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 Model Risk Management Framework, 32030-32035 [2017-14425]
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Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices
Additionally, the Exchange believes
that its proposed rounding of a buy
(sell) Market Maker Peg Order in a Pilot
Security that would be priced at an
increment other than $0.05 up (down) to
the nearest permissible increment, as
well as to cancel such orders if the
rounding methodology results in a
Market Maker Peg Order being priced to
a price below $0.05, is consistent with
the protection of investors and the
public interest in that it enables the
Exchange to comply with the Tick Pilot
Plan. Further, the Exchange believes it
is also consistent with the protection of
investors and the public interest to
cancel or reject (as applicable) a Market
Maker Peg Order that would otherwise
be priced at a price exceeding its limit
price because such price would not be
consistent with the market maker’s
instructions.
Lastly, the Exchange believes that the
proposed conforming rule change to
Rule 11.510(c)(1) is consistent with the
protection of investors and the public
interest in that it is designed to provide
clarity to market participants regarding
Market Maker Peg Order repricing
methodology, and make the Exchange’s
rule more clear and explicit.
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B. Self-Regulatory Organization’s
Statement on Burden on Competition
IEX does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange believes that the proposal
will enhance the Exchange’s
competitiveness by providing market
makers on IEX with a means to offer
liquidity even in circumstances where
they are not willing to quote at the
inside market. Based on informal
discussion with market participants that
serve as market maker on other trading
centers, the Exchange believes that this
functionality will be appealing to
potential market makers, and therefore
will make it more likely that market
participants will choose to become
registered market makers on the
Exchange. This may, in turn, increase
the extent of liquidity available on IEX
and increase its ability to compete with
other execution venues to attract orders
that are seeking liquidity. The Exchange
further notes that the Market Maker Peg
Order, as proposed, is substantially
similar to equivalent order types offered
by other market centers, including Bats,
Nasdaq, and EDGX, and therefore will
not impair market participants or other
market centers from competing, but
would in fact allow the Exchange to
compete with existing functionality
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offered by competing market centers.25
Moreover, there is no barrier to other
exchanges adopting the same repricing
functionality.
With regard to intra-market
competition, the Exchange does not
believe that the method of repricing
Market Maker Peg Orders will result in
any burden on intra-market competition
that is not necessary or appropriate in
furtherance of the purposes of the Act.
To the contrary, as described in the
Statutory Basis section, the Exchange’s
proposed method of repricing is
designed in the interest of ensuring that
market makers using Market Maker Peg
Orders will be in the same position as
market makers updating their own
quotes, as well as other market
participants using displayed orders.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall: (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
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–
IEX–2017–22 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.
PO 00000
supra note 9.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.26
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–14429 Filed 7–10–17; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
25 See
All submissions should refer to File
Number SR–IEX–2017–22. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–IEX–
2017–22, and should be submitted on or
before August 1, 2017.
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–81074; File Nos. SR–DTC–
2017–008; SR–FICC–2017–014; SR–NSCC–
2017–008]
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 Model Risk Management
Framework
July 5, 2017.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934, as
26 17
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Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices
amended (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 notice is hereby given that
on June 20, 2017, The Depository Trust
Company (‘‘DTC’’), Fixed Income
Clearing Corporation (‘‘FICC’’), and
National Securities Clearing Corporation
(‘‘NSCC,’’ and together with FICC, the
‘‘Central Counterparties’’ or ‘‘CCPs,’’
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, II and
III 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 Model Risk
Management Framework (‘‘Framework’’)
of Clearing Agencies, described below.
The Framework would be maintained
by the Clearing Agencies in compliance
with Rule 17Ad–22(e)(4)(i), (e)(4)(vii),
(e)(6)(iii), (e)(6)(vi), (e)(6)(vii), and
(e)(7)(vii), under the Act, as described
below.3
Although the Clearing Agencies
would consider the Framework to be a
rule, the proposed rule changes do not
require any changes to the DTC Rules,
By-laws and Organizational Certificate
(‘‘DTC Rules’’), the Rulebook of the
Government Securities Division of FICC
(‘‘GSD Rules’’), the Clearing Rules of the
Mortgage-Backed Securities Division of
FICC (‘‘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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.17Ad–22(e)(4)(i), (e)(4)(vii),
(e)(6)(iii), (e)(6)(vi), (e)(6)(vii), and (e)(7)(vii). Each
of DTC, NSCC and FICC is a ‘‘covered clearing
agency’’ as defined in Rule 17Ad–22(a)(5), and must
comply with subsection (e) of Rule 17Ad–22.
References to Rule 17Ad–22(e)(6) and its
subparagraphs cited herein, and compliance
therewith, apply to FICC and NSCC only and do not
apply to DTC.
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.
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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 formalize the Framework in order to
facilitate compliance with Rule 17Ad–
22(e)(4)(i), (e)(4)(vii), (e)(6)(iii),
(e)(6)(vi), (e)(6)(vii), and (e)(7)(vii) under
the Act.5 The Framework would set
forth the model risk management
practices adopted by the Clearing
Agencies, which have been designed to
assist the Clearing Agencies in
identifying, measuring, monitoring, and
managing the risks associated with the
design, development, implementation,
use, and validation of quantitative
models. The Framework would be
owned and managed by the Clearing
Agencies’ risk management area
generally responsible for model
validation (‘‘Model Validation’’) 6 and
control matters, the DTCC Model
Validation and Control Group (‘‘MVC’’),
on behalf of each Clearing Agency, with
review and oversight by senior
management and the Boards, as
described below.7
The Framework would provide that (i)
any change to the Framework must be
approved by the Boards or such
committees as may be delegated
authority by the Boards from time to
time pursuant to their charters, (ii) MVC
shall review this Framework no less
frequently than annually, and (iii) any
and all changes to this Framework are
subject to regulatory review and
approval. The Framework would (i)
articulate the Clearing Agencies’ model
note 3.
Validation’’ has the meaning set forth in
Rule 17Ad–22(a)(9) under the Act, which provides
that ‘‘Model validation means an evaluation of the
performance of each material risk management
model used by a covered clearing agency (and the
related parameters and assumptions associated with
such models), including initial margin models,
liquidity risk models, and models used to generate
clearing or guaranty fund requirements, performed
by a qualified person who is free from influence
from the persons responsible for the development
or operation of the models or policies being
validated.’’ See Rule 17Ad–22(a)(9), supra note 3.
7 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.
PO 00000
5 Supra
6 ‘‘Model
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risk management framework; and (ii)
describe the Clearing Agencies’ model
risk reporting and escalation processes.
The Clearing Agencies have adopted
the following definition for the term
‘‘model’’:
‘‘[M]odel’’ refers to a quantitative method,
system, or approach that applies statistical,
economic, financial, or mathematical
theories, techniques, and assumptions to
process input data into quantitative
estimates. A ‘‘model’’ consists of three
components: An information input
component, which delivers assumptions and
data to the model; a processing component,
which transforms inputs into estimates; and
a reporting component, which translates the
estimates into useful business information.
The definition of ‘‘model’’ also covers
quantitative approaches whose inputs are
partially or wholly qualitative or based on
expert judgment, provided that the output is
quantitative in nature.8
The term ‘‘Model Risk,’’ as defined in
the Framework, would refer to the
potential for adverse consequences from
decisions based on incorrect or misused
Model outputs and reports,9 and
primarily occurring due to (i)
fundamental errors in the design/
development of Models; (ii) incorrect
Model input or assumptions; (iii)
erroneous implementation of Models;
(iv) unauthorized and/or incorrect
changes to Models; (v) changes in
market conditions rendering existing
Models unfit for their intended purpose;
and (vi) misuse of or overreliance on
Models. The Framework is designed to
minimize the Clearing Agencies’
potential for financial loss, inaccurate
financial or regulatory reporting,
misaligned business strategies, and/or
damage to their respective reputations
resulting from a failure to properly
manage Model Risk.
Any model developed for use by any
of the Clearing Agencies and meeting
the above definition for the term
‘‘Model’’ would be subject to tracking
within each Clearing Agency’s Model
inventory (‘‘Model Inventory’’). The
Framework would describe how a
Model Inventory survey is conducted at
least annually across the Clearing
Agencies to confirm the Model
Inventory is current. During this survey
period, all Clearing Agency business
areas and support functions that intend
to develop models for Clearing Agency
use would submit a list of their planned
models to MVC in order for MVC to
review and assess whether such
8 See Supervisory Guidance on Model Risk
Management, SR Letter 11–7, dated April 4, 2011,
issued by the Board of Governors of the Federal
Reserve System and the Office of the Comptroller
of the Currency, at 3.
9 Id.
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planned models meet the definition of
‘‘Model’’ under the Framework.
The Framework would outline how
MVC would assign a materiality/
complexity index rating to each Model
when it is added to a Model Inventory,
which rating would impact the Model’s
validation in terms of prioritization and
approval authority. All Model
materiality/complexity index
assignments would be reviewed at least
annually by MVC, as well as by the
committee specifically created by the
Clearing Agencies to address Model
Risk governance matters, the DTCC
Model Risk Governance Committee
(‘‘MRGC’’).
The Framework would describe the
initial and periodic validation protocols
that would be applicable to all Models
in the Model Inventory. As required by
regulatory requirements, all Model
Validations would be performed by
qualified persons who are free from
influence from the persons responsible
for the development or operation of the
Models being validated. MVC, which is
responsible for performing all Model
Validations, is functionally separate
from all Clearing Agency areas that
develop or operate Models. The head of
MVC directly reports to the head of the
DTCC Group Chief Risk Office, rather
than to anyone that is in charge of
developing or operating Models for the
Clearing Agencies.
Each new Model would undergo a full
Model Validation (unless provisionally
approved, as discussed below) pursuant
to which MVC would verify that the
Model is performing as expected in
accordance with its design objectives
and business purpose. The full Model
Validation standards for any new Model
would include, but not be limited to, the
following core Model Validation
activities:
• Evaluation of the Model
development documentation and
testing;
• evaluation of Model theory and
assumptions, and identification of
potential limitations;
• evaluation of data inputs and
parameters;
• review of numerical
implementation including replication
for certain key Model components,
which would vary from Model to
Model;
• independent testing: sensitivity
analysis, stress testing, and
benchmarking, as appropriate; and
• evaluation of Model outputs, Model
performance, and back testing.
Full Model Validation would be
applied under the following
circumstances: (i) For all new Models
prior to their use in production; (ii)
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during periodic Model Validations (as
described below); and (iii) when Model
changes are made that require
independent Model Validation (as
further described below).
All Models approved for use in
production would also be subject to
periodic Model Validations for purposes
of confirming that the Models continue
to operate as intended, identifying any
deficiencies that would call into
question the continuing validity of any
such Model’s original approval and
evaluating whether the Model and its
prior validation remain valid within the
dynamics of current market conditions.
In this regard, the Framework would
describe that MVC would perform a
Model Validation for each Clearing
Agency Model approved for use in
production not less than annually (or
more frequently as may be contemplated
by such Clearing Agency’s established
risk management framework), including
each credit risk Model,10 liquidity risk
Model,11 and in the case of FICC and
NSCC, as central counterparties, on
their margin systems and related
Models.12
Periodic Model Validations would
follow full Model Validation standards.
In certain cases, MVC may determine
extra Model Validation activities are
warranted based on previous Model
Validation work and findings, changes
in market conditions, or because
performance monitoring of a particular
Model warrants extra validation.
Occasionally, an active Model may
require changes in either structure or
technique. Details for any Model change
request would be provided to MVC for
review and a determination of whether
full Model Validation is required.
The Framework would outline the
approval process applicable to all new
Models.
The DTCC Quantitative Risk
Management Financial Engineering
Unit, which is functionally separate
from MVC, would be responsible for
developing, testing, and signing-off on
new Clearing Agency Models and
enhancements to existing Clearing
Agency Models before submitting any
such Model to MVC for Model
Validation and approval.
All new Clearing Agency Models, and
all material changes to existing Clearing
Agency Models, would undergo Model
Validation by MVC and be approved
prior to business use. In cases where
such Model’s materiality is ‘‘Medium’’
or ‘‘High,’’ such Model Validation
10 Rule
17Ad–22(e)(4)(vii). See supra note 3.
17Ad–22(e)(7)(vii). See supra note 3.
12 Rule 17Ad–22(e)(6)(vi) and (vii). See supra note
would be reviewed by the MRGC and
recommended by the MRGC to the
Clearing Agencies’ management level
committee responsible for model risk
management matters, the Management
Risk Committee (‘‘MRC’’), for approval.
The Framework would provide that
provisional approvals with respect to
new Clearing Agency Models and
material changes to existing Clearing
Agency Models may be issued to allow
a Model to be published for urgent
business use prior to MVC’s Model
Validation thereof. Provisional approval
requests for a Model along with
appropriate control measures would be
presented by the applicable DTCC
personnel responsible for the
development or operation of the
Model 13 to MVC and the MRGC for
review. Models may be provisionally
approved by MVC for a limited period,
not to exceed six months unless also
approved by the MRGC. MVC would
track all such provisional approvals and
oversee compliance with control
measures and provisional approval
periods.
Each periodic Model Validation
would be presented to the MRGC for its
review, and its recommendation for
approval to the MRC. The Framework
would provide that MRC approval must
be obtained in order for any such
periodic validation to be deemed
complete.
All findings that result from a new
Model Validation, a change Model
Validation, a periodic Model Validation,
or in connection with implementation
of a new Model or Model change, would
be centrally tracked by MVC. The status
of findings resolution for approved
Models would be reported to the MRGC
on a monthly basis. Where there is a
finding related to Model
implementation errors, the applicable
Model Owner would report such
findings/incidents in accordance with
the policies and procedures of the
Operational Risk Management unit
(‘‘ORM’’) within the Group Chief Risk
Office. If an adverse Model Validation
finding cannot be resolved, the Model
Owner would work with MVC and ORM
to submit the finding for risk acceptance
in accordance with ORM policies and
procedures.
In addition to periodic validation,
MVC would be responsible for Model
performance monitoring and for each
Clearing Agency’s backtesting process,
which would be integral parts of each
11 Rule
3.
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13 Such personnel would be defined in the
Framework as ‘‘Model Owners.’’
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Clearing Agency’s model risk
management framework.14
As part of Model performance
monitoring, on at least a monthly basis,
sensitivity analysis would be performed
by MVC on each of the CCP’s margin
Model, the key parameters and
assumptions for backtesting would be
reviewed, and modifications would be
considered to ensure the CCP’s
backtesting practices are appropriate for
determining the adequacy of the
applicable CCP’s margin resources.
MVC would prepare Model
performance monitoring reports on a
monthly basis. Model performance
monitoring, which includes review of
risk-based Models used to calculate
margin requirements and relevant
parameters/threshold indicators,
sensitivity analysis, and model
backtesting results would be subject to
review by the MRGC, which will
escalate serious performance concerns
to the MRC.
In circumstances where the products
cleared or the markets served by a CCP
display high volatility or become less
liquid, or when the size or
concentration of positions held by the
applicable CCP’s Members increases or
decreases significantly, such sensitivity
analysis and review of key model
parameters and assumptions would be
conducted more frequently than
monthly.
VaR and Clearing Fund requirement
(‘‘CFR’’) coverage backtesting for the
CCPs would be performed by MVC on
a daily basis or more frequently.15 CFR
coverage would be backtested on an
overall basis and for individual
Members and families of affiliated
Members. DTC backtesting would be
performed by MVC on a daily basis for
collateral group 16 Collateral Monitor
coverage, collateral group level
haircut 17 coverage and Security-level
haircut coverage.
Thresholds for all backtests would be
established for the rolling 12-month
period coverage computed as the
number of instances without deficiency
over the total number of backtest
instances, where deficiency is defined
as the loss amount that exceeds the
measure being tested (i.e., VaR, CFR,
Collateral Monitor, or haircut rate).
Thresholds would be set as follows:
Threshold
(%)
Applicable to
Backtesting risk metrics
CCPs ...............................
Overall CFR Coverage ..............................................................................................................................
VaR Model Coverage ................................................................................................................................
Member Level CFR Coverage ...................................................................................................................
Family Level CFR Coverage .....................................................................................................................
Collateral Group Collateral Monitor Coverage ..........................................................................................
Collateral Group Level Haircut Coverage ..................................................................................................
Security-Level Haircut Coverage ...............................................................................................................
DTC .................................
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The CFR coverage thresholds have
been set to meet applicable regulatory
requirements that require a CCP to cover
its credit exposure to its participants by
establishing a risk-based margin system
that, among other things calculates
margin sufficient to cover its potential
future exposure to participants in the
interval between the last margin
collection and the close out of positions
following a participant default.18 The
collateral group Collateral Monitor
coverage threshold, among other
controls, has been set to support the
requirement that DTC maintain
sufficient financial resources to cover its
credit exposures to each participant
fully with a high degree of confidence.19
The ‘‘VaR Model Coverage’’, ‘‘Collateral
Group Level Haircut Coverage’’, and
‘‘Security-Level Haircut Coverage’’ have
been set and are designed for Model
performance monitoring purposes.
The MRGC would be the primary
forum for MVC’s regular reporting of
Model Validation activities and material
Model Risks identified through regular
Model performance monitoring. Reports
and recommendations with respect to
Model Risk management would be made
to the MRC.
Periodic reporting to the Risk
Committee of the Clearing Agencies’
Boards (‘‘BRC’’) with regard to Model
Risk matters may include:
• Updates of Model Validation
findings and the status of annual
validations.
• Updates on significant Model Risk
matters, and on compliance matters
with respect to Model Risk policies and
procedures (including the Framework).
• Escalation of Model Risk matters as
set forth in the market risk tolerance
statement, which establishes the
Clearing Agencies’ Model Risk
tolerances (‘‘Market Risk Tolerance
Statement’’), and subsequent, regular
updates with respect thereto.
On at least a monthly basis, the key
metrics relating to Model backtesting
would be reviewed by the Market and
Liquidity Risk Management unit within
the Group Chief Risk Office and MVC,
and reported to the MRC. Threshold
breaches would be reviewed by the
Managing Directors within the Financial
Risk Management area (including the
Market and Liquidity Risk Management
unit) of the Group Chief Risk Office, and
in the case of CFR Coverage breaches by
the CCPs and Collateral Group
Collateral Monitor Coverage by DTC,
escalated to the BRC in accordance with
the Market Risk Tolerance Statement.
The Managing Director of the Market
and Liquidity Risk Management unit
within the Group Chief Risk Office
would be responsible for reviewing the
Market Risk Tolerance Statement on at
least an annual basis. The BRC would
review and approve the Market Risk
Tolerance Statement at least annually.
14 Model performance monitoring is the process
of (i) evaluating an active Model’s ongoing
performance based on theoretical tests, (ii)
monitoring the Model’s parameters through the use
of threshold indicators, and/or (iii) backtesting
using actual historical data/realizations to test a
Value at Risk (‘‘VaR’’) Model’s predictive power.
15 VaR Model backtesting tests Model
performance at a specified confidence level, while
the CFR backtest tests margin sufficiency in case of
a Member default.
16 A DTC Participant with multiple accounts may
group its accounts into ‘‘families’’ (i.e., ‘‘collateral
groups’’) and instruct DTC to allocate a specified
portion of its overall Collateral Monitor and Net
Debit Cap to each family. All accounts that a
Participant designates as belonging to a common
collateral group share a single Collateral Monitor
and single Net Debit Cap. See Securities Exchange
Act Release No. 38201 (January 23, 1997), 62 FR
4561 (January 30, 1997) (SR–DTC–96–17).
17 A haircut represents a percentage decrease
applied to a Security’s Market Value solely for
purposes of determining the Collateral Value of the
Security. See DTC Settlement Service Guide,
available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/service-guides/Settlement.pdf, at
5.
18 See 17 CFR 240.17Ad–22(e)(6)(iii). 17 CFR
240.17Ad–22(a)(13) defines the term ‘‘potential
future exposure’’ to mean the maximum exposure
estimated to occur at a future point in time with an
established single-tailed confidence level of at least
99 percent with respect to the estimated
distribution of future exposure.
19 See 17 CFR 240.17Ad–22(e)(4)(i). See supra
note 3.
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With respect to any proposed change
to any backtesting methodology, prior to
implementation thereof (and before any
reporting thereof in any management
and regulatory report), a description of
the proposed change and impact study
results would be presented to the MRGC
for review and approval. If the impact
study results reflect that
implementation of the methodology
would negatively impact any existing
risk tolerance threshold range, such
results would be escalated by the MRGC
to the MRC, and subsequently to the
BRC, for approval prior to
implementation.
All Model performance concerns
would be escalated by MVC to the
MRGC, including Model performance
enhancement concerns. The MRGC may
further recommend certain such matters
for further escalation to the MRC and/
or the BRC.
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, DTC believes that
the Framework is consistent with
Section 17A(b)(3)(F) of the Act,20 as
well as Rule 17Ad–22(e)(4)(i), (e)(4)(vii)
and (e)(7)(vii) thereunder,21 for the
reasons described below. FICC and
NSCC believe that the Framework is
consistent with Section 17A(b)(3)(F) of
the Act,22 as well as Rule 17Ad–
22(b)(4) 23 and Rule 17Ad–22(e)(4)(vii),
(e)(6)(iii), (e)(6)(vi), (e)(6)(vii) and
(e)(7)(vii) thereunder,24 for the reasons
described below.
Section 17A(b)(3)(F) of the Act 25
requires, inter alia, that the rules of a
clearing agency be designed to promote
the prompt and accurate clearance and
settlement of securities transactions. As
described in greater detail above, the
Framework would describe the process
by which the Clearing Agencies
identify, measure, monitor, and manage
the risks associated with the design,
development, implementation, use, and
validation of quantitative models. The
quantitative models covered by the
Framework would be applied by the
Clearing Agencies, as applicable, to
evaluate and address their respective
risk exposures associated with their
settlement activity and allow them to
continue the prompt and accurate
20 15
U.S.C. 78q–1(b)(3)(F).
21 Supra note 3.
22 15 U.S.C. 78q–1(b)(3)(F).
23 17 CFR 240.17Ad–22(b)(4). See supra note 3.
24 Supra note 3.
25 15 U.S.C. 78q–1(b)(3)(F).
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clearance and settlement of securities.
In this regard, the Framework would
facilitate their ability to develop models
that would be applied to evaluate and
address risk exposure, and allow them
to continue the prompt and accurate
clearance and settlement of securities.
Therefore, the Clearing Agencies believe
that the Framework is consistent with
the requirements of Section 17A(b)(3)(F)
of the Act.26
Rule 17Ad–22(b)(4) under the Act 27
requires, inter alia, that a covered
clearing agency that is a central
counterparty establish, implement,
maintain, and enforce policies and
procedures reasonably designed to
provide for an annual Model Validation
consisting of evaluating the performance
of the clearing agency’s margin models
and the related parameters and
assumptions associated with such
models by a qualified person who is free
from influence from the persons
responsible for the development or
operation of the models being validated.
As described in the Framework and as
described above, MVC is an area that is
functionally separate from all areas
within NSCC and FICC that develop and
operate models. Pursuant to the
Framework, MVC would perform a
Model Validation on all approved
margin systems and related Models for
NSCC and FICC, not less than annually.
Therefore, NSCC and FICC believe the
Framework is consistent with Rule
17Ad–22(b)(4) under the Act.28
Rule 17Ad–22(e)(4)(i) 29 under the Act
requires, inter alia, that a covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
maintain sufficient financial resources
to cover its credit exposure to each
participant fully with a high degree of
confidence. The collateral group
Collateral Monitor coverage threshold
has been set to support the requirement
that DTC maintain sufficient financial
resources to cover its credit exposures to
each participant fully with a high degree
of confidence by using the threshold,
established as discussed above, of 99
percent, and therefore, DTC believes
that the Framework is consistent with
Rule 17Ad–22(e)(4)(i) under the Act.30
Rule 17Ad–22(e)(4)(vii) 31 and
(e)(7)(vii) 32 under the Act requires, inter
26 Id.
27 Supra
note 21.
28 Id.
29 17 CFR 240.17Ad–22(e)(4) (in particular, 17
CFR 240.17Ad–22(e)(4)(i)). See supra note 3.
30 Id.
31 17 CFR 240.17Ad–22(e)(4) (in particular, 17
CFR 240.17Ad–22(e)(4)(vii)). See supra note 3.
32 17 CFR 240.17Ad–22(e)(7) (in particular, 17
CFR 240.17Ad–22(e)(7)(vii)). See supra note 3.
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Fmt 4703
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alia, that a covered clearing agency
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to perform Model
Validations on its credit risk models and
liquidity risk models not less than
annually or more frequently as may be
contemplated by the clearing agency’s
risk management framework established
pursuant to Rule 17Ad–22(e)(3).33 As
discussed above, the Framework would
describe the Clearing Agencies’ Model
Risk validation process, which would be
performed not less than annually on its
credit risk models and liquidity risk
models. Therefore, the Clearing
Agencies believe that the Framework is
consistent with Rule 17Ad–
22(e)(4)(vii) 34 and (e)(7)(vii) 35 under
the Act.
Rule 17Ad–22(e)(6)(iii) under the
Act 36 requires that a covered clearing
agency that is a central counterparty
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that at a minimum, inter alia, calculates
margin sufficient to cover its potential
future exposure 37 to participants in the
interval between the last margin
collection and the close out of positions
following a participant default. As
discussed above, the CFR coverage
thresholds have been set at 99 percent.
Therefore, NSCC and FICC believe that
the Framework is consistent with Rule
17Ad–22(e)(6)(iii) under the Act.38
Rule 17Ad–22(e)(6)(vi) under the
Act 39 requires, inter alia, that a covered
clearing agency that is a central
counterparty establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
(a) conduct backtests of its margin
model at least once each day using
standard predetermined parameters and
assumptions, (b) conduct a sensitivity
analysis of its margin model and a
review of its parameters and
assumptions for backtesting on at least
a monthly basis, and consider
modifications to ensure the backtesting
practices are appropriate for
determining the adequacy of such
33 17
CFR 240.17Ad–22(e)(3). See supra note 3.
note 30.
35 Supra note 31.
36 17 CFR 240.17Ad–22(e)(6) (in particular, 17
CFR 240.17Ad–22(e)(6)(iii)). See supra note 3.
37 17 CFR 240.17Ad–22(a)(13) defines the term
‘‘potential future exposure’’ to mean the maximum
exposure estimated to occur at a future point in
time with an established single-tailed confidence
level of at least 99 percent with respect to the
estimated distribution of future exposure.
38 Supra note 33.
39 17 CFR 240.17Ad–22(e)(6) (in particular, 17
CFR 240.17Ad–22(e)(6)(vi)). See supra note 3.
34 Supra
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central counterparty’s margin resources,
(c) conduct a sensitivity analysis of its
margin model and a review of its
parameters and assumptions for
backtesting more frequently than
monthly during periods of time when
the products cleared or markets served
display high volatility or become less
liquid, or when the size or
concentration of positions held by such
central counterparty’s participants
increases or decreases significantly and
(d) report the results of its analyses
under (b) and (c) to appropriate decision
makers at the central counterparty,
including but not limited to, its risk
management committee or Board, and
using these results to evaluate the
adequacy of and adjust its margin
methodology, model parameters, and
any other relevant aspects of its credit
risk management framework. As
discussed above, the Framework would
provide that (a) the CCPs would perform
VaR and CFR backtesting on a daily
basis, (b) as part of Model performance
monitoring, on at least a monthly basis,
sensitivity analysis would be performed
by MVC on each of the margin Models
of the CCPs, the key parameters and
assumptions for backtesting would be
reviewed, and modifications would be
considered to ensure the applicable
CCP’s backtesting practices are
appropriate for determining the
adequacy of the applicable CCP’s
margin resources, (c) MVC would, in
circumstances where the products
cleared or the markets served by the
applicable CCP display high volatility or
become less liquid, or when the size or
concentration of positions held by the
applicable CCP’s Members increases or
decreases significantly, sensitivity
analysis and review of key model
parameters and assumptions would be
conducted more frequently than
monthly, and (d) each CCP would report
the results of its analyses under (b) and
(c) to key decision makers, including
but not limited to the MRC and/or BRC,
as discussed above. Therefore NSCC and
FICC believe the Framework is
consistent with Rule 17Ad–22(e)(6)(vi)
under the Act.40
Rule 17Ad–22(e)(6)(vii) under the
Act 41 requires, inter alia, that a covered
clearing agency that is a central
counterparty establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
perform Model Validations on its
margin system and related models not
less than annually or more frequently as
may be contemplated by the clearing
agency’s risk management framework
established pursuant to Rule 17Ad–
22(e)(3).42 As discussed above, the
Framework would describe the Model
Risk validation processes of the CCPs,
which would be performed not less than
annually on their margin system and
related models. Therefore, NSCC and
FICC believe that the Framework is
consistent with Rule 17Ad–22(e)(6)(vii)
under the Act.43
(B) Clearing Agencies’ Statements on
Burden on Competition
None of the Clearing Agencies believe
that the Framework would have any
impact, or impose any burden, on
competition because the proposed rule
changes reflect the existing framework
that the Clearing Agencies employ to
manage model risk, and would not
effectuate any changes to the Clearing
Agencies’ model risk management tools
as they currently apply to their
respective Members or Participants.
(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:
41 17
CFR 240.17Ad–22(e)(6) (in particular, 17
CFR 240.17Ad–22(e)(6)(vii)). See supra note 3.
VerDate Sep<11>2014
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–2017–008, SR–FICC–2017–014, or
SR–NSCC–2017–008 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549.
• All submissions should refer to File
Number SR–DTC–2017–008, SR–FICC–
2017–014, or SR–NSCC–2017–008. 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–
2017–008, SR–FICC–2017–014, or SR–
NSCC–2017–008 and should be
submitted on or before August 1, 2017.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.44
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017–14425 Filed 7–10–17; 8:45 am]
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43 Supra note 40.
42 Supra
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44 17
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]]>Agencies
[Federal Register Volume 82, Number 131 (Tuesday, July 11, 2017)]
[Notices]
[Pages 32030-32035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14425]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-81074; File Nos. SR-DTC-2017-008; SR-FICC-2017-014; SR-
NSCC-2017-008]
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 Model Risk Management Framework
July 5, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, as
[[Page 32031]]
amended (``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on June 20, 2017, The Depository Trust Company (``DTC''),
Fixed Income Clearing Corporation (``FICC''), and National Securities
Clearing Corporation (``NSCC,'' and together with FICC, the ``Central
Counterparties'' or ``CCPs,'' 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, II and III 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 Model
Risk Management Framework (``Framework'') of Clearing Agencies,
described below. The Framework would be maintained by the Clearing
Agencies in compliance with Rule 17Ad-22(e)(4)(i), (e)(4)(vii),
(e)(6)(iii), (e)(6)(vi), (e)(6)(vii), and (e)(7)(vii), under the Act,
as described below.\3\
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\3\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(4)(vii), (e)(6)(iii),
(e)(6)(vi), (e)(6)(vii), and (e)(7)(vii). Each of DTC, NSCC and FICC
is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5),
and must comply with subsection (e) of Rule 17Ad-22. References to
Rule 17Ad-22(e)(6) and its subparagraphs cited herein, and
compliance therewith, apply to FICC and NSCC only and do not apply
to DTC.
---------------------------------------------------------------------------
Although the Clearing Agencies would consider the Framework to be a
rule, the proposed rule changes do not require any changes to the DTC
Rules, By-laws and Organizational Certificate (``DTC Rules''), the
Rulebook of the Government Securities Division of FICC (``GSD Rules''),
the Clearing Rules of the Mortgage-Backed Securities Division of FICC
(``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 formalize the Framework in
order to facilitate compliance with Rule 17Ad-22(e)(4)(i), (e)(4)(vii),
(e)(6)(iii), (e)(6)(vi), (e)(6)(vii), and (e)(7)(vii) under the Act.\5\
The Framework would set forth the model risk management practices
adopted by the Clearing Agencies, which have been designed to assist
the Clearing Agencies in identifying, measuring, monitoring, and
managing the risks associated with the design, development,
implementation, use, and validation of quantitative models. The
Framework would be owned and managed by the Clearing Agencies' risk
management area generally responsible for model validation (``Model
Validation'') \6\ and control matters, the DTCC Model Validation and
Control Group (``MVC''), on behalf of each Clearing Agency, with review
and oversight by senior management and the Boards, as described
below.\7\
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\5\ Supra note 3.
\6\ ``Model Validation'' has the meaning set forth in Rule 17Ad-
22(a)(9) under the Act, which provides that ``Model validation means
an evaluation of the performance of each material risk management
model used by a covered clearing agency (and the related parameters
and assumptions associated with such models), including initial
margin models, liquidity risk models, and models used to generate
clearing or guaranty fund requirements, performed by a qualified
person who is free from influence from the persons responsible for
the development or operation of the models or policies being
validated.'' See Rule 17Ad-22(a)(9), supra note 3.
\7\ 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 provide that (i) any change to the Framework
must be approved by the Boards or such committees as may be delegated
authority by the Boards from time to time pursuant to their charters,
(ii) MVC shall review this Framework no less frequently than annually,
and (iii) any and all changes to this Framework are subject to
regulatory review and approval. The Framework would (i) articulate the
Clearing Agencies' model risk management framework; and (ii) describe
the Clearing Agencies' model risk reporting and escalation processes.
The Clearing Agencies have adopted the following definition for the
term ``model'':
``[M]odel'' refers to a quantitative method, system, or approach
that applies statistical, economic, financial, or mathematical
theories, techniques, and assumptions to process input data into
quantitative estimates. A ``model'' consists of three components: An
information input component, which delivers assumptions and data to
the model; a processing component, which transforms inputs into
estimates; and a reporting component, which translates the estimates
into useful business information. The definition of ``model'' also
covers quantitative approaches whose inputs are partially or wholly
qualitative or based on expert judgment, provided that the output is
quantitative in nature.\8\
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\8\ See Supervisory Guidance on Model Risk Management, SR Letter
11-7, dated April 4, 2011, issued by the Board of Governors of the
Federal Reserve System and the Office of the Comptroller of the
Currency, at 3.
The term ``Model Risk,'' as defined in the Framework, would refer
to the potential for adverse consequences from decisions based on
incorrect or misused Model outputs and reports,\9\ and primarily
occurring due to (i) fundamental errors in the design/development of
Models; (ii) incorrect Model input or assumptions; (iii) erroneous
implementation of Models; (iv) unauthorized and/or incorrect changes to
Models; (v) changes in market conditions rendering existing Models
unfit for their intended purpose; and (vi) misuse of or overreliance on
Models. The Framework is designed to minimize the Clearing Agencies'
potential for financial loss, inaccurate financial or regulatory
reporting, misaligned business strategies, and/or damage to their
respective reputations resulting from a failure to properly manage
Model Risk.
---------------------------------------------------------------------------
\9\ Id.
---------------------------------------------------------------------------
Any model developed for use by any of the Clearing Agencies and
meeting the above definition for the term ``Model'' would be subject to
tracking within each Clearing Agency's Model inventory (``Model
Inventory''). The Framework would describe how a Model Inventory survey
is conducted at least annually across the Clearing Agencies to confirm
the Model Inventory is current. During this survey period, all Clearing
Agency business areas and support functions that intend to develop
models for Clearing Agency use would submit a list of their planned
models to MVC in order for MVC to review and assess whether such
[[Page 32032]]
planned models meet the definition of ``Model'' under the Framework.
The Framework would outline how MVC would assign a materiality/
complexity index rating to each Model when it is added to a Model
Inventory, which rating would impact the Model's validation in terms of
prioritization and approval authority. All Model materiality/complexity
index assignments would be reviewed at least annually by MVC, as well
as by the committee specifically created by the Clearing Agencies to
address Model Risk governance matters, the DTCC Model Risk Governance
Committee (``MRGC'').
The Framework would describe the initial and periodic validation
protocols that would be applicable to all Models in the Model
Inventory. As required by regulatory requirements, all Model
Validations would be performed by qualified persons who are free from
influence from the persons responsible for the development or operation
of the Models being validated. MVC, which is responsible for performing
all Model Validations, is functionally separate from all Clearing
Agency areas that develop or operate Models. The head of MVC directly
reports to the head of the DTCC Group Chief Risk Office, rather than to
anyone that is in charge of developing or operating Models for the
Clearing Agencies.
Each new Model would undergo a full Model Validation (unless
provisionally approved, as discussed below) pursuant to which MVC would
verify that the Model is performing as expected in accordance with its
design objectives and business purpose. The full Model Validation
standards for any new Model would include, but not be limited to, the
following core Model Validation activities:
Evaluation of the Model development documentation and
testing;
evaluation of Model theory and assumptions, and
identification of potential limitations;
evaluation of data inputs and parameters;
review of numerical implementation including replication
for certain key Model components, which would vary from Model to Model;
independent testing: sensitivity analysis, stress testing,
and benchmarking, as appropriate; and
evaluation of Model outputs, Model performance, and back
testing.
Full Model Validation would be applied under the following
circumstances: (i) For all new Models prior to their use in production;
(ii) during periodic Model Validations (as described below); and (iii)
when Model changes are made that require independent Model Validation
(as further described below).
All Models approved for use in production would also be subject to
periodic Model Validations for purposes of confirming that the Models
continue to operate as intended, identifying any deficiencies that
would call into question the continuing validity of any such Model's
original approval and evaluating whether the Model and its prior
validation remain valid within the dynamics of current market
conditions.
In this regard, the Framework would describe that MVC would perform
a Model Validation for each Clearing Agency Model approved for use in
production not less than annually (or more frequently as may be
contemplated by such Clearing Agency's established risk management
framework), including each credit risk Model,\10\ liquidity risk
Model,\11\ and in the case of FICC and NSCC, as central counterparties,
on their margin systems and related Models.\12\
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\10\ Rule 17Ad-22(e)(4)(vii). See supra note 3.
\11\ Rule 17Ad-22(e)(7)(vii). See supra note 3.
\12\ Rule 17Ad-22(e)(6)(vi) and (vii). See supra note 3.
---------------------------------------------------------------------------
Periodic Model Validations would follow full Model Validation
standards. In certain cases, MVC may determine extra Model Validation
activities are warranted based on previous Model Validation work and
findings, changes in market conditions, or because performance
monitoring of a particular Model warrants extra validation.
Occasionally, an active Model may require changes in either
structure or technique. Details for any Model change request would be
provided to MVC for review and a determination of whether full Model
Validation is required.
The Framework would outline the approval process applicable to all
new Models.
The DTCC Quantitative Risk Management Financial Engineering Unit,
which is functionally separate from MVC, would be responsible for
developing, testing, and signing-off on new Clearing Agency Models and
enhancements to existing Clearing Agency Models before submitting any
such Model to MVC for Model Validation and approval.
All new Clearing Agency Models, and all material changes to
existing Clearing Agency Models, would undergo Model Validation by MVC
and be approved prior to business use. In cases where such Model's
materiality is ``Medium'' or ``High,'' such Model Validation would be
reviewed by the MRGC and recommended by the MRGC to the Clearing
Agencies' management level committee responsible for model risk
management matters, the Management Risk Committee (``MRC''), for
approval.
The Framework would provide that provisional approvals with respect
to new Clearing Agency Models and material changes to existing Clearing
Agency Models may be issued to allow a Model to be published for urgent
business use prior to MVC's Model Validation thereof. Provisional
approval requests for a Model along with appropriate control measures
would be presented by the applicable DTCC personnel responsible for the
development or operation of the Model \13\ to MVC and the MRGC for
review. Models may be provisionally approved by MVC for a limited
period, not to exceed six months unless also approved by the MRGC. MVC
would track all such provisional approvals and oversee compliance with
control measures and provisional approval periods.
---------------------------------------------------------------------------
\13\ Such personnel would be defined in the Framework as ``Model
Owners.''
---------------------------------------------------------------------------
Each periodic Model Validation would be presented to the MRGC for
its review, and its recommendation for approval to the MRC. The
Framework would provide that MRC approval must be obtained in order for
any such periodic validation to be deemed complete.
All findings that result from a new Model Validation, a change
Model Validation, a periodic Model Validation, or in connection with
implementation of a new Model or Model change, would be centrally
tracked by MVC. The status of findings resolution for approved Models
would be reported to the MRGC on a monthly basis. Where there is a
finding related to Model implementation errors, the applicable Model
Owner would report such findings/incidents in accordance with the
policies and procedures of the Operational Risk Management unit
(``ORM'') within the Group Chief Risk Office. If an adverse Model
Validation finding cannot be resolved, the Model Owner would work with
MVC and ORM to submit the finding for risk acceptance in accordance
with ORM policies and procedures.
In addition to periodic validation, MVC would be responsible for
Model performance monitoring and for each Clearing Agency's backtesting
process, which would be integral parts of each
[[Page 32033]]
Clearing Agency's model risk management framework.\14\
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\14\ Model performance monitoring is the process of (i)
evaluating an active Model's ongoing performance based on
theoretical tests, (ii) monitoring the Model's parameters through
the use of threshold indicators, and/or (iii) backtesting using
actual historical data/realizations to test a Value at Risk
(``VaR'') Model's predictive power.
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As part of Model performance monitoring, on at least a monthly
basis, sensitivity analysis would be performed by MVC on each of the
CCP's margin Model, the key parameters and assumptions for backtesting
would be reviewed, and modifications would be considered to ensure the
CCP's backtesting practices are appropriate for determining the
adequacy of the applicable CCP's margin resources.
MVC would prepare Model performance monitoring reports on a monthly
basis. Model performance monitoring, which includes review of risk-
based Models used to calculate margin requirements and relevant
parameters/threshold indicators, sensitivity analysis, and model
backtesting results would be subject to review by the MRGC, which will
escalate serious performance concerns to the MRC.
In circumstances where the products cleared or the markets served
by a CCP display high volatility or become less liquid, or when the
size or concentration of positions held by the applicable CCP's Members
increases or decreases significantly, such sensitivity analysis and
review of key model parameters and assumptions would be conducted more
frequently than monthly.
VaR and Clearing Fund requirement (``CFR'') coverage backtesting
for the CCPs would be performed by MVC on a daily basis or more
frequently.\15\ CFR coverage would be backtested on an overall basis
and for individual Members and families of affiliated Members. DTC
backtesting would be performed by MVC on a daily basis for collateral
group \16\ Collateral Monitor coverage, collateral group level haircut
\17\ coverage and Security-level haircut coverage.
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\15\ VaR Model backtesting tests Model performance at a
specified confidence level, while the CFR backtest tests margin
sufficiency in case of a Member default.
\16\ A DTC Participant with multiple accounts may group its
accounts into ``families'' (i.e., ``collateral groups'') and
instruct DTC to allocate a specified portion of its overall
Collateral Monitor and Net Debit Cap to each family. All accounts
that a Participant designates as belonging to a common collateral
group share a single Collateral Monitor and single Net Debit Cap.
See Securities Exchange Act Release No. 38201 (January 23, 1997), 62
FR 4561 (January 30, 1997) (SR-DTC-96-17).
\17\ A haircut represents a percentage decrease applied to a
Security's Market Value solely for purposes of determining the
Collateral Value of the Security. See DTC Settlement Service Guide,
available at https://www.dtcc.com/~/media/Files/Downloads/legal/
service-guides/Settlement.pdf, at 5.
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Thresholds for all backtests would be established for the rolling
12-month period coverage computed as the number of instances without
deficiency over the total number of backtest instances, where
deficiency is defined as the loss amount that exceeds the measure being
tested (i.e., VaR, CFR, Collateral Monitor, or haircut rate).
Thresholds would be set as follows:
------------------------------------------------------------------------
Threshold
Applicable to Backtesting risk metrics (%)
------------------------------------------------------------------------
CCPs............................. Overall CFR Coverage.... 99
VaR Model Coverage...... 99
Member Level CFR 99
Coverage.
Family Level CFR 99
Coverage.
DTC.............................. Collateral Group 99
Collateral Monitor
Coverage.
Collateral Group Level 99
Haircut Coverage.
Security-Level Haircut 95
Coverage.
------------------------------------------------------------------------
The CFR coverage thresholds have been set to meet applicable
regulatory requirements that require a CCP to cover its credit exposure
to its participants by establishing a risk-based margin system that,
among other things calculates margin sufficient to cover its potential
future exposure to participants in the interval between the last margin
collection and the close out of positions following a participant
default.\18\ The collateral group Collateral Monitor coverage
threshold, among other controls, has been set to support the
requirement that DTC maintain sufficient financial resources to cover
its credit exposures to each participant fully with a high degree of
confidence.\19\ The ``VaR Model Coverage'', ``Collateral Group Level
Haircut Coverage'', and ``Security-Level Haircut Coverage'' have been
set and are designed for Model performance monitoring purposes.
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\18\ See 17 CFR 240.17Ad-22(e)(6)(iii). 17 CFR 240.17Ad-
22(a)(13) defines the term ``potential future exposure'' to mean the
maximum exposure estimated to occur at a future point in time with
an established single-tailed confidence level of at least 99 percent
with respect to the estimated distribution of future exposure.
\19\ See 17 CFR 240.17Ad-22(e)(4)(i). See supra note 3.
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The MRGC would be the primary forum for MVC's regular reporting of
Model Validation activities and material Model Risks identified through
regular Model performance monitoring. Reports and recommendations with
respect to Model Risk management would be made to the MRC.
Periodic reporting to the Risk Committee of the Clearing Agencies'
Boards (``BRC'') with regard to Model Risk matters may include:
Updates of Model Validation findings and the status of
annual validations.
Updates on significant Model Risk matters, and on
compliance matters with respect to Model Risk policies and procedures
(including the Framework).
Escalation of Model Risk matters as set forth in the
market risk tolerance statement, which establishes the Clearing
Agencies' Model Risk tolerances (``Market Risk Tolerance Statement''),
and subsequent, regular updates with respect thereto.
On at least a monthly basis, the key metrics relating to Model
backtesting would be reviewed by the Market and Liquidity Risk
Management unit within the Group Chief Risk Office and MVC, and
reported to the MRC. Threshold breaches would be reviewed by the
Managing Directors within the Financial Risk Management area (including
the Market and Liquidity Risk Management unit) of the Group Chief Risk
Office, and in the case of CFR Coverage breaches by the CCPs and
Collateral Group Collateral Monitor Coverage by DTC, escalated to the
BRC in accordance with the Market Risk Tolerance Statement. The
Managing Director of the Market and Liquidity Risk Management unit
within the Group Chief Risk Office would be responsible for reviewing
the Market Risk Tolerance Statement on at least an annual basis. The
BRC would review and approve the Market Risk Tolerance Statement at
least annually.
[[Page 32034]]
With respect to any proposed change to any backtesting methodology,
prior to implementation thereof (and before any reporting thereof in
any management and regulatory report), a description of the proposed
change and impact study results would be presented to the MRGC for
review and approval. If the impact study results reflect that
implementation of the methodology would negatively impact any existing
risk tolerance threshold range, such results would be escalated by the
MRGC to the MRC, and subsequently to the BRC, for approval prior to
implementation.
All Model performance concerns would be escalated by MVC to the
MRGC, including Model performance enhancement concerns. The MRGC may
further recommend certain such matters for further escalation to the
MRC and/or the BRC.
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, DTC believes that the Framework is consistent with Section
17A(b)(3)(F) of the Act,\20\ as well as Rule 17Ad-22(e)(4)(i),
(e)(4)(vii) and (e)(7)(vii) thereunder,\21\ for the reasons described
below. FICC and NSCC believe that the Framework is consistent with
Section 17A(b)(3)(F) of the Act,\22\ as well as Rule 17Ad-22(b)(4) \23\
and Rule 17Ad-22(e)(4)(vii), (e)(6)(iii), (e)(6)(vi), (e)(6)(vii) and
(e)(7)(vii) thereunder,\24\ for the reasons described below.
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\20\ 15 U.S.C. 78q-1(b)(3)(F).
\21\ Supra note 3.
\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ 17 CFR 240.17Ad-22(b)(4). See supra note 3.
\24\ Supra note 3.
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Section 17A(b)(3)(F) of the Act \25\ requires, inter alia, that the
rules of a clearing agency be designed to promote the prompt and
accurate clearance and settlement of securities transactions. As
described in greater detail above, the Framework would describe the
process by which the Clearing Agencies identify, measure, monitor, and
manage the risks associated with the design, development,
implementation, use, and validation of quantitative models. The
quantitative models covered by the Framework would be applied by the
Clearing Agencies, as applicable, to evaluate and address their
respective risk exposures associated with their settlement activity and
allow them to continue the prompt and accurate clearance and settlement
of securities. In this regard, the Framework would facilitate their
ability to develop models that would be applied to evaluate and address
risk exposure, and allow them to continue the prompt and accurate
clearance and settlement of securities. Therefore, the Clearing
Agencies believe that the Framework is consistent with the requirements
of Section 17A(b)(3)(F) of the Act.\26\
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\25\ 15 U.S.C. 78q-1(b)(3)(F).
\26\ Id.
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Rule 17Ad-22(b)(4) under the Act \27\ requires, inter alia, that a
covered clearing agency that is a central counterparty establish,
implement, maintain, and enforce policies and procedures reasonably
designed to provide for an annual Model Validation consisting of
evaluating the performance of the clearing agency's margin models and
the related parameters and assumptions associated with such models by a
qualified person who is free from influence from the persons
responsible for the development or operation of the models being
validated. As described in the Framework and as described above, MVC is
an area that is functionally separate from all areas within NSCC and
FICC that develop and operate models. Pursuant to the Framework, MVC
would perform a Model Validation on all approved margin systems and
related Models for NSCC and FICC, not less than annually. Therefore,
NSCC and FICC believe the Framework is consistent with Rule 17Ad-
22(b)(4) under the Act.\28\
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\27\ Supra note 21.
\28\ Id.
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Rule 17Ad-22(e)(4)(i) \29\ under the Act requires, inter alia, that
a covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to maintain
sufficient financial resources to cover its credit exposure to each
participant fully with a high degree of confidence. The collateral
group Collateral Monitor coverage threshold has been set to support the
requirement that DTC maintain sufficient financial resources to cover
its credit exposures to each participant fully with a high degree of
confidence by using the threshold, established as discussed above, of
99 percent, and therefore, DTC believes that the Framework is
consistent with Rule 17Ad-22(e)(4)(i) under the Act.\30\
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\29\ 17 CFR 240.17Ad-22(e)(4) (in particular, 17 CFR 240.17Ad-
22(e)(4)(i)). See supra note 3.
\30\ Id.
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Rule 17Ad-22(e)(4)(vii) \31\ and (e)(7)(vii) \32\ under the Act
requires, inter alia, that a covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to perform Model Validations on its credit risk
models and liquidity risk models not less than annually or more
frequently as may be contemplated by the clearing agency's risk
management framework established pursuant to Rule 17Ad-22(e)(3).\33\ As
discussed above, the Framework would describe the Clearing Agencies'
Model Risk validation process, which would be performed not less than
annually on its credit risk models and liquidity risk models.
Therefore, the Clearing Agencies believe that the Framework is
consistent with Rule 17Ad-22(e)(4)(vii) \34\ and (e)(7)(vii) \35\ under
the Act.
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\31\ 17 CFR 240.17Ad-22(e)(4) (in particular, 17 CFR 240.17Ad-
22(e)(4)(vii)). See supra note 3.
\32\ 17 CFR 240.17Ad-22(e)(7) (in particular, 17 CFR 240.17Ad-
22(e)(7)(vii)). See supra note 3.
\33\ 17 CFR 240.17Ad-22(e)(3). See supra note 3.
\34\ Supra note 30.
\35\ Supra note 31.
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Rule 17Ad-22(e)(6)(iii) under the Act \36\ requires that a covered
clearing agency that is a central counterparty establish, implement,
maintain and enforce written policies and procedures reasonably
designed to cover its credit exposures to its participants by
establishing a risk-based margin system that at a minimum, inter alia,
calculates margin sufficient to cover its potential future exposure
\37\ to participants in the interval between the last margin collection
and the close out of positions following a participant default. As
discussed above, the CFR coverage thresholds have been set at 99
percent. Therefore, NSCC and FICC believe that the Framework is
consistent with Rule 17Ad-22(e)(6)(iii) under the Act.\38\
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\36\ 17 CFR 240.17Ad-22(e)(6) (in particular, 17 CFR 240.17Ad-
22(e)(6)(iii)). See supra note 3.
\37\ 17 CFR 240.17Ad-22(a)(13) defines the term ``potential
future exposure'' to mean the maximum exposure estimated to occur at
a future point in time with an established single-tailed confidence
level of at least 99 percent with respect to the estimated
distribution of future exposure.
\38\ Supra note 33.
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Rule 17Ad-22(e)(6)(vi) under the Act \39\ requires, inter alia,
that a covered clearing agency that is a central counterparty
establish, implement, maintain and enforce written policies and
procedures reasonably designed to (a) conduct backtests of its margin
model at least once each day using standard predetermined parameters
and assumptions, (b) conduct a sensitivity analysis of its margin model
and a review of its parameters and assumptions for backtesting on at
least a monthly basis, and consider modifications to ensure the
backtesting practices are appropriate for determining the adequacy of
such
[[Page 32035]]
central counterparty's margin resources, (c) conduct a sensitivity
analysis of its margin model and a review of its parameters and
assumptions for backtesting more frequently than monthly during periods
of time when the products cleared or markets served display high
volatility or become less liquid, or when the size or concentration of
positions held by such central counterparty's participants increases or
decreases significantly and (d) report the results of its analyses
under (b) and (c) to appropriate decision makers at the central
counterparty, including but not limited to, its risk management
committee or Board, and using these results to evaluate the adequacy of
and adjust its margin methodology, model parameters, and any other
relevant aspects of its credit risk management framework. As discussed
above, the Framework would provide that (a) the CCPs would perform VaR
and CFR backtesting on a daily basis, (b) as part of Model performance
monitoring, on at least a monthly basis, sensitivity analysis would be
performed by MVC on each of the margin Models of the CCPs, the key
parameters and assumptions for backtesting would be reviewed, and
modifications would be considered to ensure the applicable CCP's
backtesting practices are appropriate for determining the adequacy of
the applicable CCP's margin resources, (c) MVC would, in circumstances
where the products cleared or the markets served by the applicable CCP
display high volatility or become less liquid, or when the size or
concentration of positions held by the applicable CCP's Members
increases or decreases significantly, sensitivity analysis and review
of key model parameters and assumptions would be conducted more
frequently than monthly, and (d) each CCP would report the results of
its analyses under (b) and (c) to key decision makers, including but
not limited to the MRC and/or BRC, as discussed above. Therefore NSCC
and FICC believe the Framework is consistent with Rule 17Ad-
22(e)(6)(vi) under the Act.\40\
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\39\ 17 CFR 240.17Ad-22(e)(6) (in particular, 17 CFR 240.17Ad-
22(e)(6)(vi)). See supra note 3.
\40\ Id.
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Rule 17Ad-22(e)(6)(vii) under the Act \41\ requires, inter alia,
that a covered clearing agency that is a central counterparty
establish, implement, maintain and enforce written policies and
procedures reasonably designed to perform Model Validations on its
margin system and related models not less than annually or more
frequently as may be contemplated by the clearing agency's risk
management framework established pursuant to Rule 17Ad-22(e)(3).\42\ As
discussed above, the Framework would describe the Model Risk validation
processes of the CCPs, which would be performed not less than annually
on their margin system and related models. Therefore, NSCC and FICC
believe that the Framework is consistent with Rule 17Ad-22(e)(6)(vii)
under the Act.\43\
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\41\ 17 CFR 240.17Ad-22(e)(6) (in particular, 17 CFR 240.17Ad-
22(e)(6)(vii)). See supra note 3.
\42\ Supra note 32.
\43\ Supra note 40.
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(B) Clearing Agencies' Statements on Burden on Competition
None of the Clearing Agencies believe that the Framework would have
any impact, or impose any burden, on competition because the proposed
rule changes reflect the existing framework that the Clearing Agencies
employ to manage model risk, and would not effectuate any changes to
the Clearing Agencies' model risk management tools as they currently
apply to their respective Members or Participants.
(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-2017-008, SR-FICC-2017-014, or SR-NSCC-2017-008 on
the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549.
All submissions should refer to File Number SR-DTC-2017-
008, SR-FICC-2017-014, or SR-NSCC-2017-008. 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-2017-008, SR-FICC-2017-014, or SR-NSCC-2017-008 and should be
submitted on or before August 1, 2017.
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\44\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\44\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-14425 Filed 7-10-17; 8:45 am]
BILLING CODE 8011-01-P
