Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating To Formalization of the ICC Model Validation Framework, 36655-36658 [2018-16164]

Download as PDF Federal Register / Vol. 83, No. 146 / Monday, July 30, 2018 / Notices 17d–3 as if those rules applied to closed-end investment companies, which they believe will resolve any concerns that might arise in connection with a Fund financing the distribution of its shares through asset-based service and/or distribution fees. For the reasons stated above, applicants submit that the exemptions requested under section 6(c) are necessary and appropriate in the public interest and are consistent with the protection of investors and the purposes fairly intended by the policy and provisions of the Act. Applicants further submit that the relief requested pursuant to section 23(c)(3) will be consistent with the protection of investors and will insure that applicants do not unfairly discriminate against any holders of the class of securities to be purchased. Finally, applicants state that the Funds’ imposition of asset-based service and/or distribution fees is consistent with the provisions, policies and purposes of the Act and does not involve participation on a basis different from or less advantageous than that of other participants. Applicants’ Condition Applicants agree that any order granting the requested relief will be subject to the following condition: Each Fund relying on the requested order will comply with the provisions of rules 6c–10, 12b–1, 17d–3, 18f–3, 22d– 1 and, where applicable, 11a–3 under the Act, as amended from time to time or replaced, as if those rules applied to closed-end management investment companies, and will comply with FINRA Rule 2341, as amended from time to time, as if that rule applied to all closed-end management investment companies. For the Commission, by the Division of Investment Management, under delegated authority. Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–16154 Filed 7–27–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–83690; File No. SR–ICC– 2018–004] Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating To Formalization of the ICC Model Validation Framework July 24, 2018. I. Introduction On May 23, 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 to formalize the ICC Model Validation Framework. The proposed rule change was published in the Federal Register on June 12, 2018.3 The Commission has not received any 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 The proposed rule change would formalize the ICC Model Validation Framework (‘‘Framework’’), which sets forth ICC’s model validation procedures.4 Through the use of these model validation procedures, ICC determines the effectiveness of the risk models underpinning ICC’s risk management system, considers new components and enhancements to existing components of the risk models, and monitors and validates on an ongoing basis the risk models. The Framework also describes the personnel responsible for, and the governance process associated with, the successful operation and maintenance of the model validation procedures. Specifically, the Framework designates ICC’s Risk Oversight Officer (‘‘ROO’’) as the Framework owner and makes the ROO responsible to the ICC President for the successful operation and maintenance of the Framework.5 ICC has a proprietary risk management system that uses models to assess the risk of the credit default 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 34–83386 (June 6, 2018), 83 FR 27360 (June 12, 2018) (SR– ICC–2018–004) (‘‘Notice’’). 4 Notice, 83 FR at 27361. Capitalized terms used herein but not otherwise defined have the meaning set forth in the Framework and ICE Clear Europe rulebook, which is available at https:// www.theice.com/clear-europe/regulation#rulebook. 5 Notice, 83 FR at 27361. daltland on DSKBBV9HB2PROD with NOTICES 2 17 VerDate Sep<11>2014 20:33 Jul 27, 2018 Jkt 244001 PO 00000 Frm 00143 Fmt 4703 Sfmt 4703 36655 swap-based portfolios that ICC clears. ICC uses its risk management system to determine the appropriate Initial Margin and Guaranty Fund requirements that offset the risks of the credit default swap-based portfolios ICC clears. The risk management system is composed of risk model components (‘‘Model Components’’), which employ a combination of statistical analysis of credit spread time series and stress test simulation scenarios to address different sources of risk. These sources of risk addressed by the Model Components constitute the foundation of total Initial Margin and Guaranty Fund requirements for the credit default swap-based portfolios that ICC clears.6 The Framework considers both new Model Components and enhancements to existing Model Components (collectively, ‘‘Model Change’’). New Model Components consider sources of risk that are not currently included in the risk management system.7 Enhancements to existing Model Components improve upon the methodologies already used by the risk management system to consider a given source or sources of risk.8 The Framework classifies Model Changes as either Materiality A or Materiality B, depending on how substantially the Model Change affects the risk management system’s assessment of risk for the related source or sources of risk.9 Materiality A Model Changes substantially affect the risk management system’s assessment of risk for the related source or sources of risk. Materiality B Model Changes do not substantially affect the risk management system’s assessment of risk for the related source or sources of risk. The Framework requires that the ICC Chief Risk Officer (‘‘CRO’’) and the ROO review and determine which enhancements to the risk management system qualify as Model Changes and classify Model Changes as Materiality A or B.10 The Framework requires that the ICC Risk Committee review the materiality classifications and provide feedback as necessary.11 The Framework also describes the Model Inventory which is maintained by the ICC Risk Department and which contains key information about all Model Components and Model Changes.12 The Framework requires that the ICC ROO review the model 6 Id. 7 Id. 8 Notice, 83 FR at 27361. 9 Id. 10 Id. 11 Id. 12 Id. E:\FR\FM\30JYN1.SGM 30JYN1 36656 Federal Register / Vol. 83, No. 146 / Monday, July 30, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES inventory at least quarterly to ensure that it contains accurate and up to date information relating to Model Components and Model Changes.13 To assure the effectiveness of ICC’s risk management system, the Framework employs four controls: Initial validation; ongoing monitoring and validation; investigation; and independent periodic review.14 Before going live with any Model Change, the Framework requires an initial validation of the conceptual soundness of the methodology and the proposed ongoing monitoring and validation approach.15 In addition, the Framework subjects Materiality A Model Changes to an additional independent initial validation.16 Ongoing monitoring and validation provides assurances that ICC has appropriately configured and calibrated the risk management system, including any recent Model Change, and that the risk management system is achieving the desired level of performance.17 Ongoing monitoring and validation consists of three areas: Parameter setting, execution monitoring, and outcome analysis.18 Through execution monitoring ICC reviews on a daily basis the changes generated by its risk management system and explains them in relation to known changes in cleared portfolios, prices, and market conditions. If ongoing monitoring and validation identifies features of the risk management system that might indicate weakness in a Model Component, the Framework requires ICC to investigate and identify the root cause.19 If weakness in a Model Component is discovered during investigation, the Framework requires the ICC CRO to inform the ICC Risk Committee of the results of the investigation.20 ICC must then remediate the identified weakness through an appropriate Model Change, which passes through the required steps of the Framework starting with an Initial validation.21 The Framework sets forth the process for selecting independent validators and describes the independent validator criteria, including technical expertise and independence requirements. The Framework requires that the ICC CRO provide support and information to allow the independent validators to 13 Id. 14 Notice, 83 FR at 27361. 15 Id. 16 Id. 17 Id. 18 Id. 19 Notice, 83 FR at 27361. 20 Id. 21 Id. VerDate Sep<11>2014 20:33 Jul 27, 2018 Jkt 244001 perform periodic reviews of all Model Components and related practices at least once in every calendar year.22 At ICC’s choosing, the scope of an independent periodic review may cover all Model Components used by the risk management system, or a subset of Model Components, as long as all Model Components are included in one or more independent periodic reviews each year.23 The independent periodic review must demonstrate that the Model Components remain fit for purpose; that the assumptions associated with the Model Components are still valid; that ICC has adequately addressed any open items of medium priority 24 from Model Change initial validations and any other implementation conditions; and that ICC has been complying with its ongoing monitoring and validation requirements and the Model Components are performing without any significant weakness.25 The ICC CRO must present the periodic review to the ICC Risk Committee and describe ICC’s plans in relation to any open high or medium priority items in the report.26 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.27 For the reasons given below, the Commission finds that the proposal is consistent with Section 17A(b)(3)(F) of the Act 28 and Rules 17Ad–22(b)(2), 17Ad–22(b)(3), 17Ad–22(b)(4), and 17Ad–22(d)(8) thereunder.29 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 ICC be designed to promote the prompt and accurate clearance and settlement of securities transactions and, to the extent applicable, derivative agreements, contracts, and transactions, as well as to assure the safeguarding of 22 Id. 23 Id. 24 The Framework defines as medium priority those items that reflect deficiencies in the Model Components, assumptions, usage, or compliance with stated procedures that create risks that ICC can mitigate with viable workarounds until it remediates them fully, within a reasonable timeframe agreed with the Risk Committee. 25 Notice, 83 FR at 27361. 26 Id. 27 15 U.S.C. 78s(b)(2)(C). 28 15 U.S.C. 78q–1(b)(3)(F). 29 17 CFR 240.17Ad–22(b)(2)–(4), (d)(8). PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 securities and funds which are in the custody or control of ICC or for which it is responsible, and, in general, to protect investors and the public interest.30 As described above, the Framework would provide a process for reviewing and enhancing ICC’s risk management system. The Framework would also designate the personnel responsible for, and the governance process associated with, the successful operation and maintenance of the model validation procedures and would set forth the process and criteria for selecting independent validators. Taken together, the Commission believes these aspects of the Framework would help ensure that ICC’s risk management system appropriately and effectively addresses the risks associated with clearing security based swaprelated portfolios by providing ICC a means for reviewing and enhancing the risk management system as needed. In providing for independent validators, the Commission believes the Framework would help ensure that ICC receives unbiased and objective views regarding its risk management system, which would improve such review and enhancement. The Commission believes that both of these aspects of the Framework would improve the effectiveness of ICC’s risk management system, thereby improving ICC’s ability to manage the risks associated with clearing security based swap-related portfolios. Given that mismanagement of the risks associated with clearing security based swap-related portfolios could cause ICC to realize losses on such portfolios and disrupt ICC’s ability to promptly and accurately clear security based swap transactions, the Commission believes that the Framework would promote the prompt and accurate clearance and settlement of securities transactions. Similarly, given that mismanagement of the risks associated with clearing security based swap-related portfolios could cause ICC to realize losses on such portfolios and threaten ICC’s ability to operate, thereby threatening access to securities and funds in ICC’s control, the Commission believes that the Framework would help assure the safeguarding of securities and funds which are in the custody or control of the ICC or for which it is responsible. Finally, for both of these reasons, the Commission believes the Framework would, in general, protect investors and the public interest. Therefore, the Commission finds that the proposed rule change would promote the prompt and accurate 30 15 E:\FR\FM\30JYN1.SGM U.S.C. 78q–1(b)(3)(F). 30JYN1 Federal Register / Vol. 83, No. 146 / Monday, July 30, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES clearance and settlement of securities transactions, assure the safeguarding of securities and funds in ICC’s custody and control, and, in general, protect investors and the public interest, consistent with the Section 17A(b)(3)(F) of the Act.31 B. Consistency With Rule 17Ad–22(b)(2) Rule 17Ad–22(b)(2) requires that ICC establish, implement, maintain and enforce written policies and procedures reasonably designed to use margin requirements to limit its credit exposures to participants under normal market conditions and use risk-based models and parameters to set margin requirements and review such margin requirements and the related risk-based models and parameters at least monthly.32 As described above, the Framework would describe how ICC would review and enhance its risk management system, including the selection and use of independent validators. In doing so, the Commission believes that the Framework would help ensure that ICC’s risk management system is appropriate and effective for dealing with the risks associated with clearing security based swap-related portfolios. The Commission believes that the Framework would also enable ICC to improve its margin requirements by allowing ICC to review and improve the models that generate such margin requirements. The Commission believes that these aspects of the Framework would improve ICC’s use of margin requirements to limit its credit exposures to participants under normal market conditions and ICC’s use of riskbased models and parameters to set margin requirements. In addition, the Framework would describe ICC’s process for execution monitoring, whereby ICC would review on a daily basis the changes generated by its risk management system and would explain those changes in relation to known changes in cleared portfolios, prices, and market conditions. The Framework would require ICC to then investigate any anomalies identified. In reviewing such changes and anomalies, the Commission believes ICC would review its margin requirements and the models that generate such requirements. Thus, the Commission believes the Framework would enable ICC to review its margin requirements and the models that generate such requirements on a daily basis. Therefore, for the above reasons the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(b)(2).33 C. Consistency With Rule 17Ad–22(b)(3) Rule 17Ad–22(b)(3) requires that ICC establish, implement, maintain and enforce written policies and procedures reasonably designed to maintain sufficient financial resources to withstand, at a minimum, a default by the two participant families to which it has the largest exposures in extreme but plausible market conditions, in its capacity as a central counterparty for security-based swaps.34 As described above, the Framework would provide a process for reviewing and enhancing ICC’s risk management system and would set forth the process and criteria for selecting independent validators. In doing so, the Commission believes that the Framework would help ensure that ICC’s risk management system appropriately and effectively deals with the risks associated with clearing security based swap-related portfolios, including the risk associated with the default by the two participant families to which ICC has the largest exposures in extreme but plausible market conditions. The Commission believes that the Framework would also help ICC improve its guaranty fund requirements by allowing ICC to review and improve the models that generate such requirements. The Commission believes that these aspects of the Framework would help ensure that ICC effectively establishes and maintains financial resources sufficient to withstand, at a minimum, a default by the two participant families to which ICC has the largest exposures in extreme but plausible market conditions. Therefore, for the above reasons the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(b)(3).35 D. Consistency With Rule 17Ad–22(b)(4) Rule 17Ad–22(b)(4) requires that ICC establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for an annual model validation consisting of evaluating the performance of its margin models and the related parameters and assumptions associated with such models by a qualified person who is free from influence from the persons responsible for the development or operation of the models being validated.36 CFR 240.17Ad–22(b)(2). CFR 240.17Ad–22(b)(3). 35 17 CFR 240.17Ad–22(b)(3). 36 17 CFR 240.17Ad–22(b)(4). 31 15 U.S.C. 78q–1(b)(3)(F). 32 17 CFR 240.17Ad–22(b)(2). VerDate Sep<11>2014 20:33 Jul 27, 2018 Jkt 244001 PO 00000 As discussed above, the Framework would require the ICC CRO to provide support and information to allow independent validators to perform periodic reviews of all Model Components and related practices at least once in every calendar year. The Framework would further provide that the scope of an independent periodic review may cover all Model Components used by the risk management system, or a subset of Model Components, as long as all Model Components are included in one or more independent periodic reviews each year. The Framework would also provide the process and criteria (including independence) for selecting independent validators. Finally, the Framework would describe the required components of an independent review and the documentation required to be produced by the independent validators. The Commission believes these aspects of the Framework would enable ICC to validate the models underpinning its risk management system on an annual basis including the related parameters and assumptions associated with such models. The Commission also believes that by setting out the process and criteria (including independence) for selecting independent validators, the Framework would help ensure that such validations are performed by qualified persons free from influence from the persons responsible for the development or operation of the models being validated. Therefore, for the reasons described above the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(b)(4).37 E. Consistency With Rule 17Ad–22(d)(8) Rule 17Ad–22(d)(8) requires that ICC establish, implement, maintain and enforce written policies and procedures reasonably designed to have governance arrangements that are clear and transparent to fulfill the public interest requirements in Section 17A of the Act 38 applicable to clearing agencies, to support the objectives of owners and participants, and to promote the effectiveness of the clearing agency’s risk management procedures.39 As discussed above, the Framework would describe the personnel responsible for, and the governance process associated with, the successful operation and maintenance of the model validation procedures. Specifically, the Framework would designate ICC’s ROO 33 17 34 17 Frm 00145 Fmt 4703 Sfmt 4703 36657 37 17 CFR 240.17Ad–22(b)(4). U.S.C. 78q–1. 39 17 CFR 240.17Ad–22(d)(8). 38 15 E:\FR\FM\30JYN1.SGM 30JYN1 36658 Federal Register / Vol. 83, No. 146 / Monday, July 30, 2018 / Notices as the Framework owner and would make the ROO responsible to the ICC President for the successful operation and maintenance of the Framework. The Framework would also designate certain responsibilities to ICC’s CRO and the Risk Committee. The Commission believes that in doing so the Framework would allow ICC to establish clear and transparent arrangements for governing the Framework and its model validation procedures. The Commission further believes that these same arrangements would contribute to ICC’s fulfilling the public interest requirements in Section 17A of the Act 40 applicable to clearing agencies, and the objectives of owners and participants. Finally, the Commission believes that these procedures and arrangements would promote the effectiveness of ICC’s risk management procedures by clarifying the process for, and responsibilities associated with, using the Framework to improve ICC’s risk management system. Therefore, for the above reasons the Commission finds that the proposed rule change is consistent with Rule 17Ad–22(d)(8).41 IV. Conclusion On the basis of the foregoing, the Commission finds that the proposal is consistent with the requirements of the Act, and in particular, with the requirements of Section 17A(b)(3)(F) of the Act 42 and Rules 17Ad–22(b)(2), 17Ad–22(b)(3), 17Ad–22(b)(4), and 17Ad–22(d)(8) thereunder.43 It is therefore ordered pursuant to Section 19(b)(2) of the Act 44 that the proposed rule change (SR–ICC–2018– 004) be, and hereby is, approved.45 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.46 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–16164 Filed 7–27–18; 8:45 am] BILLING CODE 8011–01–P SMALL BUSINESS ADMINISTRATION [License No. 03/03–0249] Argosy Investment Partners IV, L.P.; Notice Seeking Exemption Under the Small Business Investment Act, Conflicts of Interest Notice is hereby given that Argosy Investment Partners IV, L.P., 950 West Valley Road, Suite 2900, Wayne, PA 19087, a Federal Licensee under the Small Business Investment Act of 1958, as amended (‘‘the Act’’), in connection with the financing of a small concern, has sought an exemption under Section 312 of the Act and Section 107.730, Financings which Constitute Conflicts of Interest of the Small Business Administration (‘‘SBA’’) Rules and Regulations (13 CFR 107.730). Argosy Investment Partners IV, L.P. is seeking post-financing approval from SBA for loan and equity financings it made to POSC Holdings LLC, formerly known as Panhandle Oilfield Service Companies, Inc., 14000 Quail Springs Parkway, Suite 300, Oklahoma City, OK 73134. The financing is brought within the purview of § 107.730(a)(1) of the Regulations because Argosy Investment Partners V, L.P., an Associate of Argosy Investment Partners IV, L.P., owns more than ten percent of POSC Holdings LLC, and therefore this transaction is considered Financing an Associate requiring prior SBA approval. Argosy Investment Partners IV, L.P. has already made its investments in POSC Holdings LLC and is seeking post-financing SBA approval. Notice is hereby given that any interested person may submit written comments on this transaction within fifteen days of the date of this publication to the Associate Administrator, Office of Investment and Innovation, U.S. Small Business Administration, 409 Third Street SW, Washington, DC 20416. A. Joseph Shepard, Associate Administrator for Office of Investment and Innovation. [FR Doc. 2018–16206 Filed 7–27–18; 8:45 am] BILLING CODE P SMALL BUSINESS ADMINISTRATION daltland on DSKBBV9HB2PROD with NOTICES 40 15 U.S.C. 78q–1. 41 17 CFR 240.17Ad–22(d)(8). 42 15 U.S.C. 78q–1(b)(3)(F). 43 17 CFR 240.17Ad–22(b)(2)–(4), (d)(8). 44 15 U.S.C. 78s(b)(2). 45 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). 46 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 20:33 Jul 27, 2018 Jkt 244001 [Docket No.: SBA–2018–0007] Surety Bond Guarantee Program Fees U.S. Small Business Administration. ACTION: Notification of temporary initiative to test lower fees; request for public comments. AGENCY: PO 00000 Frm 00146 Fmt 4703 Sfmt 4703 This document announces a temporary decrease in the guarantee fees that the U.S. Small Business Administration (SBA) charges all Surety companies and Principals on each guaranteed bond (other than a bid bond) issued in SBA’s Surety Bond Guarantee (SBG) Program. DATES: Applicability Date: The fee decreases described in this document will apply to all SBA surety bond guarantees approved during the one year period beginning October 1, 2018 and ending September 30, 2019. Comment Date: SBA must receive comments on or before August 29, 2018. ADDRESSES: You may submit comments, identified by Docket No. SBA–2018– 0007, by any of the following methods: (1) Federal eRulemaking Portal: https:// www.regulations.gov, following the instructions for submitting comments; or (2) Mail/Hand Delivery/Courier: Jermanne Perry, Surety Bond Specialist, U.S. Small Business Administration, Office of Surety Guarantees, 409 Third Street SW, Suite 8600, Washington, DC 20416. SBA will post all comments on www.regulations.gov. If you wish to submit confidential business information (CBI) as defined in the User Notice at www.regulations.gov, you must submit such information to U.S. Small Business Administration, Jermanne Perry, Office of Surety Guarantees, 409 Third Street SW, Washington, DC 20416 or send an email to jermanne.perry@sba.gov. Highlight the information that you consider to be CBI and explain why you believe SBA should hold this information as confidential. SBA will review your information and determine whether it will make the information public. FOR FURTHER INFORMATION CONTACT: Jermanne Perry, Surety Bond Specialist, Office of Surety Guarantees, (202) 401– 8275; jermanne.perry@sba.gov. SUPPLEMENTARY INFORMATION: Under its SBG Program, the SBA guarantees bid, payment and performance bonds for small and emerging contractors who cannot obtain surety bonds through regular commercial channels. SBA’s guarantee gives Sureties an incentive to provide bonding for small businesses and, thereby, assists small businesses in obtaining greater access to contracting opportunities. SBA’s guarantee is an agreement between a Surety and SBA that SBA will assume a certain percentage of the Surety’s loss should a contractor default on the underlying contract. Pursuant to its statutory authority ‘‘to establish such fee or fees for small business concerns and SUMMARY: E:\FR\FM\30JYN1.SGM 30JYN1

Agencies

[Federal Register Volume 83, Number 146 (Monday, July 30, 2018)]
[Notices]
[Pages 36655-36658]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16164]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83690; File No. SR-ICC-2018-004]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating To Formalization of the ICC 
Model Validation Framework

July 24, 2018.

I. Introduction

    On May 23, 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 to formalize the 
ICC Model Validation Framework. The proposed rule change was published 
in the Federal Register on June 12, 2018.\3\ The Commission has not 
received any 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\ Securities Exchange Act Release No. 34-83386 (June 6, 2018), 
83 FR 27360 (June 12, 2018) (SR-ICC-2018-004) (``Notice'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The proposed rule change would formalize the ICC Model Validation 
Framework (``Framework''), which sets forth ICC's model validation 
procedures.\4\ Through the use of these model validation procedures, 
ICC determines the effectiveness of the risk models underpinning ICC's 
risk management system, considers new components and enhancements to 
existing components of the risk models, and monitors and validates on 
an ongoing basis the risk models. The Framework also describes the 
personnel responsible for, and the governance process associated with, 
the successful operation and maintenance of the model validation 
procedures. Specifically, the Framework designates ICC's Risk Oversight 
Officer (``ROO'') as the Framework owner and makes the ROO responsible 
to the ICC President for the successful operation and maintenance of 
the Framework.\5\
---------------------------------------------------------------------------

    \4\ Notice, 83 FR at 27361. Capitalized terms used herein but 
not otherwise defined have the meaning set forth in the Framework 
and ICE Clear Europe rulebook, which is available at https://www.theice.com/clear-europe/regulation#rulebook.
    \5\ Notice, 83 FR at 27361.
---------------------------------------------------------------------------

    ICC has a proprietary risk management system that uses models to 
assess the risk of the credit default swap-based portfolios that ICC 
clears. ICC uses its risk management system to determine the 
appropriate Initial Margin and Guaranty Fund requirements that offset 
the risks of the credit default swap-based portfolios ICC clears. The 
risk management system is composed of risk model components (``Model 
Components''), which employ a combination of statistical analysis of 
credit spread time series and stress test simulation scenarios to 
address different sources of risk. These sources of risk addressed by 
the Model Components constitute the foundation of total Initial Margin 
and Guaranty Fund requirements for the credit default swap-based 
portfolios that ICC clears.\6\
---------------------------------------------------------------------------

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

    The Framework considers both new Model Components and enhancements 
to existing Model Components (collectively, ``Model Change''). New 
Model Components consider sources of risk that are not currently 
included in the risk management system.\7\ Enhancements to existing 
Model Components improve upon the methodologies already used by the 
risk management system to consider a given source or sources of 
risk.\8\ The Framework classifies Model Changes as either Materiality A 
or Materiality B, depending on how substantially the Model Change 
affects the risk management system's assessment of risk for the related 
source or sources of risk.\9\ Materiality A Model Changes substantially 
affect the risk management system's assessment of risk for the related 
source or sources of risk. Materiality B Model Changes do not 
substantially affect the risk management system's assessment of risk 
for the related source or sources of risk. The Framework requires that 
the ICC Chief Risk Officer (``CRO'') and the ROO review and determine 
which enhancements to the risk management system qualify as Model 
Changes and classify Model Changes as Materiality A or B.\10\ The 
Framework requires that the ICC Risk Committee review the materiality 
classifications and provide feedback as necessary.\11\ The Framework 
also describes the Model Inventory which is maintained by the ICC Risk 
Department and which contains key information about all Model 
Components and Model Changes.\12\ The Framework requires that the ICC 
ROO review the model

[[Page 36656]]

inventory at least quarterly to ensure that it contains accurate and up 
to date information relating to Model Components and Model Changes.\13\
---------------------------------------------------------------------------

    \7\ Id.
    \8\ Notice, 83 FR at 27361.
    \9\ Id.
    \10\ Id.
    \11\ Id.
    \12\ Id.
    \13\ Id.
---------------------------------------------------------------------------

    To assure the effectiveness of ICC's risk management system, the 
Framework employs four controls: Initial validation; ongoing monitoring 
and validation; investigation; and independent periodic review.\14\ 
Before going live with any Model Change, the Framework requires an 
initial validation of the conceptual soundness of the methodology and 
the proposed ongoing monitoring and validation approach.\15\ In 
addition, the Framework subjects Materiality A Model Changes to an 
additional independent initial validation.\16\
---------------------------------------------------------------------------

    \14\ Notice, 83 FR at 27361.
    \15\ Id.
    \16\ Id.
---------------------------------------------------------------------------

    Ongoing monitoring and validation provides assurances that ICC has 
appropriately configured and calibrated the risk management system, 
including any recent Model Change, and that the risk management system 
is achieving the desired level of performance.\17\ Ongoing monitoring 
and validation consists of three areas: Parameter setting, execution 
monitoring, and outcome analysis.\18\ Through execution monitoring ICC 
reviews on a daily basis the changes generated by its risk management 
system and explains them in relation to known changes in cleared 
portfolios, prices, and market conditions.
---------------------------------------------------------------------------

    \17\ Id.
    \18\ Id.
---------------------------------------------------------------------------

    If ongoing monitoring and validation identifies features of the 
risk management system that might indicate weakness in a Model 
Component, the Framework requires ICC to investigate and identify the 
root cause.\19\ If weakness in a Model Component is discovered during 
investigation, the Framework requires the ICC CRO to inform the ICC 
Risk Committee of the results of the investigation.\20\ ICC must then 
remediate the identified weakness through an appropriate Model Change, 
which passes through the required steps of the Framework starting with 
an Initial validation.\21\
---------------------------------------------------------------------------

    \19\ Notice, 83 FR at 27361.
    \20\ Id.
    \21\ Id.
---------------------------------------------------------------------------

    The Framework sets forth the process for selecting independent 
validators and describes the independent validator criteria, including 
technical expertise and independence requirements. The Framework 
requires that the ICC CRO provide support and information to allow the 
independent validators to perform periodic reviews of all Model 
Components and related practices at least once in every calendar 
year.\22\ At ICC's choosing, the scope of an independent periodic 
review may cover all Model Components used by the risk management 
system, or a subset of Model Components, as long as all Model 
Components are included in one or more independent periodic reviews 
each year.\23\ The independent periodic review must demonstrate that 
the Model Components remain fit for purpose; that the assumptions 
associated with the Model Components are still valid; that ICC has 
adequately addressed any open items of medium priority \24\ from Model 
Change initial validations and any other implementation conditions; and 
that ICC has been complying with its ongoing monitoring and validation 
requirements and the Model Components are performing without any 
significant weakness.\25\ The ICC CRO must present the periodic review 
to the ICC Risk Committee and describe ICC's plans in relation to any 
open high or medium priority items in the report.\26\
---------------------------------------------------------------------------

    \22\ Id.
    \23\ Id.
    \24\ The Framework defines as medium priority those items that 
reflect deficiencies in the Model Components, assumptions, usage, or 
compliance with stated procedures that create risks that ICC can 
mitigate with viable workarounds until it remediates them fully, 
within a reasonable timeframe agreed with the Risk Committee.
    \25\ Notice, 83 FR at 27361.
    \26\ 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.\27\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act 
\28\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), 17Ad-22(b)(4), and 17Ad-
22(d)(8) thereunder.\29\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(2)(C).
    \28\ 15 U.S.C. 78q-1(b)(3)(F).
    \29\ 17 CFR 240.17Ad-22(b)(2)-(4), (d)(8).
---------------------------------------------------------------------------

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 ICC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\30\
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the Framework would provide a process for 
reviewing and enhancing ICC's risk management system. The Framework 
would also designate the personnel responsible for, and the governance 
process associated with, the successful operation and maintenance of 
the model validation procedures and would set forth the process and 
criteria for selecting independent validators.
    Taken together, the Commission believes these aspects of the 
Framework would help ensure that ICC's risk management system 
appropriately and effectively addresses the risks associated with 
clearing security based swap-related portfolios by providing ICC a 
means for reviewing and enhancing the risk management system as needed. 
In providing for independent validators, the Commission believes the 
Framework would help ensure that ICC receives unbiased and objective 
views regarding its risk management system, which would improve such 
review and enhancement. The Commission believes that both of these 
aspects of the Framework would improve the effectiveness of ICC's risk 
management system, thereby improving ICC's ability to manage the risks 
associated with clearing security based swap-related portfolios. Given 
that mismanagement of the risks associated with clearing security based 
swap-related portfolios could cause ICC to realize losses on such 
portfolios and disrupt ICC's ability to promptly and accurately clear 
security based swap transactions, the Commission believes that the 
Framework would promote the prompt and accurate clearance and 
settlement of securities transactions. Similarly, given that 
mismanagement of the risks associated with clearing security based 
swap-related portfolios could cause ICC to realize losses on such 
portfolios and threaten ICC's ability to operate, thereby threatening 
access to securities and funds in ICC's control, the Commission 
believes that the Framework would help assure the safeguarding of 
securities and funds which are in the custody or control of the ICC or 
for which it is responsible. Finally, for both of these reasons, the 
Commission believes the Framework would, in general, protect investors 
and the public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate

[[Page 36657]]

clearance and settlement of securities transactions, assure the 
safeguarding of securities and funds in ICC's custody and control, and, 
in general, protect investors and the public interest, consistent with 
the Section 17A(b)(3)(F) of the Act.\31\
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

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

    Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions and use risk-based models and parameters to 
set margin requirements and review such margin requirements and the 
related risk-based models and parameters at least monthly.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

    As described above, the Framework would describe how ICC would 
review and enhance its risk management system, including the selection 
and use of independent validators. In doing so, the Commission believes 
that the Framework would help ensure that ICC's risk management system 
is appropriate and effective for dealing with the risks associated with 
clearing security based swap-related portfolios. The Commission 
believes that the Framework would also enable ICC to improve its margin 
requirements by allowing ICC to review and improve the models that 
generate such margin requirements. The Commission believes that these 
aspects of the Framework would improve ICC's use of margin requirements 
to limit its credit exposures to participants under normal market 
conditions and ICC's use of risk-based models and parameters to set 
margin requirements.
    In addition, the Framework would describe ICC's process for 
execution monitoring, whereby ICC would review on a daily basis the 
changes generated by its risk management system and would explain those 
changes in relation to known changes in cleared portfolios, prices, and 
market conditions. The Framework would require ICC to then investigate 
any anomalies identified. In reviewing such changes and anomalies, the 
Commission believes ICC would review its margin requirements and the 
models that generate such requirements. Thus, the Commission believes 
the Framework would enable ICC to review its margin requirements and 
the models that generate such requirements on a daily basis.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(b)(2).\33\
---------------------------------------------------------------------------

    \33\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------

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

    Rule 17Ad-22(b)(3) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
maintain sufficient financial resources to withstand, at a minimum, a 
default by the two participant families to which it has the largest 
exposures in extreme but plausible market conditions, in its capacity 
as a central counterparty for security-based swaps.\34\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    As described above, the Framework would provide a process for 
reviewing and enhancing ICC's risk management system and would set 
forth the process and criteria for selecting independent validators. In 
doing so, the Commission believes that the Framework would help ensure 
that ICC's risk management system appropriately and effectively deals 
with the risks associated with clearing security based swap-related 
portfolios, including the risk associated with the default by the two 
participant families to which ICC has the largest exposures in extreme 
but plausible market conditions. The Commission believes that the 
Framework would also help ICC improve its guaranty fund requirements by 
allowing ICC to review and improve the models that generate such 
requirements. The Commission believes that these aspects of the 
Framework would help ensure that ICC effectively establishes and 
maintains financial resources sufficient to withstand, at a minimum, a 
default by the two participant families to which ICC has the largest 
exposures in extreme but plausible market conditions.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(b)(3).\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

D. Consistency With Rule 17Ad-22(b)(4)

    Rule 17Ad-22(b)(4) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide for an annual model validation consisting of evaluating the 
performance of its margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development or 
operation of the models being validated.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

    As discussed above, the Framework would require the ICC CRO to 
provide support and information to allow independent validators to 
perform periodic reviews of all Model Components and related practices 
at least once in every calendar year. The Framework would further 
provide that the scope of an independent periodic review may cover all 
Model Components used by the risk management system, or a subset of 
Model Components, as long as all Model Components are included in one 
or more independent periodic reviews each year. The Framework would 
also provide the process and criteria (including independence) for 
selecting independent validators. Finally, the Framework would describe 
the required components of an independent review and the documentation 
required to be produced by the independent validators.
    The Commission believes these aspects of the Framework would enable 
ICC to validate the models underpinning its risk management system on 
an annual basis including the related parameters and assumptions 
associated with such models. The Commission also believes that by 
setting out the process and criteria (including independence) for 
selecting independent validators, the Framework would help ensure that 
such validations are performed by qualified persons free from influence 
from the persons responsible for the development or operation of the 
models being validated.
    Therefore, for the reasons described above the Commission finds 
that the proposed rule change is consistent with Rule 17Ad-
22(b)(4).\37\
---------------------------------------------------------------------------

    \37\ 17 CFR 240.17Ad-22(b)(4).
---------------------------------------------------------------------------

E. Consistency With Rule 17Ad-22(d)(8)

    Rule 17Ad-22(d)(8) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to have 
governance arrangements that are clear and transparent to fulfill the 
public interest requirements in Section 17A of the Act \38\ applicable 
to clearing agencies, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures.\39\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78q-1.
    \39\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    As discussed above, the Framework would describe the personnel 
responsible for, and the governance process associated with, the 
successful operation and maintenance of the model validation 
procedures. Specifically, the Framework would designate ICC's ROO

[[Page 36658]]

as the Framework owner and would make the ROO responsible to the ICC 
President for the successful operation and maintenance of the 
Framework. The Framework would also designate certain responsibilities 
to ICC's CRO and the Risk Committee. The Commission believes that in 
doing so the Framework would allow ICC to establish clear and 
transparent arrangements for governing the Framework and its model 
validation procedures. The Commission further believes that these same 
arrangements would contribute to ICC's fulfilling the public interest 
requirements in Section 17A of the Act \40\ applicable to clearing 
agencies, and the objectives of owners and participants. Finally, the 
Commission believes that these procedures and arrangements would 
promote the effectiveness of ICC's risk management procedures by 
clarifying the process for, and responsibilities associated with, using 
the Framework to improve ICC's risk management system.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(8).\41\
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A(b)(3)(F) of the Act 
\42\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), 17Ad-22(b)(4), and 17Ad-
22(d)(8) thereunder.\43\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78q-1(b)(3)(F).
    \43\ 17 CFR 240.17Ad-22(b)(2)-(4), (d)(8).
---------------------------------------------------------------------------

    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\44\ that the proposed rule change (SR-ICC-2018-004) be, and hereby is, 
approved.\45\
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78s(b)(2).
    \45\ 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\46\
---------------------------------------------------------------------------

    \46\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-16164 Filed 7-27-18; 8:45 am]
 BILLING CODE 8011-01-P
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.