83 FR 35033 - Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to ICC's Risk Management Model Description Document and ICC's Risk Management Framework
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 83, Issue 142 (July 24, 2018)
Federal Register Volume 83, Issue 142 (July 24, 2018)
| Page Range | 35033-35038 | |
| FR Document | 2018-15771 |
[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)] [Notices] [Pages 35033-35038] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-15771] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-83662; File No. SR-ICC-2018-008] Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to ICC's Risk Management Model Description Document and ICC's Risk Management Framework July 18, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(b)(1) and Rule 19b-4, 17 CFR 240.19b-4, notice is hereby given that on July 5, 2018, ICE Clear Credit LLC (``ICC'') filed with the Securities and Exchange 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. I. Clearing Agency's Statement of the Terms of Substance of the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice The principal purpose of the proposed rule change is to make revisions to the ICC Risk Management Model Description Document and the ICC Risk Management Framework related to the transition from a stress- based approach to a Monte Carlo-based methodology for the spread response and recovery rate (``RR'') sensitivity response components of the Initial Margin model. These revisions do not require any changes to the ICC Clearing Rules. II. Clearing Agency's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice 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, Security-Based Swap Submission, or Advance Notice (a) Purpose ICC proposes revising its Risk Management Model Description Document and its Risk Management Framework. 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. The purpose of the proposed changes is to transition from a stress- based approach to a Monte Carlo-based methodology for the spread response and recovery rate (``RR'') sensitivity response components of the Initial Margin model. ICC notes certain limitations of its stress- based approach, namely, that it generates a limited number of stress scenarios that may not capture the risk of portfolios with more complex non-linear instruments and that it does not provide for a consistent estimation of the portfolio level spread response based on a defined risk measure (e.g., Value-at-Risk (``VaR'')) and quantile (e.g., 99%). The transition to a Monte Carlo-based methodology rectifies these limitations, as it considers a large set of scenarios to more appropriately capture portfolio risk, including the risk of more complex non-linear instruments, and produces consistent quantile-based portfolio risk measure estimates. To derive the spread response component, the current stress-based approach considers a set of hypothetical ``tightening'' and ``widening'' credit spread scenarios, from which it computes instrument Profit/Loss (``P/L'') responses for every Risk Factor (``RF'') scenario. All instrument P/L responses for a scenario are aggregated to obtain the portfolio P/L response for that scenario. Since the set of scenarios does not reflect the joint distribution of the considered RFs, offsets between P/Ls are applied to provide some portfolio benefits. To derive the RR sensitivity response component, all instruments belonging to a RF or Risk Sub-Factor (``RSF'') are subjected to RR stress scenarios to obtain the resulting P/L responses, and the worst scenario response is chosen for the estimation of the RF/ RSF RR sensitivity response component. Under the proposed Monte Carlo-based methodology, the ``integrated spread response'' component replaces the spread response and RR sensitivity response components. This component will be computed by creating P/L distributions from a set of jointly-simulated hypothetical (forward looking) spread and RR scenarios. The proposed Monte Carlo- based methodology utilizes standard tools in modeling dependence, which can be seen as a means for constructing multivariate distributions with different univariate distributions and with desired dependence structures, to generate the spread and RR scenarios. The proposed Monte Carlo-based methodology provides flexibility in modeling tail dependence, an important concept in risk management as it provides information about how frequently extreme values are expected to occur, and thus ICC considers them particularly suitable for implementing its Monte Carlo framework. The univariate RF distribution assumptions do not change under the proposed Monte Carlo-based [[Page 35034]] methodology. ICC will utilize the simulated scenarios to derive hypothetical spread and RR levels, at which each instrument is repriced in order to generate a scenario instrument P/L based on post-index- decomposition positions. ICC will create P/L distributions from the set of jointly-simulated hypothetical (forward looking) credit spread and RR scenarios to compute the integrated spread response component. The P/L distributions for each instrument allow ICC to decompose portfolio level P/L at the RF level and to estimate RF-level risk measures. The proposed model will utilize the 5-day 99.5% VaR measure and allow ICC to be compliant with the European Market Infrastructure Regulation (``EMIR'') as applied to Over-The-Counter instruments. Risk Management Model Description Document ICC proposes revisions to the `Initial Margin Methodology' section of the Risk Management Model Description Document to reflect the described transition from a stress-based approach to a Monte Carlo- based methodology for the spread response and RR sensitivity response components. ICC proposes to clarify its risk management approach to note that it features stress loss considerations and a P/L distribution analysis at selected quantile levels that are 99% or higher. The proposed changes also include a description of each of the Initial Margin model components, which are separated into statistically calibrated components and stress-based add-on components. The statistically calibrated components (i.e., spread and RR dynamics, interest rate dynamics, and index/single-name (``SN'') basis dynamics) reflect fluctuations in market observed or implied quantities, and their direct P/L impacts. The stress-based add-on components (i.e., idiosyncratic loss given default (``LGD''), wrong-way-risk (``WWR'') LGD, bid/offer width risk, and concentration risk) reflect the risk associated with low probability events with limited information sets. ICC proposes to reorganize the `Initial Margin Methodology' section to begin with the `LGD Risk Analysis' section. The proposed changes to the `LGD Risk Analysis' section include minor updates to terminology. The proposed revisions clarify that the LGD calculation considers RSF- specific RR level scenarios and that the Jump-To-Default (``JTD'') RR stress levels are updated if needed. ICC proposes to update the Profit/ Loss-Given-Default (``P/LGD'') calculation at the RSF level to indicate the association between JTD and the RR level scenarios. ICC proposes to remove a reference to the stress levels noted in the current `RR Sensitivity Risk Analysis' section. ICC proposes to move the RF level P/LGD calculation ahead of the Risk Factor Group (``RFG'') LGD calculations to avoid disrupting the grouping of RFG LGD calculations. ICC proposes amendments to the `JTD Risk Analysis' section. The proposed revisions to the Uncollateralized LGD (``ULGD'') calculation incorporate the integrated spread response component described above and remove reference to the current RR sensitivity response component. ICC also proposes, for clarity, to shorten a description in the WWR JTD calculation and to move details regarding the Kendall tau rank-order correlation to follow the WWR JTD calculation since such details are associated with the WWR JTD calculation. The details regarding the Kendall tau rank-order correlation remain unchanged, except for the addition of clarifying language referencing regulatory guidance with respect to RFs deemed highly correlated. ICC proposes to include this information, which is currently located in a source in a footnote, within the text to provide further description of the source in the footnote. ICC also proposes minor structural updates to its description of specific WWR (``SWWR'') to enhance readability. ICC proposes to add clarifying language to the `Interest Rate Sensitivity Risk Analysis' section to note that the interest rate sensitivity component is a statistically calibrated Initial Margin component. ICC also proposes to correct a notation to reflect an inverse distribution function. ICC proposes amendments to the `Basis Risk Analysis' section, which consist of combining into this section the current index decomposition process, followed by SN position offsets, and then generating basis risk requirements. Currently, the index decomposition process and SN position offsets are discussed under the `Spread Risk Analysis' section. However, given the proposed changes to the `Spread Risk Analysis' section along with the interrelation of these concepts, ICC proposes to combine these concepts by discussing each of them as a different subsection under the `Basis Risk Analysis' section. Since the index decomposition process, followed by SN position offsets, generates basis risk requirements, these concepts are particularly well suited for discussion within the same section. Specifically, ICC proposes moving the description under the current `Long-Short Benefits among RFs with Common Basis' subsection to the proposed `Index Decomposition and Long-Short Offsets' subsection. ICC proposes minor changes to such description, including removing references to the spread response component that ICC proposes to replace. Similarly, ICC proposes moving the description under the current `Portfolio Benefits Hierarchy Summary' subsection to the proposed `Long/Short Offset Hierarchy' subsection. The description includes the hierarchy to be followed in the allocation of each SN position to the index derived opposite positions and remains largely the same. ICC proposes minor changes to remove references to the current spread response component and to update the index series in an example. ICC proposes moving the analysis under the current `Basis Risk Analysis' section to the proposed `Index-Basis Risk Estimation' subsection. The analysis discusses the calculation of the basis risk component and remains largely the same. The proposed edits state that the basis risk component is statistically calibrated to provide additional clarity, update a description to specify that index instruments may react to changing market conditions differently than SN instruments to more accurately reflect trading characteristics, and remove an example considered to be unnecessary and overly specific given its applicability to one index. ICC proposes to combine the current `Spread Risk Analysis' and `RR Sensitivity Risk Analysis' sections into the proposed `Spread and RR Risk Analysis' section to reflect ICC's transition from a stress-based approach to a Monte Carlo-based methodology for the spread response and RR sensitivity response components. As discussed above, ICC currently utilizes different methodologies to separately derive the spread response and the RR sensitivity response components, which are discussed in the `Spread Risk Analysis' and `RR Sensitivity Risk Analysis' sections, respectively. Under the proposed approach, ICC will utilize credit spreads and RR distributions to jointly simulate scenarios to estimate portfolio risk measures. Accordingly, ICC proposes to combine the `Spread Risk Analysis' and `RR Sensitivity Risk Analysis' sections into the `Spread and RR Risk Analysis' section given their interrelation under the proposed approach, in which the integrated spread response will be computed by creating P/L distributions from a set of jointly-simulated hypothetical (forward looking) spread and RR scenarios. ICC proposes to remove details regarding the current stress-based approach from the `Initial Margin [[Page 35035]] Methodology' section and to describe how ICC generates credit spread scenarios using Monte Carlo techniques in the amended `Spread Risk Analysis' section. As described above, the spread response component is derived in terms of a set of hypothetical ``tightening'' and ``widening'' credit spread scenarios under the current stress-based approach. The analysis of the univariate characteristics of credit spread log-returns to arrive at credit spread scenarios does not change under the Monte Carlo-based methodology. The univariate RF distribution assumptions do not change under the Monte Carlo-based methodology and thus the `Distribution of the Credit Spreads' subsection remains largely the same with some clarifying changes to language included. ICC proposes to describe the implementation of the Monte Carlo- based methodology in the new `Multivariate Statistical Approach via Copulas' subsection. ICC proposes to include a discussion on the construction and application of the standard tools in modeling dependence, including the review of their theoretical background, in the new `Copulas' subsection. ICC proposes the `Tail Dependence' subsection to provide a description of the concept of tail dependence, given its relevancy as it indicates the probability of extreme values occurring jointly. The proposed subsection provides additional support behind ICC's conclusion that the tools for modeling dependence are particularly suitable for connecting the various univariate distributions in a multivariate setting as they provide flexibility in modeling tail dependence. Under the proposed `Copula Simulation' subsection, ICC describes its Monte Carlo-based simulation approach. The proposed approach is based on first generating for all SN RF/RSF and On The Run indices Most Actively Traded Tenor (``MATT'') scenarios using the stochastic representation of the selected multivariate distribution under consideration. The conditional simulation approach is then utilized to generate individual RF/tenor-specific scenarios. ICC also proposes to describe the block simulation approach that it utilizes in generating scenarios, which departs from an approach where all tenors for all SNs are simulated together. Instead, specific blocks of the correlation matrix are considered through the stepwise block simulation approach. Under the proposed `Copula Parameter Estimation' subsection, ICC discusses the estimation of a new parameter. The proposed subsection includes a description of two methods that can be used for parameter estimation, namely the ``quasi Maximum Likelihood'' approach and the ``Canonical Maximum Likelihood'' method. ICC proposes to include the value at which this parameter is set conservatively and to explain that such a value reflects strong tail dependence within the simulation framework, which is important because ICC estimates that tail dependence will increase in stressed market conditions. Next, ICC proposes to remove details regarding the current stress- based approach for the RR sensitivity response component and to describe how ICC jointly simulates credit spread and RR scenarios using Monte Carlo techniques in the amended `RR Risk Analysis' section. As discussed above, under the current stress-based approach, the RR sensitivity response component is computed in terms of RR stress scenarios and incorporates potential losses associated with changes in the market implied RR. The proposed Monte Carlo-based methodology considers the risk arising from fluctuations in the market implied RRs of each SN RF and/or RSF jointly with the fluctuations in the curves of credit spreads. The univariate RR distribution assumptions do not change under the Monte Carlo-based methodology and thus the proposed `Distribution of RRs' subsection contains much of the relevant analysis under the current `RR Sensitivity Risk Analysis' section with some additional clarifying language to further specify that the RR stress-based sensitivity requirement transitioned to a Monte Carlo simulation-based methodology. ICC proposes to note the assumption regarding the analysis of each SN RF/RSF that includes the description located under the current `Beta Distribution' subsection since the integrated spread response also assumes a Beta distribution describing the behavior of the RRs. The amended `Parameter Estimation' subsection discusses the parameter calibration necessary to simulate RR scenarios and is largely the same. The proposed revisions remove or replace terminology associated with the stress-based approach with terminology associated with the Monte Carlo-based approach. The proposed `Spread-Recovery-Rate Bivariate Model' subsection describes the use of credit spread and RR distributions to jointly simulate scenarios to estimate portfolio risk measures under the Monte Carlo-based methodology. Namely, ICC proposes to discuss the use of the conditional simulation approach to jointly simulate SN RF/RSF-specific RR scenarios with SN RF/RSF MATT spread log-return scenarios. ICC proposes to note several assumptions under this model, along with an explanation of how it generates the individual SN RF/RSF-specific RR scenarios and the tenor-specific spread scenarios using copulas. ICC proposes moving the `Arbitrage-Free Modeling' subsection, which is currently located under the `Spread Risk Analysis' section, under the `Spread and RR Risk Analysis' section. The analysis remains largely the same with some language clarifications, including references to simulated spread levels in conjunction with simulated RR levels within the text and within formulas to ensure consistency with the proposed `Spread and RR Risk Analysis' section. ICC proposes further revisions to terminology, such as removing terminology associated with the stress-based approach and incorporating the Monte Carlo simulation based methodology described above to ensure consistency with the proposed `Spread and RR Risk Analysis' section. ICC also proposes replacing specific references to the current most actively traded tenor with references to the more general concept of ``most actively traded tenor'' to account for a situation in which the referenced most actively traded tenor is different. Under the proposed `Risk Estimations' subsection, ICC describes the computation of the integrated spread response component. Once the Monte Carlo scenarios are simulated, all instruments will be repriced, and the respective instrument P/L responses will be computed. Upon consideration of the instrument positions in each portfolio along with the instrument P/L responses, portfolio risk estimations will be performed and the integrated spread response component will be established. ICC proposes to discuss its calculation of P/Ls for instruments, RFs, common currency sub-portfolios, and multi-currency sub-portfolios under the new `RF and Sub-Portfolio Level Integrated Spread Response' subsection. ICC proposes to retain the use of sub-portfolios as is currently done today. However, the portfolio benefits across sub- portfolios will be limited. This enhancement allows ICC to decompose portfolio level P/L at the sub-portfolio level and to estimate sub- portfolio level risk measures. Under the proposed `Instrument P/L Estimations' subsection, ICC describes the calculation of instrument P/Ls. Namely, ICC will reprice all instruments [[Page 35036]] at the hypothetical spread and RR levels, which are derived from the simulated spread and RR scenarios, and take the difference between the prices of the instruments at the simulated scenarios and the current end-of-day (``EOD'') prices. ICC will utilize the instrument-related P/ L distribution to estimate the instrument-specific integrated spread response as the 99.5% VaR measure in the currency of the instrument. Under the proposed `RF P/L Estimations' subsection, ICC describes the calculation of RF P/Ls. ICC will utilize the simulated P/L scenarios, combined with the post-index-decomposition positions related to a given RF, to generate a currency-specific RF P/L distribution. ICC will utilize this RF-related P/L distribution to estimate the RF- specific integrated spread response as the 99.5% VaR measure in the currency of the considered RF. Under the proposed `Common Currency Sub-Portfolio P/L Estimations' subsection, ICC describes the calculation of common currency sub- portfolio P/Ls. For a currency specific sub-portfolio, ICC extracts the relevant risk measures from sub-portfolio level P/L distributions, which are obtained from the aggregation of common currency RF P/L distributions. Under the proposed `Multi-Currency Sub-Portfolio P/L Estimations' subsection, ICC adds clarifying language describing the calculation of multi-currency sub-portfolio P/Ls. ICC proposes to extend multi- currency portfolio benefits to RFs with similar market characteristics, where the RFs and their respective instruments are denominated in different currencies. Under the proposed approach, long-short integrated spread response benefits are provided between Corporate RFs that are denominated in different currencies. ICC proposes to retain the multi-currency risk aggregation approach, which involves obtaining U.S. Dollar (``USD'') and Euro (``EUR'') denominated sub-portfolio P/L distributions, to RFs within the North American Corporate and European Corporate sub-portfolios denominated in USD and EUR currencies, respectively. ICC proposes to include its calculation for the portfolio level integrated spread response component in the `Portfolio level Integrated Spread Response' subsection. The calculation will include the sub- portfolio-specific integrated spread response after any potential multicurrency benefits and the RF-specific integrated spread response. ICC proposes the new `RF Attributed Integrated Spread Response Requirements' subsection to describe the calculation of the RF attributed integrated spread response component for each RF in the considered portfolio. ICC proposes minor revisions to the `Anti-Procyclicality Measures' subsection to replace terminology associated with the stress-based approach with terminology associated with the Monte Carlo-based approach. ICC also proposes to update calculation descriptions relating to portfolio responses to note that certain amounts are converted to or represented in USD using the EOD established foreign exchange (``FX'') rate. ICC proposes updates to the `Multi-Currency Portfolio Treatment' section to incorporate the proposed integrated spread response component. ICC proposes to clarify that it implements a multi-currency portfolio treatment methodology for portfolios with instruments that are denominated in different currencies. The proposed changes also remove references to the current spread response component. ICC propose minor edits to the `Portfolio Loss Boundary Condition' section to remove or replace references to the current spread response and RR sensitivity response components with references to the proposed integrated spread response component within the text and within formulas to ensure consistency with the proposed `Spread and RR Risk Analysis' section, specifically the `Portfolio Level Integrated SR' subsection. Moreover, ICC proposes to reference, for clarity, the total number of RFs within the considered sub-portfolio in its calculations of the maximum portfolio loss and the maximum portfolio integrated spread response to ensure consistency with the proposed `Spread and RR Risk Analysis' section, specifically the `Portfolio Level Integrated SR' subsection. ICC proposes minor changes to the `Guaranty Fund (``GF'') Methodology' section. The proposed changes move the descriptions associated with the credit spread curve shape scenarios (i.e., Uniform Scaling, Pivoting, and Tenor Specific) from the current `Spread Risk Analysis' section to the `Unconditional Uncollateralized Exposures' subsection. Although the credit spread curve shape scenarios are currently considered as part of the spread response component, ICC proposes to only use them for GF purposes. The descriptions and calculations associated with the credit spread curve shape scenarios remain largely the same with some clarifying changes, including the substitution of a variable for the simulation quantile in the calculations to reflect consistency with the GF risk measure, and structural changes to the descriptions to enhance readability. Additionally, the proposed changes include reference to the integrated spread response in place of the spread response in the calculations describing the GF stress spread response. ICC proposes other non-material changes to the Risk Management Model Description Document, including minor grammatical, typographical, and structural changes to enhance readability and minor updates to calculations to update symbol notations. Risk Management Framework ICC proposes conforming revisions to its Risk Management Framework to reflect the transition from a stress-based approach to a Monte Carlo-based methodology for the spread response and RR sensitivity response components of the Initial Margin model. The proposed revisions are described in detail as follows. ICC proposes changes to the `Waterfall Level 2: Initial Margin' section to combine the spread response and the RR sensitivity components into the proposed integrated spread response component. The proposed revisions introduce the integrated spread response component under the amended `Integrated Spread Response Requirements' section and replace all references to the spread response with references to the integrated spread response. ICC proposes conforming changes throughout the framework. Currently, the spread response component is obtained by estimating scenario P/L for a set of hypothetical ``tightening'' and ``widening'' credit spread scenarios and by considering the largest loss. Under the proposed revisions, the integrated spread response will be computed by creating P/L distributions from a set of jointly- simulated hypothetical (forward looking) credit spread and RR scenarios. The proposed changes provide an updated calculation of the instrument scenario P/L, note the mappings between spread and RR levels and prices are performed by means of the International Swap and Derivatives Association (``ISDA'') standard conversion convention, and specify that the hypothetical prices are forward looking. ICC also proposes to state that the integrated spread response approach assumes a distribution that describes the behavior of the RRs. ICC proposes the new `Index Decomposition Approach' subsection, which contains the analysis under the current `Index Decomposition Benefits between Index RFs and SN RSFs' [[Page 35037]] subsection without any material changes. ICC also proposes the new `Portfolio Approach' subsection to describe the Monte Carlo simulation framework, which replaces the current stress-based approach noted above. ICC proposes to utilize Monte Carlo techniques to generate spread and RR scenarios. ICC will utilize the simulated scenarios to derive hypothetical spread and RR levels, at which each instrument is repriced in order to generate a scenario instrument P/L based on post- index-decomposition positions. For each scenario, instrument P/Ls are aggregated to obtain RF and sub-portfolio P/Ls, which represent the RF and sub-portfolio P/L distributions that are used to estimate the RF and sub-portfolio 99.5% VaR measures at a risk horizon that is at least 5 days. The portfolio level integrated spread response is estimated as a weighted sum of RF and sub-portfolio 99.5% VaR measures. ICC also proposes to move its analysis related to achieving anti pro-cyclicality to the amended `Integrated Spread Response Requirements' section without any material changes. (b) Statutory Basis Section 17A(b)(3)(F) of the Act \1\ 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; to assure the safeguarding of securities and funds which are in the custody or control of the clearing agency or for which it is responsible; 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),\2\ because ICC believes that the proposed rule changes will promote the prompt and accurate clearance and settlement of securities transactions, derivatives agreements, contracts, and transactions, and contribute to the safeguarding of securities and funds associated with security-based swap transactions in ICC's custody or control, or for which ICC is responsible. The transition to a Monte Carlo-based methodology rectifies certain limitations associated with the current stress-based approach, since Monte Carlo techniques allow ICC to consider a large set of scenarios to more appropriately capture portfolio risk, including the risk of more complex non-linear instruments, and produce consistent quantile-based portfolio risk measures. Moreover, the proposed transition to a Monte Carlo-based methodology enhances ICC's Initial Margin model since it provides a robust and flexible solution to assessing the risk of complex portfolios. As a result, ICC believes that it will be better able to capture portfolio risk and generate sound and efficient Initial Margin requirements, which would enhance the financial resources available to ICC and thus decrease the possibility that a default adversely impacts ICC's operations, thereby facilitating ICC's ability to promptly and accurately clear and settle its cleared CDS contracts and enhancing ICC's ability to assure the safeguarding of securities and funds which are in the custody or control of ICC or for which it is responsible. 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 and to contribute to the safeguarding of securities and funds associated with security- based swap transactions in ICC's custody or control, or for which ICC is responsible within the meaning of Section 17A(b)(3)(F) \3\ of the Act. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78q-1(b)(3)(F). \2\ Id. \3\ Id. --------------------------------------------------------------------------- The proposed rule change will also satisfy the requirements of Rule 17Ad-22.\4\ Rule 17Ad-22(b)(2) \5\ requires ICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions. ICC believes that the transition from a stress-based to a Monte Carlo-based methodology provides for a consistent and capital-efficient portfolio approach, which will improve ICC's ability to calculate margin requirements. An enhanced margin calculation will allow ICC to establish margin requirements that are better able to capture the risk of portfolios, including portfolios with more complex non-linear instruments, to ensure that ICC establishes margin requirements that are commensurate with the risks and characteristics of each portfolio, thereby improving ICC's ability to limit its credit exposures to participants under normal market conditions, consistent with the requirements of Rule 17Ad-22(b)(2).\6\ --------------------------------------------------------------------------- \4\ 17 CFR 240.17Ad-22. \5\ 17 CFR 240.17Ad-22(b)(2). \6\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(b)(3) \7\ requires ICC to establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the two Clearing Participant (``CP'') families to which it has the largest exposures in extreme but plausible market conditions. The utilization of Monte Carlo techniques will enhance the financial resources available to ICC by enhancing ICC's Initial Margin model such that ICC is better able to capture portfolio risk and generate stable and efficient Initial Margin requirements. As a result, the likelihood that a default adversely impacts ICC's operations lessens, allowing ICC to continue to ensure that it maintains sufficient financial resources 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, consistent with the requirements of Rule 17Ad-22(b)(3).\8\ --------------------------------------------------------------------------- \7\ 17 CFR 240.17Ad-22(b)(3). \8\ Id. --------------------------------------------------------------------------- Rule 17Ad-22(d)(8) \9\ requires ICC to have governance arrangements that are clear and transparent to fulfill the public interest requirements in Section 17A of the Act.\10\ ICC's Risk Management Framework and Risk Management Model Description Document clearly assign and document responsibility and accountability for risk decisions and require consultation with or approval from the ICC Board, committees, or management. ICC determined to transition to a Monte Carlo-based methodology in accordance with its governance process, which included review of the changes to the Risk Management Framework and the Risk Management Model Description Document and related risk management considerations by the ICC Risk Committee and approval by the Board. These governance arrangements continue to be clear and transparent, such that information relating to the assignment of responsibilities for risk decisions and the requisite involvement of the ICC Board, committees, and management is clearly documented, consistent with the requirements of Rule 17Ad-22(d)(8).\11\ --------------------------------------------------------------------------- \9\ 17 CFR 240.17Ad-22(d)(8). \10\ 15 U.S.C. 78q-1. \11\ 17 CFR 240.17Ad-22(d)(8). --------------------------------------------------------------------------- (B) Clearing Agency's Statement on Burden on Competition ICC does not believe the proposed rule changes would have any impact, or impose any burden, on competition. The proposed changes to ICC's Risk Management Model Description Document and ICC's Risk Management Framework will apply uniformly across [[Page 35038]] all market participants. 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) Clearing Agency's Statement on Comments on the Proposed Rule Change, Security-Based Swap Submission, or Advance Notice 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, Security-Based Swap Submission, or Advance Notice 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, security-based swap submission, or advance notice is consistent with the Act. Comments may be submitted by any of the following methods: Electronic CommentsUse the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to rule-comments@sec.gov. Please include File Number SR-ICC-2018-008 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090. All submissions should refer to File Number SR-ICC-2018-008. 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 (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change, security-based swap submission, or advance notice that are filed with the Commission, and all written communications relating to the proposed rule change, security-based swap submission, or advance notice 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 the filing also will 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-2018-008 and should be submitted on or before August 14, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\12\ --------------------------------------------------------------------------- \12\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018-15771 Filed 7-23-18; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Notices 35033
ESTIMATE OF ANNUAL RESPONDENT BURDEN—Continued
Annual Time Burden
Form No. responses (minutes) (hours)
BA–9 (FTP) .................................................................................................................................. 160 76 203
Total ...................................................................................................................................... 360 ........................ 457
Additional Information or Comments: methodology for the spread response rectifies these limitations, as it
To request more information or to and recovery rate (‘‘RR’’) sensitivity considers a large set of scenarios to
obtain a copy of the information response components of the Initial more appropriately capture portfolio
collection justification, forms, and/or Margin model. These revisions do not risk, including the risk of more complex
supporting material, contact Dana require any changes to the ICC Clearing non-linear instruments, and produces
Hickman at (312) 751–4981 or Rules. consistent quantile-based portfolio risk
Dana.Hickman@RRB.GOV. Comments measure estimates.
II. Clearing Agency’s Statement of the To derive the spread response
regarding the information collection Purpose of, and Statutory Basis for, the
should be addressed to Brian Foster, component, the current stress-based
Proposed Rule Change, Security-Based approach considers a set of hypothetical
Railroad Retirement Board, and 844 Swap Submission, or Advance Notice
North Rush Street, Chicago, Illinois ‘‘tightening’’ and ‘‘widening’’ credit
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rrb.gov. Written comments should be included statements concerning the computes instrument Profit/Loss (‘‘P/
received within 60 days of this notice. purpose of and basis for the proposed L’’) responses for every Risk Factor
rule change, security-based swap (‘‘RF’’) scenario. All instrument P/L
Brian Foster, submission, or advance notice and responses for a scenario are aggregated
Clearance Officer. discussed any comments it received on to obtain the portfolio P/L response for
[FR Doc. 2018–15755 Filed 7–23–18; 8:45 am] the proposed rule change, security- that scenario. Since the set of scenarios
BILLING CODE 7905–01–P based swap submission, or advance does not reflect the joint distribution of
notice. The text of these statements may the considered RFs, offsets between P/
be examined at the places specified in Ls are applied to provide some portfolio
SECURITIES AND EXCHANGE Item IV below. ICC has prepared benefits. To derive the RR sensitivity
COMMISSION summaries, set forth in sections (A), (B), response component, all instruments
and (C) below, of the most significant belonging to a RF or Risk Sub-Factor
[Release No. 34–83662; File No. SR–ICC– aspects of these statements.
2018–008]
(‘‘RSF’’) are subjected to RR stress
(A) Clearing Agency’s Statement of the scenarios to obtain the resulting P/L
Self-Regulatory Organizations; ICE Purpose of, and Statutory Basis for, the responses, and the worst scenario
Clear Credit LLC; Notice of Filing of Proposed Rule Change, Security-Based response is chosen for the estimation of
Proposed Rule Change Relating to Swap Submission, or Advance Notice the RF/RSF RR sensitivity response
ICC’s Risk Management Model component.
(a) Purpose Under the proposed Monte Carlo-
Description Document and ICC’s Risk
Management Framework ICC proposes revising its Risk based methodology, the ‘‘integrated
Management Model Description spread response’’ component replaces
July 18, 2018. Document and its Risk Management the spread response and RR sensitivity
Pursuant to Section 19(b)(1) of the Framework. ICC believes such revisions response components. This component
Securities Exchange Act of 1934, 15 will facilitate the prompt and accurate will be computed by creating P/L
U.S.C. 78s(b)(1) and Rule 19b–4, 17 CFR clearance and settlement of securities distributions from a set of jointly-
240.19b–4, notice is hereby given that transactions and derivative agreements, simulated hypothetical (forward
on July 5, 2018, ICE Clear Credit LLC contracts, and transactions for which it looking) spread and RR scenarios. The
(‘‘ICC’’) filed with the Securities and is responsible. The proposed revisions proposed Monte Carlo-based
Exchange Commission the proposed are described in detail as follows. methodology utilizes standard tools in
rule change as described in Items I, II The purpose of the proposed changes modeling dependence, which can be
and III below, which Items have been is to transition from a stress-based seen as a means for constructing
prepared by ICC. The Commission is approach to a Monte Carlo-based multivariate distributions with different
publishing this notice to solicit methodology for the spread response univariate distributions and with
comments on the proposed rule change and recovery rate (‘‘RR’’) sensitivity desired dependence structures, to
from interested persons. response components of the Initial generate the spread and RR scenarios.
Margin model. ICC notes certain The proposed Monte Carlo-based
I. Clearing Agency’s Statement of the limitations of its stress-based approach, methodology provides flexibility in
Terms of Substance of the Proposed namely, that it generates a limited modeling tail dependence, an important
Rule Change, Security-Based Swap number of stress scenarios that may not concept in risk management as it
Submission, or Advance Notice capture the risk of portfolios with more
jstallworth on DSKBBY8HB2PROD with NOTICES
provides information about how
The principal purpose of the complex non-linear instruments and frequently extreme values are expected
proposed rule change is to make that it does not provide for a consistent to occur, and thus ICC considers them
revisions to the ICC Risk Management estimation of the portfolio level spread particularly suitable for implementing
Model Description Document and the response based on a defined risk its Monte Carlo framework.
ICC Risk Management Framework measure (e.g., Value-at-Risk (‘‘VaR’’)) The univariate RF distribution
related to the transition from a stress- and quantile (e.g., 99%). The transition assumptions do not change under the
based approach to a Monte Carlo-based to a Monte Carlo-based methodology proposed Monte Carlo-based
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![35038 Federal Register / Vol. 83, No. 142 / Tuesday, July 24, 2018 / Notices
all market participants. Therefore, ICC internet website (http://www.sec.gov/ ‘‘Exchange’’) filed with the Securities
does not believe the proposed rule rules/sro.shtml). Copies of the and Exchange Commission
changes impose any burden on submission, all subsequent (‘‘Commission’’) the proposed rule
competition that is inappropriate in amendments, all written statements change as described in Items I and II
furtherance of the purposes of the Act. with respect to the proposed rule below, which Items have been prepared
change, security-based swap by the Exchange. The Commission is
(C) Clearing Agency’s Statement on submission, or advance notice that are
Comments on the Proposed Rule publishing this notice to solicit
filed with the Commission, and all comments on the proposed rule change
Change, Security-Based Swap written communications relating to the
Submission, or Advance Notice from interested persons.
proposed rule change, security-based
Received From Members, Participants or swap submission, or advance notice I. Self-Regulatory Organization’s
Others between the Commission and any Statement of the Terms of Substance of
Written comments relating to the person, other than those that may be the Proposed Rule Change
proposed rule change have not been withheld from the public in accordance
solicited or received. ICC will notify the with the provisions of 5 U.S.C. 552, will The Exchange proposes to amend the
Commission of any written comments be available for website viewing and Exchange’s Schedule of Fees, as further
received by ICC. printing in the Commission’s Public described below.
Reference Room, 100 F Street NE, The text of the proposed rule change
III. Date of Effectiveness of the
Washington, DC 20549, on official is available on the Exchange’s website at
Proposed Rule Change, Security-Based
business days between the hours of http://ise.cchwallstreet.com/, at the
Swap Submission, or Advance Notice
10:00 a.m. and 3:00 p.m. Copies the principal office of the Exchange, and at
and Timing for Commission Action filing also will be available for the Commission’s Public Reference
Within 45 days of the date of inspection and copying at the principal Room.
publication of this notice in the Federal office of ICE Clear Credit and on ICE
Register or within such longer period Clear Credit’s website at https:// II. Self-Regulatory Organization’s
up to 90 days (i) as the Commission may www.theice.com/clear-credit/regulation. Statement of the Purpose of, and
designate if it finds such longer period All comments received will be posted Statutory Basis for, the Proposed Rule
to be appropriate and publishes its without change. Persons submitting Change
reasons for so finding or (ii) as to which comments are cautioned that we do not
the self-regulatory organization In its filing with the Commission, the
redact or edit personal identifying
consents, the Commission will: information from comment submissions. Exchange included statements
(A) By order approve or disapprove You should submit only information concerning the purpose of and basis for
such proposed rule change, or that you wish to make available the proposed rule change and discussed
(B) institute proceedings to determine publicly. All submissions should refer any comments it received on the
whether the proposed rule change to File Number SR–ICC–2018–008 and proposed rule change. The text of these
should be disapproved. should be submitted on or before statements may be examined at the
August 14, 2018. places specified in Item IV below. The
IV. Solicitation of Comments Exchange has prepared summaries, set
For the Commission, by the Division of
Interested persons are invited to forth in sections A, B, and C below, of
Trading and Markets, pursuant to delegated
submit written data, views, and authority.12 the most significant aspects of such
arguments concerning the foregoing, Eduardo A. Aleman, statements.
including whether the proposed rule Assistant Secretary. A. Self-Regulatory Organization’s
change, security-based swap
submission, or advance notice is
[FR Doc. 2018–15771 Filed 7–23–18; 8:45 am] Statement of the Purpose of, and
consistent with the Act. Comments may BILLING CODE 8011–01–P Statutory Basis for, the Proposed Rule
be submitted by any of the following Change
methods: SECURITIES AND EXCHANGE 1. Purpose
Electronic Comments COMMISSION
The Exchange recently received
• Use the Commission’s internet [Release No. 34–83660; File No. SR–ISE– approval to list index options on the
comment form (http://www.sec.gov/ 2018–63] Nasdaq 100 Reduced Value Index
rules/sro.shtml); or (‘‘NQX’’) on a pilot basis.3 The NQX
• Send an email to rule-comments@ Self-Regulatory Organizations; Nasdaq options contract will be the same in all
sec.gov. Please include File Number SR– ISE, LLC; Notice of Filing and respects as the current Nasdaq-100
ICC–2018–008 on the subject line. Immediate Effectiveness of Proposed Index (‘‘NDX’’) options contract listed
Rule Change To Amend the
Paper Comments on the Exchange, except that it will be
Exchange’s Schedule of Fees To
based on 1⁄5 of the value of the Nasdaq
Send paper comments in triplicate to Waive Fees and Rebates for Trades in
100 Index, and will be P.M. settled with
Secretary, Securities and Exchange NQX Options
an exercise settlement value based on
Commission, 100 F Street NE, July 18, 2018. the closing index value of the Nasdaq
Washington, DC 20549–1090. Pursuant to Section 19(b)(1) of the 100 on the day of expiration.4 The
All submissions should refer to File
jstallworth on DSKBBY8HB2PROD with NOTICES
Securities Exchange Act of 1934
Number SR–ICC–2018–008. This file (‘‘Act’’),1 and Rule 19b–4 thereunder,2 3 See Securities Exchange Act Release No. 82911
number should be included on the notice is hereby given that on July 6, (March 20, 2018), 83 FR 12966 (March 26, 2018)
subject line if email is used. To help the 2018, Nasdaq ISE, LLC (‘‘ISE’’ or (SR–ISE–2017–106).
4 Id. The Exchange notes that similar features are
Commission process and review your
available with other index options contracts listed
comments more efficiently, please use 12 17 CFR 200.30–3(a)(12). on the Exchange and other options exchanges,
only one method. The Commission will 1 15 U.S.C. 78s(b)(1). including P.M. settled options on the full value of
post all comments on the Commission’s 2 17 CFR 240.19b–4. the Nasdaq-100 Index (‘‘NDXP’’).
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Document Created: 2018-07-24 00:10:44
Document Modified: 2018-07-24 00:10:44
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 83 FR 35033 |
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