Notice2023-21340
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the Stress Testing Framework
Primary source
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Published
September 29, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 188 (Friday, September 29, 2023)</title>
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[Federal Register Volume 88, Number 188 (Friday, September 29, 2023)]
[Notices]
[Pages 67405-67407]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21340]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98496; File No. SR-ICC-2023-012]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the Stress Testing Framework
September 25, 2023.
I. Introduction
On August 8, 2023, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\
and Rule 19b-4 thereunder,\2\ a proposed rule change to update its
Stress Testing Framework (``STF''). The proposed rule change was
published for comment in the Federal Register on August 21, 2023.\3\
The Commission did not receive comments regarding the proposed rule
change. For the reasons discussed below, the Commission is approving
the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change Relating to the Stress Testing
Framework; Exchange Act Release No. 98140 (Aug. 15, 2023); 88 FR
56899 (Aug. 21, 2023) (File No. SR-ICC-2023-012) (``Notice'').
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II. Description of the Proposed Rule Change
ICC is registered with the Commission as a clearing agency for the
purpose of clearing credit default swap (``CDS'') contracts. ICC clears
CDS contracts for its members, which it refers to as Clearing
Participants.\4\ Clearing CDS contracts for Clearing Participants
presents certain risks to ICC, such as exposure to systemic risk, which
may include, but is not limited to, historic and current market
volatility, and fluctuating interest rates. ICC measures and attempts
to protect against such systemic risk by performing stress tests and,
at times, adjusting the parameters underlying these stress-testing
scenarios.
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\4\ Capitalized terms not otherwise defined herein have the
meanings assigned to them in ICC's Clearing Rules.
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This proposed rule change aims to update two parameters
incorporated into several of ICC's stress-testing scenarios. The
parameters relate to the interest rate sensitivity analysis applied to
two sets of historically observed, extreme but plausible market
scenarios described in ICC's STF, and measure the magnitude of interest
rate shocks during the applicable stressed periods used to estimate
average haircut values of certain government securities. In particular,
ICC proposes to change the stress period of the default-free Euro
discount interest rate curve used in ICC's interest rate sensitivity
analysis and revise the description of the credit crisis period for the
default-free U.S. Dollar discount interest rate curve.
Currently under the STF, Section 11, which describes ICC's interest
rate sensitivity analysis, incorporates two currency-specific stress
test parallel shifts (i.e., up and down) of the default-free discount
interest rate for both CDS and CDS Index Options instruments. The
magnitude of the interest rate stress scenarios reflects the largest
shock, estimated using the collateral haircut model, during a selected
stress period for the applicable sovereign debt. The current stress
period of the default-free Euro discount interest rate curve references
the ``western European credit'' crisis period and specifies exact start
and end dates between 2011 and 2012. The selected stress periods listed
in Section 11 are subject to periodic review. Following such a review,
ICC proposes to update the stress period used to shock the Euro
default-free discount interest rate by replacing the current language
with ``2022/2023 inflation'' crisis period and not specifying start and
end dates.
ICC states that changing the stress period of the default-free Euro
discount interest rate curve would more accurately reflect the current
volatile interest rate period, which began in 2022 and continues into
2023 due to the fast pace of U.S. Dollar and Euro interest rate
increases.\5\ According to ICC, the impact to the Euro interest rate
volatility has been significant because of the sudden and rapid
increases in Euro interest rates by the European Central Bank in an
effort to curb multi-decade high inflation.\6\ ICC indicates that the
interest rate volatility observed during the ongoing ``2022/2023
inflation'' crisis period is greater than that observed during the
2011-2012 ``western European credit'' crisis period currently listed in
the STF because the collateral haircuts observed in 2022-2023 exceed
those detected in 2011-2012.\7\ ICC has
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set an internal start date for the ``2022/2023 inflation'' crisis
period. However, as the 2022-2023 period of volatility remains ongoing,
ICC states that it will continue to monitor interest rate volatility
for any new volatility peak observed in the current ``2022/2023
inflation'' crisis period for the default-free Euro discount interest
curve.
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\5\ Notice, at 56899.
\6\ Id.
\7\ Id.
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Additionally, ICC proposes to make an analogous clarifying language
change to the identification of the default-free U.S. Dollar discount
interest rate curve in Section 11 of the STF. Specifically, the
proposed change would remove the exact start and end dates of the
credit crisis period from Section 11 and replace them with the
description written as the ``2008/2009'' credit crisis period. The
exact start and end dates of the ``2008/2009'' credit crisis period are
listed in Section 5 of STF and would remain unchanged. This proposed
rule change would not alter the time span or affect any other
characteristic of the parameter covering the ``2008/2009'' credit
crisis period for the default-free U.S. Dollar discount interest rate
curve.
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.\8\ For the reasons discussed below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \9\ and Rule 17Ad-22(e)(4)(ii) and (vi) thereunder.\10\
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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The proposed rule change would update the period covering the
default-free Euro discount interest curve, which is part of the
interest rate sensitivity analysis applied to several of ICC's stress-
testing scenarios in its STF. Specifically, the proposed 2022/2023
inflation crisis period, which is ongoing, has exhibited greater
interest rate volatility than that observed during the 2011-2012
western European credit crisis period. The Commission believes that
this proposed rule change would provide a more accurate magnitude of
the largest shock to the applicable sovereign debt used as part of the
parameters underlying ICC's stress scenarios. Recalibrating the
magnitude of the largest shock would enhance ICC's ability to identify
and measure the risk of a credit exposure to defaulting Clearing
Participants, which should, in turn, increase the likelihood that ICC
calculates and collects sufficient financial resources to mitigate this
potential exposure and enhance ICC's ability to manage a default by
continuing to promptly and accurately clear and settle securities
transactions.
Additionally, ICC's proposal to streamline the description of the
2008/2009 credit crisis period applicable to the default-free U.S.
dollar interest rate curve would provide consistency to the language
relevant to the interest rate sensitivity analysis in the STF. This, in
turn, would assist in facilitating the execution of the various stress
tests, thus helping to ensure the adequacy of systemic risk protections
through appropriate financial resource collection during a Clearing
Participant default, and promoting the prompt and accurate clearance
and settlement of securities transactions.
For these reasons, the Commission believes the proposed rule
changes are consistent with Section 17A(b)(3)(F) of the Act.\12\
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\12\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(ii) and (vi)
Rule 17Ad-22(e)(4)(ii) requires ICC to establish, implement,
maintain, and enforce written policies and procedures reasonably
designed, as applicable, to effectively identify, measure, monitor, and
manage its credit exposures to participants and those arising from its
payment, clearing, and settlement processes, including by maintaining
additional financial resources at the minimum to enable it to cover a
wide range of foreseeable stress scenarios that include, but are not
limited to, the default of the two participant families that would
potentially cause the largest aggregate credit exposure for ICC in
extreme but plausible market conditions.\13\ Rule 17Ad-22(e)(4)(vi)
\14\ requires ICC to establish, implement, maintain, and enforce
written policies and procedures reasonably designed, as applicable, to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes, including by testing the sufficiency of its total
financial resources available to meet the minimum financial resource
requirements of Rule 17Ad-22(e)(4)(ii).\15\
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\13\ 17 CFR 240.17Ad-22(e)(4)(ii).
\14\ 17 CFR 240.17Ad-22(e)(4)(vi).
\15\ 17 CFR 240.17Ad-22(e)(4)(ii).
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The Commission believes that replacing the 2011-2012 western
European credit crisis period with the 2022/2023 inflation crisis
period relating to the default-free Euro discount interest rate curve
used for interest rate sensitivity analysis would provide a more
effective measurement of the required shock in stress testing. This
updated measurement may better ensure ICC's ability to monitor and
manage its credit exposures and to maintain additional financial
resources to enable it to cover a wide range of foreseeable stress
scenarios. Likewise, the Commission believes that the simplified
description of the 2008/2009 credit crisis period applicable to the
default-free U.S. dollar interest rate curve would enhance the
readability and usability of the STF, thereby enhancing the
documentation for its users and helping ensure that it remains
transparent and consistent to support the effectiveness of ICC's risk
management system.
For these reasons, the Commission believes that the proposed rule
changes are therefore consistent with the requirements of Rules 17Ad-
22(e)(4)(ii) and (e)(4)(vi).\16\
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\16\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act,\17\ and Rule 17Ad-22(e)(4)(ii) and (vi) thereunder.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the proposed rule change (SR-ICC-2023-012), be, and hereby
is, approved.\20\
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 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).
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[[Page 67407]]
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21340 Filed 9-28-23; 8:45 am]
BILLING CODE 8011-01-P
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