[Federal Register Volume 88, Number 188 (Friday, September 29, 2023)]
[Notices]
[Pages 67405-67407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21340]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98496; File No. SR-ICC-2023-012]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the Stress Testing Framework

    September 25, 2023.

I. Introduction

    On August 8, 2023, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to update its 
Stress Testing Framework (``STF''). The proposed rule change was 
published for comment in the Federal Register on August 21, 2023.\3\ 
The Commission did not receive comments regarding the proposed rule 
change. For the reasons discussed below, the Commission is approving 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the Stress Testing 
Framework; Exchange Act Release No. 98140 (Aug. 15, 2023); 88 FR 
56899 (Aug. 21, 2023) (File No. SR-ICC-2023-012) (``Notice'').
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II. Description of the Proposed Rule Change

    ICC is registered with the Commission as a clearing agency for the 
purpose of clearing credit default swap (``CDS'') contracts. ICC clears 
CDS contracts for its members, which it refers to as Clearing 
Participants.\4\ Clearing CDS contracts for Clearing Participants 
presents certain risks to ICC, such as exposure to systemic risk, which 
may include, but is not limited to, historic and current market 
volatility, and fluctuating interest rates. ICC measures and attempts 
to protect against such systemic risk by performing stress tests and, 
at times, adjusting the parameters underlying these stress-testing 
scenarios.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICC's Clearing Rules.
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    This proposed rule change aims to update two parameters 
incorporated into several of ICC's stress-testing scenarios. The 
parameters relate to the interest rate sensitivity analysis applied to 
two sets of historically observed, extreme but plausible market 
scenarios described in ICC's STF, and measure the magnitude of interest 
rate shocks during the applicable stressed periods used to estimate 
average haircut values of certain government securities. In particular, 
ICC proposes to change the stress period of the default-free Euro 
discount interest rate curve used in ICC's interest rate sensitivity 
analysis and revise the description of the credit crisis period for the 
default-free U.S. Dollar discount interest rate curve.
    Currently under the STF, Section 11, which describes ICC's interest 
rate sensitivity analysis, incorporates two currency-specific stress 
test parallel shifts (i.e., up and down) of the default-free discount 
interest rate for both CDS and CDS Index Options instruments. The 
magnitude of the interest rate stress scenarios reflects the largest 
shock, estimated using the collateral haircut model, during a selected 
stress period for the applicable sovereign debt. The current stress 
period of the default-free Euro discount interest rate curve references 
the ``western European credit'' crisis period and specifies exact start 
and end dates between 2011 and 2012. The selected stress periods listed 
in Section 11 are subject to periodic review. Following such a review, 
ICC proposes to update the stress period used to shock the Euro 
default-free discount interest rate by replacing the current language 
with ``2022/2023 inflation'' crisis period and not specifying start and 
end dates.
    ICC states that changing the stress period of the default-free Euro 
discount interest rate curve would more accurately reflect the current 
volatile interest rate period, which began in 2022 and continues into 
2023 due to the fast pace of U.S. Dollar and Euro interest rate 
increases.\5\ According to ICC, the impact to the Euro interest rate 
volatility has been significant because of the sudden and rapid 
increases in Euro interest rates by the European Central Bank in an 
effort to curb multi-decade high inflation.\6\ ICC indicates that the 
interest rate volatility observed during the ongoing ``2022/2023 
inflation'' crisis period is greater than that observed during the 
2011-2012 ``western European credit'' crisis period currently listed in 
the STF because the collateral haircuts observed in 2022-2023 exceed 
those detected in 2011-2012.\7\ ICC has

[[Page 67406]]

set an internal start date for the ``2022/2023 inflation'' crisis 
period. However, as the 2022-2023 period of volatility remains ongoing, 
ICC states that it will continue to monitor interest rate volatility 
for any new volatility peak observed in the current ``2022/2023 
inflation'' crisis period for the default-free Euro discount interest 
curve.
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    \5\ Notice, at 56899.
    \6\ Id.
    \7\ Id.
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    Additionally, ICC proposes to make an analogous clarifying language 
change to the identification of the default-free U.S. Dollar discount 
interest rate curve in Section 11 of the STF. Specifically, the 
proposed change would remove the exact start and end dates of the 
credit crisis period from Section 11 and replace them with the 
description written as the ``2008/2009'' credit crisis period. The 
exact start and end dates of the ``2008/2009'' credit crisis period are 
listed in Section 5 of STF and would remain unchanged. This proposed 
rule change would not alter the time span or affect any other 
characteristic of the parameter covering the ``2008/2009'' credit 
crisis period for the default-free U.S. Dollar discount interest rate 
curve.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\8\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \9\ and Rule 17Ad-22(e)(4)(ii) and (vi) thereunder.\10\
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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed rule change would update the period covering the 
default-free Euro discount interest curve, which is part of the 
interest rate sensitivity analysis applied to several of ICC's stress-
testing scenarios in its STF. Specifically, the proposed 2022/2023 
inflation crisis period, which is ongoing, has exhibited greater 
interest rate volatility than that observed during the 2011-2012 
western European credit crisis period. The Commission believes that 
this proposed rule change would provide a more accurate magnitude of 
the largest shock to the applicable sovereign debt used as part of the 
parameters underlying ICC's stress scenarios. Recalibrating the 
magnitude of the largest shock would enhance ICC's ability to identify 
and measure the risk of a credit exposure to defaulting Clearing 
Participants, which should, in turn, increase the likelihood that ICC 
calculates and collects sufficient financial resources to mitigate this 
potential exposure and enhance ICC's ability to manage a default by 
continuing to promptly and accurately clear and settle securities 
transactions.
    Additionally, ICC's proposal to streamline the description of the 
2008/2009 credit crisis period applicable to the default-free U.S. 
dollar interest rate curve would provide consistency to the language 
relevant to the interest rate sensitivity analysis in the STF. This, in 
turn, would assist in facilitating the execution of the various stress 
tests, thus helping to ensure the adequacy of systemic risk protections 
through appropriate financial resource collection during a Clearing 
Participant default, and promoting the prompt and accurate clearance 
and settlement of securities transactions.
    For these reasons, the Commission believes the proposed rule 
changes are consistent with Section 17A(b)(3)(F) of the Act.\12\
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    \12\ Id.
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B. Consistency With Rule 17Ad-22(e)(4)(ii) and (vi)

    Rule 17Ad-22(e)(4)(ii) requires ICC to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed, as applicable, to effectively identify, measure, monitor, and 
manage its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, including by maintaining 
additional financial resources at the minimum to enable it to cover a 
wide range of foreseeable stress scenarios that include, but are not 
limited to, the default of the two participant families that would 
potentially cause the largest aggregate credit exposure for ICC in 
extreme but plausible market conditions.\13\ Rule 17Ad-22(e)(4)(vi) 
\14\ requires ICC to establish, implement, maintain, and enforce 
written policies and procedures reasonably designed, as applicable, to 
effectively identify, measure, monitor, and manage its credit exposures 
to participants and those arising from its payment, clearing, and 
settlement processes, including by testing the sufficiency of its total 
financial resources available to meet the minimum financial resource 
requirements of Rule 17Ad-22(e)(4)(ii).\15\
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    \13\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \14\ 17 CFR 240.17Ad-22(e)(4)(vi).
    \15\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    The Commission believes that replacing the 2011-2012 western 
European credit crisis period with the 2022/2023 inflation crisis 
period relating to the default-free Euro discount interest rate curve 
used for interest rate sensitivity analysis would provide a more 
effective measurement of the required shock in stress testing. This 
updated measurement may better ensure ICC's ability to monitor and 
manage its credit exposures and to maintain additional financial 
resources to enable it to cover a wide range of foreseeable stress 
scenarios. Likewise, the Commission believes that the simplified 
description of the 2008/2009 credit crisis period applicable to the 
default-free U.S. dollar interest rate curve would enhance the 
readability and usability of the STF, thereby enhancing the 
documentation for its users and helping ensure that it remains 
transparent and consistent to support the effectiveness of ICC's risk 
management system.
    For these reasons, the Commission believes that the proposed rule 
changes are therefore consistent with the requirements of Rules 17Ad-
22(e)(4)(ii) and (e)(4)(vi).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular, with the requirements of Section 17A(b)(3)(F) of the 
Act,\17\ and Rule 17Ad-22(e)(4)(ii) and (vi) thereunder.\18\
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    \17\ 15 U.S.C. 78q-1(b)(3)(F).
    \18\ 17 CFR 240.17Ad-22(e)(4)(ii) and (vi).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\19\ that the proposed rule change (SR-ICC-2023-012), be, and hereby 
is, approved.\20\
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

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[[Page 67407]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).

Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21340 Filed 9-28-23; 8:45 am]
BILLING CODE 8011-01-P