Notice2022-17947
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the Stress Testing Framework and the Liquidity Risk Management Framework
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Published
August 22, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 161 (Monday, August 22, 2022)</title>
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[Federal Register Volume 87, Number 161 (Monday, August 22, 2022)]
[Notices]
[Pages 51466-51469]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-17947]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-95504; File No. SR-ICC-2022-008]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the Stress Testing Framework
and the Liquidity Risk Management Framework
August 16, 2022.
I. Introduction
On June 23, 2022, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend its
Stress Testing Framework (``STF'') and the ICC Liquidity Risk
Management Framework (``LRMF''). The proposed rule change was published
for comment in the Federal Register on July 11, 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the Stress Testing
Framework and the Liquidity Risk Management Framework; Exchange Act
Release No. 95200 (Jul. 5, 2022); 87 FR 41149 (Jul. 11, 2022) (File
No. SR-ICC-2022-008) (``Notice'').
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II. Description of the Proposed Rule Change
ICC proposes to revise its STF and LRMF to introduce new stress
scenarios, clarify existing stress scenarios, and make other minor
edits.\4\ Specifically, the proposed rule change would introduce new
stress scenarios related to the Coronavirus pandemic and oil price war
(the ``COVID-19/Oil Crisis'').
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\4\ The description that follows is substantially excerpted from
the Notice. Capitalized terms not otherwise defined herein have the
meanings assigned to them in the STS, LRMF or ICC's Clearing Rules,
as applicable.
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A. STF
The proposed amendments to the STF introduce new stress scenarios
related to the COVID-19/Oil Crisis, clarify existing stress scenarios
related to credit default index swaptions (``index options''), and make
other minor edits. Specifically, the proposed changes would amend
Section 5.1 containing the historically observed extreme but plausible
market scenarios with a minor edit to abbreviate a term and to
introduce additional stress scenarios
[[Page 51467]]
related to the COVID-19/Oil Crisis. ICC previously introduced price-
based stress scenarios related to the COVID-19/Oil Crisis in the STF,
which replicate observed instrument price changes during this
period.\5\ This proposal would incorporate complementing spread-based
stress scenarios related to the COVID-19/Oil Crisis, which reflect
observed relative spread increases and decreases during this period
(the ``COVID-19/Oil Crisis Spread Scenarios''). Additionally, the
stress scenarios related to index options (i.e., the stress options-
implied Mean Absolute Deviation (``MAD'') scenarios) would be moved
into a separate section and corresponding references throughout the STF
would accordingly refer to this new Section 9.
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\5\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Management
Framework, ICC Risk Management Model Description, ICC Risk Parameter
Setting and Review Policy, ICC Stress Testing Framework, and ICC
Liquidity Risk Management Framework; Exchange Act Release Number
89639 (Aug. 21, 2020); 85 FR 53036 (Aug. 27, 2020) (File No. SR-ICC-
2020-009).
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The proposal would make the following additional clarifications in
Section 5 and throughout the STF. To distinguish between price- and
spread-based stress scenarios, ICC proposes to replace references to
COVID-19/Oil Crisis Scenarios in the current STF with references to
COVID-19/Oil Crisis Price Scenarios. The proposal would also
incorporate the COVID-19/Oil Crisis Spread Scenarios in the other
categories of scenarios, namely in Section 5.3 (hypothetically
constructed (forward looking) extreme but plausible market scenarios)
and Section 5.4 (extreme model response test scenarios), as well as in
Section 14 (interpretation of results).
Additionally, the proposal would add text describing how the
existing stress scenarios for index option positions are integrated
within the current set of stress scenarios for CDS index and single
name instruments. The stress options-implied MAD scenarios are
currently generated for index option positions and are not applied to
portfolios independently, but rather, are directly incorporated into
the CDS stress scenarios. The proposed rule changes would clarify that
the stress options-implied MAD scenarios complement the underlying
stress scenarios (in Section 6) and reference proposed Section 9 for
more detail on the stress options-implied MAD approach (in Section 8).
ICC proposes to add a new Section 9 to the STF, which would
memorialize the stress options-implied MAD scenarios and approach. As
described above, information from current Section 5.1 on these
scenarios would move to Section 9 with certain amendments. The proposed
amendments would not change ICC's stress testing methodology, but
instead would add detail and updated terminology for clarity. The
proposed language would explain that when index options are present in
a portfolio, the underlying market stress test scenarios incorporate
the stress options-implied MAD scenarios. ICC proposes terminology
changes that would specify that the scenarios consider an increase/
decrease in the options-implied MAD upon spread widening/tightening and
clarification changes would detail the incorporation of the options-
implied MAD in the scenarios. The proposed changes are intended to more
clearly set forth the process for creation of the stress options-
implied MAD, including how the necessary components are derived. No
changes are proposed with respect to what the final scenario prices of
the index option instruments reflect. ICC also proposes to renumber
sections throughout the STF as necessary, including in Table 1 in
Section 14. Finally, proposed Section 17 adds a revision history to
track changes.
B. LRMF
ICC proposes corresponding changes to the LRMF to introduce new
stress scenarios related to the COVID-19/Oil Crisis, clarify existing
stress scenarios related to index options, and make other minor edits.
ICC proposes to revise Section 2.3 of the LRMF regarding liquidity
requirements for client-related accounts. The proposed changes would
specify that Clearing Participants deposit 100% of their Euro
denominated client gross margin in any acceptable collateral to match
Schedule 401 in the ICC Rules. This is intended to be a clean-up change
to remove an outdated provision to ensure consistency across the LRMF
and ICC Rules and would not change current requirements.
The proposed rule change would update Section 3.3.2 regarding the
historically observed extreme but plausible market scenarios. The
proposal would expand the set of extreme market events to include
COVID-19 and the simultaneous occurrence of the oil price war, and
would also make grammatical edits to change a term to its plural form.
Consistent with the STF, ICC previously introduced the COVID-19/Oil
Crisis price-based stress scenarios in the LRMF \6\ and proposes now to
incorporate the complementing COVID-19/Oil Crisis Spread Scenarios,
which are also referred to as the COVID-19 OCSS, in the LRMF. The
price-based stress scenarios would be referred to as the COVID-19/Oil
Crisis Price Scenarios or COVID-19 OCPS throughout the document.
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\6\ Id.
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ICC also proposes revisions to Section 3.3.2 of the LRMF regarding
stress options-implied MAD scenarios. To ensure consistency with the
STF, ICC proposes adding language and changes in subsection (b) that
would be similar to the language proposed in the STF. The proposed rule
changes would memorialize the stress options-implied MAD scenarios and
approach more clearly in the LRMF, including how the scenarios for
index option positions are integrated within the current set of stress
scenarios for CDS index and single name instruments. The proposed
amendments would not change ICC's liquidity risk management
methodology, but would instead add detail and update terminology to be
clearer. The proposed terminology changes would specify that the
scenarios consider an increase/decrease in the options-implied MAD and
clarification changes would detail the incorporation of the options-
implied MAD in the scenarios. The proposed changes are intended to more
clearly set forth the process for the creation of the stress options-
implied MAD, including how the necessary components are derived. No
changes are proposed with respect to what the final scenario prices of
the index option instruments reflect. ICC proposes a typographical fix
in the footnotes to refer to the correct reference document. In
addition, the proposal would amend subsection (d) to add a section
symbol and to set out how the stress options-implied MAD scenarios that
complement the extreme model response test scenarios are derived to
match language currently in the STF.
ICC also proposes minor updates to Section 3.3 of the LRMF.
Specifically, the proposal would incorporate the COVID-19/Oil Crisis
Spread Scenarios in Section 3.3.3 in Table 1 containing the liquidity
stress testing scenarios and in Section 3.3.4 related to the
interpretation of results. The proposed rule changes would also make a
minor edit to the extreme market scenarios in Table 1 to specify that
the COVID19OCPS are extreme.
III. Discussion of 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
[[Page 51468]]
rules and regulations thereunder applicable to such organization.\7\
For the reasons discussed below, the Commission finds that the proposed
rule change is consistent with Section 17A(b)(3)(F) of the Act \8\ and
Rule 17Ad-22(e)(4)(ii) and (vi), and Rule 17Ad-22 (e)(7)(i) and (vi)
thereunder.\9\
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi) and 17 CFR 240.17Ad-22
(e)(7)(i) and (vi).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, the proposal would incorporate into the STF and
LRMF spread-based stress scenarios related to the COVID-19/Oil Crisis,
which reflect observed relative spread increases and decreases during
this period and which complement previously introduced the COVID-19/Oil
Crisis price-based stress scenarios. By adding spread-based stress
scenarios related to the COVID-19/Oil Crisis, the Commission believes
the proposed rule change should enhance ICC's ability to manage risks
in a way that makes it more flexible and capable of considering events
beyond, for instance, price-based stress scenarios. The Commission
believes that considering additional stress scenarios should, in turn,
increase the likelihood that ICC calculates and collects sufficient
financial resources to mitigate its potential exposures. Managing such
exposures should, in turn, enhance ICC's ability to manage the default
of a clearing participant by continuing to promptly and accurately
clear and settle securities transactions.
Additionally, as noted above, the proposed rule change would, while
not changing ICC's methodology, clarify in both the STF and LRMF that
the stress options-implied MAD scenarios are integrated within the
current set of stress scenarios for CDS index and single name
instruments. Further, the proposed rule change would reorganize the STF
to memorialize the stress options-implied MAD scenarios and approach in
a separate section. The proposed language would explain that when index
options are present in a portfolio, the underlying market stress test
scenarios incorporate the stress options-implied MAD scenarios.
Proposed terminology changes would specify that the scenarios consider
an increase/decrease in the options-implied MAD upon spread widening/
tightening, and clarification changes would detail the incorporation of
the options-implied MAD in the scenarios. Further, the proposed changes
would more clearly set forth the creation of the stress options-implied
MAD, including how the necessary components are derived. The proposed
rule change would also make various clean-up changes detailed above.
For example, the proposed rule change would make grammatical edits,
renumber sections, make changes to distinguish between price and spread
COVID-19/Oil Crisis scenarios, and specify that Clearing Participants
deposit 100% of their Euro denominated client gross margin in any
acceptable collateral in order to match Schedule 401 in the ICC Rules.
The Commission believes that these proposed organizational and clean-up
changes would enhance the STF and LRMF used to support ICC's risk
management system by increasing readability, transparency, and clarity
regarding its practices, and therefore support the ability of those
utilizing these documents to manage risk and maintain adequate
financial resources, thereby promoting both the prompt and accurate
clearance and settlement of securities transactions and the ability to
safeguard securities and funds.
For these reasons, the Commission believes the proposed rule
changes are consistent with Section 17A(b)(3)(F) of the Act.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(ii) and (vi)
Rule 17Ad-22(e)(4)(ii) requires ICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed, as applicable, 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 ICC in
extreme but plausible market conditions.\12\ Rule 17Ad-22(e)(4)(vi)
\13\ requires ICC to establish, implement, maintain, and enforce
written policies and procedures reasonably designed, as applicable, 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 of Rule 17Ad-22(e)(4)(ii).\14\
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\12\ 17 CFR 240.17Ad-22(e)(4)(ii).
\13\ 17 CFR 240.17Ad-22(e)(4)(vi).
\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
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The Commission believes that the proposed introduction of the
COVID-19/Oil Crisis Spread Scenarios would complement the current
scenarios in the risk management policies and procedures and add
additional insight into potential weaknesses in the ICC risk management
methodology, thereby widening the range of stress scenarios that ICC
employs to manage its credit exposures and financial resources.
Additionally, the Commission believes that the proposed changes noted
above to add detail, update terminology, ensure consistency across the
STF and LRMF, and more clearly describe the stress options-implied MAD
scenarios, would ensure transparency and strengthen ICC's risk
management documentation, thereby supporting the effectiveness of ICC's
risk management system to cover a wide range of foreseeable stress
scenarios, including the COVID-19/Oil Crisis Spread Scenarios.
The Commission also believes that the proposed clarification and
clean-up changes noted above would also enhance the readability of the
policies and procedures, thereby strengthening the documentation for
its users and ensuring that it remains up-to-date, clear, and
transparent to support the effectiveness of ICC's risk management
system.
For these reasons, the Commission believes that the proposed rule
changes are therefore consistent with the requirements of Rules 17Ad-
22(e)(4)(ii) and (e)(4)(vi).\15\
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\15\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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C. Consistency With Rule 17Ad-22(e)(7)(i) and (vi)
Rule 17Ad-22(e)(7)(i) requires ICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed, as applicable, to effectively measure, monitor, and manage
the liquidity risk that arises in or is borne by it, including
measuring, monitoring, and managing its settlement and funding flows on
an ongoing and timely basis, and its use of intraday
[[Page 51469]]
liquidity by maintaining sufficient liquid resources at the minimum in
all relevant currencies to effect same-day and, where appropriate,
intraday and multiday settlement of payment obligations with a high
degree of confidence under a wide range of foreseeable stress scenarios
that includes, but is not limited to, the default of the participant
family that would generate the largest aggregate payment obligation for
ICC in extreme but plausible market conditions.\16\ Rule 17Ad-
22(e)(7)(vi) \17\ requires ICC to establish, implement, maintain, and
enforce written policies and procedures reasonably designed, as
applicable, to effectively measure, monitor, and manage the liquidity
risk that arises in or is borne by it, including determining the amount
and regularly testing the sufficiency of the liquid resources held for
purposes of meeting the minimum liquid resource requirement under Rule
17Ad-22(e)(7)(i).\18\
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\16\ 17 CFR 240.17Ad-22(e)(7)(i).
\17\ 17 CFR 240.17Ad-22(e)(7)(vi).
\18\ 17 CFR 240.17Ad-22(e)(7)(i).
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The Commission believes that the proposed changes noted above
provide further clarity and transparency regarding ICC's liquidity
stress testing practices to strengthen the documentation surrounding
ICC's liquidity stress testing and liquidity risk management, including
by providing additional scenario descriptions. The Commission believes
that the introduction of the COVID-19/Oil Crisis Spread Scenarios would
complement the current scenarios and, in turn, widen the range of
stress scenarios that ICC employs to monitor and manage its liquidity
risks. The Commission further believes that introduction of the COVID-
19/Oil Crisis Spread Scenarios would improve ICC's testing of the
sufficiency of its liquid resources, by providing additional insights
and information using spread-based scenarios.
The Commission believes that the proposed clarification and clean-
up changes provide further clarity and transparency regarding ICC's
liquidity risk management practices in the LRMF, including by promoting
uniformity with the STF, ensuring consistency between the LRMF and the
ICC Rules regarding the client-related liquidity requirements, and
ensuring that information and references are current, including in
Table 1 which sets out the liquidity stress testing scenarios. The
Commission believes that these proposed changes would strengthen ICC's
STF and LRMF and aid users of the documentation in managing ICC's
liquid resources.
For the reasons stated above, the Commission believes that the
proposed rule changes are consistent with Rules 17Ad-22(e)(7)(i) and
(vi).\19\
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\19\ 17 CFR 240.17Ad-22(e)(7)(i) and (vi).
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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 \20\ and Rule 17Ad-22(e)(4)(ii) and (vi), and Rule 17Ad-22
(e)(7)(i) and (vi) thereunder.\21\
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi) and (e)(7)(i) and
(vi).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\22\ that the proposed rule change (SR-ICC-2022-008), be, and hereby
is, approved.\23\
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\22\ 15 U.S.C. 78s(b)(2).
\23\ 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.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2022-17947 Filed 8-19-22; 8:45 am]
BILLING CODE 8011-01-P
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