[Federal Register Volume 89, Number 191 (Wednesday, October 2, 2024)]
[Notices]
[Pages 80285-80287]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-22563]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34-101196; File No. SR-ICC-2024-008]


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

September 26, 2024.

I. Introduction

    On July 30, 2024, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(2) of the Securities Exchange Act of 1934 (the ``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to amend its 
Back-Testing Framework (``BTF'').\3\ The proposed rule change was 
published for comment in the Federal Register on August 23, 2024.\4\ 
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\ ICC's Back-Testing Framework summarizes its formal 
statistical approach to determining whether its Value-at-Risk (VaR) 
model can reliably forecast risk.
    \4\ Securities Exchange Act Release No. 100679 (Aug. 8, 2024), 
89 FR 66154 (Aug. 14, 2024) (File No. SR-ICC-2024-008) (``Notice of 
Filing'').
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II. Description of the Proposed Rule Change

A. Background

    ICC is registered with the Commission as a clearing agency for the 
purpose of clearing Credit Default Swap (``CDS'') contracts.\5\ In 
addition to clearing CDS contracts, ICC also clears options to purchase 
index CDS contracts, which are also known as ``Index Swaptions.''
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    \5\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICC's BTF or Clearing Rules, as 
applicable.
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    As noted above, the proposed rule change would amend ICC's BTF. The 
BTF describes how ICC conducts back-testing and how ICC remediates poor 
back-testing results. The proposed rule change would amend ICC's BTF to 
(1) better describe how ICC treats its back-testing Index Swaption 
positions that expire in-the-money and within the margin period of risk 
(``MPOR''),\6\ and (2) make other updates and clarifications.
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    \6\ ``Margin-period-of-risk or `MPOR' is a maturity factor that 
is applied to reflect the length of exposure period over which the 
defaulted portfolio is exposed to changes in value.'' Securities 
Exchange Act Release No. 100008 (Apr. 22, 2024), 89 FR 32496 (Apr. 
26, 2024) (File No. SR-ICC-2024-003) (``Notice of Filing'').
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B. Index Swaption Positions

    ICC's proposed rule change would revise Subsection 2.4 (``Detailed 
Daily-Portfolio Back-Testing Results'') of the BTF to (1) add a 
description of ICC's treatment of expiring in-the-money and within-the-
MPOR Index Swaption positions, and (2) add an illustrative example in 
the form of a new Table 5.
1. Subsection 2.4: Description of Expiring In-the-Money Index Swaption 
Positions
    The proposed rule change would revise Subsection 2.4 to explain how 
ICC treats its back-testing Index Swaption positions that expire in-
the-money and within the MPOR. ICC proposes that when a particular 
portfolio contains Index Swaption positions that expire within the 
MPOR, ICC would replace the Mark-to-Market (``MTM'') values of the 
expired option positions with the corresponding Intrinsic Values 
(``IV''). In doing so, ICC would use the end-of-day (``EOD'') prices as 
of the given day that ICC is back-testing.
    In carrying out this process, ICC would use the following 
assumptions, as noted in the revised Subsection 2.4: \7\
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    \7\ Currently, the BTF assigns a standardized P/L value of $0.00 
to such positions.

    i. The IV is positive for a bought option position and negative 
for a sold option position that is in-the-money.
    ii. The option position with positive IV results in an option 
exercise on the expiration date and reflects the positive value to 
the option holder buying/selling the underling index position at the 
fixed strike price and selling/buying the underlying index position 
at the EOD-price for a profit.
    iii. The sold option position, with negative IV, results in the 
assignment of an underlying index position to the seller of the 
option on the expiration date.
    iv. The assigned underlying index position could be bought or 
sold protection depending on the type of sold option instrument.
    v. The unrealized P/L for the exercised/assigned option 
positions are computed against the underlying MTM value for all days 
after the CDS index option's expiration date.
2. Addition of Table 5 to Subsection 2.4
    The proposed rule change also would add to Subsection 2.4 a new 
Table 5, entitled ``Minimum 5-Day P/L Detail for Expiring Options 
Positions.'' Table 5 would provide an illustrative example of the back-
testing computation described in the BTF and the unrealized profit/loss 
(``P/L'') for an in-the-money Index Swaption position that expires 
within the MPOR.

[[Page 80286]]

C. Other Additions and Revisions to Table 3, Table 4, and Section 6

    In addition to the changes related to Index Swaption positions, the 
proposed rule change also would make updates and clarifications to 
other sections of the BTF. The proposed rule change would change 
references from ``P&L'' in Table 3 and Table 4 to ``P/L'' to 
consistently refer to ``profit or loss'' throughout the BTF. Moreover, 
the proposed rule change would update Section 6, ``Revision History,'' 
to reflect the revisions proposed herein. Finally, the proposed rule 
change would add a new footnote 1 in Subsection 1.1. This footnote 
would explain that the term ``Net Asset Value'' is also referred to and 
is equivalent to ``Mark-to-Market,'' as used in the BTF.

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\ Under the Commission's Rules of Practice, the ``burden 
to demonstrate that a proposed rule change is consistent with the 
Exchange Act and the rules and regulations issued thereunder . . . is 
on the self-regulatory organization [(``SRO'')] that proposed the rule 
change.'' \9\
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    \8\ 15 U.S.C. 78s(b)(2)(C).
    \9\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
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    The description of a proposed rule change, its purpose and 
operation, its effect, and a legal analysis of its consistency with 
applicable requirements, must all be sufficiently detailed and specific 
to support an affirmative Commission finding,\10\ and any failure of an 
SRO to provide this information may result in the Commission not having 
a sufficient basis to make an affirmative finding that a proposed rule 
change is consistent with the Exchange Act and the applicable rules and 
regulations.\11\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\12\
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    \10\ Id.
    \11\ Id.
    \12\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017) (``Susquehanna'').
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    After carefully considering the proposed rule change, the 
Commission finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to ICC. For the reasons given below, the 
Commission finds that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act \13\ and Rule 17Ad-22(e)(6)(vi)(A).\14\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
    \14\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
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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.\15\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
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    As noted above, the proposed rule change primarily would add to the 
BTF description of how ICC back-tests Index Swaptions positions that 
expire in-the-money within the MPOR. The proposed rule change also 
would ensure the consistent use of the term ``P/L'' and explain the 
equivalence of the terms ``Net Asset Value'' and ``Mark-to-Market.''
    The enhanced description of ICC's approach to back-testing Index 
Swaptions positions that expire in-the-money within the MPOR would 
strengthen ICC's back-testing by making the results a more accurate 
representation of potential P/L for such positions. Under the BTF as 
revised, ICC would calculate P/L for such positions, using the 
assumptions and process described above, rather than just assuming zero 
value for all as per the current practice.
    Consistent use of the term ``P/L'' and establishing the equivalence 
of the terms ``Net Asset Value'' and ``Mark-to-Market'' would also 
strengthen ICC's back-testing. The changes would help ensure the 
consistent and clear operation of the BTF by eliminating any potential 
confusion among the use of these terms. This should, in turn, help 
support the accuracy and reliability of ICC's back-testing.
    Thus, the proposed rule change would help ensure that ICC continues 
to reliably forecast risk and that its back-testing accurately verifies 
that the number of actual, observed losses is consistent with the 
number of projected losses. Because ICC uses back-testing to forecast 
and manage the risk associated with clearing Index Swaption 
transactions, these improvements to the BTF should help ICC avoid 
losses that could result from the mismanagement of such risk. Because 
such losses could disrupt ICC's ability to operate and thus clear and 
settle transactions, the Commission finds the proposed rule change 
would promote the prompt and accurate clearance and settlement of 
securities and derivative transactions.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\16\
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(6)(vi)(A) of the Act

    Rule 17Ad-22(e)(6)(vi)(A) requires ICC to establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum is monitored 
by management on an ongoing basis and is regularly reviewed, tested, 
and verified by conducting backtests of its margin model at least once 
each day using standard predetermined parameters and assumptions.\17\
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    \17\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
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    The proposed changes described above will enhance ICC's risk-based 
margin system by enhancing ICC's ability to calculate P/L more 
precisely for back-testing by factoring in accurate P/L values of ITM 
Index Swaption positions. This enhancement, along with the other 
changes detailed herein, will ensure that the predetermined parameters 
and assumptions (here, the BTF) that ICC management relies upon to 
regularly review, test, and verify its margin requirements are more 
accurate than the previous iteration of ICC's risk-based margin system.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(6)(vi)(A).\18\
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    \18\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
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IV. Conclusion

    Based on the foregoing, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and with the 
requirements of Section 17A(b)(3)(F) of the Act \19\ and Rule 17Ad-
22(e)(6)(vi)(A).\20\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ 17 CFR 240.17Ad-22(e)(6)(vi)(A).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\21\ that the proposed rule change (SR-ICC-2024-008), be, and hereby 
is, approved.\22\
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ 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).


[[Page 80287]]


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-22563 Filed 10-1-24; 8:45 am]
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