Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the ICC Back-Testing Framework

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Published

August 14, 2024

Issuing agencies

Securities and Exchange Commission

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<title>Federal Register, Volume 89 Issue 157 (Wednesday, August 14, 2024)</title>
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[Federal Register Volume 89, Number 157 (Wednesday, August 14, 2024)]
[Notices]
[Pages 66154-66156]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-18077]

[[Page 66154]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-100679; File No. SR-ICC-2024-008]

Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Back-Testing
Framework

August 8, 2024.
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 July 30, 2024, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II and III below, which Items have been
prepared primarily by ICC. 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

The principal purpose of the proposed rule change is to revise the
ICE CDS Clearing: Back-Testing Framework (``Back-Testing Framework'').
These revisions do not require any changes to the ICC Clearing Rules
(the ``Rules'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC has prepared
summaries, set forth in sections (A), (B), and (C) below, of the most
significant aspects of these statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

(a) Purpose
ICC proposes revising the Back-Testing Framework, which describes
ICC's back-testing approach and procedures and includes guidelines for
remediating poor back-testing results. The proposed amendments enhance
how credit default swap index options that expire in-the-money--within
the margin period of risk, are treated for profit or loss purposes in
back-testing and other clarifications. ICC believes that such revisions
will facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible. ICC proposes to make such
changes effective following Commission approval of the proposed rule
change. The proposed revisions are described in detail as follows.
ICC proposes to enhance Subsection 2.4. of the Back-Testing
Framework by adding a detailed description on how in-the-money
(``ITM'') expiring credit default swap (``CDS'') index option (``Index
Swaption'') positions, within the margin period of risk (``MPOR''),\3\
are treated in back-testing. Specifically, the proposed revisions
enhance how Index Swaptions that expire ITM within the MPOR, are
treated for profit or loss (``P/L'') purposes in back-testing. The
proposed revisions provide that with respect to Index Swaptions that
expire ITM within the MPOR, for back-testing calculation purposes, the
mark to market (``MTM'') value of the expired ITM Index Swaption
positions are replaced with their corresponding intrinsic values
(``IV'') \4\ of such Index Swaptions based on their corresponding
underlying CDS index's end-of-day price at the given back-testing day.
The ITM Index Swaption position, with a positive IV, results in an
option exercise on the expiration date and reflects the positive value
to the option holder of buying/selling the underlying CDS index
position at the fixed option strike price and selling/buying the
underlying CDS index position at the end-of-day price for a profit.
Likewise, the sold ITM Index Swaption position, with negative IV,
results in the assignment of an underlying CDS index position to the
seller of the option on the expiration date, where the assigned
underlying CDS index position could be bought or sold protection
position depending on the type of the sold option instrument. The
unrealized P/L for the exercised/assigned ITM Swaption positions,
within the MPOR, are computed against the underlying MTM, after the ITM
Index Swaptions expiration date, for back-testing purposes.
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\3\ Margin-period-of-risk or MPOR for back testing purposes
reflects the greatest considered risk horizon used for ICC's initial
margin requirements.
\4\ In the context of ITM Index Swaptions, intrinsic value or IV
is the difference between the current price of the underlying CDS
index and the Swaption's exercise price.
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Also, ICC proposes the addition of Table 5, `Minimum 5-Day P/L
Detail for Expiring Options Positions' to Subsection 2.4. Table 5
provides an illustrative example of the computation of MTM and
unrealized P/L for back-testing purposes for an ITM Index Swaption
position that expires within the MPOR. The example calculation provided
in Table 5 is intended to provide further transparency of ICC's back-
testing P/L treatment of ITM Index Swaptions that expire within the
MPOR.
ICC proposes additional clarifications to the Back-Testing
Framework. The proposed amendments include the addition of footnote 1
in Subsection 1.1 that clarifies `Net Asset Value' is also referred to
and is equivalent to `Mark to Market.' Also, ICC proposes to change
references from ``P&L'' in Table 3 and Table 4 to ``P/L'' to
consistently refer to `profit or loss' throughout the Back-Testing
Framework.
Lastly, ICC proposes to update Section 6, ``Revision History''.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \5\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\6\ In particular, Section 17A(b)(3)(F) of the Act \7\
requires, in part, that the rules of ICC (as a registered clearing
agency) promote the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts and
transactions cleared by ICC, assure the safeguarding of securities and
funds in the custody or control of ICC or for which it is responsible,
and protect investors and the public interest. The proposed amendments
include enhancements on how expiring Index Swaptions are valued in
back-testing. The additional revisions further ensure clarity and
transparency with respect to ICC's back-testing approach, procedures,
and guidelines for remediating poor back-testing results. As such, ICC
believes that the proposed rule change would help assure the soundness
of the model by ensuring that back-testing analysis is conducted
properly to assess the performance of the model. The proposed rule
change is therefore consistent with the prompt and accurate clearing
and settlement of the contracts cleared by ICC, the safeguarding of
securities and funds in the custody or control of ICC or for which it
is responsible, and the protection of investors and the public
interest, within

[[Page 66155]]

the meaning of Section 17A(b)(3)(F) of the Act.\8\
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\5\ 15 U.S.C. 78q-1.
\6\ 17 CFR 240.17Ad-22.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ Id.
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Rules 17Ad-22(e)(2)(i) and (v) \9\ require each covered clearing
agency 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. ICC's Back-Testing Framework clearly
assigns and documents responsibility and accountability for performing
back-testing analyses and remediating poor back-testing results. The
enhancements on how expiring Index Swaptions are treated in back-
testing, the Back-Testing Framework would continue to ensure that ICC
maintains clear and transparent governance procedures and arrangements
with respect to the performance, review, and reporting of back-testing
results and the remediation of poor back-testing results. As such, in
ICC's view, the proposed rule change continues to 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 Rules 17Ad-
22(e)(2)(i) and (v).\10\
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\9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\10\ Id.
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Rule 17Ad-22(e)(4)(ii) \11\ requires 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, 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
the covered clearing agency in extreme but plausible market conditions.
As discussed above, the proposed revisions would enhance how expiring
Index Swaptions are treated in back-testing. The additional revisions
enhance the clarity and transparency of the Back-Testing Framework,
which would strengthen the documentation and ensure that it remains up-
to-date, clear, and transparent. ICC believes that the proposed changes
would enhance ICC's ability to manage risks and maintain appropriate
financial resources, including by ensuring that back-testing analysis
is conducted properly to assess the performance of the model. As such,
the proposed amendments would strengthen ICC's ability to maintain its
financial resources and withstand the pressures of defaults, consistent
with the requirements of Rule 17Ad-22(e)(4)(ii).\12\
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\11\ 17 CFR 240.17Ad-22(e)(4)(ii).
\12\ Id.
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Rule 17Ad-22(e)(6)(vi) \13\ requires each covered clearing agency
to establish, implement, maintain, and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, is monitored by management on an ongoing basis and is
regularly reviewed, tested, and verified by (A) conducting back-tests
of its margin model at least once each day using standard predetermined
parameters and assumptions; and (B) conducting a sensitivity analysis
of its margin model and a review of its parameters and assumptions for
back-testing on at least a monthly basis, and considering modifications
to ensure the back-testing practices are appropriate for determining
the adequacy of ICC's margin resources. The Back-Testing Framework
continues to require the performance of daily, weekly, monthly, and
quarterly portfolio-level back-testing analyses, and the remediation of
poor-back-testing results. The proposed amendments consist of
enhancements to the treatment of expiring Index Swaptions for back-
testing purposes, and other clarifications to the Back-Testing
Framework. These procedures in the Back-Testing Framework continue to
promote the soundness of ICC's model and ensure that ICC's risk
management system is effective and appropriate in addressing the risks
associated with discharging its responsibilities. The proposed changes
are thus consistent with the requirements of Rule 17Ad-
22(e)(6)(vi).\14\
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\13\ 17 CFR 240.17Ad-22(e)(6)(vi).
\14\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed changes to
ICC's Back-Testing Framework will apply uniformly across all market
participants. Therefore, ICC does not believe the proposed rule change
imposes any burden on competition that is inappropriate in furtherance
of the purposes of the Act.

Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.

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-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</a>);
or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6113140d044c020e0c0c040f1512211204024f060e17"><span class="__cf_email__" data-cfemail="9be9eef7feb6f8f4f6f6fef5efe8dbe8fef8b5fcf4ed">[email&#160;protected]</span></a>. Please include
file number SR-ICC-2024-008 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.

All submissions should refer to file number SR-ICC-2024-008. 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-regulations/self-regulatory-organization-rulemaking">https://www.sec.gov/rules-regulations/self-regulatory-organization-rulemaking</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

[[Page 66156]]

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 Credit and
on ICE Clear Credit's website at <a href="https://www.ice.com/clear-credit/regulation">https://www.ice.com/clear-credit/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-ICC-2024-008 and should
be submitted on or before September 4, 2024.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-18077 Filed 8-13-24; 8:45 am]
BILLING CODE 8011-01-P

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