Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Rules, ICC Risk Management Model Description Document, ICC Risk Management Framework, ICC Stress Testing Framework, and ICC Liquidity Risk Management Framework, 11570-11573 [2018-05295]

Download as PDF 11570 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Notices FOR FURTHER INFORMATION CONTACT: SECURITIES AND EXCHANGE COMMISSION Elizabeth A. Reed, 202–268–3179. The United States Postal Service® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on March 9, 2018, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail Contract 424 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2018–130, CP2018–180. [Release No. 34–82853; File No. SR–ICC– 2018–001] Elizabeth A. Reed, Attorney, Corporate and Postal Business Law. March 12, 2018. SUPPLEMENTARY INFORMATION: [FR Doc. 2018–05224 Filed 3–14–18; 8:45 am] BILLING CODE 7710–12–P POSTAL SERVICE Product Change—Priority Mail Express and Priority Mail Negotiated Service Agreement AGENCY: ACTION: Postal Service TM. Notice. The Postal Service gives notice of filing a request with the Postal Regulatory Commission to add a domestic shipping services contract to the list of Negotiated Service Agreements in the Mail Classification Schedule’s Competitive Products List. SUMMARY: Date of required notice: March 15, 2018. DATES: FOR FURTHER INFORMATION CONTACT: Elizabeth A. Reed, 202–268–3179. The United States Postal Service ® hereby gives notice that, pursuant to 39 U.S.C. 3642 and 3632(b)(3), on March 9, 2018, it filed with the Postal Regulatory Commission a USPS Request to Add Priority Mail Express & Priority Mail Contract 62 to Competitive Product List. Documents are available at www.prc.gov, Docket Nos. MC2018–129, CP2018–179. SUPPLEMENTARY INFORMATION: Elizabeth A. Reed, Attorney, Corporate and Postal Business Law. [FR Doc. 2018–05223 Filed 3–14–18; 8:45 am] sradovich on DSK3GMQ082PROD with NOTICES BILLING CODE 7710–12–P Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Rules, ICC Risk Management Model Description Document, ICC Risk Management Framework, ICC Stress Testing Framework, and ICC Liquidity Risk Management Framework I. Introduction On January 16, 2018, ICE Clear Credit LLC (‘‘ICC’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 a proposed rule change (SR–ICC–2018–001) to revise: (i) ICC’s Clearing Rules to support the clearing of a new transaction type; and (ii) the ICC Risk Management Model Description Document, the ICC Risk Management Framework, the ICC Stress Testing Framework, and the ICC Liquidity Risk Management Framework to incorporate certain modifications to its risk management methodology.3 The proposed rule change was published for comment in the Federal Register on January 26, 2018.4 The Commission did not receive comments on the proposed rule change. For the reasons discussed below, the Commission is approving the proposed rule change. II. Description of the Proposed Rule Change ICC proposed revisions to its Rules, Risk Management Model Description Document, Risk Management Framework, Stress Testing Framework, and Liquidity Risk Management Framework in order to provide for the clearing of a new transaction type, the Standard European Senior NonPreferred Financial Corporate, and to provide for revised risk management practices. A. Changes to ICC Rules ICC proposed amending Rule 26H– 102, which sets forth the List of Eligible Standard European Financial Corporate (‘‘STEFC’’) Reference Entities, to 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Capitalized terms used in this order, but not defined herein, have the same meaning as in the ICC Clearing Rules. 4 Securities Exchange Act Release No. 34–82542 (January 19, 2018), 83 FR 3821 (January 26, 2018) (SR–ICC–2018–001) (‘‘Notice’’). 2 17 VerDate Sep<11>2014 17:34 Mar 14, 2018 Jkt 244001 PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 include the Standard European Senior Non-Preferred Financial Corporate transaction type as an Eligible STEFC Reference Entity to be cleared by ICC.5 ICC also proposed amending Rule 26H–102 to state that for a STEFC Reference Entity where the transaction type is the Standard European Senior Non-Preferred Financial Corporate, the STEFC Contracts Reference Obligation shall be determined in accordance with the Additional Provisions for Senior Non-Preferred Reference Obligations as published by the International Swaps and Derivatives Association. In addition, ICC proposed to incorporate certain conforming changes to Rule 26H–303 and Rule 26H–315 to add references to the new transaction type.6 B. Changes to ICC Risk Management Methodology As currently constructed, ICC’s risk management methodology takes into consideration the potential losses associated with idiosyncratic credit events, which ICC refers to as ‘‘LossGiven Default’’ or ‘‘LGD.’’ ICC deems each Single Name (‘‘SN’’) reference entity a Risk Factor, and each combination of definition, doc-clause, tier, and currency for a given SN Risk Factor as a SN Risk Sub-Factor. ICC currently measures losses associated with credit events through a stressbased approach incorporating three recovery rate scenarios: A minimum recovery rate, an expected recovery rate, and maximum recovery rate. ICC combines exposures for Outright and index-derived Risk Sub-Factors at each recovery rate scenario.7 ICC currently uses the results from the recovery rate scenarios as an input into the Profit/Loss-Given-Default (‘‘P/LGD’’) calculations at both the Risk Sub-Factor and Risk Factor levels. For each Risk Sub-Factor, ICC calculates the P/LGD as the worst credit event outcome, and for each Risk Factor, ICC calculates the P/ LGD as the sum of the worst credit outcomes per Risk Sub-Factor. These final P/LGD results are used as part of the determination of risk requirements.8 ICC proposed changes to its LGD framework at the Risk Factor level with respect to the LGD calculation. Specifically, ICC proposed a change to its approach by incorporating more consistency in the calculation of the P/ LGD by using the same recovery rate scenarios applied to the different Risk Sub-Factors which are part of the considered Risk Factor. For each Risk 5 Notice, 82 FR at 3821. 6 Id. 7 Id. 8 Id. E:\FR\FM\15MRN1.SGM 15MRN1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Notices Factor, ICC would continue to calculate an ‘‘extreme outcome’’ as the sum of the worst Risk Sub-Factor P/LGDs across all scenarios and would also, for each Risk Factor, calculate an ‘‘expected outcome’’ as the worst sum of all the Risk SubFactors P/LGDs across all of the same scenarios. Under the proposed changes, ICC would then combine the results of the ‘‘extreme outcome’’ calculation and the ‘‘expected outcome’’ calculation to compute the total LGD for each Risk Factor.9 ICC proposed to apply a weight of 25% to the extreme outcome component in order to implement certain requirements of relevant regulatory technical standards arising under the European Market Infrastructure Regulation.10 ICC also proposed to expand its LGD analysis to incorporate a new ‘‘Risk Factor Group’’ level. Under the proposed changes, a set of related Risk Factors would form a Risk Factor Group based on either (1) having a common majority parental sovereign ownership (e.g. quasi-sovereigns and sovereigns), or (2) being a majority owned subsidiary of a common parent entity according to the Bloomberg Related Securities Analysis. ICC noted that a Risk Factor Group could consist of only one Risk Factor.11 Under the proposed revisions, ICC would calculate the total quantity LGD on a Risk Factor Group level, and account for the exposure due to credit events associated with the reference entities within a given Risk Factor Group. Where a Risk Factor Group contains only one Risk Factor, ICC would compute the LGD as the risk exposure due to a credit event for a given underlying reference entity. Moreover, under the proposed approach, ICC would sum the P/LGDs for each Risk Factor in a given Risk Factor Group, with limited offsets in the event the Risk Factors exhibit positive P/LGD. Using the results of the above calculation, ICC would obtain the Risk Factor Group level LGD. The proposed approach would also include a calculation which allows for the Risk Factor Group level LGD to be attributed to each Risk Factor within the considered Risk Factor Group.12 9 Id. at 3821–22. Commission Delegated Regulation (EU) No 153/2013 supplementing Regulation (EU) No 648/ 2012 of the European Parliament and of the Council with regard to regulatory technical standards on requirements for central counterparties. As a thirdcountry central counterparty recognized by the European Securities and Markets Authority, ICC is subject to the requirements of the European Market Infrastructure Regulation and associated regulatory technical standards. 11 Notice, 82 FR at 3822. 12 Id. sradovich on DSK3GMQ082PROD with NOTICES 10 See VerDate Sep<11>2014 17:34 Mar 14, 2018 Jkt 244001 In addition to these changes, ICC also proposed changes to various components of its Risk Management Model Description Document. Specifically, the ‘‘Loss Given Default Risk Analysis’’ section of its Risk Management Model Description Document would be changed to incorporate the Risk Factor and Risk Factor Group LGD calculation changes described above. ICC also proposed certain conforming changes to other sections of the Risk Management Description Document to incorporate these methodology changes and reflect the Risk Factor Group analysis.13 ICC also proposed further changes with respect to the ‘Idiosyncratic Jumpto-Default Requirements’ section of the Risk Management Model Description document. As currently constructed, the portfolio jump-to-default approach collateralizes the worst uncollateralized LGD (‘‘ULGD’’) exposure among all Risk Factors. Under the proposed changes, the portfolio Jump-to-Default (‘‘JTD’’) approach will collateralize, through the portfolio JTD initial margin requirement that accounts for the Risk Factor Groupspecific LGD collateralization, the worst ULGD exposure among all Risk Factor Groups. The ULGD exposure for a given Risk Factor Group would be calculated as a sum of the associated Risk Factor ULGDs.14 ICC also proposed certain minor edits to the ‘‘Portfolio Level Wrong-Way Risk and Contagion Risk Analysis’’ section to update language and calculation descriptions to accommodate the introduction of the Risk Factor Group to the ‘‘Idiosyncratic Jump-to-Default Requirements’’ section.15 In addition, ICC proposed changes to the ‘‘Guaranty Fund Methodology’’ section. ICC’s current Guaranty Fund Methodology includes, among other things, the assumption that up to three credit events, different from the ones associated with Clearing Participants, occur during the considered risk horizon. ICC proposed expanding this approach to the Risk Factor Group level by assuming that credit events associated with up to three Risk Factor Groups, different from the ones associated with the Clearing Participants and the Risk Factors that are in the Risk Factor Groups as the Clearing Participants, occur during the considered risk horizon.16 Other proposed changes to the Risk Management Model Description Document included clarifications to the calculation for the Specific Wrong Way Risk component of the Guaranty Fund. Currently, for a given Clearing Participant, the Specific Wrong Way Risk component of the Guaranty Fund is based on self-referencing positions arising from one or more Risk Factors. ICC proposed clarifying this approach to be based on the Risk Factor Group level instead.17 ICC proposed certain conforming changes to its Risk Management Framework, Liquidity Risk Management Framework, and Stress Testing Framework, to reflect the LGD enhancements described above. With respect to the Risk Management Framework, ICC proposed revisions to the ‘‘Jump-to-Default Requirements’’ section to note that the worst LGD associated with a Risk Factor Group is selected to establish the portfolio idiosyncratic JTD requirement. ICC also proposed revisions to the ‘‘Guaranty Fund’’ section of the Risk Management Framework to reflect the Risk Factor Group LGD enhancements related to ICC’s Guaranty Fund calculation.18 Regarding its Stress Testing Framework, ICC proposed changes to its stress testing methodology to incorporate reference entity group level changes (also referred to by ICC as the Risk Factor Group level). Currently, ICC utilizes scenarios based on hypothetically constructed (forward looking) extreme but plausible market scenarios augmented with adverse credit events affecting up to two additional reference entities per Clearing Participant affiliate group. ICC proposed expanding its adverse credit event analysis to include up to two additional reference entity groups, and also proposed that the selected Risk Factor Group for stress testing purposes must contain one or more reference entities displaying a 500 bps or greater 1-year end-of-day spread level in order to be subjected to credit events. ICC also proposed changes to its reverse stress testing, general wrong way risk, and contagion stress testing analyses, to be at the Risk Factor Group level, and proposed removing Risk Factor level references under its Recovery Rate Sensitivity analysis to be consistent with the proposed changes related to Risk Factor Groups.19 Finally, with respect to ICC’s Liquidity Risk Management Framework, ICC proposed changes to base the liquidity stress testing methodology on the reference entity group level (also referred to as the Risk Factor Group 13 Id. 14 Id. 17 Id. 15 Id. 18 Id. 16 Id. 19 Id. PO 00000 Frm 00084 Fmt 4703 Sfmt 4703 11571 E:\FR\FM\15MRN1.SGM 15MRN1 11572 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Notices level). Currently, ICC utilizes scenarios based on hypothetically constructed (forward looking) extreme but plausible market scenarios augmented with adverse credit events affecting up to two additional reference entities per Clearing Participant affiliate group. ICC proposed expanding its adverse credit event analysis to include up to two additional reference entity groups. Similar to the Stress Testing Framework, ICC also proposed that the selected Risk Factor Group for liquidity stress testing purposes must contain one or more reference entities displaying a 500 bps or greater 1-year end-of-day spread level in order to be subjected to credit events. ICC also proposed adding additional language to the Liquidity Risk Management Framework detailing the rationale behind the selection of the 500 bps threshold to be consistent with its Stress Testing Framework.20 sradovich on DSK3GMQ082PROD with NOTICES 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.21 For the reasons given below, the Commission finds that the proposal is consistent with Section 17A(b)(3)(F) of the Act, and Rules 17Ad-22(b)(2) and (b)(3). A. Consistency With Section 17A(b)(3)(F) of the Act Section 17A(b)(3)(F) of the Act requires, among other things, that the rules of a registered clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, to assure the safeguarding of securities and funds which are 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.22 The proposed rule change will provide for the clearance and settlement of the Standard European Senior NonPreferred Financial Corporate, a new type of transaction that is similar to contracts already cleared by ICC. Separately, as described above, the proposed rule change would also provide for certain revisions to ICC’s risk management methodology with 20 Id. 21 15 22 15 U.S.C. 78s(b)(2)(C). U.S.C. 78q–1(b)(3)(F). VerDate Sep<11>2014 17:34 Mar 14, 2018 respect to ICC’s LGD methodology. These changes entail (i) incorporating a more consistent approach with respect to ICC’s recovery rate scenarios through the application of the same recovery rate scenarios to risk factors that form part of the same Risk Factor Group, (ii) combining the results of the ‘‘expected’’ and ‘‘extreme’’ P/LGD outcomes in order to calculate the total LGD for each Risk Factor, (iii) expanding ICC’s LGD analysis to a new Risk Factor Group level, (iv) revising the calculation of the Uncollateralized Loss Given Default to incorporate the Risk Factor Group level LGD approach, and (v) modifying ICC’s Guaranty Fund Methodology to expand the credit event analysis to include the Risk Factor Group approach. Based on a review of the Notice, the Commission believes that the Standard European Senior Non-Preferred Financial Corporate transaction type is substantially similar to other contracts cleared by ICC. As such, the Commission believes that ICC’s existing clearing arrangements, and related financial safeguards (including as further modified by the proposed rule change), protections and risk management procedures will apply to this new product on a substantially similar basis to the other contracts currently cleared by ICC. Moreover, the Commission believes that the proposed changes to ICC’s risk management framework described above will enhance the manner by which ICC considers and manages the risks particular to the range of contracts it clears, including the new Standard European Senior Non-Preferred Financial Corporate contract, because such changes will enable ICC’s ability to more accurately consider the particular risks of each type of security-based swap (‘‘SBS’’) product it clears. Therefore, the Commission finds that the proposed rule change is intended to promote the prompt and accurate clearance and settlement of securities transactions and derivatives agreements, contracts, and transactions, as well as to assure the safeguarding of securities and funds which are 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, and is therefore consistent with Section 17A(b)(3)(F) of the Act.23 B. Consistency With Rule 17Ad–22(b)(2) The Commission further finds that the proposed rule change is consistent with Rule 17Ad–22(b)(2). Rule 17Ad–22(b)(2) requires, in relevant part, a registered clearing agency that performs central counterparty services to establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit the registered clearing agency’s credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements.24 As described above, the proposed changes would (i) amend the manner in which ICC calculates its Risk Factor-level LGD, (ii) expand the LGD analysis to the Risk Factor Group level, and (iii) amend the approach to calculating the Uncollateralized LGD to incorporate the Risk Factor Group level approach. Specifically, ICC would calculate, for each Risk Factor, an extreme outcome as the sum of the worst Risk Sub-factor P/LGDs across all scenarios, and an expected outcome as the worst sum of all Risk Sub-factor P/ LGDs using the same scenarios, and then add the two components to determine the total LGD for each Risk Factor. The LGD analysis would also be modified to group individual Risk Factors into Risk Factor Groups, and would result in the total LGD being the sum of the P/LGDs for each Risk Factor within the Risk Factor Group. The Commission believes that by making these changes, ICC will augment its ability to more accurately consider the risks associated with the SBS products it clears, including the Standard European Senior Non-Preferred Financial Corporate transaction type. As a result, the Commission believes that the proposed rule changes will enable ICC to more accurately determine and collect the amount of resources necessary to limit its credit exposures under normal market conditions, including credit exposures resulting from clearing the new transaction type, through the use of risk-based models. Therefore the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(b)(2).25 C. Consistency With Rule 17Ad–22(b)(3) The Commission further finds that the proposed rule change is consistent with Rule 17Ad–22(b)(3). Rule 17Ad–22(b)(3) requires, in relevant part, a registered clearing agency that performs central counterparty services for SBS to establish, implement, maintain and enforce written policies and procedures that are reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the two participant families to which it 24 17 23 Id. Jkt 244001 PO 00000 Frm 00085 CFR 240.17Ad–22(b)(2). 25 Id. Fmt 4703 Sfmt 4703 E:\FR\FM\15MRN1.SGM 15MRN1 Federal Register / Vol. 83, No. 51 / Thursday, March 15, 2018 / Notices has the largest exposures in extreme but plausible market conditions.26 As described above, the proposed rule change would amend certain assumptions in ICC’s Guaranty Fund Methodology, and the calculation of the Specific Wrong Way Risk component, by incorporating the new Risk Factor Group level analysis. Specifically, ICC would expand its current approach to assume that credit events used in the guaranty fund analysis occur at the Risk Factor Group level, and would also base the specific wrong-way risk component of its guaranty fund methodology on the Risk Factor Group approach. As with the changes to the LGD approach, the Commission believes that the proposed changes to ICC’s Guaranty Fund Methodology will permit ICC to consider the particular risks associated with the products it clears, including the Standard European Senior NonPreferred Financial Corporate transaction type that will be cleared as a result of the proposed changes to ICC’s Rules described above. As a result, the Commission believes that the proposed changes will enable ICC’s to more accurately measure the risks of associated with the products it clears and thereby improve ICC’s ability to collect and maintain the level of financial resources necessary to address the risk of default by its participants. Therefore, the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(b)(3).27 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,28 and Rules 17Ad–22(b)(2) and (3) thereunder.29 It is therefore ordered pursuant to Section 19(b)(2) of the Act 30 that the proposed rule change (SR–ICC–2018– 001) be, and hereby is, approved.31 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.32 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–05295 Filed 3–14–18; 8:45 am] sradovich on DSK3GMQ082PROD with NOTICES BILLING CODE 8011–01–P 26 17 CFR 240.17Ad–22(b)(3). 27 Id. 28 15 U.S.C. 78q–1. CFR 240.17Ad–22(b)(2) and (3). 30 15 U.S.C. 78s(b)(2). 31 In approving the proposed rule change, the Commission considered the proposal’s impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 32 17 CFR 200.30–3(a)(12). 29 17 VerDate Sep<11>2014 17:34 Mar 14, 2018 Jkt 244001 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82852; File No. SR– NYSEAMER–2018–09] Self-Regulatory Organizations; NYSE American LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Rule 915 March 9, 2018. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’),2 and Rule 19b–4 thereunder,3 notice is hereby given that on March 6, 2018, NYSE American LLC (the ‘‘Exchange’’ or ‘‘NYSE American’’) filed with the Securities and Exchange Commission (the ‘‘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 the Substance of the Proposed Rule Change The Exchange proposes to amend Rule 915 (Criteria for Underlying Securities). 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 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 Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to amend Rule 915 to modify the criteria for listing options on an underlying security as defined in Section 18(b)(1)(A) of the Securities Act 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 2 15 PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 11573 of 1933 (each a ‘‘covered security’’; collectively, ‘‘covered securities’’). In particular, the Exchange proposes to modify Rule 915, Commentary .01(4)(a), which currently requires that to list an option, the underlying covered security has to have a market price of at least $3.00 per share for the previous five consecutive business days preceding the date on which the Exchange submits a certificate to the Options Clearing Corporation (‘‘OCC’’) for listing and trading. The proposal would shorten the current ‘‘look back’’ period of five consecutive business days to three consecutive business days.4 The Exchange does not intend to amend any other criteria in Rule 915 and the accompanying Commentary to list an option on the Exchange. This proposed rule change is substantively identical to a recently-approved rule change by Nasdaq PHLX LLC (‘‘Phlx’’),5 and would align Exchange listing rules with those of other options markets. The Exchange acknowledges that the Options Listing Procedures Plan (‘‘OLPP’’) 6 requires that the listing certificate be provided to OCC no earlier than 12:01 a.m. and no later than 11:00 a.m. (Chicago time) on the trading day prior to the day on which trading is to begin.7 The proposed amendment would still comport with that requirement. For example, if an initial public offering (‘‘IPO’’) occurs at 11 a.m. on Monday, the earliest date the Exchange could submit its listing certificate to OCC would be on Thursday by 12:01 a.m. (Chicago time), with the market price determined by the closing price over the three-day period 4 See proposed Rule 915, Commentary .01(4)(a) (providing that the market price per share of an covered security is ‘‘at least $3.00 for the previous three consecutive business days preceding the date on which the Exchange submits a certificate to [the OCC] for listing and trading, as measured by the closing price reported in the primary market in which the underlying security is traded’’). 5 See Securities Exchange Act Release No. 82474 (January 9, 2018), 83 FR 2240 (January 16, 2018) (SR–Phlx–2017–75) (Order approving amendment to Rule 1009 to modify the criteria for listing an option on an underlying covered security). 6 The OLPP (a/k/a the Plan for the Purpose of Developing and Implementing Procedures Designed to Facilitate the Listing and Trading of Standardized Options Submitted Pursuant to Section 11a(2)(3)(B) of the Securities Exchange Act of 1934) is a national market system plan that, among other things, sets forth procedures governing the listing of new options series. See Securities Exchange Act Release No. 44521 (July 6, 2001), 66 FR 36809 (July 13, 2001) (Order approving OLPP). The sponsors of OLPP include the Exchange; OCC; BATS Exchange, Inc.; BOX Options Exchange LLC; C2 Options Exchange, Inc.; Chicago Board Options Exchange, Inc.; EDGX Exchange, Inc.; Miami International Securities Exchange, LLC; MIAX PEARL, LLC; Phlx; Nasdaq BX, Inc.; Nasdaq GEMX, LLC; Nasdaq ISE, LLC; Nasdaq MRX, LLC; and NYSE Arca, Inc. 7 See OLPP at page 3. E:\FR\FM\15MRN1.SGM 15MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 83, Number 51 (Thursday, March 15, 2018)]
[Notices]
[Pages 11570-11573]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-05295]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82853; File No. SR-ICC-2018-001]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Rules, ICC Risk 
Management Model Description Document, ICC Risk Management Framework, 
ICC Stress Testing Framework, and ICC Liquidity Risk Management 
Framework

March 12, 2018.

I. Introduction

    On January 16, 2018, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change (SR-ICC-2018-001) 
to revise: (i) ICC's Clearing Rules to support the clearing of a new 
transaction type; and (ii) the ICC Risk Management Model Description 
Document, the ICC Risk Management Framework, the ICC Stress Testing 
Framework, and the ICC Liquidity Risk Management Framework to 
incorporate certain modifications to its risk management 
methodology.\3\ The proposed rule change was published for comment in 
the Federal Register on January 26, 2018.\4\ The Commission did not 
receive comments on 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\ Capitalized terms used in this order, but not defined 
herein, have the same meaning as in the ICC Clearing Rules.
    \4\ Securities Exchange Act Release No. 34-82542 (January 19, 
2018), 83 FR 3821 (January 26, 2018) (SR-ICC-2018-001) (``Notice'').
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II. Description of the Proposed Rule Change

    ICC proposed revisions to its Rules, Risk Management Model 
Description Document, Risk Management Framework, Stress Testing 
Framework, and Liquidity Risk Management Framework in order to provide 
for the clearing of a new transaction type, the Standard European 
Senior Non-Preferred Financial Corporate, and to provide for revised 
risk management practices.

A. Changes to ICC Rules

    ICC proposed amending Rule 26H-102, which sets forth the List of 
Eligible Standard European Financial Corporate (``STEFC'') Reference 
Entities, to include the Standard European Senior Non-Preferred 
Financial Corporate transaction type as an Eligible STEFC Reference 
Entity to be cleared by ICC.\5\
---------------------------------------------------------------------------

    \5\ Notice, 82 FR at 3821.
---------------------------------------------------------------------------

    ICC also proposed amending Rule 26H-102 to state that for a STEFC 
Reference Entity where the transaction type is the Standard European 
Senior Non-Preferred Financial Corporate, the STEFC Contracts Reference 
Obligation shall be determined in accordance with the Additional 
Provisions for Senior Non-Preferred Reference Obligations as published 
by the International Swaps and Derivatives Association. In addition, 
ICC proposed to incorporate certain conforming changes to Rule 26H-303 
and Rule 26H-315 to add references to the new transaction type.\6\
---------------------------------------------------------------------------

    \6\ Id.
---------------------------------------------------------------------------

B. Changes to ICC Risk Management Methodology

    As currently constructed, ICC's risk management methodology takes 
into consideration the potential losses associated with idiosyncratic 
credit events, which ICC refers to as ``Loss-Given Default'' or 
``LGD.'' ICC deems each Single Name (``SN'') reference entity a Risk 
Factor, and each combination of definition, doc-clause, tier, and 
currency for a given SN Risk Factor as a SN Risk Sub-Factor. ICC 
currently measures losses associated with credit events through a 
stress-based approach incorporating three recovery rate scenarios: A 
minimum recovery rate, an expected recovery rate, and maximum recovery 
rate. ICC combines exposures for Outright and index-derived Risk Sub-
Factors at each recovery rate scenario.\7\
---------------------------------------------------------------------------

    \7\ Id.
---------------------------------------------------------------------------

    ICC currently uses the results from the recovery rate scenarios as 
an input into the Profit/Loss-Given-Default (``P/LGD'') calculations at 
both the Risk Sub-Factor and Risk Factor levels. For each Risk Sub-
Factor, ICC calculates the P/LGD as the worst credit event outcome, and 
for each Risk Factor, ICC calculates the P/LGD as the sum of the worst 
credit outcomes per Risk Sub-Factor. These final P/LGD results are used 
as part of the determination of risk requirements.\8\
---------------------------------------------------------------------------

    \8\ Id.
---------------------------------------------------------------------------

    ICC proposed changes to its LGD framework at the Risk Factor level 
with respect to the LGD calculation. Specifically, ICC proposed a 
change to its approach by incorporating more consistency in the 
calculation of the P/LGD by using the same recovery rate scenarios 
applied to the different Risk Sub-Factors which are part of the 
considered Risk Factor. For each Risk

[[Page 11571]]

Factor, ICC would continue to calculate an ``extreme outcome'' as the 
sum of the worst Risk Sub-Factor P/LGDs across all scenarios and would 
also, for each Risk Factor, calculate an ``expected outcome'' as the 
worst sum of all the Risk Sub-Factors P/LGDs across all of the same 
scenarios. Under the proposed changes, ICC would then combine the 
results of the ``extreme outcome'' calculation and the ``expected 
outcome'' calculation to compute the total LGD for each Risk Factor.\9\ 
ICC proposed to apply a weight of 25% to the extreme outcome component 
in order to implement certain requirements of relevant regulatory 
technical standards arising under the European Market Infrastructure 
Regulation.\10\
---------------------------------------------------------------------------

    \9\ Id. at 3821-22.
    \10\ See Commission Delegated Regulation (EU) No 153/2013 
supplementing Regulation (EU) No 648/2012 of the European Parliament 
and of the Council with regard to regulatory technical standards on 
requirements for central counterparties. As a third-country central 
counterparty recognized by the European Securities and Markets 
Authority, ICC is subject to the requirements of the European Market 
Infrastructure Regulation and associated regulatory technical 
standards.
---------------------------------------------------------------------------

    ICC also proposed to expand its LGD analysis to incorporate a new 
``Risk Factor Group'' level. Under the proposed changes, a set of 
related Risk Factors would form a Risk Factor Group based on either (1) 
having a common majority parental sovereign ownership (e.g. quasi-
sovereigns and sovereigns), or (2) being a majority owned subsidiary of 
a common parent entity according to the Bloomberg Related Securities 
Analysis. ICC noted that a Risk Factor Group could consist of only one 
Risk Factor.\11\
---------------------------------------------------------------------------

    \11\ Notice, 82 FR at 3822.
---------------------------------------------------------------------------

    Under the proposed revisions, ICC would calculate the total 
quantity LGD on a Risk Factor Group level, and account for the exposure 
due to credit events associated with the reference entities within a 
given Risk Factor Group. Where a Risk Factor Group contains only one 
Risk Factor, ICC would compute the LGD as the risk exposure due to a 
credit event for a given underlying reference entity. Moreover, under 
the proposed approach, ICC would sum the P/LGDs for each Risk Factor in 
a given Risk Factor Group, with limited offsets in the event the Risk 
Factors exhibit positive P/LGD. Using the results of the above 
calculation, ICC would obtain the Risk Factor Group level LGD. The 
proposed approach would also include a calculation which allows for the 
Risk Factor Group level LGD to be attributed to each Risk Factor within 
the considered Risk Factor Group.\12\
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    In addition to these changes, ICC also proposed changes to various 
components of its Risk Management Model Description Document. 
Specifically, the ``Loss Given Default Risk Analysis'' section of its 
Risk Management Model Description Document would be changed to 
incorporate the Risk Factor and Risk Factor Group LGD calculation 
changes described above. ICC also proposed certain conforming changes 
to other sections of the Risk Management Description Document to 
incorporate these methodology changes and reflect the Risk Factor Group 
analysis.\13\
---------------------------------------------------------------------------

    \13\ Id.
---------------------------------------------------------------------------

    ICC also proposed further changes with respect to the 
`Idiosyncratic Jump-to-Default Requirements' section of the Risk 
Management Model Description document. As currently constructed, the 
portfolio jump-to-default approach collateralizes the worst 
uncollateralized LGD (``ULGD'') exposure among all Risk Factors. Under 
the proposed changes, the portfolio Jump-to-Default (``JTD'') approach 
will collateralize, through the portfolio JTD initial margin 
requirement that accounts for the Risk Factor Group-specific LGD 
collateralization, the worst ULGD exposure among all Risk Factor 
Groups. The ULGD exposure for a given Risk Factor Group would be 
calculated as a sum of the associated Risk Factor ULGDs.\14\
---------------------------------------------------------------------------

    \14\ Id.
---------------------------------------------------------------------------

    ICC also proposed certain minor edits to the ``Portfolio Level 
Wrong-Way Risk and Contagion Risk Analysis'' section to update language 
and calculation descriptions to accommodate the introduction of the 
Risk Factor Group to the ``Idiosyncratic Jump-to-Default Requirements'' 
section.\15\
---------------------------------------------------------------------------

    \15\ Id.
---------------------------------------------------------------------------

    In addition, ICC proposed changes to the ``Guaranty Fund 
Methodology'' section. ICC's current Guaranty Fund Methodology 
includes, among other things, the assumption that up to three credit 
events, different from the ones associated with Clearing Participants, 
occur during the considered risk horizon. ICC proposed expanding this 
approach to the Risk Factor Group level by assuming that credit events 
associated with up to three Risk Factor Groups, different from the ones 
associated with the Clearing Participants and the Risk Factors that are 
in the Risk Factor Groups as the Clearing Participants, occur during 
the considered risk horizon.\16\
---------------------------------------------------------------------------

    \16\ Id.
---------------------------------------------------------------------------

    Other proposed changes to the Risk Management Model Description 
Document included clarifications to the calculation for the Specific 
Wrong Way Risk component of the Guaranty Fund. Currently, for a given 
Clearing Participant, the Specific Wrong Way Risk component of the 
Guaranty Fund is based on self-referencing positions arising from one 
or more Risk Factors. ICC proposed clarifying this approach to be based 
on the Risk Factor Group level instead.\17\
---------------------------------------------------------------------------

    \17\ Id.
---------------------------------------------------------------------------

    ICC proposed certain conforming changes to its Risk Management 
Framework, Liquidity Risk Management Framework, and Stress Testing 
Framework, to reflect the LGD enhancements described above. With 
respect to the Risk Management Framework, ICC proposed revisions to the 
``Jump-to-Default Requirements'' section to note that the worst LGD 
associated with a Risk Factor Group is selected to establish the 
portfolio idiosyncratic JTD requirement. ICC also proposed revisions to 
the ``Guaranty Fund'' section of the Risk Management Framework to 
reflect the Risk Factor Group LGD enhancements related to ICC's 
Guaranty Fund calculation.\18\
---------------------------------------------------------------------------

    \18\ Id.
---------------------------------------------------------------------------

    Regarding its Stress Testing Framework, ICC proposed changes to its 
stress testing methodology to incorporate reference entity group level 
changes (also referred to by ICC as the Risk Factor Group level). 
Currently, ICC utilizes scenarios based on hypothetically constructed 
(forward looking) extreme but plausible market scenarios augmented with 
adverse credit events affecting up to two additional reference entities 
per Clearing Participant affiliate group. ICC proposed expanding its 
adverse credit event analysis to include up to two additional reference 
entity groups, and also proposed that the selected Risk Factor Group 
for stress testing purposes must contain one or more reference entities 
displaying a 500 bps or greater 1-year end-of-day spread level in order 
to be subjected to credit events. ICC also proposed changes to its 
reverse stress testing, general wrong way risk, and contagion stress 
testing analyses, to be at the Risk Factor Group level, and proposed 
removing Risk Factor level references under its Recovery Rate 
Sensitivity analysis to be consistent with the proposed changes related 
to Risk Factor Groups.\19\
---------------------------------------------------------------------------

    \19\ Id.
---------------------------------------------------------------------------

    Finally, with respect to ICC's Liquidity Risk Management Framework, 
ICC proposed changes to base the liquidity stress testing methodology 
on the reference entity group level (also referred to as the Risk 
Factor Group

[[Page 11572]]

level). Currently, ICC utilizes scenarios based on hypothetically 
constructed (forward looking) extreme but plausible market scenarios 
augmented with adverse credit events affecting up to two additional 
reference entities per Clearing Participant affiliate group. ICC 
proposed expanding its adverse credit event analysis to include up to 
two additional reference entity groups. Similar to the Stress Testing 
Framework, ICC also proposed that the selected Risk Factor Group for 
liquidity stress testing purposes must contain one or more reference 
entities displaying a 500 bps or greater 1-year end-of-day spread level 
in order to be subjected to credit events. ICC also proposed adding 
additional language to the Liquidity Risk Management Framework 
detailing the rationale behind the selection of the 500 bps threshold 
to be consistent with its Stress Testing Framework.\20\
---------------------------------------------------------------------------

    \20\ Id.
---------------------------------------------------------------------------

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.\21\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act, 
and Rules 17Ad-22(b)(2) and (b)(3).
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a registered clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds which 
are 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.\22\ The proposed rule change will provide for the clearance 
and settlement of the Standard European Senior Non-Preferred Financial 
Corporate, a new type of transaction that is similar to contracts 
already cleared by ICC.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Separately, as described above, the proposed rule change would also 
provide for certain revisions to ICC's risk management methodology with 
respect to ICC's LGD methodology. These changes entail (i) 
incorporating a more consistent approach with respect to ICC's recovery 
rate scenarios through the application of the same recovery rate 
scenarios to risk factors that form part of the same Risk Factor Group, 
(ii) combining the results of the ``expected'' and ``extreme'' P/LGD 
outcomes in order to calculate the total LGD for each Risk Factor, 
(iii) expanding ICC's LGD analysis to a new Risk Factor Group level, 
(iv) revising the calculation of the Uncollateralized Loss Given 
Default to incorporate the Risk Factor Group level LGD approach, and 
(v) modifying ICC's Guaranty Fund Methodology to expand the credit 
event analysis to include the Risk Factor Group approach.
    Based on a review of the Notice, the Commission believes that the 
Standard European Senior Non-Preferred Financial Corporate transaction 
type is substantially similar to other contracts cleared by ICC. As 
such, the Commission believes that ICC's existing clearing 
arrangements, and related financial safeguards (including as further 
modified by the proposed rule change), protections and risk management 
procedures will apply to this new product on a substantially similar 
basis to the other contracts currently cleared by ICC.
    Moreover, the Commission believes that the proposed changes to 
ICC's risk management framework described above will enhance the manner 
by which ICC considers and manages the risks particular to the range of 
contracts it clears, including the new Standard European Senior Non-
Preferred Financial Corporate contract, because such changes will 
enable ICC's ability to more accurately consider the particular risks 
of each type of security-based swap (``SBS'') product it clears. 
Therefore, the Commission finds that the proposed rule change is 
intended to promote the prompt and accurate clearance and settlement of 
securities transactions and derivatives agreements, contracts, and 
transactions, as well as to assure the safeguarding of securities and 
funds which are 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, and is therefore consistent with Section 17A(b)(3)(F) 
of the Act.\23\
---------------------------------------------------------------------------

    \23\ Id.
---------------------------------------------------------------------------

B. Consistency With Rule 17Ad-22(b)(2)

    The Commission further finds that the proposed rule change is 
consistent with Rule 17Ad-22(b)(2). Rule 17Ad-22(b)(2) requires, in 
relevant part, a registered clearing agency that performs central 
counterparty services to establish, implement, maintain and enforce 
written policies and procedures reasonably designed to use margin 
requirements to limit the registered clearing agency's credit exposures 
to participants under normal market conditions and use risk-based 
models and parameters to set margin requirements.\24\ As described 
above, the proposed changes would (i) amend the manner in which ICC 
calculates its Risk Factor-level LGD, (ii) expand the LGD analysis to 
the Risk Factor Group level, and (iii) amend the approach to 
calculating the Uncollateralized LGD to incorporate the Risk Factor 
Group level approach. Specifically, ICC would calculate, for each Risk 
Factor, an extreme outcome as the sum of the worst Risk Sub-factor P/
LGDs across all scenarios, and an expected outcome as the worst sum of 
all Risk Sub-factor P/LGDs using the same scenarios, and then add the 
two components to determine the total LGD for each Risk Factor.
---------------------------------------------------------------------------

    \24\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    The LGD analysis would also be modified to group individual Risk 
Factors into Risk Factor Groups, and would result in the total LGD 
being the sum of the P/LGDs for each Risk Factor within the Risk Factor 
Group. The Commission believes that by making these changes, ICC will 
augment its ability to more accurately consider the risks associated 
with the SBS products it clears, including the Standard European Senior 
Non-Preferred Financial Corporate transaction type.
    As a result, the Commission believes that the proposed rule changes 
will enable ICC to more accurately determine and collect the amount of 
resources necessary to limit its credit exposures under normal market 
conditions, including credit exposures resulting from clearing the new 
transaction type, through the use of risk-based models. Therefore the 
Commission finds that the proposed rule change is consistent with Rule 
17Ad-22(b)(2).\25\
---------------------------------------------------------------------------

    \25\ Id.
---------------------------------------------------------------------------

C. Consistency With Rule 17Ad-22(b)(3)

    The Commission further finds that the proposed rule change is 
consistent with Rule 17Ad-22(b)(3). Rule 17Ad-22(b)(3) requires, in 
relevant part, a registered clearing agency that performs central 
counterparty services for SBS to establish, implement, maintain and 
enforce written policies and procedures that are reasonably designed to 
maintain sufficient financial resources to withstand, at a minimum, a 
default by the two participant families to which it

[[Page 11573]]

has the largest exposures in extreme but plausible market 
conditions.\26\ As described above, the proposed rule change would 
amend certain assumptions in ICC's Guaranty Fund Methodology, and the 
calculation of the Specific Wrong Way Risk component, by incorporating 
the new Risk Factor Group level analysis. Specifically, ICC would 
expand its current approach to assume that credit events used in the 
guaranty fund analysis occur at the Risk Factor Group level, and would 
also base the specific wrong-way risk component of its guaranty fund 
methodology on the Risk Factor Group approach.
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    As with the changes to the LGD approach, the Commission believes 
that the proposed changes to ICC's Guaranty Fund Methodology will 
permit ICC to consider the particular risks associated with the 
products it clears, including the Standard European Senior Non-
Preferred Financial Corporate transaction type that will be cleared as 
a result of the proposed changes to ICC's Rules described above. As a 
result, the Commission believes that the proposed changes will enable 
ICC's to more accurately measure the risks of associated with the 
products it clears and thereby improve ICC's ability to collect and 
maintain the level of financial resources necessary to address the risk 
of default by its participants. Therefore, the Commission finds that 
the proposed rule change is consistent with Rule 17Ad-22(b)(3).\27\
---------------------------------------------------------------------------

    \27\ Id.
---------------------------------------------------------------------------

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,\28\ and 
Rules 17Ad-22(b)(2) and (3) thereunder.\29\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78q-1.
    \29\ 17 CFR 240.17Ad-22(b)(2) and (3).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\30\ that the proposed rule change (SR-ICC-2018-001) be, and hereby is, 
approved.\31\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78s(b)(2).
    \31\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-05295 Filed 3-14-18; 8:45 am]
 BILLING CODE 8011-01-P

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