Notice2023-21794
Self-Regulatory Organizations; ICE Clear Europe Limited; Order Approving Proposed Rule Change Relating to Amendments to the Model Risk Policy
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Published
October 3, 2023
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 88 Issue 190 (Tuesday, October 3, 2023)</title>
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[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68255-68258]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-21794]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-98570; File No. SR-ICEEU-2023-019]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change Relating to Amendments to the Model Risk
Policy
September 27, 2023.
I. Introduction
On August 4, 2023, ICE Clear Europe Limited (``ICE Clear Europe''
or ``the Clearing House'') 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,\2\ a
proposed rule change to amend its Model Risk Policy (the ``Policy'').
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 Europe Limited;
Notice of Filing of Proposed Rule Change Relating to Amendments to
the Model Risk Policy, Exchange Act Release No. 98138 (August 15,
2023); 88 FR 56901 (August 21, 2023) (SR-ICEEU-2023-019)
(``Notice'').
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II. Description of the Proposed Rule Change
A. Background
ICE Clear Europe is registered with the Commission as a clearing
agency for the purpose of clearing security-based swaps. In its role as
a clearing agency for security-based swaps, ICE Clear Europe maintains
the Policy. The purpose of the Policy is to establish standards and
principles for managing and mitigating the impact to ICE Clear Europe's
business caused by model error, model failure or inappropriate model
use.
The proposed rule change would make updates and amendments to the
Policy. ICE Clear Europe is making these changes to implement the
results of internal and external reviews of the Policy. The Policy has
five sections that
[[Page 68256]]
address (1) the Purpose of the Policy, (2) Definitions, (3) Model Risk
Governance, (4) Document Governance and Exception Handling, and (5)
Version History. ICE Clear Europe proposes amendments to all five
sections except for Document Governance and Exception Handling. ICE
Clear Europe also proposes to update the Version History section to
reflect these changes.
B. Purpose of the Policy
Section 1, ``Purpose,'' addresses the purpose, scope, and
architecture of the Policy. In this section and throughout the Policy,
ICE Clear Europe proposes to replace references to ``Framework'' with
``Policy'' and to include new language to 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
add language to clarify that references to ``model'' in the rest of the
document would refer to both models and risk frameworks.
Section 1 also lists certain components that support the Policy.
For example, ICE Clear Europe's model inventory, schedule for model
validations, and schedule for remediation of validation findings all
support the Policy. The amendments would further add language to
include on this list of supporting components guidelines for
remediation of validation findings.
C. Definitions
Section 2, ``Definitions,'' describes in detail certain concepts
that are used throughout the Policy, such as the meaning of the terms
model and model risk, as well as the materiality of models, and
significance of model changes. ICE Clear Europe proposes to amend the
discussion of significance of model changes. The Policy currently
states that only model changes are categorized into significant and not
significant. ICE Clear Europe proposes to modify the Policy so that
changes to both models and parameters, not just models, would be
categorized as significant and not significant.
With respect to changes in parameters, ICE Clear Europe would
further categorize these changes as Business as Usual (``BAU'') or 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
refer to all other changes. The amendments would clarify that the
definition of BAU would be in accordance with existing regulatory
guidelines.
Finally, the amendments would also update a footnote to remove a
reference to a specific European Securities and Markets Authority
opinion as providing the criteria defining model change significance.
This footnote would be revised to state more generally that the
criteria will be in accordance with prevailing regulatory opinions,
guidelines, or requirements.
D. Model Risk Governance
Within Section 3, ``Model Risk Governance,'' ICE Clear Europe
proposes to make amendments to the governance and responsibilities and
model risk management subsections. In the governance and
responsibilities subsection, the amendments would update the
responsibilities of the Board of Directors (``Board''). Currently, the
Board has several responsibilities, such as reviewing actions of the
Model Oversight Committee and approving new material models and
significant model changes for material models. The amendments would add
to those responsibilities a new requirement for the Board to approve
significant non-BAU changes to risk parameters.
The amendments would also add a footnote explaining the reasoning
for the new responsibility. The footnote would state that the Auto
Pilot versus Production deviations \4\ 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 ability to act quickly to
help ensure market stability is critical. This footnote only applies to
specific margin updates for certain futures and options contracts and
does not apply to any parameter updates for credit default swaps. 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.
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\4\ Production deviations are categorized under significant non-
BAU changes to risk parameters.
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ICE Clear Europe proposes to add new responsibilities for the Model
Oversight Committee as well. Under the proposed rule change, 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 of Defense).\5\
This function is currently performed by the First Line. The Model
Oversight Committee would also would be responsible for approving non-
significant non-BAU changes to risk parameters, reviewing significant
non-BAU changes to risk parameters for recommendation to the Board, and
approving changes to model documentation. This is a new function
currently not performed and is part of ICE Clear Europe's Policy
expansion to distinguish between BAU and non-BAU parameter changes. ICE
Clear Europe also proposes to modify the responsibilities of the First
and Second Lines of Defense.\6\ 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 amendments would include
new responsibilities for the First Line, specifically, proposing and
seeking approval for non-BAU changes to risk parameters (as it
currently does for models, model changes, and model retirements) and
proposing significance levels for non-BAU changes to risk parameters .
Under the amendments, the Second Line would be responsible for
performing independent validation exercises for non-BAU changes to risk
parameters (as it currently does for models).
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\5\ The business First Line includes models developed
internally, third-party models, and models shared with other group
entities, as well as risk frameworks used to quantify, aggregate,
and manage the risks of the Clearing House.
\6\ The second line includes the Risk Oversight Department.
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Finally, within the model risk management subsection, a new
subsection 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.\7\ Non-significant non-BAU changes must be validated in
accordance with the validation pipeline.
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\7\ As discussed above, in certain situations for certain
futures and options contracts, Board notification rather than Board
pre-approval is required.
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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 given below, the Commission finds that
the proposed rule change is
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consistent with Section 17A(b)(3)(F) of the Act \9\ and Rules 17Ad-
22(e)(2)(i) and (v), and (e)(3) 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)(2)(i) and (v), and (e)(3).
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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 ICE Clear Europe 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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As discussed above, the proposed rule change would modify the
Policy. The Policy establishes standards and principles for managing
and mitigating model risk for all product categories that ICE Clear
Europe clears. The Commission believes that these changes, taken as a
whole, would help ICE Clear Europe establish and maintain effective and
functioning models. For example, by requiring parameters to be
categorized as significant or not significant, the Commission believes
that the proposed rule change would help ICE Clear Europe to identify
and remediate possible errors in parameter changes before such changes
are put into effect by allowing for more scrutiny for parameter
changes. Because parameter changes can affect the function of ICE Clear
Europe's models, the Commission further believes that doing so may help
avoid the potential harm that could result from models that do not
function properly, such as margin requirements that are not effective
at mitigating risk. Similarly, the Commission believes that the
proposed rule change, in making the Second Line responsible for
independent validation of non-BAU changes to risk parameters, would
help ensure that validations are completed objectively and competently
because it brings additional scrutiny to model changes by adding
additional levels of review. Biased or ineffective validations could
miss potential errors in models and model changes. The Commission
believes that this change may also help ICE Clear Europe avoid the
potential harm that could result from models that do not function
properly.
Given that ICE Clear Europe uses its margin and other models to
manage and mitigate ICE Clear Europe's credit exposures to its Clearing
Members and the risks associated with clearing security-based swap-
related portfolios, the Commission believes that the proposed rule
change would enhance ICE Clear Europe's ability to avoid losses that
could result from the mismanagement of such credit exposures and risks.
Because such losses could disrupt ICE Clear Europe's ability to
promptly and accurately clear security-based swap transactions, the
Commission believes that the proposed rule change would enhance ICE
Clear Europe's ability to promote the prompt and accurate clearance and
settlement of securities transactions.
Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions, consistent with the Section 17A(b)(3)(F) of the Act.\12\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i) and (v)
Rules 17Ad-22(e)(2)(i) and (v) require that ICE Clear Europe
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.\13\
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\13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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As discussed above, the proposed rule change would add a new
requirement for the Board where it would be responsible for the
approval of significant non-BAU changes to risk parameters. In doing
so, the Commission believes that the Policy would clearly and
transparently define who is responsible for this aspect of oversight of
the Policy. The proposed rule change would also assign new
responsibilities to the First and Second Lines. For example, the Second
Line would be responsible for performing independent validation
exercises for non-BAU changes to risk parameters, while the First Line
would now be responsible for proposing and seeking approval for non-BAU
changes to risk parameters.
The Commission believes the proposed rule change would improve the
transparency of the governance related to the Policy by improving the
relevant responsibilities for the development and validation of models
and the review of the overall effectiveness of the Policy. The
Commission believes these aspects of the Policy would also clearly
define the responsibilities of the First and Second Lines.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rules 17Ad-22(e)(2)(i) and
(v).\14\
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\14\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(3)
Rule 17Ad-22(e)(3) requires that ICE Clear Europe establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to maintain a sound risk management framework for
comprehensively managing legal, credit, liquidity, operational, general
business, investment, custody, and other risks that arise in or are
borne by ICE Clear Europe. This includes risk management policies,
procedures, and systems designed to identify, measure, monitor, and
manage the range of risks that arise in or are borne by ICE Clear
Europe, that are subject to review on a specified periodic basis and
approved by the board of directors annually.\15\
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\15\ 17 CFR 240.17Ad-22(e)(3).
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As discussed above, the proposed rule change would add new
requirements for the Model Oversight Committee so that it would be
responsible for establishing and maintaining a model inventory and
assigning a specific owner to each model. Additionally, the proposed
rule change would add a requirement for significant non-BAU changes to
risk parameters to be validated before they are implemented in
production. In this way, the Commission believes the proposed rule
change would help reduce model risk at ICE Clear Europe. Moreover, the
Commission believes the proposed rule change would help ensure the
objectivity and competence of validations by establishing a specific
owner for each model. The Commission believes that competent and
objective validations would, in turn, help to reduce model risk. Thus,
the Commission believes that the proposed rule change would enable ICE
Clear Europe to maintain a sound risk management framework for
comprehensively managing its model risk.
Therefore, the Commission finds that the proposed rule change is
consistent with Rule 17Ad-22(e)(3).\16\
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\16\ 17 CFR 240.17Ad-22(e)(3).
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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 Rules 17Ad-22(e)(2)(i) and (v), and (e)(3) thereunder.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(2)(i) and (v), and (e)(3).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the
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proposed rule change (SR-ICEEU-2023-019), 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).
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).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21794 Filed 10-2-23; 8:45 am]
BILLING CODE 8011-01-P
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