[Federal Register Volume 81, Number 77 (Thursday, April 21, 2016)]
[Notices]
[Pages 23531-23533]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-09205]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77633; File No. SR-ICC-2016-005]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change To Update and Formalize the ICC Stress
Testing Framework
April 15, 2016.
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 March 31, 2016, 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 update and
formalize ICC's Stress Testing Framework.
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 to update and formalize its Stress Testing Framework.
The Stress Testing Framework sets forth stress testing practices
instituted by ICC, which are focused on ensuring the adequacy of
systemic risk protections. The framework is designed to: Articulate the
types of stress tests executed and the main purpose of each type of
test; describe how stress tests are conducted; define the actual test
scenarios currently executed; outline the range of remedial actions
available (which, depending on the results, may include enhancements to
the risk methodology or certain Clearing Participant (``CP'') specific
action); and explain how stress test results are used in the governance
process.
ICC continues to evolve its stress testing practices for many
reasons, including an increase in the number and type of instruments
eligible for clearing, and evolution of the CDS market and the cleared
portfolios themselves. The stress testing framework helps ICC identify
potential weaknesses in the risk management methodology currently used.
As such, the framework allows
[[Page 23532]]
ICC to identify potential model enhancements to the Initial Margin and
Guaranty Fund models, as well as identify the need to exercise short
term remedies based upon specific CP positions and risk of exposure
prior to introduction of model enhancements.
The framework outlines the stress test methodology employed by ICC.
During the execution of stress testing, the ICC Risk Department (``Risk
Department'') applies the standard set of pre-defined Stress Test
Scenarios (as defined on the next page) against actual portfolios,
sample portfolios derived from currently cleared positions, and
expected future portfolios, as appropriate, to generate hypothetical
profits or losses. The Risk Department compares the hypothetical losses
to the available funds from the Initial Margin requirements and
Guaranty Fund contribution related to the selected portfolios. A
scenario deficiency is identified in the event that the hypothetical
loss exceeds the protection provided by the available collateral assets
and mutualization funds. Depending on the plausibility of the stress
scenarios and the frequency and severity of any resulting deficiencies,
the Risk Department may recommend enhancements to the risk methodology.
ICC utilizes certain predefined scenarios for its stress testing,
which fall into three standard categories: (i) Historically observed
extreme but plausible market scenarios; (ii) historically observed and
hypothetically constructed (forward looking) extreme but plausible
market scenarios with a baseline credit event; and (iii) extreme model
response tests (collectively, ``Stress Test Scenarios''). Discordant
scenarios (i.e. scenarios under which selected risk factors move in
opposite directions; commonly the behavior deviates from historically
observed behavior) are applied to certain instruments to account for
discordant price moves.
ICC applies the Stress Test Scenarios to a variety of portfolios.
Specifically, ICC applies the Stress Test Scenarios to all currently
cleared portfolios. The Risk Department may also apply the Stress Test
Scenarios to sample portfolios obtained from currently cleared
portfolios. The Risk Department may also apply the Stress Test
Scenarios to staff-constructed, expected future portfolios, as
appropriate, to mimic expected future portfolios upon the launch of new
services. In this case, the stress test analysis is presented to and
reviewed by the Risk Committee prior to the launch of the new clearing
services. ICC may design specific portfolio sets to test the validity
of certain model/system assumptions. The stress test results from such
expected future portfolio executions are reviewed and analyzed
internally, and may be used to support future model initiatives.
ICC also designs stress test analysis directed toward the
identification of wrong-way risk in cleared portfolios. For every
cleared portfolio, all positions in index risk factors and single name
risk factors that exhibit high degree of association with the
considered CP are used to create a sub-portfolio which will be
subjected to additional stress test analysis. The constructed sub-
portfolio is subjected to the same Stress Test Scenarios utilized by
ICC.
The framework also describes ICC's reverse stress testing (Guaranty
Fund Adequacy Analysis) practices. The purpose of the adequacy analysis
is to provide estimates for the level of protection achieved by the
clearinghouse via its Initial Margin and Guaranty Fund models. In
performing its analysis, ICC considers a combination of adverse price
realizations and idiosyncratic credit events associated with reference
obligations on which the stress tested CP sold protection. The Stress
Testing Framework also describes the correlation sensitivity analysis
performed by ICC, based on Monte Carlo simulations, as well as the
additional recovery rate sensitivity analysis.
The framework also details how stress testing is utilized in ICC's
governance process. ICC maintains a framework to ensure that the Risk
Committee and Board are provided the appropriate level of transparency
into the Risk Department's stress test results and contemplated
methodology changes. Stress testing results are reviewed, at a minimum,
by the Risk Department weekly. Additionally, stress testing results are
provided to the Risk Committee weekly and a report of such results is
presented to the Risk Committee on a monthly basis. Ad hoc reviews of
the stress testing results may be undertaken at the discretion of the
Chief Risk Officer.
In the event of any deficiencies noted upon stress testing, the
Risk Department must report such deficiencies to ICC senior management
and the Risk Committee, and either (a) provide analysis that the
results do not highlight a significant weakness in the stress testing
or risk methodology; or (b) recommend enhancements to the stress
testing or risk methodology. ICC senior management and the Risk
Committee will review and recommend any stress testing or risk
methodology enhancements to the Board, who is responsible for approval.
The Risk Department may also choose to add new scenarios and portfolios
in response to deficiencies noted upon stress testing; in this case,
the Risk Department will discuss with the Risk Committee, who will
recommend to the Board, who is responsible for approval.
The Risk Department maintains a standard set of Stress Scenarios
and portfolios (namely actual portfolios, sample portfolios derived
from currently cleared portfolios, and expected future portfolios) that
are executed on a regular basis. In the event that a scenario or
portfolio in the standard set is no longer applicable, or has been
superseded by new scenarios or portfolios, the Risk Department may wish
to retire or modify the outdated scenario or portfolio. In this case,
the Risk Department consults with ICC senior management; conducts
analysis to support the recommendation; discusses the analysis and
obtains a recommendation from the Risk Committee; and presents the
final analysis to the Board approval. In the interest of prudent risk
management, the Risk Department may wish to add scenarios and/or
portfolios to the standard set; Risk Committee or Board approval is not
required unless such scenarios and/or portfolios are added in response
to stress testing deficiencies, as described above.
Previous versions of the framework included the Risk Working Group
in the governance structure, as ICC consulted with the Risk Working
Group as it worked to develop its initial stress testing approach and
appropriate scenarios. As ICC now has a fully developed approach,
stress testing remains focused on data analysis and reporting results,
which are addressed at the Risk Committee and Board level. Thus, to
reflect current governance practices, references to the Risk Working
Group have been removed.
Section 17A(b)(3)(F) of the Act \3\ 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 changes
are 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), \4\ because ICC believes that the proposed rule changes
[[Page 23533]]
will promote the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions. ICC's Stress Testing Framework describes ICC's stress
testing practices, which are designed to ensure the adequacy of
systemic risk protections. The Stress Testing Framework sets forth the
methodology by which ICC evaluates potential portfolio profits/losses,
compared to the Initial Margin and Guaranty Fund funds maintained, in
order to identify any potential weakness in the risk methodology. As
such, the proposed rule changes are 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) \5\ of the Act. The proposed changes will also
satisfy the requirements of Rule 17Ad-22.\6\ In particular, the Stress
Testing Framework contains stress testing practices designed to ensure
that ICE Clear Credit maintains sufficient financial resources to
withstand a default by the CP family to which it has the largest
exposure in extreme but plausible market conditions, and that as a
registered clearing agency acting as a central counterparty for
security-based swaps, ICC shall maintain additional financial resources
sufficient to withstand, at a minimum, a default by the two CP families
to which it has the largest exposures in extreme but plausible market
conditions,\7\ consistent with the requirements of Rule 17Ad-
22(b)(3).\8\
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\3\ 15 U.S.C. 78q-1(b)(3)(F).
\4\ Id.
\5\ Id.
\6\ 17 CFR 240.17Ad-22.
\7\ Pursuant to confirmation via email with ICC on April 13,
2016, staff in the Division of Trading and Markets modified this
sentence to add the reference to ICC maintaining sufficient
financial resources to withstand, at a minimum, the default by the
two CP families to which it has the largest exposures in extreme but
plausible market conditions to conform to the requirements of Rule
17Ad-22(b)(3).
\8\ 17 CFR 240.17Ad-22(b)(3).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ICC does not believe the proposed rule changes would have any
impact, or impose any burden, on competition. To the extent the Stress
Testing Framework impacts CPs, the Stress Testing Framework applies
uniformly across all CPs. Therefore, ICC does not believe the proposed
rule changes impose 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 (i) as the Commission may
designate up to 90 days of such date 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-2016-005 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-2016-005. 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-2016-005
and should be submitted on or before May 12, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-09205 Filed 4-20-16; 8:45 am]
BILLING CODE 8011-01-P