Notice2023-17860
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice of Filing of Proposed Rule Change Relating to Amendments to the Model Risk Policy
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Published
August 21, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 160 (Monday, August 21, 2023)</title>
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[Federal Register Volume 88, Number 160 (Monday, August 21, 2023)]
[Notices]
[Pages 56901-56903]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-17860]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98138; File No. SR-ICEEU-2023-019]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change Relating to Amendments to the Model
Risk Policy
August 15, 2023.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 4, 2023, ICE Clear Europe Limited (``ICE Clear Europe'' or
the ``Clearing House'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule changes described in
Items I, II and III below, which Items have been prepared primarily by
ICE Clear Europe. 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
ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing
House'') proposes to modify its Model Risk Governance Framework (to be
renamed the Model Risk Policy) (the ``Model Risk Policy'' or the
``Policy'') \3\ to make certain enhancements to the Clearing House's
current policy and practices as they pertain to model and parameter
risks.
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\3\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules and the
Policy.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICE Clear Europe included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. ICE Clear Europe has prepared summaries,
set forth in sections (A), (B), and (C) below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICE Clear Europe is proposing to amend its Model Risk Governance
Framework (to be renamed the Model Risk Policy) to expand its current
scope to include certain risk frameworks and to distinguish between
``Business As Usual'' (``BAU'') and non-BAU parameter changes, among
other changes discussed herein.
The amendments would expand the scope of the Policy to include risk
frameworks used to quantify, aggregate and manage the risks of the
Clearing House. The amendments would further clarify that references to
``model'' in the rest of the document would refer to both models and
risk frameworks. The discussion of the architecture supporting the
Policy would be revised to also include guidelines for the remediation
of validation findings relating to models.
The amendments would also state that changes to risk parameters
would be categorized as significant and not significant. This would
follow the same categorization under the existing Policy with respect
to model changes. A footnote referencing a specific ESMA opinion as
providing the criteria defining model change significance would be
revised to state more generally that the criteria will be in accordance
with prevailing regulatory opinions, guidelines or requirements (in
order to take into account any other regulatory positions that may be
in effect from time to time). Moreover, the changes to parameters would
be categorized as Business as Usual (``BAU'') and Non-BAU. Changes
considered BAU would be defined as changes in the parameters resulting
from the application of existing methodologies as part of a regular
review or calibration exercise. Non-BAU changes would be all other
changes. The amendments would clarify that the definition of BAU would
be in accordance with existing regulatory guidelines.
The amendments would also clarify certain governance
responsibilities. The Board would be responsible for the approval of
significant non-BAU changes to risk parameters. Auto Pilot versus
Production deviations beyond BAU thresholds will generally follow a
similar governance process to that for changes in parameters but given
that these deviations are usually time sensitive and driven by stressed
market conditions, the Clearing House will need the ability to act
quickly to ensure market stability. Thus, for these situations the
governance process will involve Board notification rather than Board
pre-approval and Risk Oversight Department review rather than full
independent pre-validation. The Model Oversight Committee would be
responsible for establishing and maintaining a model inventory and
assigning a specific owner to each model (a function currently
performed by the First Line). The Model Oversight Committee would also
be responsible for approving non-significant non-BAU changes to risk
parameters and for reviewing significant non-BAU changes to risk
parameters for recommendation to the Board. In addition, the committee
would be responsible for approving changes to model documentation.
The First Line responsibilities would also be modified by the
amendments. As noted above, the First Line would no longer be
responsible for establishing and maintaining a model inventory and
assigning a specific owner to each model as that responsibility would
be moved to the Model Oversight Committee. The First Line would be
responsible for proposing and seeking approval for non-BAU changes to
risk parameters (as it currently does for models, model changes, and
model retirements). Similarly, the First Line
[[Page 56902]]
would also be responsible for proposing significance levels for non-BAU
changes to risk parameters. The Second Line would be responsible for
performing independent validation exercises for non-BAU changes to risk
parameters (as it currently does for models).
Finally, a new sub-section would be added addressing Non-BAU
parameter changes. The section would provide that significant non-BAU
changes to risk parameters must be validated before they are
implemented in production. Non-significant non-BAU changes must be
validated in accordance with the validation pipeline.
A number of other drafting clarifications and conforming changes
replacing the references to ``Framework'' with ``Policy'' would also be
made throughout the document.
(b) Statutory Basis
ICE Clear Europe believes that the proposed amendments to the
Policy are consistent with the requirements of Section 17A of the
Securities Exchange Act of 1934 (the ``Act'') \4\ and the regulations
thereunder applicable to it. In particular, Section 17A(b)(3)(F) of the
Act \5\ requires, among other things, that the rules of a clearing
agency be designed to promote the prompt and accurate clearance and
settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions, the safeguarding of
securities and funds in the custody or control of the clearing agency
or for which it is responsible, and the protection of investors and the
public interest.
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\4\ 15 U.S.C. 78q-1.
\5\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed changes to the Policy are designed to facilitate the
risk management and governance of risk frameworks in a similar manner
to that for models under the existing framework. The processes,
controls and escalations used by the Clearing House with respect to the
testing and reviewing of models, as well the responsibilities of the
Clearing House's committees, management and the Board in relation to
the models would thus be applied to risk frameworks. The amendments
provide additional procedures for the management of risk parameter
changes, distinguishing between BAU and non-BAU (which are subject to
additional review and governance requirements). The Clearing House
believes these changes will further overall risk management at the
Clearing House, which would in turn promote the stability of the
Clearing House and the prompt and accurate clearance and settlement of
cleared contracts. The enhanced Policy is therefore also generally
consistent with the protection of investors and the public interest in
the safe operation of the Clearing House. (ICE Clear Europe would not
expect the amendments to affect the safeguarding of securities and
funds in ICE Clear Europe's custody or control or for which it is
responsible.) Accordingly, the amendments satisfy the requirements of
Section 17A(b)(3)(F).\6\
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments to the Policy are also consistent with relevant
provisions of Rule 17Ad-22.\7\ Rule 17Ad-22(e)(3)(i) provides that
``[e]ach covered clearing agency shall establish, implement, maintain
and enforce written policies and procedures reasonable designed to, as
applicable [. . .] identify, measure, monitor, and manage the range of
risks that arise in or are borne by the covered clearing agency''.\8\
The amendments to the Policy are intended to expand the considerations
of the existing model governance framework to apply to risk frameworks
as well as models and to distinguish BAU and non-BAU changes to risk
parameters for purposes of ongoing review and oversight. The expanded
scope of the Policy will, in ICE Clear Europe's view, assist the
Clearing House in the ongoing review and oversight of the models and
frameworks it uses in the operation of the Clearing House, and the
management of the risks that may arise from the use of such models and
frameworks. The amendments would thus strengthen the overall risk
management of the Clearing House. In ICE Clear Europe's view, the
amendments are therefore consistent with the requirements of Rule 17Ad-
22(e)(3)(i).\9\
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\7\ 17 CFR 240.17 Ad-22.
\8\ 17 CFR 240.17 Ad-22(e)(3)(i).
\9\ 17 CFR 240.17 Ad-22(e)(3)(i).
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Rule 17Ad-22(b)(4) provides ``[a] registered clearing agency that
performs central counterparty services shall establish, implement,
maintain and enforce written policies and procedures reasonably
designed to [. . .] [p]rovide for an annual model validation consisting
of evaluating the performance of the clearing agency's margin models
and the related parameters and assumptions associated with such models
by a qualified person who is free from influence from the persons
responsible for the development or operation of the models being
validated''.\10\ The amendments add non-BAU changes to risk parameters
but do not otherwise change the Policy's or Clearing House's practice
in reviewing and validating models. Under the Policy, the First Line
would still be responsible for development and operation of the models,
while the Risk Oversight Department (as part of the Second Line) is
responsible for performing independent validation exercises for the new
models, model changes and non-BAU changes to risk parameters. The Risk
Oversight Committee would also oversee independent validation exercises
performed by external validators. In ICE Clear Europe's view, the
amendments are therefore consistent with Rule 17Ad-22(b)(4).\11\
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\10\ 17 CFR 240.17Ad-22(b)(4).
\11\ 17 CFR 240.17Ad-22(b)(4).
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Rules 17Ad-22(e)(4)(vii) provides ``[e]ach covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonably designed to, as applicable [. . .] [e]ffectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes, including by [. . .] [p]erforming a model
validation for its credit risk models not less than annually or more
frequently as may be contemplated by the covered clearing agency's risk
management framework established [. . .]'' \12\ and 17Ad-22(e)(6)(vii)
provides ``[e]ach covered clearing agency shall establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable [. . .] [c]over, if the covered clearing
agency provides central counterparty services, its credit exposures to
its participants by establishing a risk-based margin system that, at a
minimum [. . .] [r]equires a model validation for the covered clearing
agency's margin system and related models to be performed not less than
annually, or more frequently as may be contemplated by the covered
clearing agency's risk management framework [. . .]''.\13\ The
amendments to the Policy expand the current scope to include risk
frameworks and do not otherwise change ICE Clear Europe's model
validation cycles. As per the Policy and the Clearing House's current
practice, the validation pipeline would still include annual validation
cycles. In ICE Clear Europe's view, the amendments are therefore
consistent with Rules 17Ad-22(e)(4)(vii) \14\ and 17Ad-
22(e)(6)(vii).\15\
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\12\ 17 CFR 240.17Ad-22(e)(4)(vii).
\13\ 17 CFR 240.17Ad-22(e)(6)(vii).
\14\ 17 CFR 240.17Ad-22(e)(4)(vii).
\15\ 17 CFR 240.17Ad-22(e)(6)(vii).
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[[Page 56903]]
Rule 17Ad-22(e)(2) provides that ``[e]ach covered clearing agency
shall establish, implement, maintain and enforce written policies and
procedures reasonable designed to, as applicable [. . .] provide for
governance arrangements that are clear and transparent'' \16\ and
``[s]pecify clear and direct lines of responsibility''.\17\ The
amendments to the Policy would extend the existing responsibilities of
the Clearing House's committees, management and the Board with respect
to models to also apply to risk frameworks. The amendments would also
clarify certain responsibilities of the Board and other relevant
committees and personnel as they relate to BAU and Non-BAU changes to
risk parameters. In ICE Clear Europe's view, the amendments are
therefore consistent with the requirements of Rule 17Ad-22(e)(2).\18\
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\16\ 17 CFR 240.17 Ad-22(e)(2)(i).
\17\ 17 CFR 240.17 Ad-22(e)(2)(v).
\18\ 17 CFR 240.17 Ad-22(e)(2).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the proposed amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The amendments
are being adopted to update and expand the Clearing House's Model Risk
Policy, which relate to the Clearing House's internal processes for
model and risk framework review, and overall risk management. The
amendments will not change the Clearing House Rules or Procedures and
will not change the rights or obligations of the Clearing House or
Clearing Members. ICE Clear Europe does not believe the amendments and
adoption would affect the costs of clearing, the ability of market
participants to access clearing, or the market for clearing services
generally. Therefore, ICE Clear Europe does not believe the proposed
rule change imposes any burden on competition that is inappropriate in
furtherance of the purposes of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed amendments have not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any written comments received with respect to the
proposed rule change.
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="https://www.sec.gov/rules/sro.shtml">https://www.sec.gov/rules/sro.shtml</a>) or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#3d4f485158105e5250505853494e7d4e585e135a524b"><span class="__cf_email__" data-cfemail="86f4f3eae3abe5e9ebebe3e8f2f5c6f5e3e5a8e1e9f0">[email protected]</span></a>. Please include
File Number SR-ICEEU-2023-019 on the subject line.
Paper Comments
<bullet> Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICEEU-2023-019. 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="https://www.sec.gov/rules/sro.shtml">https://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
a.m. and 3 p.m. Copies of such filings will also be available for
inspection and copying at the principal office of ICE Clear Europe and
on ICE Clear Europe's website at <a href="https://www.ice.com/clear-europe/regulation">https://www.ice.com/clear-europe/regulation</a>.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-ICEEU-2023-019 and
should be submitted on or before September 11, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17860 Filed 8-18-23; 8:45 am]
BILLING CODE 8011-01-P
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