[Federal Register Volume 83, Number 249 (Monday, December 31, 2018)]
[Notices]
[Pages 67810-67813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-28391]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84933; File No. SR-ICEEU-2018-024]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change as Modified by Amendment No. 1 
Relating to the ICE Clear Europe Model Risk Governance Framework (the 
``MRGF'')

December 21, 2018.
    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 December 14, 2018, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been prepared by ICE Clear 
Europe. On December 21, 2018, ICE Clear Europe filed Amendment No.1 to 
the proposed rule change.\3\ The Commission is publishing this notice 
to solicit comments on the proposed rule change, as modified by 
Amendment No. 1, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The amendment clarified Items 1(a) and 2(a) in the Form 19b-
4 but did not change any other items in Form 19b-4, any exhibits to 
the filing, or the text of the proposed rule change.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe proposes to adopt a Model Risk Governance 
Framework (the ``MRGF''). The revisions do not involve any changes to 
the ICE Clear Europe Clearing Rules or Procedures.\4\
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules (the 
``Rules'').
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe 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. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

[[Page 67811]]

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe is proposing to adopt a new MRGF, which is 
intended to establish overall standards and principles for managing and 
mitigating model risk, for all product categories. Specifically, it is 
designed to ensure that (1) the roles and responsibilities for model 
oversight are clearly defined, (2) an appropriate organizational 
structure is in place to address new models, model changes, review of 
existing models and model retirement, and (3) appropriate guidelines 
and schedules exist for model inventory, model validation and 
remediation of concerns with models. The MRGF applies throughout the 
life cycle of models used by the Clearing House.
    The MRGF defines a ``model'' for this purpose as a quantitative 
method, system or approach that applies statistical, economic, 
financial or mathematical theories, techniques and assumptions to 
process input data into quantitative estimates. The framework also 
defines ``model risk'' as the risk that a model does not perform as it 
was designed, either due to error or failure in the model specification 
or inappropriate use.
    The MRGF addresses the materiality of models, based on the 
potential impact the related model risk may have on ICE Clear Europe 
and its clearing members. A model will be deemed material where the 
output of the model is the primary factor affecting risk management 
decisions relating to counterparty and liquidity risk.\5\ With respect 
to model changes, the framework also assess the significance of the 
change, in accordance with applicable law and regulatory guidelines. 
Relevant factors include an assessment of the size of resulting changes 
in risk requirements calculated by the model, alterations in the scope 
of model use and the risk profile of products covered, and the 
development of new model features. As discussed herein, the materiality 
of a model, and significance of changes, are factors in the model 
review process.
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    \5\ A model may also be considered material if it has a high 
error potential, with sizeable impact, most likely resulting from 
complexities in the data model and inputs (e.g., complex 
manipulation of input data), the modelling approach (e.g., reliance 
on large number of assumptions), the model output (e.g., large 
number of dependent downstream models) or model users and operations 
(e.g., large number of independent systems).
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    The MRGF establishes the role of governance bodies in model review 
and approval, including the Model Oversight Committee (``MOC'') and 
Board. The MOC is responsible for model risk governance at an executive 
level, and advises the Board on material model risk. The MOC is 
responsible for approving new models, model changes and retirement of 
models, approving the periodic validation cycle, or validation 
pipeline, approving remediation actions, reviewing model performance 
assessments and approving external validators. The Board has ultimate 
responsibility for model risk governance, approving material new models 
and significant model changes for material models, reviewing the 
actions of the MOC, reviewing performance of material models outside of 
acceptable levels for model risk, in light of risk appetite metrics, 
and reviewing impact assessments for the retirement of material models.
    The MRGF uses the Clearing House's tiered approach to model 
governance. This approach entails: (i) A first line, such as the 
clearing risk department, that is responsible for owning the model, 
ensuring that models are properly developed, implemented and used, 
establishing a model inventory, proposing new models, model changes and 
model retirements and related materiality and significance levels, 
conducting performance and impact assessments, and proposing and 
implementing remediation actions as needed; (ii) a second line, 
represented by the risk oversight department (``ROD''), that is 
responsible for performing or overseeing independent validation, 
reviewing performance assessments, establishing risk appetite metrics 
for model performance, establishing guidelines for validations and 
external validators (including criteria for expertise and 
independence), and reporting results of validations and assessments to 
appropriate committees; and (iii) a third line, represented by the 
Internal Audit Department, that is responsible for assessing the 
overall effectiveness of the MRGF and related governance policies and 
assessing independent validation work.
    The MRGF sets out a general oversight process for models throughout 
their life cycle, including development of new models, model changes, 
review of existing models and model retirements. New models will be 
subject to validation before being approved and introduced into use. 
For model changes, significant changes will be validated before being 
approved (using the same criteria as for new models). Model changes 
that are not significant will be validated in accordance with the 
periodic re-validation pipeline. The MRGF provides for model re-
validation and performance assessments, to determine whether a model 
continues to be fit for its designed purposes. The ROD will establish a 
validation pipeline, or periodic re-validation cycle. The frequency of 
re-validation will be in accordance with regulatory requirements, which 
may be annually where required or more frequently as needed. Similarly, 
performance assessments will also be conducted on a periodic basis at 
least annually, in accordance with applicable regulatory requirements.
    The MRGF also addresses model retirements and deactivations 
(retirement permanently discontinues a model while deactivation is a 
temporary discontinuation). Prior to retiring or deactivating a model, 
the Clearing House will conduct an impact assessment of the risks and 
consequences.
    In terms of validation, the ROD is responsible for conducting the 
independent validation (if done internally) at the appropriate 
frequency and coordinating external validation when appropriate. ICE 
Clear Europe has adopted a set of independent validator selection 
guidelines addressing external validation. Under the guidelines, the 
Clearing House may engage an external independent model validator when 
there are insufficient internal resources to meet both the technical 
expertise and independence requirements for the model undergoing 
independent validation, internal resources do not have the operational 
capacity to perform the validation within an appropriate timeframe or 
otherwise at the discretion of the ROD. The use of external independent 
model validators is subject to review and approval by the MOC.
    To be considered independent with respect to a model:
    <bullet> The validator must have no involvement or responsibility 
for any component of the model development, implementation or operation 
for at least two years other than reviewing and commenting on the scope 
of model documentation, the completeness and appropriateness of 
documentation, the scope of model performance testing and analysis on 
the acceptance criteria for performance testing and analysis;
    <bullet> the validator must have no involvement or responsibility 
for a period of two years or more for any upstream development process 
relating to an input feeding into the model being submitted for 
validations;
    <bullet> If the validator is an employee of ICE Clear Europe, they 
must report into the chief risk officer; and
    <bullet> If the validator is an employee of an Intercontinental 
Exchange, Inc. group

[[Page 67812]]

company, the company they are employed by must have no direct 
dependence on the outcome of the validation.
    Requirements may be waived at the discretion of the ROD, subject to 
review and approval by the MOC. In evaluating the independence of an 
external validator, the ROD may also take into account the following 
factors:
    <bullet> Connections of the validator to ICE Clear Europe;
    <bullet> duration of time that the validator has been performing 
independent model validations for ICE Clear Europe;
    <bullet> dependence of the validator on ICE Clear Europe; and
    <bullet> outside interests of or any other conflicts of interest 
with the validator.
    ICE Clear Europe maintains a list of external validators, which is 
approved by the MOC, and the use of a particular validator depends on 
their ability to fulfill both the technical and independence 
requirements for a particular external validation. In addition, the 
second line keeps track of the frequency of the reviews per validator, 
and may decide to alternate validators if outputs deteriorate and 
requirements specified in the validation guidelines become less likely 
to be met.
(b) Statutory Basis
    ICE Clear Europe believes that the changes described herein are 
consistent with the requirements of Section 17A of the Act \6\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \7\ in particular requires, among other things, that the rules of 
the clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts and transactions, to 
assure the safeguarding of securities and funds in the custody or 
control of the clearing agency or for which it is responsible, and, in 
general, protect investors and the public interest. The proposed 
amendments adopt the MRGF, which will be applicable to all models used 
by the Clearing House and is intended to set an overall framework for, 
and generally facilitate, the ongoing development, review and 
validation of such models (and changes thereto) throughout their life 
cycle. The MRGF will also assist the Clearing House in managing the 
risks from its use of models. In ICE Clear Europe's view, the 
amendments will enhance the overall risk management of the Clearing 
House, and thereby promote the prompt and accurate clearance of 
transactions and further the public interest in sound operation of 
clearing agencies, within the meaning of Section 17A(b)(3)(F).\8\ The 
amendments are not intended to effect, and are consistent with, the 
Clearing House's existing provisions relating to the safeguarding of 
funds and securities in the custody or control of the Clearing House or 
for which it is responsible, within the meaning of that section.
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    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    ICE Clear Europe also believes that the amendments are consistent 
with specific requirements of Rule 17Ad-22.\9\ Rule 17Ad-22(b)(4) \10\ 
requires clearing agencies to perform an annual model validation, 
including a performance evaluation, of their margin models and the 
related parameters and assumptions. Rules 17Ad-22(e)(4)(vii) \11\ and 
17Ad-22(e)(6)(vii),\12\ also require clearing agencies to have policies 
and procedures in place to ensure the performance of a model validation 
of their credit risk models, margin system, and related models not less 
than annually. In compliance with these requirements, the MRGF provides 
for periodic re-validation and assessment of models, consistent with 
the timing required under these and other applicable regulations.
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    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(b)(4). The rule states that ``[a] 
registered clearing agency that performs central counterparty 
services shall establish, implement, maintain and enforce written 
policies and procedures reasonably designed to:
    (4) Provide for an annual model validation consisting of 
evaluating the performance of the clearing agency's margin models 
and the related parameters and assumptions associated with such 
models by a qualified person who is free from influence from the 
persons responsible for the development or operation of the models 
being validated''.
    \11\ 17 CFR 240.17Ad-22(e)(4)(vii). The rule states that 
``[e]ach covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable:
    (4) Effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by:
    (vii) Performing a model validation for its credit risk models 
not less than annually or more frequently as may be contemplated by 
the covered clearing agency's risk management framework established 
pursuant to paragraph (e)(3) of this section''.
    \12\ 17 CFR 240.17Ad-22(e)(6)(vii). The rule states that 
``[e]ach covered clearing agency shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to, as applicable:
    (6) Cover, if the covered clearing agency provides central 
counterparty services, its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum:
    (vii) Requires a model validation for the covered clearing 
agency's margin system and related models to be performed not less 
than annually, or more frequently as may be contemplated by the 
covered clearing agency's risk management framework established 
pursuant to paragraph (e)(3) of this section''.
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    In addition, Rule 17Ad-22(e)(2) \13\ requires clearing agencies to 
establish reasonably designed policies and procedures to provide for 
governance arrangements that are clear and transparent and specify 
clear and direct lines of responsibility. To facilitate compliance with 
this requirement, the MRGF sets out clear responsibilities of various 
Clearing House personnel and committees with respect to the 
development, validation and ongoing review of all models used by the 
Clearing House.
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    \13\ 17 CFR 240.17 Ad-22(e)(2). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (2) Provide for governance arrangements that:
    (i) Are clear and transparent;
    (ii) Clearly prioritize the safety and efficiency of the covered 
clearing agency;
    (iii) Support the public interest requirements in Section 17A of 
the Act (15 U.S.C. 78q-1) applicable to clearing agencies, and the 
objectives of owners and participants;
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities;
    (v) Specify clear and direct lines of responsibility; and
    (vi) Consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of 
the covered clearing agency.'' ''
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    Rule 17Ad-22(e)(3)(i) \14\ requires clearing agencies to have 
reasonably designed policies and procedures that, at a minimum, include 
risk management policies, procedures, and systems designed to identify, 
measure, monitor, and manage the range of risks that arise in or are 
borne by a clearing agency. The MRGF is intended to facilitate 
compliance with this requirement as it covers all models used by the 
Clearing House, and provides for evaluations and validations by second 
line personnel and procedures for ongoing review, amendment and 
retirement of models, to ensure models remain appropriate to manage the 
range of risks borne by the Clearing House.
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    \14\ 17 CFR 240.17 Ad-22(e)(3)(i). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (3) Maintain a sound risk management framework for 
comprehensively managing legal, credit, liquidity, operational, 
general business, investment, custody, and other risks that arise in 
or are borne by the covered clearing agency, which:
    (i) Includes risk management policies, procedures, and systems 
designed to identify, measure, monitor, and manage the range of 
risks that arise in or are borne by the covered clearing agency, 
that are subject to review on a specified periodic basis and 
approved by the board of directors annually''.

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[[Page 67813]]

1. Self-Regulatory Organization's Statement on Burden on Competition
    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The MRGF, which 
will apply to all product categories, implements internal procedures 
intended to strengthen oversight of models, and is not intended to 
affect directly Clearing Members or market participants, or the markets 
for cleared products. As a result, ICE Clear Europe does not believe 
the amendments will materially affect the cost of, or access to, 
clearing. To the extent the framework results in changes to risk and 
other models that do have an impact on margin levels or otherwise 
affect the cost of clearing, ICE Clear Europe believes such changes 
will be appropriate in furtherance of the risk management of the 
Clearing House. Therefore, ICE Clear Europe does not believe the 
proposed rule changes impose any burden on competition that is 
inappropriate in furtherance of the purposes of the Act.

(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The MRGF, which 
will apply to all product categories, implements internal procedures 
intended to strengthen oversight of models, and is not intended to 
affect directly Clearing Members or market participants, or the markets 
for cleared products. As a result, ICE Clear Europe does not believe 
the amendments will materially affect the cost of, or access to, 
clearing. To the extent the framework results in changes to risk and 
other models that do have an impact on margin levels or otherwise 
affect the cost of clearing, ICE Clear Europe believes such changes 
will be appropriate in furtherance of the risk management of the 
Clearing House. Therefore, ICE Clear Europe does not believe the 
proposed rule changes impose any burden on competition that is 
inappropriate in furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any written comments received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

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

    <bullet> Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#651710090048060a0808000b1116251600064b020a13"><span class="__cf_email__" data-cfemail="3644435a531b55595b5b535842457645535518515940">[email protected]</span></a>. Please include 
File Number SR-ICEEU-2018-024 on the subject line.

Paper Comments

    <bullet> 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-ICEEU-2018-024. 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 (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of ICE Clear Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2018-024 and should be 
submitted on or before January 22, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2018-28391 Filed 12-28-18; 8:45 am]
 BILLING CODE 8011-01-P


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