Notice2022-07623
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
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
April 11, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
<html>
<head>
<title>Federal Register, Volume 87 Issue 69 (Monday, April 11, 2022)</title>
</head>
<body><pre>
[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Notices]
[Pages 21227-21230]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[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 <a href="https://www.bis.org/bcbs/publ/d484.htm">https://www.bis.org/bcbs/publ/d484.htm</a>.
---------------------------------------------------------------------------
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
</pre></body>
</html>Indexed from Federal Register on April 11, 2022.
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.