September 14, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 175 (Tuesday, September 14, 2021)]
[Notices]
[Pages 51204-51206]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-19725]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92893; File No. SR-ICC-2021-018]

Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Back-Testing
Framework

September 8, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
\1\ and Rule 19b-4,\2\ notice is hereby given that on August 24, 2021,
ICE Clear Credit LLC (``ICC'') filed with the Securities and Exchange
Commission the proposed rule change as described in Items I, II and III
below, which Items have been prepared primarily by ICC. 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.
---------------------------------------------------------------------------

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

The principal purpose of the proposed rule change is to revise the
ICE CDS Clearing: Back-Testing Framework (``Back-Testing Framework'')
to include additional description on the lookback period for back-
testing and other clarifications. These revisions do not require any
changes to the ICC Clearing Rules (the ``Rules'').

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

In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B), and (C) below, of the most
significant aspects of these statements.

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

(a) Purpose
ICC proposes revising the Back-Testing Framework, which describes
ICC's back-testing approach and procedures and includes guidelines for
remediating poor back-testing results. The proposed amendments include
additional description on the lookback period for back-testing and
other clarifications. ICC believes that such revisions will facilitate
the prompt and accurate clearance and settlement of securities
transactions and derivative agreements, contracts, and transactions for
which it is responsible. ICC proposes to make such changes effective
following Commission approval of the proposed rule change. The proposed
revisions are described in detail as follows.
ICC proposes a clarification change in Subsection 1.2. The Back-
Testing Framework discusses ICC's back-testing analysis, which verifies
that the number of actual losses is consistent with the number of
projected losses. The proposed clarification to Subsection 1.2
specifies that the ICC Risk Department may consider back-testing
analysis based on alternative statistical tests to assess the
performance of its models in terms of statistical reliability.
ICC proposes new Subsection 2.1 to include additional description
on the lookback period for back-testing. Proposed Subsection 2.1
details the performance of back-testing analysis for Clearing
Participant (``CP'') related portfolios. The proposed language
discusses the maximum back-testing sample size, or the lookback period,
and the benefit of allowing for a greater sample size in terms of
assessing model performance. The proposed language also analyzes short
lookback periods in combination with high risk quantile estimates.
Moreover, ICC proposes to reference an alternative statistical test and
describe how the model is considered to pass or fail the test. Proposed
Figure 1 serves as an illustration under such alternative statistical
test across different sample sizes and risk quantiles. Following such
analysis, proposed Subsection 2.1 sets out ICC's rationale for the
minimum back-testing window length. Further, proposed Subsection 2.1
references the performance of additional analyses, as described in
Section 4 of the Back-Testing Framework, and includes language
concerning the reporting of back-testing results. ICC proposes to
renumber the following subsections accordingly.
ICC proposes additional clarifications to the Back-Testing
Framework. The proposed amendments include a footnote in amended
Subsection 2.6 that references a relevant Commodity Futures Trading
Commission regulation with respect to ICC's performance of back-testing
analysis. ICC further proposes amendments to Section 4, which contains
guidelines for remediating poor back-testing results. Currently, poor
back-testing results require a peer review of the risk models by the
Risk Working Group (``RWG''), which is comprised of risk
representatives from ICC's CPs, and remedial actions to improve model
performance. The proposed changes describe an additional aspect
presented to the RWG and note an assessment that corresponds to the
performance of a back-testing analysis without overlapping periods. ICC
also proposes to update Section 5, containing a list of references, to
include a reference for the alternative statistical test described in
proposed Subsection 2.1.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \3\ and the regulations
thereunder applicable to it, including the applicable

[[Page 51205]]

standards under Rule 17Ad-22.\4\ In particular, Section 17A(b)(3)(F) of
the Act \5\ requires that the rule change be consistent with the prompt
and accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICC, the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible, and the protection of investors and the
public interest. The proposed amendments include additional description
on the lookback period for back-testing and other clarifications.
Proposed Subsection 2.1 sets out ICC's rationale for the minimum back-
testing window length. The new subsection is intended to provide
additional description and analysis on the lookback period for back-
testing and would not change the methodology. The additional revisions
further ensure clarity and transparency with respect to ICC's back-
testing approach, procedures, and guidelines for remediating poor back-
testing results. The proposed footnote references a relevant regulation
to ensure ICC's performance of back-testing analysis is in compliance
with applicable requirements. As such, ICC believes that the proposed
rule change would help assure the soundness of the model by ensuring
that back-testing analysis is conducted properly to assess the
performance of the model. The proposed rule change is therefore
consistent with the prompt and accurate clearing and settlement of the
contracts cleared by ICC, the safeguarding of securities and funds in
the custody or control of ICC or for which it is responsible, and the
protection of investors and the public interest, within the meaning of
Section 17A(b)(3)(F) of the Act.\6\
---------------------------------------------------------------------------

\3\ 15 U.S.C. 78q-1.
\4\ 17 CFR 240.17Ad-22.
\5\ 15 U.S.C. 78q-1(b)(3)(F).
\6\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(2)(i) and (v) \7\ requires each covered clearing
agency to establish, implement, maintain, and enforce written policies
and procedures reasonably designed to provide for governance
arrangements that are clear and transparent and specify clear and
direct lines of responsibility. ICC's Back-Testing Framework clearly
assigns and documents responsibility and accountability for performing
back-testing analyses and remediating poor back-testing results.
Amended Subsection 4 describes an additional aspect presented to the
RWG and notes an assessment that corresponds to the performance of a
back-testing analysis without overlapping periods. ICC believes that
specifying these additional responsibilities would strengthen the
governance arrangements in the Back-Testing Framework and the Back-
Testing Framework would continue to ensure that ICC maintains clear and
transparent governance procedures and arrangements with respect to the
performance, review, and reporting of back-testing results and the
remediation of poor back-testing results. As such, in ICC's view, the
proposed rule change continues to ensure that ICC maintains policies
and procedures that are reasonably designed to provide for clear and
transparent governance arrangements and specify clear and direct lines
of responsibility, consistent with Rule 17Ad-22(e)(2)(i) and (v).\8\
---------------------------------------------------------------------------

\7\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\8\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(4)(ii) \9\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to effectively identify, measure,
monitor, and manage its credit exposures to participants and those
arising from its payment, clearing, and settlement processes, including
by maintaining additional financial resources at the minimum to enable
it to cover a wide range of foreseeable stress scenarios that include,
but are not limited to, the default of the two participant families
that would potentially cause the largest aggregate credit exposure for
the covered clearing agency in extreme but plausible market conditions.
As discussed above, proposed Subsection 2.1 would provide additional
description and analysis on the lookback period for back-testing and
would not change the methodology. The additional revisions enhance the
clarity and transparency of the Back-Testing Framework, which would
strengthen the documentation and ensure that it remains up-to-date,
clear, and transparent. ICC believes that the proposed changes would
enhance ICC's ability to manage risks and maintain appropriate
financial resources, including by ensuring that back-testing analysis
is conducted properly to assess the performance of the model. As such,
the proposed amendments would strengthen ICC's ability to maintain its
financial resources and withstand the pressures of defaults, consistent
with the requirements of Rule 17Ad-22(e)(4)(ii).\10\
---------------------------------------------------------------------------

\9\ 17 CFR 240.17Ad-22(e)(4)(ii).
\10\ Id.
---------------------------------------------------------------------------

Rule 17Ad-22(e)(6)(vi) \11\ requires each covered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, is monitored by management on an ongoing basis and is
regularly reviewed, tested, and verified by (A) conducting back-tests
of its margin model at least once each day using standard predetermined
parameters and assumptions; and (B) conducting a sensitivity analysis
of its margin model and a review of its parameters and assumptions for
back-testing on at least a monthly basis, and considering modifications
to ensure the back-testing practices are appropriate for determining
the adequacy of ICC's margin resources. The Back-Testing Framework
continues to require the performance of daily, weekly, monthly, and
quarterly portfolio-level back-testing analyses, the performance of
monthly parameter reviews and parameter sensitivity analyses, and the
remediation of poor-back-testing results. The proposed amendments
consist of additional description on the lookback period for back-
testing and other clarifications regarding back-testing analysis and
the remediation of poor back-testing results. These procedures in the
Back-Testing Framework continue to promote the soundness of ICC's model
and ensure that ICC's risk management system is effective and
appropriate in addressing the risks associated with discharging its
responsibilities. The proposed changes are thus consistent with the
requirements of Rule 17Ad-22(e)(6)(vi).\12\
---------------------------------------------------------------------------

\11\ 17 CFR 240.17Ad-22(e)(6)(vi).
\12\ Id.
---------------------------------------------------------------------------

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

ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes to
ICC's Back-Testing Framework will apply uniformly across all market
participants. Therefore, ICC does not believe the proposed rule change
imposes any burden on competition that is inappropriate in furtherance
of the purposes of the Act.

Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.

[[Page 51206]]

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:

<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#9defe8f1f8b0fef2f0f0f8f3e9eeddeef8feb3faf2eb"><span class="__cf_email__" data-cfemail="641611080149070b0909010a1017241701074a030b12">[email&#160;protected]</span></a>. Please include
File Number SR-ICC-2021-018 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-ICC-2021-018. 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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
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 Credit and on ICE
Clear Credit's website at <a href="https://www.theice.com/clear-credit/regulation">https://www.theice.com/clear-credit/regulation</a>.
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-ICC-2021-018 and should be
submitted on or before October 5, 2021.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-19725 Filed 9-13-21; 8:45 am]
BILLING CODE 8011-01-P

</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on September 14, 2021.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.