Notice2022-03872
Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Clearing Agency Model Risk Management Framework
Primary source
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Published
February 24, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 37 (Thursday, February 24, 2022)</title>
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[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Notices]
[Pages 10411-10418]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-03872]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94271; File No. SR-FICC-2022-001]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
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, Fixed Income Clearing Corporation (``FICC'')
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. FICC filed the
proposed rule change pursuant to
[[Page 10412]]
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.
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\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).
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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 FICC and its
affiliates, The Depository Trust Company (``DTC'') and National
Securities Clearing Corporation (``NSCC,'' and together with FICC, 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\
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\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 <a href="https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf">https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf</a>, 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.
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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.
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\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.
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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, 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.
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\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.
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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 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\
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\11\ See MRMF Filings, supra note 5, for additional information
on the contents of the Framework.
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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
[[Page 10413]]
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.
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\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).
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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\
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\13\ See 17 CFR 240.17Ad-22(e)(4)(vii) and (e)(7)(vii).
\14\ See 17 CFR 240.17Ad-22(e)(6)(vii).
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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.
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\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.
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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.
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\16\ Supra note 5.
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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 the
Framework and the Covered Clearing Agency Standards.
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\17\ See 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii).
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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
[[Page 10414]]
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).
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\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).
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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.
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\21\ See supra note 7.
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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 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\
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\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.
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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
[[Page 10415]]
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.
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\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.
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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.
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\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).
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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
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
[[Page 10416]]
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.
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\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.
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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.''
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\30\ MRC refers to the Management Risk Committee of the Boards
of Directors of the Clearing Agencies.
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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.
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
[[Page 10417]]
(e)(7) thereunder,\32\ for the reasons described below.
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\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.
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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\
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\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.
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(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 <a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>. 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
<a href="/cdn-cgi/l/email-protection#582c2a393c31363f39363c35392a333d2c2b182b3d3b763f372e"><span class="__cf_email__" data-cfemail="27535546434e49404649434a46554c4253546754424409404851">[email protected]</span></a> 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\
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\36\ 15 U.S.C. 78s(b)(3)(A).
\37\ 17 CFR 240.19b-4(f)(6).
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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.
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#780a0d141d551b1715151d160c0b380b1d1b561f170e"><span class="__cf_email__" data-cfemail="087a7d646d256b6765656d667c7b487b6d6b266f677e">[email protected]</span></a>. Please include
File Number SR-FICC-2022-001 on the subject line.
Paper Comments
<bullet> 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-FICC-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 (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the
[[Page 10418]]
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 FICC and on DTCC's website
(<a href="http://dtcc.com/legal/sec-rule-filings.aspx">http://dtcc.com/legal/sec-rule-filings.aspx</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-FICC-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\
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\38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03872 Filed 2-23-22; 8:45 am]
BILLING CODE 8011-01-P
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