Self-Regulatory Organizations; The Options Clearing Corporation; Order Approving Proposed Rule Change Related to The Options Clearing Corporation's Model Risk Management Policy, 9345-9347 [2018-04338]
Download as PDF
<![CDATA[
Federal Register / Vol. 83, No. 43 / Monday, March 5, 2018 / Notices
developing this document is available to
the NRC staff. This document is issued
for comment only and is not intended
for interim use. The NRC will review
public comments received on the
documents, incorporate suggested
changes as necessary, and make the
final test plan available.
Dated at Rockville, Maryland, this 26th day
of February, 2018.
For the Nuclear Regulatory Commission.
Mark Henry Salley,
Chief, Fire and External Hazard Analysis
Branch, Division of Risk Analysis, Office of
Nuclear Regulatory Research.
[FR Doc. 2018–04341 Filed 3–2–18; 8:45 am]
BILLING CODE 7590–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82786; File No. SR–ICEEU–
2017–016]
Self-Regulatory Organizations; ICE
Clear Europe Limited; Notice of
Designation of Longer Period for
Commission Action on Proposed Rule
Change Concerning the ICE Clear
Europe Recovery Plan
sradovich on DSK3GMQ082PROD with NOTICES
February 27, 2018.
On December 29, 2017, ICE Clear
Europe Limited (‘‘ICE Clear Europe’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) proposed
rule change SR–ICEEU–2017–016
(‘‘Proposed Rule Change’’) pursuant to
Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Exchange
Act’’),1 and Rule 19b–4 thereunder,2
concerning the ICE Clear Europe
Recovery Plan. The Proposed Rule
Change was published for comment in
the Federal Register on January 19,
2018.3 To date, the Commission has not
received any comment letters to the
Proposed Rule Change.
Section 19(b)(2) of the Exchange Act 4
provides that, within 45 days of the
publication of notice of the filing of a
proposed rule change, or within such
longer period up to 90 days as the
Commission may designate if it finds
such longer period to be appropriate
and publishes its reasons for so finding,
or as to which the self-regulatory
organization consents, the Commission
shall either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether the proposed rule
change should be disapproved. The 45th
day after publication of the Notice for
this Proposed Rule Change is March 5,
2018. The Commission is extending this
45-day time period. In order to provide
the Commission with sufficient time to
consider the Proposed Rule Change, the
Commission finds that it is appropriate
to designate a longer period within
which to take action on the Proposed
Rule Change.
Accordingly, the Commission,
pursuant to Section 19(b)(2) of the
Exchange Act,5 designates April 19,
2018 as the date by which the
Commission shall either approve,
disapprove, or institute proceedings to
determine whether to disapprove
proposed rule change SR–ICEEU–2017–
016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–04339 Filed 3–2–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82785; File No. SR–OCC–
2017–011]
Self-Regulatory Organizations; The
Options Clearing Corporation; Order
Approving Proposed Rule Change
Related to The Options Clearing
Corporation’s Model Risk Management
Policy
February 27, 2018.
I. Introduction
On December 28, 2017, The Options
Clearing Corporation (‘‘OCC’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities and
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change (SR–OCC–2017–011) to
formalize and update OCC’s Model Risk
Management Policy (‘‘MRM Policy’’).
The proposed rule change was
published for comment in the Federal
Register on January 16, 2018.3 The
Commission did not receive any
comments regarding the proposed rule
change. For the reasons discussed
5 Id.
1 15
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Exchange Act Release No. 82496 (Jan. 12, 2018),
83 FR 2855 (Jan. 19, 2018) (SR–ICEEU–2017–016)
(‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
VerDate Sep<11>2014
19:25 Mar 02, 2018
Jkt 244001
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 82473 (Jan.
9, 2018), 83 FR 2271 (Jan. 16, 2018) (SR–OCC–
2017–011) (‘‘Notice’’).
1 15
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
9345
below, the Commission is approving the
proposed rule change.
II. Description of the Proposed Rule
Change 4
OCC uses quantitative methods to
make estimates, forecasts, and
projections.5 Specifically, OCC employs
such methods in the context of its credit
risk models, margin system and related
models, and liquidity risk models.6 OCC
refers to the use of such quantitative
methods in this context as Risk
Models.7 OCC’s use of models
inherently exposes OCC to model risk.8
Such risk includes the consequences of
decisions based on incorrect or misused
model outputs.9 The proposed MRM
Policy will apply to all Risk Models that
OCC uses to determine, quantify, or
measure actual or potential risk
exposures or risk mitigating actions.10
The MRM Policy details the general
framework for OCC’s model risk
management practices, including
describing and outlining the roles and
responsibilities of OCC’s Quantitative
Risk Management department (‘‘QRM’’),
Model Validation Group (‘‘MVG’’), and
Model Risk Working Group
(‘‘MRWG’’).11 The MRM Policy also
addresses the roles of OCC’s Legal
department, Management Committee
(‘‘MC’’) and Board Risk Committee
(‘‘RC’’) in the review and approval of
OCC’s Risk Models.12 The proposed rule
change would formalize and update
OCC’s MRM Policy.
Under the MRM Policy, QRM will be
responsible for developing,
implementing, and monitoring OCC’s
Risk Models.13 Regarding model
development, QRM will maintain
documentation of the design, theory,
and logic of each Risk Model, including
a description of the model, its intended
purpose, assumptions, supporting data,
limitations, and other details.14 As part
of model implementation, QRM will
review, evaluate, and propose model
changes, including model
decommissioning, make
recommendations to the MRWG for
approval of changes, and seek review by
the Legal department regarding the
regulatory filing requirements related to
4 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.
5 Notice, 83 FR at 2271, n. 6.
6 Id.
7 Id.
8 Notice, 83 FR at 2271.
9 Notice, 83 FR at 2271, n. 5.
10 Notice, 83 FR at 2271.
11 Id.
12 Notice, 83 FR at 2272.
13 Notice, 83 FR at 2272–73.
14 Notice, 83 FR at 2272.
E:\FR\FM\05MRN1.SGM
05MRN1
9346
Federal Register / Vol. 83, No. 43 / Monday, March 5, 2018 / Notices
proposed model changes.15 The MC will
review, and as appropriate, recommend
model change proposals to the RC for
review and, if appropriate, to OCC’s
Board for final approval.16 Finally, QRM
will monitor the use and performance of
Risk Models, and will report its findings
to the MRWG for potential escalation to
the MC or RC as necessary.17
Under the MRM Policy, MVG will be
responsible for maintaining an
inventory of OCC’s Risk Models, and
validating such models no less than
annually.18 Each model validation must
include a review of the model’s
performance, parameters, and
assumptions.19 Such validations must
be independent, which is defined by the
MRM Policy as an evaluation performed
by a qualified person who is free from
influence from the persons responsible
for the development or operation of the
models being validated.20 Under the
proposed MRM Policy, the MRWG is
responsible for assisting the MC to
oversee and govern OCC’s model-related
risk issues.21 Specifically, the MRM
Policy requires MRWG to provide,
among other things, adequate support
and legal expertise as it relates to model
risk.22
Additionally, the MRM Policy
provides arrangements governing
updates and exceptions to, as well as
violations of, the MRM Policy.23
Specifically, updates to the MRM Policy
may be approved by the RC upon
recommendation from the MC.
Exceptions to the MRM Policy require
written approval from OCC’s Office of
the Executive Chairman.24 Finally, all
violations of the MRM Policy must be
reported to OCC’s Chief Compliance
Officer.25
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.26 After
15 Id.
16 Notice,
83 FR at 2273.
17 Id.
18 Id.
sradovich on DSK3GMQ082PROD with NOTICES
19 Id.
20 Notice,
21 Notice,
83 FR at 2273, n. 15.
83 FR at 2273.
22 Id.
23 Notice,
83 FR at 2273–74.
83 FR at 2274.
25 Id. Violations involving the Chief Compliance
Officer must be reported to the head of Internal
Audit or a member of the Office of the Executive
Chairman.
26 15 U.S.C. 78s(b)(2)(C).
24 Notice,
VerDate Sep<11>2014
19:25 Mar 02, 2018
Jkt 244001
carefully considering the proposed rule
change, the Commission finds the
proposal is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
OCC. More specifically, the Commission
finds that the proposal is consistent
with Section 17A(b)(3)(F) of the Act 27
and Rules 17Ad–22(e)(2) 28 17Ad–
22(e)(4)(vii),29 17Ad–22(e)(6)(vii),30 and
17Ad–22(e)(7)(vii) 31 thereunder.
defaulting clearing members’ collateral
to cover such losses or shortfalls.
Therefore, because the formalization of
the MRM Policy would incorporate into
OCC’s rules measures intended to
reduce the likelihood that OCC would
have to use non-defaulting clearing
members’ collateral to manage a clearing
member default, the Commission finds
that proposal is consistent with Section
17A(b)(3)(F) of the Act.33
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires that the rules of a registered
clearing agency be designed to, among
other things, assure the safeguarding of
securities and funds which are in the
custody or control of the clearing agency
or for which it is responsible.32
As described above, the MRM Policy
is designed to reduce the model risk
inherent in OCC’s use of credit risk
models, margin models, and liquidity
risk models. Such model risk includes
the consequences of decisions based on
incorrect or misused model outputs.
The Commission believes that decisions
based on incorrect or misused model
outputs could lead OCC to suffer credit
losses or liquidity shortfalls arising out
of the default of a clearing member, and
that such losses or shortfalls could
negatively affect the securities and
funds that have been posted by nondefaulting clearing members and are
within OCC’s custody or control. For
example, if an OCC risk model were to
underestimate the risks posed by a
clearing member’s positions, the default
of such a clearing member could cause
OCC to face losses in excess of the
collateral collected from the defaulting
clearing member. Where OCC faces
losses in excess of a defaulter’s
collateral, it may be forced to cover such
losses with the securities and funds
posted as collateral by non-defaulting
clearing members.
The Commission believes that
measures that reduce model risk may
allow OCC to better manage its credit
and liquidity risk exposures by more
accurately estimating the collateral OCC
must collect from its clearing members
to cover those risks. Such increased
accuracy may, in turn, help OCC avoid
credit losses or liquidity shortfalls in
excess of collateral posted by a clearing
member in the event of a default, and,
thus, avoid the need to use non-
B. Consistency With Rule 17Ad–22(e)(2)
Rule 17Ad–22(e)(2) under the Act
requires, among other things, that a
covered clearing agency establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to provide for
governance arrangements that are clear
and transparent and specify clear and
direct lines of responsibility.34
As described above, the MRM Policy
provides for arrangements governing
updates and exceptions to, as well as
violations of, the MRM Policy. Such
arrangements provide clarity to OCC
staff regarding the operation of the MRM
Policy generally, and provide for
unforeseen circumstances requiring
changes to OCC’s practices. Because
formalization of the MRM Policy would
incorporate into OCC’s rules a policy
intended to provide such clarity, the
Commission finds that the proposal is
consistent with Rule 17Ad–22(e)(2)(i).35
As described above, the MRM Policy
outlines the roles and responsibilities of
departments, a working group, and
management and board committees
within the framework of OCC’s model
risk management practices. The MRM
Policy states that the Board has final
authority to approve changes to OCC’s
Risk Models. The MRM Policy also
describes the escalation path for issues
arising out of routine performance
monitoring. The Commission believes
that this aspect of the MRM Policy,
which defines approval authority and
escalation processes within OCC’s
governance structure, supports the
specification of clear and direct lines of
responsibility, and, therefore, is
consistent with Rule 17Ad–22(e)(2)(v).36
27 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(2).
29 17 CFR 240.17Ad–22(e)(4)(vii).
30 17 CFR 240.17Ad–22(e)(6)(vii).
31 17 CFR 240.17Ad–22(e)(7)(vii).
32 15 U.S.C. 78q–1(b)(3)(F).
C. Consistency With Rules 17Ad–
22(e)(4)(vii), (e)(6)(vii) and 17Ad–
22(e)(7)(vii)
Rules 17Ad–22(e)(4)(vii), (e)(6)(vii)
and (e)(7)(vii) under the Act require a
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
28 17
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
33 Id.
34 17
CFR 240.17Ad–22(e)(2)(i) and (v).
CFR 240.17Ad–22(e)(2)(i).
36 17 CFR 240.17Ad–22(e)(2)(v).
35 17
E:\FR\FM\05MRN1.SGM
05MRN1
Federal Register / Vol. 83, No. 43 / Monday, March 5, 2018 / Notices
reasonably designed to, among other
things, require the performance of a
model validation for its credit risk
models, margin system and related
models, and liquidity risk models not
less than annually, or more frequently
as may be contemplated by the covered
clearing agency’s risk management
framework established pursuant to Rule
17Ad–22(e)(3) under the Act.37
As described above, the MRM Policy
provides for the annual validation of
OCC’s Risk Models, which include
credit risk, margin, and liquidity risk
models. Under the MRM Policy, a
model validation must include a review
of the model’s performance, parameters,
and assumptions. Further, the MRM
Policy clarifies that each model
validation must be performed by a
qualified person who is free from
influence from the persons responsible
for the development or operation of the
models being validated. Therefore,
because the Commission believes that
the MRM Policy requires the annual
validations of the performance,
parameters, and assumptions of OCC’s
credit risk, margin, and liquidity risk
models, the Commission finds that the
proposed rule change is consistent with
Rules 17Ad–22(e)(4)(vii), (e)(6)(vii), and
(e)(7)(vii).
IV. Conclusion
sradovich on DSK3GMQ082PROD with NOTICES
On the basis of the foregoing, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act, and in
particular, with the requirements of
Section 17A of the Act 38 and the rules
and regulations thereunder.
37 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii). The requirements of Rule 17Ad–22(e)(4)
pertain to the effective identification, measurement,
monitoring, and management of credit exposures.
17 CFR 240.17Ad–22(e)(4). The requirements of
Rule 17Ad–22(e)(6), which apply to a covered
clearing agency that performs central counterparty
services, pertain to the covering of a covered
clearing agency’s credit exposures to its
participants. 17 CFR 240.17Ad–22(e)(6). The
requirements of Rule 17Ad–22(e)(7) pertain to the
effective measurement, monitoring, and
management of liquidity risk. 17 CFR 240.17Ad–
22(e)(7).
Rule 17Ad–22 defines model validation to mean
an evaluation of the performance of each material
risk management model used by a covered clearing
agency (and the related parameters and
assumptions associated with such models),
including initial margin models, liquidity risk
models, and models used to generate clearing or
guaranty fund requirements, performed by a
qualified person who is free from influence from
the persons responsible for the development or
operation of the models or policies being validated.
17 CFR 240.17Ad–22(a)(9).
38 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
VerDate Sep<11>2014
19:25 Mar 02, 2018
Jkt 244001
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 39 that the
proposed rule change (SR–OCC–2017–
011) be, and hereby is, approved.
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.40
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018–04338 Filed 3–2–18; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–82788; File No. SR–
NYSEArca–2018–13]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to the Wilshire
Micro-Cap ETF
February 27, 2018.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934
(‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on February
13, 2018, NYSE Arca, Inc. (‘‘Exchange’’
or ‘‘NYSE Arca’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the self-regulatory organization. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to reflect
changes to certain representations made
in the proposed rule change previously
filed with the Commission pursuant to
Rule 19b–4 relating to the Wilshire
Micro-Cap ETF (the ‘‘Fund’’). Shares of
the Fund are currently listed and traded
on the Exchange under NYSE Arca Rule
5.2(j)(3)–E. The proposed rule change is
available on the Exchange’s website at
www.nyse.com, at the principal office of
the Exchange, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
39 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
40 17
PO 00000
Frm 00089
Fmt 4703
Sfmt 4703
9347
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 those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Commission has approved the
listing and trading on the Exchange of
shares (‘‘Shares’’) of the Fund, under
NYSE Arca Rule 5.2–E(j)(3) (formerly
NYSE Arca Equities Rule 5.2(j)(3)),
which governs the listing and trading of
Investment Company Units.4 The
Fund’s Shares are currently listed and
traded on the Exchange under NYSE
Arca Rule 5.2–E(j)(3).5 The Fund is a
series of the Claymore Exchange-Traded
Fund Trust (‘‘Trust’’).6
PowerShares Exchange-Traded Fund
Trust has filed a combined prospectus
and proxy statement (the ‘‘Proxy
Statement’’) with the Commission on
Form N–14 describing a ‘‘Plan of
Reorganization’’ pursuant to which,
following approval of the Fund’s
shareholders, all or substantially all of
the assets and all of the stated liabilities
included in the financial statements of
the Fund would be transferred to a
corresponding, newly-formed fund of
the PowerShares Exchange-Traded Fund
4 An Investment Company Unit is a security that
represents an interest in a registered investment
company that holds securities comprising, or
otherwise based on or representing an interest in,
an index or portfolio of securities (or holds
securities in another registered investment
company that holds securities comprising, or
otherwise based on or representing an interest in,
an index or portfolio of securities). See NYSE Arca
Rule 5.2–E(j)(3)(A).
5 The Commission previously approved the
listing and trading of the Shares of the Fund. The
Exchange filed a proposed rule change relating to
the Fund because Fund’s underlying index—the
Wilshire US Micro-Cap IndexSM (the ‘‘Index’’)—
did not meet the criteria set forth in Commentaries
.01(a)(A)(1) and .01(a)(A)(5) of NYSE Arca Rule 5.2–
E(j)(3) applicable to Units based on U.S. indexes or
portfolios. See Securities Exchange Act Release
Nos. 62737 (August 17, 2010), 75 FR 51863 (August
23, 2010) (SR–NYSEArca–2010–64) (Order
Approving Proposed Rule Change Relating to
Listing of the Wilshire Micro-Cap ETF) (‘‘Approval
Order’’); 62471 (July 8, 2010) (SR–NYSEArca–2010–
64) (Notice of Filing of Proposed Rule Change by
NYSE Arca, Inc. Relating to Listing of the Wilshire
Micro-Cap ETF) (the ‘‘Notice’’ and, together with
the Approval Order, the ‘‘Releases’’).
6 See Claymore Exchange-Traded Fund Trust’s
registration statement on Form N–1A, dated
December 29, 2017 (File Nos. 333–134551; 811–
21906).
E:\FR\FM\05MRN1.SGM
05MRN1
]]>Agencies
[Federal Register Volume 83, Number 43 (Monday, March 5, 2018)]
[Notices]
[Pages 9345-9347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-04338]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-82785; File No. SR-OCC-2017-011]
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Approving Proposed Rule Change Related to The Options Clearing
Corporation's Model Risk Management Policy
February 27, 2018.
I. Introduction
On December 28, 2017, The Options Clearing Corporation (``OCC'')
filed with the Securities and Exchange Commission (``Commission''),
pursuant to Section 19(b)(1) of the Securities and Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-
OCC-2017-011) to formalize and update OCC's Model Risk Management
Policy (``MRM Policy''). The proposed rule change was published for
comment in the Federal Register on January 16, 2018.\3\ The Commission
did not receive any comments regarding the proposed rule change. For
the reasons discussed below, the Commission is approving the proposed
rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 82473 (Jan. 9, 2018), 83
FR 2271 (Jan. 16, 2018) (SR-OCC-2017-011) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change \4\
---------------------------------------------------------------------------
\4\ 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.
---------------------------------------------------------------------------
OCC uses quantitative methods to make estimates, forecasts, and
projections.\5\ Specifically, OCC employs such methods in the context
of its credit risk models, margin system and related models, and
liquidity risk models.\6\ OCC refers to the use of such quantitative
methods in this context as Risk Models.\7\ OCC's use of models
inherently exposes OCC to model risk.\8\ Such risk includes the
consequences of decisions based on incorrect or misused model
outputs.\9\ The proposed MRM Policy will apply to all Risk Models that
OCC uses to determine, quantify, or measure actual or potential risk
exposures or risk mitigating actions.\10\
---------------------------------------------------------------------------
\5\ Notice, 83 FR at 2271, n. 6.
\6\ Id.
\7\ Id.
\8\ Notice, 83 FR at 2271.
\9\ Notice, 83 FR at 2271, n. 5.
\10\ Notice, 83 FR at 2271.
---------------------------------------------------------------------------
The MRM Policy details the general framework for OCC's model risk
management practices, including describing and outlining the roles and
responsibilities of OCC's Quantitative Risk Management department
(``QRM''), Model Validation Group (``MVG''), and Model Risk Working
Group (``MRWG'').\11\ The MRM Policy also addresses the roles of OCC's
Legal department, Management Committee (``MC'') and Board Risk
Committee (``RC'') in the review and approval of OCC's Risk Models.\12\
The proposed rule change would formalize and update OCC's MRM Policy.
---------------------------------------------------------------------------
\11\ Id.
\12\ Notice, 83 FR at 2272.
---------------------------------------------------------------------------
Under the MRM Policy, QRM will be responsible for developing,
implementing, and monitoring OCC's Risk Models.\13\ Regarding model
development, QRM will maintain documentation of the design, theory, and
logic of each Risk Model, including a description of the model, its
intended purpose, assumptions, supporting data, limitations, and other
details.\14\ As part of model implementation, QRM will review,
evaluate, and propose model changes, including model decommissioning,
make recommendations to the MRWG for approval of changes, and seek
review by the Legal department regarding the regulatory filing
requirements related to
[[Page 9346]]
proposed model changes.\15\ The MC will review, and as appropriate,
recommend model change proposals to the RC for review and, if
appropriate, to OCC's Board for final approval.\16\ Finally, QRM will
monitor the use and performance of Risk Models, and will report its
findings to the MRWG for potential escalation to the MC or RC as
necessary.\17\
---------------------------------------------------------------------------
\13\ Notice, 83 FR at 2272-73.
\14\ Notice, 83 FR at 2272.
\15\ Id.
\16\ Notice, 83 FR at 2273.
\17\ Id.
---------------------------------------------------------------------------
Under the MRM Policy, MVG will be responsible for maintaining an
inventory of OCC's Risk Models, and validating such models no less than
annually.\18\ Each model validation must include a review of the
model's performance, parameters, and assumptions.\19\ Such validations
must be independent, which is defined by the MRM Policy as an
evaluation performed by a qualified person who is free from influence
from the persons responsible for the development or operation of the
models being validated.\20\ Under the proposed MRM Policy, the MRWG is
responsible for assisting the MC to oversee and govern OCC's model-
related risk issues.\21\ Specifically, the MRM Policy requires MRWG to
provide, among other things, adequate support and legal expertise as it
relates to model risk.\22\
---------------------------------------------------------------------------
\18\ Id.
\19\ Id.
\20\ Notice, 83 FR at 2273, n. 15.
\21\ Notice, 83 FR at 2273.
\22\ Id.
---------------------------------------------------------------------------
Additionally, the MRM Policy provides arrangements governing
updates and exceptions to, as well as violations of, the MRM
Policy.\23\ Specifically, updates to the MRM Policy may be approved by
the RC upon recommendation from the MC. Exceptions to the MRM Policy
require written approval from OCC's Office of the Executive
Chairman.\24\ Finally, all violations of the MRM Policy must be
reported to OCC's Chief Compliance Officer.\25\
---------------------------------------------------------------------------
\23\ Notice, 83 FR at 2273-74.
\24\ Notice, 83 FR at 2274.
\25\ Id. Violations involving the Chief Compliance Officer must
be reported to the head of Internal Audit or a member of the Office
of the Executive Chairman.
---------------------------------------------------------------------------
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\26\ After carefully considering the proposed rule change,
the Commission finds the proposal is consistent with the requirements
of the Act and the rules and regulations thereunder applicable to OCC.
More specifically, the Commission finds that the proposal is consistent
with Section 17A(b)(3)(F) of the Act \27\ and Rules 17Ad-22(e)(2) \28\
17Ad-22(e)(4)(vii),\29\ 17Ad-22(e)(6)(vii),\30\ and 17Ad-22(e)(7)(vii)
\31\ thereunder.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78s(b)(2)(C).
\27\ 15 U.S.C. 78q-1(b)(3)(F).
\28\ 17 CFR 240.17Ad-22(e)(2).
\29\ 17 CFR 240.17Ad-22(e)(4)(vii).
\30\ 17 CFR 240.17Ad-22(e)(6)(vii).
\31\ 17 CFR 240.17Ad-22(e)(7)(vii).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires that the rules of a
registered clearing agency be designed to, among other things, assure
the safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible.\32\
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
As described above, the MRM Policy is designed to reduce the model
risk inherent in OCC's use of credit risk models, margin models, and
liquidity risk models. Such model risk includes the consequences of
decisions based on incorrect or misused model outputs. The Commission
believes that decisions based on incorrect or misused model outputs
could lead OCC to suffer credit losses or liquidity shortfalls arising
out of the default of a clearing member, and that such losses or
shortfalls could negatively affect the securities and funds that have
been posted by non-defaulting clearing members and are within OCC's
custody or control. For example, if an OCC risk model were to
underestimate the risks posed by a clearing member's positions, the
default of such a clearing member could cause OCC to face losses in
excess of the collateral collected from the defaulting clearing member.
Where OCC faces losses in excess of a defaulter's collateral, it may be
forced to cover such losses with the securities and funds posted as
collateral by non-defaulting clearing members.
The Commission believes that measures that reduce model risk may
allow OCC to better manage its credit and liquidity risk exposures by
more accurately estimating the collateral OCC must collect from its
clearing members to cover those risks. Such increased accuracy may, in
turn, help OCC avoid credit losses or liquidity shortfalls in excess of
collateral posted by a clearing member in the event of a default, and,
thus, avoid the need to use non-defaulting clearing members' collateral
to cover such losses or shortfalls. Therefore, because the
formalization of the MRM Policy would incorporate into OCC's rules
measures intended to reduce the likelihood that OCC would have to use
non-defaulting clearing members' collateral to manage a clearing member
default, the Commission finds that proposal is consistent with Section
17A(b)(3)(F) of the Act.\33\
---------------------------------------------------------------------------
\33\ Id.
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) under the Act requires, among other things, that
a covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent and specify
clear and direct lines of responsibility.\34\
---------------------------------------------------------------------------
\34\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
---------------------------------------------------------------------------
As described above, the MRM Policy provides for arrangements
governing updates and exceptions to, as well as violations of, the MRM
Policy. Such arrangements provide clarity to OCC staff regarding the
operation of the MRM Policy generally, and provide for unforeseen
circumstances requiring changes to OCC's practices. Because
formalization of the MRM Policy would incorporate into OCC's rules a
policy intended to provide such clarity, the Commission finds that the
proposal is consistent with Rule 17Ad-22(e)(2)(i).\35\
---------------------------------------------------------------------------
\35\ 17 CFR 240.17Ad-22(e)(2)(i).
---------------------------------------------------------------------------
As described above, the MRM Policy outlines the roles and
responsibilities of departments, a working group, and management and
board committees within the framework of OCC's model risk management
practices. The MRM Policy states that the Board has final authority to
approve changes to OCC's Risk Models. The MRM Policy also describes the
escalation path for issues arising out of routine performance
monitoring. The Commission believes that this aspect of the MRM Policy,
which defines approval authority and escalation processes within OCC's
governance structure, supports the specification of clear and direct
lines of responsibility, and, therefore, is consistent with Rule 17Ad-
22(e)(2)(v).\36\
---------------------------------------------------------------------------
\36\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------
C. Consistency With Rules 17Ad-22(e)(4)(vii), (e)(6)(vii) and 17Ad-
22(e)(7)(vii)
Rules 17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii) under the Act
require a covered clearing agency to establish, implement, maintain,
and enforce written policies and procedures
[[Page 9347]]
reasonably designed to, among other things, require the performance of
a model validation for its credit risk models, margin system and
related models, and liquidity risk models not less than annually, or
more frequently as may be contemplated by the covered clearing agency's
risk management framework established pursuant to Rule 17Ad-22(e)(3)
under the Act.\37\
---------------------------------------------------------------------------
\37\ 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and (e)(7)(vii).
The requirements of Rule 17Ad-22(e)(4) pertain to the effective
identification, measurement, monitoring, and management of credit
exposures. 17 CFR 240.17Ad-22(e)(4). The requirements of Rule 17Ad-
22(e)(6), which apply to a covered clearing agency that performs
central counterparty services, pertain to the covering of a covered
clearing agency's credit exposures to its participants. 17 CFR
240.17Ad-22(e)(6). The requirements of Rule 17Ad-22(e)(7) pertain to
the effective measurement, monitoring, and management of liquidity
risk. 17 CFR 240.17Ad-22(e)(7).
Rule 17Ad-22 defines model validation to mean an evaluation of
the performance of each material risk management model used by a
covered clearing agency (and the related parameters and assumptions
associated with such models), including initial margin models,
liquidity risk models, and models used to generate clearing or
guaranty fund requirements, performed by a qualified person who is
free from influence from the persons responsible for the development
or operation of the models or policies being validated. 17 CFR
240.17Ad-22(a)(9).
---------------------------------------------------------------------------
As described above, the MRM Policy provides for the annual
validation of OCC's Risk Models, which include credit risk, margin, and
liquidity risk models. Under the MRM Policy, a model validation must
include a review of the model's performance, parameters, and
assumptions. Further, the MRM Policy clarifies that each model
validation must be performed by a qualified person who is free from
influence from the persons responsible for the development or operation
of the models being validated. Therefore, because the Commission
believes that the MRM Policy requires the annual validations of the
performance, parameters, and assumptions of OCC's credit risk, margin,
and liquidity risk models, the Commission finds that the proposed rule
change is consistent with Rules 17Ad-22(e)(4)(vii), (e)(6)(vii), and
(e)(7)(vii).
IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A of the Act \38\
and the rules and regulations thereunder.
---------------------------------------------------------------------------
\38\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
It is therefore ordered pursuant to Section 19(b)(2) of the Act
\39\ that the proposed rule change (SR-OCC-2017-011) be, and hereby is,
approved.
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78s(b)(2).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\40\
---------------------------------------------------------------------------
\40\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-04338 Filed 3-2-18; 8:45 am]
BILLING CODE 8011-01-P
