Self-Regulatory Organizations; Fixed Income Clearing Corporation; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Amend the Clearing Agency Model Risk Management Framework, 10411-10418 [2022-03872]
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Federal Register / Vol. 87, No. 37 / Thursday, February 24, 2022 / Notices
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
BOX–2021–14 on the subject line.
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Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–BOX–2021–14. 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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change.
Persons submitting comments are
cautioned that we do not redact or edit
personal identifying information from
comment submissions. You should
submit only information that you wish
to make available publicly. All
submissions should refer to File
Number SR–BOX–2021–14, and should
be submitted on or before March 17,
2022.
V. Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 2
The Commission finds good cause to
approve the proposed rule change, as
modified by Amendment No. 2, prior to
the thirtieth day after the date of
publication of notice of the filing of
Amendment No. 2 in the Federal
Register. The Commission notes that the
original proposal and the proposal as
modified by Amendment No. 1 were
published for comment in the Federal
Register.141
In Amendment No. 2, the Exchange
amended the proposal to: (1) Introduce
141 See
Notice, supra note 3; OIP, supra note 8.
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certain defined terms, including
‘‘Shortfall Amount,’’ ‘‘Statutory
Disqualification,’’ and ‘‘Tax Matters
Representative,’’ (2) convert existing
class A and class B units of BSTX to
Economic Units and Voting Units of
BSTX, (3) remove the requirement that
the BSTX Board will appoint an Audit
Committee and a Compensation
Committee,142 (4) specify the
individuals and entities that own
economic and voting interests in BSTX
and at what levels, including that BOX
Digital and tZERO’s economic interests
have been reduced to 40% each and that
BOX Digital and tZERO’s voting
interests have been reduced to 20%
each, (5) revise Exhibit 5B to propose
the form of Instrument of Accession that
each identified Controlling Person
would sign, and (6) make other
technical, clarifying and conforming
changes. These changes help to clarify
the proposal by providing additional
specificity regarding how and by whom
ownership and voting interests in BSTX
are held, the structure and operation of
the BSTX Board, and which persons
will be required to comply with the LLC
Agreement.
In addition, the Exchange made
several changes to bring the proposed
rules into closer alignment with the
rules establishing the governance
structure of other national securities
exchanges, including by: (1) Prohibiting
events that would result in any Person,
together with its Related Persons,
holding an Economic Percentage
Interest in BSTX greater than 40% or a
Voting Percentage Interest in BSTX
greater than 20% without both
Exchange approval and an effective rule
filed pursuant to Section 19 of the
Exchange Act, (2) prohibiting BSTX
Participants from holding either an
Economic Percentage Interest or Voting
Percentage Interest in BSTX greater than
20%, (3) providing that no person
subject to a Statutory Disqualification
will serve as a Director or Officer of
BSTX, and (4) representing that the
Exchange will have adequate funding
for the Exchange’s operations with
respect to BSTX. These changes help
make these aspects of the proposal
substantially similar to the existing
rules of national securities exchanges. In
addition, the Exchange modified the
structure and composition of the BSTX
Board by limiting BOX Digital and
tZERO to one Member Director each,
providing the Regulatory Director with
voting rights, adding the BSTX CEO as
142 The
Commission notes that this configuration
is similar to other rule filings the Commission has
approved. See, e.g., NYBX Order, supra note 115;
ISE Stock Order, supra note 54.
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10411
a Director, and providing that the
Independent Director will serve as
chairman of the BSTX Board. These
changes enhance the ability of the
Exchange to carry out its regulatory
oversight of BSTX by limiting the ability
of Members of BSTX to control the
BSTX Board.
For these reasons, the changes and
additional information in Amendment
No. 2 assist the Commission in finding
that the proposal is consistent with the
Exchange Act. Accordingly, the
Commission finds good cause, pursuant
to Section 19(b)(2) of the Exchange
Act,143 to approve the proposed rule
change, as modified by Amendment No.
2, on an accelerated basis.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,144
that the proposed rule change (SR–
BOX–2021–14), as modified by
Amendment No. 2 thereto, be, and it
hereby is, approved on an accelerated
basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.145
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03873 Filed 2–23–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94271; File No. SR–FICC–
2022–001]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Amend
the Clearing Agency Model Risk
Management Framework
February 17, 2022.
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 February
11, 2022, Fixed Income Clearing
Corporation (‘‘FICC’’) 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. FICC filed the
proposed rule change pursuant to
143 15
U.S.C. 78f(b)(2).
U.S.C. 78s(b)(2).
145 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
144 15
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Federal Register / Vol. 87, No. 37 / Thursday, February 24, 2022 / Notices
Section 19(b)(3)(A) of the Act 3 and Rule
19b–4(f)(6) thereunder.4 The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change consists of
amendments to the Clearing Agency
Model Risk Management Framework
(‘‘Framework’’) of FICC and its affiliates,
The Depository Trust Company (‘‘DTC’’)
and National Securities Clearing
Corporation (‘‘NSCC,’’ and together with
FICC, the ‘‘CCPs,’’ and the CCPs
together with DTC, the ‘‘Clearing
Agencies’’).5 The Framework has been
adopted by the Clearing Agencies to
support their compliance with Rule
17Ad–22(e) (the ‘‘Covered Clearing
Agency Standards’’) under the Act,6
and, in this regard, applies solely to
models 7 utilized by the Clearing
Agencies that are subject to the model
risk management requirements set forth
3 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6).
5 The Framework sets forth the model risk
management practices that the Clearing Agencies
follow to identify, measure, monitor, and manage
the risks associated with the design, development,
implementation, use, and validation of quantitative
models. The Framework is filed as a rule of the
Clearing Agencies. See Securities Exchange Act
Release Nos. 81485 (August 25, 2017), 82 FR 41433
(August 31, 2017) (File Nos. SR–DTC–2017–008,
SR–FICC–2017–014, SR–NSCC–2017–008) (‘‘2017
Notice’’); 88911 (May 20, 2020), 85 FR 31828 (May
27, 2020) (File Nos. SR–DTC–2020–008, SR–FICC–
2020–004, SR–NSCC–2020–008); and 92379 (July
13, 2021), 86 FR 38143 (July 19, 2021) (File No. SR–
DTC–2021–013), 92381 (July 13, 2021), 86 FR 38163
(July 19, 2021) (File No. SR–NSCC–2021–008), and
92380 (July 13, 2021), 86 FR 38140 (July 19, 2021)
(File No. SR–FICC–2021–006) (collectively, the
‘‘MRMF Filings’’).
6 17 CFR 240.17Ad–22(e). Each of DTC, NSCC
and FICC is a ‘‘covered clearing agency’’ as defined
in Rule 17Ad–22(a)(5) and must comply with Rule
17Ad–22(e).
7 Pursuant to Section 3.1 of the Framework, the
Clearing Agencies have adopted the following
definition of ‘‘model’’: ‘‘[M]odel’’ refers to a
quantitative method, system, or approach that
applies statistical, economic, financial, or
mathematical theories, techniques, and
assumptions to process input data into quantitative
estimates. A ‘‘model’’ consists of three components:
(i) An information input component, which delivers
assumptions and data to the model; (ii) a processing
component, which transforms inputs into estimates;
and (iii) a reporting component, which translates
the estimates into useful business information. The
definition of model also covers quantitative
approaches whose inputs are partially or wholly
qualitative or based on expert judgment, provided
that the output is quantitative in nature. See 2017
Notice, supra note 5. See also Supervisory
Guidance on Model Risk Management, SR Letter
11–7 Attachment, dated April 4, 2011, issued by the
Board of Governors of the Federal Reserve System
and the Office of the Comptroller of the Currency,
available at https://www.federalreserve.gov/
supervisionreg/srletters/sr1107a1.pdf, page 3.
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in Rules 17Ad–22(e)(4), (e)(6), and (e)(7)
under the Act.8
The proposed rule change would
amend the Framework 9 to (i) harmonize
the terminology used in the Framework
relating to model validation, with the
definition used by the Covered Clearing
Agency Standards, by deleting ‘‘full’’
where it appears as a modifier to
‘‘model validation’’ in the Framework;
(ii) provide that provisional approvals of
models may be extended if approved by
the Managing Director of Model Risk
Management (‘‘MRM’’) and notice
thereof is given to the Group Chief Risk
Officer; however, in no event shall any
provisional approval, together with any
extension(s) granted, exceed one year
and (iii) make other technical and
clarifying changes to the text, as
described below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission, the
clearing agency included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
clearing agency has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
(A) Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
1. Purpose
The proposed rule change would
amend the Framework to (i) harmonize
the terminology used in the Framework
relating to model validation, with the
definition used by the Covered Clearing
Agency Standards, by deleting ‘‘full’’
where it appears as a modifier to
8 17 CFR 240.17Ad–22(e)(4), (e)(6) and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and not to DTC
because DTC is not a central counterparty.
9 Amending the Framework does not require any
changes to the Rules, By-Laws and Organization
Certificate of DTC (available at https://
www.dtcc.com/∼/media/Files/Downloads/legal/
rules/dtc_rules.pdf) (the ‘‘DTC Rules’’), the
Rulebook of the Government Securities Division of
FICC (available at https://www.dtcc.com/∼/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf) (the
‘‘GSD Rules’’), the Clearing Rules of the MortgageBacked Securities Division of FICC (available at
https://www.dtcc.com/∼/media/Files/Downloads/
legal/rules/ficc_mbsd_rules.pdf) (the ‘‘MBSD
Rules’’), or the Rules & Procedures of NSCC
(available at https://www.dtcc.com/∼/media/Files/
Downloads/legal/rules/nscc_rules.pdf) (the ‘‘NSCC
Rules,’’ and collectively with the DTC Rules, GSD
Rules, and MBSD Rules, the ‘‘Rules’’), because the
Framework is a standalone document. See MRMF
Filings, supra note 5.
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‘‘model validation’’ in the Framework;
(ii) provide that provisional approvals of
models may be extended if approved by
the Managing Director of MRM and
notice thereof is given to the Group
Chief Risk Officer; however, in no event
shall any provisional approval, together
with any extension(s) granted, exceed
one year and (iii) make other technical
and clarifying changes to the text, as
described below.
Background
The Covered Clearing Agency
Standards require that the Clearing
Agencies take steps to manage the
models that they employ in identifying,
measuring, monitoring, and managing
their respective credit exposures and
liquidity risks, including that the
Clearing Agencies conduct daily
backtesting of model performance,
periodic sensitivity analyses of models,
and annual validation of models.10 The
Framework is maintained by the
Clearing Agencies to support their
compliance with the requirements of the
Covered Clearing Agency Standards
relating to model risk management.
The Framework outlines the
applicable regulatory requirements
mentioned above, describes the risks
that the Clearing Agencies’ model risk
management program are designed to
mitigate, and sets forth specific model
risk management practices and
requirements adopted by the Clearing
Agencies to ensure compliance with the
Covered Clearing Agency Standards.
These practices and requirements
include, among other things, the
maintenance of a model inventory
(‘‘Model Inventory’’), a process for
rating model materiality and
complexity, processes for performing
model validations and resolving
findings identified during model
validation, and processes for model
performance monitoring, including
backtesting and sensitivity analyses.
The Framework also describes
applicable internal ownership and
governance requirements.11
The proposed rule change would
harmonize the terminology used in the
Framework relating to model validation,
with the definition used by the Covered
Clearing Agency Standards, by deleting
‘‘full’’ where it appears as a modifier to
‘‘model validation’’ in the Framework.
The proposed rule change would also
amend the Framework to provide the
Clearing Agencies with the ability to
make limited time extensions for
10 See 17 CFR 240.17Ad–22(e)(4), (e)(6) and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and not to DTC.
11 See MRMF Filings, supra note 5, for additional
information on the contents of the Framework.
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provisional approvals of models. In this
regard, the proposed rule change is
designed to facilitate the Clearing
Agencies’ ability to prudently manage
contingencies relating to events or
changes of circumstance that may
impact the Clearing Agencies’
management of credit risk, margin, and
liquidity risk management models, in
accordance with the Framework.
Additionally, the proposed rule change
would make technical and clarifying
changes to the text of the Framework, as
described below.
Proposed Rule Change
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Eliminate References to ‘‘Full’’ Model
Validation
With respect to model validation, the
Covered Clearing Agency Standards
refer to the term simply as ‘‘model
validation,’’ as defined by Rule 17Ad–
22(a)(9) under the Act.12 However, the
Framework refers to model validation
both as a ‘‘full model validation’’ and
‘‘model validation,’’ and as an
undefined and defined term depending
on usage. For example, Section 1
(Executive Summary) of the Framework
describes Section 3 (Model Risk
Management Framework), among other
things, as including a discussion on
‘‘full model validation.’’ Yet, ‘‘Model
Validation’’ is first defined in Section 3
as the definition used by the Covered
Clearing Agency Standards, which does
not use the modifier ‘‘full.’’ Moreover,
references to full model validation and
model validation in the Framework
have the same meaning, as the
Framework does not distinguish
between the two.
To address these unnecessary
variations, the Clearing Agencies
propose to harmonize the terminology
used in the Framework relating to
model validation, with the applicable
term used in the Covered Clearing
Agency Standards, by deleting ‘‘full’’ in
all instances where it appears as a
modifier to ‘‘model validation’’ in the
Framework. In this regard, the word
‘‘full’’ preceding ‘‘model validation’’
would be deleted from the Framework
in all instances where it appears,
including (i) from the reference in
Section 1 of the Framework, mentioned
above, (ii) renaming Section 3.3 of the
12 The term ‘‘model validation’’ means an
evaluation of the performance of each material risk
management model used by a covered clearing
agency (and the related parameters and
assumptions associated with such models),
including initial margin models, liquidity risk
models, and models used to generate clearing or
guaranty fund requirements, performed by a
qualified person who is free from influence from
the persons responsible for the development or
operation of the models or policies being validated.
17 CFR 240.17Ad–22(a)(9).
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Framework, named Full Model
Validation, as ‘‘Model Validation,’’ and
(iii) deleting four appearances of the
word ‘‘full’’ before ‘‘Model Validation’’
in the text of Section 3.
Extension of Provisional Approvals of
Models
The Covered Clearing Agency
Standards require that the Clearing
Agencies identify, measure, monitor,
and manage their respective credit
exposures and liquidity risks by
performing model validations of their
respective credit risk and liquidity risk
models not less than annually or more
frequently as may be contemplated by
the applicable Clearing Agency’s
established risk management
framework.13 A covered clearing agency
that is a central counterparty must
perform a model validation for its
margin system and related models not
less than annually or more frequently as
may be contemplated by such central
counterparty’s risk management
framework.14
Section 3.6 of the Framework (Model
Approval and Control) provides that
new models, and material changes to
existing models, shall undergo model
validation by MRM and then be
approved by MRM prior to business use.
In the absence of a Model Validation,
provisional approvals with respect to
new models and material changes to
existing models may be issued to allow
a model to be used for urgent business
purposes prior to the completion of
MRM’s Model Validation. Such
provisional approval requests must be
presented by the applicable Model
Owner 15 to MRM, which may
provisionally approve the model for a
limited period not to exceed six months.
The Framework does not provide for
extensions of this six-month provisional
approval period. However, MRM has
observed, over time and since the
Framework was initially filed,16 that it
could take longer than six months to
complete a model validation in
accordance with the timeframe set forth
in Section 3.3 of the Framework. For
example, a model that has been
provisionally approved and put into use
while undergoing further modification
and/or enhancement by a third-party
developer, cannot undergo validation by
MRM until such time as the developer
13 See 17 CFR 240.17Ad–22(e)(4)(vii) and
(e)(7)(vii).
14 See 17 CFR 240.17Ad–22(e)(6)(vii).
15 Pursuant to Section 3.1 of the Framework, the
‘‘Model Owner’’ is the person designated by the
applicable business area or support function to be
responsible for a particular model. The Model
Owner is recorded in the Model Inventory.
16 Supra note 5.
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has completed its process and made the
enhanced model available to the
Clearing Agencies. Considering the
amount of time it may take for the
developer to complete and deliver the
modification and/or enhancement to the
Clearing Agencies, as well as MRM’s
validation process itself, it may be
necessary for the model to operate
under provisional approval for a period
greater than six months.
Therefore, pursuant to the proposed
rule change, the Clearing Agencies
would amend Section 3.6 of the
Framework to provide that provisional
approvals of models may be extended if
approved by the Managing Director of
MRM and notice thereof is given to the
Group Chief Risk Officer; however, in
accordance with the Covered Clearing
Agency Standards requirements that
credit, liquidity and margin models, as
applicable, be validated at least
annually,17 in no event shall any
provisional approval, together with any
extension(s) granted, exceed one year. In
this regard, the proposed rule change
would accommodate the incorporation
of any modifications and enhancements
identified by a developer into a
provisionally approved model prior to
model validation, and still allow the
model validation to be completed
within a timeframe that would be
consistent with the requirements of both
the Framework and the Covered
Clearing Agency Standards.
Technical and Clarifying Changes
Section 1 (Executive Summary)
A sentence in Footnote 8 under
Section 1 (Executive Summary) of the
Framework would be revised for clarity
and grammatical usage. The footnote
describes the Model Risk Tolerance
Statement and the Market Risk
Tolerance Statement, which are listed in
Section 1 among a series of documents
used by the Clearing Agencies to
support their execution of the
Framework. In describing the Market
Risk Tolerance Statement, the footnote
states: ‘‘. . . the Market Risk Tolerance
Statement, which articulates, among
other things, risk tolerance levels
covering margin backtests covering
backtest coverage and stress tests
covering exposure to extreme market
moves.’’ The proposed rule change
would eliminate certain repetitive usage
of ‘‘covering’’ and ‘‘coverage’’ in the text
quoted above such that the applicable
text would read as follows: ‘‘. . . the
Market Risk Tolerance Statement, which
articulates, among other things, risk
tolerance levels covering margin
17 See 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vii)
and (e)(7)(vii).
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backtests and stress tests related to
exposure to extreme market moves.’’
Section 2 (Model Risk Management
Requirements)
The first paragraph of Section 2 is
intended by the Clearing Agencies to
describe that in compliance with Rules
17Ad–22(e)(4)(vii),18 and (e)(7)(vii) 19 of
the Covered Clearing Agency Standards,
each Clearing Agency is required to
establish, implement, maintain and
enforce written policies and procedures
reasonably designed to perform model
validations on its credit risk models and
liquidity risk models not less than
annually or more frequently as may be
contemplated by the Clearing Agency’s
risk management framework established
pursuant to Rule 17Ad–22(e)(3).20 The
main text of the paragraph contains
typographical errors, in that in place of
the reference to section (e) in each of the
three rules citied in the paragraph, it
instead includes an erroneous reference
to a section (C). However, the footnotes
to these references contain the correct
citations. The Clearing Agencies would
revise the main text of the paragraph to
correct the erroneous references to
section (C) to instead refer to section (e).
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Section 3.1 (Model Inventory)
Section 3.1 (Model Inventory) (i) sets
forth the definition of model adopted by
the Clearing Agencies,21 (ii) defines
MRM as responsible for model risk
management as a second-line function
that is charged with determining
whether any proposed method, system,
or approach designed for Clearing
Agency use meets the definition of
model, (iii) provides a definition of
Model Inventory as the definitive list of
models subject to the Framework, (iv)
describes a model inventory survey that
is conducted at least annually across the
Clearing Agencies to confirm that the
Model Inventory is current, and (v)
describes that all models subject to the
Framework are validated, as described
in the Framework.
The proposed rule change would
make technical and clarifying changes
to the second paragraph of this section,
which states:
The Model unit within the Group Chief
Risk Office that is responsible for model risk
management as a second-line function
(‘‘MRM’’) is charged with determining
whether any proposed method, system, or
approach designed for Clearing Agency use
meets the above definition. All models
subject to this Framework will be added to
the definitive list of models (‘‘Model
18 17
CFR 240.17Ad–22(e)(4)(vii).
CFR 240.17Ad–22(e)(7)(vii).
20 17 CFR 240.17Ad–22(e)(3).
21 See supra note 7.
19 17
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Inventory’’) and tracked by MRM. A Model
Inventory Survey is conducted at least
annually across the Clearing Agencies to
confirm the Model Inventory is current
(‘‘Annual Model Inventory Survey’’). During
the Annual Model Inventory Survey, any
business area or support function intending
to have a model developed for Clearing
Agency use will submit materials relevant to
such proposed model for MRM to review and
assess whether such proposed model will be
added to the Model Inventory. The person
designated by the applicable business area or
support function to be responsible for a
particular model (‘‘Model Owner’’) is
recorded as the Model Owner for such model
by MRM in the Model Inventory.
First, for enhanced clarity, the first
sentence of the paragraph would be
revised to replace the initial reference to
‘‘The Model’’ with ‘‘Model Risk
Management’’ and define the term as
‘‘MRM’’ directly after it is mentioned,
rather than after additional descriptive
text that follows in the sentence. The
proposed rule change would also
eliminate the reference to MRM as a
‘‘unit’’ because this reference is
redundant given the context describing
the functionality of MRM implies that it
is a unit or group. Conforming
grammatical changes would also be
made to delete ‘‘that’’ after ‘‘Group Chief
Risk Office’’ and add ‘‘and’’ after
‘‘second-line function.’’ The third
sentence of the paragraph would be
revised to make the initial letters in the
words ‘‘Model Inventory Survey’’ lower
case (i.e., ‘‘model inventory survey’’) as
the term is not defined, but rather the
reference is part of the description of the
defined term ‘‘Annual Model Inventory
Survey’’ that appears at the end of the
sentence. The fourth sentence of the
paragraph would be revised for
consistency by replacing ‘‘business area
or support function’’ with ‘‘business
line or functional unit,’’ as the latter
reflects usage of text in underlying
MRM internal procedures.
Second, the Clearing Agencies believe
that adding to the Model Inventory
certain methodologies used to
implement configuration choices made
by the Clearing Agencies, such as data
sources, model parameters, and model
performance monitoring, including but
not limited to backtesting, that are not
inherent to model selection or design
and that do not materially impact a
model’s results, and are not models
subject to this Framework, may provide
benefits for the Clearing Agencies in
terms of monitoring and tracking of
such methodologies. In this regard, the
Clearing Agencies would add text to
reflect that such methodologies may be
added to the Model Inventory at MRM’s
discretion.
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Finally, in the third paragraph of this
section, the Clearing Agencies would
change a reference to ‘‘risk management
standards’’ to ‘‘Standards’’ to conform to
the defined term for the Covered
Clearing Agency Standards used
throughout the Framework.
Section 3.2 (Model Materiality and
Complexity)
Section 3.2 of the Framework
describes that a model’s output can
affect decision making (e.g., decisions
with respect to Clearing Fund/
Participants Fund, backtesting, and
stress testing measures), which may
have a material impact on the Clearing
Agency, and that each model subject to
the Framework is assigned a materiality/
complexity rating in this regard. The
section states that ‘‘[m]ateriality/
complexity index assignments are made
at the time the applicable model is
added to the Model Inventory and are
used by MRM for Model Validation
prioritization. All model materiality/
complexity index assignments are
reviewed at least annually by MRM, as
well as by the Model Risk Governance
Council (‘‘MRGC’’), the forum for review
of model risk matters.’’ Pursuant to the
proposed rule change, the Clearing
Agencies would replace both
appearances of the words ‘‘index
assignments’’ in these two sentences
with ‘‘scores.’’ This change would align
the text of the Framework with MRM’s
practice, whereby MRM reviews
materiality and complexity scores of a
model, which directly determine the
applicable materiality/complexity
rating, at least annually.22
Section 3.3 (Full Model Validation)
In addition to deleting ‘‘full’’ where it
appears as a modifier to ‘‘model
validation’’ in Section 3.3 of the
Framework, as described above,
including in the title of the section, the
proposed rule change would make other
technical and clarifying changes to this
section.
In a paragraph that describes Model
Validation activities performed for new
models:
(i) A reference to ‘‘model
development documentation and
testing’’ would be changed to ‘‘model
22 Specifically, the Clearing Agencies use the
‘‘DTCC Model Development Standards,’’ which is a
document describing that materiality and
complexity scores for a model, which scores are
based on certain factors, underlie the determination
of the materiality/complexity rating of the model.
In accordance with the DTCC Model Development
Standards, factors relating to the materiality score
include model usage, model hierarchy and model
exposure. The factors relating to the complexity
score include structural complexity, and data
availability and treatment.
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documentation and development
testing’’;
(ii) a reference to ‘‘evaluation of data
inputs and parameters’’ would be
changed to ‘‘evaluation of model inputs
and parameters’’;
(iii) a reference to ‘‘review of
numerical implementation (including
replication for certain key model
components, which will vary from
model to model)’’ would be changed to
‘‘review of model implementation for
consistency with documentation’’;
(iv) a reference to ‘‘independent
testing: sensitivity analysis, stress
testing, and benchmarking, as
appropriate’’ would be changed to
‘‘independent testing: model output
evaluation, backtesting, sensitivity
analysis, stress testing, and
benchmarking, as appropriate’’; and
(v) a reference to ‘‘evaluation of model
outputs, model performance, and back
testing’’ would be changed to
‘‘evaluation of model performance
monitoring (or ‘‘MPM’’) plan and
results.’’ Similarly, a reference to
‘‘model performance monitoring
reports’’ in Section 3.8 of the
Framework (Model Performance
Monitoring) would be revised to
consider the definition of the term MPM
described above. In this regard, this
reference in Section 3.8 would be
revised to instead refer to ‘‘MPM
reports.’’
In the second paragraph of this
section, the third sentence states: ‘‘The
Application Development Department
for the Clearing Agencies will perform
certain production release quality
assurance checks (e.g., user acceptance
testing/systems integration testing
(UAT/SAT)).’’ Pursuant to the proposed
rule change, this sentence would be
revised to delete ‘‘Application
Development Department for the’’ and
‘‘(UAT/SAT)’’. This change would
generalize the text to eliminate the need
to revise the document in the event the
name of the area that performs such
testing changes.
The Clearing Agencies would also
revise this paragraph with respect to
text relating to ratings assigned to a
model upon validation. In this regard,
the Framework currently describes that
the result of each Model Validation is a
model validation report prepared by
MRM (‘‘Model Validation Report’’), a
key section of which is the summary of
all findings and recommendations
ranked according to the findings’
severity level, inclusive of any
identified model limitations and
compensating controls for the model.
This text would be revised to remove
the reference to recommendations as
part of the Model Validation Report
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because, pursuant to MRM’s procedures,
while the Model Validation Report
includes findings, it does not include
recommendations. In addition, the
severity level of the findings is
described in this section to be classified
as H, M or L, which the Clearing
Agencies intend as abbreviations for
‘‘High,’’ ‘‘Medium,’’ and ‘‘Low.’’
However, as these abbreviations are not
otherwise defined in the Framework,
the Clearing Agencies would replace the
abbreviations with the full spelling of
the classifications, such that the
instances in the text of ‘‘H,’’ ‘‘M,’’ and
‘‘L’’ would be replaced with ‘‘High,’’
‘‘Medium,’’ and ‘‘Low,’’ respectively.
This paragraph also describes that
MRM will provide an overall
assessment for each model having
undergone a Model Validation (‘‘Model
Grade’’).23 The Clearing Agencies
propose to clarify this text such that it
describes each model that has been
approved, as being rated (in the form of
a Model Grade) by MRM, rather than
providing an overall assessment.
This paragraph states further that the
Model Grade, together with the model
materiality/complexity index
assignment, serves to provide context
for MRM’s overall assessment of the
model’s suitability and performance for
its intended purpose. As with the
revision described immediately above,
the Clearing Agencies would remove the
reference to a Model Grade as
representing an overall assessment of
the model. In its place, the proposed
rule change would provide a description
that the Model Grade outlines the
overall assessed quality of the model
developer’s efforts to develop the model
and the extent to which the model
developer has effectively reduced model
risk during model development.
In addition, it is the Model Grade that
rates these development quality
considerations and risk factors, and the
Model Grade does not depend on the
model materiality/complexity index
assignment and is not intended to
signify the overall suitability of the
model for its intended purpose.
Therefore, the Clearing Agencies would
clarify this point to remove the
reference to model materiality and
complexity as being a factor in
determining the Model Grade, as well as
delete text that indicates the Model
Grade reflects the suitability of a model
for its intended purpose.
23 The Clearing Agencies’ current grading scale
consists of three grades—‘‘A,’’ ‘‘B,’’ and ‘‘C.’’ Any
Clearing Agency may add or remove grading levels
in its discretion, the parameters of which shall be
reflected in written procedures established by such
Clearing Agency.
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Section 3.4 (Periodic Model Validation)
Section 3.4 of the Framework
describes that MRM shall perform a
Model Validation for each model subject
to this Framework that is approved for
use in production not less than annually
(or more frequently as may be
contemplated by such Clearing Agency’s
established risk management
framework), including each credit risk
model,24 each liquidity risk model,25
and each CCP’s margin systems and
related models,26 as required by the risk
management standards set forth in the
Framework. This type of Model
Validation is referred to generally in the
Framework as ‘‘periodic’’ Model
Validation. In this regard, for the sake of
clarity, the Clearing Agencies would
insert the word ‘‘periodic’’ as a modifier
for Model Validation in the first
sentence of the first paragraph of this
section.
In addition, the Clearing Agencies
would delete a paragraph from this
section that states: ‘‘Periodic Model
Validations follow full Model
Validation standards. In certain cases,
MRM may determine extra Model
Validation activities are warranted
based on previous Model Validation
work and findings, changes in market
conditions, or because performance
monitoring of a particular model
warrants extra validation.’’ This text
would be deleted because, as noted
above, the Framework recognizes one
definition of Model Validation and the
provisions relating to how Model
Validation is conducted apply to all
models regardless of timing, and it is
unnecessary to state that periodic Model
Validation follows the same standards
as ‘‘full’’ Model Validation since there is
only one concept of Model Validation.
In addition, the reference to extra Model
Validation activities is duplicative as
the Framework contains other text
indicating that Model Validations may
be performed for a given model more
frequently than on the minimum annual
basis.
Section 3.5 (Model Change
Management)
Section 3.5 of the Framework
describes provisions relating to changes
in models. The text of this section refers
to a ‘‘version change’’ of a model in
describing changes to third-party
models. The section is intended to
apply to any changes to a model and it
is unnecessary to modify the word
change, including with ‘‘version.’’
Therefore, the Clearing Agencies would
24 See
17 CFR 240.17Ad–22(e)(4)(vii).
17 CFR 240.17Ad–22(e)(7)(vii).
26 See 17 CFR 240.17Ad–22(e)(6)(vii).
25 See
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delete the word ‘‘version’’ where it
appears before ‘‘change’’ in this section.
removed and replaced with
‘‘Operational Risk.’’
Section 3.6 (Model Approval and
Control)
In addition to the proposed change
described above to extend the period
allowable for a provisional approval to
remain in effect, the Clearing Agencies
would revise a sentence in Section 3.6
of the Framework that states:
‘‘Provisional approval requests along
with appropriate control measures must
be presented by the applicable Model
Owner to MRM.’’ The sentence as
written is duplicative as the first
paragraph of Section 3.6 states that
models must be submitted to MRM for
approval. However, given the focus of
this section on the approval of models,
the Clearing Agencies believe that the
section should more clearly state where
the approval authority resides for
provisional models. As stated above, it
is MRM’s responsibility to approve
models. Therefore, the Clearing
Agencies would revise the sentence
described above to read: ‘‘Provisional
approval requests along with
appropriate control measures must be
approved by MRM.’’
A sentence that states: ‘‘All new
models, and all material changes to
existing models, shall undergo Model
Validation by MRM and then be
approved by MRM prior to business
use’’ would be revised to replace the
word ‘‘then’’ with ‘‘must’’ to clarify the
requirement that a model must be
approved by MRM prior to use.
Section 3.8 (Model Performance and
Monitoring)
In addition to a change relating to the
definition of MRM described above, the
Clearing Agencies would revise a
footnote in Section 3.8 of the
Framework. The footnote 29 describes
the role Quantitative Risk Management
(‘‘QRM’’) performs with respect to the
CCPs’ margin models. A sentence
within the note states that a
representative of QRM self-elects as the
owner of a margin model. In fact, the
CCPs’ procedures would require the
representative to be appointed as the
owner of a model. Therefore, the
Clearing Agencies would revise this
footnote to reflect that a representative
of QRM is appointed as the owner of a
model.
This section also contains a statement
that MRM is responsible for providing
oversight of model performance
monitoring activities by setting
organizational standards and providing
critical analysis for identifying model
issues and/or limitations. This
statement has a footnote that states the
organizational standards apply to
DTCC’s 27 subsidiaries, as applicable.
This footnote is unnecessary because
the Framework applies only to the
Clearing Agencies and no other
subsidiaries of DTCC, and the mention
to DTCC’s subsidiaries in general is
extraneous. Therefore, pursuant to the
proposed rule change, the Clearing
Agencies would delete this footnote.
Section 3.7 (Resolution of Model
Validation Findings)
Consistent with the proposed change
described above to remove the
description of a group within the Group
Chief Risk Office as a ‘‘unit,’’ the
Clearing Agencies would revise a
reference to ‘‘the Operational Risk
Management unit’’ to delete the word
‘‘unit’’ from this reference. Also, the
Clearing Agencies would delete the
word ‘‘the’’ before ‘‘Operational Risk’’
because it would not be grammatically
correct when ‘‘unit’’ is deleted. In
addition, the group name of
‘‘Operational Risk Management,’’ as set
forth in this reference, would be revised
to ‘‘Operational Risk’’ to reflect a recent
name change of this group from
Operational Risk Management to
Operational Risk. In connection with
this name change, the term ‘‘ORM’’ that
is used in this section to define
‘‘Operational Risk Management’’ would
be deleted. Also, in this regard, two
subsequent references to ORM in the
Framework, which appear in Section 3.7
and Section 4.2, respectively, would be
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Section 3.9 (Backtesting)
Section 3.9 of the Framework contains
a description of backtesting performed
by the Clearing Agencies. Pursuant to
the proposed rule change, this section
would be revised to delete references to
backtesting performed by DTC and
related text, including applicable
metrics and thresholds, and a related
footnote that describes the designation
of DTC account families by DTC
Participants for purposes of managing
Collateral Monitor and Net Debit Cap.
The proposed change would be
consistent with the Covered Clearing
Agency Standards, which pursuant to
Rule 17Ad–22(e)(6) 28 requires certain
backtesting to be performed by the
CCPs. As indicated above, this rule does
not apply to DTC.29 In this regard, a
reference to a backtesting metric
(Collateral Group Collateral Monitor
27 The Depository Trust & Clearing Corporation
(‘‘DTCC’’) is the parent company of the Clearing
Agencies.
28 See 17 CFR 240.17Ad–22(e)(6).
29 See supra note 8.
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Coverage) mentioned in Section 4.2 of
the Framework (Escalation) would also
be deleted.
Section 4.2 (Escalation)
A paragraph within Section 4.2 of the
Framework states: ‘‘On at least a
monthly basis, the key metrics
identified in Section 3.9 are reviewed by
the Market and Liquidity Risk
Management unit within the Group
Chief Risk Office and reported to the
MRC 30 by the group within the Group
Chief Risk Office responsible for risk
reporting. Threshold breaches will be
reviewed by the Managing Directors
within the Financial Risk Management
area (including the Market and
Liquidity Risk Management unit) of the
Group Chief Risk Office, and in the case
of CFR Coverage breaches by the CCPs
and Collateral Group Collateral Monitor
Coverage by DTC, escalated to the BRC
in accordance with the applicable Risk
Tolerance Statement.’’
Pursuant to the proposed rule change,
first, the reference to a Market and
Liquidity Risk Management unit would
be revised to reflect only the Market
Risk Management unit. Today, the
Market Risk Management and Liquidity
Risk Management areas are under
separate management, and Market Risk
Management is the area that performs
the review of key metrics described in
the paragraph.
Second, the Clearing Agencies would
revise the paragraph to remove the
parenthetical that states, ‘‘including the
Market and Liquidity Risk Management
unit,’’ after a reference to the Financial
Risk Management area’s role in the
review of threshold breaches of key
metrics, as both units are part of
Financial Risk Management, and
therefore the parenthetical is
unnecessary. In this regard, the
proposed modification would enhance
readability.
Third, the Clearing Agencies would
remove the text ‘‘by the group within
the Group Chief Risk Office responsible
for risk reporting’’ as it is unnecessary
since it can be inferred that reports
would be provided by the group
responsible for such reporting.
2. Statutory Basis
The Clearing Agencies believe that the
proposed rule change is consistent with
Section 17A(b)(3)(F) of the Act,31 as
well as Rules 17Ad–22(e)(4), (e)(6), and
30 MRC refers to the Management Risk Committee
of the Boards of Directors of the Clearing Agencies.
31 15 U.S.C. 78q–1(b)(3)(F).
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(e)(7) thereunder,32 for the reasons
described below.
Section 17A(b)(3)(F) of the Act 33
requires, inter alia, that the rules of a
clearing agency be designed to assure
the safeguarding of securities and funds
which are in the custody or control of
the clearing agency or for which it is
responsible. As described above, the
proposed rule change enhances (i) the
Clearing Agencies’ ability to complete
modifications to a provisionally
approved model prior to the
performance of a model validation and
(ii) the text of the Framework to
facilitate clarity for the areas within the
Clearing Agencies that perform
responsibilities with regard to model
risk management and compliance with
the Framework. By enhancing the
Framework in this regard, the proposed
rule change supports the Clearing
Agencies’ performance of their
responsibilities under the Framework,
including but not limited to assuring
that models developed function as
intended to support the Clearing
Agencies in identifying, measuring,
monitoring, and managing their
respective credit exposures, liquidity
risks and, as applicable, the
maintenance of sufficient margin to
cover these risks. In this regard, the
proposed rule change would promote
the safeguarding of securities and funds
which are in the custody or control of
the Clearing Agencies or for which they
are responsible, by promoting the ability
of the Clearing Agencies to manage
credit exposures and liquidity risk that
may impact the safeguarding of those
funds and securities.
Rules 17Ad–22(e)(4), (e)(6), and (e)(7)
under the Act 34 require, inter alia, that
a covered clearing agency establish,
implement, maintain, and enforce
written policies and procedures
reasonably designed to manage risks
associated with its credit risk
management models, margin models,
and liquidity risk management models,
respectively, as applicable. As discussed
above, the proposed rule change
enhances (i) the Clearing Agencies’
ability to complete modifications to a
provisionally approved model prior to
the performance of a model validation
and (ii) the text of the Framework to
facilitate clarity for the areas within the
Clearing Agencies that perform
responsibilities with regard model risk
management and compliance with the
32 17 CFR 240.17Ad–22(e)(4), (e)(6), and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and not to DTC.
33 15 U.S.C. 78q–1(b)(3)(F).
34 17 CFR 240.17Ad–22(e)(4), (e)(6), and (e)(7).
References to Rule 17Ad–22(e)(6) and compliance
therewith apply to the CCPs only and not to DTC.
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Framework. By enhancing the
Framework in this regard, the proposed
rule change supports the Clearing
Agencies’ performance of their
responsibilities under the Framework,
including but not limited to assuring
that models developed function as
intended to support the Clearing
Agencies in identifying, measuring,
monitoring, and managing their
respective credit exposures, liquidity
risks and, as applicable, the
maintenance of sufficient margin to
cover these risks. Therefore, the
Clearing Agencies believe that the
proposed changes to the Framework are
consistent with Rules 17Ad–22(e)(4),
(e)(6), and (e)(7).35
(B) Clearing Agency’s Statement on
Burden on Competition
The Clearing Agencies do not believe
that the proposed rule change would
have any impact, or impose any burden,
on competition because the proposed
rule change simply modifies the
Framework governing the management
of model risk by the Clearing Agencies
and (a) would not effectuate any
changes to the Clearing Agencies’ model
risk management tools as they apply to
their respective Members or Participants
and (b) would not have an effect with
respect to the obligations of participants
utilizing Clearing Agency services.
(C) Clearing Agency’s Statement on
Comments on the Proposed Rule
Change Received From Members,
Participants, or Others
The Clearing Agencies have not
received or solicited any written
comments relating to this proposal. If
any written comments are received, they
will be publicly filed as an Exhibit 2 to
this filing, as required by Form 19b–4
and the General Instructions thereto.
Persons submitting comments are
cautioned that, according to Section IV
(Solicitation of Comments) of the
Exhibit 1A in the General Instructions to
Form 19b–4, the Commission does not
edit personal identifying information
from comment submissions.
Commenters should submit only
information that they wish to make
available publicly, including their
name, email address, and any other
identifying information.
All prospective commenters should
follow the Commission’s instructions on
how to submit comments, available at
https://www.sec.gov/regulatory-actions/
how-to-submit-comments. General
questions regarding the rule filing
process or logistical questions regarding
this filing should be directed to the
Main Office of the Commission’s
Division of Trading and Markets at
tradingandmarkets@sec.gov or 202–
551–5777.
The Clearing Agencies reserve the
right to not respond to any comments
received.
III. Date of Effectiveness of the
Proposed Rule Change, and Timing for
Commission Action
Because the foregoing proposed rule
change does not:
(i) Significantly affect the protection
of investors or the public interest;
(ii) impose any significant burden on
competition; and
(iii) become operative for 30 days
from the date on which it was filed, or
such shorter time as the Commission
may designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 36 and Rule 19b–4(f)(6)
thereunder.37
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act.
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–
FICC–2022–001 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–FICC–2022–001. 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
36 15
35 Id.
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submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of FICC and on DTCC’s website
(https://dtcc.com/legal/sec-rulefilings.aspx). 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–FICC–
2022–001 and should be submitted on
or before March 17, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022–03872 Filed 2–23–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–94277; File No. SR–
NASDAQ–2021–101]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Order
Approving Proposed Rule Change To
Amend Equity 4, Rule 4754 Relating to
Certain Order Handling in the Limit UpLimit Down Closing Cross
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February 17, 2022.
I. Introduction
On December 22, 2021, The Nasdaq
Stock Market LLC (‘‘Exchange’’ or
‘‘Nasdaq’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to amend Equity
38 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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4, Rule (‘‘Rule’’) 4754 relating to certain
order handling in the Limit Up-Limit
Down (‘‘LULD’’) closing cross. The
proposed rule change was published for
comment in the Federal Register on
January 5, 2022.3 The Commission has
not received any comment letters on the
proposed rule change. This order
approves the proposed rule change.
II. Description of the Proposed Rule
Change
The Nasdaq closing cross is the
Exchange’s process for determining the
price at which orders will be executed
at the close and for executing those
orders.4 In advance of the closing cross,
the Exchange disseminates an early
order imbalance indicator (‘‘EOII’’)
every 10 seconds, beginning at 3:50
p.m.5 until the order imbalance
indicator (‘‘NOII’’) begins to
disseminate.6 The Exchange
disseminates the NOII every second,
beginning at 3:55 p.m. until market
close.7 Both the EOII and the NOII
include, among other things, the current
reference price for a security, which is
the single price that is at or within the
current Nasdaq best bid and offer at
which the maximum number of shares
of market on close, limit on close
(‘‘LOC’’), and imbalance only orders can
be paired.8
Currently, Exchange participants may
enter LOC orders between 4 a.m. and
immediately prior to 3:55 p.m. for
participation in the closing cross.9
Exchange participants may also enter
LOC orders between 3:55 p.m. and
immediately prior to 3:58 p.m. (‘‘Late
LOC orders’’), provided that there is a
First Reference Price (i.e., the current
reference price disseminated in the EOII
at 3:50 p.m.) 10 or a Second Reference
Price (i.e., the current reference price
disseminated in the NOII at 3:55 p.m.) 11
for the security.12 A Late LOC order to
buy (sell) is accepted at its limit price,
unless its limit price is higher (lower)
than the higher (lower) of the First
Reference Price and the Second
Reference Price, in which case the Late
LOC order will be handled consistent
with the participant’s instruction that
order is to be either rejected or re-priced
3 See Securities Exchange Act Release No. 93876
(December 29, 2021), 87 FR 501 (‘‘Notice’’).
4 See Rule 4754(a)(6).
5 All times referenced are in Eastern Time.
6 See Rule 4754(b)(1)(A).
7 See Rule 4754(b)(1)(B).
8 See Rule 4754(a)(7)(A) (also setting forth various
tie breakers if more than one price meets this
definition) and Rule 4754(a)(10).
9 See Rule 4702(b)(12).
10 See Rule 4754(a)(9).
11 See Rule 4754(a)(11).
12 See Rule 4702(b)(12).
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
to the higher (lower) of the First
Reference Price and the Second
Reference Price.13
The LULD closing cross is the
Exchange’s process for executing closing
trades in Nasdaq-listed securities when
an LULD trading pause exists at or after
3:50 p.m. and before 4:00 p.m.14 In May
2021, the Commission approved SR–
NASDAQ–2021–009, which included
certain changes to the Exchange’s LULD
closing cross process.15 As approved,
consistent with the regular closing
cross, the Exchange would disseminate
the EOII for the LULD closing cross
every 10 seconds beginning at 3:50 p.m.
until the Exchange begins to
disseminate the NOII, and the NOII
would be disseminated every second
beginning at 3:55 p.m. until market
close.16 Unlike the regular closing cross,
the reference price contained in such
EOII and NOII represents the price at
which the LULD closing cross would
execute should the cross conclude at
that time, and that price is bound by
benchmarks that are calculated using
either the LULD price bands or the
auction collars for reopening following
an LULD trading pause, depending on
the time the trading pause was initiated
and whether the trading pause was
extended.17 Also as approved in SR–
NASDAQ–2021–009, consistent with
the regular closing cross, LOC orders
(including Late LOC orders) for the
LULD closing cross may be entered,
modified, and cancelled pursuant to
Rule 4702(b)(12).18 In accordance with
Rule 4702(b)(12), the Exchange would
determine whether Late LOC orders may
be entered, rejected, or re-priced using
the reference prices disseminated in the
EOII and NOII.
The Exchange now proposes to amend
the handling of Late LOC orders in an
LULD closing cross. Specifically, for
purposes of determining whether to
accept, reject, or re-price a Late LOC
order, the Exchange would use the First
Reference Price and the Second
Reference Price, if any, that was
disseminated in the regular closing
cross EOII and NOII, instead of any First
Reference Price and Second Reference
Price that was disseminated in the
LULD closing cross EOII and NOII.
13 See id. (also describing the rounding
methodology if the First Reference Price or Second
Reference Price is not at a permissible minimum
increment).
14 See Rule 4754(b)(6).
15 See Securities Exchange Act Release No. 92068
(May 28, 2021), 86 FR 29864 (June 3, 2021). The
Exchange has not yet implemented the changes
made in SR–NASDAQ–2021–009. See Notice, supra
note 3, at 501.
16 See Rule 4754(b)(6)(C).
17 See id. and Rule 4754(b)(6)(E).
18 See Rule 4754(b)(6)(F)(ii).
E:\FR\FM\24FEN1.SGM
24FEN1
]]>Agencies
[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Notices]
[Pages 10411-10418]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-03872]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-94271; File No. SR-FICC-2022-001]
Self-Regulatory Organizations; Fixed Income Clearing Corporation;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Clearing Agency Model Risk Management Framework
February 17, 2022.
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 February 11, 2022, Fixed Income Clearing Corporation (``FICC'')
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. FICC filed the
proposed rule change pursuant to
[[Page 10412]]
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder.\4\
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change consists of amendments to the Clearing
Agency Model Risk Management Framework (``Framework'') of FICC and its
affiliates, The Depository Trust Company (``DTC'') and National
Securities Clearing Corporation (``NSCC,'' and together with FICC, the
``CCPs,'' and the CCPs together with DTC, the ``Clearing
Agencies'').\5\ The Framework has been adopted by the Clearing Agencies
to support their compliance with Rule 17Ad-22(e) (the ``Covered
Clearing Agency Standards'') under the Act,\6\ and, in this regard,
applies solely to models \7\ utilized by the Clearing Agencies that are
subject to the model risk management requirements set forth in Rules
17Ad-22(e)(4), (e)(6), and (e)(7) under the Act.\8\
---------------------------------------------------------------------------
\5\ The Framework sets forth the model risk management practices
that the Clearing Agencies follow to identify, measure, monitor, and
manage the risks associated with the design, development,
implementation, use, and validation of quantitative models. The
Framework is filed as a rule of the Clearing Agencies. See
Securities Exchange Act Release Nos. 81485 (August 25, 2017), 82 FR
41433 (August 31, 2017) (File Nos. SR-DTC-2017-008, SR-FICC-2017-
014, SR-NSCC-2017-008) (``2017 Notice''); 88911 (May 20, 2020), 85
FR 31828 (May 27, 2020) (File Nos. SR-DTC-2020-008, SR-FICC-2020-
004, SR-NSCC-2020-008); and 92379 (July 13, 2021), 86 FR 38143 (July
19, 2021) (File No. SR-DTC-2021-013), 92381 (July 13, 2021), 86 FR
38163 (July 19, 2021) (File No. SR-NSCC-2021-008), and 92380 (July
13, 2021), 86 FR 38140 (July 19, 2021) (File No. SR-FICC-2021-006)
(collectively, the ``MRMF Filings'').
\6\ 17 CFR 240.17Ad-22(e). Each of DTC, NSCC and FICC is a
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and
must comply with Rule 17Ad-22(e).
\7\ Pursuant to Section 3.1 of the Framework, the Clearing
Agencies have adopted the following definition of ``model'':
``[M]odel'' refers to a quantitative method, system, or approach
that applies statistical, economic, financial, or mathematical
theories, techniques, and assumptions to process input data into
quantitative estimates. A ``model'' consists of three components:
(i) An information input component, which delivers assumptions and
data to the model; (ii) a processing component, which transforms
inputs into estimates; and (iii) a reporting component, which
translates the estimates into useful business information. The
definition of model also covers quantitative approaches whose inputs
are partially or wholly qualitative or based on expert judgment,
provided that the output is quantitative in nature. See 2017 Notice,
supra note 5. See also Supervisory Guidance on Model Risk
Management, SR Letter 11-7 Attachment, dated April 4, 2011, issued
by the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency, available at https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf, page
3.
\8\ 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC because DTC is not a central counterparty.
---------------------------------------------------------------------------
The proposed rule change would amend the Framework \9\ to (i)
harmonize the terminology used in the Framework relating to model
validation, with the definition used by the Covered Clearing Agency
Standards, by deleting ``full'' where it appears as a modifier to
``model validation'' in the Framework; (ii) provide that provisional
approvals of models may be extended if approved by the Managing
Director of Model Risk Management (``MRM'') and notice thereof is given
to the Group Chief Risk Officer; however, in no event shall any
provisional approval, together with any extension(s) granted, exceed
one year and (iii) make other technical and clarifying changes to the
text, as described below.
---------------------------------------------------------------------------
\9\ Amending the Framework does not require any changes to the
Rules, By-Laws and Organization Certificate of DTC (available at
https://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf) (the ``DTC Rules''), the Rulebook of the Government
Securities Division of FICC (available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf) (the ``GSD
Rules''), the Clearing Rules of the Mortgage-Backed Securities
Division of FICC (available at https://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf) (the ``MBSD Rules''), or
the Rules & Procedures of NSCC (available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf) (the ``NSCC
Rules,'' and collectively with the DTC Rules, GSD Rules, and MBSD
Rules, the ``Rules''), because the Framework is a standalone
document. See MRMF Filings, supra note 5.
---------------------------------------------------------------------------
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, the clearing agency included
statements concerning the purpose of and basis for the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item IV below. The clearing agency has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
1. Purpose
The proposed rule change would amend the Framework to (i) harmonize
the terminology used in the Framework relating to model validation,
with the definition used by the Covered Clearing Agency Standards, by
deleting ``full'' where it appears as a modifier to ``model
validation'' in the Framework; (ii) provide that provisional approvals
of models may be extended if approved by the Managing Director of MRM
and notice thereof is given to the Group Chief Risk Officer; however,
in no event shall any provisional approval, together with any
extension(s) granted, exceed one year and (iii) make other technical
and clarifying changes to the text, as described below.
Background
The Covered Clearing Agency Standards require that the Clearing
Agencies take steps to manage the models that they employ in
identifying, measuring, monitoring, and managing their respective
credit exposures and liquidity risks, including that the Clearing
Agencies conduct daily backtesting of model performance, periodic
sensitivity analyses of models, and annual validation of models.\10\
The Framework is maintained by the Clearing Agencies to support their
compliance with the requirements of the Covered Clearing Agency
Standards relating to model risk management.
---------------------------------------------------------------------------
\10\ See 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References
to Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs
only and not to DTC.
---------------------------------------------------------------------------
The Framework outlines the applicable regulatory requirements
mentioned above, describes the risks that the Clearing Agencies' model
risk management program are designed to mitigate, and sets forth
specific model risk management practices and requirements adopted by
the Clearing Agencies to ensure compliance with the Covered Clearing
Agency Standards. These practices and requirements include, among other
things, the maintenance of a model inventory (``Model Inventory''), a
process for rating model materiality and complexity, processes for
performing model validations and resolving findings identified during
model validation, and processes for model performance monitoring,
including backtesting and sensitivity analyses. The Framework also
describes applicable internal ownership and governance
requirements.\11\
---------------------------------------------------------------------------
\11\ See MRMF Filings, supra note 5, for additional information
on the contents of the Framework.
---------------------------------------------------------------------------
The proposed rule change would harmonize the terminology used in
the Framework relating to model validation, with the definition used by
the Covered Clearing Agency Standards, by deleting ``full'' where it
appears as a modifier to ``model validation'' in the Framework. The
proposed rule change would also amend the Framework to provide the
Clearing Agencies with the ability to make limited time extensions for
[[Page 10413]]
provisional approvals of models. In this regard, the proposed rule
change is designed to facilitate the Clearing Agencies' ability to
prudently manage contingencies relating to events or changes of
circumstance that may impact the Clearing Agencies' management of
credit risk, margin, and liquidity risk management models, in
accordance with the Framework. Additionally, the proposed rule change
would make technical and clarifying changes to the text of the
Framework, as described below.
Proposed Rule Change
Eliminate References to ``Full'' Model Validation
With respect to model validation, the Covered Clearing Agency
Standards refer to the term simply as ``model validation,'' as defined
by Rule 17Ad-22(a)(9) under the Act.\12\ However, the Framework refers
to model validation both as a ``full model validation'' and ``model
validation,'' and as an undefined and defined term depending on usage.
For example, Section 1 (Executive Summary) of the Framework describes
Section 3 (Model Risk Management Framework), among other things, as
including a discussion on ``full model validation.'' Yet, ``Model
Validation'' is first defined in Section 3 as the definition used by
the Covered Clearing Agency Standards, which does not use the modifier
``full.'' Moreover, references to full model validation and model
validation in the Framework have the same meaning, as the Framework
does not distinguish between the two.
---------------------------------------------------------------------------
\12\ The term ``model validation'' means an evaluation of the
performance of each material risk management model used by a covered
clearing agency (and the related parameters and assumptions
associated with such models), including initial margin models,
liquidity risk models, and models used to generate clearing or
guaranty fund requirements, performed by a qualified person who is
free from influence from the persons responsible for the development
or operation of the models or policies being validated. 17 CFR
240.17Ad-22(a)(9).
---------------------------------------------------------------------------
To address these unnecessary variations, the Clearing Agencies
propose to harmonize the terminology used in the Framework relating to
model validation, with the applicable term used in the Covered Clearing
Agency Standards, by deleting ``full'' in all instances where it
appears as a modifier to ``model validation'' in the Framework. In this
regard, the word ``full'' preceding ``model validation'' would be
deleted from the Framework in all instances where it appears, including
(i) from the reference in Section 1 of the Framework, mentioned above,
(ii) renaming Section 3.3 of the Framework, named Full Model
Validation, as ``Model Validation,'' and (iii) deleting four
appearances of the word ``full'' before ``Model Validation'' in the
text of Section 3.
Extension of Provisional Approvals of Models
The Covered Clearing Agency Standards require that the Clearing
Agencies identify, measure, monitor, and manage their respective credit
exposures and liquidity risks by performing model validations of their
respective credit risk and liquidity risk models not less than annually
or more frequently as may be contemplated by the applicable Clearing
Agency's established risk management framework.\13\ A covered clearing
agency that is a central counterparty must perform a model validation
for its margin system and related models not less than annually or more
frequently as may be contemplated by such central counterparty's risk
management framework.\14\
---------------------------------------------------------------------------
\13\ See 17 CFR 240.17Ad-22(e)(4)(vii) and (e)(7)(vii).
\14\ See 17 CFR 240.17Ad-22(e)(6)(vii).
---------------------------------------------------------------------------
Section 3.6 of the Framework (Model Approval and Control) provides
that new models, and material changes to existing models, shall undergo
model validation by MRM and then be approved by MRM prior to business
use.
In the absence of a Model Validation, provisional approvals with
respect to new models and material changes to existing models may be
issued to allow a model to be used for urgent business purposes prior
to the completion of MRM's Model Validation. Such provisional approval
requests must be presented by the applicable Model Owner \15\ to MRM,
which may provisionally approve the model for a limited period not to
exceed six months.
---------------------------------------------------------------------------
\15\ Pursuant to Section 3.1 of the Framework, the ``Model
Owner'' is the person designated by the applicable business area or
support function to be responsible for a particular model. The Model
Owner is recorded in the Model Inventory.
---------------------------------------------------------------------------
The Framework does not provide for extensions of this six-month
provisional approval period. However, MRM has observed, over time and
since the Framework was initially filed,\16\ that it could take longer
than six months to complete a model validation in accordance with the
timeframe set forth in Section 3.3 of the Framework. For example, a
model that has been provisionally approved and put into use while
undergoing further modification and/or enhancement by a third-party
developer, cannot undergo validation by MRM until such time as the
developer has completed its process and made the enhanced model
available to the Clearing Agencies. Considering the amount of time it
may take for the developer to complete and deliver the modification
and/or enhancement to the Clearing Agencies, as well as MRM's
validation process itself, it may be necessary for the model to operate
under provisional approval for a period greater than six months.
---------------------------------------------------------------------------
\16\ Supra note 5.
---------------------------------------------------------------------------
Therefore, pursuant to the proposed rule change, the Clearing
Agencies would amend Section 3.6 of the Framework to provide that
provisional approvals of models may be extended if approved by the
Managing Director of MRM and notice thereof is given to the Group Chief
Risk Officer; however, in accordance with the Covered Clearing Agency
Standards requirements that credit, liquidity and margin models, as
applicable, be validated at least annually,\17\ in no event shall any
provisional approval, together with any extension(s) granted, exceed
one year. In this regard, the proposed rule change would accommodate
the incorporation of any modifications and enhancements identified by a
developer into a provisionally approved model prior to model
validation, and still allow the model validation to be completed within
a timeframe that would be consistent with the requirements of both the
Framework and the Covered Clearing Agency Standards.
---------------------------------------------------------------------------
\17\ See 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii).
---------------------------------------------------------------------------
Technical and Clarifying Changes
Section 1 (Executive Summary)
A sentence in Footnote 8 under Section 1 (Executive Summary) of the
Framework would be revised for clarity and grammatical usage. The
footnote describes the Model Risk Tolerance Statement and the Market
Risk Tolerance Statement, which are listed in Section 1 among a series
of documents used by the Clearing Agencies to support their execution
of the Framework. In describing the Market Risk Tolerance Statement,
the footnote states: ``. . . the Market Risk Tolerance Statement, which
articulates, among other things, risk tolerance levels covering margin
backtests covering backtest coverage and stress tests covering exposure
to extreme market moves.'' The proposed rule change would eliminate
certain repetitive usage of ``covering'' and ``coverage'' in the text
quoted above such that the applicable text would read as follows: ``. .
. the Market Risk Tolerance Statement, which articulates, among other
things, risk tolerance levels covering margin
[[Page 10414]]
backtests and stress tests related to exposure to extreme market
moves.''
Section 2 (Model Risk Management Requirements)
The first paragraph of Section 2 is intended by the Clearing
Agencies to describe that in compliance with Rules 17Ad-
22(e)(4)(vii),\18\ and (e)(7)(vii) \19\ of the Covered Clearing Agency
Standards, each Clearing Agency is required to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to perform model validations on its credit risk models and
liquidity risk models not less than annually or more frequently as may
be contemplated by the Clearing Agency's risk management framework
established pursuant to Rule 17Ad-22(e)(3).\20\ The main text of the
paragraph contains typographical errors, in that in place of the
reference to section (e) in each of the three rules citied in the
paragraph, it instead includes an erroneous reference to a section (C).
However, the footnotes to these references contain the correct
citations. The Clearing Agencies would revise the main text of the
paragraph to correct the erroneous references to section (C) to instead
refer to section (e).
---------------------------------------------------------------------------
\18\ 17 CFR 240.17Ad-22(e)(4)(vii).
\19\ 17 CFR 240.17Ad-22(e)(7)(vii).
\20\ 17 CFR 240.17Ad-22(e)(3).
---------------------------------------------------------------------------
Section 3.1 (Model Inventory)
Section 3.1 (Model Inventory) (i) sets forth the definition of
model adopted by the Clearing Agencies,\21\ (ii) defines MRM as
responsible for model risk management as a second-line function that is
charged with determining whether any proposed method, system, or
approach designed for Clearing Agency use meets the definition of
model, (iii) provides a definition of Model Inventory as the definitive
list of models subject to the Framework, (iv) describes a model
inventory survey that is conducted at least annually across the
Clearing Agencies to confirm that the Model Inventory is current, and
(v) describes that all models subject to the Framework are validated,
as described in the Framework.
---------------------------------------------------------------------------
\21\ See supra note 7.
---------------------------------------------------------------------------
The proposed rule change would make technical and clarifying
changes to the second paragraph of this section, which states:
The Model unit within the Group Chief Risk Office that is
responsible for model risk management as a second-line function
(``MRM'') is charged with determining whether any proposed method,
system, or approach designed for Clearing Agency use meets the above
definition. All models subject to this Framework will be added to
the definitive list of models (``Model Inventory'') and tracked by
MRM. A Model Inventory Survey is conducted at least annually across
the Clearing Agencies to confirm the Model Inventory is current
(``Annual Model Inventory Survey''). During the Annual Model
Inventory Survey, any business area or support function intending to
have a model developed for Clearing Agency use will submit materials
relevant to such proposed model for MRM to review and assess whether
such proposed model will be added to the Model Inventory. The person
designated by the applicable business area or support function to be
responsible for a particular model (``Model Owner'') is recorded as
the Model Owner for such model by MRM in the Model Inventory.
First, for enhanced clarity, the first sentence of the paragraph
would be revised to replace the initial reference to ``The Model'' with
``Model Risk Management'' and define the term as ``MRM'' directly after
it is mentioned, rather than after additional descriptive text that
follows in the sentence. The proposed rule change would also eliminate
the reference to MRM as a ``unit'' because this reference is redundant
given the context describing the functionality of MRM implies that it
is a unit or group. Conforming grammatical changes would also be made
to delete ``that'' after ``Group Chief Risk Office'' and add ``and''
after ``second-line function.'' The third sentence of the paragraph
would be revised to make the initial letters in the words ``Model
Inventory Survey'' lower case (i.e., ``model inventory survey'') as the
term is not defined, but rather the reference is part of the
description of the defined term ``Annual Model Inventory Survey'' that
appears at the end of the sentence. The fourth sentence of the
paragraph would be revised for consistency by replacing ``business area
or support function'' with ``business line or functional unit,'' as the
latter reflects usage of text in underlying MRM internal procedures.
Second, the Clearing Agencies believe that adding to the Model
Inventory certain methodologies used to implement configuration choices
made by the Clearing Agencies, such as data sources, model parameters,
and model performance monitoring, including but not limited to
backtesting, that are not inherent to model selection or design and
that do not materially impact a model's results, and are not models
subject to this Framework, may provide benefits for the Clearing
Agencies in terms of monitoring and tracking of such methodologies. In
this regard, the Clearing Agencies would add text to reflect that such
methodologies may be added to the Model Inventory at MRM's discretion.
Finally, in the third paragraph of this section, the Clearing
Agencies would change a reference to ``risk management standards'' to
``Standards'' to conform to the defined term for the Covered Clearing
Agency Standards used throughout the Framework.
Section 3.2 (Model Materiality and Complexity)
Section 3.2 of the Framework describes that a model's output can
affect decision making (e.g., decisions with respect to Clearing Fund/
Participants Fund, backtesting, and stress testing measures), which may
have a material impact on the Clearing Agency, and that each model
subject to the Framework is assigned a materiality/complexity rating in
this regard. The section states that ``[m]ateriality/complexity index
assignments are made at the time the applicable model is added to the
Model Inventory and are used by MRM for Model Validation
prioritization. All model materiality/complexity index assignments are
reviewed at least annually by MRM, as well as by the Model Risk
Governance Council (``MRGC''), the forum for review of model risk
matters.'' Pursuant to the proposed rule change, the Clearing Agencies
would replace both appearances of the words ``index assignments'' in
these two sentences with ``scores.'' This change would align the text
of the Framework with MRM's practice, whereby MRM reviews materiality
and complexity scores of a model, which directly determine the
applicable materiality/complexity rating, at least annually.\22\
---------------------------------------------------------------------------
\22\ Specifically, the Clearing Agencies use the ``DTCC Model
Development Standards,'' which is a document describing that
materiality and complexity scores for a model, which scores are
based on certain factors, underlie the determination of the
materiality/complexity rating of the model. In accordance with the
DTCC Model Development Standards, factors relating to the
materiality score include model usage, model hierarchy and model
exposure. The factors relating to the complexity score include
structural complexity, and data availability and treatment.
---------------------------------------------------------------------------
Section 3.3 (Full Model Validation)
In addition to deleting ``full'' where it appears as a modifier to
``model validation'' in Section 3.3 of the Framework, as described
above, including in the title of the section, the proposed rule change
would make other technical and clarifying changes to this section.
In a paragraph that describes Model Validation activities performed
for new models:
(i) A reference to ``model development documentation and testing''
would be changed to ``model
[[Page 10415]]
documentation and development testing'';
(ii) a reference to ``evaluation of data inputs and parameters''
would be changed to ``evaluation of model inputs and parameters'';
(iii) a reference to ``review of numerical implementation
(including replication for certain key model components, which will
vary from model to model)'' would be changed to ``review of model
implementation for consistency with documentation'';
(iv) a reference to ``independent testing: sensitivity analysis,
stress testing, and benchmarking, as appropriate'' would be changed to
``independent testing: model output evaluation, backtesting,
sensitivity analysis, stress testing, and benchmarking, as
appropriate''; and
(v) a reference to ``evaluation of model outputs, model
performance, and back testing'' would be changed to ``evaluation of
model performance monitoring (or ``MPM'') plan and results.''
Similarly, a reference to ``model performance monitoring reports'' in
Section 3.8 of the Framework (Model Performance Monitoring) would be
revised to consider the definition of the term MPM described above. In
this regard, this reference in Section 3.8 would be revised to instead
refer to ``MPM reports.''
In the second paragraph of this section, the third sentence states:
``The Application Development Department for the Clearing Agencies will
perform certain production release quality assurance checks (e.g., user
acceptance testing/systems integration testing (UAT/SAT)).'' Pursuant
to the proposed rule change, this sentence would be revised to delete
``Application Development Department for the'' and ``(UAT/SAT)''. This
change would generalize the text to eliminate the need to revise the
document in the event the name of the area that performs such testing
changes.
The Clearing Agencies would also revise this paragraph with respect
to text relating to ratings assigned to a model upon validation. In
this regard, the Framework currently describes that the result of each
Model Validation is a model validation report prepared by MRM (``Model
Validation Report''), a key section of which is the summary of all
findings and recommendations ranked according to the findings' severity
level, inclusive of any identified model limitations and compensating
controls for the model. This text would be revised to remove the
reference to recommendations as part of the Model Validation Report
because, pursuant to MRM's procedures, while the Model Validation
Report includes findings, it does not include recommendations. In
addition, the severity level of the findings is described in this
section to be classified as H, M or L, which the Clearing Agencies
intend as abbreviations for ``High,'' ``Medium,'' and ``Low.'' However,
as these abbreviations are not otherwise defined in the Framework, the
Clearing Agencies would replace the abbreviations with the full
spelling of the classifications, such that the instances in the text of
``H,'' ``M,'' and ``L'' would be replaced with ``High,'' ``Medium,''
and ``Low,'' respectively.
This paragraph also describes that MRM will provide an overall
assessment for each model having undergone a Model Validation (``Model
Grade'').\23\ The Clearing Agencies propose to clarify this text such
that it describes each model that has been approved, as being rated (in
the form of a Model Grade) by MRM, rather than providing an overall
assessment.
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\23\ The Clearing Agencies' current grading scale consists of
three grades--``A,'' ``B,'' and ``C.'' Any Clearing Agency may add
or remove grading levels in its discretion, the parameters of which
shall be reflected in written procedures established by such
Clearing Agency.
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This paragraph states further that the Model Grade, together with
the model materiality/complexity index assignment, serves to provide
context for MRM's overall assessment of the model's suitability and
performance for its intended purpose. As with the revision described
immediately above, the Clearing Agencies would remove the reference to
a Model Grade as representing an overall assessment of the model. In
its place, the proposed rule change would provide a description that
the Model Grade outlines the overall assessed quality of the model
developer's efforts to develop the model and the extent to which the
model developer has effectively reduced model risk during model
development.
In addition, it is the Model Grade that rates these development
quality considerations and risk factors, and the Model Grade does not
depend on the model materiality/complexity index assignment and is not
intended to signify the overall suitability of the model for its
intended purpose. Therefore, the Clearing Agencies would clarify this
point to remove the reference to model materiality and complexity as
being a factor in determining the Model Grade, as well as delete text
that indicates the Model Grade reflects the suitability of a model for
its intended purpose.
Section 3.4 (Periodic Model Validation)
Section 3.4 of the Framework describes that MRM shall perform a
Model Validation for each model subject to this Framework that is
approved for use in production not less than annually (or more
frequently as may be contemplated by such Clearing Agency's established
risk management framework), including each credit risk model,\24\ each
liquidity risk model,\25\ and each CCP's margin systems and related
models,\26\ as required by the risk management standards set forth in
the Framework. This type of Model Validation is referred to generally
in the Framework as ``periodic'' Model Validation. In this regard, for
the sake of clarity, the Clearing Agencies would insert the word
``periodic'' as a modifier for Model Validation in the first sentence
of the first paragraph of this section.
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\24\ See 17 CFR 240.17Ad-22(e)(4)(vii).
\25\ See 17 CFR 240.17Ad-22(e)(7)(vii).
\26\ See 17 CFR 240.17Ad-22(e)(6)(vii).
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In addition, the Clearing Agencies would delete a paragraph from
this section that states: ``Periodic Model Validations follow full
Model Validation standards. In certain cases, MRM may determine extra
Model Validation activities are warranted based on previous Model
Validation work and findings, changes in market conditions, or because
performance monitoring of a particular model warrants extra
validation.'' This text would be deleted because, as noted above, the
Framework recognizes one definition of Model Validation and the
provisions relating to how Model Validation is conducted apply to all
models regardless of timing, and it is unnecessary to state that
periodic Model Validation follows the same standards as ``full'' Model
Validation since there is only one concept of Model Validation. In
addition, the reference to extra Model Validation activities is
duplicative as the Framework contains other text indicating that Model
Validations may be performed for a given model more frequently than on
the minimum annual basis.
Section 3.5 (Model Change Management)
Section 3.5 of the Framework describes provisions relating to
changes in models. The text of this section refers to a ``version
change'' of a model in describing changes to third-party models. The
section is intended to apply to any changes to a model and it is
unnecessary to modify the word change, including with ``version.''
Therefore, the Clearing Agencies would
[[Page 10416]]
delete the word ``version'' where it appears before ``change'' in this
section.
Section 3.6 (Model Approval and Control)
In addition to the proposed change described above to extend the
period allowable for a provisional approval to remain in effect, the
Clearing Agencies would revise a sentence in Section 3.6 of the
Framework that states: ``Provisional approval requests along with
appropriate control measures must be presented by the applicable Model
Owner to MRM.'' The sentence as written is duplicative as the first
paragraph of Section 3.6 states that models must be submitted to MRM
for approval. However, given the focus of this section on the approval
of models, the Clearing Agencies believe that the section should more
clearly state where the approval authority resides for provisional
models. As stated above, it is MRM's responsibility to approve models.
Therefore, the Clearing Agencies would revise the sentence described
above to read: ``Provisional approval requests along with appropriate
control measures must be approved by MRM.''
A sentence that states: ``All new models, and all material changes
to existing models, shall undergo Model Validation by MRM and then be
approved by MRM prior to business use'' would be revised to replace the
word ``then'' with ``must'' to clarify the requirement that a model
must be approved by MRM prior to use.
Section 3.7 (Resolution of Model Validation Findings)
Consistent with the proposed change described above to remove the
description of a group within the Group Chief Risk Office as a
``unit,'' the Clearing Agencies would revise a reference to ``the
Operational Risk Management unit'' to delete the word ``unit'' from
this reference. Also, the Clearing Agencies would delete the word
``the'' before ``Operational Risk'' because it would not be
grammatically correct when ``unit'' is deleted. In addition, the group
name of ``Operational Risk Management,'' as set forth in this
reference, would be revised to ``Operational Risk'' to reflect a recent
name change of this group from Operational Risk Management to
Operational Risk. In connection with this name change, the term ``ORM''
that is used in this section to define ``Operational Risk Management''
would be deleted. Also, in this regard, two subsequent references to
ORM in the Framework, which appear in Section 3.7 and Section 4.2,
respectively, would be removed and replaced with ``Operational Risk.''
Section 3.8 (Model Performance and Monitoring)
In addition to a change relating to the definition of MRM described
above, the Clearing Agencies would revise a footnote in Section 3.8 of
the Framework. The footnote 29 describes the role Quantitative Risk
Management (``QRM'') performs with respect to the CCPs' margin models.
A sentence within the note states that a representative of QRM self-
elects as the owner of a margin model. In fact, the CCPs' procedures
would require the representative to be appointed as the owner of a
model. Therefore, the Clearing Agencies would revise this footnote to
reflect that a representative of QRM is appointed as the owner of a
model.
This section also contains a statement that MRM is responsible for
providing oversight of model performance monitoring activities by
setting organizational standards and providing critical analysis for
identifying model issues and/or limitations. This statement has a
footnote that states the organizational standards apply to DTCC's \27\
subsidiaries, as applicable. This footnote is unnecessary because the
Framework applies only to the Clearing Agencies and no other
subsidiaries of DTCC, and the mention to DTCC's subsidiaries in general
is extraneous. Therefore, pursuant to the proposed rule change, the
Clearing Agencies would delete this footnote.
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\27\ The Depository Trust & Clearing Corporation (``DTCC'') is
the parent company of the Clearing Agencies.
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Section 3.9 (Backtesting)
Section 3.9 of the Framework contains a description of backtesting
performed by the Clearing Agencies. Pursuant to the proposed rule
change, this section would be revised to delete references to
backtesting performed by DTC and related text, including applicable
metrics and thresholds, and a related footnote that describes the
designation of DTC account families by DTC Participants for purposes of
managing Collateral Monitor and Net Debit Cap. The proposed change
would be consistent with the Covered Clearing Agency Standards, which
pursuant to Rule 17Ad-22(e)(6) \28\ requires certain backtesting to be
performed by the CCPs. As indicated above, this rule does not apply to
DTC.\29\ In this regard, a reference to a backtesting metric
(Collateral Group Collateral Monitor Coverage) mentioned in Section 4.2
of the Framework (Escalation) would also be deleted.
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\28\ See 17 CFR 240.17Ad-22(e)(6).
\29\ See supra note 8.
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Section 4.2 (Escalation)
A paragraph within Section 4.2 of the Framework states: ``On at
least a monthly basis, the key metrics identified in Section 3.9 are
reviewed by the Market and Liquidity Risk Management unit within the
Group Chief Risk Office and reported to the MRC \30\ by the group
within the Group Chief Risk Office responsible for risk reporting.
Threshold breaches will be reviewed by the Managing Directors within
the Financial Risk Management area (including the Market and Liquidity
Risk Management unit) of the Group Chief Risk Office, and in the case
of CFR Coverage breaches by the CCPs and Collateral Group Collateral
Monitor Coverage by DTC, escalated to the BRC in accordance with the
applicable Risk Tolerance Statement.''
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\30\ MRC refers to the Management Risk Committee of the Boards
of Directors of the Clearing Agencies.
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Pursuant to the proposed rule change, first, the reference to a
Market and Liquidity Risk Management unit would be revised to reflect
only the Market Risk Management unit. Today, the Market Risk Management
and Liquidity Risk Management areas are under separate management, and
Market Risk Management is the area that performs the review of key
metrics described in the paragraph.
Second, the Clearing Agencies would revise the paragraph to remove
the parenthetical that states, ``including the Market and Liquidity
Risk Management unit,'' after a reference to the Financial Risk
Management area's role in the review of threshold breaches of key
metrics, as both units are part of Financial Risk Management, and
therefore the parenthetical is unnecessary. In this regard, the
proposed modification would enhance readability.
Third, the Clearing Agencies would remove the text ``by the group
within the Group Chief Risk Office responsible for risk reporting'' as
it is unnecessary since it can be inferred that reports would be
provided by the group responsible for such reporting.
2. Statutory Basis
The Clearing Agencies believe that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act,\31\ as well as Rules
17Ad-22(e)(4), (e)(6), and
[[Page 10417]]
(e)(7) thereunder,\32\ for the reasons described below.
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\31\ 15 U.S.C. 78q-1(b)(3)(F).
\32\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC.
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Section 17A(b)(3)(F) of the Act \33\ requires, inter alia, that the
rules of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible. As described above, the
proposed rule change enhances (i) the Clearing Agencies' ability to
complete modifications to a provisionally approved model prior to the
performance of a model validation and (ii) the text of the Framework to
facilitate clarity for the areas within the Clearing Agencies that
perform responsibilities with regard to model risk management and
compliance with the Framework. By enhancing the Framework in this
regard, the proposed rule change supports the Clearing Agencies'
performance of their responsibilities under the Framework, including
but not limited to assuring that models developed function as intended
to support the Clearing Agencies in identifying, measuring, monitoring,
and managing their respective credit exposures, liquidity risks and, as
applicable, the maintenance of sufficient margin to cover these risks.
In this regard, the proposed rule change would promote the safeguarding
of securities and funds which are in the custody or control of the
Clearing Agencies or for which they are responsible, by promoting the
ability of the Clearing Agencies to manage credit exposures and
liquidity risk that may impact the safeguarding of those funds and
securities.
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\33\ 15 U.S.C. 78q-1(b)(3)(F).
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Rules 17Ad-22(e)(4), (e)(6), and (e)(7) under the Act \34\ require,
inter alia, that a covered clearing agency establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to manage risks associated with its credit risk management
models, margin models, and liquidity risk management models,
respectively, as applicable. As discussed above, the proposed rule
change enhances (i) the Clearing Agencies' ability to complete
modifications to a provisionally approved model prior to the
performance of a model validation and (ii) the text of the Framework to
facilitate clarity for the areas within the Clearing Agencies that
perform responsibilities with regard model risk management and
compliance with the Framework. By enhancing the Framework in this
regard, the proposed rule change supports the Clearing Agencies'
performance of their responsibilities under the Framework, including
but not limited to assuring that models developed function as intended
to support the Clearing Agencies in identifying, measuring, monitoring,
and managing their respective credit exposures, liquidity risks and, as
applicable, the maintenance of sufficient margin to cover these risks.
Therefore, the Clearing Agencies believe that the proposed changes to
the Framework are consistent with Rules 17Ad-22(e)(4), (e)(6), and
(e)(7).\35\
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\34\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC.
\35\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
The Clearing Agencies do not believe that the proposed rule change
would have any impact, or impose any burden, on competition because the
proposed rule change simply modifies the Framework governing the
management of model risk by the Clearing Agencies and (a) would not
effectuate any changes to the Clearing Agencies' model risk management
tools as they apply to their respective Members or Participants and (b)
would not have an effect with respect to the obligations of
participants utilizing Clearing Agency services.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
The Clearing Agencies have not received or solicited any written
comments relating to this proposal. If any written comments are
received, they will be publicly filed as an Exhibit 2 to this filing,
as required by Form 19b-4 and the General Instructions thereto.
Persons submitting comments are cautioned that, according to
Section IV (Solicitation of Comments) of the Exhibit 1A in the General
Instructions to Form 19b-4, the Commission does not edit personal
identifying information from comment submissions. Commenters should
submit only information that they wish to make available publicly,
including their name, email address, and any other identifying
information.
All prospective commenters should follow the Commission's
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General
questions regarding the rule filing process or logistical questions
regarding this filing should be directed to the Main Office of the
Commission's Division of Trading and Markets at
[email protected] or 202-551-5777.
The Clearing Agencies reserve the right to not respond to any
comments received.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) impose any significant burden on competition; and
(iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \36\ and
Rule 19b-4(f)(6) thereunder.\37\
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\36\ 15 U.S.C. 78s(b)(3)(A).
\37\ 17 CFR 240.19b-4(f)(6).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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-FICC-2022-001 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-FICC-2022-001. 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
[[Page 10418]]
submission, all subsequent amendments, all written statements with
respect to the proposed rule change that are filed with the Commission,
and all written communications relating to the proposed rule change
between the Commission and any person, other than those that may be
withheld from the public in accordance with the provisions of 5 U.S.C.
552, will be available for website viewing and printing in the
Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of FICC and on DTCC's website
(https://dtcc.com/legal/sec-rule-filings.aspx). 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-FICC-2022-001 and should be submitted on
or before March 17, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
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\38\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03872 Filed 2-23-22; 8:45 am]
BILLING CODE 8011-01-P
