[Federal Register Volume 80, Number 6 (Friday, January 9, 2015)]
[Notices]
[Pages 1466-1468]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00126]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73980; File No. SR-ICC-2014-24]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change To Revise the ICC Risk Management 
Framework

January 5, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 22, 2014, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which Items have been 
prepared primarily by ICC. 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. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The principal purpose of the proposed rule change is to revise the 
ICC Risk Management Framework to incorporate certain risk model 
enhancements. These revisions do not require any changes to the ICC 
Clearing Rules (``Rules'').

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICC 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. ICC has prepared summaries, set forth in sections A, B 
and C below, of the most significant aspects of these statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    ICC proposes revising the ICC Risk Management Framework to 
incorporate risk model enhancements related to Recovery Rate 
Sensitivity Requirements (``RRSR''), anti-procyclicality, and ICC's 
Guaranty Fund (``GF'') allocation methodology. ICC also proposes 
revisions which are intended to remove obsolete references and ensure

[[Page 1467]]

consistency. 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.
    ICC proposes revising its Risk Management Framework to incorporate 
risk model parameter estimation enhancements related to the RRSR 
computations. Under the current ICC Risk Management Framework, recovery 
rate stress scenarios are explicitly incorporated in the RRSR 
computations and for Jump-to-Default (``JTD'') considerations. The 
quantity RRSR is designed to capture fluctuations due to potential 
changes of the market expected recovery rates. In calculating the RRSR, 
all instruments belonging to a Risk Factor (``RF'') or Risk Sub-Factor 
(``RSF'') are subjected to Recovery Rate (``RR'') stress scenarios to 
obtain resulting Profit/Loss (``P/L'') responses, and the worst 
scenario response is chosen for the estimation of the RF/RSF RRSR. The 
JTD analysis is designed to capture the unexpected potential losses 
associated with credit events for assumed SN-specific set of RR stress 
values. The JTD responses are determined by using minimum and maximum 
RR levels. Currently, the RRSR and JTD computations use the same RR 
stress levels.
    ICC proposes separating the RR stress levels for these two 
computations in order to introduce more dynamic and appropriate 
estimations of the RR stress levels for RRSR purposes. The RR levels 
for RRSR purposes will reflect a 5-day 99% Expected Shortfall (``ES'') 
equivalent risk measure associated with RR fluctuations. The proposal 
will also eliminate index RRSR, as index RRs are not subject to market 
uncertainty, but rather driven by market conventions. The dynamic 
feature of the RR stress level estimations is achieved by analyzing 
historical time series of RRs in order to calibrate a statistical model 
with a time varying volatility. Under this approach, the RRSR will 
capture the exposure to RR fluctuations over a 5-day risk horizon 
described by 99% ES equivalent risk measure. The proposed enhancements 
provide a robust and quantitative driven approach for establishing the 
RR stress scenarios.
    Additionally, ICC proposes revising its Risk Management Framework 
to incorporate a portfolio level anti-procyclicality analysis that 
features price changes observed during and immediately after the Lehman 
Brothers (``LB'') default. In order to achieve an anti-procyclicality 
of Spread Response requirements, ICC proposes considerations of 
explicit price scenarios derived from the greatest price decrease and 
increase during and immediately after the LB default. These scenarios 
capture the default of a major participant in the credit market and the 
market response to the event. The introduced scenarios are defined in 
price space to maintain the stress severity during periods of low 
credit spread levels (high price) when the Spread Response 
requirements, computed under the current framework, are expected to be 
lower.
    Further, the price scenarios, derived from the greatest price 
decrease and increase during and immediately after the LB default, are 
explicitly incorporated into the GF sizing to ensure an anti-
procyclical GF size behavior. This enhancement also addresses a 
regulatory requirement as described in Article 30 of the Regulatory 
Technical Standards,\3\ European Market Infrastructure Regulations 
(``EMIR'').
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    \3\ Commission Delegated Regulation (EU) No. 153/2013 of 19 
December 2012 Supplementing Regulation (EU) No. 648/2012 of the 
European Parliament and of the Council with regard to Regulatory 
Technical Standards on Requirements for Central Counterparties (the 
``Regulatory Technical Standards'').
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    Furthermore, ICC proposes enhancements to its GF allocation 
methodology. Currently, the GF allocations reflect a risk ``silo'' 
approach, i.e. separate GF ``silo'' components reflecting the Clearing 
Participants' (``CPs'') own ``silo'' riskiness and to the GF ``silo'' 
size. Under the current approach, GF allocations can significantly 
fluctuate in response to position changes in the portfolios of the CPs 
that drive the GF size, and in response to distribution of the total GF 
size across the GF ``silos.'' ICC proposes modifying its methodology, 
so that the GF allocations reflect the CPs' total uncollateralized 
losses. Under the proposed approach, the GF allocations are independent 
of the distribution of the uncollateralized losses across the GF 
``silos.'' The new GF allocation methodology reflects an improved and 
more stable approach which allows for easier attributions of GF 
contributions to individual CP/client portfolios. Additionally, ICC 
added clarifying language regarding how the GF computations are 
performed with explicit currency dependent expressions.
    ICC has also made some non-substantive changes to the Risk 
Management Framework to address CFTC recommendations. Specifically, ICC 
proposes amending the Risk Management Framework to reflect ICC's 
current approach towards portfolio diversification. As such, ICC 
proposes unifying diversification and hedge thresholds, and explicitly 
setting both to be equal to the lowest estimated sector Kendall Tau 
correlation coefficient. Additionally, ICC clarified language regarding 
how ICC meets its liquidity requirements.
    Additionally, ICC has made non-substantive changes throughout the 
framework to correct obsolete references. ICC removed language stating 
that the Chief Risk Officer is a dual employee of both ICC and its 
sister company, The Clearing Corporation. Similarly, ICC removed 
language stating that The Clearing Corporation is the provider of risk 
management services to ICC. ICC has removed references to the ``U.K. 
Financial Services Authority'' and replaced with reference to the 
``U.K. Prudential Regulatory Authority.'' ``The European Securities and 
Markets Authority'' was added to the sample list of competent 
authorities for capital adequacy regulation listed in the framework.
    ICC has also made non-substantive changes throughout the Risk 
Management Framework to ensure consistency. ICC updated the mission 
statement contained within the document to be consistent with ICC's 
Board-approved mission statement. Also, ICC has modified the frequency 
by which the Risk Department monitors various risk metrics from a 
quarterly basis to a monthly basis to reflect actual business 
practices.
    Section 17A(b)(3)(F) of the Act \4\ 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 and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICC believes that the proposed rule change 
is 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),\5\ because ICC believes that the proposed rule change 
will promote the prompt and accurate clearance and settlement of 
securities transactions, derivatives agreements, contracts, and 
transactions, as the proposed risk model revisions enhance risk 
policies and are expected to impose more conservative initial margin 
requirements, which would enhance the financial resources available to 
ICC and thereby facilitate its ability to promptly

[[Page 1468]]

and accurately clear and settle its cleared CDS contracts. In addition, 
the proposed revisions are consistent with the relevant requirements of 
Rule 17Ad-22.\6\ In particular, the amendments to the Risk Management 
Framework will enhance the financial resources available to the 
clearing house by imposing a more conservative initial margin 
requirement, and are therefore reasonably designed to meet the margin 
and financial resource requirements of Rule 17Ad-22(b)(2-3).\7\ 
Additionally, the amendments to the Risk Management Framework related 
to ICC's GF allocation methodology further ensure ICC maintains 
sufficient financial resources consistent with the requirements of Rule 
17Ad-22(b)(3).\8\ As such, the proposed rule change is designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions, derivatives agreements, contracts, and transactions 
within the meaning of Section 17A(b)(3)(F) \9\ of the Act.
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    \4\ 15 U.S.C. 78q-1(b)(3)(F)
    \5\ Id.
    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(b)(2-3).
    \8\ 17 CFR 240.17Ad-22(b)(3).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition. The risk model 
enhancements apply uniformly across all market participants. Therefore, 
ICC does not believe the proposed rule change imposes any burden on 
competition that is inappropriate in furtherance of the purposes of the 
Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change 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 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#b5c7c0d9d098d6dad8d8d0dbc1c6f5c6d0d69bd2dac3"><span class="__cf_email__" data-cfemail="2755524b420a44484a4a424953546754424409404851">[email protected]</span></a>. Please include 
File Number SR-ICC-2014-24 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2014-24. 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 Web site (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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings will also be available 
for inspection and copying at the principal office of ICE Clear Credit 
and on ICE Clear Credit's Web site at https://www.theice.com/clear-credit/regulation.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICC-2014-24 
and should be submitted on or before January 30, 2015.\10\
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.
Brent J. Fields,
Secretary.
[FR Doc. 2015-00126 Filed 1-8-15; 8:45 am]
BILLING CODE 8011-01-P


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