Notice2022-28195
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving 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
December 28, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 248 (Wednesday, December 28, 2022)</title>
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[Federal Register Volume 87, Number 248 (Wednesday, December 28, 2022)]
[Notices]
[Pages 79922-79924]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-28195]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96557; File No. SR-ICC-2022-013]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Collateral Risk
Management Framework, ICC Treasury Operations Policies and Procedures,
and ICC Liquidity Risk Management Framework
December 21, 2022.
I. Introduction
On October 24, 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 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
formalize the Collateral Risk Management Framework (``CRMF'') and to
amend both its Treasury Operations Policies and Procedures (``Treasury
Policy'') and its Liquidity Risk Management Framework (``LRMF''). The
proposed rule change was published for comment in the Federal Register
on November 10, 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 ICC Collateral
Risk Management Framework, ICC Treasury Options Policies and
Procedures, and the ICC Liquidity Risk Management Framework;
Exchange Act Release No. 96237 (Nov. 4, 2022); 87 FR 67982 (Nov. 10,
2022) (File No. SR-ICC-2022-013) (``Notice'').
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II. Description of the Proposed Rule Change
Background
ICC's Clearing Participants provide collateral to ICC to satisfy
their margin and Guaranty Fund requirements. To manage the risk
associated with fluctuations in the value of this collateral, ICC
applies haircuts to the collateral that it accepts. These haircuts
reduce the value of the collateral for ICC's risk management purposes.
Overall, the haircuts are designed to account for potential decline in
asset liquidation value during stressed market conditions. The CRMF
would describe, in a quantitative manner, how ICC derives the
collateral haircuts.
The overall purpose of the proposed rule change is to move the
CRMF, the substance of which is currently found in Appendix 6 to
Treasury Policy, into a separate, standalone document. Making the CRMF
a separate, standalone document would allow ICC to treat the CRMF as a
separate risk management model, subject to review and validation like
ICC's other risk management models.
To accomplish this objective, the proposed rule change would: (i)
delete Appendix 6 to the Treasury Policy; (ii) move the substance of
the information found in Appendix 6 to a standalone document entitled
the CRMF; and (iii) update references in the Treasury Policy and LRMF
to refer to the CRMF, rather than Appendix 6 to the Treasury Policy.
The changes are discussed for each of the Treasury Policy, CRMF, and
LRMF as follows.
Treasury Policy
As discussed above, Appendix 6 to the Treasury Policy currently has
information that the proposed rule change would move into the CRMF.
Thus the proposed rule change would first delete Appendix 6 from the
Treasury Policy and would move this information to the CRMF (as
discussed below).
CRMF
The CRMF would describe, in a quantitative manner, how ICC derives
collateral haircuts, which ICC uses to manage the risk of fluctuations
in the prices of collateral posted by Clearing Participants. As
discussed above, the CRMF would include the substance of
[[Page 79923]]
the information that is currently found in Appendix 6 of the Treasury
Policy.\4\ The proposed rule change would move this information into
Sections I and III of the CRMF, with minor updates to reflect the re-
formatting of the CRMF as a standalone document.
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\4\ See Notice, 87 FR 67982 at 67983 (detailing where components
of Appendix 6 to the Treasury Policy would be relocated to within
the CRMP).
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In addition to this information from Appendix 6 of the Treasury
Policy, the CRMF would include other information related to collateral
risk management that is not currently found in Appendix 6. For example,
Section IV would contain examples of how ICC would apply the
methodology set out in the CRMF to arrive at haircuts for various types
of collateral. Section V would present a list of referenced
publications, which is also information not currently found in Appendix
6.
Because the CRMF would contain additional information that is not
currently found in Appendix 6, and because the Commission is approving
the CRMF as a separate document for the first time, the CRMF is
described in its entirety as follows.
The CRMF is divided into six sections. Section I describes in
general how ICC computes collateral haircuts. To compute collateral
haircuts, ICC estimates both the 5-day 99% expected shortfall and the
2-day 99.9% Value-at-Risk, using the same time series. Of the two, ICC
chooses the more conservative risk measure to establish the haircut
factors that capture potential collateral value losses.
Section I further contains three subsections. Subsections I.a and
I.b describe in more detail how ICC derives haircuts for collateral
that is denominated in foreign currencies and for collateral that is
sovereign debt. Subsection I.a describes a two-stage approach to
account for the risk associated with fluctuations of collateral asset
prices denominated in foreign currencies and the corresponding time
series is used for collateral denominated in foreign currencies.\5\
Subsection I.b describes how the fluctuations of the time to maturity
yield rates are considered and how its corresponding time series are
used for sovereign debt collateral. Subsection I.c describes how ICC
arrives at a final haircut value, a process which includes rounding up
to ensure stability and conservative bias.
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\5\ Id.
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Section II details one of the main components ICC's collateral risk
model: the distribution that describes the realizations of the risk
factor that in turn determines the price of a particular item of
collateral.\6\ For example, as is described in the CRMF, for FX
markets, the actual FX rate is the determining risk factor, whereas for
government bonds the determining risk factor is the implied yield.
Section II in turn has five subsections that further describe the model
framework and this distribution.
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\6\ See Notice, 87 FR 67982 at 67983.
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Subsection II.a details certain distribution assumptions
appropriate for foreign exchange (``FX'') and fixed income (``FI'')
assets on which the haircut methodology is based. Subsection II.b
describes how parameter estimates are obtained and used to compute
multi-day risk measures. Subsection II.c details how the variability of
a risk factor is described for risk management purposes and presents
the selected measure of variability for all considered time series.
Subsection II.d portrays multi-period forecasting, which includes the
analysis that is performed to extend one-day forecasts to multi-period
forecasts. Subsection II.e details the methods to obtain risk measures
that are used for haircut purposes.
Section III describes governance procedures relevant to the CRMF as
well as a summary of the associated governance process. Upon the daily
executions of collateral haircut factors, the Risk Department reviews
the results, which are updated no less than monthly and the ICC Chief
Risk Officer (``CRO'') has the discretion to update the haircut factors
more often. The Risk Department would also conduct back-testing, at
least quarterly, to review the statistical performance of the
collateral haircut model. If the back-testing results show exceedances
beyond the more conservative risk measure, then ICC's CRO and Risk
Oversight Officer will determine whether to trigger subsequent remedial
steps and consultations.
Section IV provides examples of the application of the methodology
to FX and FI instruments. Overall these examples demonstrate the
viability of the provide examples of the modeling approaches to various
assets. Each of the examples documents a three-stage approach to
estimate risk measures and corresponding haircut factors.
The final two sections, Section V and Section VI, provide
referential background related to the document itself. Section V has a
list of references and Section VI adds a revision history.
LRMF
The LRMF changes would be the most minor of the changes of the
three policies subject to this rule change. More specifically, instead
of referencing the Treasury Policy Appendix 6, the amended LRMF would
reference the CRMF.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\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 Rules 17Ad-22(e)(2)(i), 17Ad-22(e)(2)(v), and 17Ad-
22(e)(5) 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)(2)(i), (e)(2)(v), and (e)(5).
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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.\10\ Based on its
review of the record, and for the reasons discussed below, the
Commission believes the proposed rule change is consistent with the
promotion of the prompt and accurate clearance and settlement of
securities transactions at ICC because it would promote transparency
and effective operation of the collateral assets risk management model.
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that unifying information on ICC's
collateral assets risk management methodology in one document with more
detail will improve transparency while promoting effective operation of
the model. The CRMF would include information from Appendix 6 of the
Treasury Policy but also would expand on it. Duplicative information
would be removed from the Treasury Policy and references in the
Treasury Policy and the LRMF would be updated to the CRMF as needed.
Additional information would be provided regarding the collateral
assets risk management model and methodology that would facilitate
replication and validation by third parties. Additional information
would be included on relevant parameters, computations, equations,
definitions, and figures to describe relevant processes, which the
Commission believes would help ensure responsible parties effectively
complete their
[[Page 79924]]
assigned duties. The Commission believes that the proposed
clarifications to ICC's rules would improve transparency and
readability by avoiding unnecessary repetition and duplication in the
Treasury Policy, which could help avoid confusion and potential future
inconsistencies between policies. The Commission therefore believes
that, by unifying and expanding the detail in the CRMF for the
collateral assets risk management methodology in the CRMF, the proposed
rule change would promote the prompt and accurate clearance and
settlement of securities transactions, 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)(2)(i) and (v)
Rules 17Ad-22(e)(2)(i) and (v) \12\ require 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. As discussed above, 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. The Commission therefore believes the proposed rule change
should help 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).\13\
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\12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\13\ Id.
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C. Consistency With Rule 17Ad-22(e)(5)
Rule 17Ad-22(e)(5) \14\ 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's proposed changes would not change which assets it
accepts as collateral. In addition to ICC's existing collateral
requirements, the CRMF would provide a framework for setting and
enforcing collateral haircuts. The Commission believes the additional
procedures defined in Section III of the CRMF would help 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 at least monthly
whether it will made any updates to collateral haircuts. Haircut
factors can be updated more frequently at the discretion of the CRO or
designee. The Commission therefore finds the proposed rule change is
consistent with Rule 17Ad-22(e)(5).\15\
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\14\ 17 CFR 240.17Ad-22(e)(5).
\15\ Id.
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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 \16\ and Rules 17Ad-22(e)(2)(i) and (v) and 17Ad-22(e)(5)
thereunder.\17\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(2)(v), and (e)(5).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\18\ that the proposed rule change (SR-ICC-2022-013), be, and hereby
is, approved.\19\
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\18\ 15 U.S.C. 78s(b)(2).
\19\ 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).
\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-28195 Filed 12-27-22; 8:45 am]
BILLING CODE 8011-01-P
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