Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, Security-Based Swap Submission, or Advance Notice Relating to ICC's Liquidity Risk Management Framework and ICC's Stress Testing Framework, 32895-32900 [2017-14985]

Download as PDF Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Jill M. Peterson, Assistant Secretary. [FR Doc. 2017–14981 Filed 7–17–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81132; File No. SR–ICC– 2017–011] Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change, SecurityBased Swap Submission, or Advance Notice Relating to ICC’s Liquidity Risk Management Framework and ICC’s Stress Testing Framework July 12, 2017. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on June 28, 2017, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission the proposed rule change as described in Items I, II, and III below, which Items have been prepared primarily by ICC. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Clearing Agency’s Statement of the Terms of Substance of the Proposed Rule Change The principal purpose of the proposed rule change is to revise the ICC Liquidity Risk Management Framework and the ICC Stress Testing Framework. These revisions do not require any changes to the ICC Clearing Rules (‘‘Rules’’). sradovich on DSK3GMQ082PROD with NOTICES II. Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, ICC included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. ICC has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of these statements. 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 17:47 Jul 17, 2017 Jkt 241001 (A) Clearing Agency’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change (a) Purpose ICC proposes revisions to its Liquidity Risk Management Framework and to its Stress Testing Framework. ICC believes such revisions will facilitate the prompt and accurate clearance and settlement of securities transactions and derivative agreements, contracts, and transactions for which it is responsible. The proposed revisions are described in detail as follows. Liquidity Risk Management Framework ICC proposes to revise its Liquidity Risk Management Framework in order to make revisions to its liquidity monitoring program in order to enhance compliance with U.S. Commodity Futures Trading Commission (‘‘CFTC’’) regulations including 17 CFR 39.11, 17 CFR 39.33 and 17 CFR 39.36. ICC proposes to reorganize the format of the Liquidity Risk Management Framework to consist of three elements: Liquidity Risk Management Model; Measurement and Monitoring; and Governance. The ‘‘Regulatory Requirements’’ section, previously included as an element of the framework, will be deleted; however, the regulatory requirements applicable to liquidity risk management are still referenced in the framework. The changes to each element of the Liquidity Risk Management Framework are described below. I. Liquidity Risk Management Model ICC proposes to enhance the description of the components which comprise its liquidity risk management model. As revised, the liquidity risk management model now includes, but is not limited to, the following components: Currency-specific risk requirements; acceptable collateral; liquidity requirements; collateral valuation methodology; investment strategy; Clearing Participant (‘‘CP’’) deposits as a liquidity pool; liquidity facilities (including committed repo facilities and committed foreign exchange (‘‘FX’’) facilities); and liquidity waterfall. Each of these components are described thoroughly within the Liquidity Risk Management Framework, and changes to each component are described below. Currency-Specific Risk Requirements ICC proposes to add language to the ‘currency-specific risk requirements’ section to cross reference ICC’s current policy of maintaining cash and collateral assets posted by CPs (on PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 32895 behalf of themselves and/or their clients) to meet currency-specific Initial Margin (‘‘IM’’) and GF requirements, to ensure ICC has sufficient total resources in the required currencies of denomination. Acceptable Collateral The ‘acceptable collateral’ section remains the same, and notes that CPs may post IM and GF deposits that meet ICC’s acceptable collateral criteria as described in ICC’s Treasury Operations Policies and Procedures and Schedule 401 of the ICC Rules. Liquidity Requirements The ‘liquidity requirements’ section sets forth ICC’s liquidity requirements for house/proprietary accounts and client-related accounts. Such requirements are also set forth in ICC’s Treasury Operations Policies and Procedures and Schedule 401 of the ICC Rules. The ‘liquidity requirements’ section will reflect the changes to ICC’s liquidity thresholds for Euro (‘‘EUR’’) denominated products set forth in filing SR–ICC–2017–002.3 ICC revised the ‘liquidity requirements’ section to cross reference ICC’s minimum U.S. Dollar (‘‘USD’’) contribution to the Guaranty Fund (‘‘GF’’) of $20 million required from every CP. This is not a change, but rather a statement of current policy.4 ICC proposes revisions to the ‘liquidity requirements’ section to extend ICC’s margin risk horizon up to 6-days, to account for the risk associated with clearing Asia Pacific products. This change will apply throughout the framework; the risk horizon is reflected as ‘‘N-day’’ where N≥5 is the margin risk horizon or Margin Period of Risk (MPOR). The margin risk horizon is based on the greatest MPOR (rounded up to the nearest integer) for the CDS instruments currently eligible for clearing in order to capture the risk associated with clearing products across multiple time zones (i.e., if an instrument is subject to 5.5 day MPOR estimations, then the scenarios will reflect N=6). Collateral Valuation Methodology The ‘collateral valuation methodology’ section remains substantially the same, and sets forth the method by which ICC prices the 3 See Securities Exchange Act Release No. 34– 79988 (February 8, 2017), 82 FR 10611 (February 14, 2017). This rule change has been approved by the Commission. See Securities Exchange Act Release No. 34–80324 (March 28, 2017), 82 FR 16244 (April 3, 2017). The text of the proposed rule change for rule filing SR–ICC–2017–002 can also be found on ICC’s Web site at https://www.theice.com/ clear-credit/regulation. 4 Set forth in Schedule 401 of the ICC Rulebook. E:\FR\FM\18JYN1.SGM 18JYN1 32896 Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices assets posted as collateral, including haircut calculations. Investment Strategy The ‘investment strategy section’ remains substantially the same, and sets forth a summary of ICC’s investment strategy. ICC proposes revisions to the ‘investment strategy’ section to note that when beneficial, ICC diversifies its cash investments across multiple depository institutions to reduce its liquidity exposure to any single depository. CP Deposits as a Liquidity Pool The ‘CP deposits as a liquidity pool’ section remains substantially the same, and refers to the ability of ICC, pursuant to ICC Rules 402 and 804, to borrow GF and house origin IM cash deposits of non-defaulting CPs and pledge non-cash and cash assets of an equivalent value deposited by the defaulting and/or nondefaulting CP(s) as collateral for this loan. sradovich on DSK3GMQ082PROD with NOTICES Liquidity Facilities ICC proposes revisions to the ‘liquidity facilities’ section to add reference to its committed repurchase facilities (as opposed to committed repurchase agreements). ICC added reference to its recently available committed FX facilities for converting USD cash to EUR cash. ICC also proposes removing reference to FX Swaps, Immediate FX Spot Transactions, because these arrangements do not count as ‘‘qualifying liquidity resources’’ under CFTC Regulation 39.33,5 as they are not committed. ICC also proposes removing reference to the Intercontinental Exchange, Inc. committed line of credit, as ICC no longer participates in the arrangement. ICC’s liquidity is not negatively impacted by the proposed changes, as the committed repo facilities and committed FX facilities (coupled with ICC cash and collateral deposits) ensure ICC remains fully able to timely and effectively contain liquidity pressures consistent with Rule 17Ad– 22(d)(11).6 ICC proposes analogous changes to the ‘liquidity waterfall’ section to reflect the deletion and addition of these references. Liquidity Waterfall Under the ‘liquidity waterfall’ section, ICC proposes revisions to its definition of Available Liquidity Resources (‘‘ALR’’) to note that ALR consist of the available deposits currently in cash of the required denomination, and the cash equivalent of the available deposits in 5 17 6 17 CFR 39.33 CFR 240.17Ad–22(d)(11). VerDate Sep<11>2014 17:47 Jul 17, 2017 Jkt 241001 collateral types that ICC can convert to cash, in the required currency of denomination, using all sources of liquidity available to it. For reference, the liquidity waterfall classifies ALR on any given day into four Levels. Level One includes the House IM and GF cash deposits of the defaulting CP. Level Two includes GF cash deposits of: (i) ICC; and (ii) non-defaulting CPs, which until ICC has consumed the cash equivalent value of all defaulting CPs’ IM and GF deposits, are available to ICC after pledging an equivalent value of noncash assets (or cash assets in a different currency) from the defaulting CP’s IM deposits or GF deposits. Level Three includes House IM cash deposits of the non-defaulting CPs, which are available to ICC after pledging an equivalent value of non-cash assets (or cash assets in a different currency) from the defaulting CP’s IM deposits or GF deposits. Level Three cash used by ICC is always a loan, against which it must provide the equivalent Pledgeable Collateral from the GF deposits of the non-defaulting CPs and ICC, and/or from the IM and/or GF deposits of the defaulting CPs. Level Four includes ICC’s committed repo facilities to convert U.S. Treasuries to USD cash and ICC’s committed FX facilities to convert USD cash to EUR cash. Note that when determining ALR for stress testing analyses purposes, to account for the risk associated with Foreign Exchange (‘‘FX’’) rate fluctuations, i.e., USD/EUR and EUR/ USD, when profits and funds denominated in one currency are used to offset losses denominated in other currencies, appropriate FX ‘‘haircuts’’ are applied. ICC noted that ICC’s liquidity stress testing and historical liquidity analysis scenarios do not consider any tolerance for delayed payouts. ICC also noted that, during a default management period, ICC may initiate the liquidation of noncash collateral and/or conversion of cash collateral into the required currencies of denomination, so that ICC has additional ALR to use according to the liquidity waterfall on subsequent days of default management and/or is able to pay back some or all of the cash previously borrowed in Levels Two to Four of the liquidity waterfall. II. Measurement and Monitoring Methodology ICC proposes changes to the ‘methodology’ section to change the calculation for available liquidity resources. In the historical and stress testing analysis, ICC proposes replacing the estimation of minimum available PO 00000 Frm 00112 Fmt 4703 Sfmt 4703 liquid resources based on risk requirements with the observation of cash and collateral on deposit (excluding cash that will be unavailable by the applicable ICC Payout Deadline because it has been invested by ICC). As such, ICC proposes removing the section from the Liquidity Risk Management Framework which described the process for computing the estimation of minimum available liquid resources. In addition, ICC proposes removing other references throughout the framework related to the estimation of minimum available liquid resources. ICC is changing its approach based on feedback from the CFTC, to ensure consistency with CFTC regulations, including CFTC Regulation 39.33.7 Under the previous approach, ICC executed its stress test analysis by using the minimum requirement amounts based on ICC’s liquidity thresholds set forth in Schedule 401 of the ICC Rules. Under the revised approach, ICC proposes executing stress test analysis by using the amount of assets currently on deposit. ICC also proposes additional changes to the ‘methodology’ section. Among other things, the proposed revisions will clarify that ICC’s measurement and monitoring methodology assesses the adequacy of ICC’s established liquidity resources in response to historically observed and hypothetically created (forward looking) scenarios with risk horizons up to and including 6-days. The analyzed scenarios feature assumptions that directly impact the ability of ICC to meet its payment obligations. From available IM and GF collateral on deposit on the day of the considered default(s), the analysis determines currency-specific ALR by liquidity waterfall level, and compares these ALRs to the currency-specific Liquidity Obligations resulting from the analyzed scenarios on each day of the considered time horizon. To be conservative, the analysis assumes no client-related ALR and that only the day-1 ALR are available throughout the considered time horizon (i.e., the analysis does not consider ICC’s ability during the considered time horizon to liquefy non-cash collateral on deposit or transform the currency of cash on deposit). Historical Analysis ICC proposes changes to the ‘historical analysis’ section of the framework. ICC proposes adding language to note that, as part of its historical liquidity analysis, ICC analyzes historical data sets to assess 7 17 E:\FR\FM\18JYN1.SGM CFR 39.33. 18JYN1 Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES the level of liquidity coverage achieved for each currency. Under the revised framework, ICC will continue to conduct a historical liquidity analysis on both an individual AG basis and a cover-2 basis. ICC proposes the use of the Basel Traffic Light System 8 to determine if the minimum cash component of its risk requirements truly covers historically observed 1-day liquidity obligations with a 99% level of confidence. The proposed revisions are part of the ‘historical analysis’ section. ICC’s risk requirements are designed to meet at least a 99% N-day VaR equivalent level of coverage. CPs must meet their IM and GF requirements with a minimum cash component equivalent to the 1-day portion of the N-day requirement, computed using the square-root-of-time approach.9 ICC proposes additional enhancements to the ‘historical analysis’ section to consider the simultaneous default of the two worst-case Affiliate Groups (‘‘AGs’’) 10 of CPs, rather than the two worst-case CPs, in line with regulations, including 17 CFR 39.33(c)(1)(ii). Under the revised framework, when computing a CP’s combined house and client origin liquidity obligation for the purposes of selecting which AGs are considered to be in a state of default, ICC proposes to eliminate the application of house origin gains against client origin losses, or house origin losses against client origin gains. This analysis is designed to demonstrate to what extent the liquidity resources available to ICC were sufficient to meet historical single and multi-day cover-2 Liquidity Obligations, consistent with 17 CFR 39.33(c)(1)(ii). ICC proposes enhancements to the ‘historical analysis’ section to note that, for each day of its historical analysis, and on a currency specific basis, the Risk Department explores predefined cover-2 scenarios considering the default of the CPs within two AGs creating the largest remaining Liquidity Obligation after applying the IM and GF cash deposits of each constituent CP to that CP’s Liquidity Obligation. ICC’s 8 ‘‘Supervisory Framework for the use of ‘‘Backtesting’’ in Conjunction with the Internal Models Approach to Market Risk Capital Requirements’’, Section III: Supervisory framework for the interpretation of backtesting results, Basel Committee on Banking Supervision, January 1996. 9 ‘‘Amendment to the Capital Accord to Incorporate Market Risk’’, Basel Committee on Banking Supervision, January 1996. 10 An affiliated CPs is defined as any other CP that owns, is owned by or is under common ownership with such a CP. The set of all affiliated CPs is considered as a CP affiliate group. This term is consistent with ‘‘participant family’’ as defined in 17 CFR 240.17Ad–22(12). VerDate Sep<11>2014 18:46 Jul 17, 2017 Jkt 241001 cover-2 analysis considers the liquidity resources provided by the defaulting CPs, the GF and IM liquidity resources provided by the non-defaulting CPs and ICC, and any externally available liquidity resources. ICC proposes clarifying changes to the ‘historical analysis section’ to note that the prices considered for historical analysis purposes are ‘‘dirty’’ prices as they include riskless (deterministic) payments (i.e., upfront fees, coupon payments, credit event payments and interest on mark-to-market margin). ICC proposes adding explanatory language regarding its calculation of the N-day worst-case cumulative (combined house and client origin) liquidity obligations. ICC proposes removal of a measurement and monitoring framework diagram, deemed no longer relevant or necessary in light of the larger changes to the framework. Finally, ICC proposes revisions to note that ICC reports cover2 results from the observed immediate liquidity obligation scenarios and the worst-case five-day liquidity obligation scenarios. This audience of this reporting will depend on the results. ICC notes that the results should exhibit no deficiencies of the combined resources in Levels One through Four of the liquidity waterfall. Stress Testing Analysis ICC proposes changes to the ‘stress testing’ section of the framework. Under the previously approved framework, ICC used predefined scenarios believed to be potential market outcomes historically observed, but with a very low probability of occurrence, as well as scenarios that replicated observed instrument price changes during the Lehman Brothers default. ICC also used predefined scenarios designed to test the performance of the risk methodology under extreme conditions, which ICC did not expect the market to realize. ICC proposes re-categorizing and adding to the stress testing scenarios set forth in the ‘stress testing’ section of the framework. Under the revised framework, ICC has enhanced its description of its historically observed extreme but plausible market scenarios, to note that the scenarios define spread or price shocks based on observations during specific historical events. The historical data set from which ICC derives the proposed scenarios will continue to begin on April 1, 2007 and include periods of extreme market events such as the Bear Stearns collapse, the Lehman Brothers default, the 2009 Credit Crisis, the US ‘‘Flash Crash’’ event, and the European Sovereign Crisis. The scenarios are similar to the stress testing currently performed under PO 00000 Frm 00113 Fmt 4703 Sfmt 4703 32897 the financial resources Stress Testing Framework. ICC proposes eliminating all scenarios not expected to be realized as market outcomes (i.e. those considered extreme and not plausible). Under the revised framework, ICC will continue to have the ability to execute liquidity analyses based on extreme but not plausible scenarios, on an ad-hoc basis. Further, ICC proposes revising the ‘stress testing’ section to add 1-day, 2-day, and N-day analogues in place of existing 5-day scenarios. Under the revised framework, each historically observed scenario will have three analogues, one representing a 1-day horizon, one representing a 2day horizon and one representing a Nday horizon. Previously, only analogues representing a N-day horizon were considered. The addition of the 1-day analogue will demonstrate ICC’s ability to meeting its immediate payment obligations over a one-day period (e.g., intraday and same-day obligations), while the 2-day and N-day analogues will demonstrate ICC’s ability to meet its payment obligations over a multiday period. ICC also proposes revising the ‘stress testing’ section of the framework to add a number of hypothetically constructed (forward looking) extreme but plausible market scenarios comprised of a given historically observed extreme but plausible market scenario and additional stress enhancements representing forward looking hypothetical adverse market events. Specifically, two sets of hypothetically constructed (forward looking) extreme but plausible market scenarios are proposed: Loss-given default scenarios, and one-service-provider-down scenarios. The loss-given default scenarios consider the addition of up to three adverse credit events including the holder of the considered portfolio, one additional CP name and one additional non-CP name. The oneservice-provider-down scenarios consider a reduction in ALR designed to represent ICC’s worst-case exposure to a single service provider at which it maintains cash deposits or investments, due to ICC’s potential inability to access those deposits and/or investments when required. ICC proposes that the reduction in ALR used in the oneservice-provider-down scenarios is based on ICC’s analysis of the diversification of its deposits and investments across its multiple service providers. ICC proposes revisions to the ‘stress testing’ section to further describe its analysis under the above referenced scenarios. ICC proposes revisions to consider the simultaneous default of the E:\FR\FM\18JYN1.SGM 18JYN1 sradovich on DSK3GMQ082PROD with NOTICES 32898 Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices two worst-case Affiliate Groups (‘‘AGs’’) 11 of CPs, rather than the two worst-case CPs, in line with regulations, including 17 CFR 39.33(c)(1)(ii). ICC will perform cover-2 analysis in which, for each scenario, it determines the two AGs creating the largest remaining Liquidity Obligation after applying the IM and GF cash deposits of each constituent CP to its own Liquidity Obligation. ICC compares the remaining Liquidity Obligation of the AG to the remaining liquidity resources to determine if there are sufficient resources to meet the obligation. ICC proposes enhancements to the ‘stress testing’ section to describe its cover-N analysis in which, for each scenario, it first considers the default of one AG, then the defaults of two AGs, then three AGs, and so forth. The sequence of selecting AGs is based on the remaining Liquidity Obligation associated with the constituent CP’s portfolios after applying the IM and GF cash deposits of each constituent CP to its own Liquidity Obligation. AGs are sequenced from largest to smallest remaining Liquidity Obligation. For each set of AGs considered to be in a state of default (1 AG, 2 AGs, 3 AGs, etc.), ICC compares the total remaining Liquidity Obligation to the remaining liquidity resources to determine if there are sufficient resources to meet the obligation. In this way, ICC determines how many AGs it would require to be in a state of default to consume all available liquidity resources. To determine the Liquidity Obligations in the above analysis, ICC applies the stress scenarios to actual cleared portfolios to determine a currency-specific profit/loss for each CP, representing the largest cumulative loss over the specified risk horizon. The considered profit/loss in the analysis is the sum of the upfront fee changes corresponding to the clean prices associated with the hypothetical scenarios, and excluding the riskless (deterministic) payments. To determine ICC’s liquidity needs for each scenario, the Risk Department computes Liquidity Obligations for FCM/BD CPs by combining the net payments for house and client origin accounts. For the purposes of selecting defaulting AGs, the Risk Department does not offset client origin losses with house origin gains, or offset house origin losses with client origin gains. 11 An affiliated CPs is defined as any other CP that owns, is owned by or is under common ownership with such a CP. The set of all affiliated CPs is considered as a CP affiliate group. This term is consistent with ‘‘participant family’’ as defined in 17 CFR 240.17Ad–22(12). VerDate Sep<11>2014 17:47 Jul 17, 2017 Jkt 241001 III. Governance Required Analysis The ‘required analysis’ section remains substantially the same. The ICC Risk Department executes stress testing daily, with weekly reporting to different audiences depending on the results. The Risk Department also executes monthly historical liquidity adequacy analyses and reviews the results monthly, with monthly reporting to different audiences depending on the results. Interpretation of Results and Potential Actions The ‘interpretation of results and potential actions’ section remains substantially the same. Depending on the scenarios and the frequency and severity of any resulting deficiencies, the Risk Department may choose to make appropriate enhancements to its model. Before enhancing its liquidity risk management model, ICC first discusses such enhancements with its senior management team, and subsequently consults with its Risk Working Group and Risk Committee before submitting to the Board of Managers for approval. Materiality and Reporting Framework ICC proposes changing the ‘materiality and reporting framework’ section to note that, at each Risk Committee meeting, the Risk Department provides a summary of historical liquidity analysis and liquidity stress testing analysis, which demonstrates the adequacy of ICC’s liquidity resources to cover Liquidity Obligations over N-days. Such analyses will also include any instance where Level Three resources were required to meet Liquidity Obligations in response to any of the considered historical liquidity or liquidity stress testing scenarios. ICC proposes revisions to the ‘materiality and reporting framework’ to note that, when exceedances of funded and/or unfunded resources are identified, the Risk Department is required to report them to the senior management team and the ICC Risk Committee, and i) demonstrate breaches do not highlight a significant liquidity risk management weaknesses, or ii) recommend specific liquidity risk management model enhancements that produce an adequate increase in funded and/or unfunded liquidity resources under the identified scenario(s). In addition to the reporting described above, the Risk Department will also report to the Risk Committee any instances where the Basel Traffic Light System categorizes the number of PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 observed exceedances in its individual AG historical analysis as being in the predefined ‘‘red zone’’. In these instances, the Risk Department will discuss with the Risk Committee the appropriateness of its liquidity thresholds, and if appropriate, make revisions. Model Validation ICC proposes revisions to the ‘model validation’ section to note that its Liquidity Risk Management Framework is under the purview of the Model Validation Framework, and subject to initial validations. Stress Testing Framework ICC proposes revisions to its Stress Testing Framework to unify the stress testing scenarios with the liquidity stress testing scenarios set forth in the Liquidity Risk Management Framework. ICC operates its stress testing and liquidity stress testing on a unified set of stress testing scenarios and system. As such, revisions to the stress testing scenarios are necessary to ensure scenario unification, following changes to the Liquidity Risk Management Framework. Such changes are consistent with recently issued guidance for certain principles and key considerations in the Committee on Payments and Market InfrastructuresBoard of the International Organization of Securities Commissions Principles for Financial Market Infrastructures 12. The proposed revisions are described in detail as follows. ICC proposes to introduce Risk Factor specific scenarios for all stress test scenarios. Previously, corporate single names were considered at the sector level (as opposed to the Risk Factor level). This change is reflected throughout the framework. ICC also proposes to add clarifying language to note that the predefined stress testing scenarios set forth in its Stress Testing Framework are applied to all cleared instruments, and that namespecific scenarios are applied to all sovereign and corporate reference entities. ICC also proposes revisions to extend ICC’s margin risk horizon up to 6-days, to account for the risk associated with clearing Asia Pacific products. This change will apply throughout the framework; the risk horizon is reflected as ‘‘N-day’’ where N≥5 is the margin risk horizon or Margin Period of Risk (MPOR). The margin risk horizon is based on the greatest MPOR (rounded 12 See CPMI–IOSCO Consultative Report, Resilience and recovery of CCPs: Further guidance on the PFMI, dated August 2016 (https:// www.bis.org/cpmi/publ/d149.pdf). E:\FR\FM\18JYN1.SGM 18JYN1 Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices sradovich on DSK3GMQ082PROD with NOTICES up to the nearest integer) for the CDS instruments currently eligible for clearing in order to capture the risk associated with clearing products across multiple time zones (i.e. if an instrument is subject to 5.5 day MPOR estimations, then the scenarios will reflect N=6). ICC also proposes to revise its description of the ‘‘Historically Observed Extreme but Plausible Market Scenarios’’ to note that the stress spread changes considered as part of each scenario are extracted from the market history of the most actively traded instrument for the considered Risk Factors. ICC proposes to revise the ‘‘Hypothetically Constructed (Forward Looking) Extreme but Plausible Market Scenarios’’ to ensure consistency with the loss-given default stress scenario set forth in the Liquidity Risk Management Framework, which combines a given historically observed extreme but plausible market scenario with explicit Jump-to-Default events. The proposed revisions specify that there will be up to two reference entities selected for a hypothetical adverse credit event. ICC proposes to revise the description of the discordant scenarios (i.e. scenarios under which selected risk factors move in opposite directions; commonly the behavior deviates from historically observed behavior) in the Stress Testing Framework, in order to reflect the introduction of Risk Factor specific scenarios. The discordant scenarios are designed to reproduce significant discordant market outcomes observed during the considered historical period. ICC creates discordant scenarios for North American corporate single names and indices; European corporate single names and indices; and sovereign reference entities. (b) Statutory Basis Section 17A(b)(3)(F) of the Act 13 requires, among other things, that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions, and to the extent applicable, derivative agreements, contracts and transactions and to comply with the provisions of the Act and the rules and regulations thereunder. ICC believes that the proposed rule changes are consistent with the requirements of the Act and the rules and regulations thereunder applicable to ICC, in particular, to Section 17(A)(b)(3)(F),14 because ICC believes that the proposed rule changes will promote the prompt and accurate clearance and settlement of securities transactions, derivatives agreements, contracts, and transactions. ICC’s Liquidity Risk Management Framework describes ICC’s liquidity resources as well as the methodology for testing the sufficiency of these resources. The various elements set forth in the Liquidity Risk Management Framework, and described above, ensure that ICC has sufficient liquidity resources to effectively measure, monitor and manage its liquidity risk. Further, the Liquidity Risk Management Framework supports ICC’s ability to maintain sufficient liquid resources in all relevant currencies to effect same-day and, where appropriate, intraday and multiday settlement of payment obligations with a high degree of confidence under a wide range of potential stress scenarios. As such, the proposed rule changes are designed to promote the prompt and accurate clearance and settlement of securities transactions, derivatives agreements, contracts, and transactions within the meaning of Section 17A(b)(3)(F) 15 of the Act. Further, the changes to the Stress Testing Framework to unify the stress testing scenarios with the stress testing scenarios set forth in the Liquidity Risk Management Framework are necessary following recent changes to the Liquidity Risk Management Framework, as ICC operates its stress testing and liquidity stress testing on a unified set of stress testing scenarios and system. ICC’s stress testing practices will continue to ensure the adequacy of systemic risk protections. As such, the proposed rule changes are designed to promote the prompt and accurate clearance and settlement of securities transactions, derivatives agreements, contracts, and transactions within the meaning of Section 17A(b)(3)(F) 16 of the Act. The proposed changes will also satisfy the requirements of Rule 17Ad– 22.17 The revised stress test scenarios set forth in the Stress Testing Framework will continue to ensure that ICC maintains sufficient financial resources to withstand a default by the Clearing Participant (‘‘CP’’) family to which it has the largest exposure in extreme but plausible market conditions, consistent with the requirements of Rule 17Ad–22(b)(3).18 15 Id. 16 Id. 13 15 U.S.C. 78q–1(b)(3)(F). 17 17 14 Id. VerDate Sep<11>2014 18 17 17:47 Jul 17, 2017 Jkt 241001 PO 00000 CFR 240.17Ad–22. CFR 240.17Ad–22(b)(3). Frm 00115 Fmt 4703 Sfmt 4703 32899 (B) Clearing Agency’s Statement on Burden on Competition ICC does not believe the proposed rule changes would have any impact, or impose any burden, on competition. The Liquidity Risk Management Framework and the Stress Testing Framework apply uniformly across all CPs. Therefore, ICC does not believe the proposed rule changes impose any burden on competition that is inappropriate in furtherance of the purposes of the Act. (C) Clearing Agency’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments relating to the proposed rule change have not been solicited or received. ICC will notify the Commission of any written comments received by ICC. III. Date of Effectiveness of the Proposed Rule Change Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ICC–2017–011 on the subject line. Paper Comments Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–ICC–2017–011. 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 E:\FR\FM\18JYN1.SGM 18JYN1 32900 Federal Register / Vol. 82, No. 136 / Tuesday, July 18, 2017 / Notices 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, security-based swap submission, or advance notice that are filed with the Commission, and all written communications relating to the proposed rule change, security-based swap submission, or advance notice between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for 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 such filings will also be available for inspection and copying at the principal office of ICE Clear Credit and on ICE Clear Credit’s Web site at https:// www.theice.com/clear-credit/regulation. 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–ICC–2017–011 and should be submitted on or before August 2, 2017. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Jill M. Peterson, Assistant Secretary. [FR Doc. 2017–14985 Filed 7–17–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Proposed Collection; Comment Request Upon Written Request, Copies Available From: Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE., Washington, DC 20549–2736 sradovich on DSK3GMQ082PROD with NOTICES Extension: Rule 203–3, Form ADV–H; SEC File No. 270–481, OMB Control No. 3235–0538 Notice is hereby given that, pursuant to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.), the Securities and Exchange Commission (the ‘‘Commission’’) is soliciting comments on the collection of information 19 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 17:47 Jul 17, 2017 Jkt 241001 summarized below. The Commission plans to submit this existing collection of information to the Office of Management and Budget (‘‘OMB’’) for extension and approval. The title for the collection of information is ‘‘Form ADV–H under the Investment Advisers Act of 1940.’’ Rule 203–3 (17 CFR 275.203–3) under the Investment Advisers Act of 1940 (15 U.S.C. 80b) requires that registered advisers requesting either a temporary or continuing hardship exemption submit the request on Form ADV–H. Rule 204–4 (17 CFR 275.204–4) under the Investment Advisers Act of 1940 requires that exempt reporting advisers requesting a temporary hardship exemption submit the request on Form ADV–H. The purpose of this collection of information is to permit advisers to obtain a hardship exemption to not complete an electronic filing. The temporary hardship exemption that is available to registered advisers under rule 203–3 and exempt reporting advisers under rule 204–4 permits these advisers to make late filings due to unforeseen computer or software problems. The continuing hardship exemption available to registered advisers under rule 203–3 permits advisers to submit all required electronic filings on hard copy for data entry by the operator of the IARD. The Commission has estimated that compliance with the requirement to complete Form ADV–H imposes a total burden of approximately one hour for an adviser. Based on our experience, we estimate that we will receive two Form ADV–H filings annually from registered investment advisers and one Form ADV–H filing annually from exempt reporting advisers. Based on the 60 minute per respondent estimate, the Commission estimates a total annual burden of 3 hours for this collection of information. Rule 203–3, rule 204–4, and Form ADV–H do not require recordkeeping or records retention. The collection of information requirements under the rule and form are mandatory. The information collected pursuant to the rule and Form ADV–H consists of filings with the Commission. These filings are not kept confidential. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Written comments are invited on: (a) Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (b) the accuracy of the agency’s estimate PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 of the burden of the collection of information; (c) ways to enhance the quality, utility, and clarity of the information collected; and (d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. Consideration will be given to comments and suggestions submitted in writing within 60 days of this publication. Please direct your written comments to Pamela Dyson, Director/Chief Information Officer, Securities and Exchange Commission, C/O Remi Pavlik-Simon, 100 F Street NE., Washington, DC 20549; or send an email to: PRA_Mailbox@sec.gov. Dated: July 11, 2017. Jill M. Peterson, Assistant Secretary. [FR Doc. 2017–14967 Filed 7–17–17; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–81131; File No. SR–MIAX– 2017–19] Self-Regulatory Organizations; Miami International Securities Exchange LLC; Order Granting Approval of a Proposed Rule Change To Amend MIAX Options Rules 515, Execution of Orders and Quotes; 515A, MIAX Price Improvement Mechanism (‘‘PRIME’’) and PRIME Solicitation Mechanism; and 518, Complex Orders July 12, 2017. I. Introduction On May 12, 2017, Miami International Securities Exchange, LLC (‘‘MIAX Options’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to establish three new types of complex orders—Complex Customer Cross (‘‘cC2C’’) Orders, Complex Qualified Contingent Cross (‘‘cQCC’’) Orders, and Complex PRIME (‘‘cPRIME’’) Orders—and to adopt new provisions that relate to the processing of those new complex order types. The proposed rule change was published for comment in the Federal Register on June 1, 2017.3 The Commission received no comments regarding the proposal. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release No. 80768 (May 25, 2017), 82 FR 25347 (‘‘Notice’’). 2 17 E:\FR\FM\18JYN1.SGM 18JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 136 (Tuesday, July 18, 2017)]
[Notices]
[Pages 32895-32900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-14985]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81132; File No. SR-ICC-2017-011]

Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change, Security-Based Swap Submission, or
Advance Notice Relating to ICC's Liquidity Risk Management Framework
and ICC's Stress Testing Framework

July 12, 2017.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 28, 2017, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by ICC. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

The principal purpose of the proposed rule change is to revise the
ICC Liquidity Risk Management Framework and the ICC Stress Testing
Framework. These revisions do not require any changes to the ICC
Clearing Rules (``Rules'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change

In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. ICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.

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

(a) Purpose
ICC proposes revisions to its Liquidity Risk Management Framework
and to its Stress Testing Framework. ICC believes such revisions will
facilitate the prompt and accurate clearance and settlement of
securities transactions and derivative agreements, contracts, and
transactions for which it is responsible. The proposed revisions are
described in detail as follows.
Liquidity Risk Management Framework
ICC proposes to revise its Liquidity Risk Management Framework in
order to make revisions to its liquidity monitoring program in order to
enhance compliance with U.S. Commodity Futures Trading Commission
(``CFTC'') regulations including 17 CFR 39.11, 17 CFR 39.33 and 17 CFR
39.36.
ICC proposes to reorganize the format of the Liquidity Risk
Management Framework to consist of three elements: Liquidity Risk
Management Model; Measurement and Monitoring; and Governance. The
``Regulatory Requirements'' section, previously included as an element
of the framework, will be deleted; however, the regulatory requirements
applicable to liquidity risk management are still referenced in the
framework. The changes to each element of the Liquidity Risk Management
Framework are described below.
I. Liquidity Risk Management Model
ICC proposes to enhance the description of the components which
comprise its liquidity risk management model. As revised, the liquidity
risk management model now includes, but is not limited to, the
following components: Currency-specific risk requirements; acceptable
collateral; liquidity requirements; collateral valuation methodology;
investment strategy; Clearing Participant (``CP'') deposits as a
liquidity pool; liquidity facilities (including committed repo
facilities and committed foreign exchange (``FX'') facilities); and
liquidity waterfall. Each of these components are described thoroughly
within the Liquidity Risk Management Framework, and changes to each
component are described below.
Currency-Specific Risk Requirements
ICC proposes to add language to the `currency-specific risk
requirements' section to cross reference ICC's current policy of
maintaining cash and collateral assets posted by CPs (on behalf of
themselves and/or their clients) to meet currency-specific Initial
Margin (``IM'') and GF requirements, to ensure ICC has sufficient total
resources in the required currencies of denomination.
Acceptable Collateral
The `acceptable collateral' section remains the same, and notes
that CPs may post IM and GF deposits that meet ICC's acceptable
collateral criteria as described in ICC's Treasury Operations Policies
and Procedures and Schedule 401 of the ICC Rules.
Liquidity Requirements
The `liquidity requirements' section sets forth ICC's liquidity
requirements for house/proprietary accounts and client-related
accounts. Such requirements are also set forth in ICC's Treasury
Operations Policies and Procedures and Schedule 401 of the ICC Rules.
The `liquidity requirements' section will reflect the changes to ICC's
liquidity thresholds for Euro (``EUR'') denominated products set forth
in filing SR-ICC-2017-002.\3\ ICC revised the `liquidity requirements'
section to cross reference ICC's minimum U.S. Dollar (``USD'')
contribution to the Guaranty Fund (``GF'') of $20 million required from
every CP. This is not a change, but rather a statement of current
policy.\4\ ICC proposes revisions to the `liquidity requirements'
section to extend ICC's margin risk horizon up to 6-days, to account
for the risk associated with clearing Asia Pacific products. This
change will apply throughout the framework; the risk horizon is
reflected as ``N-day'' where N>=5 is the margin risk horizon or Margin
Period of Risk (MPOR). The margin risk horizon is based on the greatest
MPOR (rounded up to the nearest integer) for the CDS instruments
currently eligible for clearing in order to capture the risk associated
with clearing products across multiple time zones (i.e., if an
instrument is subject to 5.5 day MPOR estimations, then the scenarios
will reflect N=6).
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\3\ See Securities Exchange Act Release No. 34-79988 (February
8, 2017), 82 FR 10611 (February 14, 2017). This rule change has been
approved by the Commission. See Securities Exchange Act Release No.
34-80324 (March 28, 2017), 82 FR 16244 (April 3, 2017). The text of
the proposed rule change for rule filing SR-ICC-2017-002 can also be
found on ICC's Web site at https://www.theice.com/clear-credit/regulation.
\4\ Set forth in Schedule 401 of the ICC Rulebook.
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Collateral Valuation Methodology
The `collateral valuation methodology' section remains
substantially the same, and sets forth the method by which ICC prices
the

[[Page 32896]]

assets posted as collateral, including haircut calculations.
Investment Strategy
The `investment strategy section' remains substantially the same,
and sets forth a summary of ICC's investment strategy. ICC proposes
revisions to the `investment strategy' section to note that when
beneficial, ICC diversifies its cash investments across multiple
depository institutions to reduce its liquidity exposure to any single
depository.
CP Deposits as a Liquidity Pool
The `CP deposits as a liquidity pool' section remains substantially
the same, and refers to the ability of ICC, pursuant to ICC Rules 402
and 804, to borrow GF and house origin IM cash deposits of non-
defaulting CPs and pledge non-cash and cash assets of an equivalent
value deposited by the defaulting and/or non-defaulting CP(s) as
collateral for this loan.
Liquidity Facilities
ICC proposes revisions to the `liquidity facilities' section to add
reference to its committed repurchase facilities (as opposed to
committed repurchase agreements). ICC added reference to its recently
available committed FX facilities for converting USD cash to EUR cash.
ICC also proposes removing reference to FX Swaps, Immediate FX Spot
Transactions, because these arrangements do not count as ``qualifying
liquidity resources'' under CFTC Regulation 39.33,\5\ as they are not
committed. ICC also proposes removing reference to the Intercontinental
Exchange, Inc. committed line of credit, as ICC no longer participates
in the arrangement. ICC's liquidity is not negatively impacted by the
proposed changes, as the committed repo facilities and committed FX
facilities (coupled with ICC cash and collateral deposits) ensure ICC
remains fully able to timely and effectively contain liquidity
pressures consistent with Rule 17Ad-22(d)(11).\6\ ICC proposes
analogous changes to the `liquidity waterfall' section to reflect the
deletion and addition of these references.
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\5\ 17 CFR 39.33
\6\ 17 CFR 240.17Ad-22(d)(11).
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Liquidity Waterfall
Under the `liquidity waterfall' section, ICC proposes revisions to
its definition of Available Liquidity Resources (``ALR'') to note that
ALR consist of the available deposits currently in cash of the required
denomination, and the cash equivalent of the available deposits in
collateral types that ICC can convert to cash, in the required currency
of denomination, using all sources of liquidity available to it. For
reference, the liquidity waterfall classifies ALR on any given day into
four Levels. Level One includes the House IM and GF cash deposits of
the defaulting CP. Level Two includes GF cash deposits of: (i) ICC; and
(ii) non-defaulting CPs, which until ICC has consumed the cash
equivalent value of all defaulting CPs' IM and GF deposits, are
available to ICC after pledging an equivalent value of non-cash assets
(or cash assets in a different currency) from the defaulting CP's IM
deposits or GF deposits. Level Three includes House IM cash deposits of
the non-defaulting CPs, which are available to ICC after pledging an
equivalent value of non-cash assets (or cash assets in a different
currency) from the defaulting CP's IM deposits or GF deposits. Level
Three cash used by ICC is always a loan, against which it must provide
the equivalent Pledgeable Collateral from the GF deposits of the non-
defaulting CPs and ICC, and/or from the IM and/or GF deposits of the
defaulting CPs.
Level Four includes ICC's committed repo facilities to convert U.S.
Treasuries to USD cash and ICC's committed FX facilities to convert USD
cash to EUR cash. Note that when determining ALR for stress testing
analyses purposes, to account for the risk associated with Foreign
Exchange (``FX'') rate fluctuations, i.e., USD/EUR and EUR/USD, when
profits and funds denominated in one currency are used to offset losses
denominated in other currencies, appropriate FX ``haircuts'' are
applied.
ICC noted that ICC's liquidity stress testing and historical
liquidity analysis scenarios do not consider any tolerance for delayed
payouts. ICC also noted that, during a default management period, ICC
may initiate the liquidation of non-cash collateral and/or conversion
of cash collateral into the required currencies of denomination, so
that ICC has additional ALR to use according to the liquidity waterfall
on subsequent days of default management and/or is able to pay back
some or all of the cash previously borrowed in Levels Two to Four of
the liquidity waterfall.
II. Measurement and Monitoring
Methodology
ICC proposes changes to the `methodology' section to change the
calculation for available liquidity resources. In the historical and
stress testing analysis, ICC proposes replacing the estimation of
minimum available liquid resources based on risk requirements with the
observation of cash and collateral on deposit (excluding cash that will
be unavailable by the applicable ICC Payout Deadline because it has
been invested by ICC). As such, ICC proposes removing the section from
the Liquidity Risk Management Framework which described the process for
computing the estimation of minimum available liquid resources. In
addition, ICC proposes removing other references throughout the
framework related to the estimation of minimum available liquid
resources. ICC is changing its approach based on feedback from the
CFTC, to ensure consistency with CFTC regulations, including CFTC
Regulation 39.33.\7\ Under the previous approach, ICC executed its
stress test analysis by using the minimum requirement amounts based on
ICC's liquidity thresholds set forth in Schedule 401 of the ICC Rules.
Under the revised approach, ICC proposes executing stress test analysis
by using the amount of assets currently on deposit.
---------------------------------------------------------------------------

\7\ 17 CFR 39.33.
---------------------------------------------------------------------------

ICC also proposes additional changes to the `methodology' section.
Among other things, the proposed revisions will clarify that ICC's
measurement and monitoring methodology assesses the adequacy of ICC's
established liquidity resources in response to historically observed
and hypothetically created (forward looking) scenarios with risk
horizons up to and including 6-days. The analyzed scenarios feature
assumptions that directly impact the ability of ICC to meet its payment
obligations. From available IM and GF collateral on deposit on the day
of the considered default(s), the analysis determines currency-specific
ALR by liquidity waterfall level, and compares these ALRs to the
currency-specific Liquidity Obligations resulting from the analyzed
scenarios on each day of the considered time horizon. To be
conservative, the analysis assumes no client-related ALR and that only
the day-1 ALR are available throughout the considered time horizon
(i.e., the analysis does not consider ICC's ability during the
considered time horizon to liquefy non-cash collateral on deposit or
transform the currency of cash on deposit).
Historical Analysis
ICC proposes changes to the `historical analysis' section of the
framework. ICC proposes adding language to note that, as part of its
historical liquidity analysis, ICC analyzes historical data sets to
assess

[[Page 32897]]

the level of liquidity coverage achieved for each currency. Under the
revised framework, ICC will continue to conduct a historical liquidity
analysis on both an individual AG basis and a cover-2 basis.
ICC proposes the use of the Basel Traffic Light System \8\ to
determine if the minimum cash component of its risk requirements truly
covers historically observed 1-day liquidity obligations with a 99%
level of confidence. The proposed revisions are part of the `historical
analysis' section. ICC's risk requirements are designed to meet at
least a 99% N-day VaR equivalent level of coverage. CPs must meet their
IM and GF requirements with a minimum cash component equivalent to the
1-day portion of the N-day requirement, computed using the square-root-
of-time approach.\9\
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\8\ ``Supervisory Framework for the use of ``Backtesting'' in
Conjunction with the Internal Models Approach to Market Risk Capital
Requirements'', Section III: Supervisory framework for the
interpretation of backtesting results, Basel Committee on Banking
Supervision, January 1996.
\9\ ``Amendment to the Capital Accord to Incorporate Market
Risk'', Basel Committee on Banking Supervision, January 1996.
---------------------------------------------------------------------------

ICC proposes additional enhancements to the `historical analysis'
section to consider the simultaneous default of the two worst-case
Affiliate Groups (``AGs'') \10\ of CPs, rather than the two worst-case
CPs, in line with regulations, including 17 CFR 39.33(c)(1)(ii). Under
the revised framework, when computing a CP's combined house and client
origin liquidity obligation for the purposes of selecting which AGs are
considered to be in a state of default, ICC proposes to eliminate the
application of house origin gains against client origin losses, or
house origin losses against client origin gains. This analysis is
designed to demonstrate to what extent the liquidity resources
available to ICC were sufficient to meet historical single and multi-
day cover-2 Liquidity Obligations, consistent with 17 CFR
39.33(c)(1)(ii).
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\10\ An affiliated CPs is defined as any other CP that owns, is
owned by or is under common ownership with such a CP. The set of all
affiliated CPs is considered as a CP affiliate group. This term is
consistent with ``participant family'' as defined in 17 CFR
240.17Ad-22(12).
---------------------------------------------------------------------------

ICC proposes enhancements to the `historical analysis' section to
note that, for each day of its historical analysis, and on a currency
specific basis, the Risk Department explores predefined cover-2
scenarios considering the default of the CPs within two AGs creating
the largest remaining Liquidity Obligation after applying the IM and GF
cash deposits of each constituent CP to that CP's Liquidity Obligation.
ICC's cover-2 analysis considers the liquidity resources provided by
the defaulting CPs, the GF and IM liquidity resources provided by the
non-defaulting CPs and ICC, and any externally available liquidity
resources.
ICC proposes clarifying changes to the `historical analysis
section' to note that the prices considered for historical analysis
purposes are ``dirty'' prices as they include riskless (deterministic)
payments (i.e., upfront fees, coupon payments, credit event payments
and interest on mark-to-market margin). ICC proposes adding explanatory
language regarding its calculation of the N-day worst-case cumulative
(combined house and client origin) liquidity obligations. ICC proposes
removal of a measurement and monitoring framework diagram, deemed no
longer relevant or necessary in light of the larger changes to the
framework. Finally, ICC proposes revisions to note that ICC reports
cover-2 results from the observed immediate liquidity obligation
scenarios and the worst-case five-day liquidity obligation scenarios.
This audience of this reporting will depend on the results. ICC notes
that the results should exhibit no deficiencies of the combined
resources in Levels One through Four of the liquidity waterfall.
Stress Testing Analysis
ICC proposes changes to the `stress testing' section of the
framework. Under the previously approved framework, ICC used predefined
scenarios believed to be potential market outcomes historically
observed, but with a very low probability of occurrence, as well as
scenarios that replicated observed instrument price changes during the
Lehman Brothers default. ICC also used predefined scenarios designed to
test the performance of the risk methodology under extreme conditions,
which ICC did not expect the market to realize.
ICC proposes re-categorizing and adding to the stress testing
scenarios set forth in the `stress testing' section of the framework.
Under the revised framework, ICC has enhanced its description of its
historically observed extreme but plausible market scenarios, to note
that the scenarios define spread or price shocks based on observations
during specific historical events. The historical data set from which
ICC derives the proposed scenarios will continue to begin on April 1,
2007 and include periods of extreme market events such as the Bear
Stearns collapse, the Lehman Brothers default, the 2009 Credit Crisis,
the US ``Flash Crash'' event, and the European Sovereign Crisis. The
scenarios are similar to the stress testing currently performed under
the financial resources Stress Testing Framework.
ICC proposes eliminating all scenarios not expected to be realized
as market outcomes (i.e. those considered extreme and not plausible).
Under the revised framework, ICC will continue to have the ability to
execute liquidity analyses based on extreme but not plausible
scenarios, on an ad-hoc basis. Further, ICC proposes revising the
`stress testing' section to add 1-day, 2-day, and N-day analogues in
place of existing 5-day scenarios. Under the revised framework, each
historically observed scenario will have three analogues, one
representing a 1-day horizon, one representing a 2-day horizon and one
representing a N-day horizon. Previously, only analogues representing a
N-day horizon were considered. The addition of the 1-day analogue will
demonstrate ICC's ability to meeting its immediate payment obligations
over a one-day period (e.g., intraday and same-day obligations), while
the 2-day and N-day analogues will demonstrate ICC's ability to meet
its payment obligations over a multiday period.
ICC also proposes revising the `stress testing' section of the
framework to add a number of hypothetically constructed (forward
looking) extreme but plausible market scenarios comprised of a given
historically observed extreme but plausible market scenario and
additional stress enhancements representing forward looking
hypothetical adverse market events. Specifically, two sets of
hypothetically constructed (forward looking) extreme but plausible
market scenarios are proposed: Loss-given default scenarios, and one-
service-provider-down scenarios. The loss-given default scenarios
consider the addition of up to three adverse credit events including
the holder of the considered portfolio, one additional CP name and one
additional non-CP name. The one-service-provider-down scenarios
consider a reduction in ALR designed to represent ICC's worst-case
exposure to a single service provider at which it maintains cash
deposits or investments, due to ICC's potential inability to access
those deposits and/or investments when required. ICC proposes that the
reduction in ALR used in the one-service-provider-down scenarios is
based on ICC's analysis of the diversification of its deposits and
investments across its multiple service providers.
ICC proposes revisions to the `stress testing' section to further
describe its analysis under the above referenced scenarios. ICC
proposes revisions to consider the simultaneous default of the

[[Page 32898]]

two worst-case Affiliate Groups (``AGs'') \11\ of CPs, rather than the
two worst-case CPs, in line with regulations, including 17 CFR
39.33(c)(1)(ii). ICC will perform cover-2 analysis in which, for each
scenario, it determines the two AGs creating the largest remaining
Liquidity Obligation after applying the IM and GF cash deposits of each
constituent CP to its own Liquidity Obligation. ICC compares the
remaining Liquidity Obligation of the AG to the remaining liquidity
resources to determine if there are sufficient resources to meet the
obligation.
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\11\ An affiliated CPs is defined as any other CP that owns, is
owned by or is under common ownership with such a CP. The set of all
affiliated CPs is considered as a CP affiliate group. This term is
consistent with ``participant family'' as defined in 17 CFR
240.17Ad-22(12).
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ICC proposes enhancements to the `stress testing' section to
describe its cover-N analysis in which, for each scenario, it first
considers the default of one AG, then the defaults of two AGs, then
three AGs, and so forth. The sequence of selecting AGs is based on the
remaining Liquidity Obligation associated with the constituent CP's
portfolios after applying the IM and GF cash deposits of each
constituent CP to its own Liquidity Obligation. AGs are sequenced from
largest to smallest remaining Liquidity Obligation. For each set of AGs
considered to be in a state of default (1 AG, 2 AGs, 3 AGs, etc.), ICC
compares the total remaining Liquidity Obligation to the remaining
liquidity resources to determine if there are sufficient resources to
meet the obligation. In this way, ICC determines how many AGs it would
require to be in a state of default to consume all available liquidity
resources.
To determine the Liquidity Obligations in the above analysis, ICC
applies the stress scenarios to actual cleared portfolios to determine
a currency-specific profit/loss for each CP, representing the largest
cumulative loss over the specified risk horizon. The considered profit/
loss in the analysis is the sum of the upfront fee changes
corresponding to the clean prices associated with the hypothetical
scenarios, and excluding the riskless (deterministic) payments.
To determine ICC's liquidity needs for each scenario, the Risk
Department computes Liquidity Obligations for FCM/BD CPs by combining
the net payments for house and client origin accounts. For the purposes
of selecting defaulting AGs, the Risk Department does not offset client
origin losses with house origin gains, or offset house origin losses
with client origin gains.
III. Governance
Required Analysis
The `required analysis' section remains substantially the same. The
ICC Risk Department executes stress testing daily, with weekly
reporting to different audiences depending on the results. The Risk
Department also executes monthly historical liquidity adequacy analyses
and reviews the results monthly, with monthly reporting to different
audiences depending on the results.
Interpretation of Results and Potential Actions
The `interpretation of results and potential actions' section
remains substantially the same. Depending on the scenarios and the
frequency and severity of any resulting deficiencies, the Risk
Department may choose to make appropriate enhancements to its model.
Before enhancing its liquidity risk management model, ICC first
discusses such enhancements with its senior management team, and
subsequently consults with its Risk Working Group and Risk Committee
before submitting to the Board of Managers for approval.
Materiality and Reporting Framework
ICC proposes changing the `materiality and reporting framework'
section to note that, at each Risk Committee meeting, the Risk
Department provides a summary of historical liquidity analysis and
liquidity stress testing analysis, which demonstrates the adequacy of
ICC's liquidity resources to cover Liquidity Obligations over N-days.
Such analyses will also include any instance where Level Three
resources were required to meet Liquidity Obligations in response to
any of the considered historical liquidity or liquidity stress testing
scenarios.
ICC proposes revisions to the `materiality and reporting framework'
to note that, when exceedances of funded and/or unfunded resources are
identified, the Risk Department is required to report them to the
senior management team and the ICC Risk Committee, and i) demonstrate
breaches do not highlight a significant liquidity risk management
weaknesses, or ii) recommend specific liquidity risk management model
enhancements that produce an adequate increase in funded and/or
unfunded liquidity resources under the identified scenario(s). In
addition to the reporting described above, the Risk Department will
also report to the Risk Committee any instances where the Basel Traffic
Light System categorizes the number of observed exceedances in its
individual AG historical analysis as being in the predefined ``red
zone''. In these instances, the Risk Department will discuss with the
Risk Committee the appropriateness of its liquidity thresholds, and if
appropriate, make revisions.
Model Validation
ICC proposes revisions to the `model validation' section to note
that its Liquidity Risk Management Framework is under the purview of
the Model Validation Framework, and subject to initial validations.
Stress Testing Framework
ICC proposes revisions to its Stress Testing Framework to unify the
stress testing scenarios with the liquidity stress testing scenarios
set forth in the Liquidity Risk Management Framework. ICC operates its
stress testing and liquidity stress testing on a unified set of stress
testing scenarios and system. As such, revisions to the stress testing
scenarios are necessary to ensure scenario unification, following
changes to the Liquidity Risk Management Framework. Such changes are
consistent with recently issued guidance for certain principles and key
considerations in the Committee on Payments and Market Infrastructures-
Board of the International Organization of Securities Commissions
Principles for Financial Market Infrastructures \12\. The proposed
revisions are described in detail as follows.
---------------------------------------------------------------------------

\12\ See CPMI-IOSCO Consultative Report, Resilience and recovery
of CCPs: Further guidance on the PFMI, dated August 2016 (https://www.bis.org/cpmi/publ/d149.pdf).
---------------------------------------------------------------------------

ICC proposes to introduce Risk Factor specific scenarios for all
stress test scenarios. Previously, corporate single names were
considered at the sector level (as opposed to the Risk Factor level).
This change is reflected throughout the framework.
ICC also proposes to add clarifying language to note that the
predefined stress testing scenarios set forth in its Stress Testing
Framework are applied to all cleared instruments, and that name-
specific scenarios are applied to all sovereign and corporate reference
entities.
ICC also proposes revisions to extend ICC's margin risk horizon up
to 6-days, to account for the risk associated with clearing Asia
Pacific products. This change will apply throughout the framework; the
risk horizon is reflected as ``N-day'' where N>=5 is the margin risk
horizon or Margin Period of Risk (MPOR). The margin risk horizon is
based on the greatest MPOR (rounded

[[Page 32899]]

up to the nearest integer) for the CDS instruments currently eligible
for clearing in order to capture the risk associated with clearing
products across multiple time zones (i.e. if an instrument is subject
to 5.5 day MPOR estimations, then the scenarios will reflect N=6).
ICC also proposes to revise its description of the ``Historically
Observed Extreme but Plausible Market Scenarios'' to note that the
stress spread changes considered as part of each scenario are extracted
from the market history of the most actively traded instrument for the
considered Risk Factors.
ICC proposes to revise the ``Hypothetically Constructed (Forward
Looking) Extreme but Plausible Market Scenarios'' to ensure consistency
with the loss-given default stress scenario set forth in the Liquidity
Risk Management Framework, which combines a given historically observed
extreme but plausible market scenario with explicit Jump-to-Default
events. The proposed revisions specify that there will be up to two
reference entities selected for a hypothetical adverse credit event.
ICC proposes to revise the description of the discordant scenarios
(i.e. scenarios under which selected risk factors move in opposite
directions; commonly the behavior deviates from historically observed
behavior) in the Stress Testing Framework, in order to reflect the
introduction of Risk Factor specific scenarios. The discordant
scenarios are designed to reproduce significant discordant market
outcomes observed during the considered historical period. ICC creates
discordant scenarios for North American corporate single names and
indices; European corporate single names and indices; and sovereign
reference entities.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \13\ requires, among other things,
that the rules of a clearing agency be designed to promote the prompt
and accurate clearance and settlement of securities transactions, and
to the extent applicable, derivative agreements, contracts and
transactions and to comply with the provisions of the Act and the rules
and regulations thereunder. ICC believes that the proposed rule changes
are consistent with the requirements of the Act and the rules and
regulations thereunder applicable to ICC, in particular, to Section
17(A)(b)(3)(F),\14\ because ICC believes that the proposed rule changes
will promote the prompt and accurate clearance and settlement of
securities transactions, derivatives agreements, contracts, and
transactions. ICC's Liquidity Risk Management Framework describes ICC's
liquidity resources as well as the methodology for testing the
sufficiency of these resources. The various elements set forth in the
Liquidity Risk Management Framework, and described above, ensure that
ICC has sufficient liquidity resources to effectively measure, monitor
and manage its liquidity risk. Further, the Liquidity Risk Management
Framework supports ICC's ability to maintain sufficient liquid
resources in all relevant currencies to effect same-day and, where
appropriate, intraday and multiday settlement of payment obligations
with a high degree of confidence under a wide range of potential stress
scenarios. As such, the proposed rule changes are designed to promote
the prompt and accurate clearance and settlement of securities
transactions, derivatives agreements, contracts, and transactions
within the meaning of Section 17A(b)(3)(F) \15\ of the Act.
---------------------------------------------------------------------------

\13\ 15 U.S.C. 78q-1(b)(3)(F).
\14\ Id.
\15\ Id.
---------------------------------------------------------------------------

Further, the changes to the Stress Testing Framework to unify the
stress testing scenarios with the stress testing scenarios set forth in
the Liquidity Risk Management Framework are necessary following recent
changes to the Liquidity Risk Management Framework, as ICC operates its
stress testing and liquidity stress testing on a unified set of stress
testing scenarios and system. ICC's stress testing practices will
continue to ensure the adequacy of systemic risk protections. As such,
the proposed rule changes are designed to promote the prompt and
accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions within the meaning
of Section 17A(b)(3)(F) \16\ of the Act. The proposed changes will also
satisfy the requirements of Rule 17Ad-22.\17\ The revised stress test
scenarios set forth in the Stress Testing Framework will continue to
ensure that ICC maintains sufficient financial resources to withstand a
default by the Clearing Participant (``CP'') family to which it has the
largest exposure in extreme but plausible market conditions, consistent
with the requirements of Rule 17Ad-22(b)(3).\18\
---------------------------------------------------------------------------

\16\ Id.
\17\ 17 CFR 240.17Ad-22.
\18\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

(B) Clearing Agency's Statement on Burden on Competition

ICC does not believe the proposed rule changes would have any
impact, or impose any burden, on competition. The Liquidity Risk
Management Framework and the Stress Testing Framework apply uniformly
across all CPs. Therefore, ICC does not believe the proposed rule
changes impose any burden on competition that is inappropriate in
furtherance of the purposes of the Act.

Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change

Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-ICC-2017-011 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2017-011. 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

[[Page 32900]]

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, security-based
swap submission, or advance notice that are filed with the Commission,
and all written communications relating to the proposed rule change,
security-based swap submission, or advance notice between the
Commission and any person, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for 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
such filings will also be available for inspection and copying at the
principal office of ICE Clear Credit and on ICE Clear Credit's Web site
at https://www.theice.com/clear-credit/regulation.
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-ICC-2017-011
and should be submitted on or before August 2, 2017.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2017-14985 Filed 7-17-17; 8:45 am]
BILLING CODE 8011-01-P

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