Self-Regulatory Organizations; The Options Clearing Corporation; Notice of Filing of Proposed Rule Change Related to The Options Clearing Corporation's Model Risk Management Policy, 2271-2275 [2018-00530]
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Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices
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 CboeEDGX–2017–006. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
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Persons submitting comments are
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submissions should refer to File
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should be submitted on or before
February 6, 2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.21
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00526 Filed 1–12–18; 8:45 am]
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II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
[Release No. 34–82473; File No. SR–OCC–
2017–011]
In its filing with the Commission,
OCC 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. OCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
Self-Regulatory Organizations; The
Options Clearing Corporation; Notice
of Filing of Proposed Rule Change
Related to The Options Clearing
Corporation’s Model Risk Management
Policy
January 9, 2018.
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 December
28, 2017, The Options Clearing
Corporation (‘‘OCC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by OCC. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change by OCC
would formalize and update OCC’s
Model Risk Management Policy (‘‘MRM
Policy’’ or ‘‘Policy’’) in connection with
multiple requirements applicable to
OCC under Rule 17Ad–22, including
Rules 17Ad–22(b)(2) concerning margin
requirements and (b)(4) concerning
model validation as well as Rules
17Ad–22(e)(2) concerning governance,
(e)(3) concerning frameworks for the
comprehensive management of risks,
and (e)(4)(vii), (e)(6)(vii) and (e)(7)(vii)
concerning model validation.3 The
MRM Policy is included as confidential
Exhibit 5 of the filing. The Policy is
being is submitted without marking to
improve readability as it is being
submitted in its entirety as new rule
text.
The proposed rule change does not
require any changes to the text of OCC’s
By-Laws or Rules. All terms with initial
capitalization that are not otherwise
defined herein have the same meaning
as set forth in the OCC By-Laws and
Rules.4
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 17 CFR 240.17Ad–22(b)(2), (b)(4), (e)(2)–(4), and
(e)(6)–(7).
4 OCC’s By-Laws and Rules can be found on
OCC’s public website: https://optionsclearing.com/
about/publications/bylaws.jsp.
2 17
21 17
CFR 200.30–3(a)(12).
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(1) Purpose
Background
OCC’s use of models inherently
exposes OCC to model risk.5 To help
manage this risk, OCC is proposing to
formalize and update its MRM Policy,
which sets forth the general framework
for OCC’s model risk management
practices. The MRM Policy would apply
to all Risk Models 6 used by OCC to
determine, quantify or measure actual or
potential risk exposures or risk
mitigating actions. The purpose of the
MRM Policy is to ensure that OCC
appropriately manages its model risks
by clearly outlining the roles and
responsibilities of OCC’s (1)
Quantitative Risk Management
department (‘‘QRM’’), (2) Model
Validation Group (‘‘MVG’’), and (3)
Model Risk Working Group (‘‘MRWG’’)
in model development, implementation,
use, monitoring, and validation. The
provisions of the MRM Policy
addressing these core elements are
described in greater detail below and are
designed to ensure that OCC uses an
appropriate approach to managing
model risk. OCC notes that the MRM
Policy is part of a broader framework
regarding model risk management that
is designed to further the appropriate
5 Under the proposed Policy, ‘‘Model Risk’’
would be defined as the potential for adverse
consequences from decisions based on incorrect or
misused model outputs.
6 Under the proposed Policy, ‘‘Risk Models’’
would be defined as any quantitative method or
approach that applies statistical, economic,
financial, or mathematical theories, techniques,
and/or assumptions to process inputs into
quantitative estimates, forecasts, or projections. A
Risk Model may also be a quantitative method with
inputs that are qualitative or based on business
judgment. Under the Policy, the term Risk Models
would be used specifically in the context of credit
risk models, margin system and related models, and
liquidity risk models.
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OCC staff. These roles and
responsibilities are described in further
detail below.
design, validation and operation of
OCC’s Risk Models.7
Model Risk Management Policy
Introduction
The MRM Policy would apply to all
Risk Models used by OCC to determine,
quantify or measure actual or potential
risk exposures or risk mitigating actions.
As noted above, Risk Models are
defined under the Policy to be credit
risk models (e.g., models concerning
OCC’s Clearing Fund), margin system
and related models (e.g., OCC’s System
for Theoretical Analysis and Numerical
Simulations or ‘‘STANS’’), and liquidity
risk models.
The MRM Policy also would clarify
that OCC considers a Risk Model to be
any quantitative method or approach
that applies statistical, economic,
financial, or mathematical theories,
techniques, and/or assumptions to
process inputs into quantitative
estimates, forecasts, or projections. A
Risk Model can also be a quantitative
method with inputs that are qualitative
or based on business judgment.8 The
MRM Policy also would define
‘‘Methodology’’ to mean a collection of
Risk Models used to estimate financial
risk exposures.
To guide activities in this part of
OCC’s model risk framework, OCC shall
primarily follow the Supervisory
Guidance on Model Risk Management
issued by the Board of Governors of the
Federal Reserve System and the Office
of the Comptroller of the Currency
(April 4, 2011), as well as any
applicable regulatory requirements.9
The MRM Policy sets forth a
governance structure for the allocation
of roles and responsibilities for Risk
Model development, implementation,
use, monitoring, and validation among
different groups and individuals,
including OCC’s Board, the Risk
Committee of the Board (‘‘Risk
Committee’’), management, and other
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7 For
example, OCC’s Margin Policy is also part
of OCC’s framework regarding model risk
management in that it is designed to be consistent
with the requirement in Rule 17Ad–22(e)(6)(vii)
that OCC’s policies and procedures provide for a
risk-based margin system that requires a margin
model validation not less than annually. See 17
CFR 240.17Ad–22(e)(6)(vii). OCC recently filed a
proposed rule change with the Commission
concerning the formalizing and updating of its
Margin Policy, which is currently pending
Commission review. See Securities Exchange Act
Release No. 82355 (December 19, 2017), 82 FR
61060 (December 26, 2017) (SR–OCC–2017–007).
8 See SR Letter 11–7, ‘‘Guidance on Model Risk
Management,’’ Board of Governors of the Federal
Reserve System (April 4, 2011), and OCC Bulletin
2011–12, ‘‘Sound Practices for Model Risk
Management,’’ The Office of the Comptroller of the
Currency (April 4, 2011).
9 Id.
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Quantitative Risk Management
Under the proposed Policy, the
Executive Vice President of OCC’s
Financial Risk Management department
(‘‘EVP–FRM’’) would be responsible for
(i) having staff with the requisite
knowledge, skills, and expertise to
perform model risk management
activities necessary to the staffs’
responsibilities and (ii) overseeing Risk
Model development, implementation,
monitoring, and use.
Risk Model Development
Under the proposed Policy, Risk
Model development and
implementation shall be conducted by
QRM unless a third-party is otherwise
engaged by QRM to develop a Risk
Model. Where QRM does not develop a
Risk Model, it shall oversee the
development, implementation, and
monitoring in accordance with the Risk
Model Development Procedure.
The design, theory, and logic of each
Risk Model used by OCC shall be
described in a document maintained by
QRM and shall take into consideration
published literature and industry best
practice, where it is available. The
document shall include a description of
the Risk Model, the intended purpose of
the Risk Model, the motivation of the
Risk Model assumptions, the test data
supporting the Risk Model, the Risk
Model limitations, and other details as
outlined in OCC’s Maintenance and
Periodic Review of Methodology
Procedure. QRM also would be
responsible for describing each Risk
Model Methodology in a Methodology
document. Requirements for
Methodology documentation shall be
contained in the Maintenance and
Periodic Review of Methodology
Procedure. The EVP–FRM also shall
review and, if appropriate, approve the
Risk Model documentation. The EVP–
FRM may delegate the responsibility for
reviewing and approving such Risk
Model documentation to the First Vice
President, Quantitative Risk
Management, who shall provide notice
of any approval to the EVP–FRM.
Risk Model Implementation
Under the proposed MRM Policy,
QRM would review, evaluate, and
propose model changes (to include
Model Defects,10 enhancements, and/or
10 Under the proposed Policy, ‘‘Risk Model
Defect’’ would be defined as an error, flaw, failure,
or fault in a computer program or system that
causes a Risk Model to produce an incorrect or
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Decommissioning 11 of a Risk Model) in
accordance with the Model
Implementation Procedure and OCC’s
Legal Services Policy (and related
procedures). New products that are nonstandard equity options/futures shall be
reviewed by QRM according to the
Model Implementation Procedure for
determination as to whether or not a
new Risk Model is required or if the use
of an existing Risk Model is fit for
purpose. QRM shall recommend
approval to OCC’s Model Risk Working
Group (‘‘MRWG’’) 12 in accordance with
the Model Risk Working Group
Procedure subsequent to effective
challenge and approval by MVG.
Under the Policy, QRM shall seek
Legal department (‘‘Legal’’) review to
determine if a new Risk Model or
change to an existing Risk Model
requires regulatory filing prior to
implementation and use in accordance
with OCC’s Legal Services Policy and
related procedures. OCC shall not
implement or use such Risk Model until
Legal provides a written notice to QRM
and MVG that the Risk Model does not
require any additional regulatory action
prior to implementation and use or, if a
regulatory filing is required, that all
requisite filing and approvals are
complete.
Under the proposed Policy, QRM
shall implement new Risk Models and
changes to existing Risk Models in
accordance with the Risk Model
Development Procedure and the Model
Implementation Procedure. QRM shall
be responsible for overseeing the quality
assurance and related testing procedures
required for implementation and/or
Decommissioning of a Risk Model.
Reporting and escalation to the MRWG
shall be performed in accordance with
the Model Risk Working Group
Procedure. The MRWG shall review
and, if appropriate, approve all new
Risk Models, Material Changes 13 to Risk
unexpected result, or to behave in unintended
ways.
11 Under the proposed Policy, ‘‘Decommissioned
Model’’ would be defined as a Risk Model that has
been approved by the Risk Committee to no longer
be used to estimate margin or Clearing Fund
exposures.
12 The MRWG is responsible for assisting OCC’s
Management Committee in overseeing and
governing OCC’s model-related risk issues and
consists of representatives from Financial Risk
Management, QRM, MVG and Enterprise Risk
Management.
13 Under the proposed Policy, ‘‘Material Change’’
would be defined as a change to a Risk Model that,
as deemed by the MRWG, requires Risk Committee
approval due to its anticipated effect on margin or
Clearing Fund requirements, impact to Clearing
Members, volume or open interest, backtesting
performance, etc. Material Changes may be
quantitative or qualitative in nature and take into
account the likelihood, impact, and context of the
change relative to Risk Model.
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Models, and proposals for
Decommissioning Risk Models prior to
submitting to the Management
Committee for approval.
Under the Policy, the Management
Committee would be responsible for
reviewing and approving each new Risk
Model and each Material Change to a
Risk Model prior to implementation and
use. The Management Committee also
would review and approve each
proposal for Decommissioning a Risk
Model. Each approval shall constitute a
recommendation and be reported to the
Risk Committee for further review and
approval. The Risk Committee shall
review and, if appropriate, approve each
new Risk Model and each Material
Change prior to implementation and
use, except that Material Changes to
OCC’s margin and Clearing Fund
methodologies shall be referred to the
Board for review and, if appropriate,
final approval, upon a recommendation
from the Risk Committee. The Risk
Committee also shall review and, if
appropriate, approve the
Decommissioning of a Risk Model prior
to removing it from the Model
Inventory.14
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Risk Model Monitoring
Pursuant to the proposed Policy, QRM
shall monitor the use and performance
of Risk Models according to the Model
Backtesting Procedure, the Business
Backtesting Procedure, and the Margin
Model Parameter Review and
Sensitivity Analysis Procedure.
Monitoring shall be reasonably designed
to determine if the Risk Model is
accurate, reliable and robust, and to
identify limitations. The results of
monitoring also shall be used to
evaluate the behavior of a Risk Model
over a range of input values. Risk
tolerance and associated key risk
indicators would be maintained by
QRM to measure and monitor model
risk. These risk measures, in addition to
monthly Risk Model parameter reviews
shall be reported to the MRWG and
escalated to the Management Committee
and/or Risk Committee as necessary in
accordance with the Model Risk
Working Group Procedure.
Model Validation Group
Under the proposed Policy, the First
Vice President of MVG shall have
qualified staff with the requisite
knowledge, skills, and expertise to
perform validations in accordance with
the Model Validation Procedure. MVG
personnel responsible for validation
14 Under the proposed Policy, ‘‘Model Inventory’’
would be defined as OCC’s database of in-use Risk
Models and Methodologies.
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shall be independent from, shall not
report to, and shall otherwise be free
from influence from OCC business areas
involved in the development,
implementation and operation of such
Risk Models.
Annual Model Validation Plan
The First Vice President of MVG shall
develop and maintain an Annual Model
Validation Plan (‘‘Annual Plan’’). The
Annual Plan, as defined in the Annual
Model Validation Plan Procedure, is a
schedule of Risk Model validations
performed for all Risk Models on the
Model Inventory. MVG’s Annual Plan
shall require all Risk Models on the
Model Inventory to be validated no less
than annually (where annually is
defined as 12 months, or 365 days).
Pursuant to the proposed Policy, the
Risk Committee shall review and
approve the Annual Model Validation
Plan and any removals or deferrals from
the previously approved Annual Model
Validation Plan based on
recommendations from the Chief Risk
Officer (‘‘CRO’’). In addition, the CRO
shall provide a quarterly report to the
Risk Committee that provides
information on progress against the
Annual Model Validation Plan.
Model Inventory
Pursuant to the proposed Policy, MVG
shall maintain a complete and accurate
inventory of Risk Models according to
the Model Inventory Procedure. To
ensure the Model Inventory is complete
and accurate, MVG shall perform a firmwide assessment on an annual basis in
accordance with the Model
Identification Procedure.
Independent Model Validation
Under the proposed Policy, MVG
would be responsible for evaluating the
performance of each Risk Model by
performing Independent Model
Validations 15 in accordance with the
Model Validation Procedure.
Validations shall be performed
according to the Model Validation
Procedure, and shall include a review of
Risk Model performance, parameters,
and assumptions. Conclusions shall be
formulated in the form of a ‘‘Model
Assessment Report’’ and shall be
reviewed by QRM upon conclusion of
the report. MVG shall perform
performance monitoring of Risk Models
according to the Model Performance
15 Under the proposed Policy, ‘‘Independent
Model Validation’’ would be defined as the
evaluation of the performance of a Risk Model
performed by a qualified person who is free from
influence from the persons responsible for the
development or operation of the models being
validated.
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Monitoring Procedure. Findings from
validations and performance monitoring
shall be identified, monitored,
remediated, and reported according to
the Model Findings Management
Procedure and presented to the
Management Committee and Risk
Committee in the form of a Model Risk
Management Findings Dashboard.
Pursuant to the proposed Policy, MVG
shall validate all Risks Models prior to
implementation and use in accordance
with the Model Validation Procedure.
Additionally, MVG shall review
Material Changes to Risk Models prior
to implementation of the Material
Change and in accordance with the
Model Implementation Procedure. MVG
shall assign a model rating and model
risk level to each Risk Model on the
Model Inventory. The effectiveness of
each Risk Model shall be reported by
the CRO to the Risk Committee on a
quarterly basis.
In the event a third-party validator is
used to validate a Risk Model or in the
event that OCC uses a third-party to
develop a Risk Model, MVG shall
oversee/perform the validation in
accordance with the Model Validation
Procedure. The CRO shall report results
of third party validations of OCC’s Risk
Models and results of validations of
third-party Risk Models to the
Management Committee and Risk
Committee along with any
recommended actions and remediation
plans associated with such validations.
Model Risk Working Group
Under the proposed Policy, the
MRWG would be responsible for
assisting OCC’s Management Committee
in overseeing and governing OCC’s
model-related risk issues. The MRWG
consists of representatives from
Financial Risk Management, QRM, MVG
and Enterprise Risk Management as well
as representatives from Legal to provide
adequate support and Legal expertise as
it relates to Model Risk. The MRWG
shall serve as a resource by overseeing
model risk, which includes, without
limitation, ongoing model risk
monitoring activities, approving, or
recommending approval of new Risk
Models and Material Changes to Risk
Models, and tracking Model Defects and
remediation activities as stipulated in
the Model Risk Working Group
Procedure.
Policy Updates Exceptions and
Violations
Finally, pursuant to the proposed
Policy, OCC’s Management Committee
shall review and approve the Policy on
an annual basis and recommend
approval of the Policy to the Risk
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Committee. The Management
Committee also shall review and
approve any material changes to the
Policy and recommend further approval
to the Risk Committee.
The MRM Policy also would contain
OCC’s standard policy language
concerning the policy exception and
violation processes. Specifically, any
request for an exception to the Policy
must be made in writing to a member
of the Office of the Executive
Chairman,16 who is then responsible for
reviewing the exception request and
providing a decision in writing to the
person requesting the exception. OCC’s
CRO, Chief Compliance Officer, or Chief
Audit Executive may also request an
exception to the Policy directly to the
Board. All requests for exceptions and
their dispositions would be reported to
the Board or Risk Committee as
appropriate no later than its next
regularly scheduled meeting, in a format
approved by the Chair of the Board or
Risk Committee. In addition, Policy
violations shall be reported to OCC’s
Chief Compliance Officer, or, if the
violation involves the Compliance
Department, to the head of Internal
Audit or a member of the Office of the
Executive Chairman.
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act 17
requires, among other things, that the
rules of a clearing agency be designed to
assure the safeguarding of securities and
funds in the custody or control of the
clearing agency or for which it is
responsible, and, in general, to protect
investors and the public interest. As
described in more detail above, OCC
believes that formalizing the MRM
Policy would help to ensure that OCC
maintains policies and procedures that
are reasonably designed to provide for a
robust model risk management
framework, which includes controls
pertaining to the governance,
development, implementation, use,
monitoring, and Independent Model
Validation of OCC’s Risk Models. In this
way, the Policy is intended to further
the appropriate design, validation and
operation of Risk Models within OCC’s
performance of clearance and settlement
services. The MRM Policy thereby
promotes, for example, the
development, use and monitoring of
appropriately conservative margin and
Clearing Fund requirements. As a result,
OCC believes the proposed rule change
is designed to assure the safeguarding of
16 OCC’s Office of the Executive Chairman
currently consists of the Executive Chairman and
Chief Executive Officer, President and Chief
Operating Officer, and Chief Administrative Officer.
17 15 U.S.C. 78q–1(b)(3)(F).
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securities and funds at OCC and, in
general, protect investors and the public
interest consistent with Section
17A(b)(3)(F) of the Act.18
Rule 17Ad–22(e)(2) 19 requires a
covered clearing agency to establish,
implement, maintain and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that, among
other things: (i) Are clear and
transparent; (ii) clearly prioritize safety
and efficiency of the covered clearing
agency; (iii) support the public interest
requirements in Section 17A of the
Act 20 applicable to clearing agencies,
and the objectives of owners and
participants; and (iv) specify clear and
direct lines of responsibility. The
proposed Policy would describe, in
detail, OCC’s overall framework for Risk
Model governance. This includes
establishing clear, transparent, and
direct responsibilities for OCC’s Board,
Risk Committee, management, and other
OCC staff in connection with OCC’s
model risk management framework and
how the relevant groups and individuals
interact. In particular, the proposed
Policy is designed to establish
appropriate governance arrangements
for the development, implementation,
use, monitoring, and Independent
Model Validation of OCC’s Risk Models.
OCC believes that these governance
arrangements prioritize the safety and
efficiency of OCC and support the
public interest requirements of the Act
by describing specifies roles,
responsibilities and requirements for
OCC’s model testing, monitoring,
validation, and review processes,
thereby helping to ensure that OCC
maintains a robust framework for
managing its model risk.
Rule 17Ad–22(e)(3)(i) 21 requires a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to, among other
things, maintain a sound risk
management framework for
comprehensively managing its risks,
which includes risk management
policies, procedures, and systems
designed to identify, measure, monitor,
and manage such risks and that are
subject to review on a specified periodic
18 Id.
19 17
CFR 240.17Ad–22(e)(2).
U.S.C. 78q–1. The public interest
requirements in Section 17A of the Act include that
the ‘‘prompt and accurate clearance and settlement
of securities transactions, including the transfer of
record ownership and the safeguarding of securities
and funds related thereto, are necessary for the
protection of investors and persons facilitating and
acting on behalf of investors.’’ See 15 U.S.C. 78q–
1(a)(1)(A).
21 17 CFR 240.17Ad–22(e)(3)(i).
20 15
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basis and approved by its Board
annually. OCC believes the proposed
Policy is consistent with Rule 17Ad–
22(e)(3)(i) 22 because it is an essential
component of OCC’s overall framework
for comprehensively managing its risks,
which includes model risk. Specifically,
OCC believes the proposed Policy is
reasonably designed to identify,
measure, monitor, and manage model
risks by providing a sound framework
for defining, developing, maintaining,
and validating OCC’s Risk Models and
for making any changes necessary to
ensure those Risk Models continue to
address relevant risks appropriately. As
noted above, the proposed Policy
provides that OCC’s QRM staff, as part
of model risk management and model
development, are responsible for
monitoring model performance on a
continuous basis. Specifically, QRM
staff would monitor OCC’s Risk Models
to determine whether such models
perform as intended and are accurate,
reliable and robust and to identify any
Risk Model limitations. The results of
monitoring also shall be used to
evaluate the behavior of a Risk Model
over a range of input values. Moreover,
the proposed Policy describes MVG’s
obligations for the independent
validation of new Risk Models, Material
Changes to Risk Models, and the annual
validation of Risk Models.
Rules 17Ad–22(e)(4)(vii), (e)(6)(vii)
and (e)(7)(vii) 23 require a covered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
perform independent model validations
on its credit risk models, margin
models, and liquidity risk models not
less than annually or more frequently as
may be contemplated by the clearing
agency’s risk management framework.
OCC believes the proposed rule change
is consistent with Rules 17Ad–
22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii) 24
because the Policy would require OCC
to perform an Independent Model
Validation of its Risk Models on at least
an annual basis, or more frequently as
needed, and prior to the implementation
of new Risk Models or Material Changes
to Risk Models. OCC also believes that
the proposed rule change is consistent
with the requirement in Rule 17Ad–
22(b)(4) 25 that OCC’s policies and
procedures be reasonably designed to
provide for an annual model validation
of OCC’s margin models, that evaluates
their performance and the related
22 Id.
23 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii).
24 Id.
25 17 CFR 240.17Ad–22(b)(4).
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parameters and assumptions, by a
qualified person who is free from
influence from the persons responsible
for the development or operation of the
models being validated. As noted above,
the proposed Policy provides that OCC’s
model validation staff reviews each Risk
Model in OCC’s inventory, including
margin models, at least annually and
such staff is removed from the primary
development path of a model to
preserve its ability to provide an
independent assessment.
Finally, Rule 17Ad–22(b)(2) 26
requires, in part, that a registered
clearing agency establish, implement,
maintain and enforce written policies
and procedures reasonably designed to
use risk-based models and parameters to
set margin requirements. OCC believes
that the proposed Policy would provide
for clear identification of its risk-based
models and thereby promote
compliance with the requirement in
Rule 17Ad–22(b)(2) 27 that OCC’s
policies and procedures be reasonably
designed to use risk-based models and
parameters to set margin requirements.
The proposed rule change is not
inconsistent with the existing rules of
OCC, including any other rules
proposed to be amended.
(B) Clearing Agency’s Statement on
Burden on Competition
Section 17A(b)(3)(I) of the Act 28
requires that the rules of a clearing
agency not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Act. OCC does not
believe that the proposed rule change
would impact or impose any burden on
competition. The proposed rule change
addresses OCC’s internal framework
surrounding the governance,
development, implementation, use,
monitoring, and validation of Risk
Models. Under this framework, OCC’s
controls regarding the design, use,
implementation and validation of
models, as set forth in the proposed
Policy, insofar as they affect margin or
Clearing Fund requirements, would
have an equal impact on all Clearing
Members. Consequently, the proposed
Policy does not provide any Clearing
Member with a competitive advantage
over any other Clearing Member.
Further, the proposed rule change
would not affect any Clearing Member’s
access to OCC’s services or impose any
direct burdens on Clearing Members.
Accordingly, the proposed rule change
would not unfairly inhibit access to
26 17
CFR 240.17Ad–22(b)(2).
27 Id.
28 15
U.S.C. 78q–1(b)(3)(I).
VerDate Sep<11>2014
22:48 Jan 12, 2018
Jkt 244001
OCC’s services or disadvantage or favor
any particular user in relationship to
another user.
For the foregoing reasons, OCC
believes that the proposed rule change
is in the public interest, would be
consistent with the requirements of the
Act applicable to clearing agencies, and
would not impact or impose a burden
on competition.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments on the proposed
rule change were not and are not
intended to be solicited with respect to
the proposed rule change and none have
been 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
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
the 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–
OCC–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–OCC–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
only one method. The Commission will
post all comments on the Commission’s
PO 00000
Frm 00145
Fmt 4703
Sfmt 4703
2275
internet website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filing also will be available for
inspection and copying at the principal
office of OCC and on OCC’s website at
https://www.theocc.com/components/
docs/legal/rules_and_bylaws/sr_occ_17_
011.pdf.
All comments received will be posted
without change. Persons submitting
comments are cautioned that we do not
redact or edit personal identifying
information from comment submissions.
You should submit only information
that you wish to make available
publicly.
All submissions should refer to File
Number SR–OCC–2017–011 and should
be submitted on or before February 6,
2018.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–00530 Filed 1–12–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[SEC File No. 270–135, OMB Control No.
3235–0176]
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.
Extension:
Rules 8b–1 to 8b–33
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
(‘‘Commission’’) is soliciting comments
29 17
E:\FR\FM\16JAN1.SGM
CFR 200.30–3(a)(12).
16JAN1
]]>Agencies
[Federal Register Volume 83, Number 10 (Tuesday, January 16, 2018)]
[Notices]
[Pages 2271-2275]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00530]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82473; File No. SR-OCC-2017-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Notice of Filing of Proposed Rule Change Related to The Options
Clearing Corporation's Model Risk Management Policy
January 9, 2018.
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 December 28, 2017, The Options Clearing Corporation (``OCC'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by OCC. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change by OCC would formalize and update OCC's
Model Risk Management Policy (``MRM Policy'' or ``Policy'') in
connection with multiple requirements applicable to OCC under Rule
17Ad-22, including Rules 17Ad-22(b)(2) concerning margin requirements
and (b)(4) concerning model validation as well as Rules 17Ad-22(e)(2)
concerning governance, (e)(3) concerning frameworks for the
comprehensive management of risks, and (e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii) concerning model validation.\3\ The MRM Policy is included
as confidential Exhibit 5 of the filing. The Policy is being is
submitted without marking to improve readability as it is being
submitted in its entirety as new rule text.
---------------------------------------------------------------------------
\3\ 17 CFR 240.17Ad-22(b)(2), (b)(4), (e)(2)-(4), and (e)(6)-
(7).
---------------------------------------------------------------------------
The proposed rule change does not require any changes to the text
of OCC's By-Laws or Rules. All terms with initial capitalization that
are not otherwise defined herein have the same meaning as set forth in
the OCC By-Laws and Rules.\4\
---------------------------------------------------------------------------
\4\ OCC's By-Laws and Rules can be found on OCC's public
website: https://optionsclearing.com/about/publications/bylaws.jsp.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, OCC 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. OCC 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
(1) Purpose
Background
OCC's use of models inherently exposes OCC to model risk.\5\ To
help manage this risk, OCC is proposing to formalize and update its MRM
Policy, which sets forth the general framework for OCC's model risk
management practices. The MRM Policy would apply to all Risk Models \6\
used by OCC to determine, quantify or measure actual or potential risk
exposures or risk mitigating actions. The purpose of the MRM Policy is
to ensure that OCC appropriately manages its model risks by clearly
outlining the roles and responsibilities of OCC's (1) Quantitative Risk
Management department (``QRM''), (2) Model Validation Group (``MVG''),
and (3) Model Risk Working Group (``MRWG'') in model development,
implementation, use, monitoring, and validation. The provisions of the
MRM Policy addressing these core elements are described in greater
detail below and are designed to ensure that OCC uses an appropriate
approach to managing model risk. OCC notes that the MRM Policy is part
of a broader framework regarding model risk management that is designed
to further the appropriate
[[Page 2272]]
design, validation and operation of OCC's Risk Models.\7\
---------------------------------------------------------------------------
\5\ Under the proposed Policy, ``Model Risk'' would be defined
as the potential for adverse consequences from decisions based on
incorrect or misused model outputs.
\6\ Under the proposed Policy, ``Risk Models'' would be defined
as any quantitative method or approach that applies statistical,
economic, financial, or mathematical theories, techniques, and/or
assumptions to process inputs into quantitative estimates,
forecasts, or projections. A Risk Model may also be a quantitative
method with inputs that are qualitative or based on business
judgment. Under the Policy, the term Risk Models would be used
specifically in the context of credit risk models, margin system and
related models, and liquidity risk models.
\7\ For example, OCC's Margin Policy is also part of OCC's
framework regarding model risk management in that it is designed to
be consistent with the requirement in Rule 17Ad-22(e)(6)(vii) that
OCC's policies and procedures provide for a risk-based margin system
that requires a margin model validation not less than annually. See
17 CFR 240.17Ad-22(e)(6)(vii). OCC recently filed a proposed rule
change with the Commission concerning the formalizing and updating
of its Margin Policy, which is currently pending Commission review.
See Securities Exchange Act Release No. 82355 (December 19, 2017),
82 FR 61060 (December 26, 2017) (SR-OCC-2017-007).
---------------------------------------------------------------------------
Model Risk Management Policy
Introduction
The MRM Policy would apply to all Risk Models used by OCC to
determine, quantify or measure actual or potential risk exposures or
risk mitigating actions. As noted above, Risk Models are defined under
the Policy to be credit risk models (e.g., models concerning OCC's
Clearing Fund), margin system and related models (e.g., OCC's System
for Theoretical Analysis and Numerical Simulations or ``STANS''), and
liquidity risk models.
The MRM Policy also would clarify that OCC considers a Risk Model
to be any quantitative method or approach that applies statistical,
economic, financial, or mathematical theories, techniques, and/or
assumptions to process inputs into quantitative estimates, forecasts,
or projections. A Risk Model can also be a quantitative method with
inputs that are qualitative or based on business judgment.\8\ The MRM
Policy also would define ``Methodology'' to mean a collection of Risk
Models used to estimate financial risk exposures.
---------------------------------------------------------------------------
\8\ See SR Letter 11-7, ``Guidance on Model Risk Management,''
Board of Governors of the Federal Reserve System (April 4, 2011),
and OCC Bulletin 2011-12, ``Sound Practices for Model Risk
Management,'' The Office of the Comptroller of the Currency (April
4, 2011).
---------------------------------------------------------------------------
To guide activities in this part of OCC's model risk framework, OCC
shall primarily follow the Supervisory Guidance on Model Risk
Management issued by the Board of Governors of the Federal Reserve
System and the Office of the Comptroller of the Currency (April 4,
2011), as well as any applicable regulatory requirements.\9\
---------------------------------------------------------------------------
\9\ Id.
---------------------------------------------------------------------------
The MRM Policy sets forth a governance structure for the allocation
of roles and responsibilities for Risk Model development,
implementation, use, monitoring, and validation among different groups
and individuals, including OCC's Board, the Risk Committee of the Board
(``Risk Committee''), management, and other OCC staff. These roles and
responsibilities are described in further detail below.
Quantitative Risk Management
Under the proposed Policy, the Executive Vice President of OCC's
Financial Risk Management department (``EVP-FRM'') would be responsible
for (i) having staff with the requisite knowledge, skills, and
expertise to perform model risk management activities necessary to the
staffs' responsibilities and (ii) overseeing Risk Model development,
implementation, monitoring, and use.
Risk Model Development
Under the proposed Policy, Risk Model development and
implementation shall be conducted by QRM unless a third-party is
otherwise engaged by QRM to develop a Risk Model. Where QRM does not
develop a Risk Model, it shall oversee the development, implementation,
and monitoring in accordance with the Risk Model Development Procedure.
The design, theory, and logic of each Risk Model used by OCC shall
be described in a document maintained by QRM and shall take into
consideration published literature and industry best practice, where it
is available. The document shall include a description of the Risk
Model, the intended purpose of the Risk Model, the motivation of the
Risk Model assumptions, the test data supporting the Risk Model, the
Risk Model limitations, and other details as outlined in OCC's
Maintenance and Periodic Review of Methodology Procedure. QRM also
would be responsible for describing each Risk Model Methodology in a
Methodology document. Requirements for Methodology documentation shall
be contained in the Maintenance and Periodic Review of Methodology
Procedure. The EVP-FRM also shall review and, if appropriate, approve
the Risk Model documentation. The EVP-FRM may delegate the
responsibility for reviewing and approving such Risk Model
documentation to the First Vice President, Quantitative Risk
Management, who shall provide notice of any approval to the EVP-FRM.
Risk Model Implementation
Under the proposed MRM Policy, QRM would review, evaluate, and
propose model changes (to include Model Defects,\10\ enhancements, and/
or Decommissioning \11\ of a Risk Model) in accordance with the Model
Implementation Procedure and OCC's Legal Services Policy (and related
procedures). New products that are non-standard equity options/futures
shall be reviewed by QRM according to the Model Implementation
Procedure for determination as to whether or not a new Risk Model is
required or if the use of an existing Risk Model is fit for purpose.
QRM shall recommend approval to OCC's Model Risk Working Group
(``MRWG'') \12\ in accordance with the Model Risk Working Group
Procedure subsequent to effective challenge and approval by MVG.
---------------------------------------------------------------------------
\10\ Under the proposed Policy, ``Risk Model Defect'' would be
defined as an error, flaw, failure, or fault in a computer program
or system that causes a Risk Model to produce an incorrect or
unexpected result, or to behave in unintended ways.
\11\ Under the proposed Policy, ``Decommissioned Model'' would
be defined as a Risk Model that has been approved by the Risk
Committee to no longer be used to estimate margin or Clearing Fund
exposures.
\12\ The MRWG is responsible for assisting OCC's Management
Committee in overseeing and governing OCC's model-related risk
issues and consists of representatives from Financial Risk
Management, QRM, MVG and Enterprise Risk Management.
---------------------------------------------------------------------------
Under the Policy, QRM shall seek Legal department (``Legal'')
review to determine if a new Risk Model or change to an existing Risk
Model requires regulatory filing prior to implementation and use in
accordance with OCC's Legal Services Policy and related procedures. OCC
shall not implement or use such Risk Model until Legal provides a
written notice to QRM and MVG that the Risk Model does not require any
additional regulatory action prior to implementation and use or, if a
regulatory filing is required, that all requisite filing and approvals
are complete.
Under the proposed Policy, QRM shall implement new Risk Models and
changes to existing Risk Models in accordance with the Risk Model
Development Procedure and the Model Implementation Procedure. QRM shall
be responsible for overseeing the quality assurance and related testing
procedures required for implementation and/or Decommissioning of a Risk
Model. Reporting and escalation to the MRWG shall be performed in
accordance with the Model Risk Working Group Procedure. The MRWG shall
review and, if appropriate, approve all new Risk Models, Material
Changes \13\ to Risk
[[Page 2273]]
Models, and proposals for Decommissioning Risk Models prior to
submitting to the Management Committee for approval.
---------------------------------------------------------------------------
\13\ Under the proposed Policy, ``Material Change'' would be
defined as a change to a Risk Model that, as deemed by the MRWG,
requires Risk Committee approval due to its anticipated effect on
margin or Clearing Fund requirements, impact to Clearing Members,
volume or open interest, backtesting performance, etc. Material
Changes may be quantitative or qualitative in nature and take into
account the likelihood, impact, and context of the change relative
to Risk Model.
---------------------------------------------------------------------------
Under the Policy, the Management Committee would be responsible for
reviewing and approving each new Risk Model and each Material Change to
a Risk Model prior to implementation and use. The Management Committee
also would review and approve each proposal for Decommissioning a Risk
Model. Each approval shall constitute a recommendation and be reported
to the Risk Committee for further review and approval. The Risk
Committee shall review and, if appropriate, approve each new Risk Model
and each Material Change prior to implementation and use, except that
Material Changes to OCC's margin and Clearing Fund methodologies shall
be referred to the Board for review and, if appropriate, final
approval, upon a recommendation from the Risk Committee. The Risk
Committee also shall review and, if appropriate, approve the
Decommissioning of a Risk Model prior to removing it from the Model
Inventory.\14\
---------------------------------------------------------------------------
\14\ Under the proposed Policy, ``Model Inventory'' would be
defined as OCC's database of in-use Risk Models and Methodologies.
---------------------------------------------------------------------------
Risk Model Monitoring
Pursuant to the proposed Policy, QRM shall monitor the use and
performance of Risk Models according to the Model Backtesting
Procedure, the Business Backtesting Procedure, and the Margin Model
Parameter Review and Sensitivity Analysis Procedure. Monitoring shall
be reasonably designed to determine if the Risk Model is accurate,
reliable and robust, and to identify limitations. The results of
monitoring also shall be used to evaluate the behavior of a Risk Model
over a range of input values. Risk tolerance and associated key risk
indicators would be maintained by QRM to measure and monitor model
risk. These risk measures, in addition to monthly Risk Model parameter
reviews shall be reported to the MRWG and escalated to the Management
Committee and/or Risk Committee as necessary in accordance with the
Model Risk Working Group Procedure.
Model Validation Group
Under the proposed Policy, the First Vice President of MVG shall
have qualified staff with the requisite knowledge, skills, and
expertise to perform validations in accordance with the Model
Validation Procedure. MVG personnel responsible for validation shall be
independent from, shall not report to, and shall otherwise be free from
influence from OCC business areas involved in the development,
implementation and operation of such Risk Models.
Annual Model Validation Plan
The First Vice President of MVG shall develop and maintain an
Annual Model Validation Plan (``Annual Plan''). The Annual Plan, as
defined in the Annual Model Validation Plan Procedure, is a schedule of
Risk Model validations performed for all Risk Models on the Model
Inventory. MVG's Annual Plan shall require all Risk Models on the Model
Inventory to be validated no less than annually (where annually is
defined as 12 months, or 365 days).
Pursuant to the proposed Policy, the Risk Committee shall review
and approve the Annual Model Validation Plan and any removals or
deferrals from the previously approved Annual Model Validation Plan
based on recommendations from the Chief Risk Officer (``CRO''). In
addition, the CRO shall provide a quarterly report to the Risk
Committee that provides information on progress against the Annual
Model Validation Plan.
Model Inventory
Pursuant to the proposed Policy, MVG shall maintain a complete and
accurate inventory of Risk Models according to the Model Inventory
Procedure. To ensure the Model Inventory is complete and accurate, MVG
shall perform a firm-wide assessment on an annual basis in accordance
with the Model Identification Procedure.
Independent Model Validation
Under the proposed Policy, MVG would be responsible for evaluating
the performance of each Risk Model by performing Independent Model
Validations \15\ in accordance with the Model Validation Procedure.
Validations shall be performed according to the Model Validation
Procedure, and shall include a review of Risk Model performance,
parameters, and assumptions. Conclusions shall be formulated in the
form of a ``Model Assessment Report'' and shall be reviewed by QRM upon
conclusion of the report. MVG shall perform performance monitoring of
Risk Models according to the Model Performance Monitoring Procedure.
Findings from validations and performance monitoring shall be
identified, monitored, remediated, and reported according to the Model
Findings Management Procedure and presented to the Management Committee
and Risk Committee in the form of a Model Risk Management Findings
Dashboard.
---------------------------------------------------------------------------
\15\ Under the proposed Policy, ``Independent Model Validation''
would be defined as the evaluation of the performance of a Risk
Model performed by a qualified person who is free from influence
from the persons responsible for the development or operation of the
models being validated.
---------------------------------------------------------------------------
Pursuant to the proposed Policy, MVG shall validate all Risks
Models prior to implementation and use in accordance with the Model
Validation Procedure. Additionally, MVG shall review Material Changes
to Risk Models prior to implementation of the Material Change and in
accordance with the Model Implementation Procedure. MVG shall assign a
model rating and model risk level to each Risk Model on the Model
Inventory. The effectiveness of each Risk Model shall be reported by
the CRO to the Risk Committee on a quarterly basis.
In the event a third-party validator is used to validate a Risk
Model or in the event that OCC uses a third-party to develop a Risk
Model, MVG shall oversee/perform the validation in accordance with the
Model Validation Procedure. The CRO shall report results of third party
validations of OCC's Risk Models and results of validations of third-
party Risk Models to the Management Committee and Risk Committee along
with any recommended actions and remediation plans associated with such
validations.
Model Risk Working Group
Under the proposed Policy, the MRWG would be responsible for
assisting OCC's Management Committee in overseeing and governing OCC's
model-related risk issues. The MRWG consists of representatives from
Financial Risk Management, QRM, MVG and Enterprise Risk Management as
well as representatives from Legal to provide adequate support and
Legal expertise as it relates to Model Risk. The MRWG shall serve as a
resource by overseeing model risk, which includes, without limitation,
ongoing model risk monitoring activities, approving, or recommending
approval of new Risk Models and Material Changes to Risk Models, and
tracking Model Defects and remediation activities as stipulated in the
Model Risk Working Group Procedure.
Policy Updates Exceptions and Violations
Finally, pursuant to the proposed Policy, OCC's Management
Committee shall review and approve the Policy on an annual basis and
recommend approval of the Policy to the Risk
[[Page 2274]]
Committee. The Management Committee also shall review and approve any
material changes to the Policy and recommend further approval to the
Risk Committee.
The MRM Policy also would contain OCC's standard policy language
concerning the policy exception and violation processes. Specifically,
any request for an exception to the Policy must be made in writing to a
member of the Office of the Executive Chairman,\16\ who is then
responsible for reviewing the exception request and providing a
decision in writing to the person requesting the exception. OCC's CRO,
Chief Compliance Officer, or Chief Audit Executive may also request an
exception to the Policy directly to the Board. All requests for
exceptions and their dispositions would be reported to the Board or
Risk Committee as appropriate no later than its next regularly
scheduled meeting, in a format approved by the Chair of the Board or
Risk Committee. In addition, Policy violations shall be reported to
OCC's Chief Compliance Officer, or, if the violation involves the
Compliance Department, to the head of Internal Audit or a member of the
Office of the Executive Chairman.
---------------------------------------------------------------------------
\16\ OCC's Office of the Executive Chairman currently consists
of the Executive Chairman and Chief Executive Officer, President and
Chief Operating Officer, and Chief Administrative Officer.
---------------------------------------------------------------------------
(2) Statutory Basis
Section 17A(b)(3)(F) of the Act \17\ requires, among other things,
that the rules of a clearing agency be designed to assure the
safeguarding of securities and funds in the custody or control of the
clearing agency or for which it is responsible, and, in general, to
protect investors and the public interest. As described in more detail
above, OCC believes that formalizing the MRM Policy would help to
ensure that OCC maintains policies and procedures that are reasonably
designed to provide for a robust model risk management framework, which
includes controls pertaining to the governance, development,
implementation, use, monitoring, and Independent Model Validation of
OCC's Risk Models. In this way, the Policy is intended to further the
appropriate design, validation and operation of Risk Models within
OCC's performance of clearance and settlement services. The MRM Policy
thereby promotes, for example, the development, use and monitoring of
appropriately conservative margin and Clearing Fund requirements. As a
result, OCC believes the proposed rule change is designed to assure the
safeguarding of securities and funds at OCC and, in general, protect
investors and the public interest consistent with Section 17A(b)(3)(F)
of the Act.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(2) \19\ requires a covered clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that, among other things: (i) Are clear and transparent; (ii) clearly
prioritize safety and efficiency of the covered clearing agency; (iii)
support the public interest requirements in Section 17A of the Act \20\
applicable to clearing agencies, and the objectives of owners and
participants; and (iv) specify clear and direct lines of
responsibility. The proposed Policy would describe, in detail, OCC's
overall framework for Risk Model governance. This includes establishing
clear, transparent, and direct responsibilities for OCC's Board, Risk
Committee, management, and other OCC staff in connection with OCC's
model risk management framework and how the relevant groups and
individuals interact. In particular, the proposed Policy is designed to
establish appropriate governance arrangements for the development,
implementation, use, monitoring, and Independent Model Validation of
OCC's Risk Models. OCC believes that these governance arrangements
prioritize the safety and efficiency of OCC and support the public
interest requirements of the Act by describing specifies roles,
responsibilities and requirements for OCC's model testing, monitoring,
validation, and review processes, thereby helping to ensure that OCC
maintains a robust framework for managing its model risk.
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(e)(2).
\20\ 15 U.S.C. 78q-1. The public interest requirements in
Section 17A of the Act include that the ``prompt and accurate
clearance and settlement of securities transactions, including the
transfer of record ownership and the safeguarding of securities and
funds related thereto, are necessary for the protection of investors
and persons facilitating and acting on behalf of investors.'' See 15
U.S.C. 78q-1(a)(1)(A).
---------------------------------------------------------------------------
Rule 17Ad-22(e)(3)(i) \21\ requires a covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to, among other things, maintain a sound
risk management framework for comprehensively managing its risks, which
includes risk management policies, procedures, and systems designed to
identify, measure, monitor, and manage such risks and that are subject
to review on a specified periodic basis and approved by its Board
annually. OCC believes the proposed Policy is consistent with Rule
17Ad-22(e)(3)(i) \22\ because it is an essential component of OCC's
overall framework for comprehensively managing its risks, which
includes model risk. Specifically, OCC believes the proposed Policy is
reasonably designed to identify, measure, monitor, and manage model
risks by providing a sound framework for defining, developing,
maintaining, and validating OCC's Risk Models and for making any
changes necessary to ensure those Risk Models continue to address
relevant risks appropriately. As noted above, the proposed Policy
provides that OCC's QRM staff, as part of model risk management and
model development, are responsible for monitoring model performance on
a continuous basis. Specifically, QRM staff would monitor OCC's Risk
Models to determine whether such models perform as intended and are
accurate, reliable and robust and to identify any Risk Model
limitations. The results of monitoring also shall be used to evaluate
the behavior of a Risk Model over a range of input values. Moreover,
the proposed Policy describes MVG's obligations for the independent
validation of new Risk Models, Material Changes to Risk Models, and the
annual validation of Risk Models.
---------------------------------------------------------------------------
\21\ 17 CFR 240.17Ad-22(e)(3)(i).
\22\ Id.
---------------------------------------------------------------------------
Rules 17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii) \23\ require
a covered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to perform
independent model validations on its credit risk models, margin models,
and liquidity risk models not less than annually or more frequently as
may be contemplated by the clearing agency's risk management framework.
OCC believes the proposed rule change is consistent with Rules 17Ad-
22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii) \24\ because the Policy
would require OCC to perform an Independent Model Validation of its
Risk Models on at least an annual basis, or more frequently as needed,
and prior to the implementation of new Risk Models or Material Changes
to Risk Models. OCC also believes that the proposed rule change is
consistent with the requirement in Rule 17Ad-22(b)(4) \25\ that OCC's
policies and procedures be reasonably designed to provide for an annual
model validation of OCC's margin models, that evaluates their
performance and the related
[[Page 2275]]
parameters and assumptions, by a qualified person who is free from
influence from the persons responsible for the development or operation
of the models being validated. As noted above, the proposed Policy
provides that OCC's model validation staff reviews each Risk Model in
OCC's inventory, including margin models, at least annually and such
staff is removed from the primary development path of a model to
preserve its ability to provide an independent assessment.
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\23\ 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii).
\24\ Id.
\25\ 17 CFR 240.17Ad-22(b)(4).
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Finally, Rule 17Ad-22(b)(2) \26\ requires, in part, that a
registered clearing agency establish, implement, maintain and enforce
written policies and procedures reasonably designed to use risk-based
models and parameters to set margin requirements. OCC believes that the
proposed Policy would provide for clear identification of its risk-
based models and thereby promote compliance with the requirement in
Rule 17Ad-22(b)(2) \27\ that OCC's policies and procedures be
reasonably designed to use risk-based models and parameters to set
margin requirements.
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\26\ 17 CFR 240.17Ad-22(b)(2).
\27\ Id.
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The proposed rule change is not inconsistent with the existing
rules of OCC, including any other rules proposed to be amended.
(B) Clearing Agency's Statement on Burden on Competition
Section 17A(b)(3)(I) of the Act \28\ requires that the rules of a
clearing agency not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act. OCC does not
believe that the proposed rule change would impact or impose any burden
on competition. The proposed rule change addresses OCC's internal
framework surrounding the governance, development, implementation, use,
monitoring, and validation of Risk Models. Under this framework, OCC's
controls regarding the design, use, implementation and validation of
models, as set forth in the proposed Policy, insofar as they affect
margin or Clearing Fund requirements, would have an equal impact on all
Clearing Members. Consequently, the proposed Policy does not provide
any Clearing Member with a competitive advantage over any other
Clearing Member. Further, the proposed rule change would not affect any
Clearing Member's access to OCC's services or impose any direct burdens
on Clearing Members. Accordingly, the proposed rule change would not
unfairly inhibit access to OCC's services or disadvantage or favor any
particular user in relationship to another user.
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\28\ 15 U.S.C. 78q-1(b)(3)(I).
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For the foregoing reasons, OCC believes that the proposed rule
change is in the public interest, would be consistent with the
requirements of the Act applicable to clearing agencies, and would not
impact or impose a burden on competition.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments on the proposed rule change were not and are not
intended to be solicited with respect to the proposed rule change and
none have been 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 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 the 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 [email protected]. Please include
File Number SR-OCC-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-OCC-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 only one method. The Commission will post all comments on
the Commission's internet website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filing also will be available for inspection
and copying at the principal office of OCC and on OCC's website at
https://www.theocc.com/components/docs/legal/rules_and_bylaws/sr_occ_17_011.pdf.
All comments received will be posted without change. Persons
submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
All submissions should refer to File Number SR-OCC-2017-011 and
should be submitted on or before February 6, 2018.
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\29\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00530 Filed 1-12-18; 8:45 am]
BILLING CODE 8011-01-P
