Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Notice of Filings of Proposed Rule Changes To Adopt the Clearing Agency Stress Testing Framework (Market Risk), 19131-19136 [2017-08283]
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Federal Register / Vol. 82, No. 78 / Tuesday, April 25, 2017 / Notices
Replenishment Plan is consistent with
Rule 17Ad–22(e)(15)(iii).28
(B) Clearing Agencies’ Statements on
Burden on Competition
Electronic Comments
Each of the Clearing Agencies believes
that neither the Capital Policy nor the
Capital Replenishment Plan would have
any impact, or impose any burden, on
competition because the Proposed Rule
Changes would implement the Policy
and the Plan as rules within the
meaning of Rule 19b–4 under the Act.29
The Policy and the Plan have been
developed and documented in order to
satisfy the regulatory requirements set
forth above, and they generally reflect
existing tools and existing internal
procedures. Existing tools that would
have a direct impact on the rights,
responsibilities or obligations of
members or participants of the Clearing
Agencies are reflected in the Clearing
Agencies’ existing rules.30 Accordingly,
the Policy and the Plan themselves are
documents intended to enhance the
Clearing Agencies’ internal management
and regulatory compliance and therefore
do not have any impact, or impose any
burden, on competition.
(C) Clearing Agencies’ Statements on
Comments on the Proposed Rule
Changes Received From Members,
Participants, or Others
The Clearing Agencies have not
solicited or received any written
comments relating to this proposal. The
Clearing Agencies will notify the
Commission of any written comments
received by the Clearing Agencies.
III. Date of Effectiveness of the
Proposed Rule Changes, and Timing for
Commission Action
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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 clearing agency consents, the
Commission will:
(A) by order approve or disapprove
such Proposed Rule Changes, or
(B) institute proceedings to determine
whether the Proposed Rule Changes
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
Changes are consistent with the Act.
Comments may be submitted by any of
the following methods:
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
DTC–2017–003, SR–NSCC–2017–004 or
SR–FICC–2017–007 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–DTC–2017–003, SR–NSCC–
2017–004 or SR–FICC–2017–007. One of
these file numbers 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
(https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent
amendments, all written statements
with respect to the Proposed Rule
Changes that are filed with the
Commission, and all written
communications relating to the
Proposed Rule Changes 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 the
filing also will be available for
inspection and copying at the principal
office of the Clearing Agencies, and on
DTCC’s Web site (https://dtcc.com/legal/
sec-rule-filings.aspx). 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–DTC–
2017–003, SR–NSCC–2017–004 or SR–
FICC–2017–007, and should be
submitted on or before May 16, 2017.
28 Id.
29 17
CFR 240.19b–4.
note 4.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.31
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–08287 Filed 4–24–17; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80485; File Nos. SR–DTC–
2017–005; SR–FICC–2017–009; SR–NSCC–
2017–006]
Self-Regulatory Organizations; The
Depository Trust Company; Fixed
Income Clearing Corporation; National
Securities Clearing Corporation;
Notice of Filings of Proposed Rule
Changes To Adopt the Clearing
Agency Stress Testing Framework
(Market Risk)
April 19, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934, as
amended (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on April 7, 2017, The Depository Trust
Company (‘‘DTC’’), Fixed Income
Clearing Corporation (‘‘FICC’’), and
National Securities Clearing Corporation
(‘‘NSCC,’’ and together with DTC and
FICC, the ‘‘Clearing Agencies’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule changes as described in
Items I and II below, which Items have
been prepared primarily by the Clearing
Agencies. The Commission is
publishing this notice to solicit
comments on the proposed rule changes
from interested persons.
I. Clearing Agencies’ Statements of the
Terms of Substance of the Proposed
Rule Changes
The proposed rule changes would
adopt the Clearing Agency Stress
Testing Framework (Market Risk)
(‘‘Framework’’) of the Clearing
Agencies, described below. The
Framework would apply to both of
FICC’s divisions, the Government
Securities Division (‘‘GSD’’) and the
Mortgage-Backed Securities Division
(‘‘MBSD’’). The Framework would be
maintained by the Clearing Agencies in
compliance with Rule 17Ad–22(e)(4)(i),
(iii) through (vii), under the Act, as
described below.3
31 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 17 CFR 240.17Ad–22(e)(4)(i), and (iii) through
(vii). The Commission adopted amendments to Rule
17Ad–22, including the addition of new section
1 15
30 Supra
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Although the Clearing Agencies
would consider the Framework to be a
rule, the proposed rule changes do not
require any changes to the Rules, ByLaws and Organizational Certificate of
DTC (‘‘DTC Rules’’), the Rulebook of
GSD (‘‘GSD Rules’’), the Clearing Rules
of MBSD (‘‘MBSD Rules’’), or the Rules
& Procedures of NSCC (‘‘NSCC Rules’’),
as the Framework would be a
standalone document.4
II. Clearing Agencies’ Statements of the
Purpose of, and Statutory Basis for, the
Proposed Rule Changes
In their filings with the Commission,
the Clearing Agencies included
statements concerning the purpose of
and basis for the proposed rule changes
and discussed any comments they
received on the proposed rule changes.
The text of these statements may be
examined at the places specified in Item
IV below. The Clearing Agencies have
prepared summaries, set forth in
sections A, B, and C below, of the most
significant aspects of such statements.
(A) Clearing Agencies’ Statements of the
Purpose of, and Statutory Basis for, the
Proposed Rule Changes
1. Purpose
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The Clearing Agencies are proposing
to adopt the Framework, which would
set forth the manner in which each
Clearing Agency effectively identifies,
measures, monitors and manages its
credit exposures to Members 5 and those
arising from its payment, clearing, and
settling processes, as applicable. In
general, the Framework would describe
the stress testing practices adopted by
the Clearing Agencies that are designed
to ensure the sufficiency of each
Clearing Agency’s total prefunded
financial resources, as described in
greater detail below. The Framework
would describe (i) the sources of each
Clearing Agency’s total prefunded
financial resources; (ii) the Clearing
Agencies’ stress testing methodologies;
(iii) the Clearing Agencies’ stress testing
governance and execution processes;
17Ad–22(e), on September 28, 2016. See Securities
Exchange Act Release No. 78961 (September 28,
2016), 81 FR 70786 (October 13, 2016) (S7–03–14).
Each of the Clearing Agencies is a ‘‘covered clearing
agency’’ as defined in Rule 17Ad–22(a)(5), and must
comply with new section (e) of Rule 17Ad–22 by
April 11, 2017.
4 Capitalized terms not defined herein are defined
in the DTC Rules, GSD Rules, MBSD Rules, or
NSCC Rules, as applicable, available at https://
dtcc.com/legal/rules-and-procedures.
5 FICC and NSCC refer to their participants as
‘‘Members,’’ while DTC refers to its participants as
‘‘Participants.’’ These terms are defined in the rules
of each of the Clearing Agencies. Supra note 4. In
this filing ‘‘Members’’ refers to both the Members
of FICC and NSCC and the Participants of DTC.
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17:42 Apr 24, 2017
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and (iv) the Clearing Agencies’ model
validation practices. The Framework
would address stress testing of each
Clearing Agency’s total prefunded
financial resources, and would not
address assessments for additional
contributions or other resources that are
not prefunded and may be available to
the Clearing Agencies. The Framework
would be owned and managed by the
Data and Portfolio Analytics group
within the Quantitative Risk
Management department.6
The Framework would first outline
the regulatory requirements that apply
to each Clearing Agency with respect to
credit risk management, and then would
describe how the Clearing Agencies
address those requirements. The
Framework would describe the credit
risk management strategy of each of the
Clearing Agencies,7 which is to
maintain sufficient prefunded financial
resources to cover fully its credit
exposures to each Member with a high
degree of confidence, and further, to
maintain additional prefunded financial
resources at a minimum to enable it to
cover a wide range of foreseeable stress
scenarios that include, but are not
limited to, the default of the affiliated
family (‘‘Affiliated Family’’) of Members
that would potentially cause the largest
aggregate credit exposure to the Clearing
Agency in extreme but plausible market
conditions (‘‘Cover One Requirement’’).8
Because the credit risks and prefunded
financial resources of the Clearing
Agencies are different in certain
respects, the Framework would describe
the prefunded financial resources and
related stress testing methodologies of
the Clearing Agencies separately, where
applicable.
The Framework would describe the
sources of prefunded financial resources
of the Clearing Agencies for purposes of
compliance with Rule 17Ad–22(e)(4).9
With respect to FICC and NSCC, the
Framework would describe that such
prefunded financial resources are their
respective clearing funds, which contain
deposits from their Members pursuant
to their respective rules consisting of
both cash and eligible securities, with
6 The parent company of the Clearing Agencies is
The Depository Trust & Clearing Corporation
(‘‘DTCC’’). DTCC operates on a shared services
model with respect to the Clearing Agencies. Most
corporate functions are established and managed on
an enterprise-wide basis pursuant to intercompany
agreements under which it is generally DTCC that
provides a relevant service to a Clearing Agency.
7 Rule 17Ad–22(e)(4) under the Act refers to these
risks as ‘‘credit risks.’’ 17 CFR 240.17Ad–22(e)(4),
supra note 3. Because the Clearing Agencies refers
to these risks as ‘‘market risks,’’ the Framework
would use these terms interchangeably.
8 See 17 CFR 240.17Ad–22(e)(4)(iii). Supra note 3.
9 17 CFR 240.17Ad–22(e)(4). Supra note 3.
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any eligible securities being subject to a
haircut, as provided for under those
rules.10 The Framework would describe
that such deposits are calculated for
each individual Member pursuant to the
GSD Rules, MBSD Rules, or NSCC
Rules, as applicable, and each Member’s
deposits would be referred to in the
Framework as its ‘‘Required Deposit.’’ 11
With respect to DTC, the Framework
would describe that its prefunded
financial resources are cash deposits to
its Participants Fund, made by its
Members pursuant to the DTC Rules.12
The Framework would also describe
that DTC may use its risk management
control, the ‘‘Collateral Monitor,’’ to
monitor and assure that the settlement
obligations of each Member are fully
collateralized.13
The Framework would describe the
stress testing methodologies that are
used by the Clearing Agencies to test the
sufficiency of their total prefunded
financial resources, described above,
against potential losses, assuming the
default of a Member with the largest
credit exposure to a Clearing Agency
and that Member’s Affiliated Family
under extreme but plausible market
conditions. The Framework would state
that the stress testing would be designed
to identify potential weaknesses in the
methodologies used to calculate
Members’ Required Deposits and to
determine collateral haircuts.
The Framework would describe in
detail the three key components of the
development of stress testing
methodologies, which include the
following:
Risk Identification. The Clearing Agencies
identify the principal credit risk drivers that
are representative and specific to each
Clearing Agency’s clearing and/or collateral
portfolio to determine risk exposures by
analyzing the securities and risk exposures in
their Members’ clearing and/or collateral
portfolios to identify representative principal
market risk drivers and to capture the risk
sensitivity of the clearing and/or collateral
portfolios under stressed market conditions.
Scenario Development. The Clearing
Agencies construct comprehensive and
relevant sets of extreme but plausible
historical and hypothetical stress scenarios
for the identified risk drivers. The
Framework would describe how the Clearing
Agencies develop and select both historical
and hypothetical scenarios that reflect
10 FICC/GSD Rule 4 (Clearing Fund and Loss
Allocation), FICC/MBSD Rule 4 (Clearing Fund and
Loss Allocation), and NSCC Rule 4 (Clearing Fund).
Supra note 4.
11 Id.
12 DTC Rule 4 (Participants Fund and Participants
Investment). Supra note 4.
13 ‘‘Collateral Monitor’’ is defined in DTC Rule 1,
Section 1 (Definitions), and its calculation is further
provided for in the DTC Settlement Service Guide
of the DTC Rules. Supra note 4.
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stressed market conditions. Historical
scenarios are based on stressed market
conditions that occurred on specific dates in
the past. Hypothetical stress scenarios are
theoretical market conditions that could
conceivably occur.
Risk Measurement and Aggregation. The
Clearing Agencies calculate the risk metrics
of each Clearing Agency’s actual portfolio to
estimate the profits and losses (‘‘P&L’’) of
close out over a suitable stressed period of
risk, deficiencies, and coverage ratios. The
Framework would describe how the Clearing
Agencies develop P&L estimation
methodologies, and how they calculate risk
metrics that are applicable to such
methodologies under the chosen stress
testing scenarios. Risk metrics may include,
without limitation, deficiency and coverage
ratios. The Clearing Agencies may use a
number of P&L methodologies for stress
testing purposes, including risk sensitivity,
index mapping, and actual or approximate
historical shock approaches.
The Framework would define
‘‘Member stress deficiency’’ for each
scenario as, with respect to FICC and
NSCC, the stress loss exceeding the
applicable Member’s Required Deposits,
and for DTC, the shortfall of a Member’s
Collateral Monitor. The Framework
would also define ‘‘Affiliated Family
deficiency’’ as the aggregate of all
Member stress deficiencies within the
applicable Affiliated Family. Finally,
the Framework would define ‘‘Cover
One Ratio’’ as the ratio of Affiliated
Family deficiency over the total value of
the relevant Clearing Agency’s clearing
fund (or, for DTC, the Participants
Fund), excluding the value of the
applicable Affiliated Family’s Required
Deposits. The Framework would state
that the Clearing Agencies calculate
Member stress deficiencies, Affiliated
Family deficiencies, and Cover One
Ratios daily.
The Framework would state that FICC
and NSCC consider other coverage
ratios as well, such as comparing
Member stress deficiencies against such
Member’s known financial resources
(e.g., equity capital base), to keep
abreast of potential financial
vulnerabilities facing such Member.
Additionally, the Framework would
state that DTC also tests the adequacy of
its collateral haircuts by measuring
‘‘Haircut Deficiency’’ as the amount of
stress losses exceeding the haircut
applied to collateral securities.
The Framework would state that the
Clearing Agencies also apply wrong-way
risk scenarios to measure both specific
and generic wrong-way risk for each
Clearing Agency’s Members and
Affiliated Families. Such scenarios
reflect the default of a Member’s
Affiliated Family, and the potential
impacts of that default to all securities
in the Affiliated Family’s clearing or
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collateral portfolios, as well as the
potential general market impacts of that
default to other securities. The
Framework would describe the reverse
stress testing analyses that are
performed by FICC and NSCC on at least
a semi-annual basis. These analyses
provide FICC and NSCC, as central
counterparties, another means for
testing the sufficiency of the Clearing
Agencies’ respective prefunded
financial resources. In conducting
reverse stress testing, FICC and NSCC
utilize scenarios of multiple defaults,
extreme market shocks or shocks for
other risk factors, which would cause
those Clearing Agencies, as applicable,
to exhaust all of their respective
prefunded financial resources.
The Framework would describe the
Clearing Agencies’ stress testing
governance and execution processes.
Stress testing is conducted daily for
each of the Clearing Agencies, and stress
testing risk metrics are also generated
each day. Stress testing results of Cover
One Ratios and Member stress
deficiencies of certain Members are
monitored against pre-established
thresholds.14 Breaches of these preestablished thresholds are initially
subject to more detailed studies to
identify any potential impact to the
applicable Clearing Agencies’ Cover
One Requirement. The Framework
would describe that, to the extent such
studies indicate a potential impact to a
Clearing Agency’s Cover One
Requirement, the threshold breach
would be escalated internally and
analyzed to determine if either there is
a need to adjust the stress testing
methodology, or if the threshold breach
indicates an issue with a particular
Member. Based on these analyses, the
Clearing Agencies determine the
appropriate course of action, which
could include options available under
their respective rules.
The Framework would describe that
the Clearing Agencies conduct
comprehensive analyses of daily stress
testing results, the existing scenario sets
(including any changes to such
scenarios for the period since the last
review), and the performance of the
methodologies along with key
underlying parameters and
assumptions. These analyses are
performed at least monthly and are
conducted to assess whether each
Clearing Agency’s stress testing
components are appropriate for
determining the sufficiency of its
14 Risk threshold levels are chosen to assist each
Clearing Agency in achieving a high degree of
confidence that its Cover One Requirement is met
daily.
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19133
prefunded financial resources in light of
current and evolving market conditions.
The Framework would state that such
analyses may occur more frequently
than monthly if, for example, the
products cleared or markets served by a
Clearing Agency display high volatility
or become less liquid, or when the size
or concentration of positions held by the
applicable Clearing Agency’s Members
increases significantly.
The Framework would state that the
results of these analyses are reviewed
monthly by the DTCC Enterprise Stress
Testing Council. The Framework would
also state that daily stress testing results
are summarized and reported monthly
to the DTCC Risk Management
Committee. Finally, the Framework
would state that stress testing
methodologies and related models are
subject to independent model validation
on at least an annual basis.
2. Statutory Basis
The Clearing Agencies believe that the
proposed rule changes are consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to a registered clearing
agency. In particular, the Clearing
Agencies believe that the Framework is
consistent with Section 17A(b)(3)(F) of
the Act,15 as well as Rule 17Ad–
22(b)(3),16 and the subsections cited
below of Rule 17Ad–22(e)(4),17 each
promulgated under the Act, for the
reasons described below.
Section 17A(b)(3)(F) of the Act
requires, in part, that the rules of a
registered clearing agency be designed
to promote the prompt and accurate
clearance and settlement of securities
transactions, and 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.18 As described in greater
detail above, the Framework would
describe how the Clearing Agencies
have developed and carry out a credit
risk management strategy to maintain
sufficient prefunded financial resources
to cover fully its credit exposures to
each Member with a high degree of
confidence, and further, to maintain
additional prefunded financial
resources at a minimum to enable it to
cover a wide range of foreseeable stress
scenarios that include, but are not
limited to the Cover One Requirement.
As such, the credit risk management
strategy of the Clearing Agencies
addresses their credit exposures and
15 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(3).
17 17 CFR 240.17Ad–22(e)(4). Supra note 3.
18 15 U.S.C. 78q–1(b)(3)(F).
16 17
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allows them to continue the prompt and
accurate clearance and settlement of
securities and can continue to assure the
safeguarding of securities and funds
which are in their custody or control or
for which they are responsible
notwithstanding those risks. Therefore,
the Clearing Agencies believe the
Framework, which describes how the
Clearing Agencies carry out this
strategy, is consistent with the
requirements of Section 17A(b)(3)(F) of
the Act.19
Rule 17Ad–22(b)(3) under the Act
requires, in part, that a registered
clearing agency that performs central
counterparty services establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to, among other
things, maintain sufficient financial
resources to withstand, at a minimum,
a default by the participant family to
which it has the largest exposure in
extreme but plausible market
conditions.20 As described above, the
Framework would describe how both
FICC and NSCC have developed and
carry out a credit risk management
strategy to maintain sufficient
prefunded financial resources to cover
fully its credit exposures to each
Member with a high degree of
confidence, and further, to maintain
additional prefunded financial
resources at a minimum to enable it to
cover a wide range of foreseeable stress
scenarios that include, but are not
limited to the Cover One Requirement.
By carrying out their credit risk
management strategy and conducting
this daily stress testing to test the
sufficiency of their prefunded financial
resources, FICC and NSCC believe the
Framework is consistent with Rule
17Ad–22(b)(3).21
The proposed rule changes are also
designed to be consistent with Rule
17Ad–22(e)(4) under the Act, which
requires, in part, that each covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
effectively identify, measure, monitor,
and manage its credit exposures to
participants and those arising from its
payment, clearing, and settlement
processes.22 The Clearing Agencies
believe the Framework is designed to
meet the requirements of the following
subsections of Rule 17Ad–22(e)(4),23
cited below, for the reasons described
below.
Rule 17Ad–22(e)(4)(i) under the Act
requires that a covered clearing agency
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence.24 Rule 17Ad–22(e)(4)(iii)
under the Act requires that, to the extent
not already maintained pursuant to Rule
17Ad–22(e)(4)(i) under the Act, for a
covered clearing agency not subject to
Rule 17Ad–22(e)(4)(ii) under the Act, a
covered clearing agency maintain
additional financial resources at the
minimum to enable it to cover a wide
range of foreseeable stress scenarios that
include, but are not limited to, the
default of the participant family that
would potentially cause the largest
aggregate credit exposure for the
covered clearing agency in extreme but
plausible market conditions.25 The
Framework would describe how the
Clearing Agencies have developed and
carry out a credit risk management
strategy to maintain sufficient
prefunded financial resources to cover
fully its credit exposures to each
Member with a high degree of
confidence, and further, to maintain
additional prefunded financial
resources at a minimum to enable it to
cover a wide range of foreseeable stress
scenarios that include, but are not
limited to the Cover One Requirement.
The Framework would also describe
how each Clearing Agency tests the
sufficiency of its prefunded resources
daily to support compliance with this
requirement. As such, the Clearing
Agencies believe the Framework is
designed to meet the requirements of
Rule 17Ad–22(e)(4)(i) and (iii) under the
Act.26
Rule 17Ad–22(e)(4)(iv) under the Act
requires that a covered clearing agency
include prefunded financial resources,
exclusive of assessments for additional
guaranty fund contributions or other
resources that are not prefunded, when
calculating financial resources available
to meet the standards under Rule 17Ad–
22(e)(4)(i) through (iii) under the Act, as
applicable.27 The Framework would
identify the sources of prefunded
resources of each Clearing Agency for
purposes of meeting its requirements
under Rule 17Ad-22(e)(4)(iii), and
further would state that the stress
testing used to test the sufficiency of
those resources do not test other
resources that are not prefunded.
28 Id.
19 Id.
20 17
Therefore, the Clearing Agencies believe
the Framework is consistent with Rule
17Ad–22(e)(4)(iv) under the Act.28
Rule 17Ad–22(e)(4)(v) under the Act
requires that a covered clearing agency
maintain the financial resources under
Rule 17Ad–22(e)(4)(ii) and (iii) under
the Act, in combined or separately
maintained clearing or guaranty
funds.29 The Framework would identify
the sources of prefunded resources of
each Clearing Agency for purposes of
meeting its requirements under Rule
17Ad–22(e)(4)(iii) as their Members’
deposits to, with respect to NSCC and
FICC, their respective clearing funds,
and, with respect to DTC, deposits to its
Participants Fund. Therefore, the
Clearing Agencies believe the
Framework is consistent with Rule
17Ad–22(e)(v) under the Act.30
Rule 17Ad–22(e)(4)(vi)(A) under the
Act requires that a covered clearing
agency conduct stress testing of its total
financial resources once each day using
standard predetermined parameters and
assumptions.31 The Framework would
describe how the Clearing Agencies
conduct stress tests on a daily basis, and
would describe how the Clearing
Agencies develop the stress testing
methodologies for these tests.
Specifically, the Framework would
describe how the stress testing
methodologies are developed through
risk identification, scenario
development, and risk measurement
and aggregation. The Framework would
also state that the stress testing
methodologies are reviewed and
analyzed monthly to determine if the
components continue to be appropriate
for determining sufficiency of the
Clearing Agencies’ prefunded financial
resources. Therefore, the Clearing
Agencies believe the Framework is
consistent with Rule 17Ad–
22(e)(4)(vi)(A) under the Act.32
Rule 17Ad–22(e)(4)(vi)(B) under the
Act requires that a covered clearing
agency conduct a comprehensive
analysis on at least a monthly basis of
the existing stress testing scenarios,
models, and underlying parameters and
assumptions, and consider
modifications to ensure they are
appropriate for determining the covered
clearing agency’s required level of
default protection in light of current and
evolving market conditions.33 Rule
17Ad–22(e)(4)(vi)(C) under the Act
requires that a covered clearing agency
CFR 240.17Ad–22(b)(3).
24 17
21 Id.
22 17 CFR 240.17Ad–22(e)(4)(i), and (iii) through
(vii). Supra note 3.
23 17 CFR 240.17Ad–22(e)(4). Supra note 3.
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CFR 240.17Ad–22(e)(4)(i). Supra note 3.
25 17 CFR 240.17Ad–22(e)(4)(iii). Supra note 3.
26 17 CFR 240.17Ad–22(e)(4)(i) and (iii). Supra
note 3.
27 17 CFR 240.17Ad–22(e)(4)(iv). Supra note 3.
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29 17
CFR 240.17Ad–22(e)(4)(v). Supra note 3.
30 Id.
31 17
CFR 240.17Ad–22(e)(4)(vi)(A). Supra note 3.
32 Id.
33 17
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CFR 240.17Ad–22(e)(4)(vi)(B). Supra note 3.
25APN1
asabaliauskas on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 82, No. 78 / Tuesday, April 25, 2017 / Notices
conduct a comprehensive analysis of
stress testing scenarios, models, and
underlying parameters and assumptions
more frequently than monthly when the
products cleared or markets served
display high volatility or become less
liquid, or when the size or
concentration of positions held by the
covered clearing agency’s participants
increases significantly.34 The
Framework would describe that the
Clearing Agencies conduct
comprehensive analyses of daily stress
testing results, the existing scenario sets,
and the performance of the methodology
along with key underlying parameters
and assumptions. The Framework
would also state that these analyses are
performed at least monthly, and may
occur more frequently than monthly if,
for example, the products cleared or
markets served by a Clearing Agency
display high volatility or become less
liquid, or when the size or
concentration of positions held by the
applicable Clearing Agency’s Members
increases significantly. The Framework
would state that these analyses are
designed to assess whether each
Clearing Agency’s stress testing
components are appropriate for
determining the sufficiency of its
prefunded financial resources in light of
current and evolving market conditions.
As such, the Clearing Agencies believe
the Framework is consistent with Rule
17Ad–22(e)(4)(vi)(B) and (C) under the
Act.35
Rule 17Ad–22(e)(4)(vi)(D) under the
Act requires that a covered clearing
agency report the results of its analyses
under Rule 17Ad–22(e)(4)(vi)(B) and (C)
to appropriate decision makers at the
covered clearing agency, including but
not limited to, its risk management
committee or board of directors, and use
these results to evaluate the adequacy of
and adjust its margin methodology,
model parameters, models used to
generate clearing or guaranty fund
requirements, and any other relevant
aspects of its credit risk management
framework, in supporting compliance
with the minimum financial resources
requirements set forth in Rule 17Ad–
22(e)(4)(i) through (iii) under the Act.36
The Framework would provide that the
results of the analyses described above
are reviewed monthly by the DTCC
Enterprise Stress Testing Council. The
Framework would also state that this
group would consider these results to
evaluate the adequacy of the stress
testing methodologies and would
34 17
35 17
CFR 240.17Ad–22(e)(4)(vi)(C). Supra note 3.
CFR 240.17Ad–22(e)(4)(vi)(B) and (C). Supra
note 3.
36 17 CFR 240.17Ad–22(e)(4)(vi)(D). Supra note 3.
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determine if adjustments to the stress
testing methodologies are appropriate to
support the Clearing Agencies’
compliance with the minimum financial
resources requirements set forth in Rule
17Ad–22(e)(4)(i) through (iii) under the
Act. Additionally, the Framework
would state that daily stress testing
results are summarized and reported
monthly to the DTCC Risk Management
Committee. Based on their review of the
information provided, this committee
may determine to inform or further
escalate any concerns to the Risk
Committees of the Boards, as they deem
necessary. Therefore, the Clearing
Agencies believe that the Framework is
consistent with Rule 17Ad–22(e)(vi)(D)
under the Act.37
Rule 17Ad–22(e)(4)(vii) under the Act
requires a covered clearing agency to
perform a model validation for its credit
risk models not less than annually or
more frequently as may be contemplated
by the covered clearing agency’s risk
management framework established
pursuant to Rule 17Ad–22(e)(3) under
the Act.38 The Framework would
provide that the Clearing Agencies’
stress testing methodologies and models
are subject to independent model
validation on at least an annual basis
thereafter. Therefore, the Clearing
Agencies believe that the Framework
supports compliance with Rule 17Ad–
22(e)(4)(vii) under the Act.39
(B) Clearing Agencies’ Statements on
Burden on Competition
None of the Clearing Agencies
believes that the Framework would have
any impact, or impose any burden, on
competition because the proposed rule
changes reflect the existing framework
that each of the Clearing Agencies
employ to manage its market risk, and
would not effectuate changes to the
Clearing Agencies’ stress testing
methodologies, or to the remedial action
the Clearing Agencies may take in
response to the results thereof, as they
currently apply to Members.
(C) Clearing Agencies’ Statements on
Comments on the Proposed Rule
Changes Received From Members,
Participants, or Others
The Clearing Agencies have not
solicited or received any written
comments relating to this proposal. The
Clearing Agencies will notify the
Commission of any written comments
received by the Clearing Agencies.
37 Id.
38 17
CFR 240.17Ad–22(e)(4)(vii). Supra note 3.
39 Id.
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19135
III. Date of Effectiveness of the
Proposed Rule Changes, 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 clearing agency consents, the
Commission will:
(A) by order approve or disapprove
such proposed rule changes, or
(B) institute proceedings to determine
whether the proposed rule changes
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
changes are consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
DTC–2017–005, SR–FICC–2017–009, or
SR–NSCC–2017–006 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
All submissions should refer to File
Number SR–DTC–2017–005, SR–FICC–
2017–009, or SR–NSCC–2017–006. One
of these file numbers 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
(https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent
amendments, all written statements
with respect to the proposed rule
changes that are filed with the
Commission, and all written
communications relating to the
proposed rule changes 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
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10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Clearing Agencies and on
DTCC’s Web site (https://dtcc.com/legal/
sec-rule-filings.aspx). 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–DTC–
2017–005, SR–FICC–2017–009, or SR–
NSCC–2017–006 and should be
submitted on or before May 16, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Assistant Secretary.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–80484; File No. SR–FICC–
2017–011]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Establish
Effective Date of Government
Securities Division Margin Proxy Rule
Changes
April 19, 2017.
asabaliauskas on DSK3SPTVN1PROD with NOTICES
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 April 13,
2017, Fixed Income Clearing
Corporation (‘‘FICC’’) 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 the clearing agency. 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
The proposed rule change consists of
amendments to the Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘GSD Rules’’) 3 of FICC in order to
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Capitalized terms used herein and not otherwise
defined shall have the meaning assigned to such
terms in the GSD Rules, available at www.dtcc.com/
∼/media/Files/Downloads/legal/rules/ficc_gov_
rules.pdf.
1 15
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17:42 Apr 24, 2017
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II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency 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. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
[FR Doc. 2017–08283 Filed 4–24–17; 8:45 am]
40 17
establish April 24, 2017 as the effective
date of rule changes submitted pursuant
to rule filing SR–FICC–2017–001 (‘‘Rule
Filing’’) 4 and advance notice SR–FICC–
2017–801 (‘‘Advance Notice’’).5
1. Purpose
On March 30, 2017, the Commission
issued an order approving the Rule
Filing,6 which was filed by FICC
pursuant to Section 19(b)(2) of the Act.7
The Commission also issued a notice of
no objection to the Advance Notice,8
which was filed with the Commission
pursuant to Section 806(e)(1) of Title
VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act
entitled the Payment, Clearing, and
Settlement Supervision Act of 2010 9
and Rule 19b–4(n)(1)(i) of the Act.10
The purpose of the Rule Filing and
the Advance Notice is to amend the
GSD Rules to (i) include a minimum
volatility calculation (referred to as the
‘‘Margin Proxy’’) when determining a
GSD Netting Member’s VaR Charge, (ii)
modify the calculation of GSD’s
Coverage Charge in circumstances
where the Margin Proxy applies and (iii)
make certain technical corrections.
FICC is filing this proposed rule
change to establish April 24, 2017 as the
effective date of rule changes submitted
pursuant to the Rule Filing and the
Advance Notice. Specifically, FICC
would add a legend to both GSD Rule
4 See
Securities Exchange Act Release No. 79958
(February 3, 2017), 82 FR 10117 (February 9, 2017)
(SR–FICC–2017–001).
5 See Securities Exchange Act Release No. 80139
(March 2, 2017), 82 FR 13026 (March 8, 2017) (SR–
FICC–2017–801).
6 See Securities Exchange Act Release No. 80349
(March 30, 2017), 82 FR 16638 (April 5, 2017) (SR–
FICC–2017–001).
7 15 U.S.C. 78s(b)(2).
8 See Securities Exchange Act Release No. 80341
(March 30, 2017), 82 FR 16644 (April 5, 2017) (SR–
FICC–2017–801).
9 12 U.S.C. 5465(e)(1).
10 17 CFR 240.19b–4(n)(1)(i).
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1 and GSD Rule 4 to state that the rule
changes submitted pursuant to the Rule
Filing and the Advance Notice have
been approved and not objected to,
respectively, but are not yet effective.
The legend would provide April 24,
2017 as the date on which these rule
changes would become effective, and
would include the file numbers of the
Rule Filing and the Advance Notice.
The legend would state that bold and
underlined text indicates added
language, and that bold and
strikethrough text indicates deleted
language. The legend would also state
that, once effective, the legend would
automatically be removed from the GSD
Rules and the formatting of the rule
changes would automatically be revised
accordingly.
2. Statutory Basis
Section 17A(b)(3)(F) of the Act
requires, in part, that the GSD Rules be
designed to (i) promote the prompt and
accurate clearance and settlement of
securities transactions and (ii) remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
and, in general, to protect investors and
the public interest.11 The proposed rule
change would establish the effective
date of rule changes described above
and provide GSD Members with an
understanding of when these rule
changes will begin to affect them.
Knowing when the rule changes will
begin to affect GSD Members would
enable them to timely fulfill their
obligations to FICC, which would in
turn ensure FICC’s processes work as
intended. Therefore, FICC believes that
the proposed rule change would
promote the prompt and accurate
clearance and settlement of securities
transactions as well as remove
impediments to and perfect the
mechanism of a national system for the
prompt and accurate clearance and
settlement of securities transactions,
consistent with Section 17A(b)(3)(F) of
the Act cited above.
(B) Clearing Agency’s Statement on
Burden on Competition
FICC does not believe that the
proposed rule change to establish an
effective date for the rule changes
described above would have any
impact, or impose any burden, on
competition because the proposed rule
change is intended to provide additional
clarity in the GSD Rules with respect to
when these rule changes would become
effective for GSD Members. As such, the
11 15
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U.S.C. 78q–1(b)(3)(F).
25APN1
]]>Agencies
[Federal Register Volume 82, Number 78 (Tuesday, April 25, 2017)]
[Notices]
[Pages 19131-19136]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-08283]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-80485; File Nos. SR-DTC-2017-005; SR-FICC-2017-009; SR-
NSCC-2017-006]
Self-Regulatory Organizations; The Depository Trust Company;
Fixed Income Clearing Corporation; National Securities Clearing
Corporation; Notice of Filings of Proposed Rule Changes To Adopt the
Clearing Agency Stress Testing Framework (Market Risk)
April 19, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is
hereby given that on April 7, 2017, The Depository Trust Company
(``DTC''), Fixed Income Clearing Corporation (``FICC''), and National
Securities Clearing Corporation (``NSCC,'' and together with DTC and
FICC, the ``Clearing Agencies'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule changes as described in
Items I and II below, which Items have been prepared primarily by the
Clearing Agencies. The Commission is publishing this notice to solicit
comments on the proposed rule changes from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agencies' Statements of the Terms of Substance of the
Proposed Rule Changes
The proposed rule changes would adopt the Clearing Agency Stress
Testing Framework (Market Risk) (``Framework'') of the Clearing
Agencies, described below. The Framework would apply to both of FICC's
divisions, the Government Securities Division (``GSD'') and the
Mortgage-Backed Securities Division (``MBSD''). The Framework would be
maintained by the Clearing Agencies in compliance with Rule 17Ad-
22(e)(4)(i), (iii) through (vii), under the Act, as described below.\3\
---------------------------------------------------------------------------
\3\ 17 CFR 240.17Ad-22(e)(4)(i), and (iii) through (vii). The
Commission adopted amendments to Rule 17Ad-22, including the
addition of new section 17Ad-22(e), on September 28, 2016. See
Securities Exchange Act Release No. 78961 (September 28, 2016), 81
FR 70786 (October 13, 2016) (S7-03-14). Each of the Clearing
Agencies is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5), and must comply with new section (e) of Rule 17Ad-22 by
April 11, 2017.
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[[Page 19132]]
Although the Clearing Agencies would consider the Framework to be a
rule, the proposed rule changes do not require any changes to the
Rules, By-Laws and Organizational Certificate of DTC (``DTC Rules''),
the Rulebook of GSD (``GSD Rules''), the Clearing Rules of MBSD (``MBSD
Rules''), or the Rules & Procedures of NSCC (``NSCC Rules''), as the
Framework would be a standalone document.\4\
---------------------------------------------------------------------------
\4\ Capitalized terms not defined herein are defined in the DTC
Rules, GSD Rules, MBSD Rules, or NSCC Rules, as applicable,
available at https://dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------
II. Clearing Agencies' Statements of the Purpose of, and Statutory
Basis for, the Proposed Rule Changes
In their filings with the Commission, the Clearing Agencies
included statements concerning the purpose of and basis for the
proposed rule changes and discussed any comments they received on the
proposed rule changes. The text of these statements may be examined at
the places specified in Item IV below. The Clearing Agencies have
prepared summaries, set forth in sections A, B, and C below, of the
most significant aspects of such statements.
(A) Clearing Agencies' Statements of the Purpose of, and Statutory
Basis for, the Proposed Rule Changes
1. Purpose
The Clearing Agencies are proposing to adopt the Framework, which
would set forth the manner in which each Clearing Agency effectively
identifies, measures, monitors and manages its credit exposures to
Members \5\ and those arising from its payment, clearing, and settling
processes, as applicable. In general, the Framework would describe the
stress testing practices adopted by the Clearing Agencies that are
designed to ensure the sufficiency of each Clearing Agency's total
prefunded financial resources, as described in greater detail below.
The Framework would describe (i) the sources of each Clearing Agency's
total prefunded financial resources; (ii) the Clearing Agencies' stress
testing methodologies; (iii) the Clearing Agencies' stress testing
governance and execution processes; and (iv) the Clearing Agencies'
model validation practices. The Framework would address stress testing
of each Clearing Agency's total prefunded financial resources, and
would not address assessments for additional contributions or other
resources that are not prefunded and may be available to the Clearing
Agencies. The Framework would be owned and managed by the Data and
Portfolio Analytics group within the Quantitative Risk Management
department.\6\
---------------------------------------------------------------------------
\5\ FICC and NSCC refer to their participants as ``Members,''
while DTC refers to its participants as ``Participants.'' These
terms are defined in the rules of each of the Clearing Agencies.
Supra note 4. In this filing ``Members'' refers to both the Members
of FICC and NSCC and the Participants of DTC.
\6\ The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies. Most
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is
generally DTCC that provides a relevant service to a Clearing
Agency.
---------------------------------------------------------------------------
The Framework would first outline the regulatory requirements that
apply to each Clearing Agency with respect to credit risk management,
and then would describe how the Clearing Agencies address those
requirements. The Framework would describe the credit risk management
strategy of each of the Clearing Agencies,\7\ which is to maintain
sufficient prefunded financial resources to cover fully its credit
exposures to each Member with a high degree of confidence, and further,
to maintain additional prefunded financial resources at a minimum to
enable it to cover a wide range of foreseeable stress scenarios that
include, but are not limited to, the default of the affiliated family
(``Affiliated Family'') of Members that would potentially cause the
largest aggregate credit exposure to the Clearing Agency in extreme but
plausible market conditions (``Cover One Requirement'').\8\ Because the
credit risks and prefunded financial resources of the Clearing Agencies
are different in certain respects, the Framework would describe the
prefunded financial resources and related stress testing methodologies
of the Clearing Agencies separately, where applicable.
---------------------------------------------------------------------------
\7\ Rule 17Ad-22(e)(4) under the Act refers to these risks as
``credit risks.'' 17 CFR 240.17Ad-22(e)(4), supra note 3. Because
the Clearing Agencies refers to these risks as ``market risks,'' the
Framework would use these terms interchangeably.
\8\ See 17 CFR 240.17Ad-22(e)(4)(iii). Supra note 3.
---------------------------------------------------------------------------
The Framework would describe the sources of prefunded financial
resources of the Clearing Agencies for purposes of compliance with Rule
17Ad-22(e)(4).\9\ With respect to FICC and NSCC, the Framework would
describe that such prefunded financial resources are their respective
clearing funds, which contain deposits from their Members pursuant to
their respective rules consisting of both cash and eligible securities,
with any eligible securities being subject to a haircut, as provided
for under those rules.\10\ The Framework would describe that such
deposits are calculated for each individual Member pursuant to the GSD
Rules, MBSD Rules, or NSCC Rules, as applicable, and each Member's
deposits would be referred to in the Framework as its ``Required
Deposit.'' \11\ With respect to DTC, the Framework would describe that
its prefunded financial resources are cash deposits to its Participants
Fund, made by its Members pursuant to the DTC Rules.\12\ The Framework
would also describe that DTC may use its risk management control, the
``Collateral Monitor,'' to monitor and assure that the settlement
obligations of each Member are fully collateralized.\13\
---------------------------------------------------------------------------
\9\ 17 CFR 240.17Ad-22(e)(4). Supra note 3.
\10\ FICC/GSD Rule 4 (Clearing Fund and Loss Allocation), FICC/
MBSD Rule 4 (Clearing Fund and Loss Allocation), and NSCC Rule 4
(Clearing Fund). Supra note 4.
\11\ Id.
\12\ DTC Rule 4 (Participants Fund and Participants Investment).
Supra note 4.
\13\ ``Collateral Monitor'' is defined in DTC Rule 1, Section 1
(Definitions), and its calculation is further provided for in the
DTC Settlement Service Guide of the DTC Rules. Supra note 4.
---------------------------------------------------------------------------
The Framework would describe the stress testing methodologies that
are used by the Clearing Agencies to test the sufficiency of their
total prefunded financial resources, described above, against potential
losses, assuming the default of a Member with the largest credit
exposure to a Clearing Agency and that Member's Affiliated Family under
extreme but plausible market conditions. The Framework would state that
the stress testing would be designed to identify potential weaknesses
in the methodologies used to calculate Members' Required Deposits and
to determine collateral haircuts.
The Framework would describe in detail the three key components of
the development of stress testing methodologies, which include the
following:
Risk Identification. The Clearing Agencies identify the
principal credit risk drivers that are representative and specific
to each Clearing Agency's clearing and/or collateral portfolio to
determine risk exposures by analyzing the securities and risk
exposures in their Members' clearing and/or collateral portfolios to
identify representative principal market risk drivers and to capture
the risk sensitivity of the clearing and/or collateral portfolios
under stressed market conditions.
Scenario Development. The Clearing Agencies construct
comprehensive and relevant sets of extreme but plausible historical
and hypothetical stress scenarios for the identified risk drivers.
The Framework would describe how the Clearing Agencies develop and
select both historical and hypothetical scenarios that reflect
[[Page 19133]]
stressed market conditions. Historical scenarios are based on
stressed market conditions that occurred on specific dates in the
past. Hypothetical stress scenarios are theoretical market
conditions that could conceivably occur.
Risk Measurement and Aggregation. The Clearing Agencies
calculate the risk metrics of each Clearing Agency's actual
portfolio to estimate the profits and losses (``P&L'') of close out
over a suitable stressed period of risk, deficiencies, and coverage
ratios. The Framework would describe how the Clearing Agencies
develop P&L estimation methodologies, and how they calculate risk
metrics that are applicable to such methodologies under the chosen
stress testing scenarios. Risk metrics may include, without
limitation, deficiency and coverage ratios. The Clearing Agencies
may use a number of P&L methodologies for stress testing purposes,
including risk sensitivity, index mapping, and actual or approximate
historical shock approaches.
The Framework would define ``Member stress deficiency'' for each
scenario as, with respect to FICC and NSCC, the stress loss exceeding
the applicable Member's Required Deposits, and for DTC, the shortfall
of a Member's Collateral Monitor. The Framework would also define
``Affiliated Family deficiency'' as the aggregate of all Member stress
deficiencies within the applicable Affiliated Family. Finally, the
Framework would define ``Cover One Ratio'' as the ratio of Affiliated
Family deficiency over the total value of the relevant Clearing
Agency's clearing fund (or, for DTC, the Participants Fund), excluding
the value of the applicable Affiliated Family's Required Deposits. The
Framework would state that the Clearing Agencies calculate Member
stress deficiencies, Affiliated Family deficiencies, and Cover One
Ratios daily.
The Framework would state that FICC and NSCC consider other
coverage ratios as well, such as comparing Member stress deficiencies
against such Member's known financial resources (e.g., equity capital
base), to keep abreast of potential financial vulnerabilities facing
such Member. Additionally, the Framework would state that DTC also
tests the adequacy of its collateral haircuts by measuring ``Haircut
Deficiency'' as the amount of stress losses exceeding the haircut
applied to collateral securities.
The Framework would state that the Clearing Agencies also apply
wrong-way risk scenarios to measure both specific and generic wrong-way
risk for each Clearing Agency's Members and Affiliated Families. Such
scenarios reflect the default of a Member's Affiliated Family, and the
potential impacts of that default to all securities in the Affiliated
Family's clearing or collateral portfolios, as well as the potential
general market impacts of that default to other securities. The
Framework would describe the reverse stress testing analyses that are
performed by FICC and NSCC on at least a semi-annual basis. These
analyses provide FICC and NSCC, as central counterparties, another
means for testing the sufficiency of the Clearing Agencies' respective
prefunded financial resources. In conducting reverse stress testing,
FICC and NSCC utilize scenarios of multiple defaults, extreme market
shocks or shocks for other risk factors, which would cause those
Clearing Agencies, as applicable, to exhaust all of their respective
prefunded financial resources.
The Framework would describe the Clearing Agencies' stress testing
governance and execution processes. Stress testing is conducted daily
for each of the Clearing Agencies, and stress testing risk metrics are
also generated each day. Stress testing results of Cover One Ratios and
Member stress deficiencies of certain Members are monitored against
pre-established thresholds.\14\ Breaches of these pre-established
thresholds are initially subject to more detailed studies to identify
any potential impact to the applicable Clearing Agencies' Cover One
Requirement. The Framework would describe that, to the extent such
studies indicate a potential impact to a Clearing Agency's Cover One
Requirement, the threshold breach would be escalated internally and
analyzed to determine if either there is a need to adjust the stress
testing methodology, or if the threshold breach indicates an issue with
a particular Member. Based on these analyses, the Clearing Agencies
determine the appropriate course of action, which could include options
available under their respective rules.
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\14\ Risk threshold levels are chosen to assist each Clearing
Agency in achieving a high degree of confidence that its Cover One
Requirement is met daily.
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The Framework would describe that the Clearing Agencies conduct
comprehensive analyses of daily stress testing results, the existing
scenario sets (including any changes to such scenarios for the period
since the last review), and the performance of the methodologies along
with key underlying parameters and assumptions. These analyses are
performed at least monthly and are conducted to assess whether each
Clearing Agency's stress testing components are appropriate for
determining the sufficiency of its prefunded financial resources in
light of current and evolving market conditions. The Framework would
state that such analyses may occur more frequently than monthly if, for
example, the products cleared or markets served by a Clearing Agency
display high volatility or become less liquid, or when the size or
concentration of positions held by the applicable Clearing Agency's
Members increases significantly.
The Framework would state that the results of these analyses are
reviewed monthly by the DTCC Enterprise Stress Testing Council. The
Framework would also state that daily stress testing results are
summarized and reported monthly to the DTCC Risk Management Committee.
Finally, the Framework would state that stress testing methodologies
and related models are subject to independent model validation on at
least an annual basis.
2. Statutory Basis
The Clearing Agencies believe that the proposed rule changes are
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a registered clearing agency. In
particular, the Clearing Agencies believe that the Framework is
consistent with Section 17A(b)(3)(F) of the Act,\15\ as well as Rule
17Ad-22(b)(3),\16\ and the subsections cited below of Rule 17Ad-
22(e)(4),\17\ each promulgated under the Act, for the reasons described
below.
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\15\ 15 U.S.C. 78q-1(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(b)(3).
\17\ 17 CFR 240.17Ad-22(e)(4). Supra note 3.
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Section 17A(b)(3)(F) of the Act requires, in part, that the rules
of a registered clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions, and 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.\18\ As described in greater detail above, the Framework
would describe how the Clearing Agencies have developed and carry out a
credit risk management strategy to maintain sufficient prefunded
financial resources to cover fully its credit exposures to each Member
with a high degree of confidence, and further, to maintain additional
prefunded financial resources at a minimum to enable it to cover a wide
range of foreseeable stress scenarios that include, but are not limited
to the Cover One Requirement. As such, the credit risk management
strategy of the Clearing Agencies addresses their credit exposures and
[[Page 19134]]
allows them to continue the prompt and accurate clearance and
settlement of securities and can continue to assure the safeguarding of
securities and funds which are in their custody or control or for which
they are responsible notwithstanding those risks. Therefore, the
Clearing Agencies believe the Framework, which describes how the
Clearing Agencies carry out this strategy, is consistent with the
requirements of Section 17A(b)(3)(F) of the Act.\19\
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\18\ 15 U.S.C. 78q-1(b)(3)(F).
\19\ Id.
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Rule 17Ad-22(b)(3) under the Act requires, in part, that a
registered clearing agency that performs central counterparty services
establish, implement, maintain and enforce written policies and
procedures reasonably designed to, among other things, maintain
sufficient financial resources to withstand, at a minimum, a default by
the participant family to which it has the largest exposure in extreme
but plausible market conditions.\20\ As described above, the Framework
would describe how both FICC and NSCC have developed and carry out a
credit risk management strategy to maintain sufficient prefunded
financial resources to cover fully its credit exposures to each Member
with a high degree of confidence, and further, to maintain additional
prefunded financial resources at a minimum to enable it to cover a wide
range of foreseeable stress scenarios that include, but are not limited
to the Cover One Requirement. By carrying out their credit risk
management strategy and conducting this daily stress testing to test
the sufficiency of their prefunded financial resources, FICC and NSCC
believe the Framework is consistent with Rule 17Ad-22(b)(3).\21\
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\20\ 17 CFR 240.17Ad-22(b)(3).
\21\ Id.
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The proposed rule changes are also designed to be consistent with
Rule 17Ad-22(e)(4) under the Act, which requires, in part, that each
covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to effectively
identify, measure, monitor, and manage its credit exposures to
participants and those arising from its payment, clearing, and
settlement processes.\22\ The Clearing Agencies believe the Framework
is designed to meet the requirements of the following subsections of
Rule 17Ad-22(e)(4),\23\ cited below, for the reasons described below.
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\22\ 17 CFR 240.17Ad-22(e)(4)(i), and (iii) through (vii). Supra
note 3.
\23\ 17 CFR 240.17Ad-22(e)(4). Supra note 3.
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Rule 17Ad-22(e)(4)(i) under the Act requires that a covered
clearing agency maintain sufficient financial resources to cover its
credit exposure to each participant fully with a high degree of
confidence.\24\ Rule 17Ad-22(e)(4)(iii) under the Act requires that, to
the extent not already maintained pursuant to Rule 17Ad-22(e)(4)(i)
under the Act, for a covered clearing agency not subject to Rule 17Ad-
22(e)(4)(ii) under the Act, a covered clearing agency maintain
additional financial resources at the minimum to enable it to cover a
wide range of foreseeable stress scenarios that include, but are not
limited to, the default of the participant family that would
potentially cause the largest aggregate credit exposure for the covered
clearing agency in extreme but plausible market conditions.\25\ The
Framework would describe how the Clearing Agencies have developed and
carry out a credit risk management strategy to maintain sufficient
prefunded financial resources to cover fully its credit exposures to
each Member with a high degree of confidence, and further, to maintain
additional prefunded financial resources at a minimum to enable it to
cover a wide range of foreseeable stress scenarios that include, but
are not limited to the Cover One Requirement. The Framework would also
describe how each Clearing Agency tests the sufficiency of its
prefunded resources daily to support compliance with this requirement.
As such, the Clearing Agencies believe the Framework is designed to
meet the requirements of Rule 17Ad-22(e)(4)(i) and (iii) under the
Act.\26\
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\24\ 17 CFR 240.17Ad-22(e)(4)(i). Supra note 3.
\25\ 17 CFR 240.17Ad-22(e)(4)(iii). Supra note 3.
\26\ 17 CFR 240.17Ad-22(e)(4)(i) and (iii). Supra note 3.
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Rule 17Ad-22(e)(4)(iv) under the Act requires that a covered
clearing agency include prefunded financial resources, exclusive of
assessments for additional guaranty fund contributions or other
resources that are not prefunded, when calculating financial resources
available to meet the standards under Rule 17Ad-22(e)(4)(i) through
(iii) under the Act, as applicable.\27\ The Framework would identify
the sources of prefunded resources of each Clearing Agency for purposes
of meeting its requirements under Rule 17Ad-22(e)(4)(iii), and further
would state that the stress testing used to test the sufficiency of
those resources do not test other resources that are not prefunded.
Therefore, the Clearing Agencies believe the Framework is consistent
with Rule 17Ad-22(e)(4)(iv) under the Act.\28\
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\27\ 17 CFR 240.17Ad-22(e)(4)(iv). Supra note 3.
\28\ Id.
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Rule 17Ad-22(e)(4)(v) under the Act requires that a covered
clearing agency maintain the financial resources under Rule 17Ad-
22(e)(4)(ii) and (iii) under the Act, in combined or separately
maintained clearing or guaranty funds.\29\ The Framework would identify
the sources of prefunded resources of each Clearing Agency for purposes
of meeting its requirements under Rule 17Ad-22(e)(4)(iii) as their
Members' deposits to, with respect to NSCC and FICC, their respective
clearing funds, and, with respect to DTC, deposits to its Participants
Fund. Therefore, the Clearing Agencies believe the Framework is
consistent with Rule 17Ad-22(e)(v) under the Act.\30\
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\29\ 17 CFR 240.17Ad-22(e)(4)(v). Supra note 3.
\30\ Id.
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Rule 17Ad-22(e)(4)(vi)(A) under the Act requires that a covered
clearing agency conduct stress testing of its total financial resources
once each day using standard predetermined parameters and
assumptions.\31\ The Framework would describe how the Clearing Agencies
conduct stress tests on a daily basis, and would describe how the
Clearing Agencies develop the stress testing methodologies for these
tests. Specifically, the Framework would describe how the stress
testing methodologies are developed through risk identification,
scenario development, and risk measurement and aggregation. The
Framework would also state that the stress testing methodologies are
reviewed and analyzed monthly to determine if the components continue
to be appropriate for determining sufficiency of the Clearing Agencies'
prefunded financial resources. Therefore, the Clearing Agencies believe
the Framework is consistent with Rule 17Ad-22(e)(4)(vi)(A) under the
Act.\32\
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\31\ 17 CFR 240.17Ad-22(e)(4)(vi)(A). Supra note 3.
\32\ Id.
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Rule 17Ad-22(e)(4)(vi)(B) under the Act requires that a covered
clearing agency conduct a comprehensive analysis on at least a monthly
basis of the existing stress testing scenarios, models, and underlying
parameters and assumptions, and consider modifications to ensure they
are appropriate for determining the covered clearing agency's required
level of default protection in light of current and evolving market
conditions.\33\ Rule 17Ad-22(e)(4)(vi)(C) under the Act requires that a
covered clearing agency
[[Page 19135]]
conduct a comprehensive analysis of stress testing scenarios, models,
and underlying parameters and assumptions more frequently than monthly
when the products cleared or markets served display high volatility or
become less liquid, or when the size or concentration of positions held
by the covered clearing agency's participants increases
significantly.\34\ The Framework would describe that the Clearing
Agencies conduct comprehensive analyses of daily stress testing
results, the existing scenario sets, and the performance of the
methodology along with key underlying parameters and assumptions. The
Framework would also state that these analyses are performed at least
monthly, and may occur more frequently than monthly if, for example,
the products cleared or markets served by a Clearing Agency display
high volatility or become less liquid, or when the size or
concentration of positions held by the applicable Clearing Agency's
Members increases significantly. The Framework would state that these
analyses are designed to assess whether each Clearing Agency's stress
testing components are appropriate for determining the sufficiency of
its prefunded financial resources in light of current and evolving
market conditions. As such, the Clearing Agencies believe the Framework
is consistent with Rule 17Ad-22(e)(4)(vi)(B) and (C) under the Act.\35\
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\33\ 17 CFR 240.17Ad-22(e)(4)(vi)(B). Supra note 3.
\34\ 17 CFR 240.17Ad-22(e)(4)(vi)(C). Supra note 3.
\35\ 17 CFR 240.17Ad-22(e)(4)(vi)(B) and (C). Supra note 3.
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Rule 17Ad-22(e)(4)(vi)(D) under the Act requires that a covered
clearing agency report the results of its analyses under Rule 17Ad-
22(e)(4)(vi)(B) and (C) to appropriate decision makers at the covered
clearing agency, including but not limited to, its risk management
committee or board of directors, and use these results to evaluate the
adequacy of and adjust its margin methodology, model parameters, models
used to generate clearing or guaranty fund requirements, and any other
relevant aspects of its credit risk management framework, in supporting
compliance with the minimum financial resources requirements set forth
in Rule 17Ad-22(e)(4)(i) through (iii) under the Act.\36\ The Framework
would provide that the results of the analyses described above are
reviewed monthly by the DTCC Enterprise Stress Testing Council. The
Framework would also state that this group would consider these results
to evaluate the adequacy of the stress testing methodologies and would
determine if adjustments to the stress testing methodologies are
appropriate to support the Clearing Agencies' compliance with the
minimum financial resources requirements set forth in Rule 17Ad-
22(e)(4)(i) through (iii) under the Act. Additionally, the Framework
would state that daily stress testing results are summarized and
reported monthly to the DTCC Risk Management Committee. Based on their
review of the information provided, this committee may determine to
inform or further escalate any concerns to the Risk Committees of the
Boards, as they deem necessary. Therefore, the Clearing Agencies
believe that the Framework is consistent with Rule 17Ad-22(e)(vi)(D)
under the Act.\37\
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\36\ 17 CFR 240.17Ad-22(e)(4)(vi)(D). Supra note 3.
\37\ Id.
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Rule 17Ad-22(e)(4)(vii) under the Act requires a covered clearing
agency to perform a model validation for its credit risk models not
less than annually or more frequently as may be contemplated by the
covered clearing agency's risk management framework established
pursuant to Rule 17Ad-22(e)(3) under the Act.\38\ The Framework would
provide that the Clearing Agencies' stress testing methodologies and
models are subject to independent model validation on at least an
annual basis thereafter. Therefore, the Clearing Agencies believe that
the Framework supports compliance with Rule 17Ad-22(e)(4)(vii) under
the Act.\39\
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\38\ 17 CFR 240.17Ad-22(e)(4)(vii). Supra note 3.
\39\ Id.
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(B) Clearing Agencies' Statements on Burden on Competition
None of the Clearing Agencies believes that the Framework would
have any impact, or impose any burden, on competition because the
proposed rule changes reflect the existing framework that each of the
Clearing Agencies employ to manage its market risk, and would not
effectuate changes to the Clearing Agencies' stress testing
methodologies, or to the remedial action the Clearing Agencies may take
in response to the results thereof, as they currently apply to Members.
(C) Clearing Agencies' Statements on Comments on the Proposed Rule
Changes Received From Members, Participants, or Others
The Clearing Agencies have not solicited or received any written
comments relating to this proposal. The Clearing Agencies will notify
the Commission of any written comments received by the Clearing
Agencies.
III. Date of Effectiveness of the Proposed Rule Changes, 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 clearing agency consents, the Commission will:
(A) by order approve or disapprove such proposed rule changes, or
(B) institute proceedings to determine whether the proposed rule
changes 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
changes are consistent with the Act. Comments may be submitted by any
of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-DTC-2017-005, SR-FICC-2017-009, or SR-NSCC-2017-006 on
the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2017-005, SR-FICC-
2017-009, or SR-NSCC-2017-006. One of these file numbers 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 (https://www.sec.gov/rules/sro.shtml). Copies of the
submission, all subsequent amendments, all written statements with
respect to the proposed rule changes that are filed with the
Commission, and all written communications relating to the proposed
rule changes 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
[[Page 19136]]
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Clearing
Agencies and on DTCC's Web site (https://dtcc.com/legal/sec-rule-filings.aspx). 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-DTC-
2017-005, SR-FICC-2017-009, or SR-NSCC-2017-006 and should be submitted
on or before May 16, 2017.
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\40\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-08283 Filed 4-24-17; 8:45 am]
BILLING CODE 8011-01-P
