Notice2021-23258
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Back-Testing Framework
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Published
October 26, 2021
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 86 Issue 204 (Tuesday, October 26, 2021)</title>
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[Federal Register Volume 86, Number 204 (Tuesday, October 26, 2021)]
[Notices]
[Pages 59258-59261]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-23258]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93388; File No. SR-ICC-2021-018]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Back-Testing
Framework
October 20, 2021.
I. Introduction
On August 24, 2021, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-ICC-2021-018)
to revise the ICE CDS Clearing: Back-Testing Framework (``Back-Testing
Framework'') to include additional description on the lookback period
for back-testing and other
[[Page 59259]]
clarifications.\3\ The proposed rule change was published in the
Federal Register on September 14, 2021.\4\ The Commission did not
receive comments on the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Capitalized terms used herein but not otherwise defined have
the meaning set forth in the ICC Rules or the Back-Testing
Framework.
\4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the ICC Back-Testing
Framework, Exchange Act Release No. 92893 (Sept. 8, 2021); 86 FR
51204 (Sept. 14, 2021) (SR-ICC-2021-018) (``Notice'').
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II. Description of the Proposed Rule Change
The Back-Testing Framework discusses ICC's back-testing approach
and analysis to verify that the number of actual losses is consistent
with the number of projected losses, and includes guidelines for
remediating poor back-testing results. ICC proposes revising the Back-
Testing Framework to include additional description on the lookback
period for back-testing, which refers to the maximum back-testing
sample size, and other clarifications. The proposed revisions to the
Back-Testing Framework are described in detail as follows.\5\
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\5\ The following description of the proposed rule change is
substantially excerpted from the Notice.
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ICC proposes a clarification change in Subsection 1.2 to specify
that the ICC Risk Management Department (``ICC Risk'') may consider
back-testing analysis based on alternative statistical tests to assess
the performance of its models in terms of statistical reliability, in
addition to its current consideration of clustering of exceedances,
which refers to excessive losses.
ICC proposes new Subsection 2.1 (Lookback Period for Back-Testing
of the Production Model with Clearing Participant Portfolios) to
include additional description of the lookback period for back-testing,
which refers to the maximum back-testing sample size. ICC represents
that proposed Subsection 2.1 would not change its methodology.\6\
Specifically, proposed Subsection 2.1 defines back-testing as
statistics-based hypothesis testing, and clarifies that the larger the
sample size is, the more reliable the inference is from such testing.
Proposed Subsection 2.1 describes the performance of production model
back-testing analysis for Clearing Participant (``CP'') related
portfolios reflecting all available observations over periods of
various market conditions. The proposed language also describes the
maximum back-testing sample size, or the lookback period, and the
benefit of allowing for a greater sample size that would incorporate
observations from various market regimes to assess model performance
and thus ensure more reliable inferences from back-testing. The
proposed language also analyzes short lookback periods, which may
exclude extreme stress market conditions, in combination with high risk
quantile estimates (e.g., greater than 99%). ICC also proposes to
introduce an alternative statistical test and describe how the model is
considered to pass or fail such test. Proposed Figure 1 provides an
illustration under the alternative statistical test across different
sample sizes and risk quantiles. Following proposed Figure 1, ICC would
explain its rationale for establishing the minimum back-testing window
length for the initial margin risk horizon, or the Margin Period of
Risk (``MPOR'') model analysis. Proposed Subsection 2.1 also references
the performance of additional analyses, as described in Section 4 of
the Back-Testing Framework which contain guidelines to remediate poor
back-testing results. Proposed Subsection 2.1 includes language
concerning the reporting of back-testing results for portfolios,
including those with an insufficient number of observations. Given the
proposed addition of new Subsection 2.1, ICC proposes to renumber the
subsequent subsections of the Back-Testing Framework document.
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\6\ See Notice at 51205.
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ICC proposes additional clarifications to the Back-Testing
Framework. The proposed amendments include a footnote in amended
Subsection 2.6 (BTLS Exceedance Summaries) that references a relevant
Commodity Futures Trading Commission (``CFTC'') regulation with respect
to ICC's performance of production model 99% back-testing analysis for
all CP related portfolios. ICC also proposes amendments to Section 4
(Guidelines to Remediate Poor Back-Testing Results). Currently, poor
back-testing results require a peer review of the risk models by the
Risk Working Group (``RWG''), which is comprised of risk
representatives from ICC's CPs, and remedial actions to improve model
performance. Section 4 currently states that model performance analysis
along with the model assumptions are presented to the RWG for review
and discussions. In addition to the model assumptions, the proposed
change would include the number of observations for the RWG's review
and discussions. Section 4 also currently states that a back-testing
analysis without overlapping periods will be performed in order to
confirm poor-backing results if the number of observed exceedances
falls in the ``red zone'' of the so-called Basel Traffic Light System
(BTLS) of the Basel Committee Supervisory Framework. The proposed rule
change would amend such statement to include the RWG's assessment of
the sufficiency of the number of observations in performing the
portfolio-level back-testing analysis, thus supplementing the current
complementary back-testing analysis without overlapping periods. ICC
also proposes to update Section 5, containing a list of references, to
include a reference to the alternative statistical test described above
in the proposed new Subsection 2.1.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\7\ For the reasons given below, the Commission finds that
the proposal is consistent with Section 17A(b)(3)(F) of the Act \8\ and
Rules 17Ad-22(e)(2)(i) and (v), and 17Ad-22(e)(6)(vi) thereunder.\9\
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, the proposed rule change would revise the Back-
Testing Framework to include additional description of the lookback
period for back-testing and other clarifications. For the specific
reasons discussed below, the Commission believes that, in general, the
proposed rule change would help ensure the sound operation of the Back-
Testing Framework that should enhance the overall risk management and
financial stability of ICC, and thereby promote ICC's prompt and
accurate clearance and settlement of
[[Page 59260]]
credit default swap (``CDS'') transactions, and help assure the
safeguarding of securities and funds which are in ICC's custody or
control or for which ICC is responsible.
First, the Commission believes that the proposed clarification in
Subsection 1.2, in specifying that ICC Risk may use alternative
statistical tests to assess the performance of its risk models for
statistical reliability, would strengthen its back-testing approach and
analysis by supplementing its consideration of the clustering of
exceedances or excessive losses.
Second, as discussed above, the proposed rule change also would
introduce a new Subsection 2.1 that provides additional detail and
explanation regarding the lookback period for its back-testing analysis
methodology. Specifically, the Commission believes that proposed
Subsection 2.1, in clarifying that back-testing is statistics-based
hypothesis testing and that a larger sample size enhances the
reliability of the inferences from such testing, would establish a
clear risk management rationale for ICC's methodology to assess the
performance of production model back-testing analysis for CP related
portfolios reflecting all available observations over periods of
various market conditions. The Commission also believes that proposed
Subsection 2.1, in analyzing short lookback periods and describing in
detail an alternative statistical test by illustrating its application
across different sample sizes and risk quantiles, would provide a
transparent, risk-based explanation for setting the minimum back-
testing window length for ICC's MPOR model analysis. The Commission
also believes that proposed Subsection 2.1, in referencing additional
analyses described in Section 4 (Guidelines to Remediate Poor Back-
Testing Results), and describing the reporting of back-testing results
for portfolios, including those with an insufficient number of
observations, would enhance the clarity and transparency of ICC's back-
testing procedures and contribute to the effective implementation of
its overall back-testing approach. The Commission also believes that
the proposed renumbering of sections that follow proposed new
Subsection 2.1 will provide further clarity and enhance the readability
of the Back-Testing Framework document.
Third, as discussed above, ICC proposes additional clarifications
to the Back-Testing Framework that the Commission believes, taken
together, will enhance the clarity of its back-testing approach,
procedures, and guidelines for remediating poor back-testing results.
Specifically, the proposed amendments to Subsection 2.6 (BTLS
Exceedance Summaries), in clearly referencing a relevant CFTC
regulation with respect to ICC's performance of production model 99%
back-testing analysis for all CP related portfolios, would help assure
continued compliance with such regulation. The proposed amendments to
Section 4 (Guidelines to Remediate Poor Back-Testing Results), in
specifying that the RWG will review and discuss the number of
observations in conducting its risk model performance analysis, and
also assess the sufficiency of the number of observations on the
portfolio level back-testing analysis without overlapping periods,
would strengthen the RWG's analysis and better inform remedial actions.
Finally, the proposed amendment to Section 5, in including a clear
reference to the alternative statistical test described above in the
proposed new Subsection 2.1, would assure that the RWG and relevant ICC
Risk personnel have access to further details in using such test.
By helping to assure the sound operation of the Back-Testing
Framework, which ICC uses to manage the credit exposures associated
with clearing CDS transactions, the Commission believes that the
proposed rule change would help improve ICC's ability to avoid the
losses that could result from the miscalculation of ICC's credit
exposures and margin requirements for such transactions. Because such
losses could disrupt ICC's ability to operate and thus clear and settle
CDS transactions, the Commission finds the proposed rule change, by
helping to enhance ICC's overall risk management and financial
stability, would promote the prompt and accurate clearance and
settlement of securities and derivative transactions. Because such
losses could also threaten access to securities and funds in ICC's
control, the Commission finds the proposed rule change would help
assure the safeguarding of securities and funds that are in the custody
or control of ICC or for which it is responsible.
Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions and derivative agreements, contracts, and transactions,
and assure the safeguarding of securities and funds in ICC's custody
and control or for which ICC is responsible, consistent with Section
17A(b)(3)(F) of the Act.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i) and (v) Under the Act
Rules 17Ad-22(e)(2)(i) and (v) require that ICC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent and specify clear and direct lines of
responsibility, respectively.\12\ As discussed above, the Commission
believes that the proposed rule change, in specifying that ICC Risk may
use alternative statistical tests to assess the performance of its risk
models for statistical reliability, would provide ICC Risk with
procedural clarity in conducting its back-testing analysis of risk
models. The Commission believes that the proposed amendments in Section
4, in specifying that the RWG will review and discuss the number of
observations in conducting its risk model performance analysis, and
also assess the sufficiency of the number of observations on the
portfolio level back-testing analysis without overlapping periods,
would clarify the scope of the RWG's responsibility in reviewing poor
back-testing results and would help the RWG to take more fully informed
remedial actions, such as making risk model enhancements or introducing
ad-hoc parameter values to achieve an increased conservative bias of
the risk models. Finally, the proposed amendment to Section 5, in
including a clear reference to the alternative statistical test
described above in the proposed new Subsection 2.1, would assure that
the RWG and relevant ICC Risk personnel have the correct source
document to govern the ongoing use of such test for verifying the
accuracy of risk management models.
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\12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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The Commission believes that these aspects of proposed rule change
would clearly assign and document the respective roles and
responsibilities of ICC Risk and the RWG in implementing the Back-
Testing Framework, and thereby improving the related governance
arrangements for performing the appropriate scope of back-testing
analysis and taking remedial actions if poor back-testing results
warrant such action. The Commission therefore finds that the proposed
rule change is consistent with Rules 17Ad-22(e)(2)(i) and (v).\13\
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\13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(6)(vi) Under the Act
Rule 17Ad-22(e)(6)(vi) requires that ICC establish, implement,
maintain and enforce written policies and procedures
[[Page 59261]]
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that, at a minimum, is
monitored by management on an ongoing basis and is regularly reviewed,
tested, and verified by, among other things: (A) Conducting backtests
of its margin model at least once each day using standard predetermined
parameters and assumptions; and (B) conducting a sensitivity analysis
of its margin model and a review of its parameters and assumptions for
backtesting on at least a monthly basis, and considering modifications
to ensure the backtesting practices are appropriate for determining the
adequacy of ICC's margin resources.\14\
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\14\ 17 CFR 240.17Ad-22(e)(6)(vi).
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Consistent with such back-testing requirements, the proposed rule
change would not modify ICC Risk's current back-testing practices of
performing daily, weekly, monthly, and quarterly portfolio-level back-
testing analyses, performing monthly parameter reviews and parameter
sensitivity analyses, and remediating poor back-testing results under
the Back-Testing Framework.\15\ For the reasons discussed below, the
Commission finds that the proposed rule change would enhance such back-
testing practices to help ICC monitor its credit exposures to its
clearing participants and maintain the ongoing effectiveness of its
risk-based margin system and overall risk management framework. As
described above, proposed new Subsection 2.1 (Lookback Period for Back-
Testing of the Production Model with Clearing Participant Portfolios),
in adding a detailed description of the maximum back-testing sample
size, or lookback period, and an alternative statistical test for
enhanced analysis and verification of the accuracy of risk model
performance, would clarify and strengthen ICC's back-testing analysis
for CP related portfolios. Proposed Subsection 2.1, in establishing the
minimum back-testing window length for the Margin Period of Risk (MPOR)
model analysis, subjecting the MPOR model to the performance of
additional analyses for portfolios with an insufficient number of
available observations, and clarifying the reporting of back-testing
results for such portfolios, would help ensure that the back-testing
practices for MPOR models are appropriate for determining the accuracy
of ICC's margin resources. If red-zone results appear from overlapping
back-testing periods, Section 4, as amended, would require ICC Risk to
assess the sufficiency of the number of observations on the portfolio-
level back-testing analysis, which would supplement its complementary
back-testing analysis without overlapping periods. The Commission
therefore finds that these aspects of the proposed rule change, taken
together, are consistent with Rule 17Ad-22(e)(6)(vi).\16\
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\15\ See Notice at 51205.
\16\ 17 CFR 240.17Ad-22(e)(6)(vi).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act, and in
particular, with the requirements of Section 17A(b)(3)(F) of the Act
\17\ and Rules 17Ad-22(e)(2)(i) and (v), and 17Ad-22(e)(6)(vi)
thereunder.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(6)(vi).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the proposed rule change (SR-ICC-2021-018) be, and hereby is,
approved.\20\
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\19\ 15 U.S.C. 78s(b)(2).
\20\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\21\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23258 Filed 10-25-21; 8:45 am]
BILLING CODE 8011-01-P
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