[Federal Register Volume 87, Number 115 (Wednesday, June 15, 2022)]
[Notices]
[Pages 36182-36188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-12842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95079; File No. SR-FICC-2022-004]


Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Amend the Stress Testing 
Framework and Liquidity Risk Management Framework

June 9, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 26, 2022, Fixed Income Clearing Corporation (``FICC'') filed 
with the

[[Page 36183]]

Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared by the clearing agency. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to (1) the Clearing 
Agency Stress Testing Framework (Market Risk) (``ST Framework'') and 
the Clearing Agency Liquidity Risk Management Framework (``LRM 
Framework,'' and, together with the ST Framework, the ``Frameworks'') 
of FICC and its affiliates, The Depository Trust Company (``DTC'') and 
National Securities Clearing Corporation (``NSCC,'' and together with 
FICC and DTC, the ``Clearing Agencies''), and (2) the Clearing Rules of 
the Mortgage-Backed Securities Division of FICC (``MBSD''), as 
described below.
    First, the proposed changes would amend both the ST Framework and 
the LRM Framework to move descriptions of the Clearing Agencies' 
liquidity stress testing activities from the LRM Framework to the ST 
Framework. In connection with this proposed change, the Clearing 
Agencies are also proposing to recategorize the stress scenarios used 
for liquidity risk management, such that all such stress scenarios are 
described as either regulatory or informational scenarios.
    Second, the proposed changes would amend the ST Framework to (1) 
enhance stress testing for the Government Securities Division of FICC 
(``GSD'') to obtain certain data utilized in stress testing from 
external vendors and implement a back-up stress testing calculation 
that would be utilized in the event such data is not supplied by its 
vendors, and amend the ST Framework to reflect these practices for both 
GSD and MBSD; (2) reflect that a stress testing team is primarily 
responsible for the actions described in the ST Framework, and (3) make 
other revisions to update and clarify the statements in the ST 
Framework, as further described below.
    Third, the proposed changes would amend the LRM Framework to update 
and clarify the statements in the LRM Framework, as further described 
below.
    Finally, the proposed changes would amend the Clearing Rules of 
MBSD (``MBSD Rules'') to remove disclosures regarding the stress 
testing program, which would be described in the ST Framework, as 
further described below.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

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

1. Purpose
    The Clearing Agencies adopted the ST Framework to set forth the 
manner in which they identify, measure, monitor, and manage their 
respective credit exposures to participants and those arising from 
their respective payment, clearing, and settlement processes by, for 
example, maintaining sufficient prefunded financial resources to cover 
its credit exposures to each participant fully with a high degree of 
confidence and testing the sufficiency of those prefunded financial 
resources through stress testing.\3\ In this way, the ST Framework 
describes the stress testing activities of each of the Clearing 
Agencies and how the Clearing Agencies meet the applicable requirements 
of Rule 17Ad-22(e)(4).\4\
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    \3\ Securities Exchange Act Release No. 82368 (December 19, 
2017), 82 FR 61082 (December 26, 2017) (SR-DTC-2017-005; SR-FICC-
2017-009; SR-NSCC-2017-006) (``Initial ST Framework Filing'').
    \4\ 17 CFR 240.17Ad-22(e)(4).
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    The Clearing Agencies adopted the LRM Framework to set forth the 
manner in which they measure, monitor and manage the liquidity risks 
that arise in or are borne by each of the Clearing Agencies by, for 
example, (1) maintaining sufficient liquid resources to effect same-day 
settlement of payment obligations with a high degree of confidence 
under a wide range of foreseeable stress scenarios that includes, but 
is not limited to, the default of the participant family that would 
generate the largest aggregate payment obligation for the Clearing 
Agency in extreme but plausible market conditions, and (2) determining 
the amount and regularly testing the sufficiency of qualifying liquid 
resources by conducting stress testing of those resources.\5\ In this 
way, the LRM Framework describes the liquidity risk management 
activities of each of the Clearing Agencies and how the Clearing 
Agencies meet the applicable requirements of Rule 17Ad-22(e)(7).\6\
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    \5\ Securities Exchange Act Release Nos. 82377 (December 21, 
2017), 82 FR 61617 (December 28, 2017) (File Nos. SR-DTC-2017-004; 
SR-FICC-2017-008; SR-NSCC-2017-005) (``Initial LRM Framework 
Filing'').
    \6\ 17 CFR 240.17Ad-22(e)(7).
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    The Clearing Agencies currently utilize vendor-supplied data in 
various aspects of the stress testing program for DTC, NSCC and MBSD. 
In 2020, in connection with enhancing stress testing for MBSD to 
utilize vendor-supplied data, FICC adopted changes to the MBSD Rules to 
describe the key components of the stress testing program.\7\ These 
disclosures are redundant of the descriptions of stress testing in the 
ST Framework and create a potential risk of having inconsistent 
statements regarding the Clearing Agencies' stress testing program.
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    \7\ See Securities Exchange Act Release No. 88382 (March 13, 
2020), 85 FR 15830 (March 19, 2020) (SR-FICC-2020-801) (``MBSD 
Stress Testing Filing'').
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    The Clearing Agencies are proposing changes to the Frameworks and 
the MBSD Rules, described below, that would (1) enhance GSD stress 
testing, (2) reorganize, update and clarify the statements and 
descriptions already set forth in the Frameworks and (3) move all 
descriptions of stress testing to the ST Framework. While the proposal 
would include certain enhancements to the GSD stress testing, the 
Clearing Agencies are not proposing any material changes to how they 
conduct stress testing, manage credit exposures and liquidity risks, or 
otherwise comply with the requirements of Rules 17Ad-22(e)(4) and 
(7).\8\
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    \8\ 17 CFR 240.17Ad-22(e)(4) and (7).
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    First, the proposed rule change would amend both the ST Framework 
and the LRM Framework to move descriptions of the Clearing Agencies' 
liquidity stress testing activities, which are designed to comply with 
the requirements of Rule 17Ad-22(e)(7)(vi),\9\ from the LRM Framework 
to the ST Framework. In connection with this proposed change, the 
Clearing Agencies are also proposing to recategorize the liquidity 
stress scenarios by removing the Level 1, Level 2 and Level 3 labels 
and instead categorizing all stress scenarios as either regulatory or 
informational. As described in greater detail below, this proposed 
change is a change only to the categorization of these stress scenarios 
and is not a change to how the Clearing Agencies conduct liquidity 
stress testing

[[Page 36184]]

or otherwise meet the requirements of Rule 17Ad-22(e)(7)(vi)(A).\10\
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    \9\ 17 CFR 240.17Ad-22(e)(7)(vi).
    \10\ 17 CFR 240.17Ad-22(e)(7)(vi)(A).
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    Second, the proposed changes would amend the ST Framework to (1) 
enhance stress testing for GSD to obtain certain data utilized in 
stress testing from external vendors and implement a back-up stress 
testing calculation that would be utilized in the event such data is 
not supplied by its vendors, and amend the ST Framework to reflect 
these practices for both GSD and MBSD; (2) reflect that a stress 
testing team is primarily responsible for the actions described in the 
ST Framework, and (3) make other revisions to update and clarify the 
statements in the ST Framework, as further described below.
    Third, the proposed changes would amend the LRM Framework to update 
and clarify the statements in the LRM Framework, as further described 
below.
    Finally, the proposed changes would amend the MBSD Rules to remove 
disclosures regarding the stress testing program, as further described 
below.
i. Proposed Amendments To Move Activities Related to Stress Testing 
Qualifying Liquid Resources From the LRM Framework to the ST Framework
    First, the proposed changes would amend both the ST Framework and 
the LRM Framework to move descriptions of the Clearing Agencies' 
liquidity stress testing activities, which are designed to comply with 
the requirements of Rule 17Ad-22(e)(7)(vi),\11\ from the LRM Framework 
to the ST Framework. These activities are primarily performed by the 
Stress Testing Team within the Group Chief Risk Office of DTCC 
(``GCRO''), which includes members of the Market Risk Management and 
the Liquidity Risk Management groups within the GCRO.\12\ The Stress 
Testing Team, which was previously responsible for stress testing the 
Clearing Agencies' prefunded financial resources, as part of the market 
risk management function, took over stress testing of the Clearing 
Agencies liquidity resources related to liquidity risk management in 
order to centralize stress testing activities and related 
responsibilities under one team. By moving the description of the 
Clearing Agencies' liquidity stress testing activities into the ST 
Framework, the proposed change would create a clearer, simpler 
description of the Clearing Agencies' collective stress testing 
activities in one document and would reflect the consolidation of these 
activities under the Stress Testing Team.
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    \11\ 17 CFR 240.17Ad-22(e)(7)(vi).
    \12\ The parent company of the Clearing Agencies is The 
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on 
a shared services model with respect to the Clearing Agencies and 
its other subsidiaries. Most corporate functions are established and 
managed on an enterprise-wide basis pursuant to intercompany 
agreements under which it is generally DTCC that provides a relevant 
service to a subsidiary, including the Clearing Agencies.
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    In order to implement this proposed change, a number of drafting 
changes are being proposed to both the ST Framework and the LRM 
Framework. First, Section 1 (Executive Summary) and Section 4 
(Liquidity Risk Management Regulatory Requirements) of the LRM 
Framework would be amended to make clear that compliance with the 
requirements of Rule 17Ad-22(e)(7)(vi) are not addressed in that 
document, and are addressed in the ST Framework. Section 2 (Glossary of 
Key Terms) of the LRM Framework would also be amended to include 
definitions of ``Clearing Agency Stress Testing Framework'' and the 
``Stress Testing Team,'' and to remove the definition of the Enterprise 
Stress Testing Council, which is an internal forum that addresses 
stress testing matters. Finally, Section 6 (Liquidity Risk Management) 
of the LRM Framework would be amended to describe at a high-level the 
activities related to stress testing of the Clearing Agencies' 
qualifying liquid resources and to state that these activities are 
described in greater detail in the ST Framework.
    The proposed change would also require revisions throughout the ST 
Framework to include descriptions of liquidity stress testing 
activities that support the Clearing Agencies' compliance with the 
requirements of Rule 17Ad-22(e)(7)(vi) within the existing sections of 
the ST Framework. These proposed changes would include revisions to 
Section 1 (Executive Summary) of the ST Framework to clarify that 
stress testing related to liquidity risk management is described in 
this document, and revisions to Section 2 (Glossary of Key Terms) to 
include definitions related to these activities. These definitions 
would include the Liquidity Risk Management group within GCRO and a 
Clearing Agency Liquidity Risk Management Framework. Section 4 of the 
ST Framework would be renamed ``Stress Testing Requirements'' and would 
be amended to make clearer which requirements in Rules 17Ad-22(e)(4) 
and (7) are addressed in the ST Framework, and to identify the 
documents where the requirements not addressed in the ST Framework are 
addressed.
    The proposed changes to the ST Framework would create a new Section 
6, which would be named ``Qualifying Liquid Resources--Liquidity Risk 
Management,'' to describe at a high-level how each of the Clearing 
Agencies determine the amount and regularly test the sufficiency of 
their respective qualifying liquid resources. This new section would 
include language that is substantially identical to language that would 
be removed from Section 6 (Liquidity Risk Management) of the LRM 
Framework.
    The new Section 7 (Stress Testing Methodologies) (previously 
numbered Section 6) of the ST Framework would be updated to include 
descriptions of the methodologies used in liquidity stress testing. 
Such methodologies would not change substantively, and the language 
used in the revisions to this section would be substantively identical 
to language that would be removed from Section 6 (Liquidity Risk 
Management) of the LRM Framework. As described in greater detail below, 
the Clearing Agencies are proposing to revise the categorization of the 
liquidity stress scenarios, and those revisions would be reflected in 
this Section 7 of the ST Framework.
    Finally, the new Section 8 of the ST Framework (previously numbered 
Section 7), which would be renamed ``Stress Testing Governance and 
Escalation Procedures,'' would be amended to include matters related to 
liquidity stress testing. More specifically, the new Section 8.1 would 
address governance and oversight of stress testing, which is set forth 
in a number of internal documents, and overseen by a stress testing 
committee, the Management Risk Committee and the Risk Committee of the 
Board of Directors of the Clearing Agencies. The new Section 8.2 would 
describe the daily monitoring for threshold breaches and liquidity 
shortfalls, and the escalations and actions that would follow those 
breaches. More specifically, the Clearing Agencies monitor for breaches 
of a ``Cover One Ratio,'' which is defined as the ratio of a family of 
affiliated Members' deficiency over the total value of the applicable 
Clearing Agencies' Clearing Fund or Participants Fund, excluding the 
sum value of the applicable family's required deposit to the Clearing 
Fund or Participants Fund, as applicable. With respect to liquidity 
stress testing, the Clearing Agencies monitor daily for liquidity 
shortfalls, which trigger a series of escalations and remediation 
actions, which would be identified in this new Section 8.2.
    The new Section 8.3 would address comprehensive analyses of stress 
scenarios, which occur on at least a monthly basis and are designed to 
comply with the requirements of Rules

[[Page 36185]]

17Ad-22(e)(4)(vi)(B) and (C), and (7)(vi)(B) and (C). These analyses 
include (1) daily stress testing results, model parameters, model 
assumptions, and model performance, and (2) each stress scenario set 
for its comprehensiveness and relevance, including any changes or 
updates to such scenarios for the period. The new Section 8.4 would 
address the escalations and reporting of the monthly analyses of stress 
scenarios, which are designed to comply with the requirements of Rules 
17Ad-22(e)(4)(vi)(D) and (7)(vi)(D). Finally, the new Section 8.5 would 
address the regular escalation of the results of stress testing, 
including any concerns related to those results, which are also 
designed to comply with Rules 17Ad-22(e)(4)(vi)(D) and (7)(vi)(D).
    Each of these subsections would address stress testing related to 
market risk, using language that is currently in the ST Framework, and 
would include language to address liquidity stress testing that would 
be substantially similar to the language removed from the LRM 
Framework. Revisions to the language removed from the LRM Framework 
would be primarily drafting revisions, as the Clearing Agencies are not 
proposing changes to how they conduct liquidity stress testing.
ii. Proposed Amendments To Re-Categorize the Stress Scenarios Used for 
Liquidity Stress Testing
    In connection with the changes described above, the proposed 
amendments would also reflect the recategorization of liquidity stress 
scenarios. Previously, liquidity stress scenarios were categorized as 
Level 1, 2 and 3 scenarios. Level 1 scenarios described qualifying 
liquid resources under normal market conditions and were considered 
``baseline'' scenarios. Level 2 scenarios assumed a wide range of 
foreseeable stress scenarios that included, but were not limited to, 
the default of the family of affiliated Members that would generate the 
largest aggregate payment obligation for each Clearing Agency in 
extreme but plausible market conditions. These scenarios were designed 
to identify the qualifying liquid resources each Clearing Agency should 
maintain to meet compliance with Rule 17Ad-22(e)(7)(i). Finally, the 
Level 3 scenarios were divided into either (1) regulatory scenarios, 
which were designed to meet the requirements of Rule 17Ad-
22(e)(7)(vi)(A), and (2) informational scenarios, which were designed 
to be performed for informational and monitoring purposes using stress 
scenarios that exceed the requirements of Rule 17Ad-22(e)(7)(vi)(A).
    While the Clearing Agencies continue to maintain a wide range of 
stress scenarios that are designed to comply with the requirements of 
Rules 17Ad-22(e)(7), in order to simplify the descriptions of its 
liquidity stress scenarios and align them with the categorization of 
market risk stress scenarios, the Clearing Agencies have re-categorized 
the liquidity stress scenarios and eliminated the Level 1, Level 2 and 
Level 3 categories. Instead, all stress scenarios would be described in 
Section 6 of the ST Framework as being either (1) regulatory stress 
scenarios, which are designed to comply with the requirements of Rules 
17Ad-22(e)(4)(i) and (vi)(A), and Rules 17Ad-22(e)(7)(i) and (vi)(A); 
or (2) informational stress scenarios, which may utilize parameters and 
assumptions that exceed the requirements of Rules 17Ad-22(e)(4)(vi)(A) 
and (7)(vi)(A) and are utilized for informational, analytical and/or 
monitoring purposes only.
iii. Proposed Amendments to the ST Framework
    The proposed changes would amend the ST Framework to (1) enhance 
stress testing for GSD to obtain certain data utilized in stress 
testing from external vendors and implement a back-up stress testing 
calculation that would be utilized in the event such data is not 
supplied by its vendors, and amend the ST Framework to reflect these 
practices for both GSD and MBSD; (2) reflect that a stress testing team 
is primarily responsible for the actions described in the ST Framework, 
and (3) make other revisions to update and clarify the statements in 
the ST Framework, as further described below.
1. Enhance GSD Stress Testing To Use Vendor-Sourced Data
    First, the proposed changes would enhance GSD stress testing to 
utilize vendor-supplied historical risk factor time series data 
(``Historical Data'') and vendor-supplied security-level risk 
sensitivity data (``Security-Level Data'') in the stress testing 
program. This proposed enhancement would be similar to the approach 
utilized in MBSD stress testing.\13\
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    \13\ See supra note 7.
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    The vendor-sourced Historical Data would include data regarding (1) 
interest rate, (2) implied inflation rate, (3) agency spread, (4) 
mortgage option adjusted spread, (5) interest rate volatility, and (6) 
mortgage basis. The vendor-sourced Security-Level Data would include 
data regarding (1) sensitivity to interest rates, (2) implied inflation 
rate, (3) agency spread, (4) convexity, (5) sensitivity to mortgage 
option adjusted spread, (6) sensitivity to interest rate volatility, 
and (7) sensitivity to mortgage basis. FICC currently utilizes the 
Historical Data and Security-Level Data in GSD's value-at-risk 
(``VaR'') model, which calculates the VaR Charge component of GSD's 
Clearing Fund (referred to in the GSD Rulebook as Required Fund 
Deposit).\14\ FICC would use this same data set in GSD's stress testing 
program.
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    \14\ GSD Rulebook, available at https://www.dtcc.com/~/media/
Files/Downloads/legal/rules/ficc_gov_rules.pdf.
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    As described in greater detail in the ST Framework,\15\ stress 
testing involves three key components: (1) risk identification, (2) 
scenario development, which involves the construction of comprehensive 
and relevant sets of extreme but plausible historical and hypothetical 
stress scenarios; and (3) risk measurement and aggregation, in which 
risk metrics are calculated to estimate the profits and losses in 
connection with the hypothetical close out of a participant's portfolio 
in certain stress scenarios.
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    \15\ These key components of stress testing are also described 
in the Initial ST Framework Filing. See supra note 3.
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    FICC would utilize the vendor-sourced data in the development of 
historical stress scenarios and in the risk measurement and aggregation 
process of the GSD stress testing program. More specifically, the 
Historical Data would be used to identify the largest historical 
changes of risk factors that influence the pricing of product cleared 
by GSD, in connection with the development of stress scenarios. The 
vendor-sourced Historical Data would identify stress risk exposures 
under broader and more varied market conditions than the data currently 
available to FICC.
    FICC would utilize both the Historical Data and the Security-Level 
Data in the risk measurement and aggregation process of stress testing. 
FICC believes that the vendor-sourced Security-Level Data is more 
stable and robust than the data currently utilized by FICC for GSD 
stress testing. Because the stress profits and losses calculation that 
occur in connection with the risk measurement and aggregation process 
in stress testing would include Security-Level Data, FICC believes that 
the calculated results would be improved and would reflect results that 
are closer to actual price changes for government securities during 
larger market moves which are typical of stress testing scenarios.
    Finally, the proposed changes to enhance GSD stress testing would 
also

[[Page 36186]]

implement a back-up calculation that GSD would utilize in the event 
that the vendor fails to provide such data to GSD. Specifically, if the 
vendor fails to provide any data or a significant portion of data in 
accordance with the timeframes agreed to by FICC and the vendor, FICC 
would use the most recently available data on the first day that such 
disruption occurs in its stress testing calculations. Subject to 
discussions with the vendor, if FICC determines that the vendor would 
resume providing data within five (5) Business Days, FICC would 
determine whether the daily stress testing calculation should continue 
to be calculated by using the most recently available data or whether 
the back-up calculation (as described below) should be invoked. Subject 
to discussions with the vendor, if FICC determines that the data 
disruption would extend beyond five (5) Business Days, the back-up 
calculation would be employed for daily stress testing, subject to 
appropriate internal governance.
    The proposed back-up calculation would include the following 
calculations: (1) calculate each Netting Member's portfolio net 
exposures, (2) calculate the historical stress return, and (3) 
calculate each Netting Member's stress profits and losses. FICC would 
use publicly available indices as the data source for the stress return 
calculations. This calculation would be referred to as the Back-up 
Stress Testing Calculation in the ST Framework.
    The Clearing Agencies would describe the use of vendor-sourced data 
in stress testing for GSD and MBSD and the Back-up Stress Testing 
Calculation, as described above, in a new Section 7.1 of the ST 
Framework.
2. Identify the Stress Testing Team as Responsible for Stress Testing
    As described above, stress testing for the Clearing Agencies is 
primarily performed by the Stress Testing Team, which includes members 
of both Market Risk Management and Liquidity Risk Management of DTCC 
within GCRO. The Stress Testing Team took over stress testing 
responsibilities related to liquidity risk management in late 2019 to 
centralize stress testing and related responsibilities under one team.
    Therefore, the Clearing Agencies are proposing to include a general 
statement in Section 1 (Executive Summary) of the ST Framework that, 
unless otherwise specified, actions in the ST Framework related to 
stress testing are performed by the Stress Testing Team. The proposed 
changes would also amend Section 3 (Framework Ownership and Change 
Management) of the ST Framework to make it clear that the Stress 
Testing Team owns and manages the ST Framework and is responsible for 
reviewing the ST Framework no less frequently than annually.
    In connection with this proposed change, the ST Framework would 
also be updated to describe actions related to stress testing without 
specifically identifying the group responsible for those actions. These 
proposed changes would simplify the descriptions in the ST Framework, 
while clarifying the team responsible for conducting these actions in a 
general statement in the ST Framework.
3. Update and Clarify the ST Framework
    Finally, the proposed changes would also make immaterial revisions 
to update and clarify the ST Framework. For example, the proposed 
changes would update the names of certain documents that support the ST 
Framework to refer to the Clearing Agencies, rather than DTCC, in the 
document titles. These documents were renamed to conform to internal 
document naming conventions. The proposed changes would also amend 
Section 2 (Glossary of Key Terms) of the ST Framework to clarify and 
simplify the use of certain key terms. For example, the proposed 
changes would move the definitions of ``Members'' and ``Participants'' 
from a footnote in Section 4 to this Section 2, and would update the 
definition of ``BRC,'' which refers to the Risk Committee of the Boards 
of Directors of the Clearing Agency, to be more descriptive.
    The proposed amendments would update Section 4 (Stress Testing 
Requirements) of the ST Framework to (1) more clearly state which 
requirements under Rules 17Ad-22(e)(4) and (7) are addressed in the ST 
Framework, (2) identify the separate documents that describe the 
requirements that are not addressed in the ST Framework, and (3) 
identify the requirements that are not applicable to the Clearing 
Agencies and, therefore, not described in any document.
    Finally, the proposed change would also revise the description of 
reverse stress testing to more clearly describe the goal and purpose of 
this testing.\16\ Specifically, reverse stress testing is used to 
identify tail risks by using extreme stress scenarios. In this way, 
reverse stress testing, which is conducting semi-annually, can be used 
to inform regular stress testing activities. The proposed changes would 
provide more transparency into the purpose of reverse stress testing 
conducted by the Clearing Agencies.
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    \16\ Tail risk generally refers to risks of outcomes that are 
caused by extreme or rare events.
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    None of these proposed changes would make substantive revisions to 
the ST Framework or reflect material changes to how the Clearing 
Agencies conduct the activities described in the ST Framework but would 
update and clarify those descriptions.
iv. Proposed Amendments To Update and Clarify the LRM Framework
    In addition to removing descriptions of stress testing activities 
from the LRM Framework, the proposed changes would also make immaterial 
revisions to update and clarify the LRM Framework. For example, the 
proposed changes would update the name of the team within the GCRO that 
is responsible for liquidity risk management from the Liquidity Product 
Risk Unit, or LPRU, to Liquidity Risk Management. This proposed change 
would reflect a recent organizational change to the name of this group.
    Additionally, the proposed changes would update Section 10 
(Liquidity Risk Tolerances) of the LRM Framework to state that an 
officer in Liquidity Risk Management is responsible for reviewing the 
Liquidity Risk Tolerance Statement.\17\ The LRM Framework currently 
identifies the specific title of the individual who is responsible for 
reviewing the Liquidity Risk Tolerance Statement on at least an annual 
basis. The proposed change would provide the Clearing Agencies with 
flexibility to change the title of the person responsible for this 
review.
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    \17\ The Liquidity Risk Tolerance Statement is liquidity risk 
management control that, among other things, (1) defines liquidity 
risk and describes how liquidity risk would materialize for each 
Clearing Agency specifically, (2) sets forth how liquidity risk is 
monitored by the Clearing Agencies, and (3) describes the various 
risk tolerance levels and thresholds for each the Clearing Agency.
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v. Proposed Amendments to MBSD Rules To Remove Stress Testing 
Descriptions
    Finally, the proposed rule change would remove descriptions of 
stress testing from the MBSD Rules, which would be duplicative of 
statements added to the ST Framework, described above. The Clearing 
Agencies do not believe that it is necessary to describe its stress 
testing program in multiple places in its rules, and that duplicative 
disclosures create a risk of inconsistencies. The ST Framework was 
designed to, among other things, describe the manner in which the 
Clearing Agencies test the sufficiency of their respective prefunded 
financial resources through stress testing and,

[[Page 36187]]

therefore, the Clearing Agencies believe this is the appropriate rule 
for these disclosures.
    As such, the proposed change would remove the duplicative 
descriptions of the MBSD stress testing program from the MBSD Rules by 
deleting the definition of ``Back-up Stress Testing Calculation'' from 
MBSD Rule 1 and Section 13 of MBSD Rule 4. As described above, the 
matters being removed from the MBSD Rules in this proposal would be 
addressed in the ST Framework.
vi. Implementation Timeframe
    Subject to approval by the Commission, the proposal to enhance GSD 
stress testing to use vendor-sourced data and the proposal to remove 
descriptions of stress testing from the MBSD Rules would be implemented 
no later than November 30, 2022. The remaining proposals would be 
implemented upon approval by the Commission.
2. Statutory Basis
    The Clearing Agencies believe that the proposed changes are 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. In 
particular, the Clearing Agencies believe that the proposed changes are 
consistent with Section 17A(b)(3)(F) of the Act,\18\ and Rule 17Ad-
22(e)(4) under the Act,\19\ for the reasons described below.
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
    \19\ 17 CFR 240.17Ad-22(e)(4).
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    Section 17A(b)(3)(F) of the Act requires, in part, that the rules 
of a registered clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, and 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, for the reasons described below.\20\ As described above, 
the proposed changes would (1) amend both the ST Framework and the LRM 
Framework to move the descriptions of liquidity stress testing from the 
LRM Framework to the ST Framework; (2) simplify the categorization of 
the liquidity stress scenarios; (3) amend the ST Framework to reflect 
that the Stress Testing Team is primarily responsible for stress 
testing activities; (4) update and clarify descriptions within the ST 
Framework; and (5) update and clarify descriptions within the LRM 
Framework, as described above.
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    \20\ Id.
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    The ST Framework currently describes how each of the Clearing 
Agencies carry out a market risk management strategy to maintain 
sufficient prefunded financial resources to cover fully its exposures 
to each participant fully with a high degree of confidence. As such, 
the market risk management strategy of the Clearing Agencies addresses 
their respective market risk exposures and allows them to continue the 
prompt and accurate clearance and settlement of securities and can 
continue to assure the safeguarding of securities and funds which are 
in their custody or control or for which they are responsible 
notwithstanding those risks.
    The LRM Framework describes how each of the Clearing Agencies carry 
out its liquidity risk management strategy such that, with respect to 
FICC and NSCC, they maintain liquid resources sufficient to meet the 
potential amount of funding required to settle outstanding transactions 
of a defaulting participant or family of affiliated participants in a 
timely manner, and with respect to DTC, it maintains sufficient 
available liquid resources to complete system-wide settlement on each 
business day, with a high degree of confidence and notwithstanding the 
failure to settle of the participant or affiliated family of 
participants with the largest settlement obligation. As such, the 
Clearing Agencies' liquidity risk management strategies address the 
Clearing Agencies' maintenance of sufficient liquid resources, which 
allow them to continue the prompt and accurate clearance and settlement 
of securities and can continue to assure the safeguarding of securities 
and funds which are in their custody or control or for which they are 
responsible notwithstanding the default of a participant or family of 
affiliated participants.
    The proposed changes to reorganize the Frameworks, simplify the 
categorization of stress scenarios, and make other updates to improve 
the clarity and accuracy of the descriptions within the Frameworks, as 
described in this filing, would assist the Clearing Agencies in 
carrying out their stress testing and liquidity risk management 
functions. Therefore, the Clearing Agencies believe the proposed 
changes are consistent with the requirements of Section 17A(b)(3)(F) of 
the Act.\21\
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    \21\ Id.
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    The proposal to enhance the GSD stress testing to utilize vendor-
sourced data and implement a back-up stress testing calculation is 
designed to be consistent with Rule 17Ad-22(e)(4) under the Act, which 
requires, in part, that a covered clearing agency establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes.\22\ Rule 17Ad-22(e)(4)(i) under the 
Act requires that a covered clearing agency maintain sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence.\23\
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    \22\ 17 CFR 240.17Ad-22(e)(4).
    \23\ 17 CFR 240.17Ad-22(e)(4)(i).
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    FICC believes that the proposal to utilize Historical Data in the 
development of historical stress scenarios would incorporate a broad 
range of risk factors that enables GSD's model to better understand a 
Member's exposure to these risk factors. FICC also believes that the 
proposal to utilize Historical Data and Security-Level Data in the 
calculation of stress profits and losses for Members' portfolios would 
provide for calculated amounts that are closer to actual price changes 
for securities cleared at GSD during larger market moves in an effort 
to test the adequacy of GSD's prefunded resources. Lastly, FICC 
believes that the proposal to use a back-up calculation would help to 
ensure that FICC has a methodology in place that allows it to continue 
to measure the adequacy of GSD's prefunded financial resources in the 
event that the vendor fails to provide data. For these reasons, FICC 
believes that the proposed changes to utilize the vendor-sourced 
Historical Data and Security-Level Data in GSD stress testing would 
improve GSD's stress testing program, which is used to test the 
sufficiency of GSD's prefunded resources daily to support compliance 
with Rule 17Ad-22(e)(4)(i).
    Furthermore, the proposal to adopt a back-up stress testing 
calculation in circumstances when the vendor-sourced data is 
unavailable would support GSD's stress testing program by ensuring that 
the program utilizes a predetermined calculation in the event of a 
disruption to its data source.
    As such, FICC believes that these proposed changes are designed to 
be consistent with the requirements of Rule 17Ad-22(e)(4)(i) under the 
Act.\24\
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    \24\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    The Clearing Agencies do not believe the proposed changes to the 
Frameworks described above would have any impact, or impose any burden,

[[Page 36188]]

on competition. As described above, the proposed changes would 
reorganize the Frameworks to improve the clarity regarding the Clearing 
Agencies' stress testing activities and would make other updates and 
enhancements that would improve the clarity and accuracy of the 
descriptions of the Clearing Agencies' stress testing and liquidity 
risk management functions. Therefore, the proposed changes are 
technical and non-material in nature, relating mostly to the operation 
of the Frameworks rather than the risk management functions described 
therein.
    Further, the proposed changes to enhance GSD stress testing to 
utilize vendor-sourced data and establish a back-up stress testing 
calculation would not have any impact, or impose any burden, on 
competition because this proposal does not affect the respective rights 
or obligations of Members that utilize GSD's services.
    As such, the Clearing Agencies do not believe that the proposed 
rule changes would have any impact on competition.

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

    The Clearing Agencies have not received or solicited any written 
comments relating to this proposal. If any written comments are 
received, they will be publicly filed as an Exhibit 2 to this filing, 
as required by Form 19b-4 and the General Instructions thereto.
    Persons submitting comments are cautioned that, according to 
Section IV (Solicitation of Comments) of the Exhibit 1A in the General 
Instructions to Form 19b-4, the Commission does not edit personal 
identifying information from comment submissions. Commenters should 
submit only information that they wish to make available publicly, 
including their name, email address, and any other identifying 
information.
    All prospective commenters should follow the Commission's 
instructions on how to submit comments, available at https://www.sec.gov/regulatory-actions/how-to-submit-comments. General 
questions regarding the rule filing process or logistical questions 
regarding this filing should be directed to the Main Office of the 
SEC's Division of Trading and Markets at <a href="/cdn-cgi/l/email-protection#f88c8a999c91969f99969c95998a939d8c8bb88b9d9bd69f978e"><span class="__cf_email__" data-cfemail="0f7b7d6e6b6661686e616b626e7d646a7b7c4f7c6a6c21686079">[email protected]</span></a> or 
202-551-5777.
    The Clearing Agencies reserve the right to not respond to any 
comments received.

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

    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 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#fa888f969fd7999597979f948e89ba899f99d49d958c"><span class="__cf_email__" data-cfemail="e391968f86ce808c8e8e868d9790a3908680cd848c95">[email protected]</span></a>. Please include 
File Number SR-FICC-2022-004 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.

All submissions should refer to File Number SR-FICC-2022-004. 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 the filing also will be available for inspection 
and copying at the principal office of FICC and on DTCC's website 
(http://dtcc.com/legal/sec-rule-filings.aspx). All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FICC-2022-004 and should be submitted on 
or before July 6, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-12842 Filed 6-14-22; 8:45 am]
BILLING CODE 8011-01-P


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