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

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June 3, 2022

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Securities and Exchange Commission

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<title>Federal Register, Volume 87 Issue 107 (Friday, June 3, 2022)</title>
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[Federal Register Volume 87, Number 107 (Friday, June 3, 2022)]
[Notices]
[Pages 33851-33854]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-11877]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95002; File No. SR-ICC-2022-006]

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

May 27, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on May 17, 2022, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (the ``Commission'') the proposed
rule change as described in Items I, II, and III below, which Items
have been prepared primarily by ICC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

The principal purpose of the proposed rule change is to revise the
ICC Model Validation Framework (the ``Model Validation Framework'' or
``Framework''). These revisions do not require any changes to the ICC
Clearing Rules (the ``Rules'').

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

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

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

(a) Purpose
ICC proposes revisions to the Model Validation Framework, which
provides assurances that ICC models are performing as expected. The
proposed amendments include clarifications on the scope and
applicability of the Framework, responsibilities of relevant
stakeholders, and other validation elements. Additional proposed
changes reorganize certain portions of the Framework and make language
clarifications to promote readability. ICC believes the proposed
changes will facilitate the prompt and accurate clearance and
settlement of securities transactions and derivative agreements,
contracts, and transactions for which it is responsible. ICC proposes
to make such changes following Commission approval of the proposed rule
change. The proposed rule change is described in detail as follows.
ICC proposes amendments to Section 1 containing the introduction.
To introduce the purpose of the Framework more clearly, ICC proposes to
begin the document with an overview in Subsection 1.1. The revision
history of the Framework would be moved to the end of the document.
Proposed new language in Subsection 1.1 describes ICC's clearing
approach that utilizes various models as part of its risk processes.
For clarity, the definition of a model and the purpose of validation is
included. Relevant language from current Subsection 1.1 is accordingly
moved to Subsection 1.2 and certain other language is removed as
described below.
Amended Subsection 1.2 applies the Framework to clearing house
models, rather than risk management system models. ICC proposes these
revisions to expand the scope of the Framework. The current language
directly applies the Framework to ICC's risk management system models
(i.e., those relating to financial resources and liquidity resources).
The proposed revisions clarify that the Framework applies to all ICC
models, which would include an additional model relating to
counterparty credit. Accordingly, the changes frame the components that
make up a model (``model components'') in terms of ICC's models rather
than its risk management system. Information in current Subsection 1.1
regarding risk drivers would be removed to avoid confusion as it is
specific to risk management system models and not relevant elsewhere in
the document. Detailed information regarding risk

[[Page 33852]]

drivers and ICC's risk management system is more appropriate in ICC's
risk policies. ICC would continue to distinguish between new, enhanced,
and retired model components (collectively, ``model change'').
References to the risk management system are replaced with references
to models in Section 1 and throughout the document. ICC's Model
Inventory, which lists ICC models, is introduced in this subsection
instead of later in the document. Additional procedures are
incorporated for consulting with the Risk Committee regarding adding,
enhancing, or retiring models or model components.
Amended Subsection 1.3 includes language from current Subsection
2.2 pertaining to materiality classifications of model changes. The
language remains mostly the same with a small update to spell out an
abbreviated term. Such language is more fitting in the introductory
section, as it provides the foundation of how ICC views model changes
in terms of materiality.
New Subsection 1.4 contains language from current Subsection 1.2
with certain clarifications. Specifically, Subsection 1.4 applies the
development process set out in the document to new model and model
change development rather than just model change development. This is
intended to be a clarification and would not change how ICC develops
new models. The development process continues to include design,
implementation, user-acceptance testing, and deployment phases.
ICC also proposes revisions to Section 2 containing information on
Framework oversight. The Risk Oversight Officer (``ROO'') continues to
be responsible for the operation and maintenance of the Framework under
Subsection 2.1. Since language from Subsection 2.2 is moved, the
following subsections are renumbered accordingly. Amended Subsection
2.2 details how a team of independent validators meets the criteria for
independence and technical expertise. Minor changes pertaining to the
ROO's responsibilities are also included. In Subsection 2.3, a
redundant statement is removed and minor language clarifications are
made. In Subsection 2.4, ICC would specify that the Model Inventory
holds key information about all ICC models, model components, and model
changes. The Model Inventory is maintained by the ROO, who would review
it with the ICC Risk Department.
ICC further proposes amending Section 3 describing the Framework
controls. Subsection 3.1 takes language (including Figure 1) from
current Subsection 1.3, which provides an overview of the Framework
controls. This information is more appropriate in Section 3, which
covers Framework controls. The following subsections are renumbered
accordingly and continue to describe the same four controls.
Revisions regarding initial validations are made in Subsection 3.2.
Subsection 3.2.2 specifies that an independent initial validation is
required for all new models. Updates to part (a) and throughout the
subsection clarify that the validation may consider new models or model
change. Proposed language in part (b) describes the validation report
deliverable in more detail, noting certain information the report
should include. This is not a new requirement and is intended to
reflect and memorialize current and good practices to ensure reports
are effective. Amended part (c) includes minor changes regarding the
presentation of the report to the Risk Committee, including the role of
the ROO and the presentation scope, which are not new requirements and
are intended to reflect current practices.
Minor updates are included in Subsection 3.3. ICC proposes to more
generally refer to certain policies in Subsection 3.3.1 and to remove
references to specific policies in Subsection 3.3.3. ICC considers such
references unnecessary, as the Framework is not intended to introduce
other policies. ICC also proposes a clarification in Subsection 3.3.3
that it performs several types of outcome analyses comparing model
results to corresponding actual or hypothetical outcomes (e.g., stress
testing and back testing).
ICC proposes amending Subsection 3.5 related to independent
periodic reviews. ICC proposes to begin by referencing applicable
regulations on its requirement to perform independent periodic reviews.
Information on the Chief Risk Officer's responsibilities is moved to
the end. ICC continues to ensure that not more than twelve months
passes between each independent periodic review. Additional references
to the twelve-month period are referred to generally as the review
cycle. For models that are not subject to the annual requirement,
proposed language directs the ROO, in consultation with the Risk
Committee, to set an established periodicity for independent periodic
review. Currently, the ROO as the individual responsible for the
operation and maintenance of the Framework determines the appropriate
periodicity of review for models, in consultation with the Risk
Committee. Such language is intended to memorialize current practices
and formalize the requirement in the Framework. In Subsection 3.5.1,
ICC proposes updates to an independent periodic review component,
including when it is not applicable, to ensure that ICC adequately
addresses any open items. In Subsection 3.5.2, ICC proposes to describe
the independent periodic review report deliverable in more detail,
noting certain information the report should include, to reflect and
memorialize current and good practices to ensure reports are effective.
ICC also proposes minor changes regarding the presentation of the
report to the Risk Committee, including the role of the ROO and the
presentation scope, which are not new requirements and are intended to
reflect current practices. Additional information regarding remediation
of items in the reports is proposed, including required consultations
with the Risk Committee on remedial actions and timelines. Such updates
ensure that ICC remediates high priority items as soon as possible and
considers any applicable governance or regulatory actions or technology
implementations in timelines for remedial actions. Currently, ICC
consults with the Risk Committee on remedial action timelines and
closure of items. The proposed language is intended to memorialize
current practices and formalize the requirement in the Framework. New
Subsection 3.5.3 proposes procedures for ad hoc reviews of
methodologies that are not considered models under the Framework.
Finally, ICC proposes an appendix that clearly sets out the current ICC
models.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \3\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\4\ In particular, Section 17A(b)(3)(F) of the Act \5\
requires that the rule change be consistent with the prompt and
accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICC, the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible, and the protection of investors and the
public interest.
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\3\ 15 U.S.C. 78q-1.
\4\ 17 CFR 240.17Ad-22.
\5\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change is generally designed to enhance, clarify,
and more clearly document ICC's model validation processes and
procedures.

[[Page 33853]]

The changes clarify that the Framework applies to all ICC models, which
would expand the scope of the Framework. Additional stakeholder
responsibilities are included pertaining to the ROO, Risk Department,
and Risk Committee. Further information regarding validation elements
is proposed, such as applicable regulations, remedial actions and
timelines, and procedures for ad hoc reviews of methodologies. Proposed
language specifies that ICC remediate high priority items as soon as
possible and consider applicable governance or regulatory actions or
technology implementations in remedial action timelines. These
amendments would strengthen the Framework to ensure that it
appropriately provide assurances that all ICC models are performing as
expected and that ICC remediates report items in an appropriate and
timely manner. The proposed revisions also provide clarity, reflect
current practices, and formalize certain requirements in the
documentation to ensure that the Framework remains up-to-date,
transparent, and effective. Furthermore, other proposed changes promote
readability and understanding, including beginning the document with an
overview, reorganizing text to follow section headings more closely,
and making minor language clarifications, and will promote the
successful maintenance and operation of the Framework. ICC believes
that the proposed rule change would facilitate and enhance its ability
to carry out its model validation procedures and fulfill its model
validation requirements in respect of the models utilized as part of
ICC's risk processes and thus promote overall risk management and
stability of ICC. Accordingly, in ICC's view, the proposed rule change
is consistent with the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions, the safeguarding of securities and funds in the custody
or control of ICC or for which it is responsible, and the protection of
investors and the public interest, within the meaning of Section
17A(b)(3)(F) of the Act.\6\
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\6\ Id.
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The amendments would also satisfy relevant requirements of Rule
17Ad-22.\7\ Rule 17Ad-22(b)(4) \8\ requires ICC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to provide for an annual model validation
consisting of evaluating the performance of its margin models and the
related parameters and assumptions associated with such models by a
qualified person who is free from influence from the persons
responsible for the development or operation of the models being
validated. Rule 17Ad-22(e)(4)(vii) \9\ requires ICC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes, including by performing a
model validation for its credit risk models not less than annually or
more frequently as may be contemplated by its risk management
framework. Rule 17Ad-22(e)(6)(vii) \10\ requires ICC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that, among other things,
requires a model validation for its margin system and related models to
be performed not less than annually, or more frequently as may be
contemplated by its risk management framework. Rule 17Ad-22(e)(7)(vii)
\11\ requires ICC to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to effectively
measure, monitor, and manage the liquidity risk that arises in or is
borne by ICC, including measuring, monitoring, and managing its
settlement and funding flows on an ongoing and timely basis, and its
use of intraday liquidity by, among other things, performing a model
validation of its liquidity risk models not less than annually or more
frequently as may be contemplated by its risk management framework. As
described above, the amendments clarify that the Framework applies to
all ICC models, including an appendix to clearly set out current
models. The amendments propose updates and specificity regarding the
report deliverable and presentation as well as how a team of validators
meets independence and technical expertise requirements. The amendments
incorporate applicable regulatory requirements and procedures related
to annual validation cycles and periodic reviews. ICC believes that
such changes continue to ensure that ICC receives independent and
effective model validations and that ICC continues to perform model
validations in accordance with applicable regulations. Therefore, ICC
believes the proposed rule change is consistent with the requirements
of Rule 17ad-22(b)(4), (e)(4)(vii), (e)(6)(vii) and (e)(7)(vii).\12\
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\7\ 17 CFR 240.17Ad-22.
\8\ 17 CFR 240.17Ad-22(b)(4).
\9\ 17 CFR 240.17Ad-22(e)(4)(vii).
\10\ 17 CFR 240.17Ad-22(e)(6)(vii).
\11\ 17 CFR 240.17Ad-22(e)(7)(vii).
\12\ 17 CFR 240.17Ad-22(b)(4), (e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii).
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Rule 17Ad-22(e)(2)(i) and (v) \13\ requires ICC to establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent and specify clear and direct lines of
responsibility. The Framework continues to describe the personnel
responsible for, and the governance procedures associated with, the
successful operation and maintenance of the Framework. Additional
responsibilities of relevant stakeholders are included in the
Framework. For instance, updates and procedures are incorporated for
presenting reports to the Risk Committee and consulting with the Risk
Committee to add, enhance, or retire models or model components and
regarding remedial actions and timelines. The amendments more clearly
set out the role of the ROO in the operation and maintenance of the
Framework and the role of the Risk Department in reviewing the Model
Inventory. Moreover, for models that are not subject to the annual
requirement, proposed language directs the ROO, in consultation with
the Risk Committee, to set an established periodicity for review.
Memorializing additional detail and responsibilities, including to
reflect current practices, would strengthen the Framework to ensure
that responsible parties effectively carry out ICC's model validation
procedures. As such, ICC believes that the proposed rule change ensures
that ICC maintains policies and procedures that are reasonably designed
to provide for clear and transparent governance arrangements and
specify clear and direct lines of responsibility, consistent with Rule
17Ad-22(e)(2)(i) and (v).\14\
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\13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\14\ Id.
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Rule 17Ad-22(e)(4)(ii) \15\ requires ICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to effectively identify, measure, monitor, and manage its
credit exposures to participants and those arising from its payment,
clearing, and settlement processes, including by maintaining additional
financial resources at the minimum to enable it to cover a wide range
of foreseeable stress scenarios that include, but are not limited to,
the default of the two participant families that would potentially
cause the largest aggregate credit exposure for the covered clearing

[[Page 33854]]

agency in extreme but plausible market conditions. The Framework
supports ICC's ability to maintain sufficient risk requirements and
enhances ICC's approach to identifying potential weaknesses in the risk
management system through the use of independent validations and
periodic reviews. The amended Framework continues to provide a process
for reviewing and enhancing the models that ICC utilizes as part of its
risk processes. The changes strengthen the Framework and ensure
completeness by expanding the scope to clearing house models, including
procedures regarding ad hoc reviews of methodologies to ensure
objective and effective review, and including procedures regarding
remedial actions and timelines to ensure remediation of report items in
an appropriate and timely manner. Additional changes ensure the
Framework remains up-to-date, transparent, and focused on clearly
articulating the policies and procedures used to support ICC's model
validation efforts, including by reorganizing text, removing
unnecessary references to policies, and specifying when an independent
periodic review component is not applicable. In ICC's view, the
proposed rule change would facilitate and enhance its ability to carry
out its validation processes and procedures in respect of the models
utilized as part of ICC's risk processes or other methodologies. As
such, the proposed amendments would strengthen ICC's ability to
maintain its financial resources and withstand the pressures of
defaults, consistent with the requirements of Rule 17Ad-
22(e)(4)(ii).\16\
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\15\ 17 CFR 240.17Ad-22(e)(4)(ii).
\16\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes to
the Framework will apply uniformly across all market participants. They
are generally designed to enhance, clarify, and more clearly document
ICC's model validation processes and procedures and include
clarifications on the scope and applicability of the Framework,
responsibilities of relevant stakeholders, and other validation
elements. ICC does not believe these amendments would affect the costs
of clearing or the ability of market participants to access clearing.
Therefore, ICC does not believe the proposed rule change would impose
any burden on competition that is inappropriate in furtherance of the
purposes of the Act.

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#becccbd2db93ddd1d3d3dbd0cacdfecddbdd90d9d1c8"><span class="__cf_email__" data-cfemail="8efcfbe2eba3ede1e3e3ebe0fafdcefdebeda0e9e1f8">[email&#160;protected]</span></a>. Please include
File Number SR-ICC-2022-006 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to File Number SR-ICC-2022-006. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (<a href="http://www.sec.gov/rules/sro.shtml">http://www.sec.gov/rules/sro.shtml</a>).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of ICE Clear Credit and on ICE
Clear Credit's website at <a href="https://www.theice.com/clear-credit/regulation">https://www.theice.com/clear-credit/regulation</a>.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-ICC-2022-006 and should be
submitted on or before June 24, 2022.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-11877 Filed 6-2-22; 8:45 am]
BILLING CODE 8011-01-P

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