[Federal Register Volume 83, Number 142 (Tuesday, July 24, 2018)]
[Notices]
[Pages 35033-35038]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-15771]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83662; File No. SR-ICC-2018-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change Relating to ICC's Risk Management Model 
Description Document and ICC's Risk Management Framework

July 18, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1) and Rule 19b-4, 17 CFR 240.19b-4, notice is 
hereby given that on July 5, 2018, ICE Clear Credit LLC (``ICC'') filed 
with the Securities and Exchange Commission the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by ICC. 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, Security-Based Swap Submission, or Advance Notice

    The principal purpose of the proposed rule change is to make 
revisions to the ICC Risk Management Model Description Document and the 
ICC Risk Management Framework related to the transition from a stress-
based approach to a Monte Carlo-based methodology for the spread 
response and recovery rate (``RR'') sensitivity response components of 
the Initial Margin model. These revisions do not require any changes to 
the ICC Clearing Rules.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. The text of these statements may be 
examined at the places specified in Item IV below. ICC has prepared 
summaries, set forth in sections (A), (B), and (C) below, of the most 
significant aspects of these statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

(a) Purpose
    ICC proposes revising its Risk Management Model Description 
Document and its Risk Management Framework. ICC believes such revisions 
will facilitate the prompt and accurate clearance and settlement of 
securities transactions and derivative agreements, contracts, and 
transactions for which it is responsible. The proposed revisions are 
described in detail as follows.
    The purpose of the proposed changes is to transition from a stress-
based approach to a Monte Carlo-based methodology for the spread 
response and recovery rate (``RR'') sensitivity response components of 
the Initial Margin model. ICC notes certain limitations of its stress-
based approach, namely, that it generates a limited number of stress 
scenarios that may not capture the risk of portfolios with more complex 
non-linear instruments and that it does not provide for a consistent 
estimation of the portfolio level spread response based on a defined 
risk measure (e.g., Value-at-Risk (``VaR'')) and quantile (e.g., 99%). 
The transition to a Monte Carlo-based methodology rectifies these 
limitations, as it considers a large set of scenarios to more 
appropriately capture portfolio risk, including the risk of more 
complex non-linear instruments, and produces consistent quantile-based 
portfolio risk measure estimates.
    To derive the spread response component, the current stress-based 
approach considers a set of hypothetical ``tightening'' and 
``widening'' credit spread scenarios, from which it computes instrument 
Profit/Loss (``P/L'') responses for every Risk Factor (``RF'') 
scenario. All instrument P/L responses for a scenario are aggregated to 
obtain the portfolio P/L response for that scenario. Since the set of 
scenarios does not reflect the joint distribution of the considered 
RFs, offsets between P/Ls are applied to provide some portfolio 
benefits. To derive the RR sensitivity response component, all 
instruments belonging to a RF or Risk Sub-Factor (``RSF'') are 
subjected to RR stress scenarios to obtain the resulting P/L responses, 
and the worst scenario response is chosen for the estimation of the RF/
RSF RR sensitivity response component.
    Under the proposed Monte Carlo-based methodology, the ``integrated 
spread response'' component replaces the spread response and RR 
sensitivity response components. This component will be computed by 
creating P/L distributions from a set of jointly-simulated hypothetical 
(forward looking) spread and RR scenarios. The proposed Monte Carlo-
based methodology utilizes standard tools in modeling dependence, which 
can be seen as a means for constructing multivariate distributions with 
different univariate distributions and with desired dependence 
structures, to generate the spread and RR scenarios. The proposed Monte 
Carlo-based methodology provides flexibility in modeling tail 
dependence, an important concept in risk management as it provides 
information about how frequently extreme values are expected to occur, 
and thus ICC considers them particularly suitable for implementing its 
Monte Carlo framework.
    The univariate RF distribution assumptions do not change under the 
proposed Monte Carlo-based

[[Page 35034]]

methodology. ICC will utilize the simulated scenarios to derive 
hypothetical spread and RR levels, at which each instrument is repriced 
in order to generate a scenario instrument P/L based on post-index-
decomposition positions. ICC will create P/L distributions from the set 
of jointly-simulated hypothetical (forward looking) credit spread and 
RR scenarios to compute the integrated spread response component. The 
P/L distributions for each instrument allow ICC to decompose portfolio 
level P/L at the RF level and to estimate RF-level risk measures. The 
proposed model will utilize the 5-day 99.5% VaR measure and allow ICC 
to be compliant with the European Market Infrastructure Regulation 
(``EMIR'') as applied to Over-The-Counter instruments.
Risk Management Model Description Document
    ICC proposes revisions to the `Initial Margin Methodology' section 
of the Risk Management Model Description Document to reflect the 
described transition from a stress-based approach to a Monte Carlo-
based methodology for the spread response and RR sensitivity response 
components. ICC proposes to clarify its risk management approach to 
note that it features stress loss considerations and a P/L distribution 
analysis at selected quantile levels that are 99% or higher. The 
proposed changes also include a description of each of the Initial 
Margin model components, which are separated into statistically 
calibrated components and stress-based add-on components. The 
statistically calibrated components (i.e., spread and RR dynamics, 
interest rate dynamics, and index/single-name (``SN'') basis dynamics) 
reflect fluctuations in market observed or implied quantities, and 
their direct P/L impacts. The stress-based add-on components (i.e., 
idiosyncratic loss given default (``LGD''), wrong-way-risk (``WWR'') 
LGD, bid/offer width risk, and concentration risk) reflect the risk 
associated with low probability events with limited information sets.
    ICC proposes to reorganize the `Initial Margin Methodology' section 
to begin with the `LGD Risk Analysis' section. The proposed changes to 
the `LGD Risk Analysis' section include minor updates to terminology. 
The proposed revisions clarify that the LGD calculation considers RSF-
specific RR level scenarios and that the Jump-To-Default (``JTD'') RR 
stress levels are updated if needed. ICC proposes to update the Profit/
Loss-Given-Default (``P/LGD'') calculation at the RSF level to indicate 
the association between JTD and the RR level scenarios. ICC proposes to 
remove a reference to the stress levels noted in the current `RR 
Sensitivity Risk Analysis' section. ICC proposes to move the RF level 
P/LGD calculation ahead of the Risk Factor Group (``RFG'') LGD 
calculations to avoid disrupting the grouping of RFG LGD calculations.
    ICC proposes amendments to the `JTD Risk Analysis' section. The 
proposed revisions to the Uncollateralized LGD (``ULGD'') calculation 
incorporate the integrated spread response component described above 
and remove reference to the current RR sensitivity response component. 
ICC also proposes, for clarity, to shorten a description in the WWR JTD 
calculation and to move details regarding the Kendall tau rank-order 
correlation to follow the WWR JTD calculation since such details are 
associated with the WWR JTD calculation. The details regarding the 
Kendall tau rank-order correlation remain unchanged, except for the 
addition of clarifying language referencing regulatory guidance with 
respect to RFs deemed highly correlated. ICC proposes to include this 
information, which is currently located in a source in a footnote, 
within the text to provide further description of the source in the 
footnote. ICC also proposes minor structural updates to its description 
of specific WWR (``SWWR'') to enhance readability.
    ICC proposes to add clarifying language to the `Interest Rate 
Sensitivity Risk Analysis' section to note that the interest rate 
sensitivity component is a statistically calibrated Initial Margin 
component. ICC also proposes to correct a notation to reflect an 
inverse distribution function.
    ICC proposes amendments to the `Basis Risk Analysis' section, which 
consist of combining into this section the current index decomposition 
process, followed by SN position offsets, and then generating basis 
risk requirements. Currently, the index decomposition process and SN 
position offsets are discussed under the `Spread Risk Analysis' 
section. However, given the proposed changes to the `Spread Risk 
Analysis' section along with the interrelation of these concepts, ICC 
proposes to combine these concepts by discussing each of them as a 
different subsection under the `Basis Risk Analysis' section. Since the 
index decomposition process, followed by SN position offsets, generates 
basis risk requirements, these concepts are particularly well suited 
for discussion within the same section. Specifically, ICC proposes 
moving the description under the current `Long-Short Benefits among RFs 
with Common Basis' subsection to the proposed `Index Decomposition and 
Long-Short Offsets' subsection. ICC proposes minor changes to such 
description, including removing references to the spread response 
component that ICC proposes to replace.
    Similarly, ICC proposes moving the description under the current 
`Portfolio Benefits Hierarchy Summary' subsection to the proposed 
`Long/Short Offset Hierarchy' subsection. The description includes the 
hierarchy to be followed in the allocation of each SN position to the 
index derived opposite positions and remains largely the same. ICC 
proposes minor changes to remove references to the current spread 
response component and to update the index series in an example.
    ICC proposes moving the analysis under the current `Basis Risk 
Analysis' section to the proposed `Index-Basis Risk Estimation' 
subsection. The analysis discusses the calculation of the basis risk 
component and remains largely the same. The proposed edits state that 
the basis risk component is statistically calibrated to provide 
additional clarity, update a description to specify that index 
instruments may react to changing market conditions differently than SN 
instruments to more accurately reflect trading characteristics, and 
remove an example considered to be unnecessary and overly specific 
given its applicability to one index.
    ICC proposes to combine the current `Spread Risk Analysis' and `RR 
Sensitivity Risk Analysis' sections into the proposed `Spread and RR 
Risk Analysis' section to reflect ICC's transition from a stress-based 
approach to a Monte Carlo-based methodology for the spread response and 
RR sensitivity response components. As discussed above, ICC currently 
utilizes different methodologies to separately derive the spread 
response and the RR sensitivity response components, which are 
discussed in the `Spread Risk Analysis' and `RR Sensitivity Risk 
Analysis' sections, respectively. Under the proposed approach, ICC will 
utilize credit spreads and RR distributions to jointly simulate 
scenarios to estimate portfolio risk measures. Accordingly, ICC 
proposes to combine the `Spread Risk Analysis' and `RR Sensitivity Risk 
Analysis' sections into the `Spread and RR Risk Analysis' section given 
their interrelation under the proposed approach, in which the 
integrated spread response will be computed by creating P/L 
distributions from a set of jointly-simulated hypothetical (forward 
looking) spread and RR scenarios.
    ICC proposes to remove details regarding the current stress-based 
approach from the `Initial Margin

[[Page 35035]]

Methodology' section and to describe how ICC generates credit spread 
scenarios using Monte Carlo techniques in the amended `Spread Risk 
Analysis' section. As described above, the spread response component is 
derived in terms of a set of hypothetical ``tightening'' and 
``widening'' credit spread scenarios under the current stress-based 
approach. The analysis of the univariate characteristics of credit 
spread log-returns to arrive at credit spread scenarios does not change 
under the Monte Carlo-based methodology.
    The univariate RF distribution assumptions do not change under the 
Monte Carlo-based methodology and thus the `Distribution of the Credit 
Spreads' subsection remains largely the same with some clarifying 
changes to language included.
    ICC proposes to describe the implementation of the Monte Carlo-
based methodology in the new `Multivariate Statistical Approach via 
Copulas' subsection. ICC proposes to include a discussion on the 
construction and application of the standard tools in modeling 
dependence, including the review of their theoretical background, in 
the new `Copulas' subsection.
    ICC proposes the `Tail Dependence' subsection to provide a 
description of the concept of tail dependence, given its relevancy as 
it indicates the probability of extreme values occurring jointly. The 
proposed subsection provides additional support behind ICC's conclusion 
that the tools for modeling dependence are particularly suitable for 
connecting the various univariate distributions in a multivariate 
setting as they provide flexibility in modeling tail dependence.
    Under the proposed `Copula Simulation' subsection, ICC describes 
its Monte Carlo-based simulation approach. The proposed approach is 
based on first generating for all SN RF/RSF and On The Run indices Most 
Actively Traded Tenor (``MATT'') scenarios using the stochastic 
representation of the selected multivariate distribution under 
consideration. The conditional simulation approach is then utilized to 
generate individual RF/tenor-specific scenarios. ICC also proposes to 
describe the block simulation approach that it utilizes in generating 
scenarios, which departs from an approach where all tenors for all SNs 
are simulated together. Instead, specific blocks of the correlation 
matrix are considered through the stepwise block simulation approach.
    Under the proposed `Copula Parameter Estimation' subsection, ICC 
discusses the estimation of a new parameter. The proposed subsection 
includes a description of two methods that can be used for parameter 
estimation, namely the ``quasi Maximum Likelihood'' approach and the 
``Canonical Maximum Likelihood'' method. ICC proposes to include the 
value at which this parameter is set conservatively and to explain that 
such a value reflects strong tail dependence within the simulation 
framework, which is important because ICC estimates that tail 
dependence will increase in stressed market conditions.
    Next, ICC proposes to remove details regarding the current stress-
based approach for the RR sensitivity response component and to 
describe how ICC jointly simulates credit spread and RR scenarios using 
Monte Carlo techniques in the amended `RR Risk Analysis' section. As 
discussed above, under the current stress-based approach, the RR 
sensitivity response component is computed in terms of RR stress 
scenarios and incorporates potential losses associated with changes in 
the market implied RR. The proposed Monte Carlo-based methodology 
considers the risk arising from fluctuations in the market implied RRs 
of each SN RF and/or RSF jointly with the fluctuations in the curves of 
credit spreads.
    The univariate RR distribution assumptions do not change under the 
Monte Carlo-based methodology and thus the proposed `Distribution of 
RRs' subsection contains much of the relevant analysis under the 
current `RR Sensitivity Risk Analysis' section with some additional 
clarifying language to further specify that the RR stress-based 
sensitivity requirement transitioned to a Monte Carlo simulation-based 
methodology. ICC proposes to note the assumption regarding the analysis 
of each SN RF/RSF that includes the description located under the 
current `Beta Distribution' subsection since the integrated spread 
response also assumes a Beta distribution describing the behavior of 
the RRs.
    The amended `Parameter Estimation' subsection discusses the 
parameter calibration necessary to simulate RR scenarios and is largely 
the same. The proposed revisions remove or replace terminology 
associated with the stress-based approach with terminology associated 
with the Monte Carlo-based approach.
    The proposed `Spread-Recovery-Rate Bivariate Model' subsection 
describes the use of credit spread and RR distributions to jointly 
simulate scenarios to estimate portfolio risk measures under the Monte 
Carlo-based methodology. Namely, ICC proposes to discuss the use of the 
conditional simulation approach to jointly simulate SN RF/RSF-specific 
RR scenarios with SN RF/RSF MATT spread log-return scenarios. ICC 
proposes to note several assumptions under this model, along with an 
explanation of how it generates the individual SN RF/RSF-specific RR 
scenarios and the tenor-specific spread scenarios using copulas.
    ICC proposes moving the `Arbitrage-Free Modeling' subsection, which 
is currently located under the `Spread Risk Analysis' section, under 
the `Spread and RR Risk Analysis' section. The analysis remains largely 
the same with some language clarifications, including references to 
simulated spread levels in conjunction with simulated RR levels within 
the text and within formulas to ensure consistency with the proposed 
`Spread and RR Risk Analysis' section. ICC proposes further revisions 
to terminology, such as removing terminology associated with the 
stress-based approach and incorporating the Monte Carlo simulation 
based methodology described above to ensure consistency with the 
proposed `Spread and RR Risk Analysis' section. ICC also proposes 
replacing specific references to the current most actively traded tenor 
with references to the more general concept of ``most actively traded 
tenor'' to account for a situation in which the referenced most 
actively traded tenor is different.
    Under the proposed `Risk Estimations' subsection, ICC describes the 
computation of the integrated spread response component. Once the Monte 
Carlo scenarios are simulated, all instruments will be repriced, and 
the respective instrument P/L responses will be computed. Upon 
consideration of the instrument positions in each portfolio along with 
the instrument P/L responses, portfolio risk estimations will be 
performed and the integrated spread response component will be 
established.
    ICC proposes to discuss its calculation of P/Ls for instruments, 
RFs, common currency sub-portfolios, and multi-currency sub-portfolios 
under the new `RF and Sub-Portfolio Level Integrated Spread Response' 
subsection. ICC proposes to retain the use of sub-portfolios as is 
currently done today. However, the portfolio benefits across sub-
portfolios will be limited. This enhancement allows ICC to decompose 
portfolio level P/L at the sub-portfolio level and to estimate sub-
portfolio level risk measures.
    Under the proposed `Instrument P/L Estimations' subsection, ICC 
describes the calculation of instrument P/Ls. Namely, ICC will reprice 
all instruments

[[Page 35036]]

at the hypothetical spread and RR levels, which are derived from the 
simulated spread and RR scenarios, and take the difference between the 
prices of the instruments at the simulated scenarios and the current 
end-of-day (``EOD'') prices. ICC will utilize the instrument-related P/
L distribution to estimate the instrument-specific integrated spread 
response as the 99.5% VaR measure in the currency of the instrument.
    Under the proposed `RF P/L Estimations' subsection, ICC describes 
the calculation of RF P/Ls. ICC will utilize the simulated P/L 
scenarios, combined with the post-index-decomposition positions related 
to a given RF, to generate a currency-specific RF P/L distribution. ICC 
will utilize this RF-related P/L distribution to estimate the RF-
specific integrated spread response as the 99.5% VaR measure in the 
currency of the considered RF.
    Under the proposed `Common Currency Sub-Portfolio P/L Estimations' 
subsection, ICC describes the calculation of common currency sub-
portfolio P/Ls. For a currency specific sub-portfolio, ICC extracts the 
relevant risk measures from sub-portfolio level P/L distributions, 
which are obtained from the aggregation of common currency RF P/L 
distributions.
    Under the proposed `Multi-Currency Sub-Portfolio P/L Estimations' 
subsection, ICC adds clarifying language describing the calculation of 
multi-currency sub-portfolio P/Ls. ICC proposes to extend multi-
currency portfolio benefits to RFs with similar market characteristics, 
where the RFs and their respective instruments are denominated in 
different currencies. Under the proposed approach, long-short 
integrated spread response benefits are provided between Corporate RFs 
that are denominated in different currencies. ICC proposes to retain 
the multi-currency risk aggregation approach, which involves obtaining 
U.S. Dollar (``USD'') and Euro (``EUR'') denominated sub-portfolio P/L 
distributions, to RFs within the North American Corporate and European 
Corporate sub-portfolios denominated in USD and EUR currencies, 
respectively.
    ICC proposes to include its calculation for the portfolio level 
integrated spread response component in the `Portfolio level Integrated 
Spread Response' subsection. The calculation will include the sub-
portfolio-specific integrated spread response after any potential 
multicurrency benefits and the RF-specific integrated spread response. 
ICC proposes the new `RF Attributed Integrated Spread Response 
Requirements' subsection to describe the calculation of the RF 
attributed integrated spread response component for each RF in the 
considered portfolio.
    ICC proposes minor revisions to the `Anti-Procyclicality Measures' 
subsection to replace terminology associated with the stress-based 
approach with terminology associated with the Monte Carlo-based 
approach. ICC also proposes to update calculation descriptions relating 
to portfolio responses to note that certain amounts are converted to or 
represented in USD using the EOD established foreign exchange (``FX'') 
rate.
    ICC proposes updates to the `Multi-Currency Portfolio Treatment' 
section to incorporate the proposed integrated spread response 
component. ICC proposes to clarify that it implements a multi-currency 
portfolio treatment methodology for portfolios with instruments that 
are denominated in different currencies. The proposed changes also 
remove references to the current spread response component.
    ICC propose minor edits to the `Portfolio Loss Boundary Condition' 
section to remove or replace references to the current spread response 
and RR sensitivity response components with references to the proposed 
integrated spread response component within the text and within 
formulas to ensure consistency with the proposed `Spread and RR Risk 
Analysis' section, specifically the `Portfolio Level Integrated SR' 
subsection. Moreover, ICC proposes to reference, for clarity, the total 
number of RFs within the considered sub-portfolio in its calculations 
of the maximum portfolio loss and the maximum portfolio integrated 
spread response to ensure consistency with the proposed `Spread and RR 
Risk Analysis' section, specifically the `Portfolio Level Integrated 
SR' subsection.
    ICC proposes minor changes to the `Guaranty Fund (``GF'') 
Methodology' section. The proposed changes move the descriptions 
associated with the credit spread curve shape scenarios (i.e., Uniform 
Scaling, Pivoting, and Tenor Specific) from the current `Spread Risk 
Analysis' section to the `Unconditional Uncollateralized Exposures' 
subsection. Although the credit spread curve shape scenarios are 
currently considered as part of the spread response component, ICC 
proposes to only use them for GF purposes. The descriptions and 
calculations associated with the credit spread curve shape scenarios 
remain largely the same with some clarifying changes, including the 
substitution of a variable for the simulation quantile in the 
calculations to reflect consistency with the GF risk measure, and 
structural changes to the descriptions to enhance readability. 
Additionally, the proposed changes include reference to the integrated 
spread response in place of the spread response in the calculations 
describing the GF stress spread response.
    ICC proposes other non-material changes to the Risk Management 
Model Description Document, including minor grammatical, typographical, 
and structural changes to enhance readability and minor updates to 
calculations to update symbol notations.
Risk Management Framework
    ICC proposes conforming revisions to its Risk Management Framework 
to reflect the transition from a stress-based approach to a Monte 
Carlo-based methodology for the spread response and RR sensitivity 
response components of the Initial Margin model. The proposed revisions 
are described in detail as follows.
    ICC proposes changes to the `Waterfall Level 2: Initial Margin' 
section to combine the spread response and the RR sensitivity 
components into the proposed integrated spread response component. The 
proposed revisions introduce the integrated spread response component 
under the amended `Integrated Spread Response Requirements' section and 
replace all references to the spread response with references to the 
integrated spread response. ICC proposes conforming changes throughout 
the framework. Currently, the spread response component is obtained by 
estimating scenario P/L for a set of hypothetical ``tightening'' and 
``widening'' credit spread scenarios and by considering the largest 
loss. Under the proposed revisions, the integrated spread response will 
be computed by creating P/L distributions from a set of jointly-
simulated hypothetical (forward looking) credit spread and RR 
scenarios. The proposed changes provide an updated calculation of the 
instrument scenario P/L, note the mappings between spread and RR levels 
and prices are performed by means of the International Swap and 
Derivatives Association (``ISDA'') standard conversion convention, and 
specify that the hypothetical prices are forward looking. ICC also 
proposes to state that the integrated spread response approach assumes 
a distribution that describes the behavior of the RRs.
    ICC proposes the new `Index Decomposition Approach' subsection, 
which contains the analysis under the current `Index Decomposition 
Benefits between Index RFs and SN RSFs'

[[Page 35037]]

subsection without any material changes. ICC also proposes the new 
`Portfolio Approach' subsection to describe the Monte Carlo simulation 
framework, which replaces the current stress-based approach noted 
above. ICC proposes to utilize Monte Carlo techniques to generate 
spread and RR scenarios. ICC will utilize the simulated scenarios to 
derive hypothetical spread and RR levels, at which each instrument is 
repriced in order to generate a scenario instrument P/L based on post-
index-decomposition positions. For each scenario, instrument P/Ls are 
aggregated to obtain RF and sub-portfolio P/Ls, which represent the RF 
and sub-portfolio P/L distributions that are used to estimate the RF 
and sub-portfolio 99.5% VaR measures at a risk horizon that is at least 
5 days. The portfolio level integrated spread response is estimated as 
a weighted sum of RF and sub-portfolio 99.5% VaR measures. ICC also 
proposes to move its analysis related to achieving anti pro-cyclicality 
to the amended `Integrated Spread Response Requirements' section 
without any material changes.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \1\ requires, among other things, 
that the rules of a 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 which 
are in the custody or control of the clearing agency or for which it is 
responsible; and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule changes 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to ICC, in particular, to Section 
17(A)(b)(3)(F),\2\ because ICC believes that the proposed rule changes 
will promote the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions, and contribute to the safeguarding of securities and 
funds associated with security-based swap transactions in ICC's custody 
or control, or for which ICC is responsible. The transition to a Monte 
Carlo-based methodology rectifies certain limitations associated with 
the current stress-based approach, since Monte Carlo techniques allow 
ICC to consider a large set of scenarios to more appropriately capture 
portfolio risk, including the risk of more complex non-linear 
instruments, and produce consistent quantile-based portfolio risk 
measures. Moreover, the proposed transition to a Monte Carlo-based 
methodology enhances ICC's Initial Margin model since it provides a 
robust and flexible solution to assessing the risk of complex 
portfolios. As a result, ICC believes that it will be better able to 
capture portfolio risk and generate sound and efficient Initial Margin 
requirements, which would enhance the financial resources available to 
ICC and thus decrease the possibility that a default adversely impacts 
ICC's operations, thereby facilitating ICC's ability to promptly and 
accurately clear and settle its cleared CDS contracts and enhancing 
ICC's ability to assure the safeguarding of securities and funds which 
are in the custody or control of ICC or for which it is responsible. As 
such, the proposed rule changes are designed to promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions and to contribute 
to the safeguarding of securities and funds associated with security-
based swap transactions in ICC's custody or control, or for which ICC 
is responsible within the meaning of Section 17A(b)(3)(F) \3\ of the 
Act.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78q-1(b)(3)(F).
    \2\ Id.
    \3\ Id.
---------------------------------------------------------------------------

    The proposed rule change will also satisfy the requirements of Rule 
17Ad-22.\4\ Rule 17Ad-22(b)(2) \5\ requires ICC to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to use margin requirements to limit its credit 
exposures to participants under normal market conditions. ICC believes 
that the transition from a stress-based to a Monte Carlo-based 
methodology provides for a consistent and capital-efficient portfolio 
approach, which will improve ICC's ability to calculate margin 
requirements. An enhanced margin calculation will allow ICC to 
establish margin requirements that are better able to capture the risk 
of portfolios, including portfolios with more complex non-linear 
instruments, to ensure that ICC establishes margin requirements that 
are commensurate with the risks and characteristics of each portfolio, 
thereby improving ICC's ability to limit its credit exposures to 
participants under normal market conditions, consistent with the 
requirements of Rule 17Ad-22(b)(2).\6\
---------------------------------------------------------------------------

    \4\ 17 CFR 240.17Ad-22.
    \5\ 17 CFR 240.17Ad-22(b)(2).
    \6\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(b)(3) \7\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources to withstand, at a 
minimum, a default by the two Clearing Participant (``CP'') families to 
which it has the largest exposures in extreme but plausible market 
conditions. The utilization of Monte Carlo techniques will enhance the 
financial resources available to ICC by enhancing ICC's Initial Margin 
model such that ICC is better able to capture portfolio risk and 
generate stable and efficient Initial Margin requirements. As a result, 
the likelihood that a default adversely impacts ICC's operations 
lessens, allowing ICC to continue to ensure that it maintains 
sufficient financial resources to withstand, at a minimum, a default by 
the two CP families to which it has the largest exposures in extreme 
but plausible market conditions, consistent with the requirements of 
Rule 17Ad-22(b)(3).\8\
---------------------------------------------------------------------------

    \7\ 17 CFR 240.17Ad-22(b)(3).
    \8\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(d)(8) \9\ requires ICC to have governance arrangements 
that are clear and transparent to fulfill the public interest 
requirements in Section 17A of the Act.\10\ ICC's Risk Management 
Framework and Risk Management Model Description Document clearly assign 
and document responsibility and accountability for risk decisions and 
require consultation with or approval from the ICC Board, committees, 
or management. ICC determined to transition to a Monte Carlo-based 
methodology in accordance with its governance process, which included 
review of the changes to the Risk Management Framework and the Risk 
Management Model Description Document and related risk management 
considerations by the ICC Risk Committee and approval by the Board. 
These governance arrangements continue to be clear and transparent, 
such that information relating to the assignment of responsibilities 
for risk decisions and the requisite involvement of the ICC Board, 
committees, and management is clearly documented, consistent with the 
requirements of Rule 17Ad-22(d)(8).\11\
---------------------------------------------------------------------------

    \9\ 17 CFR 240.17Ad-22(d)(8).
    \10\ 15 U.S.C. 78q-1.
    \11\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

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

    ICC does not believe the proposed rule changes would have any 
impact, or impose any burden, on competition. The proposed changes to 
ICC's Risk Management Model Description Document and ICC's Risk 
Management Framework will apply uniformly across

[[Page 35038]]

all market participants. Therefore, ICC 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, Security-Based Swap Submission, or Advance Notice Received From 
Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change, Security-Based 
Swap Submission, or Advance Notice and Timing for Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission, or advance notice 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#1c6e697079317f7371717972686f5c6f797f327b736a"><span class="__cf_email__" data-cfemail="3b494e575e16585456565e554f487b485e58155c544d">[email protected]</span></a>. Please include 
File Number SR-ICC-2018-008 on the subject line.

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-ICC-2018-008. 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, security-based 
swap submission, or advance notice that are filed with the Commission, 
and all written communications relating to the proposed rule change, 
security-based swap submission, or advance notice 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 the 
filing also will be available for inspection and copying at the 
principal office of ICE Clear Credit and on ICE Clear Credit's website 
at https://www.theice.com/clear-credit/regulation. All comments 
received will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-ICC-2018-008 and should be submitted on 
or before August 14, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-15771 Filed 7-23-18; 8:45 am]
BILLING CODE 8011-01-P


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