[Federal Register Volume 80, Number 6 (Friday, January 9, 2015)]
[Notices]
[Pages 1466-1468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00126]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73980; File No. SR-ICC-2014-24]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change To Revise the ICC Risk Management
Framework
January 5, 2015.
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 December 22, 2014, 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. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The principal purpose of the proposed rule change is to revise the
ICC Risk Management Framework to incorporate certain risk model
enhancements. These revisions do not require any changes to the ICC
Clearing Rules (``Rules'').
II. Self-Regulatory Organization'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 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. ICC has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of these statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
ICC proposes revising the ICC Risk Management Framework to
incorporate risk model enhancements related to Recovery Rate
Sensitivity Requirements (``RRSR''), anti-procyclicality, and ICC's
Guaranty Fund (``GF'') allocation methodology. ICC also proposes
revisions which are intended to remove obsolete references and ensure
[[Page 1467]]
consistency. ICC believes 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. The proposed revisions are described in detail as follows.
ICC proposes revising its Risk Management Framework to incorporate
risk model parameter estimation enhancements related to the RRSR
computations. Under the current ICC Risk Management Framework, recovery
rate stress scenarios are explicitly incorporated in the RRSR
computations and for Jump-to-Default (``JTD'') considerations. The
quantity RRSR is designed to capture fluctuations due to potential
changes of the market expected recovery rates. In calculating the RRSR,
all instruments belonging to a Risk Factor (``RF'') or Risk Sub-Factor
(``RSF'') are subjected to Recovery Rate (``RR'') stress scenarios to
obtain resulting Profit/Loss (``P/L'') responses, and the worst
scenario response is chosen for the estimation of the RF/RSF RRSR. The
JTD analysis is designed to capture the unexpected potential losses
associated with credit events for assumed SN-specific set of RR stress
values. The JTD responses are determined by using minimum and maximum
RR levels. Currently, the RRSR and JTD computations use the same RR
stress levels.
ICC proposes separating the RR stress levels for these two
computations in order to introduce more dynamic and appropriate
estimations of the RR stress levels for RRSR purposes. The RR levels
for RRSR purposes will reflect a 5-day 99% Expected Shortfall (``ES'')
equivalent risk measure associated with RR fluctuations. The proposal
will also eliminate index RRSR, as index RRs are not subject to market
uncertainty, but rather driven by market conventions. The dynamic
feature of the RR stress level estimations is achieved by analyzing
historical time series of RRs in order to calibrate a statistical model
with a time varying volatility. Under this approach, the RRSR will
capture the exposure to RR fluctuations over a 5-day risk horizon
described by 99% ES equivalent risk measure. The proposed enhancements
provide a robust and quantitative driven approach for establishing the
RR stress scenarios.
Additionally, ICC proposes revising its Risk Management Framework
to incorporate a portfolio level anti-procyclicality analysis that
features price changes observed during and immediately after the Lehman
Brothers (``LB'') default. In order to achieve an anti-procyclicality
of Spread Response requirements, ICC proposes considerations of
explicit price scenarios derived from the greatest price decrease and
increase during and immediately after the LB default. These scenarios
capture the default of a major participant in the credit market and the
market response to the event. The introduced scenarios are defined in
price space to maintain the stress severity during periods of low
credit spread levels (high price) when the Spread Response
requirements, computed under the current framework, are expected to be
lower.
Further, the price scenarios, derived from the greatest price
decrease and increase during and immediately after the LB default, are
explicitly incorporated into the GF sizing to ensure an anti-
procyclical GF size behavior. This enhancement also addresses a
regulatory requirement as described in Article 30 of the Regulatory
Technical Standards,\3\ European Market Infrastructure Regulations
(``EMIR'').
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\3\ Commission Delegated Regulation (EU) No. 153/2013 of 19
December 2012 Supplementing Regulation (EU) No. 648/2012 of the
European Parliament and of the Council with regard to Regulatory
Technical Standards on Requirements for Central Counterparties (the
``Regulatory Technical Standards'').
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Furthermore, ICC proposes enhancements to its GF allocation
methodology. Currently, the GF allocations reflect a risk ``silo''
approach, i.e. separate GF ``silo'' components reflecting the Clearing
Participants' (``CPs'') own ``silo'' riskiness and to the GF ``silo''
size. Under the current approach, GF allocations can significantly
fluctuate in response to position changes in the portfolios of the CPs
that drive the GF size, and in response to distribution of the total GF
size across the GF ``silos.'' ICC proposes modifying its methodology,
so that the GF allocations reflect the CPs' total uncollateralized
losses. Under the proposed approach, the GF allocations are independent
of the distribution of the uncollateralized losses across the GF
``silos.'' The new GF allocation methodology reflects an improved and
more stable approach which allows for easier attributions of GF
contributions to individual CP/client portfolios. Additionally, ICC
added clarifying language regarding how the GF computations are
performed with explicit currency dependent expressions.
ICC has also made some non-substantive changes to the Risk
Management Framework to address CFTC recommendations. Specifically, ICC
proposes amending the Risk Management Framework to reflect ICC's
current approach towards portfolio diversification. As such, ICC
proposes unifying diversification and hedge thresholds, and explicitly
setting both to be equal to the lowest estimated sector Kendall Tau
correlation coefficient. Additionally, ICC clarified language regarding
how ICC meets its liquidity requirements.
Additionally, ICC has made non-substantive changes throughout the
framework to correct obsolete references. ICC removed language stating
that the Chief Risk Officer is a dual employee of both ICC and its
sister company, The Clearing Corporation. Similarly, ICC removed
language stating that The Clearing Corporation is the provider of risk
management services to ICC. ICC has removed references to the ``U.K.
Financial Services Authority'' and replaced with reference to the
``U.K. Prudential Regulatory Authority.'' ``The European Securities and
Markets Authority'' was added to the sample list of competent
authorities for capital adequacy regulation listed in the framework.
ICC has also made non-substantive changes throughout the Risk
Management Framework to ensure consistency. ICC updated the mission
statement contained within the document to be consistent with ICC's
Board-approved mission statement. Also, ICC has modified the frequency
by which the Risk Department monitors various risk metrics from a
quarterly basis to a monthly basis to reflect actual business
practices.
Section 17A(b)(3)(F) of the Act \4\ 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 and to comply with the provisions of the Act and the rules
and regulations thereunder. ICC believes that the proposed rule change
is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to ICC, in particular, to Section
17(A)(b)(3)(F),\5\ because ICC believes that the proposed rule change
will promote the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions, as the proposed risk model revisions enhance risk
policies and are expected to impose more conservative initial margin
requirements, which would enhance the financial resources available to
ICC and thereby facilitate its ability to promptly
[[Page 1468]]
and accurately clear and settle its cleared CDS contracts. In addition,
the proposed revisions are consistent with the relevant requirements of
Rule 17Ad-22.\6\ In particular, the amendments to the Risk Management
Framework will enhance the financial resources available to the
clearing house by imposing a more conservative initial margin
requirement, and are therefore reasonably designed to meet the margin
and financial resource requirements of Rule 17Ad-22(b)(2-3).\7\
Additionally, the amendments to the Risk Management Framework related
to ICC's GF allocation methodology further ensure ICC maintains
sufficient financial resources consistent with the requirements of Rule
17Ad-22(b)(3).\8\ As such, the proposed rule change is designed to
promote the prompt and accurate clearance and settlement of securities
transactions, derivatives agreements, contracts, and transactions
within the meaning of Section 17A(b)(3)(F) \9\ of the Act.
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\4\ 15 U.S.C. 78q-1(b)(3)(F)
\5\ Id.
\6\ 17 CFR 240.17Ad-22.
\7\ 17 CFR 240.17Ad-22(b)(2-3).
\8\ 17 CFR 240.17Ad-22(b)(3).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization'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 risk model
enhancements 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.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
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
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ICC-2014-24 on the subject line.
Paper Comments
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-ICC-2014-24. 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 Web site (http://www.sec.gov/rules/sro.shtml). 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 Web site 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
10:00 a.m. and 3:00 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 Web site at https://www.theice.com/clear-credit/regulation.
All comments received will be posted without change; the Commission
does not edit personal identifying information from submissions. You
should submit only information that you wish to make available
publicly. All submissions should refer to File Number SR-ICC-2014-24
and should be submitted on or before January 30, 2015.\10\
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\10\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-00126 Filed 1-8-15; 8:45 am]
BILLING CODE 8011-01-P