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]

Download as PDF 32030 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. mstockstill on DSK30JT082PROD with NOTICES 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 VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 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 (http://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. Frm 00098 Fmt 4703 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 (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 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 Sfmt 4703 E:\FR\FM\11JYN1.SGM CFR 200.30–3(a)(12). 11JYN1 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 http:// dtcc.com/legal/rules-and-procedures. mstockstill on DSK30JT082PROD with NOTICES 2 17 VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 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 Frm 00099 Fmt 4703 Sfmt 4703 32031 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. E:\FR\FM\11JYN1.SGM 11JYN1 mstockstill on DSK30JT082PROD with NOTICES 32032 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices 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) VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 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. PO 00000 Frm 00100 Fmt 4703 Sfmt 4703 13 Such personnel would be defined in the Framework as ‘‘Model Owners.’’ E:\FR\FM\11JYN1.SGM 11JYN1 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices 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 ................................. 32033 99 99 99 99 99 99 95 mstockstill on DSK30JT082PROD with NOTICES 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 http://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. VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 PO 00000 Frm 00101 Fmt 4703 Sfmt 4703 E:\FR\FM\11JYN1.SGM 11JYN1 32034 Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices mstockstill on DSK30JT082PROD with NOTICES 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). VerDate Sep<11>2014 18:01 Jul 10, 2017 Jkt 241001 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. PO 00000 Frm 00102 Fmt 4703 Sfmt 4703 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 E:\FR\FM\11JYN1.SGM 11JYN1 mstockstill on DSK30JT082PROD with NOTICES Federal Register / Vol. 82, No. 131 / Tuesday, July 11, 2017 / Notices 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 (http://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 (http://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 (http://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] BILLING CODE 8011–01–P 40 Id. 18:01 Jul 10, 2017 Jkt 241001 PO 00000 note 32. 43 Supra note 40. 42 Supra Frm 00103 Fmt 4703 44 17 Sfmt 9990 32035 E:\FR\FM\11JYN1.SGM CFR 200.30–3(a)(12). 11JYN1

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]


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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 http://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\
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 http://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.
---------------------------------------------------------------------------

    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 (http://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 (http://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 (http://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