Notice2022-25474
Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Corporation; Order Granting Proposed Rule Changes To Amend the Stress Testing Framework and Liquidity Risk Management Framework
Primary source
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Published
November 23, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 225 (Wednesday, November 23, 2022)</title>
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[Federal Register Volume 87, Number 225 (Wednesday, November 23, 2022)]
[Notices]
[Pages 71714-71719]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-25474]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96345; File Nos. SR-DTC-2022-006; SR-FICC-2022-004; SR-
NSCC-2022-006]
Self-Regulatory Organizations; The Depository Trust Company;
Fixed Income Clearing Corporation; National Securities Corporation;
Order Granting Proposed Rule Changes To Amend the Stress Testing
Framework and Liquidity Risk Management Framework
November 17, 2022.
On May 26, 2022, The Depository Trust Company (``DTC''), Fixed
Income Clearing Corporation (``FICC''), and National Securities
Clearing Corporation (``NSCC'') (each a ``Clearing Agency,'' and
collectively, the ``Clearing Agencies''), filed with the Securities and
Exchange Commission (``Commission'') proposed rule changes SR-DTC-2022-
006, SR-FICC-2022-004, and SR-NSCC-2022-006 (the ``Proposed Rule
Changes'') pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder \2\ to amend the Stress
Testing Framework and Liquidity Risk Management Framework adopted by
the Clearing Agencies, as well as to update the FICC Mortgage-Backed
Securities Division (``MBSD'') Rules.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The Proposed Rule Changes were published for comment in the Federal
Register on June 15, 2022.\3\ On July 14, 2022, the Commission
published notices designating a longer period of time for Commission
action and a longer period for public comment on the Proposed Rule
Changes.\4\ On September 9, 2022, the Commission issued orders
instituting proceedings on the Proposed Rule Changes.\5\ The Commission
has received comments on the changes proposed therein.\6\ This order
approves the Proposed Rule Changes.
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\3\ Securities Exchange Act Release No. 95080 (June 9, 2022), 87
FR 36191 (June 15, 2022) (File No. SR-DTC-2022-006) (``DTC
Notice''); Securities Exchange Act Release No. 95079 (June 9, 2022),
87 FR 36182 (June 15, 2022) (File No. SR-FICC-2022-004) (``FICC
Notice''); Securities Exchange Act Release No. 95078 (June 10,
2022), 87 FR 36158 (June 15, 2022) (File No. SR-NSCC-2022-006)
(``NSCC Notice'').
\4\ Securities Exchange Act Release No. 95282 (July 14, 2022),
87 FR 43354 (July 20, 2022) (SR-DTC-006); Securities Exchange Act
Release No. 95283 (July 14, 2022), 87 FR 43364 (July 20, 2022) (SR-
FICC-2022-004); Securities Exchange Act Release No. (July 14, 2022),
87 FR 43354 (July 20, 2022) (SR-NSCC-2022-006).
\5\ Securities Exchange Act Release No. 95729 (Sept. 9, 2022),
87 FR 56733 (Sept. 15, 2022) (SR-DTC-2022-006); Securities Exchange
Act Release No. 95724 (Sept. 9, 2022), 87 FR 56732 (Sept. 15, 2022)
(SR-FICC-2022-004); Securities Exchange Act Release No. 95725 (Sept.
9, 2022), 87 FR 56735 (Sept. 15, 2022) (SR-NSCC-2022-006).
\6\ Specifically, the Commission received comments only on the
DTC Notice, and the comment is available at <a href="https://www.sec.gov/comments/sr-dtc-2022-006/srdtc2022006.htm">https://www.sec.gov/comments/sr-dtc-2022-006/srdtc2022006.htm</a>. The commenter raised a
concern regarding the confidentiality of the proposed rule. Id. DTC
asserted that the exhibits to the filing, including the proposed
rule, were entitled to confidential treatment because, if released,
they could cause harm to the Clearing Agencies and their
participants. Under Section 23(a)(3) of the Exchange Act, the
Commission is not required to make public statements filed with the
Commission in connection with a proposed rule change of a self-
regulatory organization if the Commission could withhold the
statements from the public in accordance with the Freedom of
Information Act (``FOIA''), 5 U.S.C. 552. 15 U.S.C. 78w(a)(3). The
Commission has reviewed the documents for which DTC requests
confidential treatment and concludes that they could be withheld
from the public under the FOIA. FOIA Exemption 4 protects
confidential commercial or financial information. 5 U.S.C.
552(b)(4). Under Exemption 4, information is confidential if it ``is
both customarily and actually treated as private by its owner and
provided to government under an assurance of privacy.'' Food
Marketing Institute v. Argus Leader Media, 139 S. Ct. 2356, 2366
(2019). The Commission understands that DTC has not disclosed the
confidential exhibits to the public, and believes that the
information is the type that would not customarily be disclosed to
the public. In addition, by requesting confidential treatment, DTC
had an assurance of privacy because the Commission generally
protects information that can be withheld under Exemption 4. Thus,
the Commission has determined to accord confidential treatment to
the confidential exhibits.
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I. Description of the Proposed Rule Changes
A. Background and Overview of the Changes
The Clearing Agencies adopted the Clearing Agency Stress Testing
Framework (Market Risk) (``ST Framework'') to set forth the manner in
which they identify, measure, monitor, and manage their credit
exposures to participants and those arising from their respective
payment, clearing, and settlement processes by, for example,
maintaining sufficient prefunded financial resources to cover its
credit exposures to each participant fully with a high degree of
confidence and testing the sufficiency of those prefunded financial
resources through stress testing.\7\ The ST Framework describes the
stress testing activities of each of the Clearing Agencies. The
Clearing Agencies adopted the Clearing Agency Liquidity Risk Management
Framework (``LRM Framework,'' and, together with the ST Framework, the
``Frameworks'') to set forth the manner in which they measure, monitor
and manage the liquidity risks that arise in or are borne by each of
the Clearing Agencies by, for example, (1) maintaining sufficient
liquid resources to effect same-day 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 each Clearing Agency in extreme but plausible
market conditions, and (2) determining the amount and regularly testing
the sufficiency of qualifying liquid resources by conducting stress
testing of those resources.\8\ The LRM Framework describes the
liquidity risk management activities of each of the Clearing Agencies.
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\7\ Securities Exchange Act Release No. 82368 (Dec. 19, 2017),
82 FR 61082 (Dec. 26, 2017) (SR-DTC-2017-005; SR-FICC-2017-009; SR-
NSCC-2017-006) (``Initial ST Framework Order'').
\8\ Securities Exchange Act Release Nos. 82377 (December 21,
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004;
SR-FICC-2017-008; SR-NSCC-2017-005) (``Initial LRM Framework
Order'').
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First, the proposed rule change would amend both the ST Framework
and the LRM Framework to move descriptions of the Clearing Agencies'
liquidity stress testing activities,\9\ from the LRM Framework to the
ST Framework. In connection with this proposed change, the Clearing
Agencies are also proposing to recategorize the liquidity stress
scenarios by removing the Level 1, Level 2 and Level 3 labels and
instead categorizing all stress scenarios as either regulatory or
informational.
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\9\ 17 CFR 240.17Ad-22(e)(7)(vi).
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Second, the proposed changes would amend the ST Framework to (1)
enhance stress testing for GSD to obtain certain data utilized in
stress testing from external vendors and implement a back-up stress
testing calculation that would
[[Page 71715]]
be utilized in the event such data is not supplied by its vendors, and
amend the ST Framework to reflect these practices for both GSD and
MBSD; (2) reflect that a stress testing team is primarily responsible
for the actions described in the ST Framework, and (3) make other
revisions to update and clarify the statements in the ST Framework, as
further described below.
Third, the proposed changes would amend the LRM Framework to update
and clarify the statements in the LRM Framework, as further described
below.
Finally, the proposed changes would amend the MBSD Rules to remove
duplicative disclosures regarding the stress testing program, as
further described below.
B. Changes To Move Activities Related To Stress Testing Qualifying
Liquid Resources From the LRM Framework to the ST Framework
The proposed changes would amend both the ST Framework and the LRM
Framework to move descriptions of the Clearing Agencies' liquidity
stress testing activities from the LRM Framework to the ST Framework.
These activities are primarily performed by the Stress Testing Team
within the Group Chief Risk Office (``GCRO'') of the Depository Trust
and Clearing Corporation, which includes members of the Market Risk
Management and the Liquidity Risk Management groups within the
GCRO.\10\ The Clearing Agencies state that the Stress Testing Team,
which was previously responsible for stress testing the Clearing
Agencies' prefunded financial resources, as part of the market risk
management function, took over stress testing of the Clearing Agencies'
liquidity resources related to liquidity risk management in order to
centralize stress testing activities and related responsibilities under
one team.\11\
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\10\ DTCC is the parent company of the Clearing Agencies. DTCC
operates on a shared services model with respect to the Clearing
Agencies and its other subsidiaries. Most corporate functions are
established and managed on an enterprise-wide basis pursuant to
intercompany agreements under which it is generally DTCC that
provides a relevant service to its subsidiaries, including the
Clearing Agencies.
\11\ DTC Notice, supra note 3, 87 FR at 36193; FICC Notice,
supra note 3, 87 FR at 36184; NSCC Notice, supra note 3, 87 FR at
36159.
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The Clearing Agencies propose several amendments to both the ST
Framework and the LRM Framework to incorporate these changes. First,
Section 1 (Executive Summary) and Section 4 (Liquidity Risk Management
Regulatory Requirements) of the LRM Framework would be amended to make
clear that compliance with the requirements of Rule 17Ad-22(e)(7)(vi)
are not addressed in that document, and are addressed in the ST
Framework. Section 2 (Glossary of Key Terms) of the LRM Framework would
also be amended to include definitions of ``Clearing Agency Stress
Testing Framework'' and the ``Stress Testing Team,'' and to remove the
definition of the Enterprise Stress Testing Council, which is an
internal forum that addresses stress testing matters. Finally, Section
6 (Liquidity Risk Management) of the LRM Framework would be amended to
describe at a high-level the activities related to stress testing of
the Clearing Agencies' qualifying liquid resources and to state that
these activities are described in greater detail in the ST Framework.
The proposed change would also require revisions throughout the ST
Framework to include descriptions of liquidity stress testing
activities that support the Clearing Agencies' compliance with the
requirements of Rule 17Ad-22(e)(7)(vi) within the existing sections of
the ST Framework. These proposed changes would include revisions to
Section 1 (Executive Summary) of the ST Framework to clarify that
stress testing related to liquidity risk management is described in
this document, and revisions to Section 2 (Glossary of Key Terms) to
include definitions related to these activities. These definitions
would include the Liquidity Risk Management group within GCRO and a
Clearing Agency Liquidity Risk Management Framework. Section 4 of the
ST Framework would be renamed ``Stress Testing Requirements'' and would
be amended to make clearer which requirements in Rules 17Ad-22(e)(4)
and (7) are addressed in the ST Framework, and to identify the
documents where the requirements not addressed in the ST Framework are
addressed.
The proposed changes to the ST Framework would create a new Section
6, which would be named ``Qualifying Liquid Resources--Liquidity Risk
Management,'' to describe at a high-level how each of the Clearing
Agencies determine the amount and regularly test the sufficiency of
their respective qualifying liquid resources. This new section would
include language that is substantially identical to language that would
be removed from Section 6 (Liquidity Risk Management) of the LRM
Framework.
The new Section 7 (Stress Testing Methodologies) (previously
numbered Section 6) of the ST Framework would be updated to include
descriptions of the methodologies used in liquidity stress testing.
Such methodologies would not change substantively, and the language
used in the revisions to this section would be substantively identical
to language that would be removed from Section 6 (Liquidity Risk
Management) of the LRM Framework.
Finally, the new Section 8 of the ST Framework (previously numbered
Section 7), which would be renamed ``Stress Testing Governance and
Escalation Procedures,'' would be amended to include matters related to
liquidity stress testing. More specifically, the new Section 8.1 would
address governance and oversight of stress testing, which is set forth
in a number of internal documents, and overseen by a stress testing
committee, the Management Risk Committee and the Risk Committee of the
Board of Directors of the Clearing Agencies. The new Section 8.2 would
describe the daily monitoring for threshold breaches and liquidity
shortfalls, and the escalations and actions that would follow those
breaches. More specifically, the Clearing Agencies monitor for breaches
of a ``Cover One Ratio,'' which is defined as the ratio of a family of
affiliated Members' deficiency over the total value of the applicable
Clearing Agencies' Clearing Fund or Participants Fund, excluding the
sum value of the applicable family's required deposit to the Clearing
Fund or Participants Fund, as applicable. With respect to liquidity
stress testing, the Clearing Agencies monitor daily for liquidity
shortfalls, which trigger a series of escalations and remediation
actions, which would be identified in this new Section 8.2.
The new Section 8.3 would address comprehensive analyses of stress
scenarios, which occur on at least a monthly basis. These analyses
include (1) daily stress testing results, model parameters, model
assumptions, and model performance, and (2) each stress scenario set
for its comprehensiveness and relevance, including any changes or
updates to such scenarios for the period. The new Section 8.4 would
address the escalations and reporting of the monthly analyses of stress
scenarios. Finally, the new Section 8.5 would address the regular
escalation of the results of stress testing, including any concerns
related to those results.
Each of these subsections would address stress testing related to
market risk, using language that is currently in the ST Framework, and
would include language to address liquidity stress testing that would
be substantially similar to the language removed from the LRM
Framework. Revisions to the language removed from the LRM
[[Page 71716]]
Framework would be primarily drafting revisions, as the Clearing
Agencies are not proposing changes to how they conduct liquidity stress
testing.\12\
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\12\ DTC Notice, supra note 3, 87 FR at 36192, 36193; FICC
Notice, supra note 3, 87 FR at 36185; NSCC Notice, supra note 3, 87
FR at 36160.
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In connection with the changes described above, the proposed
amendments would also reflect the recategorization of liquidity stress
scenarios. Previously, liquidity stress scenarios were categorized as
Level 1, 2 and 3 scenarios. Level 1 scenarios described qualifying
liquid resources under normal market conditions and were considered
``baseline'' scenarios. Level 2 scenarios assumed a wide range of
foreseeable stress scenarios that included, but were not limited to,
the default of the family of affiliated Members that would generate the
largest aggregate payment obligation for each Clearing Agency in
extreme but plausible market conditions. These scenarios were designed
to identify the qualifying liquid resources each Clearing Agency should
maintain to meet compliance with Rule 17Ad-22(e)(7)(i). Finally, the
Level 3 scenarios were divided into either (1) regulatory scenarios,
which were designed to meet the requirements of Rule 17Ad-
22(e)(7)(vi)(A), and (2) informational scenarios, which were designed
to be performed for informational and monitoring purposes using stress
scenarios that exceed the requirements of Rule 17Ad-
22(e)(7)(vi)(A).\13\
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\13\ Initial LRM Framework Order, supra note 7, 82 FR at 61619.
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The Clearing Agencies state that, while they continue to maintain a
wide range of stress scenarios that are designed to comply with the
requirements of Rules 17Ad-22(e)(7), in order to simplify the
descriptions of its liquidity stress scenarios and align them with the
categorization of market risk stress scenarios, the Clearing Agencies
have re-categorized the liquidity stress scenarios and eliminated the
Level 1, Level 2 and Level 3 categories. Instead, all stress scenarios
would be described in Section 6 of the ST Framework as being either (1)
regulatory stress scenarios, which are designed to comply with the
requirements of Rules 17Ad-22(e)(4)(i) and (vi)(A), and Rules 17Ad-
22(e)(7)(i) and (vi)(A); or (2) informational stress scenarios, which
may utilize parameters and assumptions that exceed the requirements of
Rules 17Ad-22(e)(4)(vi)(A) and (7)(vi)(A) and are utilized for
informational, analytical and/or monitoring purposes only. The Clearing
Agencies state that this proposed change is a change only to the
categorization of these stress scenarios and is not a change to how the
Clearing Agencies conduct liquidity stress testing or otherwise meet
the requirements of Rule 17Ad-22(e)(7)(vi)(A).\14\ Those revisions
regarding the categorization of the liquidity stress scenarios would be
reflected in Section 7 of the ST Framework.
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\14\ DTC Notice, supra note 3, 87 FR at 36194; FICC Notice,
supra note 3, 87 FR at 36184; NSCC Notice, supra note 3, 87 FR at
36160.
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C. Proposed Amendments to the ST Framework
The proposed changes would amend the ST Framework to (1)
incorporate the use of certain data utilized in stress testing from
external vendors and implement a back-up stress testing calculation
that would be utilized in the event such data is not supplied by its
vendors, similar to the process currently used at MBSD, which is
currently the case; (2) reflect that a stress testing team is primarily
responsible for the actions described in the ST Framework, and (3) make
other revisions to update and clarify the statements in the ST
Framework, as further described below.
1. Enhance GSD Stress Testing To Use Vendor-Sourced Data
First, the proposed changes would amend GSD stress testing to
utilize vendor-supplied historical risk factor time series data
(``Historical Data'') and vendor-supplied security-level risk
sensitivity data (``Security-Level Data'') in the stress testing
program. This proposed enhancement would be similar to the approach
utilized in MBSD stress testing.\15\
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\15\ See Securities Exchange Act Release No. 88382 (March 13,
2020), 85 FR 15830 (March 19, 2020) (SR-FICC-2020-801).
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The vendor-sourced Historical Data would include data regarding (1)
interest rate, (2) implied inflation rate, (3) agency spread, (4)
mortgage option adjusted spread, (5) interest rate volatility, and (6)
mortgage basis. The vendor-sourced Security-Level Data would include
data regarding (1) sensitivity to interest rates, (2) implied inflation
rate, (3) agency spread, (4) convexity, (5) sensitivity to mortgage
option adjusted spread, (6) sensitivity to interest rate volatility,
and (7) sensitivity to mortgage basis. FICC currently utilizes the
Historical Data and Security-Level Data in GSD's value-at-risk
(``VaR'') model, which calculates the VaR Charge component of GSD's
Clearing Fund (referred to in the GSD Rulebook as Required Fund
Deposit).\16\ FICC now proposes to use at GSD the data set currently
used in MBSD's stress testing program.
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\16\ GSD Rulebook, available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf.
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As described in greater detail in the ST Framework,\17\ stress
testing involves three key components: (1) risk identification, (2)
scenario development, which involves the construction of comprehensive
and relevant sets of extreme but plausible historical and hypothetical
stress scenarios; and (3) risk measurement and aggregation, in which
risk metrics are calculated to estimate the profits and losses in
connection with the hypothetical close out of a participant's portfolio
in certain stress scenarios.
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\17\ These key components of stress testing are also described
in the Initial ST Framework Filing. See supra note 6.
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FICC would utilize the vendor-sourced data in the development of
historical stress scenarios and in the risk measurement and aggregation
process of the GSD stress testing program. More specifically, the
Historical Data would be used to identify the largest historical
changes of risk factors that influence the pricing of product cleared
by GSD, in connection with the development of stress scenarios. The
vendor-sourced Historical Data would identify stress risk exposures
under broader and more varied market conditions than the data currently
available to FICC.
FICC would utilize both the Historical Data and the Security-Level
Data in the risk measurement and aggregation process of stress testing.
FICC believes that the vendor-sourced Security-Level Data is more
stable and robust than the data currently utilized by FICC for GSD
stress testing.\18\ Because the stress profits and losses calculation
that occur in connection with the risk measurement and aggregation
process in stress testing would include Security-Level Data, FICC
believes that the calculated results would be improved and would
reflect results that are closer to actual price changes for government
securities during larger market moves which are typical of stress
testing scenarios.\19\
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\18\ FICC Notice, supra note 3, 87 FR at 36185.
\19\ Id.
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Finally, the proposed changes to enhance GSD stress testing would
also implement a back-up calculation that GSD would utilize in the
event that the vendor fails to provide such data to GSD. Specifically,
if the vendor fails to provide any data or a significant portion of
data in accordance with the timeframes agreed to by FICC and the
vendor, FICC would use the most recently available data on the first
day that such disruption occurs in its stress
[[Page 71717]]
testing calculations. Subject to discussions with the vendor, if FICC
determines that the vendor would resume providing data within five (5)
Business Days, FICC would determine whether the daily stress testing
calculation should continue to be calculated by using the most recently
available data or whether the back-up calculation (as described below)
should be invoked. Subject to discussions with the vendor, if FICC
determines that the data disruption would extend beyond five (5)
Business Days, the back-up calculation would be employed for daily
stress testing, subject to appropriate internal governance.
The proposed back-up calculation would include the following
calculations: (1) calculate each Netting Member's portfolio net
exposures, (2) calculate the historical stress return, and (3)
calculate each Netting Member's stress profits and losses. FICC would
use publicly available indices as the data source for the stress return
calculations. This calculation would be referred to as the Back-up
Stress Testing Calculation in the ST Framework.
The Clearing Agencies would describe the use of vendor-sourced data
in stress testing for GSD and MBSD and the Back-up Stress Testing
Calculation, as described above, in a new Section 7.1 of the ST
Framework.
2. Identify the Stress Testing Team as Responsible for Stress Testing
As described above, stress testing for the Clearing Agencies is
primarily performed by the Stress Testing Team, which includes members
of both Market Risk Management and Liquidity Risk Management of DTCC
within GCRO. The Stress Testing Team took over stress testing
responsibilities related to liquidity risk management in late 2019 to
centralize stress testing and related responsibilities under one team.
Therefore, the Clearing Agencies are proposing to include a general
statement in Section 1 (Executive Summary) of the ST Framework that,
unless otherwise specified, actions in the ST Framework related to
stress testing are performed by the Stress Testing Team. The proposed
changes would also amend Section 3 (Framework Ownership and Change
Management) of the ST Framework to make it clear that the Stress
Testing Team owns and manages the ST Framework and is responsible for
reviewing the ST Framework no less frequently than annually.
In connection with this proposed change, the ST Framework would
also be updated to describe actions related to stress testing without
specifically identifying the group responsible for those actions. These
proposed changes would simplify the descriptions in the ST Framework,
while clarifying the team responsible for conducting these actions in a
general statement in the ST Framework.
3. Update and Clarify the ST Framework
Finally, the proposed changes would also make immaterial revisions
to update and clarify the ST Framework. For example, the proposed
changes would update the names of certain documents that support the ST
Framework to refer to the Clearing Agencies, rather than DTCC, in the
document titles. These documents were renamed to conform to internal
document naming conventions. The proposed changes would also amend
Section 2 (Glossary of Key Terms) of the ST Framework to clarify and
simplify the use of certain key terms. For example, the proposed
changes would move the definitions of ``Members'' and ``Participants''
from a footnote in Section 4 to Section 2, and would update the
definition of ``BRC,'' which refers to the Risk Committee of the Boards
of Directors of the Clearing Agency, to be more descriptive.
The proposed amendments would update Section 4 (Stress Testing
Requirements) of the ST Framework to (1) more clearly state which
requirements under Rules 17Ad-22(e)(4) and (7) are addressed in the ST
Framework, (2) identify the separate documents that describe the
requirements that are not addressed in the ST Framework, and (3)
identify the requirements that are not applicable to the Clearing
Agencies and, therefore, not described in any document.
In addition, the proposed change would also revise the description
of reverse stress testing to more clearly describe the goal and purpose
of this testing.\20\ Specifically, reverse stress testing is used to
identify tail risks by using extreme stress scenarios. In this way,
reverse stress testing, which is conducted semi-annually, can be used
to inform regular stress testing activities. The proposed changes would
provide more transparency into the purpose of reverse stress testing
conducted by the Clearing Agencies.
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\20\ Tail risk generally refers to risks of outcomes that are
caused by extreme or rare events.
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None of these proposed changes would make substantive revisions to
the ST Framework or reflect material changes to how the Clearing
Agencies conduct the activities described in the ST Framework but would
update and clarify those descriptions.\21\
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\21\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice,
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at
36161.
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D. Proposed Amendments To Update and Clarify the LRM Framework
In addition to removing descriptions of stress testing activities
from the LRM Framework, as described in section I.A above, the proposed
changes would also make immaterial revisions to update and clarify the
LRM Framework. For example, the proposed changes would update the name
of the team within the GCRO that is responsible for liquidity risk
management from the Liquidity Product Risk Unit, or LPRU, to Liquidity
Risk Management. This proposed change would reflect a recent
organizational change to the name of this group.\22\
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\22\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice,
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at
36161.
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Additionally, the proposed changes would update Section 10
(Liquidity Risk Tolerances) of the LRM Framework to state that an
officer in Liquidity Risk Management is responsible for reviewing the
Liquidity Risk Tolerance Statement.\23\ The LRM Framework currently
identifies the specific title of the individual who is responsible for
reviewing the Liquidity Risk Tolerance Statement on at least an annual
basis. The proposed change would provide the Clearing Agencies with
flexibility to change the title of the person responsible for this
review.\24\
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\23\ The Liquidity Risk Tolerance Statement is liquidity risk
management control that, among other things, (1) defines liquidity
risk and describes how liquidity risk would materialize for each
Clearing Agency specifically, (2) sets forth how liquidity risk is
monitored by the Clearing Agencies, and (3) describes the various
risk tolerance levels and thresholds for each Clearing Agency.
\24\ DTC Notice, supra note 3, 87 FR at 36195; FICC Notice,
supra note 3, 87 FR at 36186; NSCC Notice, supra note 3, 87 FR at
36161-62.
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E. Proposed Amendments to MBSD Rules To Remove Stress Testing
Descriptions
Finally, the proposed rule change would remove descriptions of
stress testing from the MBSD Rules, which would be duplicative of
statements added to the ST Framework, described above. The Clearing
Agencies do not believe that it is necessary to describe its stress
testing program in multiple places in its rules, and that duplicative
disclosures create a risk of inconsistencies. The ST Framework was
designed to, among other things, describe the manner in which the
Clearing Agencies test the sufficiency of their respective prefunded
financial
[[Page 71718]]
resources through stress testing and, therefore, the Clearing Agencies
believe this is the appropriate rule for these disclosures.\25\
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\25\ FICC Notice, supra note 3, 87 FR at 36186-87.
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As such, the proposed change would remove the duplicative
descriptions of the MBSD stress testing program from the MBSD Rules by
deleting the definition of ``Back-up Stress Testing Calculation'' from
MBSD Rule 1 and Section 13 of MBSD Rule 4. As described in section
II.C.1 above, the matters being removed from the MBSD Rules in this
proposal would be addressed in the ST Framework.
II. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act \26\ 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 rules and regulations thereunder applicable
to such organization. After carefully considering the Proposed Rule
Change, the Commission finds that the Proposed Rule Change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to FICC. In particular, the
Commission finds that the Proposed Rule Change is consistent with
Sections 17A(b)(3)(F) \27\ of the Act and Rule 17Ad-22(e)(4)
thereunder.\28\
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\26\ 15 U.S.C. 78s(b)(2)(C).
\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 17 CFR 240.17Ad-22(e)(4).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act \29\ requires the rules of a
clearing agency to, among other things, (i) promote the prompt and
accurate clearance and settlement of securities transactions, (ii)
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, and (iii) protect investors and the public interest.
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\29\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above in sections I.B, I.C.2, I.C.3, I.D, and I.E, the
proposed changes would (1) amend both the ST Framework and the LRM
Framework to move the descriptions of liquidity stress testing from the
LRM Framework to the ST Framework, as well as to simplify the
categorization of the liquidity stress scenarios; (2) amend the ST
Framework to reflect that the Stress Testing Team is primarily
responsible for stress testing activities; (3) update and clarify
descriptions within the ST Framework; (4) update and clarify
descriptions within the LRM Framework; and (5) remove certain
duplicative sections from the MBSD Rules, as described above. These
proposed changes should assist the Clearing Agencies in carrying out
their stress testing and liquidity risk management functions and
improve the clarity of the Frameworks in describing the Clearing
Agencies' processes and responsibilities. With respect to the ST
Framework, as described in sections I.B, I.C.2, and I.C.3, these
changes should help maintain the Clearing Agencies' ability to
determine and evaluate the credit risk presented by Clearing Agencies'
members by testing (i) the sufficiency of their credit resources in a
variety of extreme but plausible scenarios, and (ii) the potential
losses to the Clearing Agencies from a participant default. The
continued ability to evaluate credit risk could, in turn, enable the
Clearing Agencies to deploy their risk-management tools more
effectively to manage the credit and market presented by such members.
Through such preparation, the Framework could decrease the possibility
of a member default. By enabling the Clearing Agencies to use their
risk-management tools to monitor its credit and market more
effectively, the proposed amendments to the ST Framework are designed
to help mitigate the risk that the Clearing Agencies and their non-
defaulting members would suffer a loss from a member default.
Similarly, with respect to the LRM Framework, as described in
sections I.D, these changes should help continue the Clearing Agencies'
ability to carry out its liquidity risk management strategy such that,
with respect to FICC and NSCC, they maintain liquid resources
sufficient to meet the potential amount of funding required to settle
outstanding transactions of a defaulting participant or family of
affiliated participants in a timely manner, and with respect to DTC, it
maintains sufficient available liquid resources to complete system-wide
settlement on each business day, with a high degree of confidence and
notwithstanding the failure to settle of the participant or affiliated
family of participants with the largest settlement obligation. As such,
the Clearing Agencies' liquidity risk management strategies address the
Clearing Agencies' maintenance of sufficient liquid resources, which
allow them to continue the prompt and accurate clearance and settlement
of securities and can continue to assure the safeguarding of securities
and funds which are in their custody or control or for which they are
responsible notwithstanding the default of a participant or family of
affiliated participants.
In addition, moving the description of the Clearing Agencies'
liquidity stress testing activities into the ST Framework, the proposed
change should create a description of the Clearing Agencies' collective
stress testing activities in one place. Moreover, based on its review
of the Proposed Rule Changes and its supervisory knowledge, the
Commission understands that the Clearing Agencies are not amending
their stress testing program in a substantive manner, but instead are
reorganizing the stress testing scenarios and Frameworks to avoid
duplication and confusion.
Therefore, the Commission finds that the proposed rule changes are
designed to help promote prompt and accurate clearance and settlement,
and assure the safeguarding of securities and funds which are in the
custody or control of the Clearing Agencies or for which they are
responsible, consistent with Section 17A(b)(3)(F) of the Act.\30\
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\30\ 15 U.S.C. 78q-1(b)(3)(F).
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Second, as described in Section I.C.1, FICC proposes to use vendor-
supplied data in GSD's stress testing program. The Commission believes
that vendor-supplied data should allow FICC to identify and analyze
risk exposures under a broad and varied range of stressed market
conditions, which should, in turn, help FICC identify the amount of
financial resources necessary to cover its credit exposure under stress
scenarios in extreme but plausible market conditions. The Commission
further believes that the use of vendor-supplied data should enable
FICC to perform a robust assessment of the stress profits and losses
calculation, identify and address potential risks with respect to
specific Clearing Members and their affiliates, and in turn, should
help FICC ensure that it is collecting adequate prefunded financial
resources to cover its potential losses resulting from the default of
clearing members and their affiliates under extreme but plausible
market conditions.
Moreover, as also described in Section I.C.1., FICC proposes to use
a back-up calculation for the GSD stress testing program in the event
the vendor fails to provide FICC with the vendor-sourced data. The
Commission believes that the back-up calculation is designed to provide
FICC with a reasonable alternative method for calculating stress
profit-and-loss in the event of an interruption in the vendor-sourced
data feed. By providing FICC with a reasonable alternative method for
conducting stress testing, the
[[Page 71719]]
Commission believes that the proposed back-up calculation is designed
to help FICC avoid gaps in assessing the sufficiency of its prefunded
financial resources due to the inability to access the vendor-sourced
data.
Taken together, the Commission believes that these aspects of the
proposed rule change, as described in section I.C.1, should better
enable FICC to evaluate and manage the credit risk presented by its
Clearing Members. The Commission believes that the proposed rule change
is designed to improve FICC's ability to establish, implement, maintain
and enforce written policies and procedures reasonably designed to
maintain sufficient prefunded financial resources that, at a minimum,
enable FICC to cover the default of the Clearing Member (including
relevant affiliates) that would potentially cause the largest aggregate
credit exposure for FICC in extreme but plausible conditions, as
required under Rule 17Ad-22(e)(4)(iii).\31\ Accordingly, the Commission
believes that the proposed rule change should help FICC to continue
providing prompt and accurate clearance and settlement of securities
transactions even in extreme but plausible historical and hypothetical
stress scenarios, consistent with Section 17A(b)(3)(F) of the Act.\32\
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\31\ 17 CFR 240.17Ad-22(e)(4).
\32\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(iii) and (vi)
Rule 17Ad-22(e)(4)(iii) requires, in part, each covered clearing
agency 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, 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 participant family that would
potentially cause the largest aggregate credit exposure for the covered
clearing agency in extreme but plausible market conditions.\33\ Rule
17Ad-22(e)(4)(vi) requires, in part, each covered clearing agency to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes, by testing the sufficiency of its total financial
resources available by conducting stress testing of its total financial
resources once each day using standard predetermined parameters and
assumptions.\34\
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\33\ 17 CFR 240.17Ad-22(e)(4)(iii).
\34\ 17 CFR 240.17Ad-22(e)(4)(vi).
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As described above in Section I.C.1, FICC proposes to change its
stress testing methodology to use vendor-supplied data in the GSD
stress testing program and to incorporate a back-up calculation that it
would utilize in the event of an interruption in the availability of
that data. Taken together, these changes should allow FICC to identify
and analyze risk exposures under a broader range of stressed market
conditions covering a longer time period, which should, in turn, help
FICC identify the amount of financial resources necessary to cover its
credit exposure under stress scenarios in extreme but plausible market
conditions.
Accordingly, the Commission believes that FICC's proposed
amendments to the ST Framework with respect to the GSD stress testing
program set forth in section I.C.1 are consistent with Rule 17Ad-
22(e)(4)(iii) because it should better enable FICC to assess its
ability to maintain sufficient financial resources to cover a wide
range of foreseeable stress scenarios that include the default of the
member (including relevant affiliates) that would potentially cause
FICC's largest aggregate credit exposure in extreme but plausible
conditions.\35\ Additionally, the Commission believes FICC's proposed
amendments to the ST Framework set forth in section I.C.1 are
consistent with Rule 17Ad-22(e)(4)(vi) because it should enable FICC to
test the sufficiency of its minimum financial resources by conducting
stress testing using standard predetermined parameters and
assumptions.\36\
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\35\ See 17 CFR 240.17Ad-22(e)(4)(iii).
\36\ See 17 CFR 240.17Ad-22(e)(4)(vi).
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V. Conclusion
On the basis of the foregoing, the Commission finds that the
Proposed Rule Changes are consistent with the requirements of the Act
and in particular with the requirements of Section 17A of the Act \37\
and the rules and regulations promulgated thereunder.
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\37\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act
\38\ that proposed rule changes SR-DTC-2022-006, SR-FICC-2022-004, and
SR-NSCC-2022-006, be, and hereby are, approved.\39\
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\38\ 15 U.S.C. 78s(b)(2).
\39\ In approving the proposed rule change, the Commission
considered the proposals' 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.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-25474 Filed 11-22-22; 8:45 am]
BILLING CODE 8011-01-P
</pre></body>
</html>Indexed from Federal Register on November 23, 2022.
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