Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Order Approving a Proposed Rule Change To Modify the Clearing Agency Model Risk Management Framework, 31828-31832 [2020-11285]

Download as PDF 31828 Federal Register / Vol. 85, No. 102 / Wednesday, May 27, 2020 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has filed the proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 11 and Rule 19b–4(f)(6) thereunder.12 Because the proposed rule change does not: (i) Significantly affect the protection of investors or the public interest; (ii) impose any significant burden on competition; and (iii) become operative prior to 30 days from the date on which it was filed, or such shorter time as the Commission may designate, if consistent with the protection of investors and the public interest, the proposed rule change has become effective pursuant to Section 19(b)(3)(A) of the Act and Rule 19b–4(f)(6)(iii) thereunder.13 A proposed rule change filed under Rule 19b–4(f)(6) 14 normally does not become operative prior to 30 days after the date of the filing. However, pursuant to Rule 19b–4(f)(6)(iii),15 the Commission may designate a shorter time if such action is consistent with the protection of investors and the public interest. The Exchange has asked the Commission to waive the 30-day operative delay so that the proposal may become operative immediately upon filing. The Exchange states that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest because the Commission has previously approved the listing and trading of goldbased commodity trusts that include a physical redemption feature but do not specify any minimum deadline for physical delivery of the commodity to the redeeming investor following a redemption request,16 and the proposed changes are substantively identical to those in another proposed rule change relating to redemption procedures.17 In addition, the Exchange believes the proposed rule change may benefit investors by decreasing operational jbell on DSKJLSW7X2PROD with NOTICES 11 15 U.S.C. 78s(b)(3)(A)(iii). 12 17 CFR 240.19b–4(f)(6). 13 17 CFR 240.19b–4(f)(6)(iii). 14 17 CFR 240.19b–4(f)(6). 15 17 CFR 240.19b–4(f)(6)(iii). 16 See note 7, supra. 17 See note 6, supra (relating to redemption procedures of the Sprott Physical Gold and Silver Trust). VerDate Sep<11>2014 16:59 May 26, 2020 Jkt 250001 expenses and risk caused by the 10 Business Day timeframe (as described above) currently provided by the Trust Agreements. Furthermore, the Exchange represents that, in the absence of large numbers or volumes of redemption requests or other factors causing delay, the armored transportation service carrier will typically receive physical gold and silver bullion in accordance with the 10 Business Day time frame contained in the Prior Releases, and the Commission notes that Units of the Trusts have commenced trading on the Exchange. The Commission believes that waiver of the 30-day operative delay is consistent with the protection of investors and the public interest for these reasons. Accordingly, the Commission hereby waives the 30-day operative delay and designates the proposed rule change operative upon filing.18 At any time within 60 days of the filing of such proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSEArca–2020–42 and should be submitted on or before June 17, 2020. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 J. Matthew DeLesDernier, Assistant Secretary. Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NYSEArca–2020–42 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments • Send paper comments in triplicate to: Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–NYSEArca–2020–42. This file number should be included on the subject line if email is used. To help the 18 For purposes only of waiving the 30-day operative delay, the Commission has also considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 [FR Doc. 2020–11286 Filed 5–26–20; 8:45 am] BILLING CODE 8011–01–P [Release No. 34–88911; File Nos. SR–DTC– 2020–008; SR–FICC–2020–004; SR–NSCC– 2020–008] Self-Regulatory Organizations; The Depository Trust Company; Fixed Income Clearing Corporation; National Securities Clearing Corporation; Order Approving a Proposed Rule Change To Modify the Clearing Agency Model Risk Management Framework May 20, 2020. On April 10, 2020, The Depository Trust Company (‘‘DTC’’), Fixed Income Clearing Corporation (‘‘FICC’’), and National Securities Clearing Corporation (‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ and collectively, the ‘‘Clearing 19 17 E:\FR\FM\27MYN1.SGM CFR 200.30–3(a)(12). 27MYN1 Federal Register / Vol. 85, No. 102 / Wednesday, May 27, 2020 / Notices Agencies’’), filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule changes SR–DTC–2020– 008; SR–FICC–2020–004; SR–NSCC– 2020–008, respectively, pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder.2 The proposed rule changes were published for comment in the Federal Register on April 21, 2020,3 and the Commission received no comment letters regarding the changes proposed in the proposed rule changes. For the reasons discussed below, the Commission is approving the proposed rule changes.4 I. Description of the Proposed Rule Change A. Background Each Clearing Agency has established a Model Risk Management Framework (‘‘Framework’’) 5 to help it identify, measure, monitor, and manage the risks associated with the design, development, implementation, use, and validation of quantitative models.6 Pursuant to the Framework, a model developed for use by any of the Clearing Agencies and meeting the above definition for the term ‘‘model’’ is 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Securities Exchange Act Release No. 88640 (April 15, 2020), 85 FR 22191 (April 21, 2020) (‘‘DTC Notice of Filing’’); Securities Exchange Act Release No. 88636 (April 15, 2020), 85 FR 22228 (April 21, 2020) (‘‘FICC Notice of Filing’’); Securities Exchange Act Release No. 88637 (April 15, 2020), 85 FR 22222 (April 21, 2020) (‘‘NSCC Notice of Filing’’). 4 Capitalized terms not defined herein are defined in the DTC Rules, GSD Rules, MBSD Rules, or NSCC Rules, as applicable, available at https:// dtcc.com/legal/rules-and-procedures. 5 See Securities Exchange Act Release No. 81485 (August 25, 2017), 82 FR 41433 (August 31, 2017) (File Nos. SR–DTC–2017–008; SR–FICC–2017–014; SR–NSCC–2017–008) (‘‘2017 Framework Order’’). The proposed rule changes do not require any changes to (1) the Rules, By-Laws and Organization Certificate of DTC (‘‘DTC Rules’’), (2) the Rulebook of the Government Securities Division of FICC (‘‘GSD Rules’’), (3) the Clearing Rules of the Mortgage-Backed Securities Division of FICC (‘‘MBSD Rules’’), or (4) the Rules & Procedures of NSCC (‘‘NSCC Rules’’), as the Framework is a standalone document. 6 See 2017 Framework Order, 82 FR at 41433. ‘‘[M]odel’’ refers to a quantitative method, system, or approach that applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates. A ‘‘model’’ consists of three components: An information input component, which delivers assumptions and data to the model; a processing component, which transforms inputs into estimates; and a reporting component, which translates the estimates into useful business information. The definition of ‘‘model’’ also covers quantitative approaches whose inputs are partially or wholly qualitative or based on expert judgment, provided that the output is quantitative in nature. See DTC Notice of Filing, 82 FR at 22192; FICC Notice of Filing, 82 FR at 22228; NSCC Notice of Filing, 82 FR at 22222. jbell on DSKJLSW7X2PROD with NOTICES 2 17 VerDate Sep<11>2014 16:59 May 26, 2020 Jkt 250001 included and tracked within a model inventory (‘‘Model Inventory’’) maintained by DTCC’s Model Validation and Control Unit (‘‘MVC’’), which is part of the Group Chief Risk Office. The parent company of the Clearing Agencies is The Depository Trust & Clearing Corporation (‘‘DTCC’’). DTCC operates on a shared services model with respect to the Clearing Agencies. Most corporate functions are established and managed on an enterprise-wide basis pursuant to intercompany agreements under which it is generally DTCC that provides a relevant service to a Clearing Agency. The proposed rule changes would amend the Framework to (i) modify certain roles and governance arrangements set forth within the Framework, (ii) incorporate a description of and references to the ‘‘Model Risk Tolerance Statement,’’ and (iii) make other technical and clarifying changes to the text of the Framework, as described below. B. Modification of Roles and Governance Arrangements 1. Role and Reporting Lines of the Model Owner, MVC, and MRC Section 3.1 of the Framework describes how models are developed for use by any of the Clearing Agencies and tracked within the Model Inventory.7 In particular, the Framework currently describes a ‘‘Model Owner’’ 8 as the person responsible for the development or operation of a model being validated by MVC. The proposal would define a Model Owner as the person who is designated by the applicable business area or support function to be responsible for a particular model and who is recorded as the Model Owner for such model by MVC in the Model Inventory. Currently, the Framework states that the Executive Director of MVC reports to the Group Chief Risk Officer rather than to any Model Owner. The proposal would change the title of the head of MVC from an Executive Director to Managing Director at each Clearing Agency to reflect that a more senior officer of the Clearing Agencies would be responsible for supervising MVC.9 The proposal would also clarify that the head of MVC reports to the Group Chief Risk Officer rather than to anyone that could be a Model Owner (i.e., anyone 7 See DTC Notice of Filing, 82 FR at 22192; FICC Notice of Filing, 82 FR at 22228; NSCC Notice of Filing, 82 FR at 22223. 8 See 2017 Framework Order, 82 FR at 41434. 9 See DTC Notice of Filing, 82 FR at 22193; FICC Notice of Filing, 82 FR at 22229; NSCC Notice of Filing, 82 FR at 22223. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 31829 who develops and operates a model and not only personnel who are currently Model Owners). The Clearing Agencies represent that this change is to make clear that MVC has an independent reporting line to the Group Chief Risk Officer, without potential conflict of reporting to any person that could be a Model Owner.10 Under the proposal, the Framework would further state that the head of MVC is a member of the Management Risk Committee (‘‘MRC’’).11 2. Processes for Determining Model Materiality and Complexity Section 3.2 of the Framework outlines that MVC assigns a materiality rating and complexity rating to each model after it is added to the Model Inventory.12 Currently, all model materiality rating and complexity rating assignments are reviewed by at least annually by MVC, as well as by the Model Risk Governance Committee (‘‘MRGC’’).13 The proposal would revise the role of the MRGC, including by removing its oversight authority in the Model Validation process and leaving MVC as the sole entity responsible for reviewing the model materiality and complexity ratings. Moreover, under the proposal, the MRGC would serve as a forum for review of model risk matters rather than a decision-making body charged with the oversight of such matters. The proposal would also revise the MRGC’s name by replacing ‘‘Committee’’ with ‘‘Council’’ to reflect the MRGC’s role as an advisory body.14 3. Processes for Model Approval and Control Section 3.6 of the Framework currently provides that the Financial Engineering Unit (‘‘FEU’’) within Quantitative Risk Management (‘‘QRM’’) is responsible for developing, testing, and signing-off on new models and enhancements to existing models before 10 See DTC Notice of Filing, 82 FR at 22193; FICC Notice of Filing, 82 FR at 22229; NSCC Notice of Filing, 82 FR at 22224. 11 The MRC is the Clearing Agencies’ management level committee responsible for, among other things, model risk management matters. See 2017 Framework Order, 82 FR at 41435. 12 A model’s rating impacts both the prioritization and approval authority for that model’s validation. See DTC Notice of Filing, 82 FR at 22193; FICC Notice of Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. 13 See 2017 Framework Order, 82 FR at 41434. 14 See DTC Notice of Filing, 82 FR at 22193; FICC Notice of Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. As proposed, the MRGC could provide advice or recommendations regarding model risk matters to the interested party of a pertinent model. E:\FR\FM\27MYN1.SGM 27MYN1 31830 Federal Register / Vol. 85, No. 102 / Wednesday, May 27, 2020 / Notices submitting any new model to MVC for Model Validation and approval. The Clearing Agencies state that QRM is a risk management function within the Group Chief Risk Office, and that a representative of QRM is the Model Owner for all margin models used by the Clearing Agencies.15 The section further explains that all new models and all material changes to existing models undergo Model Validation by MVC and must be approved prior to business use. In addition, the section states that models that have a materiality rating of ‘Medium’ or ‘High’ must be approved by the MRC, after the MRGC has reviewed the model and recommended it to the MRC for approval. The proposal would transfer FEU’s responsibilities to the Model Owners to reflect the elimination of the FEU within QRM.16 Also, the proposal would remove the requirement that Model Validations with a materiality rating of ‘Medium’ or ‘High’ be approved by the MRC, after the MRGC has reviewed and recommended the model to the MRC for approval. As a result of these changes, MVC would have the sole and exclusive authority to approve a model. The Clearing Agencies represent that MVC is best suited to address Model Validation issues based on its quantitative and technical expertise and knowledge.17 Accordingly, the proposal would remove any text that indicates that MRC approval is required for any Model Validation to be complete and/or for a model to remain in production. In addition, consistent with the proposed changes to Section 3.2, the proposal would make changes to reflect that the MRGC does not have any oversight role for model approval and control. jbell on DSKJLSW7X2PROD with NOTICES 4. Model Performance Monitoring Responsibilities Section 3.8 of the Framework currently states that MVC is responsible for model performance monitoring, including review of risk-based models used to calculate margin requirements and relevant parameters/threshold indicators, sensitivity analysis, and model backtesting results, and preparation of related reports. It also states that review of these model performance measures is subject to review by the MRGC. Under the proposal, the Framework would identify Model Owners as responsible for the design and execution 15 See DTC Notice of Filing, 82 FR at 22194; FICC Notice of Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. 16 See id. 17 See id. VerDate Sep<11>2014 16:59 May 26, 2020 Jkt 250001 of model performance monitoring and preparation of model performance monitoring reports. Similarly, the proposal would revise the Framework to clarify that QRM, which encompasses Model Owners, would be responsible for model performance monitoring of the Clearing Agencies’ margin models. The proposal would also revise the role of MVC with respect to model performance monitoring to providing oversight of model performance monitoring activities (as opposed to conducting the monitoring) by setting organizational standards and providing critical analysis for identifying model issues and/or limitations. In addition, the proposal would remove the statement that review of model performance measure is subject to review by the MRGC. 5. Backtesting Responsibilities Section 3.9 of the Framework currently states that MVC is responsible for each Clearing Agency’s Value-at-Risk (‘‘VaR’’) backtesting and Clearing Fund Requirement (‘‘CFR’’) backtesting. Consistent with the changes described above, this section would be revised to state that QRM would perform VaR and CFR backtesting, as QRM is responsible for performance monitoring functions with respect to margin models. 6. Board of Directors and Senior Management Reporting Section 4.1 of the Framework currently describes the MRGC as the primary forum for MVC’s regular reporting of Model Validation activities and material model risks identified through regular model performance monitoring. The proposal would delete this reference to the MRGC’s role, as it would no longer have oversight of Model Validation and model performance monitoring. In addition, it would add the MRC as a recipient of periodic reporting. 7. Escalation Section 4.2 describes the processes applicable for further review of the key metrics identified in Section 3.9 (Backtesting). Currently, such metrics are reviewed by the Market and Liquidity Risk Management unit within the Group Chief Risk Office and MVC, and also reported to the MRC, on at least a monthly basis. The section further states that the MRGC reviews and approves changes to backtesting methodology. The proposal would eliminate the provision that MVC would review the metrics and clarify that the key metrics are reported to MRC by the group within the Group Chief Risk Office responsible PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 for risk reporting. The proposal would remove the MRGC’s role in review and approval of changes to backtesting methodology and instead vest that responsibility with MVC to reflect the change in oversight of Model Validation from the MRGC to MVC. C. Incorporation of the Model Risk Tolerance Statement The Framework currently includes a description of internal DTCC policies and procedures that support the Framework, including the (1) DTCC Model Risk Management Policy, (2) DTCC Model Validation Procedures, (3) DTCC Model Risk Performance Monitoring Procedures, (4) the DTCC Backtesting Procedures, and (5) Market Risk Tolerance Statement (‘‘Related Procedures’’). The Framework also notes that the Related Procedures may be updated or amended. The proposal would add the Model Risk Tolerance Statement as one of DTCC’s internal policies and procedures to support the Framework. The proposal would explain that the Model Risk Tolerance Statement sets forth, among other things, risk tolerance levels covering model design and implementation, including consideration of a model’s intended purpose and/or its adequacy of performance. The proposal would also add an explanation of the existing Market Risk Tolerance Statement, stating that it articulates, among other things, risk tolerance levels for (i) margin backtests addressing backtest coverage and (ii) stress tests covering exposure to extreme market moves. Further, the proposal would add language to the Framework stating that the Model Risk Tolerance Statement and the Market Risk Tolerance Statement (each a ‘‘Risk Tolerance Statement’’) record the overall risk reduction or mitigation objectives as they relate to model risk and market risk activities. Under the proposal, the Framework would also state that the Risk Tolerance Statements document the risk controls and other measures used to manage such activities, including escalation requirements in the event of risk metric breaches. Similarly, the proposal would also revise the Framework to provide that the Risk Tolerance Statements would be reviewed, revised, retired, replaced, or approved by the BRC annually, based upon the existing circumstances and the reasonable best judgement of management relating to model risk management matters. E:\FR\FM\27MYN1.SGM 27MYN1 Federal Register / Vol. 85, No. 102 / Wednesday, May 27, 2020 / Notices D. Other Technical Changes The proposal would also make a number of technical changes to the Framework. First, Section 3.8 of the Framework currently states that model performance monitoring is the process of (i) evaluating an active model’s ongoing performance based on theoretical tests, (ii) monitoring the model’s parameters through the use of threshold indicators, and/or (iii) backtesting using actual historical data/ realizations to test a VaR model’s predictive power. The Clearing Agencies state that the process of model performance monitoring does not always take into account theoretical tests, threshold indicators, and/or historical data/realizations, but could take some or all of these into account as appropriate under the circumstances.18 Accordingly, the proposal would eliminate references to ‘‘theoretical tests,’’ ‘‘threshold indicators,’’ and ‘‘historical data/realizations’’ to provide a more accurate description of the Clearing Agencies’ model performance monitoring process.19 Second, to improve the readability and clarity of the Framework’s text, the proposal would (1) remove the use of the modifier ‘‘Clearing Agency’’ with respect to references to models and other parts of the Framework, (2) replace ‘‘vendor’’ with ‘‘externally purchased’’ in describing models developed externally, (3) relocate certain sentences, and (4) consistently use ‘‘model’’ without capitalization. jbell on DSKJLSW7X2PROD with NOTICES II. Discussion and Commission Findings Section 19(b)(2)(C) of the Act 20 directs the Commission to approve a proposed rule change of a selfregulatory organization if it finds that such proposed rule change is consistent with the requirements of the Act and rules and regulations thereunder applicable to such organization. After carefully considering the proposed rule change, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to the Clearing Agencies. In particular, the Commission finds that the proposed rule change is consistent with Section 17A(b)(3)(F) 21 of the Act and Rules 17Ad–22(e)(2)(v), (e)(4)(vii), and (e)(7)(vii) thereunder.22 18 See DTC Notice of Filing, 82 FR at 22194; FICC Notice of Filing, 82 FR at 22231; NSCC Notice of Filing, 82 FR at 22225. 19 See id. 20 15 U.S.C. 78s(b)(2)(C). 21 15 U.S.C. 78q–1(b)(3)(F). 22 17 CFR 240.17Ad–22(e)(2)(v), (e)(4)(vii), and (e)(7)(vii). VerDate Sep<11>2014 16:59 May 26, 2020 Jkt 250001 A. Consistency With Section 17A(b)(3)(F) Section 17A(b)(3)(F) of the Act requires, in part, that the rules of a clearing agency be designed 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.23 As described above, the Framework is designed to identify, measure, monitor, and manage the risks related to the design, development, implementation, use, and validation of quantitative models. The proposal is designed to enhance the Framework by improving the governance arrangements relating to the management of the Clearing Agencies’ quantitative models, expanding internal policies and procedures to manage the models, and removing inconsistent and inaccurate terminology. First, the proposal is designed to clarify and enhance the governance structures set forth in the Framework in a number of ways. The proposal would clarify and revise the roles of Model Owner and QRM. The proposal would revise MRGC’s role as advisory and nodecision making one, and transfer MRGC’s responsibilities to MVC. The proposal would transfer the responsibility for approval of Model Validations from MRC to MVC. The Clearing Agencies represent that MVC is composed of individuals with a high level of expertise relating to Model Validation, and that MVC has an independent reporting line to the Group Chief Risk Officer, without any potential conflict of reporting to any person that could be a Model Owner.24 Thus, taken together, under the proposal, the governance arrangements set forth in the Framework would specify these particular lines of responsibility that ensure independence and competency of the group that manages model risk. Second, the proposal incorporates the Model Risk Tolerance Statement in the Framework as one of the Clearing Agencies’ internal policies and procedures to support the Framework. The Model Risk Tolerance Statement should provide additional specificity and clarity to the risk tolerance levels and help the Clearing Agencies to manage their models within more clearly defined risk tolerance levels. Third, the proposal makes other 23 15 U.S.C. 78q–1(b)(3)(F). DTC Notice of Filing, 82 FR at 22194; FICC Notice of Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. MVC is functionally separate from all Clearing Agency areas that develop or operate models. See 2017 Framework Order, 82 FR at 41434. 24 See PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 31831 technical and clarifying changes to the text that should help facilitate the effective execution of the Framework by removing inconsistent use of terminology and adopting more accurate terminology. With the proposed rule changes designed to enhance the Framework, the Clearing Agencies should be able to more effectively manage its quantitative models, and in turn, better evaluate and address risk presented by Clearing Agencies’ members. By effectively evaluating and addressing risk presented by members, the Clearing Agencies should be able to better address their exposure to members and assure the safeguarding of securities and funds which are in Clearing Agencies’ custody or control. Therefore, for the reasons stated above, the Commission believes that the proposed rule changes are consistent with the requirements of Section 17A(b)(3)(F) of the Act.25 B. Consistency With Rules 17Ad– 22(e)(2)(v) Rule 17Ad–22(e)(2)(v) under the Act requires that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to provide for governance arrangements that specify clear and direct lines of responsibility.26 As stated above, the proposal clarifies and specifies the governance arrangements relating to the management of the Clearing Agencies model risk management, including: (1) The officer responsible for supervising MVC would be elevated from Executive Director to Managing Director; (2) the officer responsible for supervising would report directly to the Group Chief Risk Officer rather than any person that is part of the development or operation of a model; (3) the MRGC would relinquish any decision making authority with regard to model risk management issues; (4) MVC would have the sole and exclusive authority to approve a model, and would oversee model performance monitoring activities; and (5) QRM would perform VaR and CFR backtesting. Such changes would clearly specify particular lines of responsibilities and a decision making process at each stage of the model risk management process. Because the proposal would specify clear and direct lines of responsibility, the Commission believes that the proposed changes to 25 15 26 17 E:\FR\FM\27MYN1.SGM U.S.C. 78q–1(b)(3)(F). CFR 240.17Ad–22(e)(2)(v). 27MYN1 31832 Federal Register / Vol. 85, No. 102 / Wednesday, May 27, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES the Framework are consistent with Rule 17Ad–22(e)(2)(v) 27 under the Act. C. Consistency With Rules 17Ad– 22(e)(4)(vii) and (e)(7)(vii) Rule 17Ad–22(e)(4)(vii) under the Act requires that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage its credit exposures to participants and those arising from its payment, clearing, and settlement processes, including by performing a model validation for its credit risk models not less than annually or more frequently as may be contemplated by the covered clearing agency’s risk management framework.28 Rule 17Ad–22(e)(7)(vii) under the Act requires, in part, that each covered clearing agency establish, implement, maintain and enforce written policies and procedures reasonably designed to effectively identify, measure, monitor, and manage the liquidity risk that arises in or is borne by the covered clearing agency, including measuring, monitoring, and managing its settlement and funding flows on an ongoing basis, and its use of intraday liquidity by, at a minimum, performing a model validation for its liquidity risk models not less than annually or more frequently as may be contemplated by the covered clearing agency’s risk management framework.29 Rule 17Ad–22(a)(9) under the Act defines a model validation as an evaluation of the performance of each material risk management model used by a covered clearing agency (and the related parameters and assumptions associated with such models), including initial margin models, liquidity risk models, and models used to generate clearing or guaranty fund requirements, performed by a qualified person who is free from influence from the persons responsible for the development or operation of the models or policies being validated.30 The Framework provides a process for validation of the Clearing Agencies’ credit and liquidity risk models. The proposal would enhance the Framework by clarifying and amending the governance relating to the model risk management of these models, including Model Validation, expanding internal policies and procedures to manage the models, and removing inconsistent and inaccurate terminology. 27 17 CFR 240.17Ad–22(e)(2)(v). CFR 240.17Ad–22(e)(4)(vii). 29 17 CFR 240.17Ad–22(e)(7)(vii). 30 17 CFR 240.17Ad–22(a)(9). 28 17 VerDate Sep<11>2014 16:59 May 26, 2020 Jkt 250001 In particular, the proposal would state that MVC would have the sole and exclusive authority to approve a model and that it has an independent reporting line to the Group Chief Risk Officer. The Clearing Agencies represent that this change is to make clear that MVC would not have potential conflicts of interest by reporting to any person that could have been a part of the development or operation of a model. Also, the proposal would remove the MRGC’s oversight authority regarding Model Validation and move that authority to MVC. The Clearing Agencies represent that MVC is composed of individuals with a high level of quantitative and technical expertise and knowledge. The changes set forth in the proposal would clearly define the governance applicable to the Model Validation process and assign responsibilities to a group that is qualified and free from influence from the persons responsible for the development and operation of the Clearing Agencies’ models. The Framework would continue to provide that Model Validations are performed annually. The Commission therefore believes that the proposed changes to the Framework are consistent with Rule 17Ad–22(e)(4)(vii) 31 and (e)(7)(vii) 32 under the Act. III. Conclusion On the basis of the foregoing, the Commission finds that the proposed rule changes are consistent with the requirements of the Act and in particular with the requirements of Section 17A of the Act 33 and the rules and regulations promulgated thereunder. It is therefore ordered, pursuant to Section 19(b)(2) of the Act 34 that proposed rule changes SR–DTC–2020– 008, SR–FICC–2020–004, SR–NSCC– 2020–008, be, and hereby are, APPROVED.35 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.36 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–11285 Filed 5–26–20; 8:45 am] BILLING CODE 8011–01–P 31 17 CFR 240.17Ad–22(e)(4)(vii). CFR 240.17Ad–22(e)(7)(vii). 33 15 U.S.C. 78q–1. 34 15 U.S.C. 78s(b)(2). 35 In approving the proposed rule changes, the Commission considered the proposals’ impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 36 17 CFR 200.30–3(a)(12). 32 17 PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–88917; File No. SR–FINRA– 2020–015] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Temporarily Amend Certain Timing, Method of Service and Other Procedural Requirements in FINRA Rules During the Outbreak of the Coronavirus Disease (COVID–19) May 20, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 8, 2020, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the self-regulatory organization. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA proposes to temporarily amend FINRA Rules 1012, 1015, 6490, 9132, 9133, 9146, 9321, 9341, 9349, 9351, 9522, 9524, 9525, 9559, and 9630 primarily to provide FINRA with temporary relief from certain timing, method of service and other procedural requirements during the period in which FINRA’s operations are impacted by the outbreak of the coronavirus disease (‘‘COVID–19’’).3 The text of the proposed rule change is available on FINRA’s website at https:// www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 While the temporary rule change primarily provides FINRA with relief, it also requires applicants, respondents and other parties to file certain applications, documents or other information by electronic mail, unless FINRA and the relevant party agree to an alternative method of service. The rule change also temporarily provides an extension of time for a Requesting Party to file an appeal in connection with Rule 6490(e) and removes the requirement to send FINRA a duplicate hard copy of certain documents and filings. FINRA has proposed these temporary rule changes in an effort to provide consistent relief to both FINRA and the impacted party under those rules. 2 17 E:\FR\FM\27MYN1.SGM 27MYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 102 (Wednesday, May 27, 2020)]
[Notices]
[Pages 31828-31832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11285]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88911; File Nos. SR-DTC-2020-008; SR-FICC-2020-004; SR-
NSCC-2020-008]


Self-Regulatory Organizations; The Depository Trust Company; 
Fixed Income Clearing Corporation; National Securities Clearing 
Corporation; Order Approving a Proposed Rule Change To Modify the 
Clearing Agency Model Risk Management Framework

May 20, 2020.
    On April 10, 2020, The Depository Trust Company (``DTC''), Fixed 
Income Clearing Corporation (``FICC''), and National Securities 
Clearing Corporation (``NSCC,'' each a ``Clearing Agency,'' and 
collectively, the ``Clearing

[[Page 31829]]

Agencies''), filed with the Securities and Exchange Commission 
(``Commission'') proposed rule changes SR-DTC-2020-008; SR-FICC-2020-
004; SR-NSCC-2020-008, respectively, pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule changes were published for comment in 
the Federal Register on April 21, 2020,\3\ and the Commission received 
no comment letters regarding the changes proposed in the proposed rule 
changes. For the reasons discussed below, the Commission is approving 
the proposed rule changes.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 88640 (April 15, 2020), 
85 FR 22191 (April 21, 2020) (``DTC Notice of Filing''); Securities 
Exchange Act Release No. 88636 (April 15, 2020), 85 FR 22228 (April 
21, 2020) (``FICC Notice of Filing''); Securities Exchange Act 
Release No. 88637 (April 15, 2020), 85 FR 22222 (April 21, 2020) 
(``NSCC Notice of Filing'').
    \4\ Capitalized terms not defined herein are defined in the DTC 
Rules, GSD Rules, MBSD Rules, or NSCC Rules, as applicable, 
available at https://dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------

I. Description of the Proposed Rule Change

A. Background

    Each Clearing Agency has established a Model Risk Management 
Framework (``Framework'') \5\ to help it identify, measure, monitor, 
and manage the risks associated with the design, development, 
implementation, use, and validation of quantitative models.\6\ Pursuant 
to the Framework, a model developed for use by any of the Clearing 
Agencies and meeting the above definition for the term ``model'' is 
included and tracked within a model inventory (``Model Inventory'') 
maintained by DTCC's Model Validation and Control Unit (``MVC''), which 
is part of the Group Chief Risk Office. The parent company of the 
Clearing Agencies is The Depository Trust & Clearing Corporation 
(``DTCC''). DTCC operates on a shared services model with respect to 
the Clearing Agencies. Most corporate functions are established and 
managed on an enterprise-wide basis pursuant to intercompany agreements 
under which it is generally DTCC that provides a relevant service to a 
Clearing Agency.
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 81485 (August 25, 
2017), 82 FR 41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-
FICC-2017-014; SR-NSCC-2017-008) (``2017 Framework Order''). The 
proposed rule changes do not require any changes to (1) the Rules, 
By-Laws and Organization Certificate of DTC (``DTC Rules''), (2) the 
Rulebook of the Government Securities Division of FICC (``GSD 
Rules''), (3) the Clearing Rules of the Mortgage-Backed Securities 
Division of FICC (``MBSD Rules''), or (4) the Rules & Procedures of 
NSCC (``NSCC Rules''), as the Framework is a standalone document.
    \6\ See 2017 Framework Order, 82 FR at 41433. ``[M]odel'' refers 
to a quantitative method, system, or approach that applies 
statistical, economic, financial, or mathematical theories, 
techniques, and assumptions to process input data into quantitative 
estimates. A ``model'' consists of three components: An information 
input component, which delivers assumptions and data to the model; a 
processing component, which transforms inputs into estimates; and a 
reporting component, which translates the estimates into useful 
business information. The definition of ``model'' also covers 
quantitative approaches whose inputs are partially or wholly 
qualitative or based on expert judgment, provided that the output is 
quantitative in nature. See DTC Notice of Filing, 82 FR at 22192; 
FICC Notice of Filing, 82 FR at 22228; NSCC Notice of Filing, 82 FR 
at 22222.
---------------------------------------------------------------------------

    The proposed rule changes would amend the Framework to (i) modify 
certain roles and governance arrangements set forth within the 
Framework, (ii) incorporate a description of and references to the 
``Model Risk Tolerance Statement,'' and (iii) make other technical and 
clarifying changes to the text of the Framework, as described below.

B. Modification of Roles and Governance Arrangements

1. Role and Reporting Lines of the Model Owner, MVC, and MRC
    Section 3.1 of the Framework describes how models are developed for 
use by any of the Clearing Agencies and tracked within the Model 
Inventory.\7\ In particular, the Framework currently describes a 
``Model Owner'' \8\ as the person responsible for the development or 
operation of a model being validated by MVC. The proposal would define 
a Model Owner as the person who is designated by the applicable 
business area or support function to be responsible for a particular 
model and who is recorded as the Model Owner for such model by MVC in 
the Model Inventory.
---------------------------------------------------------------------------

    \7\ See DTC Notice of Filing, 82 FR at 22192; FICC Notice of 
Filing, 82 FR at 22228; NSCC Notice of Filing, 82 FR at 22223.
    \8\ See 2017 Framework Order, 82 FR at 41434.
---------------------------------------------------------------------------

    Currently, the Framework states that the Executive Director of MVC 
reports to the Group Chief Risk Officer rather than to any Model Owner. 
The proposal would change the title of the head of MVC from an 
Executive Director to Managing Director at each Clearing Agency to 
reflect that a more senior officer of the Clearing Agencies would be 
responsible for supervising MVC.\9\ The proposal would also clarify 
that the head of MVC reports to the Group Chief Risk Officer rather 
than to anyone that could be a Model Owner (i.e., anyone who develops 
and operates a model and not only personnel who are currently Model 
Owners). The Clearing Agencies represent that this change is to make 
clear that MVC has an independent reporting line to the Group Chief 
Risk Officer, without potential conflict of reporting to any person 
that could be a Model Owner.\10\ Under the proposal, the Framework 
would further state that the head of MVC is a member of the Management 
Risk Committee (``MRC'').\11\
---------------------------------------------------------------------------

    \9\ See DTC Notice of Filing, 82 FR at 22193; FICC Notice of 
Filing, 82 FR at 22229; NSCC Notice of Filing, 82 FR at 22223.
    \10\ See DTC Notice of Filing, 82 FR at 22193; FICC Notice of 
Filing, 82 FR at 22229; NSCC Notice of Filing, 82 FR at 22224.
    \11\ The MRC is the Clearing Agencies' management level 
committee responsible for, among other things, model risk management 
matters. See 2017 Framework Order, 82 FR at 41435.
---------------------------------------------------------------------------

2. Processes for Determining Model Materiality and Complexity
    Section 3.2 of the Framework outlines that MVC assigns a 
materiality rating and complexity rating to each model after it is 
added to the Model Inventory.\12\ Currently, all model materiality 
rating and complexity rating assignments are reviewed by at least 
annually by MVC, as well as by the Model Risk Governance Committee 
(``MRGC'').\13\
---------------------------------------------------------------------------

    \12\ A model's rating impacts both the prioritization and 
approval authority for that model's validation. See DTC Notice of 
Filing, 82 FR at 22193; FICC Notice of Filing, 82 FR at 22230; NSCC 
Notice of Filing, 82 FR at 22224.
    \13\ See 2017 Framework Order, 82 FR at 41434.
---------------------------------------------------------------------------

    The proposal would revise the role of the MRGC, including by 
removing its oversight authority in the Model Validation process and 
leaving MVC as the sole entity responsible for reviewing the model 
materiality and complexity ratings. Moreover, under the proposal, the 
MRGC would serve as a forum for review of model risk matters rather 
than a decision-making body charged with the oversight of such matters. 
The proposal would also revise the MRGC's name by replacing 
``Committee'' with ``Council'' to reflect the MRGC's role as an 
advisory body.\14\
---------------------------------------------------------------------------

    \14\ See DTC Notice of Filing, 82 FR at 22193; FICC Notice of 
Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. As 
proposed, the MRGC could provide advice or recommendations regarding 
model risk matters to the interested party of a pertinent model.
---------------------------------------------------------------------------

3. Processes for Model Approval and Control
    Section 3.6 of the Framework currently provides that the Financial 
Engineering Unit (``FEU'') within Quantitative Risk Management 
(``QRM'') is responsible for developing, testing, and signing-off on 
new models and enhancements to existing models before

[[Page 31830]]

submitting any new model to MVC for Model Validation and approval. The 
Clearing Agencies state that QRM is a risk management function within 
the Group Chief Risk Office, and that a representative of QRM is the 
Model Owner for all margin models used by the Clearing Agencies.\15\ 
The section further explains that all new models and all material 
changes to existing models undergo Model Validation by MVC and must be 
approved prior to business use. In addition, the section states that 
models that have a materiality rating of `Medium' or `High' must be 
approved by the MRC, after the MRGC has reviewed the model and 
recommended it to the MRC for approval.
---------------------------------------------------------------------------

    \15\ See DTC Notice of Filing, 82 FR at 22194; FICC Notice of 
Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224.
---------------------------------------------------------------------------

    The proposal would transfer FEU's responsibilities to the Model 
Owners to reflect the elimination of the FEU within QRM.\16\ Also, the 
proposal would remove the requirement that Model Validations with a 
materiality rating of `Medium' or `High' be approved by the MRC, after 
the MRGC has reviewed and recommended the model to the MRC for 
approval. As a result of these changes, MVC would have the sole and 
exclusive authority to approve a model.
---------------------------------------------------------------------------

    \16\ See id.
---------------------------------------------------------------------------

    The Clearing Agencies represent that MVC is best suited to address 
Model Validation issues based on its quantitative and technical 
expertise and knowledge.\17\ Accordingly, the proposal would remove any 
text that indicates that MRC approval is required for any Model 
Validation to be complete and/or for a model to remain in production. 
In addition, consistent with the proposed changes to Section 3.2, the 
proposal would make changes to reflect that the MRGC does not have any 
oversight role for model approval and control.
---------------------------------------------------------------------------

    \17\ See id.
---------------------------------------------------------------------------

4. Model Performance Monitoring Responsibilities
    Section 3.8 of the Framework currently states that MVC is 
responsible for model performance monitoring, including review of risk-
based models used to calculate margin requirements and relevant 
parameters/threshold indicators, sensitivity analysis, and model 
backtesting results, and preparation of related reports. It also states 
that review of these model performance measures is subject to review by 
the MRGC.
    Under the proposal, the Framework would identify Model Owners as 
responsible for the design and execution of model performance 
monitoring and preparation of model performance monitoring reports. 
Similarly, the proposal would revise the Framework to clarify that QRM, 
which encompasses Model Owners, would be responsible for model 
performance monitoring of the Clearing Agencies' margin models. The 
proposal would also revise the role of MVC with respect to model 
performance monitoring to providing oversight of model performance 
monitoring activities (as opposed to conducting the monitoring) by 
setting organizational standards and providing critical analysis for 
identifying model issues and/or limitations. In addition, the proposal 
would remove the statement that review of model performance measure is 
subject to review by the MRGC.
5. Backtesting Responsibilities
    Section 3.9 of the Framework currently states that MVC is 
responsible for each Clearing Agency's Value-at-Risk (``VaR'') 
backtesting and Clearing Fund Requirement (``CFR'') backtesting. 
Consistent with the changes described above, this section would be 
revised to state that QRM would perform VaR and CFR backtesting, as QRM 
is responsible for performance monitoring functions with respect to 
margin models.
6. Board of Directors and Senior Management Reporting
    Section 4.1 of the Framework currently describes the MRGC as the 
primary forum for MVC's regular reporting of Model Validation 
activities and material model risks identified through regular model 
performance monitoring. The proposal would delete this reference to the 
MRGC's role, as it would no longer have oversight of Model Validation 
and model performance monitoring. In addition, it would add the MRC as 
a recipient of periodic reporting.
7. Escalation
    Section 4.2 describes the processes applicable for further review 
of the key metrics identified in Section 3.9 (Backtesting). Currently, 
such metrics are reviewed by the Market and Liquidity Risk Management 
unit within the Group Chief Risk Office and MVC, and also reported to 
the MRC, on at least a monthly basis. The section further states that 
the MRGC reviews and approves changes to backtesting methodology.
    The proposal would eliminate the provision that MVC would review 
the metrics and clarify that the key metrics are reported to MRC by the 
group within the Group Chief Risk Office responsible for risk 
reporting. The proposal would remove the MRGC's role in review and 
approval of changes to backtesting methodology and instead vest that 
responsibility with MVC to reflect the change in oversight of Model 
Validation from the MRGC to MVC.

C. Incorporation of the Model Risk Tolerance Statement

    The Framework currently includes a description of internal DTCC 
policies and procedures that support the Framework, including the (1) 
DTCC Model Risk Management Policy, (2) DTCC Model Validation 
Procedures, (3) DTCC Model Risk Performance Monitoring Procedures, (4) 
the DTCC Backtesting Procedures, and (5) Market Risk Tolerance 
Statement (``Related Procedures''). The Framework also notes that the 
Related Procedures may be updated or amended.
    The proposal would add the Model Risk Tolerance Statement as one of 
DTCC's internal policies and procedures to support the Framework. The 
proposal would explain that the Model Risk Tolerance Statement sets 
forth, among other things, risk tolerance levels covering model design 
and implementation, including consideration of a model's intended 
purpose and/or its adequacy of performance.
    The proposal would also add an explanation of the existing Market 
Risk Tolerance Statement, stating that it articulates, among other 
things, risk tolerance levels for (i) margin backtests addressing 
backtest coverage and (ii) stress tests covering exposure to extreme 
market moves.
    Further, the proposal would add language to the Framework stating 
that the Model Risk Tolerance Statement and the Market Risk Tolerance 
Statement (each a ``Risk Tolerance Statement'') record the overall risk 
reduction or mitigation objectives as they relate to model risk and 
market risk activities. Under the proposal, the Framework would also 
state that the Risk Tolerance Statements document the risk controls and 
other measures used to manage such activities, including escalation 
requirements in the event of risk metric breaches. Similarly, the 
proposal would also revise the Framework to provide that the Risk 
Tolerance Statements would be reviewed, revised, retired, replaced, or 
approved by the BRC annually, based upon the existing circumstances and 
the reasonable best judgement of management relating to model risk 
management matters.

[[Page 31831]]

D. Other Technical Changes

    The proposal would also make a number of technical changes to the 
Framework. First, Section 3.8 of the Framework currently states that 
model performance monitoring is the process of (i) evaluating an active 
model's ongoing performance based on theoretical tests, (ii) monitoring 
the model's parameters through the use of threshold indicators, and/or 
(iii) backtesting using actual historical data/realizations to test a 
VaR model's predictive power. The Clearing Agencies state that the 
process of model performance monitoring does not always take into 
account theoretical tests, threshold indicators, and/or historical 
data/realizations, but could take some or all of these into account as 
appropriate under the circumstances.\18\ Accordingly, the proposal 
would eliminate references to ``theoretical tests,'' ``threshold 
indicators,'' and ``historical data/realizations'' to provide a more 
accurate description of the Clearing Agencies' model performance 
monitoring process.\19\
---------------------------------------------------------------------------

    \18\ See DTC Notice of Filing, 82 FR at 22194; FICC Notice of 
Filing, 82 FR at 22231; NSCC Notice of Filing, 82 FR at 22225.
    \19\ See id.
---------------------------------------------------------------------------

    Second, to improve the readability and clarity of the Framework's 
text, the proposal would (1) remove the use of the modifier ``Clearing 
Agency'' with respect to references to models and other parts of the 
Framework, (2) replace ``vendor'' with ``externally purchased'' in 
describing models developed externally, (3) relocate certain sentences, 
and (4) consistently use ``model'' without capitalization.

II. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \20\ 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 rules and regulations thereunder applicable 
to such organization. After carefully considering the proposed rule 
change, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Clearing Agencies. In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) \21\ of the Act and Rules 17Ad-
22(e)(2)(v), (e)(4)(vii), and (e)(7)(vii) thereunder.\22\
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2)(C).
    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(e)(2)(v), (e)(4)(vii), and (e)(7)(vii).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(F)

    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a clearing agency be designed 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.\23\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As described above, the Framework is designed to identify, measure, 
monitor, and manage the risks related to the design, development, 
implementation, use, and validation of quantitative models. The 
proposal is designed to enhance the Framework by improving the 
governance arrangements relating to the management of the Clearing 
Agencies' quantitative models, expanding internal policies and 
procedures to manage the models, and removing inconsistent and 
inaccurate terminology.
    First, the proposal is designed to clarify and enhance the 
governance structures set forth in the Framework in a number of ways. 
The proposal would clarify and revise the roles of Model Owner and QRM. 
The proposal would revise MRGC's role as advisory and no-decision 
making one, and transfer MRGC's responsibilities to MVC. The proposal 
would transfer the responsibility for approval of Model Validations 
from MRC to MVC. The Clearing Agencies represent that MVC is composed 
of individuals with a high level of expertise relating to Model 
Validation, and that MVC has an independent reporting line to the Group 
Chief Risk Officer, without any potential conflict of reporting to any 
person that could be a Model Owner.\24\ Thus, taken together, under the 
proposal, the governance arrangements set forth in the Framework would 
specify these particular lines of responsibility that ensure 
independence and competency of the group that manages model risk.
---------------------------------------------------------------------------

    \24\ See DTC Notice of Filing, 82 FR at 22194; FICC Notice of 
Filing, 82 FR at 22230; NSCC Notice of Filing, 82 FR at 22224. MVC 
is functionally separate from all Clearing Agency areas that develop 
or operate models. See 2017 Framework Order, 82 FR at 41434.
---------------------------------------------------------------------------

    Second, the proposal incorporates the Model Risk Tolerance 
Statement in the Framework as one of the Clearing Agencies' internal 
policies and procedures to support the Framework. The Model Risk 
Tolerance Statement should provide additional specificity and clarity 
to the risk tolerance levels and help the Clearing Agencies to manage 
their models within more clearly defined risk tolerance levels. Third, 
the proposal makes other technical and clarifying changes to the text 
that should help facilitate the effective execution of the Framework by 
removing inconsistent use of terminology and adopting more accurate 
terminology.
    With the proposed rule changes designed to enhance the Framework, 
the Clearing Agencies should be able to more effectively manage its 
quantitative models, and in turn, better evaluate and address risk 
presented by Clearing Agencies' members. By effectively evaluating and 
addressing risk presented by members, the Clearing Agencies should be 
able to better address their exposure to members and assure the 
safeguarding of securities and funds which are in Clearing Agencies' 
custody or control. Therefore, for the reasons stated above, the 
Commission believes that the proposed rule changes are consistent with 
the requirements of Section 17A(b)(3)(F) of the Act.\25\
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Consistency With Rules 17Ad-22(e)(2)(v)

    Rule 17Ad-22(e)(2)(v) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to provide for governance 
arrangements that specify clear and direct lines of responsibility.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

    As stated above, the proposal clarifies and specifies the 
governance arrangements relating to the management of the Clearing 
Agencies model risk management, including: (1) The officer responsible 
for supervising MVC would be elevated from Executive Director to 
Managing Director; (2) the officer responsible for supervising would 
report directly to the Group Chief Risk Officer rather than any person 
that is part of the development or operation of a model; (3) the MRGC 
would relinquish any decision making authority with regard to model 
risk management issues; (4) MVC would have the sole and exclusive 
authority to approve a model, and would oversee model performance 
monitoring activities; and (5) QRM would perform VaR and CFR 
backtesting. Such changes would clearly specify particular lines of 
responsibilities and a decision making process at each stage of the 
model risk management process. Because the proposal would specify clear 
and direct lines of responsibility, the Commission believes that the 
proposed changes to

[[Page 31832]]

the Framework are consistent with Rule 17Ad-22(e)(2)(v) \27\ under the 
Act.
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22(e)(2)(v).
---------------------------------------------------------------------------

C. Consistency With Rules 17Ad-22(e)(4)(vii) and (e)(7)(vii)

    Rule 17Ad-22(e)(4)(vii) under the Act requires that each covered 
clearing agency establish, implement, maintain and enforce written 
policies and procedures reasonably designed to effectively identify, 
measure, monitor, and manage its credit exposures to participants and 
those arising from its payment, clearing, and settlement processes, 
including by performing a model validation for its credit risk models 
not less than annually or more frequently as may be contemplated by the 
covered clearing agency's risk management framework.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(e)(4)(vii).
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(7)(vii) under the Act requires, in part, that each 
covered clearing agency establish, implement, maintain and enforce 
written policies and procedures reasonably designed to effectively 
identify, measure, monitor, and manage the liquidity risk that arises 
in or is borne by the covered clearing agency, including measuring, 
monitoring, and managing its settlement and funding flows on an ongoing 
basis, and its use of intraday liquidity by, at a minimum, performing a 
model validation for its liquidity risk models not less than annually 
or more frequently as may be contemplated by the covered clearing 
agency's risk management framework.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 240.17Ad-22(e)(7)(vii).
---------------------------------------------------------------------------

    Rule 17Ad-22(a)(9) under the Act defines a model validation as an 
evaluation of the performance of each material risk management model 
used by a covered clearing agency (and the related parameters and 
assumptions associated with such models), including initial margin 
models, liquidity risk models, and models used to generate clearing or 
guaranty fund requirements, performed by a qualified person who is free 
from influence from the persons responsible for the development or 
operation of the models or policies being validated.\30\
---------------------------------------------------------------------------

    \30\ 17 CFR 240.17Ad-22(a)(9).
---------------------------------------------------------------------------

    The Framework provides a process for validation of the Clearing 
Agencies' credit and liquidity risk models. The proposal would enhance 
the Framework by clarifying and amending the governance relating to the 
model risk management of these models, including Model Validation, 
expanding internal policies and procedures to manage the models, and 
removing inconsistent and inaccurate terminology.
    In particular, the proposal would state that MVC would have the 
sole and exclusive authority to approve a model and that it has an 
independent reporting line to the Group Chief Risk Officer. The 
Clearing Agencies represent that this change is to make clear that MVC 
would not have potential conflicts of interest by reporting to any 
person that could have been a part of the development or operation of a 
model. Also, the proposal would remove the MRGC's oversight authority 
regarding Model Validation and move that authority to MVC. The Clearing 
Agencies represent that MVC is composed of individuals with a high 
level of quantitative and technical expertise and knowledge.
    The changes set forth in the proposal would clearly define the 
governance applicable to the Model Validation process and assign 
responsibilities to a group that is qualified and free from influence 
from the persons responsible for the development and operation of the 
Clearing Agencies' models. The Framework would continue to provide that 
Model Validations are performed annually. The Commission therefore 
believes that the proposed changes to the Framework are consistent with 
Rule 17Ad-22(e)(4)(vii) \31\ and (e)(7)(vii) \32\ under the Act.
---------------------------------------------------------------------------

    \31\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \32\ 17 CFR 240.17Ad-22(e)(7)(vii).
---------------------------------------------------------------------------

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule changes are consistent with the requirements of the Act 
and in particular with the requirements of Section 17A of the Act \33\ 
and the rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\34\ that proposed rule changes SR-DTC-2020-008, SR-FICC-2020-004, SR-
NSCC-2020-008, be, and hereby are, APPROVED.\35\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).
    \35\ In approving the proposed rule changes, the Commission 
considered the proposals' impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \36\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11285 Filed 5-26-20; 8:45 am]
BILLING CODE 8011-01-P

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