Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Risk Management Model Description, ICC Stress Testing Framework, ICC Liquidity Risk Management Framework, ICC Back-Testing Framework, and ICC Risk Parameter Setting and Review Policy, 39226-39230 [2020-14009]
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Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Notices
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within 60 days of this notice.
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[FR Doc. 2020–13985 Filed 6–29–20; 8:45 am]
BILLING CODE 7905–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89147; File No. SR–NYSE–
2019–67]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Designation of Longer Period for
Commission Action on Proceedings To
Determine Whether To Approve or
Disapprove a Proposed Rule Change,
as Modified by Amendment No. 2, To
Amend Chapter One of the Listed
Company Manual To Modify the
Provisions Relating to Direct Listings
June 24, 2020.
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Time
(minutes)
On December 11, 2019, New York
Stock Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) 1 of the Securities Exchange Act
of 1934 (‘‘Act’’) 2 and Rule 19b–4
thereunder,3 a proposed rule change to
amend Chapter One of the Listed
Company Manual to modify the
provisions relating to direct listings. On
December 13, 2019, the Exchange filed
Amendment No. 1 to the proposed rule
change, which amended and replaced
the proposed rule change in its entirety.
The proposed rule change, as modified
by Amendment No. 1, was published for
1 15
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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comment in the Federal Register on
December 30, 2019.4 On February 13,
2020, pursuant to Section 19(b)(2) of the
Exchange Act,5 the Commission
designated a longer period within which
to either approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether to disapprove the
proposed rule change.6 On March 26,
2020, the Commission instituted
proceedings to determine whether to
approve or disapprove the proposed
rule change, as modified by Amendment
No. 1.7 On June 22, 2020, the Exchange
filed Amendment No. 2 to the proposed
rule change, which superseded the
proposed rule change as modified by
Amendment No. 1.8
Section 19(b)(2) of the Act 9 provides
that, after initiating proceedings, the
Commission shall issue an order
approving or disapproving the proposed
rule change not later than 180 days after
the date of publication of notice of the
filing of the proposed rule change. The
Commission may extend the period for
issuing an order approving or
disapproving the proposed rule change,
however, by not more than 60 days if
the Commission determines that a
longer period is appropriate and
publishes the reasons for such
determination. The proposed rule
change was published for comment in
the Federal Register on December 30,
2019.10 The 180th day after publication
of the Notice is June 27, 2020. The
Commission is extending the time
period for approving or disapproving
the proposal for an additional 60 days.
The Commission finds that it is
appropriate to designate a longer period
within which to issue an order
4 See Securities Exchange Act Release No. 87821
(December 20, 2019), 84 FR 72065 (December 30,
2019) (‘‘Notice’’). Comments received on the Notice
are available on the Commission’s website at:
https://www.sec.gov/comments/sr-nyse-2019-67/
srnyse201967.htm.
5 15 U.S.C. 78s(b)(2).
6 See Securities and Exchange Act Release No.
88190 (February 13, 2020), 85 FR 9891 (February
20, 2020).
7 See Securities and Exchange Act Release No.
88485 (March 26, 2020), 85 FR 18292 (April 1,
2020).
8 See Securities and Exchange Act Release No.
89148 (June 24, 2020).
9 15 U.S.C. 78s(b)(2).
10 See supra note 4.
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approving or disapproving the proposed
rule change so that it has sufficient time
to consider the proposed rule change, as
modified by Amendment No. 2, along
with the comments received on the
proposal and the Exchange’s response.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,11
designates August 26, 2020, as the date
by which the Commission should either
approve or disapprove the proposed
rule change (File No. SR–NYSE–2019–
67), as modified by Amendment No. 2.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14012 Filed 6–29–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89142; File No. SR–ICC–
2020–002]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Risk Management Model
Description, ICC Stress Testing
Framework, ICC Liquidity Risk
Management Framework, ICC BackTesting Framework, and ICC Risk
Parameter Setting and Review Policy
June 24, 2020.
I. Introduction
On January 14, 2020, 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 (the ‘‘Act’’),1 and Rule 19b–4
thereunder,2 a proposed rule change to
amend ICC’s Risk Management Model
Description, Stress Testing Framework,
Liquidity Risk Management Framework,
Back-Testing Framework, and Risk
Parameter Setting and Review Policy
(together, the ‘‘Risk Policies’’) in
connection with the clearing of credit
11 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
12 17
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Federal Register / Vol. 85, No. 126 / Tuesday, June 30, 2020 / Notices
default index swaptions. The proposed
rule change was published for comment
in the Federal Register on January 31,
2020.3 On March 13, 2020, the
Commission designated a longer period
of time for Commission action on the
proposed rule change until April 30,
2020.4 On April 29, 2020, the
Commission issued an order instituting
proceedings under Section 19(b)(2)(B) of
the Act 5 to determine whether to
approve or disapprove the proposed
rule change.6 The Commission did not
receive comments regarding the
proposed rule change. For the reasons
discussed below, the Commission is
approving the proposed rule change.
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II. Description of the Proposed Rule
Change
The proposed rule change would
amend the Risk Policies in connection
with ICC’s proposed clearing of credit
default index swaptions (‘‘Index
Swaptions’’).7 Pursuant to an Index
Swaption, one party (the ‘‘Swaption
Buyer’’) has the right (but not the
obligation) to cause the other party (the
‘‘Swaption Seller’’) to enter into an
index credit default swap transaction at
a pre-determined strike price on a
specified expiration date on specified
terms. In the case of Index Swaptions
that would be cleared by ICC, the
underlying index credit default swap
would be limited to certain CDX and
iTraxx Europe index credit default
swaps that are accepted for clearing by
ICC and would be automatically cleared
by ICC upon exercise of the Index
3 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing of Proposed Rule Change,
Security-Based Swap Submission, or Advance
Notice Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC
Liquidity Risk Management Framework, ICC BackTesting Framework, and ICC Risk Parameter Setting
and Review Policy; Exchange Act Release No.
88047 (Jan. 27, 2020); 85 FR 5756 (Jan. 31, 2020)
(SR–ICC–2020–002) (‘‘Notice’’).
4 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Designation of Longer Period of
Time for Commission Action on Proposed Rule
Change Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC
Liquidity Risk Management Framework, ICC BackTesting Framework, and ICC Risk Parameter Setting
and Review Policy; Exchange Act Release No.
88379 (Mar. 13, 2020); 85 FR 15829 (Mar. 19, 2020)
(SR–ICC–2020–002).
5 15 U.S.C. 78s(b)(2)(B).
6 Self-Regulatory Organizations; ICE Clear Credit
LLC; Order Instituting Proceedings to Determine
Whether to Approve or Disapprove Proposed Rule
Change Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC
Liquidity Risk Management Framework, ICC BackTesting Framework, and ICC Risk Parameter Setting
and Review Policy; Exchange Act Release No.
88775 (Apr. 29, 2020); 85 FR 26774 (May 5, 2020)
(SR–ICC–2020–002).
7 Index Swaptions are also referred to herein and
in the Risk Policies as ‘‘index options’’ or ‘‘index
CDS options’’, or in similar terms.
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Swaption by the Swaption Buyer in
accordance with its terms. The
Commission has previously approved
changes that ICC made to its Rules, Endof-Day Price Discovery Policies and
Procedures, and Risk Management
Framework related to the clearing of
Index Swaptions (the ‘‘Swaption Rule
Filing’’).8 As explained in the Swaption
Rule Filing, ICC would need to adopt
certain related policies and procedures
in preparation for the launch of clearing
of Index Swaptions, including those set
out in this filing, and would not
commence clearing of Index Swaptions
until such policies and procedures have
been approved by the Commission or
otherwise become effective.9
As discussed above, the proposed rule
change would amend the Risk
Management Model Description, the
Stress Testing Framework, Liquidity
Risk Management Framework, BackTesting Framework, and Risk Parameter
Setting and Review Policy.
A. Amendments to the Risk
Management Model Description
The proposed rule change would
amend ICC’s Risk Management Model
Description (‘‘RMMD’’) to take into
account ICC clearing and settling Index
Swaptions. Specifically, the proposed
rule change would extend to Index
Swaptions the existing methodology
that ICC uses to determining initial
margin and guaranty fund requirements
for index and single-name CDS. In
addition, the proposed rule change
would make typographical corrections
and would re-number and update crossreferences.
i. Initial Margin
The RMMD provides an overall
description of ICC’s initial margin
methodology describes in detail each
component thereof. The proposed rule
change would first amend the overall
description of ICC’s initial margin
methodology to add a general definition
for Index Swaptions. The proposed rule
change would define an Index Swaption
as an option instrument that is a specific
combination of underlying index,
expiration date, strike price, optionality
type, exercise style, denomination
currency, and transaction type.
Moreover, the proposed rule change
would specify that for purposes of the
8 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Filing of Filing of Partial
Amendment No. 1 and Order Granting Accelerated
Approval of Proposed Rule Change, as Modified by
Partial Amendment No. 1, Relating to the ICC Rules,
ICC End-of-Day Price Discovery Policies and
Procedures, and ICC Risk Management Framework,
Exchange Act Release No. 87297 (Oct. 15, 2019); 84
FR 56270 (Oct. 21, 2019) (SR–ICC–2019–007).
9 Id. at 56270, n. 7.
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39227
initial margin methodology, ICC would
treat an Index Swaption as part of the
risk sub-factor underlying the index
referenced by the Index Swaption.
The proposed rule change would next
amend the description of each
component of ICC’s initial margin
methodology to explain how ICC would
apply that component to Index
Swaptions: Jump-to-default, liquidity
charge, concentration charge, interest
rate sensitivity, basis risk, spread
response, and anti-procyclicality.
Beginning with the jump-to-default
requirement, the proposed rule change
would specify that ICC would determine
an Index Swaption’s jump-to-default
requirement by adding the Index
Swaption’s delta equivalent notional
amount to the aggregate outright
position in index CDS and then
determining the jump-to-default
requirement for that combined position.
With respect to the liquidity charge,
the proposed rule change would add an
Index Swaption component to the
liquidity charge for the outright index
CDS position. The proposed rule change
would set out the formulas that ICC
would use to calculate an Index
Swaption component of the liquidity
charge, and the formulas would take
into account the direction of the
underlying position (bought or sold
protection), other option characteristics
(such as call or put and the underlying
index), bid-offer width scaling factors,
and the liquidity charge for the
underlying CDS position. ICC would
calculate the specific liquidity charge
for an Index Swaption position by
adding together the instrument level
liquidity charges for all Index
Swaptions that share the same effective
underlying directionality. Finally, ICC’s
proposed approach for Index Swaptions
would not provide portfolio benefits
between the Index Swaption position
and the outright underlying index
position, meaning that ICC would not
reduce the liquidity charge to account
for offsets between the Index Swaption
position and the outright underlying
index position.
For the concentration charge, the
proposed rule change would set out the
formulas that ICC would use to calculate
the concentration charge for Index
Swaptions. ICC would base the
calculation on each Index Swaption’s
effective notional amount and 5-year
equivalent analog. Moreover, the
proposed rule change would amend the
overall concentration charge analysis to
consider Index Swaption positions
combined with outright index CDS
positions.
For the interest rate sensitivity
requirement, the proposed rule change
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would extend the existing approach for
index CDS to Index Swaptions. The
proposed rule change would adjust this
approach to account for price changes
for Index Swaptions. Overall, ICC would
use the interest rate sensitivity
requirement to account for the risk
associated with changes in the defaultfree discount interest rate term structure
used to price Index Swaption
instruments.
With respect to basis risk, the
proposed rule change would calculate
basis risk requirements for Index
Swaptions based on decomposed index
positions. Similar to the liquidity
charge, the proposed rule change would
also specify that Index Swaptions would
not be eligible for decomposition
benefits in terms of long-short offsets.
For the spread response component of
initial margin, the proposed rule change
would incorporate an options-implied
credit spread distribution. Specifically,
ICC would model an implied
distribution of credit spread log-returns
for each put and call instrument at each
given expiry, such that the implied
distribution option prices would be as
close as possible to the option prices
established via the end-of-day process.
The proposed rule change would also
make amendments to address the
determination of expected options
payoffs, forward prices and spreads, and
shape parameters for swaption
instruments with the relevant expiry, for
purposes of determining the relevant
distribution of implied prices. Finally,
the proposed rule change would add
formulas to the profit and loss estimates
to take into account Index Swaptions.
With respect to the anti-procyclicality
aspect of initial margin, currently the
RMMD describes how ICC examines
instrument price changes observed
during the Lehman Brothers default,
including consideration of the greatest
price decreases between end-of-day
prices on September 11, 2008 and any
of the next five consecutive trading
days. The proposed rule change would
extend this period for consideration to
the next six consecutive trading days
instead of five. The proposed rule
change would also make this change for
the opposite Lehman Brothers scenario.
The proposed rule change would also
add formulas to compute the profit and
loss for Index Swaptions under these
scenarios. Finally, to determine the
impact of price change on Index
Swaption prices, ICC would re-price the
Index Swaptions instruments in the
underlying stress scenarios.
ii. Guaranty Fund
The proposed rule change would add
Index Swaptions to ICC’s calculation of
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Guaranty Fund requirements. Under the
proposed rule change, ICC would
combine the Index Swaption profit and
loss with the index CDS profit and loss
to determine the worst combined profit
and loss for both Index Swaptions and
Index CDS, and then use that amount to
determine Guaranty Fund requirements.
The proposed rule change would also
add language to explain the
assumptions that ICC uses when
computing the profit and loss for Index
Swaptions.
B. Liquidity Risk Management
Framework
The proposed rule change would
amend the Liquidity Risk Management
Framework to add references to Index
Swaptions and to further explain how
ICC would consider the liquidity risk
associated with Index Swaptions.
Specifically, the proposed rule change
would amend the Liquidity Risk
Management Framework to require that
ICC consider extreme but plausible
scenarios for Index Swaptions when
engaging in stress testing. The proposed
rule change would further add language
to explain the Index Swaption specific
scenarios and how ICC creates them,
including the assumptions that ICC uses
when creating the scenarios.
sensitivity analysis of estimates used for
Index Swaptions. As part of this
sensitivity analysis, the proposed rule
change would also require that ICC use
alternative assumptions and methods
for implied distributions and other
factors to provide supplementary
information to assess on an ongoing
basis the validity and quality of
assumptions used to price Index
Swaptions.
Finally, the proposed rule change
would add references to Index
Swaptions as appropriate and make
clarifying amendments and corrections
to the Risk Parameter Setting and
Review Policy.
C. Risk Parameter Setting and Review
Policy
The proposed rule change would
revise the Risk Parameter Setting and
Review Policy to describe the
parameters associated with the liquidity
charge, concentration charge, and
spread response components for Index
Swaptions, as described above. The
proposed rule change would also
describe the assumptions maintained for
purposes of pricing Index Swaptions.
Finally, consistent with parameters that
ICC uses for single-name and index
CDS,10 the proposed rule change would
require that ICC’s Risk Management
Department review the parameters and
assumptions associated with Index
Swaptions at least monthly and present
any proposed updates to the Risk
Working Group.
Currently, the Risk Parameter Setting
and Review Policy explains the analyses
that ICC performs to explore the
sensitivity of the outputs of ICC’s risk
management model to certain core
parameters.11 The proposed rule change
would likewise require that ICC perform
D. Back-Testing Framework
The proposed rule change would
amend the Back-Testing Framework to
ensure that ICC conducts back-testing
with respect to Index Swaptions. The
proposed rule change would do so by
adding five special strategy portfolios to
assess hypothetical positions in Index
Swaptions. As with other special
strategy portfolios, ICC would use the
back-testing results for the special
strategy portfolios involving Index
Swaptions to identify and assess
potential weaknesses in the risk
management model with respect to
Index Swaptions.
Currently, the Back-Testing
Framework requires that ICC Risk report
results of back-testing on a univariate
basis, meaning per instrument and risk
factor, periodically and as appropriate
depending on market conditions.12 The
proposed rule change would similarly
require that ICC conduct periodic
univariate back-testing analysis on
Index Swaptions and report the
exceedances as an average over all
strikes for each time-to-expiry strip.
Currently, the Back-Testing
Framework provides guidelines for
remediating poor back-testing results.13
The proposed rule change would
likewise set out requirements for
remediating poor back-testing results
with respect to Index Swaptions.
Specifically, under the Back-Testing
Framework as amended, if ICC found
that poor back-testing results were
directly related to Index Swaptions, it
would conduct an analysis of the CDS
index option implied distribution
assumptions, estimation techniques and
estimated parameters. The proposed
rule change would also require that the
10 Self-Regulatory Organizations; ICE Clear Credit
LLC; Order Approving Proposed Rule Change
Relating to the ICC Risk Parameter Setting and
Review Policy; Exchange Act Release No. 85495
(Apr. 3, 2019); 84 FR 14158 (Apr. 9, 2019) (SR–ICC–
2019–002).
11 Id.
12 Self-Regulatory Organizations; ICE Clear Credit
LLC; Order Approving Proposed Rule Change
Relating to the ICE CDS Clearing: Back-Testing
Framework; Exchange Act Release No. 85357 (Mar.
19, 2019); 84 FR 11146 (Mar. 25, 2019) (SR–ICC–
2019–001).
13 Id.
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ICC Risk Management Department
review results and statistical
assumptions related to Index Swaptions.
If the back-testing results based on daily
parameter estimates did not exhibit poor
performance, the ICC Risk Management
Department could immediately update
the statistical parameters and increase
the frequency of parameter updates. If
the daily parameter updates did not
remediate poor back-testing results, the
ICC Risk Management Department could
recalibrate and update certain scaling
factors related to Index Swaptions.
E. Stress Testing Framework
ICC uses stress testing to establish if
its available financial resources are
sufficient to cover hypothetical losses
associated with uncollateralized stress
losses in extreme but plausible
scenarios of the two greatest groups of
Clearing Participants that fall under a
common parent entity (a ‘‘Clearing
Participant Affiliate Group’’). The
proposed rule change would stress test
Index Swaptions by applying each of
the defined stress scenario categories to
Index Swaptions. The proposed rule
change would further explain that for
each of the stress scenario categories,
ICC would create Index Swaption
pricing scenarios by pricing the option
instruments using the calibrated
implied distribution, at the
corresponding underlying stress levels
and stress options-implied levels
associated with the various pricing
scenarios. Moreover, for each of the
stress scenario categories the proposed
rule change would explain in detail how
ICC would apply that category to Index
Swaptions. Finally, the proposed rule
change would make other conforming
changes to incorporate references to
Index Swaptions throughout the Stress
Testing Framework.
khammond on DSKJM1Z7X2PROD with NOTICES
III. Discussion and Commission
Findings
Section 19(b)(2)(C) of the Act directs
the Commission to approve a proposed
rule change of a self-regulatory
organization if it finds that such
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to such organization.14 For
the reasons given below, the
Commission finds that the proposed
rule change is consistent with Section
17A(b)(3)(F) of the Act 15 and Rules
17Ad–22(b)(2), (b)(3), and (d)(8)
thereunder.16
14 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–2(b)(3)(F).
16 17 CFR 240.17Ad–22(b)(2), (b)(3), (d)(8).
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of a clearing agency, like 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 its custody or
control or for which it is responsible,
and, in general, to protect investors and
the public interest.17 The Commission
believes that the proposed changes to
the Risk Policies generally should help
to ensure that ICC collects sufficient
Initial Margin and Guaranty Fund
requirements for clearing Index
Swaptions. For example, by amending
ICC’s Risk Management Model
Description to apply ICC’s risk
management model to Index Swaptions,
including Initial Margin and Guaranty
Fund requirements, the Commission
believes the proposed rule change
should help to ensure that ICC collects
Initial Margin and Guaranty Fund
contributions necessary to manage the
risks associated with clearing Index
Swaptions. Similarly, by applying the
Stress Testing Framework to Index
Swaptions, the Commission believes
that the proposed rule change should
help to ensure that ICC maintains
sufficient available financial resources
to cover hypothetical losses associated
with Index Swaptions for the two
greatest Clearing Participant Affiliate
Group uncollateralized stress losses in
extreme but plausible scenarios.
In addition, by applying the Risk
Parameter Setting and Review Policy to
Index Swaptions, the Commission
believes the proposed rule change
should help to ensure that the
parameters and assumptions that ICC
uses in establishing the Initial Margin
and Guaranty Fund requirements
associated with Index Swaptions are
appropriately reviewed and calibrated.
Finally, by applying the Back-Testing
Framework to Index Swaptions, the
Commission believes the proposed rule
change should help to ensure that ICC
tests the requirements produced by the
risk management model with respect to
clearing Index Swaptions and should
therefore help to ensure the sound
operation of the risk management model
with respect to Index Swaptions.
Moreover, the Commission also
believes the proposed rule change
should help to ensure that ICC
maintains adequate liquid resources for
clearing Index Swaptions. Specifically,
in applying the Liquidity Risk
Management Framework to the clearing
of Index Swaptions, the Commission
believes the proposed rule change
should help to ensure that ICC is able
to manage the liquidity risk associated
with, and has sufficient liquid resources
to meet the liquidity demands resulting
from, clearing Index Swaptions.
By helping to ensure that ICC collects
and maintains sufficient Initial Margin
and Guaranty Fund requirements for
clearing Index Swaptions, which ICC
would use to manage the credit
exposures associated with clearing
Index Swaptions, the Commission
believes that the proposed rule change
should help improve ICC’s ability to
avoid losses that could result from the
miscalculation of ICC’s credit exposures
resulting from clearing Index
Swaptions. Similarly, the Commission
believes the proposed rule change
should help ICC to avoid potential
losses that could result from
mismanaging the liquidity risks
associated with, or having insufficient
liquid resources to satisfy the liquidity
demands resulting from, clearing Index
Swaptions. Because these losses could
disrupt ICC’s ability to operate, and thus
clear and settle securities transactions,
the Commission finds the proposed rule
change should promote the prompt and
accurate clearance and settlement of
securities transactions. Because such
losses could also threaten access to
securities and funds in ICC’s control,
the Commission finds the proposed rule
change should help assure the
safeguarding of securities and funds that
are in the custody or control of ICC or
for which it is responsible.
Therefore, the Commission finds that
the proposed rule change should
promote the prompt and accurate
clearance and settlement of securities
transactions and assure the safeguarding
of securities and funds in ICC’s custody
and control, consistent with the Section
17A(b)(3)(F) of the Act.18
B. Consistency With Rule 17Ad–22(b)(2)
Rule 17Ad–22(b)(2) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to use margin
requirements to limit its credit
exposures to participants under normal
market conditions and use risk-based
models and parameters to set margin
requirements and review such margin
requirements and the related risk-based
models and parameters at least
15 15
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17 15
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18 15
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monthly.19 As discussed above, the
proposed rule change would amend
ICC’s Risk Management Model
Description to apply ICC’s Initial Margin
requirements to Index Swaptions, which
the Commission believes should help to
ensure that ICC uses margin
requirements to limit its credit
exposures with respect to Index
Swaptions. Moreover, in applying the
Risk Parameter Setting and Review
Policy to Index Swaptions, the proposed
rule change would require that ICC’s
Risk Management Department reviews
the parameters and assumptions
associated with Index Swaptions at least
monthly and present any proposed
updates to the Risk Working Group.
Therefore, for these reasons, the
Commission finds that the proposed
rule change is consistent with Rule
17Ad–22(b)(2).20
khammond on DSKJM1Z7X2PROD with NOTICES
C. Consistency With Rule 17Ad–22(b)(3)
Rule 17Ad–22(b)(3) requires that ICC
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to maintain
sufficient financial resources to
withstand, at a minimum, a default by
the two participant families to which it
has the largest exposures in extreme but
plausible market conditions.21 As
discussed above, the proposed rule
change would amend ICC’s Risk
Management Model Description to
apply ICC’s Guaranty Fund
requirements to Index Swaptions, which
the Commission believes should help to
ensure that ICC maintains 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. Moreover,
in applying the Stress Testing
Framework to Index Swaptions, the
proposed rule change would require
that ICC take Index Swaptions into
consideration when conducting the
stress testing that ICC uses to establish
if its available financial resources are
sufficient to cover hypothetical losses
associated with the two greatest
Clearing Participant Affiliate Group
uncollateralized stress losses in extreme
but plausible scenarios. Therefore, for
these reasons, the Commission finds
that the proposed rule change is
consistent with Rule 17Ad–22(b)(3).22
D. Consistency With Rule 17Ad–22(d)(8)
Rule 17Ad–22(d)(8) requires that ICC
establish, implement, maintain and
19 17
CFR 240.17Ad–22(b)(2).
20 17 CFR 240.17Ad–22(b)(2).
21 17 CFR 240.17Ad–22(b)(3).
22 17 CFR 240.17Ad–22(b)(3).
VerDate Sep<11>2014
18:18 Jun 29, 2020
Jkt 250001
enforce written policies and procedures
reasonably designed to have governance
arrangements that are clear and
transparent to fulfill the public interest
requirements in Section 17A of the Act
and to promote the effectiveness of
ICC’s risk management procedures.23 As
discussed above, in applying the Risk
Parameter Setting and Review Policy to
Index Swaptions, the proposed rule
change would require that ICC’s Risk
Management Department review the
parameters and assumptions associated
with Index Swaptions at least monthly
and present any proposed updates to the
Risk Working Group. The Commission
believes this should establish a clear
and transparent governance
arrangement with respect to reviewing
and update those parameter and
assumptions. Moreover, as discussed
above, the proposed rule change would
revise the Back-Testing Framework to
require that the ICC Risk Management
Department review results and
statistical assumptions related to Index
Swaptions and specify actions to
remediate poor results. The Commission
believes this should clearly assign
responsibility to the ICC Risk
Management Department for reviewing
and remediating poor results. Therefore,
for these reasons, the Commission finds
that the proposed rule change is
consistent with Rule 17Ad–22(d)(8).24
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 25 and
Rules 17Ad–22(b)(2), (b)(3), and (d)(8)
thereunder.26
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 27 that the
proposed rule change (SR–ICC–2020–
002), be, and hereby is, approved.28
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–14009 Filed 6–29–20; 8:45 am]
BILLING CODE 8011–01–P
23 17
CFR 240.17Ad–22(d)(8).
CFR 240.17Ad–22(d)(8).
25 15 U.S.C. 78q–2(b)(3)(F).
26 17 CFR 240.17Ad–22(b)(2), (b)(3), (d)(8).
27 15 U.S.C. 78s(b)(2).
28 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).
29 17 CFR 200.30–3(a)(12).
24 17
PO 00000
Frm 00071
Fmt 4703
Sfmt 4703
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89140; File No. SR–MEMX–
2020–01]
Self-Regulatory Organizations; MEMX
LLC; Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend the Exchange’s
Compliance Rules Regarding the
National Market System Plan
Governing the Consolidated Audit Trail
June 24, 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 June 23,
2020, MEMX LLC (‘‘MEMX’’ or
‘‘Exchange’’) 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 Exchange. 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
MEMX LLC (‘‘MEMX’’ or the
‘‘Exchange’’) is filing with the
Commission a proposed rule change to
to amend Exchange Rules 4.5–4.16, the
Exchange’s compliance rules
(collectively, ‘‘Compliance Rules’’)
regarding the National Market System
Plan Governing the Consolidated Audit
Trail (the ‘‘CAT NMS Plan’’ or ‘‘Plan’’) 3
to be consistent with certain exemptions
from the CAT NMS Plan as well as to
facilitate the retirement of certain
existing regulatory systems. The text of
the proposed ruel change is provided in
Exhibit 5.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Unless otherwise specified, capitalized terms
used in this rule filing are defined as set forth in
the Compliance Rules.
2 17
E:\FR\FM\30JNN1.SGM
30JNN1
]]>Agencies
[Federal Register Volume 85, Number 126 (Tuesday, June 30, 2020)]
[Notices]
[Pages 39226-39230]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-14009]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89142; File No. SR-ICC-2020-002]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Management
Model Description, ICC Stress Testing Framework, ICC Liquidity Risk
Management Framework, ICC Back-Testing Framework, and ICC Risk
Parameter Setting and Review Policy
June 24, 2020.
I. Introduction
On January 14, 2020, 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 (the
``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
amend ICC's Risk Management Model Description, Stress Testing
Framework, Liquidity Risk Management Framework, Back-Testing Framework,
and Risk Parameter Setting and Review Policy (together, the ``Risk
Policies'') in connection with the clearing of credit
[[Page 39227]]
default index swaptions. The proposed rule change was published for
comment in the Federal Register on January 31, 2020.\3\ On March 13,
2020, the Commission designated a longer period of time for Commission
action on the proposed rule change until April 30, 2020.\4\ On April
29, 2020, the Commission issued an order instituting proceedings under
Section 19(b)(2)(B) of the Act \5\ to determine whether to approve or
disapprove the proposed rule change.\6\ The Commission did not receive
comments regarding the proposed rule change. For the reasons discussed
below, the Commission is approving the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Proposed Rule Change, Security-Based Swap Submission,
or Advance Notice Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC Liquidity Risk
Management Framework, ICC Back-Testing Framework, and ICC Risk
Parameter Setting and Review Policy; Exchange Act Release No. 88047
(Jan. 27, 2020); 85 FR 5756 (Jan. 31, 2020) (SR-ICC-2020-002)
(``Notice'').
\4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Designation of Longer Period of Time for Commission Action on
Proposed Rule Change Relating to the ICC Risk Management Model
Description, ICC Stress Testing Framework, ICC Liquidity Risk
Management Framework, ICC Back-Testing Framework, and ICC Risk
Parameter Setting and Review Policy; Exchange Act Release No. 88379
(Mar. 13, 2020); 85 FR 15829 (Mar. 19, 2020) (SR-ICC-2020-002).
\5\ 15 U.S.C. 78s(b)(2)(B).
\6\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Instituting Proceedings to Determine Whether to Approve or
Disapprove Proposed Rule Change Relating to the ICC Risk Management
Model Description, ICC Stress Testing Framework, ICC Liquidity Risk
Management Framework, ICC Back-Testing Framework, and ICC Risk
Parameter Setting and Review Policy; Exchange Act Release No. 88775
(Apr. 29, 2020); 85 FR 26774 (May 5, 2020) (SR-ICC-2020-002).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
The proposed rule change would amend the Risk Policies in
connection with ICC's proposed clearing of credit default index
swaptions (``Index Swaptions'').\7\ Pursuant to an Index Swaption, one
party (the ``Swaption Buyer'') has the right (but not the obligation)
to cause the other party (the ``Swaption Seller'') to enter into an
index credit default swap transaction at a pre-determined strike price
on a specified expiration date on specified terms. In the case of Index
Swaptions that would be cleared by ICC, the underlying index credit
default swap would be limited to certain CDX and iTraxx Europe index
credit default swaps that are accepted for clearing by ICC and would be
automatically cleared by ICC upon exercise of the Index Swaption by the
Swaption Buyer in accordance with its terms. The Commission has
previously approved changes that ICC made to its Rules, End-of-Day
Price Discovery Policies and Procedures, and Risk Management Framework
related to the clearing of Index Swaptions (the ``Swaption Rule
Filing'').\8\ As explained in the Swaption Rule Filing, ICC would need
to adopt certain related policies and procedures in preparation for the
launch of clearing of Index Swaptions, including those set out in this
filing, and would not commence clearing of Index Swaptions until such
policies and procedures have been approved by the Commission or
otherwise become effective.\9\
---------------------------------------------------------------------------
\7\ Index Swaptions are also referred to herein and in the Risk
Policies as ``index options'' or ``index CDS options'', or in
similar terms.
\8\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Filing of Filing of Partial Amendment No. 1 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by Partial
Amendment No. 1, Relating to the ICC Rules, ICC End-of-Day Price
Discovery Policies and Procedures, and ICC Risk Management
Framework, Exchange Act Release No. 87297 (Oct. 15, 2019); 84 FR
56270 (Oct. 21, 2019) (SR-ICC-2019-007).
\9\ Id. at 56270, n. 7.
---------------------------------------------------------------------------
As discussed above, the proposed rule change would amend the Risk
Management Model Description, the Stress Testing Framework, Liquidity
Risk Management Framework, Back-Testing Framework, and Risk Parameter
Setting and Review Policy.
A. Amendments to the Risk Management Model Description
The proposed rule change would amend ICC's Risk Management Model
Description (``RMMD'') to take into account ICC clearing and settling
Index Swaptions. Specifically, the proposed rule change would extend to
Index Swaptions the existing methodology that ICC uses to determining
initial margin and guaranty fund requirements for index and single-name
CDS. In addition, the proposed rule change would make typographical
corrections and would re-number and update cross-references.
i. Initial Margin
The RMMD provides an overall description of ICC's initial margin
methodology describes in detail each component thereof. The proposed
rule change would first amend the overall description of ICC's initial
margin methodology to add a general definition for Index Swaptions. The
proposed rule change would define an Index Swaption as an option
instrument that is a specific combination of underlying index,
expiration date, strike price, optionality type, exercise style,
denomination currency, and transaction type. Moreover, the proposed
rule change would specify that for purposes of the initial margin
methodology, ICC would treat an Index Swaption as part of the risk sub-
factor underlying the index referenced by the Index Swaption.
The proposed rule change would next amend the description of each
component of ICC's initial margin methodology to explain how ICC would
apply that component to Index Swaptions: Jump-to-default, liquidity
charge, concentration charge, interest rate sensitivity, basis risk,
spread response, and anti-procyclicality.
Beginning with the jump-to-default requirement, the proposed rule
change would specify that ICC would determine an Index Swaption's jump-
to-default requirement by adding the Index Swaption's delta equivalent
notional amount to the aggregate outright position in index CDS and
then determining the jump-to-default requirement for that combined
position.
With respect to the liquidity charge, the proposed rule change
would add an Index Swaption component to the liquidity charge for the
outright index CDS position. The proposed rule change would set out the
formulas that ICC would use to calculate an Index Swaption component of
the liquidity charge, and the formulas would take into account the
direction of the underlying position (bought or sold protection), other
option characteristics (such as call or put and the underlying index),
bid-offer width scaling factors, and the liquidity charge for the
underlying CDS position. ICC would calculate the specific liquidity
charge for an Index Swaption position by adding together the instrument
level liquidity charges for all Index Swaptions that share the same
effective underlying directionality. Finally, ICC's proposed approach
for Index Swaptions would not provide portfolio benefits between the
Index Swaption position and the outright underlying index position,
meaning that ICC would not reduce the liquidity charge to account for
offsets between the Index Swaption position and the outright underlying
index position.
For the concentration charge, the proposed rule change would set
out the formulas that ICC would use to calculate the concentration
charge for Index Swaptions. ICC would base the calculation on each
Index Swaption's effective notional amount and 5-year equivalent
analog. Moreover, the proposed rule change would amend the overall
concentration charge analysis to consider Index Swaption positions
combined with outright index CDS positions.
For the interest rate sensitivity requirement, the proposed rule
change
[[Page 39228]]
would extend the existing approach for index CDS to Index Swaptions.
The proposed rule change would adjust this approach to account for
price changes for Index Swaptions. Overall, ICC would use the interest
rate sensitivity requirement to account for the risk associated with
changes in the default-free discount interest rate term structure used
to price Index Swaption instruments.
With respect to basis risk, the proposed rule change would
calculate basis risk requirements for Index Swaptions based on
decomposed index positions. Similar to the liquidity charge, the
proposed rule change would also specify that Index Swaptions would not
be eligible for decomposition benefits in terms of long-short offsets.
For the spread response component of initial margin, the proposed
rule change would incorporate an options-implied credit spread
distribution. Specifically, ICC would model an implied distribution of
credit spread log-returns for each put and call instrument at each
given expiry, such that the implied distribution option prices would be
as close as possible to the option prices established via the end-of-
day process. The proposed rule change would also make amendments to
address the determination of expected options payoffs, forward prices
and spreads, and shape parameters for swaption instruments with the
relevant expiry, for purposes of determining the relevant distribution
of implied prices. Finally, the proposed rule change would add formulas
to the profit and loss estimates to take into account Index Swaptions.
With respect to the anti-procyclicality aspect of initial margin,
currently the RMMD describes how ICC examines instrument price changes
observed during the Lehman Brothers default, including consideration of
the greatest price decreases between end-of-day prices on September 11,
2008 and any of the next five consecutive trading days. The proposed
rule change would extend this period for consideration to the next six
consecutive trading days instead of five. The proposed rule change
would also make this change for the opposite Lehman Brothers scenario.
The proposed rule change would also add formulas to compute the profit
and loss for Index Swaptions under these scenarios. Finally, to
determine the impact of price change on Index Swaption prices, ICC
would re-price the Index Swaptions instruments in the underlying stress
scenarios.
ii. Guaranty Fund
The proposed rule change would add Index Swaptions to ICC's
calculation of Guaranty Fund requirements. Under the proposed rule
change, ICC would combine the Index Swaption profit and loss with the
index CDS profit and loss to determine the worst combined profit and
loss for both Index Swaptions and Index CDS, and then use that amount
to determine Guaranty Fund requirements. The proposed rule change would
also add language to explain the assumptions that ICC uses when
computing the profit and loss for Index Swaptions.
B. Liquidity Risk Management Framework
The proposed rule change would amend the Liquidity Risk Management
Framework to add references to Index Swaptions and to further explain
how ICC would consider the liquidity risk associated with Index
Swaptions. Specifically, the proposed rule change would amend the
Liquidity Risk Management Framework to require that ICC consider
extreme but plausible scenarios for Index Swaptions when engaging in
stress testing. The proposed rule change would further add language to
explain the Index Swaption specific scenarios and how ICC creates them,
including the assumptions that ICC uses when creating the scenarios.
C. Risk Parameter Setting and Review Policy
The proposed rule change would revise the Risk Parameter Setting
and Review Policy to describe the parameters associated with the
liquidity charge, concentration charge, and spread response components
for Index Swaptions, as described above. The proposed rule change would
also describe the assumptions maintained for purposes of pricing Index
Swaptions. Finally, consistent with parameters that ICC uses for
single-name and index CDS,\10\ the proposed rule change would require
that ICC's Risk Management Department review the parameters and
assumptions associated with Index Swaptions at least monthly and
present any proposed updates to the Risk Working Group.
---------------------------------------------------------------------------
\10\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Parameter
Setting and Review Policy; Exchange Act Release No. 85495 (Apr. 3,
2019); 84 FR 14158 (Apr. 9, 2019) (SR-ICC-2019-002).
---------------------------------------------------------------------------
Currently, the Risk Parameter Setting and Review Policy explains
the analyses that ICC performs to explore the sensitivity of the
outputs of ICC's risk management model to certain core parameters.\11\
The proposed rule change would likewise require that ICC perform
sensitivity analysis of estimates used for Index Swaptions. As part of
this sensitivity analysis, the proposed rule change would also require
that ICC use alternative assumptions and methods for implied
distributions and other factors to provide supplementary information to
assess on an ongoing basis the validity and quality of assumptions used
to price Index Swaptions.
---------------------------------------------------------------------------
\11\ Id.
---------------------------------------------------------------------------
Finally, the proposed rule change would add references to Index
Swaptions as appropriate and make clarifying amendments and corrections
to the Risk Parameter Setting and Review Policy.
D. Back-Testing Framework
The proposed rule change would amend the Back-Testing Framework to
ensure that ICC conducts back-testing with respect to Index Swaptions.
The proposed rule change would do so by adding five special strategy
portfolios to assess hypothetical positions in Index Swaptions. As with
other special strategy portfolios, ICC would use the back-testing
results for the special strategy portfolios involving Index Swaptions
to identify and assess potential weaknesses in the risk management
model with respect to Index Swaptions.
Currently, the Back-Testing Framework requires that ICC Risk report
results of back-testing on a univariate basis, meaning per instrument
and risk factor, periodically and as appropriate depending on market
conditions.\12\ The proposed rule change would similarly require that
ICC conduct periodic univariate back-testing analysis on Index
Swaptions and report the exceedances as an average over all strikes for
each time-to-expiry strip.
---------------------------------------------------------------------------
\12\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICE CDS Clearing:
Back-Testing Framework; Exchange Act Release No. 85357 (Mar. 19,
2019); 84 FR 11146 (Mar. 25, 2019) (SR-ICC-2019-001).
---------------------------------------------------------------------------
Currently, the Back-Testing Framework provides guidelines for
remediating poor back-testing results.\13\ The proposed rule change
would likewise set out requirements for remediating poor back-testing
results with respect to Index Swaptions. Specifically, under the Back-
Testing Framework as amended, if ICC found that poor back-testing
results were directly related to Index Swaptions, it would conduct an
analysis of the CDS index option implied distribution assumptions,
estimation techniques and estimated parameters. The proposed rule
change would also require that the
[[Page 39229]]
ICC Risk Management Department review results and statistical
assumptions related to Index Swaptions. If the back-testing results
based on daily parameter estimates did not exhibit poor performance,
the ICC Risk Management Department could immediately update the
statistical parameters and increase the frequency of parameter updates.
If the daily parameter updates did not remediate poor back-testing
results, the ICC Risk Management Department could recalibrate and
update certain scaling factors related to Index Swaptions.
---------------------------------------------------------------------------
\13\ Id.
---------------------------------------------------------------------------
E. Stress Testing Framework
ICC uses stress testing to establish if its available financial
resources are sufficient to cover hypothetical losses associated with
uncollateralized stress losses in extreme but plausible scenarios of
the two greatest groups of Clearing Participants that fall under a
common parent entity (a ``Clearing Participant Affiliate Group''). The
proposed rule change would stress test Index Swaptions by applying each
of the defined stress scenario categories to Index Swaptions. The
proposed rule change would further explain that for each of the stress
scenario categories, ICC would create Index Swaption pricing scenarios
by pricing the option instruments using the calibrated implied
distribution, at the corresponding underlying stress levels and stress
options-implied levels associated with the various pricing scenarios.
Moreover, for each of the stress scenario categories the proposed rule
change would explain in detail how ICC would apply that category to
Index Swaptions. Finally, the proposed rule change would make other
conforming changes to incorporate references to Index Swaptions
throughout the Stress Testing Framework.
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.\14\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \15\ and Rules 17Ad-22(b)(2), (b)(3), and (d)(8)
thereunder.\16\
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78s(b)(2)(C).
\15\ 15 U.S.C. 78q-2(b)(3)(F).
\16\ 17 CFR 240.17Ad-22(b)(2), (b)(3), (d)(8).
---------------------------------------------------------------------------
A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency, like 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 its custody or control or for which it is
responsible, and, in general, to protect investors and the public
interest.\17\ The Commission believes that the proposed changes to the
Risk Policies generally should help to ensure that ICC collects
sufficient Initial Margin and Guaranty Fund requirements for clearing
Index Swaptions. For example, by amending ICC's Risk Management Model
Description to apply ICC's risk management model to Index Swaptions,
including Initial Margin and Guaranty Fund requirements, the Commission
believes the proposed rule change should help to ensure that ICC
collects Initial Margin and Guaranty Fund contributions necessary to
manage the risks associated with clearing Index Swaptions. Similarly,
by applying the Stress Testing Framework to Index Swaptions, the
Commission believes that the proposed rule change should help to ensure
that ICC maintains sufficient available financial resources to cover
hypothetical losses associated with Index Swaptions for the two
greatest Clearing Participant Affiliate Group uncollateralized stress
losses in extreme but plausible scenarios.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78q-2(b)(3)(F).
---------------------------------------------------------------------------
In addition, by applying the Risk Parameter Setting and Review
Policy to Index Swaptions, the Commission believes the proposed rule
change should help to ensure that the parameters and assumptions that
ICC uses in establishing the Initial Margin and Guaranty Fund
requirements associated with Index Swaptions are appropriately reviewed
and calibrated. Finally, by applying the Back-Testing Framework to
Index Swaptions, the Commission believes the proposed rule change
should help to ensure that ICC tests the requirements produced by the
risk management model with respect to clearing Index Swaptions and
should therefore help to ensure the sound operation of the risk
management model with respect to Index Swaptions.
Moreover, the Commission also believes the proposed rule change
should help to ensure that ICC maintains adequate liquid resources for
clearing Index Swaptions. Specifically, in applying the Liquidity Risk
Management Framework to the clearing of Index Swaptions, the Commission
believes the proposed rule change should help to ensure that ICC is
able to manage the liquidity risk associated with, and has sufficient
liquid resources to meet the liquidity demands resulting from, clearing
Index Swaptions.
By helping to ensure that ICC collects and maintains sufficient
Initial Margin and Guaranty Fund requirements for clearing Index
Swaptions, which ICC would use to manage the credit exposures
associated with clearing Index Swaptions, the Commission believes that
the proposed rule change should help improve ICC's ability to avoid
losses that could result from the miscalculation of ICC's credit
exposures resulting from clearing Index Swaptions. Similarly, the
Commission believes the proposed rule change should help ICC to avoid
potential losses that could result from mismanaging the liquidity risks
associated with, or having insufficient liquid resources to satisfy the
liquidity demands resulting from, clearing Index Swaptions. Because
these losses could disrupt ICC's ability to operate, and thus clear and
settle securities transactions, the Commission finds the proposed rule
change should promote the prompt and accurate clearance and settlement
of securities transactions. Because such losses could also threaten
access to securities and funds in ICC's control, the Commission finds
the proposed rule change should help assure the safeguarding of
securities and funds that are in the custody or control of ICC or for
which it is responsible.
Therefore, the Commission finds that the proposed rule change
should promote the prompt and accurate clearance and settlement of
securities transactions and assure the safeguarding of securities and
funds in ICC's custody and control, consistent with the Section
17A(b)(3)(F) of the Act.\18\
---------------------------------------------------------------------------
\18\ 15 U.S.C. 78q-2(b)(3)(F).
---------------------------------------------------------------------------
B. Consistency With Rule 17Ad-22(b)(2)
Rule 17Ad-22(b)(2) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to use
margin requirements to limit its credit exposures to participants under
normal market conditions and use risk-based models and parameters to
set margin requirements and review such margin requirements and the
related risk-based models and parameters at least
[[Page 39230]]
monthly.\19\ As discussed above, the proposed rule change would amend
ICC's Risk Management Model Description to apply ICC's Initial Margin
requirements to Index Swaptions, which the Commission believes should
help to ensure that ICC uses margin requirements to limit its credit
exposures with respect to Index Swaptions. Moreover, in applying the
Risk Parameter Setting and Review Policy to Index Swaptions, the
proposed rule change would require that ICC's Risk Management
Department reviews the parameters and assumptions associated with Index
Swaptions at least monthly and present any proposed updates to the Risk
Working Group. Therefore, for these reasons, the Commission finds that
the proposed rule change is consistent with Rule 17Ad-22(b)(2).\20\
---------------------------------------------------------------------------
\19\ 17 CFR 240.17Ad-22(b)(2).
\20\ 17 CFR 240.17Ad-22(b)(2).
---------------------------------------------------------------------------
C. Consistency With Rule 17Ad-22(b)(3)
Rule 17Ad-22(b)(3) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to
maintain sufficient financial resources to withstand, at a minimum, a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions.\21\ As discussed
above, the proposed rule change would amend ICC's Risk Management Model
Description to apply ICC's Guaranty Fund requirements to Index
Swaptions, which the Commission believes should help to ensure that ICC
maintains 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. Moreover, in
applying the Stress Testing Framework to Index Swaptions, the proposed
rule change would require that ICC take Index Swaptions into
consideration when conducting the stress testing that ICC uses to
establish if its available financial resources are sufficient to cover
hypothetical losses associated with the two greatest Clearing
Participant Affiliate Group uncollateralized stress losses in extreme
but plausible scenarios. Therefore, for these reasons, the Commission
finds that the proposed rule change is consistent with Rule 17Ad-
22(b)(3).\22\
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\21\ 17 CFR 240.17Ad-22(b)(3).
\22\ 17 CFR 240.17Ad-22(b)(3).
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D. Consistency With Rule 17Ad-22(d)(8)
Rule 17Ad-22(d)(8) requires that ICC establish, implement, maintain
and enforce written policies and procedures reasonably designed to have
governance arrangements that are clear and transparent to fulfill the
public interest requirements in Section 17A of the Act and to promote
the effectiveness of ICC's risk management procedures.\23\ As discussed
above, in applying the Risk Parameter Setting and Review Policy to
Index Swaptions, the proposed rule change would require that ICC's Risk
Management Department review the parameters and assumptions associated
with Index Swaptions at least monthly and present any proposed updates
to the Risk Working Group. The Commission believes this should
establish a clear and transparent governance arrangement with respect
to reviewing and update those parameter and assumptions. Moreover, as
discussed above, the proposed rule change would revise the Back-Testing
Framework to require that the ICC Risk Management Department review
results and statistical assumptions related to Index Swaptions and
specify actions to remediate poor results. The Commission believes this
should clearly assign responsibility to the ICC Risk Management
Department for reviewing and remediating poor results. Therefore, for
these reasons, the Commission finds that the proposed rule change is
consistent with Rule 17Ad-22(d)(8).\24\
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\23\ 17 CFR 240.17Ad-22(d)(8).
\24\ 17 CFR 240.17Ad-22(d)(8).
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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 \25\ and Rules 17Ad-22(b)(2), (b)(3), and (d)(8) thereunder.\26\
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\25\ 15 U.S.C. 78q-2(b)(3)(F).
\26\ 17 CFR 240.17Ad-22(b)(2), (b)(3), (d)(8).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\27\ that the proposed rule change (SR-ICC-2020-002), be, and hereby
is, approved.\28\
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\27\ 15 U.S.C. 78s(b)(2).
\28\ 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.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-14009 Filed 6-29-20; 8:45 am]
BILLING CODE 8011-01-P
