Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of filing of Proposed Rule Change Relating to the ICC Collateral Risk Management Framework, ICC Treasury Operations Policies and Procedures, and ICC Liquidity Risk Management Framework

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Published

November 10, 2022

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 87 Issue 217 (Thursday, November 10, 2022)</title>
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[Federal Register Volume 87, Number 217 (Thursday, November 10, 2022)]
[Notices]
[Pages 67982-67985]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-24505]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96237; File No. SR-ICC-2022-013]

Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
filing of Proposed Rule Change Relating to the ICC Collateral Risk
Management Framework, ICC Treasury Operations Policies and Procedures,
and ICC Liquidity Risk Management Framework

November 4, 2022.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
\1\ (the ``Act'') and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 24, 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 primarily prepared 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 formalize
the Collateral Risk Management Framework (``CRMF'') and to amend the
Treasury Operations Policies and Procedures (``Treasury Policy'') and
the Liquidity Risk Management Framework (``LRMF''). 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 to formalize the CRMF and to make related changes to
the Treasury Policy and the LRMF. The proposed changes formalize a
standalone CRMF to centralize relevant information on ICC's collateral
assets risk management methodology in one document. The proposed
changes further remove duplicative information from the Treasury Policy
and update references in the Treasury Policy and the LRMF accordingly.
Such changes would not amend ICC's methodology but would instead
promote transparency and effective operation of the collateral assets
risk management model by unifying key information on ICC's collateral
assets risk management approach in one document. ICC believes that such
revisions 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 effective following Commission approval of the
proposed rule change. The proposed revisions are discussed in detail as
follows.
CRMF
ICC proposes to formalize the CRMF as a standalone document
containing its current collateral assets risk management approach. The
CRMF begins by introducing ICC's quantitative risk management approach
that accounts for the risk associated with fluctuations of collateral
asset prices. The document is further divided into six sections that
are detailed below.
Section I sets out the computation of the current collateral asset
haircut factors. To compute collateral haircut factors, estimations of
two risk measures are performed. The more conservative risk measure is
chosen to establish the haircut factors that capture potential
collateral value losses. The chosen methodology, which consists of
quantifying the potential risk exposures by analyzing the distribution
of the appropriately identified risk factor describing the collateral
asset price changes, is set forth in more detail in this section.
The following subsections are specific to currency and sovereign
debt haircut factors. Regarding currency haircut factors in Subsection
I.a, a two-stage approach is set out to account for the risk associated
with fluctuations of collateral asset prices denominated in foreign
currencies and its corresponding time series are used for collateral
denominated in foreign currencies. The risk of the underlying
collateral asset is estimated in its own currency in the first stage,
and the risk exposure to an exchange rate conversion is considered by
applying a foreign exchange (``FX'') haircut factor in the second
stage. With respect to sovereign debt haircut factors, Subsection I.b
sets out how the fluctuations of the time to maturity yield rates are
considered and its corresponding time series are used for sovereign
debt collateral. In each subsection, further detail, such as relevant
computations, equations, definitions, and considerations, is included
to describe how currency and sovereign debt haircut factors are
determined.
The final haircut factor rounding process is set out in Subsection
I.c. The estimated haircut factors are rounded up to ensure appropriate
stability and some conversative bias. Relevant computations, equations
and illustrations demonstrate the haircut factor rounding process.
Section II details the current collateral assets risk management
model and contains additional risk management information. This section
begins by

[[Page 67983]]

introducing the statistical calibration of the model by estimating an
appropriate distribution to a time series of past realizations of the
driving factor. One of the main components of the collateral assets
risk management model is the distribution that describes the
realizations of the asset price determining risk factor. Certain
assumptions are also introduced to provide more stable and easy-to-
reproduce numerical results.
The model framework is described in more detail in the following
subsections. Subsection II.a details certain distributional assumptions
appropriate for FX and fixed income (``FI'') assets on which the
haircut methodology is based. A summary of relevant literature is
included; the haircut methodology uses the cited results on
distribution families with applications to FX and FI instruments.
Subsection II.b and II.c set forth parameter estimations. Subsection
II.b expresses how parameter estimates are obtained and used to compute
multi-day risk measures. Parameter estimations are performed in stages
to facilitate numerical implementation and result replication and to
eliminate potential operational risk. The main inputs for the
statistical approach are set out and the calibration of the collateral
haircut model is discussed. Subsection II.c explains how the
variability of a risk factor is described for risk management purposes
and sets out the selected measure of variability for all considered
time series. Subsection II.d depicts multi-period forecasting,
including the analysis that is performed to extend one-day to multi-
period forecasts. Subsection II.e discusses how risk measures are
obtained which are used for haircut purposes. For each subsection,
additional detail, such as relevant parameters, computations,
equations, definitions, and figures, is included to describe relevant
processes.
Section III contains governance procedures relevant to the CRMF.
Collateral haircut factor estimations are executed daily, and the ICC
Risk Department reviews the results and determines any updates, at
least monthly. Haircut factors can be updated more frequently at the
discretion of the ICC Chief Risk Officer (``CRO'') or designee.
Additional language explains the implementation of updates by relevant
departments and the periodic review of the statistical performance of
the collateral haircut model, which consists of back-testing of
applicable risk factors at least quarterly. A discussion of the back-
testing exercise is included related to exploring poor back-testing
results and taking remedial actions. The associated governance process
is also summarized, including the ICC officers responsible for
determining poor back-testing, the steps required following such
determination, the groups consulted regarding poor back-testing or
remedial action, and additional statistical analyses to measure and
monitor the significance of back-testing results.
Section IV provides applications to FX and FI instruments to
demonstrate the viability of the model used in the collateral risk
management methodology. Subsection IV.a presents an example of the
modeling approach applied to cash collateral denominated in a currency
different from the required currency. Subsection IV.b presents an
example of the modeling approach applied to US Treasury Bonds
denominated in US Dollars (``USD''). Subsection IV.c presents an
example of the modeling approach applied to US Treasury Inflation
Protected Securities (``TIPS'') denominated in USD. Each subsection
sets out a three-stage approach to estimate risk measures and
corresponding haircut factors and includes illustrations and back-
testing results. Finally, Section V consists of a list of references
and Section VI adds a revision history.
Treasury Policy
The proposed changes remove information on ICC's collateral assets
risk management approach from the Treasury Policy. Currently, Appendix
6 to the Treasury Policy, titled Collateral Assets Risk Management
Framework, (``Appendix 6'') contains this information. ICC proposes to
remove Appendix 6 and, accordingly, to replace a reference to Appendix
6 with a reference to the CRMF in Section V.B.3.
In general, information from Appendix 6 is included throughout
Sections I and III of the CRMF with minor differences in drafting style
and without substantive changes. The below list summarizes where the
information in Appendix 6 would reside following removal and
differences from the CRMF.
<bullet> The approach accounting for the risk associated with
fluctuations of collateral assets denominated in foreign currencies in
Appendix 6, paragraph 1 is moved to the CRMF, Subsection I.a.
<bullet> The estimations of two risk measures in Appendix 6,
paragraph 2 are moved to the CRMF, Section I.
<bullet> Examples related to currencies and sovereign debt from
Appendix 6, paragraphs 3 and 4 are moved to the CRMF, Subsections I.a
and I.b, respectively.
<bullet> A risk measure definition in Appendix 6, paragraph 5 is
moved to the CRMF, Section I. A policy reference from Appendix 6,
paragraph 5 is removed, as ICC considers it unnecessary given the
additional risk management information in the CRMF.
<bullet> Information on FX and sovereign debt haircuts in Appendix
6, paragraphs 6-9 is moved to the CRMF, Subsections I.a and I.b,
respectively.
<bullet> The rounding of estimated haircuts in Appendix 6,
paragraph 10 is moved to the CRMF, Subsection I.c. Information on
establishing, reviewing, and updating haircuts in Appendix 6, paragraph
10 is moved to the CRMF, Section III.
<bullet> Information on updating haircuts during periods of extreme
stress in Appendix 6, paragraph 11 is moved to the CRMF, Subsection
I.c.
As described above, the remaining CRMF sections include additional
information that is not in Appendix 6. The CRMF would more fully
describe ICC's collateral assets risk management approach and would not
change the methodology in Appendix 6.
LRMF
ICC proposes minor changes to the LRMF to update references from
the Treasury Policy to the CRMF. Currently, Section 2.4 in the LRMF
references information in Appendix 6, including details on the
collateral haircut methodology and process for reviewing and updating
collateral haircuts. The amended LRMF would reference the CRMF instead
of the Treasury Policy which would contain the subject information
under the proposed updates.
(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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As discussed herein, the proposed amendments formalize the CRMF to
centralize relevant information on ICC's collateral assets risk
management

[[Page 67984]]

methodology in one standalone document. The CRMF includes information
from Appendix 6 as well as information not in Appendix 6, such as
additional risk management information, governance procedures, modeling
approach examples, and references. The proposed amendments also remove
duplicative information from the Treasury Policy and update references
in the Treasury Policy and the LRMF to the CRMF as needed. The proposed
rule change would not amend ICC's methodology and would promote
effective operation of the collateral assets risk management model by
unifying key information on ICC's collateral assets risk management
approach in one document. The additional information in the CRMF would
provide a more detailed explanation of the collateral assets risk
management model and methodology that would facilitate replication and
validation by third parties. In ICC's view, such changes promote
transparency by including additional information on ICC's collateral
assets risk management approach in the CRMF, including relevant
parameters, computations, equations, definitions, and figures to
describe relevant processes, which would also ensure that responsible
parties carry out their assigned duties effectively and aid them in
doing so. Further, the clarification changes ensure transparency,
readability, and clarity by avoiding unnecessary repetition and
duplication in the Treasury Policy and maintaining references to the
appropriate document in the Treasury Policy and LRMF, which would avoid
confusion between policies and promote efficient and effective
operation of ICC's collateral assets risk management methodology.
Accordingly, ICC believes that 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(e)(2)(i) and (v) \8\ 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 proposed changes strengthen the governance
procedures related to ICC's collateral assets risk management approach
by memorializing associated governance processes and procedures in the
CRMF. The CRMF details governance procedures associated with haircut
factor updates, implementation, and review, including the responsible
ICC personnel, department, group, or committee. As such, in ICC's view,
the proposed rule change continues to ensure 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).\9\
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\7\ 17 CFR 240.17Ad-22.
\8\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\9\ Id.
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Rule 17Ad-22(e)(4)(ii) \10\ 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 ICC in extreme but
plausible market conditions. The proposed amendments enhance ICC's
ability to manage its financial resources by providing further clarity
and transparency on its collateral assets risk management approach
through additional details, examples, and references in the CRMF, which
will promote the effective and accurate function of the collateral
assets risk management model. The additional information in the CRMF
provides a more detailed explanation of the collateral assets risk
management model and methodology, which will facilitate replication and
validation by third parties. The proposed rule change would also
enhance the implementation of various processes and procedures
associated with the collateral assets risk management methodology to
ensure that responsible parties effectively carry out their associated
duties, including by providing relevant parameters, computations,
equations, definitions, and figures. Furthermore, the clarification
changes serve to avoid confusion between policies and promote efficient
and effective operation of ICC's collateral assets risk management
methodology by avoiding unnecessary repetition and duplication in the
Treasury Policy by removing Appendix 6 and by ensuring references to
the appropriate document in the Treasury Policy and LRMF. As such, the
proposed amendments would support 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).\11\
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\10\ 17 CFR 240.17Ad-22(e)(4)(ii).
\11\ Id.
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Rule 17Ad-22(e)(5) \12\ requires ICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to limit the assets it accepts as collateral to those with low
credit, liquidity, and market risks, and set and enforce appropriately
conservative haircuts and concentration limits if the covered clearing
agency requires collateral to manage its or its participants' credit
exposure; and require a review of the sufficiency of its collateral
haircuts and concentration limits to be performed not less than
annually. ICC would continue to limit the assets that ICC accepts as
collateral to those with low credit, liquidity, and market risks under
the proposed rule change. Furthermore, the CRMF would provide a clear
framework for ICC to continue to set and enforce appropriately
conservative haircuts for acceptable collateral assets and would set
out responsible parties. The additional governance procedures in
Section III of the CRMF would ensure that ICC establishes, reviews, and
updates haircuts within defined intervals, and more frequently if
deemed necessary. As described above, collateral haircut factor
estimations are executed daily, and the ICC Risk Department reviews the
results and determines any updates, at least monthly. Haircut factors
can be updated more frequently at the discretion of the CRO or
designee. As such, the amendments would satisfy the requirements of
Rule 17Ad-22(e)(5).\13\
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\12\ 17 CFR 240.17Ad-22(e)(5).
\13\ 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
formalize a standalone CRMF to centralize relevant information on ICC's
collateral assets risk management methodology in one document. The
proposed changes further remove duplicative information

[[Page 67985]]

from the Treasury Policy and update references in the Treasury Policy
and the LRMF accordingly. These changes do not amend ICC's methodology
and would apply uniformly across all market participants. 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 imposes 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#2052554c450d434f4d4d454e5453605345430e474f56"><span class="__cf_email__" data-cfemail="5a282f363f77393537373f342e291a293f39743d352c">[email&#160;protected]</span></a>. Please include
File Number SR-ICC-2022-013 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-2022-013. 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-2022-013 and should be
submitted on or before December 1, 2022.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-24505 Filed 11-9-22; 8:45 am]
BILLING CODE 8011-01-P

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