83 FR 27360 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to Formalization of the ICC Model Validation Framework

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 83, Issue 113 (June 12, 2018)

[Federal Register Volume 83, Number 113 (Tuesday, June 12, 2018)]
[Notices]
[Pages 27360-27362]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-12550]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83386; File No. SR-ICC-2018-004]


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

June 6, 2018.
    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 May 23, 2018, 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 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 formalize 
the ICC Model Validation Framework. This change does not require any 
revisions to the ICC Clearing 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 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.

[[Page 27361]]

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

(a) Summary of Proposed Changes
    ICC proposes to formalize the ICC Model Validation Framework, which 
sets forth ICC's model validation procedures. ICC has developed a 
proprietary risk management system that models the risk of credit 
default swap based portfolios and determines appropriate Initial Margin 
and Guaranty Fund requirements. The risk management system is composed 
of risk modeling components (``Model Components'') which employ a 
combination of statistical analysis of credit spread time series and 
stress test simulation scenarios to address different risk drivers. The 
risk drivers addressed by the Model Components constitute the 
foundation of total Initial Margin and Guaranty Fund requirements for 
cleared portfolios. The ICC Model Validation Framework provides 
assurances as to the appropriateness of its risk requirements. ICC's 
Risk Oversight Officer is the ICC Model Validation Framework owner and 
is responsible to the ICC President for the successful operation and 
maintenance of the ICC Model Validation Framework.
    ICC considers both new Model Components and enhancements to Model 
Components as part of its Model Validation Framework (collectively, 
``Model Change''). New Model Components consider risk drivers that are 
not currently included in the risk management system; enhanced Model 
Components improve upon the methodologies used by the risk management 
system to consider a given risk driver or drivers. ICC classifies Model 
Changes as either Materiality A or Materiality B, depending on how 
substantially the Model Change affects the risk management system's 
assessment of risk for the related risk driver or drivers. The ICC 
Chief Risk Officer and the ICC Risk Oversight Officer will review all 
enhancements to ICC's risk management system and decide which 
enhancements qualify as Model Changes, and which qualifying 
enhancements should be classified as Materiality A versus Materiality 
B. Materiality A Model Changes receive a higher control standard than 
Materiality B Model Changes. The ICC Risk Committee reviews the 
materiality classifications and provides feedback as necessary.
    The ICC Model Validation Framework sets forth the process for 
selecting Model Validators and describes the independent validator 
criteria, including technical expertise and independence requirements. 
The ICC Model Validation Framework also describes the Model Inventory 
which is maintained by the ICC Risk Department and which contains key 
information about all ICC Model Components and Model Changes. The ICC 
Risk Oversight Officer will review the model inventory at least 
quarterly to ensure that it contains accurate and up to date 
information relating to ICC's Model Components and Model Changes.
    The ICC Model Validation Framework consists of four controls: 
Initial validation; ongoing monitoring and validation; investigation; 
and independent periodic review. Before going live with a Model Change, 
ICC must successfully complete an initial validation of the conceptual 
soundness of the methodology and the proposed ongoing monitoring and 
validation approach. All Model Changes are subject to internal initial 
validation. In addition, Materiality A Model Changes are subject to an 
additional independent initial validation.
    Ongoing monitoring and validation provides assurances that ICC has 
appropriately configured and calibrated the risk management system, 
including any recent Model Change, and that the risk management system 
is achieving the desired level of performance. The ongoing monitoring 
and validation control consists of three areas: Parameter setting, 
execution monitoring, and outcome analysis.
    If ongoing monitoring and validation identifies features of the 
risk management system that might indicate a Model Component weakness, 
ICC investigates and identifies the root cause. If a model weakness is 
discovered during investigation, the ICC Chief Risk Officer informs the 
ICC Risk Committee of the ongoing monitoring and validation results 
which triggered the investigation. If ICC is satisfied that the 
identified features do not represent a model weakness, the ICC Chief 
Risk Officer will present the results of the investigation 
demonstrating no model weakness exists. If ICC identifies a model 
weakness during the investigation, the ICC Chief Risk Officer will 
present the results of the investing demonstrating a model weakness, 
and ICC will remediate the identified weakness through an appropriate 
Model Change, which passes through the ICC Model Validation Framework 
starting with an Initial validation.
    The ICC Chief Risk Officer provides support and information to 
allow the independent validators to perform periodic reviews of all ICC 
Model Components and related practices at least once in every calendar 
year. At ICC's choosing, the scope of an independent periodic review 
may cover all Model Components used by the risk management system, or a 
subset of Model Components, as long as all Model Components are 
included in one or more independent periodic reviews each year. The 
independent periodic review will demonstrate that the Model Components 
remain fit for purpose; that the Model Components assumptions are 
valid; that ICC has adequately addressed any medium priority open items 
from Model Change initial validations and any other implementation 
conditions; and that ICC has been complying with its ongoing monitoring 
and validation requirements and the Model Components are performing 
without any significant weakness. The deliverables from the independent 
periodic review must include a report from the independent validator 
providing a summary of the completed evaluation and details of any 
remaining open items, classified by priority. The ICC Chief Risk 
Officer will present the periodic review to the ICC Risk Committee and 
describe ICC's plans in relation to any open high or medium priority 
items in the report.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the ActHD1\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 change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, to Section 
17A(b)(3)(F),\4\ 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. The ICC Model Validation Framework provides assurances as 
to the appropriateness of changes to ICC's risk models, including the 
appropriateness of risk requirements. 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

[[Page 27362]]

Section 17A(b)(3)(F) \5\ of the Act. The proposed rule change will also 
satisfy the requirements of Rule 17Ad-22.\6\ In particular, the 
proposed rule change sets forth ICC's model validation procedures, 
including the evaluation of the performance of ICC's risk models and 
related parameters and assumptions by a qualified and independent Model 
Validator, consistent with the requirements of Rule 17Ad-22(b)(4).\7\
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    \3\ 15 U.S.C. 78q-1(b)(3)(F).
    \4\ Id.
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(b)(4).
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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 ICC Model Validation 
Framework applies uniformly across all market participants. Therefore, 
ICC does not believe the proposed rule change impose any burden on 
competition that is inappropriate in furtherance of the purposes of the 
Act.

(C) Clearing Agency'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-2018-004 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-2018-004. 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 (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 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 10:00 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 website at https://www.theice.com/clear-credit/regulation. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICC-2018-004 and should be 
submitted on or before July 3, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-12550 Filed 6-11-18; 8:45 am]
 BILLING CODE 8011-01-P