Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving Proposed Rule Change Relating to the ICC Risk Management Model Description, 60845-60847 [2020-21269]
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Federal Register / Vol. 85, No. 188 / Monday, September 28, 2020 / Notices
invites public comment, and takes other
administrative steps.
DATES: Comments are due: September
30, 2020.
ADDRESSES: Submit comments
electronically via the Commission’s
Filing Online system at https://
www.prc.gov. Those who cannot submit
comments electronically should contact
the person identified in the FOR FURTHER
INFORMATION CONTACT section by
telephone for advice on filing
alternatives.
FOR FURTHER INFORMATION CONTACT:
David A. Trissell, General Counsel, at
202–789–6820.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
II. Docketed Proceeding(s)
I. Introduction
The Commission gives notice that the
Postal Service filed request(s) for the
Commission to consider matters related
to negotiated service agreement(s). The
request(s) may propose the addition or
removal of a negotiated service
agreement from the market dominant or
the competitive product list, or the
modification of an existing product
currently appearing on the market
dominant or the competitive product
list.
Section II identifies the docket
number(s) associated with each Postal
Service request, the title of each Postal
Service request, the request’s acceptance
date, and the authority cited by the
Postal Service for each request. For each
request, the Commission appoints an
officer of the Commission to represent
the interests of the general public in the
proceeding, pursuant to 39 U.S.C. 505
(Public Representative). Section II also
establishes comment deadline(s)
pertaining to each request.
The public portions of the Postal
Service’s request(s) can be accessed via
the Commission’s website (https://
www.prc.gov). Non-public portions of
the Postal Service’s request(s), if any,
can be accessed through compliance
with the requirements of 39 CFR
3011.301.1
The Commission invites comments on
whether the Postal Service’s request(s)
in the captioned docket(s) are consistent
with the policies of title 39. For
request(s) that the Postal Service states
concern market dominant product(s),
applicable statutory and regulatory
requirements include 39 U.S.C. 3622, 39
1 See Docket No. RM2018–3, Order Adopting
Final Rules Relating to Non-Public Information,
June 27, 2018, Attachment A at 19–22 (Order No.
4679).
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18:25 Sep 25, 2020
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U.S.C. 3642, 39 CFR part 3030, and 39
CFR part 3040, subpart B. For request(s)
that the Postal Service states concern
competitive product(s), applicable
statutory and regulatory requirements
include 39 U.S.C. 3632, 39 U.S.C. 3633,
39 U.S.C. 3642, 39 CFR part 3035, and
39 CFR part 3040, subpart B. Comment
deadline(s) for each request appear in
section II.
II. Docketed Proceeding(s)
1. Docket No(s).: MC2020–253 and
CP2020–283; Filing Title: USPS Request
to Add Priority Mail Contract 664 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: September 22, 2020;
Filing Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Kenneth R. Moeller; Comments Due:
September 30, 2020.
2. Docket No(s).: MC2020–254 and
CP2020–284; Filing Title: USPS Request
to Add Priority Mail & First-Class
Package Service Contract 168 to
Competitive Product List and Notice of
Filing Materials Under Seal; Filing
Acceptance Date: September 22, 2020;
Filing Authority: 39 U.S.C. 3642, 39 CFR
3040.130 through 3040.135, and 39 CFR
3035.105; Public Representative:
Christopher C. Mohr; Comments Due:
September 30, 2020.
This Notice will be published in the
Federal Register.
Erica A. Barker,
Secretary.
60845
(‘‘ATSs’’) that would, among other
things, eliminate an exemption from
compliance with Regulation ATS for
ATSs that trade government securities,
require ATSs that trade government
securities to file a new public form,
apply the fair access rule under Rule
301(b)(5) of Regulation ATS to ATSs
that meet certain volume thresholds for
U.S. Treasury securities and agency
securities, and require the electronic
filing of Form ATS and Form ATS–R;
and propose amendments to Regulation
SCI to apply to ATSs that meet certain
volume thresholds for U.S. Treasury
securities and agency securities. The
Commission will also consider whether
to issue a concept release on the
regulatory framework for electronic
platforms that trade corporate debt and
municipal securities.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed, please contact
Vanessa A. Countryman, Office of the
Secretary, at (202) 551–5400.
Dated: September 23, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–21419 Filed 9–24–20; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89948; File No. SR–ICC–
2020–010]
[FR Doc. 2020–21356 Filed 9–25–20; 8:45 am]
BILLING CODE 7710–FW–P
SECURITIES AND EXCHANGE
COMMISSION
September 22, 2020.
Sunshine Act Meetings
Notice is hereby given,
pursuant to the provisions of the
Government in the Sunshine Act, Pub.
L. 94–409, the Securities and Exchange
Commission will hold an Open Meeting
on Wednesday, September 30, 2020 at
10:00 a.m.
PLACE: The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street, NE, Washington, DC 20549.
STATUS: This meeting will begin at 10:00
a.m. (ET) and will be open to the public
via audio webcast only on the
Commission’s website at www.sec.gov.
MATTERS TO BE CONSIDERED: The
Commission will consider whether to
propose amendments to Regulation ATS
under the Securities Exchange Act of
1934 for alternative trading systems
TIME AND DATE:
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Self-Regulatory Organizations; ICE
Clear Credit LLC; Order Approving
Proposed Rule Change Relating to the
ICC Risk Management Model
Description
I. Introduction
On July 29, 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–4,2
a proposed rule change to make changes
to ICC’s Risk Management Model
Description.3 The proposed rule change
was published for comment in the
Federal Register on August 12, 2020.4
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 Self-Regulatory Organizations; ICE Clear Credit
LLC; Notice of Proposed Rule Change Relating to
the ICC Risk Management Model Description,
Exchange Act Release No. 89491 (August 6, 2020);
2 17
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60846
Federal Register / Vol. 85, No. 188 / Monday, September 28, 2020 / Notices
The Commission did not receive
comments regarding the proposed rule
change. For the reasons discussed
below, the Commission is approving the
proposed rule change.
II. Description of the Proposed Rule
Change
ICC is proposing to make changes to
its Risk Management Model Description
in connection with its proposed launch
of the clearing of credit default index
swaptions (‘‘Index Swaptions’’).5 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’’) in order to
adopt or amend certain related policies
and procedures in preparation for the
launch of clearing of Index Swaptions.6
The Swaption Rule Filings describe an
Index Swaption as when 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. As also
described in the Swaption Rule Filings,
ICC would not commence clearing of
Index Swaptions until all such policies
and procedures have been approved by
the Commission or otherwise become
effective. As such, ICC filed the
proposed rule change as part of ICC’s
larger effort to adopt the necessary
policies and procedures prior to the
eventual launch of the clearing of Index
Swaptions.
The proposed changes would 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.
Specifically, the proposed amendments
85 FR 48741 (August 12, 2020) (SR–ICC–2020–010)
(‘‘Notice).
5 The description herein is substantially
excerpted from the Notice.
6 SEC Release No. 34–87297 (Oct. 15, 2019), 84
FR 56270 (Oct. 21, 2019) (SR–ICC–2019–007); SEC
Release No. 34–89142 (June 24, 2020), 85 FR 39226
(June 30, 2020) (SR–ICC–2020–002); SEC Release
No. 34–89436 (July 31, 2020), 85 FR 47827 (Aug.
6, 2020) (SR–ICC–2020–008).
VerDate Sep<11>2014
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would modify Section VII of the Risk
Management Model Description to add
a subsection on stochastic implied MAD
modeling. In ICC–2020–002, which is
one of the Swaption Rule Filings, ICC
modified 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’’).7 In the current proposed rule
change, ICC proposes enhancements to
its approach to feature a stochastic
implied MAD, which would present a
more advanced risk modeling technique
for option instruments in rapidly
changing market conditions and highvolatility 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.
The rule proposal would also make
minor clarification changes to the Risk
Management Model Description.
Specifically, the proposal would
reference the clearinghouse in
Subsection III.6 when describing from
where certain data is obtained and to
abbreviate the term ‘mean absolute
deviation’ in Subsection VI.2. Because
of the addition of Subsection VII.3, the
proposal would therefore renumber the
subsections in Section VII accordingly.
7 SEC Release No. 34–89142 (June 24, 2020), 85
FR 39226 (June 30, 2020) (SR–ICC–2020–002).
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Additionally, the proposal would make
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.
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.8 For the
reasons given below, the Commission
finds that the proposed rule change is
consistent with Section 17A(b)(3)(F) of
the Act 9 and Rules 17Ad–22(e)(4)(ii)
and 17Ad–22(e)(6)(i) thereunder.10
A. Consistency With Section
17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act
requires, among other things, that the
rules of ICC be designed to promote the
prompt and accurate clearance and
settlement of securities transactions
and, to the extent applicable, derivative
agreements, contracts, and transactions,
as well as to assure the safeguarding of
securities and funds which are in the
custody or control of ICC or for which
it is responsible.11
As noted above, 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. The
stochastic implied MAD approach
considers the joint fluctuations of the
underlying index levels and the options
implied MAD scales, which is 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
Commission believes that by adjusting
its risk modeling to account for rapidly
changing and highly volatile markets,
ICC will enhance its ability to manage
the participant default risk by taking
into account changing market
environments. The Commission also
believes that the clarification updates
foster more clear and up to date
8 15
U.S.C. 78s(b)(2)(C).
U.S.C. 78q–1(b)(3)(F).
10 17 CFR 240.17Ad–22(e)(4)(ii) and 17 CFR
240.17Ad–22(e)(6)(i).
11 15 U.S.C. 78q–1(b)(3)(F).
9 15
E:\FR\FM\28SEN1.SGM
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Federal Register / Vol. 85, No. 188 / Monday, September 28, 2020 / Notices
documentation, which will also
enhance ICC’s ability to manage risk.
The Commission believes that such
enhancements to ICC’s ability to manage
default risk combined with more up to
date documentation will consequently
enhance its financial position by
facilitating the collection of margin
more precisely tailored to the risks of
the relevant products and, therefore,
promote its ability to manage the
applicable credit exposures, thereby
helping to ensure ICC’s continued
operations in the event of a default and
to promote the prompt and accurate
clearance and settlement of transactions.
Similarly, the Commission believes that
the more precisely tailored margin
could, in turn, help reduce the amount
of credit losses that would potentially
be charged to non-defaulting members
in the event of a default, thereby helping
to ensure that ICC is able to safeguard
securities and funds in its custody and
control. Therefore, the Commission
believes that the proposed rule change
is consistent with Section 17A(b)(3)(F)
of the Act.12
B. Consistency With Rule 17Ad–
22(e)(4)(ii)
Rule 17Ad–22(e)(4)(ii) 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.13
As noted above, the proposed rule
change would modify the Risk
Management Model Description to add
a subsection on stochastic implied MAD
modeling in which 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. The Commission
believes that by incorporating these
changes, ICC will be in a better position
to anticipate risks in these products
under more dynamic and volatile
market conditions for the underlying
indexes, thereby enhancing its ability to
12 15
13 17
U.S.C. 78q–1(b)(3)(F).
CFR 240.17Ad–22(e)(4)(ii).
VerDate Sep<11>2014
18:25 Sep 25, 2020
Jkt 250001
collect the appropriate margin and
consequently 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. For these reasons, the
Commission believes that the proposed
rule change is consistent with Rule
17Ad–22(e)(4)(ii).14
C. Consistency With Rule 17Ad–
22(e)(6)(i)
Rule 17Ad–22(e)(6)(i) 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. As noted above, the proposed
rule change 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.
The Commission believes that by taking
into account the market dynamics of the
underlying index levels, the proposed
change will enable ICC to produces
margin levels commensurate with the
risks and attributes of Index Swaptions.
The Commission believes that the
proposed rule change is therefore
consistent with Rule 17Ad–22(e)(6)(i).15
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 16 and
Rules 17Ad–22(e)(4)(ii) and 17Ad–
22(e)(6)(i) thereunder.17
It is therefore ordered pursuant to
Section 19(b)(2) of the Act 18 that the
proposed rule change (SR–ICC–2020–
010) be, and hereby is, approved.19
14 Id.
15 17
CFR 240.17Ad–22(e)(6)(i).
U.S.C. 78q–1(b)(3)(F).
17 17 CFR 240.17Ad–22(e)(4)(ii) and 17 CFR
240.17Ad–22(e)(6)(i).
18 15 U.S.C. 78s(b)(2).
19 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).
16 15
PO 00000
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Fmt 4703
Sfmt 4703
60847
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–21269 Filed 9–25–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–89952; File No. SR–DTC–
2020–011]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Amend Rule 4
September 22, 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
September 9, 2020, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II and III
below, which Items have been prepared
by the clearing agency.3 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 proposed rule change would
amend Rule 4 4 to provide expressly that
the Participants Fund continues to be a
liquidity resource that may be used by
DTC to fund a settlement funding gap to
complete settlement on a Business Day,
whether the funding gap is the result of
a Participant Default or otherwise. In
addition, the proposed rule change
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 On September 9, 2020, DTC filed this proposed
rule change as an advance notice (SR–DTC–2020–
801) with the Commission pursuant to Section
806(e)(1) of Title VIII of the Dodd-Frank Wall Street
Reform and Consumer Protection Act entitled the
Payment, Clearing, and Settlement Supervision Act
of 2010, 12 U.S.C. 5465(e)(1), and Rule 19b–
4(n)(1)(i) under the Act, 17 CFR 240.19b–4(n)(1)(i).
A copy of the advance notice is available at https://
www.dtcc.com/legal/sec-rule-filings.aspx.
4 Each capitalized term not otherwise defined
herein has its respective meaning as set forth in
DTC’s rules, including, but not limited to, the
Rules, By-Laws and Organization Certificate of DTC
(the ‘‘Rules’’) and the DTC Settlement Service
Guide (the ‘‘Settlement Guide’’), available at https://
www.dtcc.com/legal/rules-and-procedures.aspx.
The Settlement Guide is a Procedure of DTC filed
with the Commission that, among other things,
operationalizes and supplements the DTC Rules
that relate to settlement, including, but not limited
to, Rule 4 (Participants Fund and Participants
Investment).
1 15
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]]>Agencies
[Federal Register Volume 85, Number 188 (Monday, September 28, 2020)]
[Notices]
[Pages 60845-60847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21269]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89948; File No. SR-ICC-2020-010]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Management
Model Description
September 22, 2020.
I. Introduction
On July 29, 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,\2\ a proposed rule change to make changes
to ICC's Risk Management Model Description.\3\ The proposed rule change
was published for comment in the Federal Register on August 12,
2020.\4\
[[Page 60846]]
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\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
\4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Proposed Rule Change Relating to the ICC Risk Management Model
Description, Exchange Act Release No. 89491 (August 6, 2020); 85 FR
48741 (August 12, 2020) (SR-ICC-2020-010) (``Notice).
---------------------------------------------------------------------------
II. Description of the Proposed Rule Change
ICC is proposing to make changes to its Risk Management Model
Description in connection with its proposed launch of the clearing of
credit default index swaptions (``Index Swaptions'').\5\ 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'') in order to adopt or amend certain related
policies and procedures in preparation for the launch of clearing of
Index Swaptions.\6\ The Swaption Rule Filings describe an Index
Swaption as when 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. As also described in the Swaption Rule Filings, ICC would
not commence clearing of Index Swaptions until all such policies and
procedures have been approved by the Commission or otherwise become
effective. As such, ICC filed the proposed rule change as part of ICC's
larger effort to adopt the necessary policies and procedures prior to
the eventual launch of the clearing of Index Swaptions.
---------------------------------------------------------------------------
\5\ The description herein is substantially excerpted from the
Notice.
\6\ SEC Release No. 34-87297 (Oct. 15, 2019), 84 FR 56270 (Oct.
21, 2019) (SR-ICC-2019-007); SEC Release No. 34-89142 (June 24,
2020), 85 FR 39226 (June 30, 2020) (SR-ICC-2020-002); SEC Release
No. 34-89436 (July 31, 2020), 85 FR 47827 (Aug. 6, 2020) (SR-ICC-
2020-008).
---------------------------------------------------------------------------
The proposed changes would 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. Specifically, the proposed amendments would modify Section VII
of the Risk Management Model Description to add a subsection on
stochastic implied MAD modeling. In ICC-2020-002, which is one of the
Swaption Rule Filings, ICC modified 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'').\7\ In the current
proposed rule change, ICC proposes enhancements to its approach to
feature a stochastic implied MAD, which would present 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.
---------------------------------------------------------------------------
\7\ SEC Release No. 34-89142 (June 24, 2020), 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.
The rule proposal would also make minor clarification changes to
the Risk Management Model Description. Specifically, the proposal would
reference the clearinghouse in Subsection III.6 when describing from
where certain data is obtained and to abbreviate the term `mean
absolute deviation' in Subsection VI.2. Because of the addition of
Subsection VII.3, the proposal would therefore renumber the subsections
in Section VII accordingly. Additionally, the proposal would make
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.
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.\8\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \9\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i)
thereunder.\10\
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\8\ 15 U.S.C. 78s(b)(2)(C).
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17 CFR 240.17Ad-
22(e)(6)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, 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.
The stochastic implied MAD approach considers the joint fluctuations of
the underlying index levels and the options implied MAD scales, which
is 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 Commission believes that by adjusting its risk modeling to
account for rapidly changing and highly volatile markets, ICC will
enhance its ability to manage the participant default risk by taking
into account changing market environments. The Commission also believes
that the clarification updates foster more clear and up to date
[[Page 60847]]
documentation, which will also enhance ICC's ability to manage risk.
The Commission believes that such enhancements to ICC's ability to
manage default risk combined with more up to date documentation will
consequently enhance its financial position by facilitating the
collection of margin more precisely tailored to the risks of the
relevant products and, therefore, promote its ability to manage the
applicable credit exposures, thereby helping to ensure ICC's continued
operations in the event of a default and to promote the prompt and
accurate clearance and settlement of transactions. Similarly, the
Commission believes that the more precisely tailored margin could, in
turn, help reduce the amount of credit losses that would potentially be
charged to non-defaulting members in the event of a default, thereby
helping to ensure that ICC is able to safeguard securities and funds in
its custody and control. Therefore, the Commission believes that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act.\12\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(4)(ii)
Rule 17Ad-22(e)(4)(ii) 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.\13\
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\13\ 17 CFR 240.17Ad-22(e)(4)(ii).
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As noted above, the proposed rule change would modify the Risk
Management Model Description to add a subsection on stochastic implied
MAD modeling in which 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. The
Commission believes that by incorporating these changes, ICC will be in
a better position to anticipate risks in these products under more
dynamic and volatile market conditions for the underlying indexes,
thereby enhancing its ability to collect the appropriate margin and
consequently 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. For these reasons, the Commission believes that the
proposed rule change is consistent with Rule 17Ad-22(e)(4)(ii).\14\
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\14\ Id.
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C. Consistency With Rule 17Ad-22(e)(6)(i)
Rule 17Ad-22(e)(6)(i) 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. As noted above, the proposed rule change 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. The Commission believes that by taking into
account the market dynamics of the underlying index levels, the
proposed change will enable ICC to produces margin levels commensurate
with the risks and attributes of Index Swaptions. The Commission
believes that the proposed rule change is therefore consistent with
Rule 17Ad-22(e)(6)(i).\15\
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\15\ 17 CFR 240.17Ad-22(e)(6)(i).
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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 \16\ and Rules 17Ad-22(e)(4)(ii) and 17Ad-22(e)(6)(i)
thereunder.\17\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17Ad-22(e)(4)(ii) and 17 CFR 240.17Ad-
22(e)(6)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\18\ that the proposed rule change (SR-ICC-2020-010) be, and hereby is,
approved.\19\
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\18\ 15 U.S.C. 78s(b)(2).
\19\ 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.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-21269 Filed 9-25-20; 8:45 am]
BILLING CODE 8011-01-P
