Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of Filing of Proposed Rule Change Relating to the Counterparty Monitoring Procedures and the Credit Rating System Model Description and Parameterization, 60305-60309 [2021-23676]
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Federal Register / Vol. 86, No. 208 / Monday, November 1, 2021 / Notices
SECURITIES AND EXCHANGE
COMMISSION
and (C) below, of the most significant
aspects of these statements.
[Release No. 34–93429; File No. SR–ICC–
2021–021]
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
Self-Regulatory Organizations; ICE
Clear Credit LLC; Notice of Filing of
Proposed Rule Change Relating to the
Counterparty Monitoring Procedures
and the Credit Rating System Model
Description and Parameterization
October 26, 2021.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4,2 notice is
hereby given that on October 13, 2021,
ICE Clear Credit LLC (‘‘ICC’’) 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 primarily by ICC.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
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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 adopt and
formalize the ICC Counterparty
Monitoring Procedures (the ‘‘CMPs’’)
and the ICC Credit Rating System
(‘‘CRS’’) Model Description and
Parameterization (the ‘‘CRS Policy’’)
(together, the ‘‘Documents’’) and to
retire the ICC CDS Clearing
Counterparty Monitoring Procedures:
Futures Commission Merchant (‘‘FCM’’)
Counterparties (the ‘‘FCM Procedures’’)
and the ICC CDS Clearing Counterparty
Monitoring Procedures: Bank
Counterparties (the ‘‘Bank Procedures’’)
(together, the ‘‘FCM and Bank
Procedures’’). These revisions do not
require any changes to the ICC Clearing
Rules (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, security-based swap
submission, or advance notice and
discussed any comments it received on
the proposed rule change, securitybased swap submission, or advance
notice. 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),
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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(a) Purpose
ICC’s counterparty monitoring
policies and procedures and credit
scoring approach are divided by
counterparty type in the FCM and Bank
Procedures. Information with respect to
FCM/broker-dealer (‘‘BD’’)
counterparties and bank counterparties
(i.e., non-FCM/BD counterparties) is set
out in the FCM Procedures and the Bank
Procedures, respectively. ICC proposes
to adopt and formalize the CMPs to
consolidate these existing counterparty
monitoring policies and procedures for
Clearing Participants (‘‘CPs’’) and
financial service providers (‘‘FSPs’’) into
one document. ICC proposes to
similarly consolidate and move
information related to its credit scoring
approach into the CRS Policy, which
ICC would adopt and formalize as a
separate policy describing ICC’s CRS.
The proposed rule change is generally
designed to enhance, clarify, and more
clearly document descriptions of key
ICC processes and procedures related to
ICC’s counterparty monitoring practices
and CRS. ICC proposes to adopt and
formalize the Documents and to retire
the FCM and Bank Procedures following
Commission approval of the proposed
rule change. The proposed rule change
is described in detail as follows.
CMPs
The proposed CMPs consolidate ICC’s
existing counterparty monitoring
policies and procedures for CPs and
FSPs into one document. The proposed
document would enhance and provide
more clarity on ICC’s counterparty
monitoring practices. This document is
divided into 11 sections, which are
detailed below.
The CMPs provide background with
respect to ICC for the purpose of
counterparty monitoring. Section 1
serves as an introduction with
fundamental information about ICC’s
organization and operation. FSPs are
defined as the entities to which ICC has
actual or potential credit exposure (e.g.,
settlement banks, custodians, reverse
repurchase counterparties). Section 2
gives an overview of the roles and
responsibilities of ICC and external
parties for counterparty monitoring,
including the roles of CPs and FSPs in
providing information requested by ICC
and the roles of ICC’s Risk and
Operations Departments, Chief Risk
Officer (‘‘CRO’’), and internal
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60305
committees. Specifically, the ICC Risk
Department is responsible for
monitoring all counterparties,
presenting information to relevant
committees, and maintaining these
CMPs. The CRO is responsible for
reviewing and validating the Risk
Department’s counterparty credit
findings and recommendations, which
includes reviewing analysis, identifying
where additional information is
required, and ensuring that
recommendations are supported. The
Risk Department presents information to
the ICC Participant Review Committee
(‘‘PRC’’) and the ICC Credit Review
Subcommittee of the PRC
(‘‘Subcommittee’’), which are internal
committees that assist in fulfilling
counterparty review responsibilities.
The PRC is responsible for reviewing
membership applications; monitoring
ongoing compliance with membership
requirements, including financial,
operational, legal, and compliance
requirements; and overseeing the due
diligence and approval of FSPs. The
Subcommittee assists the PRC in
fulfilling counterparty review
responsibilities, including monitoring
and reviewing reports on the
creditworthiness of counterparties on an
at least monthly basis.
Section 3 discusses ICC’s standards
for counterparty relationships, namely
the requirements for CPs and FSPs, and
includes references to relevant existing
documentation. Chapter 2 of the ICC
Rules continues to set forth the
membership requirements for CPs,
which remain unchanged. Section 3
requires ICC, through the PRC, to
perform an annual review of such
criteria in the Rules to ensure continued
sufficiency and appropriateness of the
membership requirements. Further,
under this section, FSPs must meet
certain requirements and be approved
by the PRC, meet the operational
requirements of the ICC Treasury
Department, and be subject to regulation
and supervision by a competent
authority. Section 3 also describes key
steps, responsible parties, and relevant
documentation regarding the processes
of on-boarding new counterparties and
the withdrawal of existing
counterparties. For on-boarding new
FSPs, the Risk Department is
responsible for collecting necessary
information and requiring the
completion of a risk questionnaire
which is presented to the Subcommittee
and PRC. The PRC is responsible for
overseeing the withdrawal process for
FSPs, which includes confirmation from
relevant departments that all exposures
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to the FSP have been closed out and all
legal agreements terminated.
The CMPs explain how ICC monitors
the stability of its counterparties.
Section 4 includes the financial
elements of ongoing CP monitoring and
discusses monitoring of other CP
requirements, such as participation in
ICC’s price discovery process and
default management simulations.
Section 4 details the procedures
associated with the Risk Department’s
intraday and daily monitoring functions
for CPs and FSPs and specifies how
issues are escalated and resulting
actions are documented. This includes
intraday monitoring of Risk Filter
Threshold (‘‘RFT’’) consumption to
manage the intraday risk associated
with incoming real-time position
changes to a portfolio that may require
pre-funding; a daily end-of-day review
of initial margin and guaranty fund
changes; intraday and daily monitoring
of news and market metrics for CPs and
FSPs; and monitoring and review of
timely payments and notices from CPs.
This section discusses the preparation
and review of a monthly credit report on
the financial condition of ICC’s
counterparties as part of the monthly
monitoring process. The monthly credit
report includes, among other items, a
summary of the data used for the
analysis, current and historical
counterparty credit scores and changes
per credit risk factor, exposures of CPs
with respect to their total requirements,
exposures of FSPs and current
allocation and investment limits, and
counterparties on the Watch List.
Additional reviews of exposure to CPs
and FSPs, counterparty qualitative
analysis, RFT and investment
allocations conducted as part of
monthly monitoring are set out in
Section 4 along with the procedures for
escalating identified issues and
documenting resulting actions.
Furthermore, Section 4 further discusses
how ICC monitors and manages its
aggregate exposure to entities and their
affiliates with which ICC maintains
multiple counterparty relationships,
including through limits on FSPs and
CPs which are reviewed on a specified
basis and more frequently as warranted.
Exposures to FSPs are managed through
investment allocations, which represent
limits established by the Risk
Department for entities and are
reviewed at least once a year. With
respect to CPs, ICC manages the risk that
it is willing to take, considering realtime position changes, through the RFT
level which is reviewed at least once a
month by the Risk Department.
Moreover, this section describes the risk
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reviews that ICC completes for its
counterparties. All counterparties are
subject to an initial risk review and
periodic risk reviews, which allow ICC
to monitor the capacity of its
counterparties to perform as required.
The periodicity of these reviews is
within a four-year time frame. The
timing of review, the steps for
conducting a risk review, the possible
review outcomes, and escalation
procedures are detailed. Under the
CMPs, more frequent risk reviews may
be performed if the latest periodic risk
review was considered unsatisfactory or
the counterparty was recently placed on
the highest Watch List level. Section 5
describes ICC’s CRS that computes
credit scores for counterparties and
specifies the frequency of review of the
credit scoring methodology.
The CMPs detail how ICC identifies
counterparties that may pose additional
risk to it and include additional
information relevant to ICC’s monitoring
responsibilities. Section 6 sets out the
criteria for placing counterparties on the
Watch List and the procedures for
adding and removing counterparties to
and from the Watch List. Regarding
Watch List criteria, this section
distinguishes between automatic
placement on the Watch List based on
credit score and qualitative
considerations of counterparty
deterioration that may merit placement
on the Watch List or movement to a
higher Watch List level. A credit score
of 3.0 or higher warrants a counterparty
to be automatically placed on the Watch
List. Qualitative considerations include
decreasing levels of capitalization and
failure to maintain operations,
infrastructure, and personnel capable of
meeting requirements. The CRO
determines if a counterparty should be
added to the Watch List, except for
automatic placement, and if a
counterparty should be removed. The
CRO may consider recommendations
regarding which counterparties to add
to the Watch List as well as
counterparty Watch List level changes
from the Subcommittee and PRC.
Section 7 details the actions available to
ICC with respect to CPs or FSPs on the
Watch List or for whom a deficiency is
identified during the monitoring
process. Actions the CRO may take
include, among others, an increase in
initial margin requirements, notification
to the Board, recommendation for
suspension of clearing privileges, or
termination of the relationship with the
FSP. Section 7 also discusses how such
actions are determined, documented,
and escalated. The Risk Department is
responsible for contacting firms to
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discuss activity that raised concern. The
CRO is responsible for documenting the
details, rationale, and criteria used in
determining actions taken against the
CP, and the documentation is presented
to the Subcommittee. For FSPs,
concerns are escalated to ICC Senior
Management to evaluate the issues and
determine what, if any, additional
actions should be taken. Finally, the
CMPs include additional information
regarding the confidentiality of credit
scores in Section 8, record keeping
responsibilities in Section 9, references
in Section 10, and the revision history
in Section 11.
CRS Policy
The proposed CRS Policy describes
ICC’s CRS and provides additional
clarity on the processes and procedures
related to ICC’s credit scoring approach.
The proposed document is divided into
9 sections, which are detailed below.
The CRS Policy contains background
on ICC’s CRS that computes credit
scores for counterparties. Section 1
describes the CRS and sets out its
purpose, which is to rate counterparties
and identify counterparties that may
exhibit inconsistent financial
performance or that show signs of
operational and risk management
weaknesses and require more extensive
analysis. The CRS estimates a credit
score representative of the financial
condition of the counterparty and relies
on credit risk factors representing a
combination of data and performance
ratios derived from financial reporting
and market information. Section 1
specifies that the ICC Risk Department
is responsible for calibrating the credit
risk factor metrics. Section 2 explains
the scope of the CRS, which features
two credit scoring models due to the
variety of CPs and FSPs facing ICC.
Section 2 summarizes each credit
scoring model and its corresponding
model components and provides a range
of possible credit scores and credit score
interpretations. The credit scoring scale
ranges from 1 to 5, with a score of 1
indicating the strongest financial
stability and the level of least concern
and a score of 5 indicating the weakest
financial stability and the greatest level
of concern. This section further
summarizes the data required for the
CRS and describes how implementation
of the CRS is supported internally.
The CRS Policy describes the model
components of each credit scoring
model in detail. Section 3 discusses the
selection of credit risk factors, which are
divided into financial and market
metrics. Financial metrics provide a
point in time view of the state of the
company, while market metrics are used
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to capture frequent changes in the
market sentiment of the companies
facing ICC. Section 3 includes
descriptions of the credit risk factors.
For each credit risk factor, this section
specifies corresponding metrics,
relevant definitions, formulas,
applicability based on type of
counterparty, and key regulatory
requirements, among others. The CRS
also considers a qualitative assessment,
which allows flexibility to incorporate
additional information (e.g., business
risk, litigation risk, management
actions) regarding the counterparty into
the credit score, and provides a range of
possible qualitative assessment scores
and qualitative assessment score
interpretations. Furthermore, Section 3
notes the use of proxies for
counterparties that may not report the
exact metrics described in this
document.
Model specifications are also
included in the CRS Policy. Section 4
describes the calibration of the model
component weights. Each credit risk
factor receives its own credit risk factorspecific weight. This section notes how
credit risk factor weights are determined
and discusses the testing of the weights
between the financial and market
metrics to measure the effectiveness of
the scoring model in identifying early
signs of weakness. Section 4 further
discusses metric parameterization for
each credit risk factor and provides
input values, metric descriptions,
graphical representations, assumptions,
parameter sets, and calibrated values,
among others.
The CRS Policy specifies the data
required for the CRS to compute credit
scores and memorializes other
information relevant to the CRS. Section
5 includes procedures for collecting
data from internal and external sources
and describes the case in which
component weights are reallocated
based on the availability of data. Section
5 further explains how the adequacy of
the data is ensured and assigns
responsibility for checking the validity
of data and remedying inconsistencies.
Under Section 6, the credit risk factors,
corresponding metrics and
parameterization of the credit scoring
model are reviewed at least once a year.
Results are evaluated based on
predefined thresholds, which are set out
in this section, and actions are taken to
update the model parameterization if
needed. Section 7 specifies the
assumptions and limitations of the CRS.
Section 8 contains a list of references,
and Section 9 includes the revision
history. The appendices maintain other
relevant information for the purpose of
using the CRS, including a list of
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proxies and information relevant to
metric parameterization.
Retirement of the FCM and Bank
Procedures
ICC proposes retiring the FCM and
Bank Procedures. The below list
summarizes where the information in
the FCM and Bank Procedures would
reside following retirement and
differences from the proposed
Documents.
• Introduction and Overview:
Information in Section I would be
moved to Section 1 of the CMPs.
• Roles and Responsibilities:
Information in Section II would be
moved to Section 2 of the CMPs. The
CMPs memorialize the Risk
Department’s responsibility of
presenting information to relevant
committees. Moreover, under the CMPs,
the PRC is responsible for the approval
of FSPs.3
• Monitoring Scope: Information in
Section III would be moved to Section
4 of the CMPs. While additional
procedures or detail is included and
there are minor differences in drafting
style or terminology, ICC does not
propose material changes to its
monitoring scope. Procedures are added
describing ICC’s monitoring of RFT
consumption and how issues are
escalated and resulting actions are
documented. Language related to ICC’s
monitoring and management of
aggregate exposure to entities with
which ICC maintains multiple
counterparty relationships is also
included, as well as procedures
associated with FSP investment
allocation and RFT limits. More detail,
such as steps for conducting a risk
review, possible review outcomes, and
criteria for more frequent risk reviews,
are also set forth. Further, the list of
general information maintained for
counterparties in the FCM and Bank
Procedures is removed given the
additional procedures in the Documents
in respect of counterparty review and
CRS data.
• Clearing House Counterparty Credit
Rating System: Information in Section
IV would be moved to Section 5 of the
CMPs and Sections 2–4 of the CRS
Policy. While the information is
reorganized and additional detail or
procedures are included, ICC does not
propose material changes to its credit
scoring approach. ICC specifies the
frequency of review of the credit scoring
methodology in Section 5 of the CMPs.
Descriptions of the credit risk factors,
metrics, and qualitative assessment are
3 See SR–ICC–2021–015 for more information on
the responsibilities of the PRC.
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moved to Sections 2 and 3 of the CRS
Policy and information related to metric
parameterization and computations,
including input values, graphical
representations, parameter sets, and
calibrated values is moved to Section 4
the CRS Policy. Minor revisions to
credit score interpretations are made in
the CRS Policy, including removing
language associated with the Watch List
which would be contained in the CMPs.
Additional language is proposed in the
CRS Policy to describe the CRS and
credit scoring approach broadly (Section
1), model foundations and selection of
credit risk factors and metrics (Section
3), testing of the weights between
metrics and model performance testing
(Sections 4 and 6), data sources and data
quality (Section 5), and assumptions
and limitations of the CRS (Section 7).
• Additional Internal Rating
Considerations: Information in Section
V (FCM Procedures only) would be
moved to Section 4 of the CRS Policy.
• Data Proxies: Information in
Section VI (FCM Procedures) and
Section V (Bank Procedures) would be
moved to Section 3 of the CRS Policy.
• Information Privacy: Information in
Section VII (FCM Procedures) and
Section VI (Bank Procedures) would be
moved to Section 8 of the CMPs.
• Record Keeping: Information in
Section VIII (FCM Procedures) and
Section VII (Bank Procedures) would be
moved to Section 9 of the CMPs.
• Watch List Criteria: Information in
Section IX (FCM Procedures), Section
VIII (Bank Procedures), and Appendix 3
would be moved to Sections 6 and 7 of
the CMPs. The FCM and Bank
Procedures list reasons for placing
counterparties on the Watch List and
Appendix 3 specifies that counterparties
exhibiting certain criteria may be placed
on the Watch List (e.g., deterioration in
credit score, capitalization, operational
or other violations). The Watch List
criteria is updated in the CMPs to
distinguish between automatic
placement on the Watch List based on
credit score and qualitative
considerations of counterparty
deterioration that may merit placement
on the Watch List or movement to a
higher Watch List level.
• Appendices 1 and 2 are moved to
the appendices of the CRS Policy and
Appendix 3 is removed.
Consolidation of the FCM and Bank
Procedures with respect to counterparty
monitoring in the CMPs and with
respect to the credit scoring approach in
the CRS Policy would allow ICC to
avoid unnecessary repetition. The
Documents are generally designed to
enhance, clarify, and more clearly
document descriptions of key ICC
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processes and procedures related to
ICC’s counterparty monitoring practices
and CRS, and not to materially change
existing processes and practices in the
FCM and Bank Procedures. Additional
detail is memorialized in the Documents
which was not previously in the Bank
and FCM Procedures, including ICC’s
standards for counterparty relationships
and procedures for counterparty onboarding and withdrawal in Section 3 of
the CMPs and a comprehensive
description of the CRS, including its
foundations, data, testing, and
assumptions and limitations, in the CRS
Policy. Overall, the purpose of and
substance across the documents remains
largely consistent with some differences
in drafting style or terminology,
additional procedures or detail, and
other minor updates or revisions.
(b) Statutory Basis
ICC believes that the proposed rule
change is consistent with the
requirements of Section 17A of the Act 4
and the regulations thereunder
applicable to it, including the applicable
standards under Rule 17Ad–22.5 In
particular, Section 17A(b)(3)(F) of the
Act 6 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. As discussed herein, the
proposed rule change is generally
designed to enhance, clarify, and more
clearly document descriptions of key
ICC procedures related to ICC’s
counterparty monitoring practices and
CRS. The proposed CMPs would
consolidate ICC’s existing counterparty
monitoring procedures for CPs and FSPs
into one document. Information related
to the CRS would be moved into a
separate policy, the CRS Policy, which
describes ICC’s credit scoring approach
and is intended to more clearly
document the processes and procedures
associated with the CRS. Memorializing
additional detail in respect of the CRS,
such as its foundations, data sources,
testing, and assumptions and
limitations, in the CRS Policy would
strengthen the CRS to ensure that it
appropriately estimates credit scores
representative of the financial condition
of counterparties. Consolidation of the
FCM and Bank Procedures regarding
counterparty monitoring in the CMPs
and regarding the credit scoring
approach in the CRS Policy would allow
ICC to avoid unnecessary repetition,
avoid potential confusion between
policies, and promote efficiency. ICC
believes that the proposed rule change
would thus facilitate and enhance its
ability to carry out its counterparty
monitoring responsibilities and manage
counterparty credit risk and thus
promote overall risk management and
the stability of ICC. Accordingly, in
ICC’s view, the proposed rule change is
consistent with the prompt and accurate
clearance and settlement of securities
transactions, derivatives agreements,
contracts, and transactions, 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.7
The proposed rule change would also
satisfy the relevant requirements of Rule
17Ad–22.8 Rule 17Ad–22(e)(2)(i) and
(v) 9 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 and
specify clear and direct lines of
responsibility. The Documents clearly
and transparently assign and document
responsibility and accountability
associated with counterparty monitoring
and computation of credit scores. The
CMPs specify how identified issues are
escalated and set out the roles and
responsibilities of internal personnel
and committees, including with respect
to ongoing counterparty monitoring,
review, and reporting; on-boarding and
withdrawal of counterparties; and
changes to the Watch List. The CMPs
clearly set out the roles of the PRC and
Subcommittee with respect to
counterparty monitoring, review, and
approval and detail their interaction
with the Risk Department and CRO. For
the CRS, the ICC Risk Department is
responsible for calibrating the credit risk
factor metrics under the CRS Policy.
The CRS Policy also assigns
responsibility for checking the validity
of data for the CRS and remedying
inconsistencies. As such, in ICC’s view,
the proposed rule change ensures that
ICC maintains policies and procedures
that are reasonably designed to provide
for clear and transparent governance
arrangements and specify clear and
direct lines of responsibility, consistent
with Rule 17Ad–22(e)(2)(i) and (v).10
Rule 17Ad–22(e)(4)(ii) 11 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. The proposed rule change
enhances ICC’s ability to manage its
financial resources since the Documents
are designed to minimize the risk
associated with ICC’s counterparty
relationships by more clearly describing
key processes, controls, decisions, and
escalations associated with ICC’s
counterparty review and monitoring
processes and CRS. The Documents are
not intended to materially change ICC’s
existing processes and practices in the
FCM and Bank Procedures.
Memorializing the processes and
procedures associated with the CRS in
the CRS Policy would strengthen the
CRS to ensure that it appropriately
estimates credit scores representative of
the financial condition of
counterparties. The proposed rule
change would thus promote ICC’s
ability to ensure financial health and the
ability to fulfill obligations by ICC’s
counterparties, which promotes and
strengthens ICC’s own financial
condition and supports 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).12
Rule 17Ad–22(e)(16) 13 requires each
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to safeguard its
own and its participants’ assets,
minimize the risk of loss and delay in
access to these assets, and invest such
assets in instruments with minimal
credit, market, and liquidity risks. The
Documents memorialize the processes
and procedures associated with
managing credit risk from ICC’s
counterparties, including FSPs who are
10 Id.
4 15
U.S.C. 78q–1.
5 17 CFR 240.17Ad–22.
6 15 U.S.C. 78q–1(b)(3)(F).
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7 Id.
11 17
8 17
12 Id.
CFR 240.17Ad–22.
9 17 CFR 240.17Ad–22(e)(2)(i) and (v).
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defined as the entities to which ICC has
actual or potential credit exposure (e.g.,
settlement banks, custodians, reverse
repurchase counterparties). The CMPs
describe ICC’s requirements for FSPs
and the procedures for intraday, daily,
and monthly monitoring of the financial
and operational capacity of FSPs. This
document also includes procedures for
placing counterparties on the Watch List
and for monitoring and managing ICC’s
aggregate exposure to entities and their
affiliates with which ICC maintains
multiple counterparty relationships.
Accordingly, the proposed rule change
would continue to ensure that ICC
safeguards its own and its participants’
assets, minimizes the risk of loss and
delay in access to these assets, and
invests such assets in instruments with
minimal credit, market, and liquidity
risks, consistent with the requirements
of Rule 17Ad–22(e)(16).14
Rule 17Ad–22(e)(18) 15 requires each
covered clearing agency to establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to establish
objective, risk-based, and publicly
disclosed criteria for participation,
which permit fair and open access by
direct and, where relevant, indirect
participants and other financial market
utilities, require participants to have
sufficient financial resources and robust
operational capacity to meet obligations
arising from participation in the clearing
agency, and monitor compliance with
such participation requirements on an
ongoing basis. The proposed rule
change does not change ICC’s existing
CP membership criteria. The CMPs
discuss ICC’s standards for counterparty
relationships, namely the requirements
for CPs and FSPs, and include
references to relevant documentation.
The CMPs define the entities included
as FSPs to ensure that ICC appropriately
identifies and monitors its counterparty
relationships. The proposed rule change
is designed to more clearly document
the standards for counterparty
relationships and the associated
monitoring processes to ensure that
responsible parties carry out their duties
and appropriately monitor for
compliance with such requirements.
Furthermore, the CMPs require the
performance of an annual review of the
CP membership criteria to ensure
continued sufficiency and
appropriateness. As such, the proposed
rule change will continue to ensure that
participants have sufficient financial
resources and robust operational
capacity to meet obligations and
promote ICC’s ability to monitor
compliance for such requirements on an
ongoing basis, consistent with Rule
17Ad–22(e)(18).16
(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.
The proposed rule change to adopt and
formalize the Documents and to retire
the FCM and Bank Procedures will
apply uniformly across all market
participants. Therefore, ICC does not
believe the proposed rule change would
impose any burden on competition that
is inappropriate in furtherance of the
purposes 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 rule-comments@
sec.gov. Please include File Number SR–
ICC–2021–021 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–2021–021. 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–2021–021 and
should be submitted on or before
November 22, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.17
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–23676 Filed 10–29–21; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meetings
2:00 p.m. on Thursday,
November 4, 2021.
TIME AND DATE:
The meeting will be held via
remote means and/or at the
Commission’s headquarters, 100 F
Street NE, Washington, DC 20549.
PLACE:
14 Id.
15 17
CFR 240.17Ad–22(e)(18).
VerDate Sep<11>2014
18:03 Oct 29, 2021
16 Id.
Jkt 256001
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Frm 00112
17 17
Fmt 4703
Sfmt 4703
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E:\FR\FM\01NON1.SGM
CFR 200.30–3(a)(12).
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]]>Agencies
[Federal Register Volume 86, Number 208 (Monday, November 1, 2021)]
[Notices]
[Pages 60305-60309]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-23676]
[[Page 60305]]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93429; File No. SR-ICC-2021-021]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the Counterparty Monitoring
Procedures and the Credit Rating System Model Description and
Parameterization
October 26, 2021.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4,\2\ notice is hereby given that on October
13, 2021, ICE Clear Credit LLC (``ICC'') 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
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 adopt and
formalize the ICC Counterparty Monitoring Procedures (the ``CMPs'') and
the ICC Credit Rating System (``CRS'') Model Description and
Parameterization (the ``CRS Policy'') (together, the ``Documents'') and
to retire the ICC CDS Clearing Counterparty Monitoring Procedures:
Futures Commission Merchant (``FCM'') Counterparties (the ``FCM
Procedures'') and the ICC CDS Clearing Counterparty Monitoring
Procedures: Bank Counterparties (the ``Bank Procedures'') (together,
the ``FCM and Bank Procedures''). These revisions do not require any
changes to the ICC Clearing Rules (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,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. 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's counterparty monitoring policies and procedures and credit
scoring approach are divided by counterparty type in the FCM and Bank
Procedures. Information with respect to FCM/broker-dealer (``BD'')
counterparties and bank counterparties (i.e., non-FCM/BD
counterparties) is set out in the FCM Procedures and the Bank
Procedures, respectively. ICC proposes to adopt and formalize the CMPs
to consolidate these existing counterparty monitoring policies and
procedures for Clearing Participants (``CPs'') and financial service
providers (``FSPs'') into one document. ICC proposes to similarly
consolidate and move information related to its credit scoring approach
into the CRS Policy, which ICC would adopt and formalize as a separate
policy describing ICC's CRS. The proposed rule change is generally
designed to enhance, clarify, and more clearly document descriptions of
key ICC processes and procedures related to ICC's counterparty
monitoring practices and CRS. ICC proposes to adopt and formalize the
Documents and to retire the FCM and Bank Procedures following
Commission approval of the proposed rule change. The proposed rule
change is described in detail as follows.
CMPs
The proposed CMPs consolidate ICC's existing counterparty
monitoring policies and procedures for CPs and FSPs into one document.
The proposed document would enhance and provide more clarity on ICC's
counterparty monitoring practices. This document is divided into 11
sections, which are detailed below.
The CMPs provide background with respect to ICC for the purpose of
counterparty monitoring. Section 1 serves as an introduction with
fundamental information about ICC's organization and operation. FSPs
are defined as the entities to which ICC has actual or potential credit
exposure (e.g., settlement banks, custodians, reverse repurchase
counterparties). Section 2 gives an overview of the roles and
responsibilities of ICC and external parties for counterparty
monitoring, including the roles of CPs and FSPs in providing
information requested by ICC and the roles of ICC's Risk and Operations
Departments, Chief Risk Officer (``CRO''), and internal committees.
Specifically, the ICC Risk Department is responsible for monitoring all
counterparties, presenting information to relevant committees, and
maintaining these CMPs. The CRO is responsible for reviewing and
validating the Risk Department's counterparty credit findings and
recommendations, which includes reviewing analysis, identifying where
additional information is required, and ensuring that recommendations
are supported. The Risk Department presents information to the ICC
Participant Review Committee (``PRC'') and the ICC Credit Review
Subcommittee of the PRC (``Subcommittee''), which are internal
committees that assist in fulfilling counterparty review
responsibilities. The PRC is responsible for reviewing membership
applications; monitoring ongoing compliance with membership
requirements, including financial, operational, legal, and compliance
requirements; and overseeing the due diligence and approval of FSPs.
The Subcommittee assists the PRC in fulfilling counterparty review
responsibilities, including monitoring and reviewing reports on the
creditworthiness of counterparties on an at least monthly basis.
Section 3 discusses ICC's standards for counterparty relationships,
namely the requirements for CPs and FSPs, and includes references to
relevant existing documentation. Chapter 2 of the ICC Rules continues
to set forth the membership requirements for CPs, which remain
unchanged. Section 3 requires ICC, through the PRC, to perform an
annual review of such criteria in the Rules to ensure continued
sufficiency and appropriateness of the membership requirements.
Further, under this section, FSPs must meet certain requirements and be
approved by the PRC, meet the operational requirements of the ICC
Treasury Department, and be subject to regulation and supervision by a
competent authority. Section 3 also describes key steps, responsible
parties, and relevant documentation regarding the processes of on-
boarding new counterparties and the withdrawal of existing
counterparties. For on-boarding new FSPs, the Risk Department is
responsible for collecting necessary information and requiring the
completion of a risk questionnaire which is presented to the
Subcommittee and PRC. The PRC is responsible for overseeing the
withdrawal process for FSPs, which includes confirmation from relevant
departments that all exposures
[[Page 60306]]
to the FSP have been closed out and all legal agreements terminated.
The CMPs explain how ICC monitors the stability of its
counterparties. Section 4 includes the financial elements of ongoing CP
monitoring and discusses monitoring of other CP requirements, such as
participation in ICC's price discovery process and default management
simulations. Section 4 details the procedures associated with the Risk
Department's intraday and daily monitoring functions for CPs and FSPs
and specifies how issues are escalated and resulting actions are
documented. This includes intraday monitoring of Risk Filter Threshold
(``RFT'') consumption to manage the intraday risk associated with
incoming real-time position changes to a portfolio that may require
pre-funding; a daily end-of-day review of initial margin and guaranty
fund changes; intraday and daily monitoring of news and market metrics
for CPs and FSPs; and monitoring and review of timely payments and
notices from CPs. This section discusses the preparation and review of
a monthly credit report on the financial condition of ICC's
counterparties as part of the monthly monitoring process. The monthly
credit report includes, among other items, a summary of the data used
for the analysis, current and historical counterparty credit scores and
changes per credit risk factor, exposures of CPs with respect to their
total requirements, exposures of FSPs and current allocation and
investment limits, and counterparties on the Watch List. Additional
reviews of exposure to CPs and FSPs, counterparty qualitative analysis,
RFT and investment allocations conducted as part of monthly monitoring
are set out in Section 4 along with the procedures for escalating
identified issues and documenting resulting actions. Furthermore,
Section 4 further discusses how ICC monitors and manages its aggregate
exposure to entities and their affiliates with which ICC maintains
multiple counterparty relationships, including through limits on FSPs
and CPs which are reviewed on a specified basis and more frequently as
warranted. Exposures to FSPs are managed through investment
allocations, which represent limits established by the Risk Department
for entities and are reviewed at least once a year. With respect to
CPs, ICC manages the risk that it is willing to take, considering real-
time position changes, through the RFT level which is reviewed at least
once a month by the Risk Department. Moreover, this section describes
the risk reviews that ICC completes for its counterparties. All
counterparties are subject to an initial risk review and periodic risk
reviews, which allow ICC to monitor the capacity of its counterparties
to perform as required. The periodicity of these reviews is within a
four-year time frame. The timing of review, the steps for conducting a
risk review, the possible review outcomes, and escalation procedures
are detailed. Under the CMPs, more frequent risk reviews may be
performed if the latest periodic risk review was considered
unsatisfactory or the counterparty was recently placed on the highest
Watch List level. Section 5 describes ICC's CRS that computes credit
scores for counterparties and specifies the frequency of review of the
credit scoring methodology.
The CMPs detail how ICC identifies counterparties that may pose
additional risk to it and include additional information relevant to
ICC's monitoring responsibilities. Section 6 sets out the criteria for
placing counterparties on the Watch List and the procedures for adding
and removing counterparties to and from the Watch List. Regarding Watch
List criteria, this section distinguishes between automatic placement
on the Watch List based on credit score and qualitative considerations
of counterparty deterioration that may merit placement on the Watch
List or movement to a higher Watch List level. A credit score of 3.0 or
higher warrants a counterparty to be automatically placed on the Watch
List. Qualitative considerations include decreasing levels of
capitalization and failure to maintain operations, infrastructure, and
personnel capable of meeting requirements. The CRO determines if a
counterparty should be added to the Watch List, except for automatic
placement, and if a counterparty should be removed. The CRO may
consider recommendations regarding which counterparties to add to the
Watch List as well as counterparty Watch List level changes from the
Subcommittee and PRC. Section 7 details the actions available to ICC
with respect to CPs or FSPs on the Watch List or for whom a deficiency
is identified during the monitoring process. Actions the CRO may take
include, among others, an increase in initial margin requirements,
notification to the Board, recommendation for suspension of clearing
privileges, or termination of the relationship with the FSP. Section 7
also discusses how such actions are determined, documented, and
escalated. The Risk Department is responsible for contacting firms to
discuss activity that raised concern. The CRO is responsible for
documenting the details, rationale, and criteria used in determining
actions taken against the CP, and the documentation is presented to the
Subcommittee. For FSPs, concerns are escalated to ICC Senior Management
to evaluate the issues and determine what, if any, additional actions
should be taken. Finally, the CMPs include additional information
regarding the confidentiality of credit scores in Section 8, record
keeping responsibilities in Section 9, references in Section 10, and
the revision history in Section 11.
CRS Policy
The proposed CRS Policy describes ICC's CRS and provides additional
clarity on the processes and procedures related to ICC's credit scoring
approach. The proposed document is divided into 9 sections, which are
detailed below.
The CRS Policy contains background on ICC's CRS that computes
credit scores for counterparties. Section 1 describes the CRS and sets
out its purpose, which is to rate counterparties and identify
counterparties that may exhibit inconsistent financial performance or
that show signs of operational and risk management weaknesses and
require more extensive analysis. The CRS estimates a credit score
representative of the financial condition of the counterparty and
relies on credit risk factors representing a combination of data and
performance ratios derived from financial reporting and market
information. Section 1 specifies that the ICC Risk Department is
responsible for calibrating the credit risk factor metrics. Section 2
explains the scope of the CRS, which features two credit scoring models
due to the variety of CPs and FSPs facing ICC. Section 2 summarizes
each credit scoring model and its corresponding model components and
provides a range of possible credit scores and credit score
interpretations. The credit scoring scale ranges from 1 to 5, with a
score of 1 indicating the strongest financial stability and the level
of least concern and a score of 5 indicating the weakest financial
stability and the greatest level of concern. This section further
summarizes the data required for the CRS and describes how
implementation of the CRS is supported internally.
The CRS Policy describes the model components of each credit
scoring model in detail. Section 3 discusses the selection of credit
risk factors, which are divided into financial and market metrics.
Financial metrics provide a point in time view of the state of the
company, while market metrics are used
[[Page 60307]]
to capture frequent changes in the market sentiment of the companies
facing ICC. Section 3 includes descriptions of the credit risk factors.
For each credit risk factor, this section specifies corresponding
metrics, relevant definitions, formulas, applicability based on type of
counterparty, and key regulatory requirements, among others. The CRS
also considers a qualitative assessment, which allows flexibility to
incorporate additional information (e.g., business risk, litigation
risk, management actions) regarding the counterparty into the credit
score, and provides a range of possible qualitative assessment scores
and qualitative assessment score interpretations. Furthermore, Section
3 notes the use of proxies for counterparties that may not report the
exact metrics described in this document.
Model specifications are also included in the CRS Policy. Section 4
describes the calibration of the model component weights. Each credit
risk factor receives its own credit risk factor-specific weight. This
section notes how credit risk factor weights are determined and
discusses the testing of the weights between the financial and market
metrics to measure the effectiveness of the scoring model in
identifying early signs of weakness. Section 4 further discusses metric
parameterization for each credit risk factor and provides input values,
metric descriptions, graphical representations, assumptions, parameter
sets, and calibrated values, among others.
The CRS Policy specifies the data required for the CRS to compute
credit scores and memorializes other information relevant to the CRS.
Section 5 includes procedures for collecting data from internal and
external sources and describes the case in which component weights are
reallocated based on the availability of data. Section 5 further
explains how the adequacy of the data is ensured and assigns
responsibility for checking the validity of data and remedying
inconsistencies. Under Section 6, the credit risk factors,
corresponding metrics and parameterization of the credit scoring model
are reviewed at least once a year. Results are evaluated based on
predefined thresholds, which are set out in this section, and actions
are taken to update the model parameterization if needed. Section 7
specifies the assumptions and limitations of the CRS. Section 8
contains a list of references, and Section 9 includes the revision
history. The appendices maintain other relevant information for the
purpose of using the CRS, including a list of proxies and information
relevant to metric parameterization.
Retirement of the FCM and Bank Procedures
ICC proposes retiring the FCM and Bank Procedures. The below list
summarizes where the information in the FCM and Bank Procedures would
reside following retirement and differences from the proposed
Documents.
Introduction and Overview: Information in Section I would
be moved to Section 1 of the CMPs.
Roles and Responsibilities: Information in Section II
would be moved to Section 2 of the CMPs. The CMPs memorialize the Risk
Department's responsibility of presenting information to relevant
committees. Moreover, under the CMPs, the PRC is responsible for the
approval of FSPs.\3\
---------------------------------------------------------------------------
\3\ See SR-ICC-2021-015 for more information on the
responsibilities of the PRC.
---------------------------------------------------------------------------
Monitoring Scope: Information in Section III would be
moved to Section 4 of the CMPs. While additional procedures or detail
is included and there are minor differences in drafting style or
terminology, ICC does not propose material changes to its monitoring
scope. Procedures are added describing ICC's monitoring of RFT
consumption and how issues are escalated and resulting actions are
documented. Language related to ICC's monitoring and management of
aggregate exposure to entities with which ICC maintains multiple
counterparty relationships is also included, as well as procedures
associated with FSP investment allocation and RFT limits. More detail,
such as steps for conducting a risk review, possible review outcomes,
and criteria for more frequent risk reviews, are also set forth.
Further, the list of general information maintained for counterparties
in the FCM and Bank Procedures is removed given the additional
procedures in the Documents in respect of counterparty review and CRS
data.
Clearing House Counterparty Credit Rating System:
Information in Section IV would be moved to Section 5 of the CMPs and
Sections 2-4 of the CRS Policy. While the information is reorganized
and additional detail or procedures are included, ICC does not propose
material changes to its credit scoring approach. ICC specifies the
frequency of review of the credit scoring methodology in Section 5 of
the CMPs. Descriptions of the credit risk factors, metrics, and
qualitative assessment are moved to Sections 2 and 3 of the CRS Policy
and information related to metric parameterization and computations,
including input values, graphical representations, parameter sets, and
calibrated values is moved to Section 4 the CRS Policy. Minor revisions
to credit score interpretations are made in the CRS Policy, including
removing language associated with the Watch List which would be
contained in the CMPs. Additional language is proposed in the CRS
Policy to describe the CRS and credit scoring approach broadly (Section
1), model foundations and selection of credit risk factors and metrics
(Section 3), testing of the weights between metrics and model
performance testing (Sections 4 and 6), data sources and data quality
(Section 5), and assumptions and limitations of the CRS (Section 7).
Additional Internal Rating Considerations: Information in
Section V (FCM Procedures only) would be moved to Section 4 of the CRS
Policy.
Data Proxies: Information in Section VI (FCM Procedures)
and Section V (Bank Procedures) would be moved to Section 3 of the CRS
Policy.
Information Privacy: Information in Section VII (FCM
Procedures) and Section VI (Bank Procedures) would be moved to Section
8 of the CMPs.
Record Keeping: Information in Section VIII (FCM
Procedures) and Section VII (Bank Procedures) would be moved to Section
9 of the CMPs.
Watch List Criteria: Information in Section IX (FCM
Procedures), Section VIII (Bank Procedures), and Appendix 3 would be
moved to Sections 6 and 7 of the CMPs. The FCM and Bank Procedures list
reasons for placing counterparties on the Watch List and Appendix 3
specifies that counterparties exhibiting certain criteria may be placed
on the Watch List (e.g., deterioration in credit score, capitalization,
operational or other violations). The Watch List criteria is updated in
the CMPs to distinguish between automatic placement on the Watch List
based on credit score and qualitative considerations of counterparty
deterioration that may merit placement on the Watch List or movement to
a higher Watch List level.
Appendices 1 and 2 are moved to the appendices of the CRS
Policy and Appendix 3 is removed.
Consolidation of the FCM and Bank Procedures with respect to
counterparty monitoring in the CMPs and with respect to the credit
scoring approach in the CRS Policy would allow ICC to avoid unnecessary
repetition. The Documents are generally designed to enhance, clarify,
and more clearly document descriptions of key ICC
[[Page 60308]]
processes and procedures related to ICC's counterparty monitoring
practices and CRS, and not to materially change existing processes and
practices in the FCM and Bank Procedures. Additional detail is
memorialized in the Documents which was not previously in the Bank and
FCM Procedures, including ICC's standards for counterparty
relationships and procedures for counterparty on-boarding and
withdrawal in Section 3 of the CMPs and a comprehensive description of
the CRS, including its foundations, data, testing, and assumptions and
limitations, in the CRS Policy. Overall, the purpose of and substance
across the documents remains largely consistent with some differences
in drafting style or terminology, additional procedures or detail, and
other minor updates or revisions.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \4\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\5\ In particular, Section 17A(b)(3)(F) of the Act \6\
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. As discussed herein, the proposed rule change is
generally designed to enhance, clarify, and more clearly document
descriptions of key ICC procedures related to ICC's counterparty
monitoring practices and CRS. The proposed CMPs would consolidate ICC's
existing counterparty monitoring procedures for CPs and FSPs into one
document. Information related to the CRS would be moved into a separate
policy, the CRS Policy, which describes ICC's credit scoring approach
and is intended to more clearly document the processes and procedures
associated with the CRS. Memorializing additional detail in respect of
the CRS, such as its foundations, data sources, testing, and
assumptions and limitations, in the CRS Policy would strengthen the CRS
to ensure that it appropriately estimates credit scores representative
of the financial condition of counterparties. Consolidation of the FCM
and Bank Procedures regarding counterparty monitoring in the CMPs and
regarding the credit scoring approach in the CRS Policy would allow ICC
to avoid unnecessary repetition, avoid potential confusion between
policies, and promote efficiency. ICC believes that the proposed rule
change would thus facilitate and enhance its ability to carry out its
counterparty monitoring responsibilities and manage counterparty credit
risk and thus promote overall risk management and the stability of ICC.
Accordingly, in ICC's view, the proposed rule change is consistent with
the prompt and accurate clearance and settlement of securities
transactions, derivatives agreements, contracts, and transactions, 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.\7\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ Id.
---------------------------------------------------------------------------
The proposed rule change would also satisfy the relevant
requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(e)(2)(i) and (v) \9\
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 and specify clear and direct lines of responsibility. The
Documents clearly and transparently assign and document responsibility
and accountability associated with counterparty monitoring and
computation of credit scores. The CMPs specify how identified issues
are escalated and set out the roles and responsibilities of internal
personnel and committees, including with respect to ongoing
counterparty monitoring, review, and reporting; on-boarding and
withdrawal of counterparties; and changes to the Watch List. The CMPs
clearly set out the roles of the PRC and Subcommittee with respect to
counterparty monitoring, review, and approval and detail their
interaction with the Risk Department and CRO. For the CRS, the ICC Risk
Department is responsible for calibrating the credit risk factor
metrics under the CRS Policy. The CRS Policy also assigns
responsibility for checking the validity of data for the CRS and
remedying inconsistencies. As such, in ICC's view, the proposed rule
change ensures that ICC maintains policies and procedures that are
reasonably designed to provide for clear and transparent governance
arrangements and specify clear and direct lines of responsibility,
consistent with Rule 17Ad-22(e)(2)(i) and (v).\10\
---------------------------------------------------------------------------
\8\ 17 CFR 240.17Ad-22.
\9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
\10\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(ii) \11\ 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.
The proposed rule change enhances ICC's ability to manage its financial
resources since the Documents are designed to minimize the risk
associated with ICC's counterparty relationships by more clearly
describing key processes, controls, decisions, and escalations
associated with ICC's counterparty review and monitoring processes and
CRS. The Documents are not intended to materially change ICC's existing
processes and practices in the FCM and Bank Procedures. Memorializing
the processes and procedures associated with the CRS in the CRS Policy
would strengthen the CRS to ensure that it appropriately estimates
credit scores representative of the financial condition of
counterparties. The proposed rule change would thus promote ICC's
ability to ensure financial health and the ability to fulfill
obligations by ICC's counterparties, which promotes and strengthens
ICC's own financial condition and supports 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).\12\
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\11\ 17 CFR 240.17Ad-22(e)(4)(ii).
\12\ Id.
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Rule 17Ad-22(e)(16) \13\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to safeguard its own and its
participants' assets, minimize the risk of loss and delay in access to
these assets, and invest such assets in instruments with minimal
credit, market, and liquidity risks. The Documents memorialize the
processes and procedures associated with managing credit risk from
ICC's counterparties, including FSPs who are
[[Page 60309]]
defined as the entities to which ICC has actual or potential credit
exposure (e.g., settlement banks, custodians, reverse repurchase
counterparties). The CMPs describe ICC's requirements for FSPs and the
procedures for intraday, daily, and monthly monitoring of the financial
and operational capacity of FSPs. This document also includes
procedures for placing counterparties on the Watch List and for
monitoring and managing ICC's aggregate exposure to entities and their
affiliates with which ICC maintains multiple counterparty
relationships. Accordingly, the proposed rule change would continue to
ensure that ICC safeguards its own and its participants' assets,
minimizes the risk of loss and delay in access to these assets, and
invests such assets in instruments with minimal credit, market, and
liquidity risks, consistent with the requirements of Rule 17Ad-
22(e)(16).\14\
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\13\ 17 CFR 240.17Ad-22(e)(16).
\14\ Id.
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Rule 17Ad-22(e)(18) \15\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities, require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, and
monitor compliance with such participation requirements on an ongoing
basis. The proposed rule change does not change ICC's existing CP
membership criteria. The CMPs discuss ICC's standards for counterparty
relationships, namely the requirements for CPs and FSPs, and include
references to relevant documentation. The CMPs define the entities
included as FSPs to ensure that ICC appropriately identifies and
monitors its counterparty relationships. The proposed rule change is
designed to more clearly document the standards for counterparty
relationships and the associated monitoring processes to ensure that
responsible parties carry out their duties and appropriately monitor
for compliance with such requirements. Furthermore, the CMPs require
the performance of an annual review of the CP membership criteria to
ensure continued sufficiency and appropriateness. As such, the proposed
rule change will continue to ensure that participants have sufficient
financial resources and robust operational capacity to meet obligations
and promote ICC's ability to monitor compliance for such requirements
on an ongoing basis, consistent with Rule 17Ad-22(e)(18).\16\
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\15\ 17 CFR 240.17Ad-22(e)(18).
\16\ 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. The proposed rule change
to adopt and formalize the Documents and to retire the FCM and Bank
Procedures will apply uniformly across all market participants.
Therefore, ICC does not believe the proposed rule change would impose
any burden on competition that is inappropriate in furtherance of the
purposes 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-2021-021 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-2021-021. 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-2021-021 and should be
submitted on or before November 22, 2021.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-23676 Filed 10-29-21; 8:45 am]
BILLING CODE 8011-01-P
