Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Model Validation Framework, 27167-27169 [2019-12193]
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Jkt 247001
[Release No. 34–86039; File No. SR–ICC–
2019–004]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Model Validation Framework
June 5, 2019.
I. Introduction
On April 5, 2019, 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
revise the ICC Model Validation
Framework. The proposed rule change
was published in the Federal Register
on April 23, 2019.3 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
revise the ICC Model Validation
Framework (‘‘Framework’’), which sets
forth ICC’s model validation
procedures.4 Through the model
validation procedures, ICC determines
the appropriateness of changes to the
risk modeling components (‘‘Model
Components’’) of ICC’s risk management
system and the appropriateness of the
configuration and calibration of ICC’s
risk management system.
The proposed rule change would
update the Framework’s classification of
Model Components, categorization of
model changes, documentation
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Securities Exchange Act Release No. 34–85673
(April 17, 2019), 84 FR 16900 (April 23, 2019) (SR–
ICC–2019–004) (‘‘Notice’’).
4 Notice, 84 FR at 16900. Capitalized terms used
herein but not otherwise defined have the meaning
set forth in the Framework and ICE Clear Credit
rulebook, which is available at https://
www.theice.com/clear-credit/regulation.
2 17
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27167
requirements relating to model
inventory, the priority scale used by
independent validators, and the annual
validation of Model Components and
related practices.
The proposed rule change would
revise the ‘Risk Management System
Models’ section to account for Model
Components that are no longer utilized.5
Currently, the Framework classifies
Model Components as new Model
Components, which consider risk
drivers that are not currently included
in the risk management system, and
enhancements to Model Components,
which improve upon the methodologies
used by the risk management system to
consider a given risk driver or drivers
(these are, collectively, ‘‘Model
Change’’). The proposed rule change
would amend the Framework to add a
category for retired Model Components,
which are Model Components that are
no longer utilized in the risk
management system.
In the ‘Model Change Qualification
and Materiality’ section, the proposed
rule change would add a quantitative
measure to define certain Model
Changes.6 Currently, the Framework
classifies a Model Change 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 risk driver or drivers.
Materiality B model changes do not
substantially affect the risk management
system’s assessment of risk for the
related risk driver or drivers. The
proposed rule change would
characterize any Model Change that
leads to a decrease/increase of the total
pre-funded financial resources over a
certain percentage as a Materiality A
Model Change.
The proposed revisions to the
‘Documentation Requirements’ section
of the Framework would relate to the
Model Inventory.7 The Model Inventory
is maintained by the ICC Risk
Department and contains key
information about all Model
Components and Model Changes. The
Framework currently specifies
documentation requirements for the
information maintained in the Model
Inventory. The proposed rule change
would update the documentation
requirements to require documentation
related to retired Model Components
and to remove information related to
design and development resources and
the location of filenames of certain
documents, which ICC no longer
5 Notice,
84 FR at 16901.
84 FR at 16901.
7 Notice, 84 FR at 16901.
6 Notice,
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Federal Register / Vol. 84, No. 112 / Tuesday, June 11, 2019 / Notices
considers relevant for purposes of the
Model Inventory.
The proposed updates to the
‘Independent Initial Validation’ section
would relate to the priority scale used
by independent validators in
completing initial validations.8 The
Framework currently directs
independent validators conducting
initial validations to classify their
findings based on a priority scale,
consisting of high, medium, and low
priority ratings, and an observation only
rating. The Framework currently
describes low priority findings as those
where the likely deficiencies or impact
to any process is not material. The
Framework currently requires that ICC
document all low priority items and
address them within a reasonable
timescale. The proposed rule change
would modify this requirement to
provide that ICC, in consultation with
the Risk Committee, may determine that
a low priority item does not reflect a
potential deficiency and take no action.
The proposed rule change would make
an identical change with respect to low
priority items found by independent
validators conducting periodic reviews.
The proposed rule change would
make clarifying changes to the
‘Independent Periodic Review’ section.9
Specifically, the proposed rule change
would add information regarding how
ICC tracks the annual validation of
Model Components and related
practices. Currently, the Framework
only provides that independent
validators perform periodic reviews of
Model Components and related
practices once in every calendar year.
The proposed rule change would further
specify that independent validators
perform periodic reviews of Model
Components and related practices at
least every twelve months and that ICC
relies on the date of the engagement
letter to track this twelve month
requirement. The proposed rule change
would also make a clarifying change to
the ‘Independent Periodic Review’
section to refer to a twelve month cycle
of reviews, rather than reviews each
year.
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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.10 For
the reasons given below, the
Commission finds that the proposed
rule change is consistent with Section
17A(b)(3)(F) of the Act 11 and Rules
17Ad–22(b)(2), 17Ad–22(b)(3), and
17Ad–22(b)(4) thereunder.12
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.13
The Commission believes that the
proposed rule change would enhance
the operation of the Framework.
Specifically, the Commission believes
that in adding a category for retired
Model Components the proposed rule
change would distinguish Model
Components that are no longer used,
avoiding potential confusion regarding
which Model Components are currently
effective.
The Commission also believes that by
adding a quantitative measure to define
Materiality A Model Changes, the
proposed rule change would provide
greater certainty and objectivity
regarding Materiality A Model Changes,
which is important given that
Materiality A Model Changes are subject
to internal initial validation and an
independent initial validation.
The Commission further believes that
in adding retired Model Components to
the Model Inventory the proposed rule
change would help ensure that ICC has
information on retired Model
Components in case it ever needs to
employ those Model Components again
or needs to use those retired Model
Components in developing new Model
Components. Moreover, the
Commission believes that in removing
information no longer considered
relevant to the Model Inventory, the
proposed rule change would help to
ensure that the Model Inventory focuses
only on the information needed to carry
out the purposes of the Framework.
In specifying that ICC, in consultation
with the Risk Committee, may
determine that a low priority item found
10 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
12 17 CFR 240.17Ad–22(b)(2)–(4).
13 15 U.S.C. 78q–1(b)(3)(F).
11 15
8 Notice,
9 Notice,
84 FR at 16901.
84 FR at 16901.
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by an independent validator during an
initial validation or periodic review
does not reflect a potential deficiency
and take no action in response to the
item, the Commission believes that the
proposed rule change would allow ICC
to efficiently close findings by
independent validators that may have
no material impact on ICC’s risk
management system. Doing so could
also free up resources within ICC and
the Risk Committee to respond to other,
higher priority findings by independent
validators.
Finally, by specifying that
independent validators perform
periodic reviews of Model Components
and related practices at least every
twelve months and that ICC relies on
the date of the engagement letter to track
this twelve month requirement, the
Commission believes that the proposed
rule change would help to ensure that
all Model Components and related
practices are reviewed annually by
providing a uniform and objective
means of tracking the date of the
validation through the date of the
engagement letter.
For these reasons, the Commission
believes these proposed revisions to the
Framework would help improve the
functioning of the Framework. The
Commission further believes that
because the Framework allows ICC to
determine the appropriateness of Model
Change and Model Components, a wellfunctioning Framework is necessary for
an effective risk management system.
Moreover, the Commission believes that
ICC’s risk mismanagement system
enables ICC to manage the risks
associated with clearing security based
swap-related portfolios, and that such
risks, if not properly managed, 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 therefore believes that the
proposed rule change, in improving the
Framework and thereby improving the
functioning of ICC’s risk management
system, 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 proposed rule change,
in improving 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
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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
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.14
B. Consistency With Rules 17Ad–
22(b)(2) and 17Ad–22(b)(3)
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.15 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.16
As described above, the proposed rule
change would enhance the operation of
the Framework. In doing so, the
Commission believes that the proposed
rule change 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 further believes that
the proposed improvements to the
Framework would also improve ICC’s
review and maintenance of the models
that generate margin requirements. The
Commission believes that the proposed
rule change would therefore improve
ICC’s use of initial 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. The Commission
therefore finds that the proposed rule
change is consistent with Rule 17Ad–
22(b)(2).17
Moreover, the amount a clearing
member must contribute to ICC’s
Guaranty Fund is equal to the expected
losses to ICC associated with the default
of that clearing member, calculated
using ICC’s stress test methodology, and
taking into account, among other things,
the loss after application of initial
margin.18 Thus, ICC’s guaranty fund is
based on the initial margin
requirements. The Commission
therefore believes that, in improving the
operation of the Framework, which
would in turn improve the operation of
ICC’s margin model and margin
requirements, the proposed rule change
would also help ICC 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. The
Commission therefore finds that the
proposed rule change is consistent with
Rule 17Ad–22(b)(3).19
Therefore, for the above reasons the
Commission finds that the proposed
rule change is consistent with Rules
17Ad–22(b)(2) and 17Ad–22(b)(3).20
C. 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.21
As discussed above, the proposed rule
change would revise the Framework to
specify that independent validators
perform periodic reviews of Model
Components and related practices at
least every twelve months and that ICC
relies on the date of the engagement
letter to track this twelve month
requirement. The Commission believes
that the proposed rule change would
therefore help to ensure that all Model
Components and related practices are
reviewed annually by providing a
uniform and objective means of tracking
the date of the validation through the
date of the engagement letter. Therefore,
the Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(b)(4).22
18 See
ICC Rule 801(a).
CFR 240.17Ad–22(b)(3).
20 17 CFR 240.17Ad–22(b)(2), (b)(3).
21 17 CFR 240.17Ad–22(b)(4).
22 17 CFR 240.17Ad–22(b)(4).
14 15
U.S.C. 78q–1(b)(3)(F).
15 17 CFR 240.17Ad–22(b)(2).
16 17 CFR 240.17Ad–22(b)(3).
17 17 CFR 240.17Ad–22(b)(2).
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19 17
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27169
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(b)(3)(F) of the Act 23 and
Rules 17Ad–22(b)(2), 17Ad–22(b)(3),
and 17Ad–22(b)(4) thereunder.24
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 25 that the
proposed rule change (SR–ICC–2019–
004) be, and hereby is, approved.26
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019–12193 Filed 6–10–19; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–86038; File No. SR–C2–
2019–013]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating To Adopt Limiton-Close (‘‘LOC’’) and Market-on-Close
(‘‘MOC’’) Orders
June 5, 2019.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 29,
2019, Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) 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 Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
23 15
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(b)(2)–(4).
25 15 U.S.C. 78s(b)(2).
26 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).
27 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
24 17
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]]>Agencies
[Federal Register Volume 84, Number 112 (Tuesday, June 11, 2019)]
[Notices]
[Pages 27167-27169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-12193]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86039; File No. SR-ICC-2019-004]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Model Validation
Framework
June 5, 2019.
I. Introduction
On April 5, 2019, 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 revise the ICC
Model Validation Framework. The proposed rule change was published in
the Federal Register on April 23, 2019.\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. 34-85673 (April 17,
2019), 84 FR 16900 (April 23, 2019) (SR-ICC-2019-004) (``Notice'').
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The proposed rule change would revise the ICC Model Validation
Framework (``Framework''), which sets forth ICC's model validation
procedures.\4\ Through the model validation procedures, ICC determines
the appropriateness of changes to the risk modeling components (``Model
Components'') of ICC's risk management system and the appropriateness
of the configuration and calibration of ICC's risk management system.
---------------------------------------------------------------------------
\4\ Notice, 84 FR at 16900. Capitalized terms used herein but
not otherwise defined have the meaning set forth in the Framework
and ICE Clear Credit rulebook, which is available at https://www.theice.com/clear-credit/regulation.
---------------------------------------------------------------------------
The proposed rule change would update the Framework's
classification of Model Components, categorization of model changes,
documentation requirements relating to model inventory, the priority
scale used by independent validators, and the annual validation of
Model Components and related practices.
The proposed rule change would revise the `Risk Management System
Models' section to account for Model Components that are no longer
utilized.\5\ Currently, the Framework classifies Model Components as
new Model Components, which consider risk drivers that are not
currently included in the risk management system, and enhancements to
Model Components, which improve upon the methodologies used by the risk
management system to consider a given risk driver or drivers (these
are, collectively, ``Model Change''). The proposed rule change would
amend the Framework to add a category for retired Model Components,
which are Model Components that are no longer utilized in the risk
management system.
---------------------------------------------------------------------------
\5\ Notice, 84 FR at 16901.
---------------------------------------------------------------------------
In the `Model Change Qualification and Materiality' section, the
proposed rule change would add a quantitative measure to define certain
Model Changes.\6\ Currently, the Framework classifies a Model Change 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 risk driver or drivers. Materiality B model
changes do not substantially affect the risk management system's
assessment of risk for the related risk driver or drivers. The proposed
rule change would characterize any Model Change that leads to a
decrease/increase of the total pre-funded financial resources over a
certain percentage as a Materiality A Model Change.
---------------------------------------------------------------------------
\6\ Notice, 84 FR at 16901.
---------------------------------------------------------------------------
The proposed revisions to the `Documentation Requirements' section
of the Framework would relate to the Model Inventory.\7\ The Model
Inventory is maintained by the ICC Risk Department and contains key
information about all Model Components and Model Changes. The Framework
currently specifies documentation requirements for the information
maintained in the Model Inventory. The proposed rule change would
update the documentation requirements to require documentation related
to retired Model Components and to remove information related to design
and development resources and the location of filenames of certain
documents, which ICC no longer
[[Page 27168]]
considers relevant for purposes of the Model Inventory.
---------------------------------------------------------------------------
\7\ Notice, 84 FR at 16901.
---------------------------------------------------------------------------
The proposed updates to the `Independent Initial Validation'
section would relate to the priority scale used by independent
validators in completing initial validations.\8\ The Framework
currently directs independent validators conducting initial validations
to classify their findings based on a priority scale, consisting of
high, medium, and low priority ratings, and an observation only rating.
The Framework currently describes low priority findings as those where
the likely deficiencies or impact to any process is not material. The
Framework currently requires that ICC document all low priority items
and address them within a reasonable timescale. The proposed rule
change would modify this requirement to provide that ICC, in
consultation with the Risk Committee, may determine that a low priority
item does not reflect a potential deficiency and take no action. The
proposed rule change would make an identical change with respect to low
priority items found by independent validators conducting periodic
reviews.
---------------------------------------------------------------------------
\8\ Notice, 84 FR at 16901.
---------------------------------------------------------------------------
The proposed rule change would make clarifying changes to the
`Independent Periodic Review' section.\9\ Specifically, the proposed
rule change would add information regarding how ICC tracks the annual
validation of Model Components and related practices. Currently, the
Framework only provides that independent validators perform periodic
reviews of Model Components and related practices once in every
calendar year. The proposed rule change would further specify that
independent validators perform periodic reviews of Model Components and
related practices at least every twelve months and that ICC relies on
the date of the engagement letter to track this twelve month
requirement. The proposed rule change would also make a clarifying
change to the `Independent Periodic Review' section to refer to a
twelve month cycle of reviews, rather than reviews each year.
---------------------------------------------------------------------------
\9\ Notice, 84 FR at 16901.
---------------------------------------------------------------------------
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.\10\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \11\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-
22(b)(4) thereunder.\12\
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78s(b)(2)(C).
\11\ 15 U.S.C. 78q-1(b)(3)(F).
\12\ 17 CFR 240.17Ad-22(b)(2)-(4).
---------------------------------------------------------------------------
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.\13\
---------------------------------------------------------------------------
\13\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
The Commission believes that the proposed rule change would enhance
the operation of the Framework. Specifically, the Commission believes
that in adding a category for retired Model Components the proposed
rule change would distinguish Model Components that are no longer used,
avoiding potential confusion regarding which Model Components are
currently effective.
The Commission also believes that by adding a quantitative measure
to define Materiality A Model Changes, the proposed rule change would
provide greater certainty and objectivity regarding Materiality A Model
Changes, which is important given that Materiality A Model Changes are
subject to internal initial validation and an independent initial
validation.
The Commission further believes that in adding retired Model
Components to the Model Inventory the proposed rule change would help
ensure that ICC has information on retired Model Components in case it
ever needs to employ those Model Components again or needs to use those
retired Model Components in developing new Model Components. Moreover,
the Commission believes that in removing information no longer
considered relevant to the Model Inventory, the proposed rule change
would help to ensure that the Model Inventory focuses only on the
information needed to carry out the purposes of the Framework.
In specifying that ICC, in consultation with the Risk Committee,
may determine that a low priority item found by an independent
validator during an initial validation or periodic review does not
reflect a potential deficiency and take no action in response to the
item, the Commission believes that the proposed rule change would allow
ICC to efficiently close findings by independent validators that may
have no material impact on ICC's risk management system. Doing so could
also free up resources within ICC and the Risk Committee to respond to
other, higher priority findings by independent validators.
Finally, by specifying that independent validators perform periodic
reviews of Model Components and related practices at least every twelve
months and that ICC relies on the date of the engagement letter to
track this twelve month requirement, the Commission believes that the
proposed rule change would help to ensure that all Model Components and
related practices are reviewed annually by providing a uniform and
objective means of tracking the date of the validation through the date
of the engagement letter.
For these reasons, the Commission believes these proposed revisions
to the Framework would help improve the functioning of the Framework.
The Commission further believes that because the Framework allows ICC
to determine the appropriateness of Model Change and Model Components,
a well-functioning Framework is necessary for an effective risk
management system. Moreover, the Commission believes that ICC's risk
mismanagement system enables ICC to manage the risks associated with
clearing security based swap-related portfolios, and that such risks,
if not properly managed, 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 therefore believes
that the proposed rule change, in improving the Framework and thereby
improving the functioning of ICC's risk management system, 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 proposed rule
change, in improving 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
[[Page 27169]]
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 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.\14\
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\14\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(b)(2) and 17Ad-22(b)(3)
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.\15\ 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.\16\
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\15\ 17 CFR 240.17Ad-22(b)(2).
\16\ 17 CFR 240.17Ad-22(b)(3).
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As described above, the proposed rule change would enhance the
operation of the Framework. In doing so, the Commission believes that
the proposed rule change 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 further believes that the proposed improvements to the
Framework would also improve ICC's review and maintenance of the models
that generate margin requirements. The Commission believes that the
proposed rule change would therefore improve ICC's use of initial
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. The Commission therefore finds
that the proposed rule change is consistent with Rule 17Ad-
22(b)(2).\17\
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\17\ 17 CFR 240.17Ad-22(b)(2).
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Moreover, the amount a clearing member must contribute to ICC's
Guaranty Fund is equal to the expected losses to ICC associated with
the default of that clearing member, calculated using ICC's stress test
methodology, and taking into account, among other things, the loss
after application of initial margin.\18\ Thus, ICC's guaranty fund is
based on the initial margin requirements. The Commission therefore
believes that, in improving the operation of the Framework, which would
in turn improve the operation of ICC's margin model and margin
requirements, the proposed rule change would also help ICC 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. The Commission therefore finds
that the proposed rule change is consistent with Rule 17Ad-
22(b)(3).\19\
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\18\ See ICC Rule 801(a).
\19\ 17 CFR 240.17Ad-22(b)(3).
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Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rules 17Ad-22(b)(2) and 17Ad-
22(b)(3).\20\
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\20\ 17 CFR 240.17Ad-22(b)(2), (b)(3).
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C. 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.\21\
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\21\ 17 CFR 240.17Ad-22(b)(4).
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As discussed above, the proposed rule change would revise the
Framework to specify that independent validators perform periodic
reviews of Model Components and related practices at least every twelve
months and that ICC relies on the date of the engagement letter to
track this twelve month requirement. The Commission believes that the
proposed rule change would therefore help to ensure that all Model
Components and related practices are reviewed annually by providing a
uniform and objective means of tracking the date of the validation
through the date of the engagement letter. Therefore, the Commission
finds that the proposed rule change is consistent with Rule 17Ad-
22(b)(4).\22\
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\22\ 17 CFR 240.17Ad-22(b)(4).
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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(b)(3)(F) of the
Act \23\ and Rules 17Ad-22(b)(2), 17Ad-22(b)(3), and 17Ad-22(b)(4)
thereunder.\24\
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ 17 CFR 240.17Ad-22(b)(2)-(4).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\25\ that the proposed rule change (SR-ICC-2019-004) be, and hereby is,
approved.\26\
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\25\ 15 U.S.C. 78s(b)(2).
\26\ 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.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-12193 Filed 6-10-19; 8:45 am]
BILLING CODE 8011-01-P
