Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the ICC Risk Management Model Description, 48741-48743 [2020-17557]
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Federal Register / Vol. 85, No. 156 / Wednesday, August 12, 2020 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89491; File No. SR–ICC–
2020–010]
Self-Regulatory Organizations; ICE
Clear Credit LLC; Notice of Filing of
Proposed Rule Change Relating to the
ICC Risk Management Model
Description
August 6, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934,1 and
Rule 19b–4,2 notice is hereby given that
on July 29, 2020, ICE Clear Credit LLC
(‘‘ICC’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared primarily by ICC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The principal purpose of the
proposed rule change is to make
changes to ICC’s Risk Management
Model Description. These revisions do
not require any changes to the ICC
Clearing Rules (the ‘‘Rules’’).3
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, ICC
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. ICC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.
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(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
(a) Purpose
ICC proposes to revise its Risk
Management Model Description in
connection with its proposed launch of
the clearing of credit default index
swaptions (‘‘Index Swaptions’’).4 ICC
has previously filed with the
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Capitalized terms used but not defined herein
have the meanings specified in the Rules.
4 Index Swaptions are also referred to herein and
in the Risk Management Model Description as
‘‘index options’’ or ‘‘index CDS options’’, or in
similar terms.
2 17
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Commission changes to certain other
policies and procedures related to the
clearing of Index Swaptions (the
‘‘Swaption Rule Filings’’).5 As set out in
the Swaption Rule Filings, ICC intends
to adopt or amend certain related
policies and procedures in preparation
for the launch of clearing of Index
Swaptions and does not intend to
commence clearing of Index Swaptions
until all such policies and procedures
have been approved by the Commission
or otherwise become effective.
Accordingly, ICC proposes to make such
changes to the Risk Management Model
Description effective following the
approval of all such policies and
procedures and the completion of the
ICC governance process surrounding the
Index Swaptions product expansion.
As discussed in the Swaption Rule
Filings, 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 predetermined 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 which would be
automatically cleared by ICC upon
exercise of the Index Swaption by the
Swaption Buyer in accordance with its
terms.
The proposed changes amend the Risk
Management Model Description to
incorporate a stochastic implied mean
absolute deviation (‘‘MAD’’) feature in
connection with the proposed launch of
the clearing of Index Swaptions and
make certain other minor clarification
changes. The proposed amendments
would modify Section VII of the Risk
Management Model Description to add
a subsection on stochastic implied MAD
modeling. In the Swaption Rule Filings,
ICC proposed to modify the integrated
spread response component of the
margin model to incorporate an optionsimplied credit spread distribution,
which includes a scale parameter
related to the MAD implied from
swaption prices (‘‘implied MAD’’).6 ICC
proposes enhancements to its approach
5 SEC Release No. 34–87297 (Oct. 15, 2019)
(approval), 84 FR 56270 (Oct. 21, 2019) (SR–ICC–
2019–007); SEC Release No. 34–89142 (June 24,
2020) (approval), 85 FR 39226 (June 30, 2020) (SR–
ICC–2020–002); SEC Release No. 34–89072 (June
16, 2020) (notice), 85 FR 37483 (June 22, 2020) (SR–
ICC–2020–008).
6 SEC Release No. 34–89142 (June 24, 2020)
(approval), 85 FR 39226 (June 30, 2020) (SR–ICC–
2020–002).
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48741
to feature a stochastic implied MAD,
which presents a more advanced risk
modeling technique for option
instruments in rapidly changing market
conditions and high-volatility market
environments. Currently, the model
assumes a static implied MAD
formulation where the implied MAD
scale does not change in response to the
simulated underlying index levels.
Under the proposed changes, the risk
methodology for clearing Index
Swaptions would consider the risk
arising from the joint fluctuations of the
underlying index levels and the options
implied MAD scales in proposed
Subsection VII.3. ICC would identify
and describe the distribution that the
changes of the implied MAD scales
associated with each option expiry
follow. ICC would also discuss and
provide the rationale for its selected
parameter estimation approach.
Specifically, ICC would set out how the
distribution parameters are estimated
for a set of implied MAD changes. The
proposed changes further explain how
ICC models the joint fluctuations of the
underlying index levels and the options
implied MAD scales. Proposed Figure
12 illustrates the simulation approach
and is thus intended to replace Figure
11 in Subsection VII.2.2 that ICC
proposes to remove. Relatedly, in
Subsection VII.5.1.1 with respect to
instrument profit/loss (‘‘P/L’’)
estimations for Index Swaptions, ICC
proposes to add reference to notations
related to the stochastic implied MAD
from proposed Subsection VII.3.
ICC also proposes other minor
clarification changes to the Risk
Management Model Description. ICC
propose to reference the clearinghouse
in Subsection III.6 when describing
where certain data is obtained and to
abbreviate a term in Subsection VI.2.
Given the addition of Subsection VII.3,
ICC proposes to renumber the
subsections in Section VII accordingly.
ICC further proposes clarifications to a
formula and its notes in Subsection
VII.5.1.2 regarding risk factor P/L
estimations, including with respect to
the description of an alternative option
position P/L computation, subsequent
risk estimations and the addition of
certain payments to portfolio
requirements.
(b) Statutory Basis
ICC believes that the proposed rule
change is consistent with the
requirements of Section 17A of the Act 7
and the regulations thereunder
applicable to it, including the applicable
7 15
E:\FR\FM\12AUN1.SGM
U.S.C. 78q–1.
12AUN1
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48742
Federal Register / Vol. 85, No. 156 / Wednesday, August 12, 2020 / Notices
standards under Rule 17Ad–22.8 In
particular, Section 17A(b)(3)(F) of the
Act 9 requires that the rule change be
consistent with the prompt and accurate
clearance and settlement of securities
transactions and derivative agreements,
contracts and transactions cleared by
ICC, the safeguarding of securities and
funds in the custody or control of ICC
or for which it is responsible, and the
protection of investors and the public
interest. The proposed rule change
would enable a stochastic implied MAD
feature in the Risk Management Model
Description in connection with the
proposed launch of the clearing of Index
Swaptions. In contrast to the static
implied MAD formulation where the
implied MAD scale does not change in
response to the simulated underlying
index levels, the stochastic implied
MAD approach considers the joint
fluctuations of the underlying index
levels and the options implied MAD
scales in proposed Subsection VII.3.
Such feature presents a more advanced
risk modeling technique for option
instruments in rapidly changing market
conditions and high-volatility market
environments. The proposed
clarification changes would further
ensure readability and transparency
with respect to ICC’s risk methodology
and practices in the Risk Management
Model Description to ensure that it
remains up-to-date, clear, and
transparent to support the effectiveness
of ICC’s risk management system. ICC’s
view, these changes will enhance its
risk model and thus enhance its ability
to manage the participant default risk,
including with respect to Index
Swaptions. The proposed rule change is
therefore consistent with the prompt
and accurate clearing and settlement of
the contracts cleared by ICC, including
Index Swaptions, the safeguarding of
securities and funds in the custody or
control of ICC or for which it is
responsible, and the protection of
investors and the public interest, within
the meaning of Section 17A(b)(3)(F) of
the Act.10
The amendments would also satisfy
relevant requirements of Rule 17Ad–
22.11 Rule 17Ad–22(e)(2)(i), (iii), and
(v) 12 requires each covered clearing
agency to establish, implement,
maintain, and enforce written policies
and procedures reasonably designed to
provide for governance arrangements
that are clear and transparent; support
the public interest requirements of
CFR 240.17Ad–22.
U.S.C. 78q–1(b)(3)(F).
10 Id.
11 17 CFR 240.17Ad–22.
12 17 CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
Section 17A of the Act 13 applicable to
clearing agencies, and the objectives of
owners and participants; and specify
clear and direct lines of responsibility.
ICC’s Risk Management Model
Description clearly assigns and
documents responsibility and
accountability for risk decisions and
requires consultation or approval from
relevant parties. ICC determined to
incorporate a stochastic implied MAD
feature in the Risk Management Model
Description in accordance with its
governance process, which included
review and/or approval by the ICC Risk
Committee and Board of the
determination to enable the stochastic
implied MAD feature of the model and
the corresponding changes to the Risk
Management Model Description. In
ICC’s view, the proposed rule change
continues to ensure that ICC maintains
policies and procedures that are
reasonably designed to provide for clear
and transparent governance
arrangements that support the public
interest requirements of Section 17A of
the Act 14 applicable to clearing
agencies, and the objectives of owners
and participants, and specify clear and
direct lines of responsibility, consistent
with Rule 17Ad–22(e)(2)(i), (iii), and
(v).15
Rule 17Ad–22(e)(4)(ii) 16 requires
each covered clearing agency to
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
maintaining additional financial
resources at the minimum to enable it
to cover a wide range of foreseeable
stress scenarios that include, but are not
limited to, the default of the two
participant families that would
potentially cause the largest aggregate
credit exposure for the covered clearing
agency in extreme but plausible market
conditions. As discussed above, ICC
proposes to modify the Risk
Management Model Description to add
a subsection on stochastic implied MAD
modeling. Under the proposed changes,
the risk methodology for clearing Index
Swaptions would consider the risk
arising from the joint fluctuations of the
underlying index levels and the options
implied MAD scales. ICC believes that
the proposed changes support and
enhance its ability to manage its
financial resources as such feature
8 17
9 15
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13 15
presents a more advanced risk modeling
technique for option instruments in
rapidly changing market conditions and
high-volatility market environments.
Additionally, the proposed clarification
changes provide further clarity and
transparency regarding ICC’s risk
management practices to strengthen the
documentation surrounding ICC’s risk
methodology, including the
incorporation of a reference to the
clearinghouse in Subsection III.6 when
describing where certain data is
obtained and the clarifications to a
formula and its notes in Subsection
VII.5.1.2. As such, the proposed
amendments would strengthen ICC’s
ability to maintain its financial
resources and withstand the pressures
of defaults, consistent with the
requirements of Rule 17Ad–
22(e)(4)(ii).17
Rule 17Ad–22(e)(6)(i) 18 requires each
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to cover its credit
exposures to its participants by
establishing a risk-based margin system
that, at a minimum, considers, and
produces margin levels commensurate
with, the risks and particular attributes
of each relevant product, portfolio, and
market. ICC proposes to modify the
Initial Margin Methodology section of
the Risk Management Model
Description to enable a stochastic
implied MAD feature of the model in
connection with the clearing of Index
Swaptions. As described above, this
feature considers the relationship
between the underlying index levels
and the implied MAD scales and
presents a more advanced risk modeling
technique for option instruments in
rapidly changing market conditions and
high-volatility market environments.
ICC believes that such feature enhances
its margin methodology, which
considers and produces margin levels
commensurate with the risks and
particular attributes of each relevant
product, portfolio, and market,
consistent with the requirements of Rule
17Ad–22(e)(6)(i).19
(B) Clearing Agency’s Statement on
Burden on Competition
ICC does not believe the proposed
rule change would have any impact, or
impose any burden, on competition not
necessary or appropriate in furtherance
of the purpose of the Act. The proposed
rule change would amend the Risk
Management Model Description to add
U.S.C. 78q–1.
14 Id.
17 Id.
15 17
18 17
CFR 240.17Ad–22(e)(2)(i), (iii), and (v).
16 17 CFR 240.17Ad–22(e)(4)(ii).
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CFR 240.17Ad–22(e)(6)(i).
19 Id.
E:\FR\FM\12AUN1.SGM
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Federal Register / Vol. 85, No. 156 / Wednesday, August 12, 2020 / Notices
a subsection on stochastic implied MAD
modeling in connection with the
proposed launch of the clearing of Index
Swaptions and make certain other
minor clarification changes. The
proposed rule change will apply
uniformly across all market participants.
ICC does not believe acceptance of
Index Swaptions for clearing would
adversely affect the trading markets for
such contracts, and in fact acceptance of
such contracts by ICC would provide
market participants with the additional
flexibility to have their Index Swaptions
cleared. Acceptance of Index Swaptions
for clearing will not, in ICC’s view,
adversely affect clearing of any other
currently cleared product. ICC does not
believe the amendments would
adversely affect the ability of
Participants, their customers or other
market participants to continue to clear
contracts, including CDS Contracts. ICC
also does not believe the enhancements
would adversely affect the cost of
clearing or otherwise limit market
participants’ choices for selecting
clearing services in Index Swaptions,
credit default swaps or other products.
Accordingly, ICC does not believe the
amendments would impose any burden
on competition not necessary or
appropriate in furtherance of the
purpose of the Act.
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(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants or Others
Written comments relating to the
proposed rule change have not been
solicited or received. ICC will notify the
Commission of any written comments
received by ICC.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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.
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16:37 Aug 11, 2020
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Comments may be submitted by any of
the following methods:
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–
ICC–2020–010 on the subject line.
Paper Comments
Send paper comments in triplicate to
Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549.
All submissions should refer to File
Number SR–ICC–2020–010. This file
number should be included on the
subject line if email is used. To help the
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 such
filings will also be available for
inspection and copying at the principal
office of ICE Clear Credit and on ICE
Clear Credit’s website at https://
www.theice.com/clear-credit/regulation.
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–ICC–2020–010 and
should be submitted on or before
September 2, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–17557 Filed 8–11–20; 8:45 am]
BILLING CODE 8011–01–P
20 17
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89496; File No. SR–C2–
2020–010]
Self-Regulatory Organizations; Cboe
C2 Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change Relating To Introduce a
New Data Product To Be Known as
Intraday Open-Close Data
August 6, 2020.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 29,
2020, Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) filed with the
Securities and Exchange Commission
(the ‘‘Commission’’) the proposed rule
change as described in Items I and II,
which Items have been prepared by the
Exchange. The Exchange filed the
proposal as a ‘‘non-controversial’’
proposed rule change pursuant to
Section 19(b)(3)(A)(iii) of the Act 3 and
Rule 19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe C2 Exchange, Inc. (the
‘‘Exchange’’ or ‘‘C2’’) is filing with the
Securities and Exchange Commission
(‘‘Commission’’) a proposed rule change
to introduce a new data product to be
known as Intraday Open-Close Data.
The text of the proposed rule change
is also available on the Exchange’s
website (https://markets.cboe.com/us/
options/regulation/rule_filings/ctwo/),
at the Exchange’s Office of the
Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
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
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(iii).
4 17 CFR 240.19b–4(f)(6).
2 17
CFR 200.30–3(a)(12).
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48743
E:\FR\FM\12AUN1.SGM
12AUN1
]]>Agencies
[Federal Register Volume 85, Number 156 (Wednesday, August 12, 2020)]
[Notices]
[Pages 48741-48743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17557]
[[Page 48741]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89491; File No. SR-ICC-2020-010]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Risk Management
Model Description
August 6, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on July 29,
2020, ICE Clear Credit LLC (``ICC'') filed with the Securities and
Exchange Commission (the ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by ICC. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The principal purpose of the proposed rule change is to make
changes to ICC's Risk Management Model Description. These revisions do
not require any changes to the ICC Clearing Rules (the ``Rules'').\3\
---------------------------------------------------------------------------
\3\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICC 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. ICC has prepared summaries, set forth in sections (A),
(B), and (C) below, of the most significant aspects of these
statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
(a) Purpose
ICC proposes to revise its Risk Management Model Description in
connection with its proposed launch of the clearing of credit default
index swaptions (``Index Swaptions'').\4\ ICC has previously filed with
the Commission changes to certain other policies and procedures related
to the clearing of Index Swaptions (the ``Swaption Rule Filings'').\5\
As set out in the Swaption Rule Filings, ICC intends to adopt or amend
certain related policies and procedures in preparation for the launch
of clearing of Index Swaptions and does not intend to commence clearing
of Index Swaptions until all such policies and procedures have been
approved by the Commission or otherwise become effective. Accordingly,
ICC proposes to make such changes to the Risk Management Model
Description effective following the approval of all such policies and
procedures and the completion of the ICC governance process surrounding
the Index Swaptions product expansion.
---------------------------------------------------------------------------
\4\ Index Swaptions are also referred to herein and in the Risk
Management Model Description as ``index options'' or ``index CDS
options'', or in similar terms.
\5\ SEC Release No. 34-87297 (Oct. 15, 2019) (approval), 84 FR
56270 (Oct. 21, 2019) (SR-ICC-2019-007); SEC Release No. 34-89142
(June 24, 2020) (approval), 85 FR 39226 (June 30, 2020) (SR-ICC-
2020-002); SEC Release No. 34-89072 (June 16, 2020) (notice), 85 FR
37483 (June 22, 2020) (SR-ICC-2020-008).
---------------------------------------------------------------------------
As discussed in the Swaption Rule Filings, 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 which would be automatically cleared by ICC upon exercise of
the Index Swaption by the Swaption Buyer in accordance with its terms.
The proposed changes amend the Risk Management Model Description to
incorporate a stochastic implied mean absolute deviation (``MAD'')
feature in connection with the proposed launch of the clearing of Index
Swaptions and make certain other minor clarification changes. The
proposed amendments would modify Section VII of the Risk Management
Model Description to add a subsection on stochastic implied MAD
modeling. In the Swaption Rule Filings, ICC proposed to modify the
integrated spread response component of the margin model to incorporate
an options-implied credit spread distribution, which includes a scale
parameter related to the MAD implied from swaption prices (``implied
MAD'').\6\ ICC proposes enhancements to its approach to feature a
stochastic implied MAD, which presents a more advanced risk modeling
technique for option instruments in rapidly changing market conditions
and high-volatility market environments. Currently, the model assumes a
static implied MAD formulation where the implied MAD scale does not
change in response to the simulated underlying index levels.
---------------------------------------------------------------------------
\6\ SEC Release No. 34-89142 (June 24, 2020) (approval), 85 FR
39226 (June 30, 2020) (SR-ICC-2020-002).
---------------------------------------------------------------------------
Under the proposed changes, the risk methodology for clearing Index
Swaptions would consider the risk arising from the joint fluctuations
of the underlying index levels and the options implied MAD scales in
proposed Subsection VII.3. ICC would identify and describe the
distribution that the changes of the implied MAD scales associated with
each option expiry follow. ICC would also discuss and provide the
rationale for its selected parameter estimation approach. Specifically,
ICC would set out how the distribution parameters are estimated for a
set of implied MAD changes. The proposed changes further explain how
ICC models the joint fluctuations of the underlying index levels and
the options implied MAD scales. Proposed Figure 12 illustrates the
simulation approach and is thus intended to replace Figure 11 in
Subsection VII.2.2 that ICC proposes to remove. Relatedly, in
Subsection VII.5.1.1 with respect to instrument profit/loss (``P/L'')
estimations for Index Swaptions, ICC proposes to add reference to
notations related to the stochastic implied MAD from proposed
Subsection VII.3.
ICC also proposes other minor clarification changes to the Risk
Management Model Description. ICC propose to reference the
clearinghouse in Subsection III.6 when describing where certain data is
obtained and to abbreviate a term in Subsection VI.2. Given the
addition of Subsection VII.3, ICC proposes to renumber the subsections
in Section VII accordingly. ICC further proposes clarifications to a
formula and its notes in Subsection VII.5.1.2 regarding risk factor P/L
estimations, including with respect to the description of an
alternative option position P/L computation, subsequent risk
estimations and the addition of certain payments to portfolio
requirements.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \7\ and the regulations
thereunder applicable to it, including the applicable
[[Page 48742]]
standards under Rule 17Ad-22.\8\ In particular, Section 17A(b)(3)(F) of
the Act \9\ requires that the rule change be consistent with the prompt
and accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICC, the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible, and the protection of investors and the
public interest. The proposed rule change would enable a stochastic
implied MAD feature in the Risk Management Model Description in
connection with the proposed launch of the clearing of Index Swaptions.
In contrast to the static implied MAD formulation where the implied MAD
scale does not change in response to the simulated underlying index
levels, the stochastic implied MAD approach considers the joint
fluctuations of the underlying index levels and the options implied MAD
scales in proposed Subsection VII.3. Such feature presents a more
advanced risk modeling technique for option instruments in rapidly
changing market conditions and high-volatility market environments. The
proposed clarification changes would further ensure readability and
transparency with respect to ICC's risk methodology and practices in
the Risk Management Model Description to ensure that it remains up-to-
date, clear, and transparent to support the effectiveness of ICC's risk
management system. ICC's view, these changes will enhance its risk
model and thus enhance its ability to manage the participant default
risk, including with respect to Index Swaptions. The proposed rule
change is therefore consistent with the prompt and accurate clearing
and settlement of the contracts cleared by ICC, including Index
Swaptions, the safeguarding of securities and funds in the custody or
control of ICC or for which it is responsible, and the protection of
investors and the public interest, within the meaning of Section
17A(b)(3)(F) of the Act.\10\
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\7\ 15 U.S.C. 78q-1.
\8\ 17 CFR 240.17Ad-22.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ Id.
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The amendments would also satisfy relevant requirements of Rule
17Ad-22.\11\ Rule 17Ad-22(e)(2)(i), (iii), and (v) \12\ requires each
covered clearing agency to establish, implement, maintain, and enforce
written policies and procedures reasonably designed to provide for
governance arrangements that are clear and transparent; support the
public interest requirements of Section 17A of the Act \13\ applicable
to clearing agencies, and the objectives of owners and participants;
and specify clear and direct lines of responsibility. ICC's Risk
Management Model Description clearly assigns and documents
responsibility and accountability for risk decisions and requires
consultation or approval from relevant parties. ICC determined to
incorporate a stochastic implied MAD feature in the Risk Management
Model Description in accordance with its governance process, which
included review and/or approval by the ICC Risk Committee and Board of
the determination to enable the stochastic implied MAD feature of the
model and the corresponding changes to the Risk Management Model
Description. In ICC's view, the proposed rule change continues to
ensure that ICC maintains policies and procedures that are reasonably
designed to provide for clear and transparent governance arrangements
that support the public interest requirements of Section 17A of the Act
\14\ applicable to clearing agencies, and the objectives of owners and
participants, and specify clear and direct lines of responsibility,
consistent with Rule 17Ad-22(e)(2)(i), (iii), and (v).\15\
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\11\ 17 CFR 240.17Ad-22.
\12\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
\13\ 15 U.S.C. 78q-1.
\14\ Id.
\15\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
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Rule 17Ad-22(e)(4)(ii) \16\ requires each covered clearing agency
to 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 maintaining additional financial resources at the minimum to enable
it to cover a wide range of foreseeable stress scenarios that include,
but are not limited to, the default of the two participant families
that would potentially cause the largest aggregate credit exposure for
the covered clearing agency in extreme but plausible market conditions.
As discussed above, ICC proposes to modify the Risk Management Model
Description to add a subsection on stochastic implied MAD modeling.
Under the proposed changes, the risk methodology for clearing Index
Swaptions would consider the risk arising from the joint fluctuations
of the underlying index levels and the options implied MAD scales. ICC
believes that the proposed changes support and enhance its ability to
manage its financial resources as such feature presents a more advanced
risk modeling technique for option instruments in rapidly changing
market conditions and high-volatility market environments.
Additionally, the proposed clarification changes provide further
clarity and transparency regarding ICC's risk management practices to
strengthen the documentation surrounding ICC's risk methodology,
including the incorporation of a reference to the clearinghouse in
Subsection III.6 when describing where certain data is obtained and the
clarifications to a formula and its notes in Subsection VII.5.1.2. As
such, the proposed amendments would strengthen ICC's ability to
maintain its financial resources and withstand the pressures of
defaults, consistent with the requirements of Rule 17Ad-
22(e)(4)(ii).\17\
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\16\ 17 CFR 240.17Ad-22(e)(4)(ii).
\17\ Id.
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Rule 17Ad-22(e)(6)(i) \18\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to cover its credit exposures to its
participants by establishing a risk-based margin system that, at a
minimum, considers, and produces margin levels commensurate with, the
risks and particular attributes of each relevant product, portfolio,
and market. ICC proposes to modify the Initial Margin Methodology
section of the Risk Management Model Description to enable a stochastic
implied MAD feature of the model in connection with the clearing of
Index Swaptions. As described above, this feature considers the
relationship between the underlying index levels and the implied MAD
scales and presents a more advanced risk modeling technique for option
instruments in rapidly changing market conditions and high-volatility
market environments. ICC believes that such feature enhances its margin
methodology, which considers and produces margin levels commensurate
with the risks and particular attributes of each relevant product,
portfolio, and market, consistent with the requirements of Rule 17Ad-
22(e)(6)(i).\19\
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\18\ 17 CFR 240.17Ad-22(e)(6)(i).
\19\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purpose of the Act. The proposed rule
change would amend the Risk Management Model Description to add
[[Page 48743]]
a subsection on stochastic implied MAD modeling in connection with the
proposed launch of the clearing of Index Swaptions and make certain
other minor clarification changes. The proposed rule change will apply
uniformly across all market participants. ICC does not believe
acceptance of Index Swaptions for clearing would adversely affect the
trading markets for such contracts, and in fact acceptance of such
contracts by ICC would provide market participants with the additional
flexibility to have their Index Swaptions cleared. Acceptance of Index
Swaptions for clearing will not, in ICC's view, adversely affect
clearing of any other currently cleared product. ICC does not believe
the amendments would adversely affect the ability of Participants,
their customers or other market participants to continue to clear
contracts, including CDS Contracts. ICC also does not believe the
enhancements would adversely affect the cost of clearing or otherwise
limit market participants' choices for selecting clearing services in
Index Swaptions, credit default swaps or other products. Accordingly,
ICC does not believe the amendments would impose any burden on
competition not necessary or appropriate in furtherance of the purpose
of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
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:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-ICC-2020-010 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-ICC-2020-010. This file
number should be included on the subject line if email is used. To help
the 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 such filings will also be available for inspection
and copying at the principal office of ICE Clear Credit and on ICE
Clear Credit's website at https://www.theice.com/clear-credit/regulation.
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-ICC-2020-010 and should be
submitted on or before September 2, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17557 Filed 8-11-20; 8:45 am]
BILLING CODE 8011-01-P
