Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Notices 41433 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Securities Exchange Act Release No. 81074 (July 

5, 2017), 82 FR 32030 (July 11, 2017) (SR–DTC– 

2017–008; SR–FICC–2017–014; SR–NSCC–2017– 

008) (‘‘Notice’’). 

4Available at http://www.dtcc.com/en/legal/ 

rules-and-procedures. FICC is comprised of two 

divisions: The Government Securities Division 

(‘‘GSD’’) and the Mortgage-Backed Securities 

Division (‘‘MBSD’’). Each division serves as a 

central counterparty, becoming the buyer and seller 

to each of their respective members’ securities 

transactions and guarantying settlement of those 

transactions, even if a member defaults. GSD 

provides, among other things, clearance and 

settlement for trades in U.S. Government debt 

issues. MBSD provides, among other things, 

clearance and settlement for trades in mortgagebacked securities. GSD and MBSD maintain 

separate sets of rules, margin models, and clearing 

funds. 

5The 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. 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 Clearing Agency. 

Notice, 82 at 32031. 

6 Id. 

7 Id. 

8 Id. 

9 Id. 

10 Id.; see Supervisory Guidance on Model Risk 

Management, SR Letter 11–7, dated April 4, 2011, 

issued by the Board of Governors of the Federal 

Reserve System and the Office of the Comptroller 

of the Currency, at 3. 

Areas (MSAs) and non-metropolitan 

counties. The sample is selected using 

the United States Postal Service postal 

delivery sequence file (DSF) and, where 

the DSF has poor coverage (90% or 

less), field listing. The 17 largest MSAs 

are included with certainty, while other 

NFAs are sampled with probability 

proportionate to size (PPS) and with 

implicit stratification by geographic and 

demographic characteristics. Within all 

selected NFAs, tracts or block groups 

are further selected with PPS and 

implicit stratification by additional 

geographic and demographic 

characteristics. The tertiary sampling 

units, addresses, are a random sample 

from the DSF or, alternatively, a field 

inventory of addresses. When a housing 

unit is visited by a field interviewer, one 

person is selected to be interviewed 

from the housing unit at random. Not all 

GSS respondents are given the S&T 

Attitudes survey, which is a module on 

the GSS. Which GSS respondents get 

the S&T Attitudes module is determined 

by systematic sampling conducted to 

ensure that each NFA and segment (tract 

or block group) in the sample has an 

equal number of S&T Attitudes surveys. 

Dated: August 28, 2017. 

Suzanne H. Plimpton, 

Reports Clearance Officer, National Science 

Foundation. 

[FR Doc. 2017–18472 Filed 8–30–17; 8:45 am] 

BILLING CODE 7555–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81485; File Nos. SR–DTC– 

2017–008; SR–FICC–2017–014; SR–NSCC– 

2017–008] 

Self-Regulatory Organizations; The 

Depository Trust Company; Fixed 

Income Clearing Corporation; National 

Securities Clearing Corporation; Order 

Approving Proposed Rule Changes To 

Adopt the Clearing Agency Model Risk 

Management Framework 

August 25, 2017. 

On June 20, 2017, The Depository 

Trust Company (‘‘DTC’’), Fixed Income 

Clearing Corporation (‘‘FICC’’), and 

National Securities Clearing Corporation 

(‘‘NSCC,’’ each a ‘‘Clearing Agency,’’ 

and collectively, ‘‘Clearing Agencies’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’), proposed 

rule changes SR–DTC–2017–008, SR– 

FICC–2017–014, and SR–NSCC–2017– 

008 (collectively, the ‘‘Proposed Rule 

Changes’’), respectively, pursuant to 

Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder.2 The Proposed Rule 

Changes were published for comment in 

the Federal Register on July 11, 2017.3

The Commission did not receive any 

comment letters on the Proposed Rule 

Changes. For the reasons discussed 

below, the Commission approves the 

Proposed Rule Changes. 

I. Description of the Proposed Rule 

Changes 

The Proposed Rule Changes would 

adopt the Clearing Agency Model Risk 

Management Framework 

(‘‘Framework’’), which would set forth 

the model risk management practices 

adopted by the Clearing Agencies. 

Although the Framework would be a 

rule of each Clearing Agency, the 

Proposed Rule Changes do not require 

any changes to the Rules, By-Laws and 

Organizational Certificate of DTC, the 

Rulebook of GSD, the Clearing Rules of 

MBSD,4 or the Rules & Procedures of 

NSCC, as the Framework would be a 

standalone document for each Clearing 

Agency. 

In general, the Framework would 

describe the model risk management 

practices adopted by the Clearing 

Agencies. The Framework is designed to 

help identify, measure, monitor, and 

manage the risks associated with the 

design, development, implementation, 

use, and validation of quantitative 

models. The Framework would describe 

(i) governance of the Framework; (ii) key 

terms; (iii) model inventory procedures; 

(iv) model validation procedures; (v) 

model approval process; and (vi) model 

performance procedures. 

A. Governance of the Framework 

The Framework would outline the 

Clearing Agencies’ governance of the 

Framework itself. The Framework 

would be owned and managed by (i) the 

Clearing Agencies’ risk management 

area generally responsible for model 

validation and control matters, (ii) the 

DTCC Model Validation and Control 

Group (‘‘MVC’’),5 and (iii) senior 

management and the Board of Directors 

of each Clearing Agency (‘‘Boards’’), 

which would have review and oversight 

authority.6

The Framework would provide that (i) 

any change to the Framework must be 

approved by the Boards or such 

committees as may be delegated 

authority by the Boards, from time to 

time, pursuant to the Boards’ charters, 

(ii) MVC shall review this Framework 

no less frequently than annually, and 

(iii) any and all changes to this 

Framework are subject to regulatory 

review and approval.7

B. Key Terms 

The Framework would define two key 

terms: Model and Model Risk. The term 

‘‘Model’’ would refer to a quantitative 

method, system, or approach that 

applies statistical, economic, financial, 

or mathematical theories, techniques, 

and assumptions to process input data 

into quantitative estimates.8 A Model 

would consist of three components: (1) 

An information input component, 

which would deliver assumptions and 

data to the Model; (2) a processing 

component, which would transform 

inputs into estimates; and (3) a reporting 

component, which would translate the 

estimates into useful business 

information.9 A Model also would cover 

quantitative approaches whose inputs 

are partially or wholly qualitative or 

based on expert judgment, provided that 

the output is quantitative in nature.10

The term ‘‘Model Risk’’ would refer to 

the potential for adverse consequences 

from decisions based on incorrect or 

misused Model outputs and reports, and 

primarily occurring due to (i) 

fundamental errors in the design or 

development of Models; (ii) incorrect 

Model input or assumptions; (iii) 

erroneous implementation of Models; 

(iv) unauthorized or incorrect changes 

to Models; (v) changes in market 

conditions rendering existing Models 


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11Notice, 82 at 32031. 

12 Id. 

13 Id. 

14Notice, 82 at 32031–32. 

15Notice, 82 at 32032. 

16 Id. 

17 Id. 

18 Id. 

19 Id. 

20 Id. 

21 Id. 

22 Id. 

23 Id. 

24 Id. 

25 Id. 

26 Id. 

27 Id. 

28 Id. 

29 Id. 

30 Id. 

31 Id. 

32 Id. 

33 Id. 

34 Id. 

35 Id. 

unfit for their intended purpose; and 

(vi) misuse of or overreliance on 

Models.11 The Framework would state 

that it is designed to minimize the 

Clearing Agencies’ potential for 

financial loss, inaccurate financial or 

regulatory reporting, misaligned 

business strategies, or damage to their 

respective reputations resulting from a 

failure to properly manage Model 

Risk.12

C. Model Inventory Procedures 

The Framework would describe the 

Clearing Agencies’ Model inventory 

procedures. All Clearing Agency Models 

would be subject to tracking for 

monitoring purposes within each 

Clearing Agency (‘‘Model Inventory’’).13

The Framework would describe how a 

Model Inventory survey is conducted at 

least annually across the Clearing 

Agencies to confirm that the Model 

Inventory is current.14 During this 

survey period, all Clearing Agency 

business areas and support functions 

that intend to develop a model (for 

Clearing Agency use) would submit a 

list of their planned models to MVC in 

order for MVC to conclude whether they 

meet the definition of Model under the 

Framework.15

The Framework would outline how 

MVC would assign a materiality/ 

complexity index rating to each Model 

when it is added to a Model Inventory, 

which would impact the Model’s 

prioritization and authority required for 

approval.16 All Model materiality/ 

complexity index assignments would be 

reviewed at least annually by MVC, as 

well as by the committee specifically 

created by the Clearing Agencies to 

address Model Risk governance matters, 

the DTCC Model Risk Governance 

Committee (‘‘MRGC’’).17

The Framework would further 

describe the initial and periodic 

validation protocols that would be 

applicable to all Models in the Model 

Inventory (‘‘Model Validation’’).18 The 

Framework would state that all Model 

Validations would be performed by 

qualified persons who are free from 

influence from the persons responsible 

for the development or operation of the 

Models being validated.19 MVC, which 

is responsible for performing all Model 

Validations, is functionally separate 

from all Clearing Agency areas that 

develop or operate Models.20 The head 

of MVC directly reports to the head of 

the DTCC Group Chief Risk Office, 

rather than to anyone that is in charge 

of developing or operating Models for 

the Clearing Agencies.21

D. Model Validation Procedures 

The Framework would describe the 

Clearing Agencies’ Model Validation 

procedures. Each new Model would 

undergo a full Model Validation unless 

provisionally approved.22 The 

Framework would state that a full 

Model Validation would be applied (i) 

to all new Models prior to their use in 

production; (ii) during periodic Model 

Validations; and (iii) when Model 

changes are made that require an 

independent Model Validation.23

The Framework would provide that 

the DTCC Quantitative Risk 

Management Financial Engineering 

Unit, which is functionally separate 

from MVC, would be responsible for 

developing, testing, and signing-off on 

new Clearing Agency Models and 

enhancements to existing Clearing 

Agency Models before submitting any 

such Model to MVC for Model 

Validation and approval.24

The Framework would state that an 

active Model may require changes in 

either structure or technique.25 Details 

for any Model change request would be 

provided to MVC for review and a 

determination of whether full Model 

Validation is required.26 The 

Framework would describe that MVC 

would perform a Model Validation for 

each Clearing Agency Model approved 

for use in production not less than 

annually (or more frequently as may be 

contemplated by such Clearing Agency’s 

established risk management 

framework), including each credit risk 

Model, liquidity risk Model, and in the 

case of FICC and NSCC, as central 

counterparties (‘‘CCPs’’), on their 

margin systems and related Models.27

In conducting a full Model Validation, 

MVC would verify that the Model is 

performing as expected in accordance 

with its design objectives and business 

purpose. The full Model Validation 

standards for any new Model would 

include, but not be limited to: 

• Evaluation of the Model 

development documentation and 

testing; 

• evaluation of Model theory and 

assumptions, and identification of 

potential limitations; 

• evaluation of data inputs and 

parameters; 

• review of numerical 

implementation including replication 

for certain key Model components, 

which would vary from Model to 

Model; 

• independent testing, with respect to 

sensitivity analysis, stress testing, and 

benchmarking, as appropriate; and 

• evaluation of Model outputs, Model 

performance, and backtesting.28

The Framework would provide that 

all Models approved for use in 

production also would be subject to 

periodic Model Validations for purposes 

of confirming that the Models continue 

to operate as intended, identifying any 

deficiencies that would call into 

question the continuing validity of any 

such Model.29 The Framework would 

further provide that periodic Model 

Validations would generally use the 

same standards as an initial Model 

Validation.30 In certain cases, MVC may 

determine extra Model Validation 

activities are warranted based on 

previous Model Validation work and 

findings, changes in market conditions, 

or because a particular Model warrants 

extra validation.31

The Framework would provide that 

MVC would centrally track all findings 

from (i) a new Model Validation; (ii) a 

change in Model Validation; (iii) a 

periodic Model Validation; or (iv) the 

implementation of a new Model or 

Model change.32 The status of any 

changes to address a finding for 

approved Models would be reported to 

the MRGC on a monthly basis.33 If a 

finding is related to Model 

implementation errors, the persons 

responsible for the development or 

operation of the Model (‘‘Model 

Owner’’) would report such findings, 

incidents, or both in accordance with 

the policies and procedures of the 

Operational Risk Management unit 

(‘‘ORM’’) within the Group Chief Risk 

Office.34 If an adverse Model Validation 

finding cannot be resolved, the Model 

Owner would work with MVC and ORM 

to submit the finding for risk acceptance 

in accordance with ORM policies and 

procedures.35


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36 Id. 

37 Id. 

38 Id. 

39 Id. 

40 Id. 

41 Id. 

42 Id. 

43 Id. 

44 Id. 

45 Id. 

46 Id. The Clearing Agencies define Model 

performance monitoring is the process of (i) 

evaluating an active Model’s ongoing performance 

based on theoretical tests, (ii) monitoring the 

Model’s parameters through the use of threshold 

indicators, and/or (iii) backtesting using actual 

historical data/realizations to test a Value at Risk 

(‘‘VaR’’) Model’s predictive power. 

47Notice, 82 at 32033. 

48 Id. 

49 Id. 

50 Id. 

51 Id. 

52 Id. 

53 Id. 

54 Id. 

55 Id. To mitigate default risk, FICC and NSCC 

collect funds from their members to maintain 

sufficient financial resources in the event a member 

or members default on their obligations. Those 

funds are held by FICC and NSCC in their 

respective Clearing Funds. As compared to the CFR, 

VaR Model backtesting tests Model performance at 

a specified confidence level, while the CFR 

backtesting tests margin sufficiency in case of a 

member default. 

56Notice, 82 at 32033. 

57A DTC Participant with multiple accounts may 

group its accounts into ‘‘families’’ (i.e., ‘‘collateral 

groups’’) and instruct DTC to allocate a specified 

portion of its overall Collateral Monitor and Net 

Debit Cap to each family. All accounts that a 

Participant designates as belonging to a common 

collateral group share a single Collateral Monitor 

and single Net Debit Cap. See Securities Exchange 

Act Release No. 38201 (January 23, 1997), 62 FR 

4561 (January 30, 1997) (SR–DTC–96–17). 

58A haircut represents a percentage decrease 

applied to a Security’s Market Value solely for 

purposes of determining the collateral value of the 

Security. See DTC Settlement Service Guide, 

available at http://www.dtcc.com/∼/media/Files/

Downloads/legal/service-guides/Settlement.pdf, at 

5. 

59Notice, 82 at 32033. 

E. Model Approval Process 

The Framework would outline the 

approval process applicable to all new 

Models. All new Clearing Agency 

Models, and all material changes to 

existing Clearing Agency Models, would 

undergo Model Validation by MVC and 

must be approved prior to business 

use.36 If the Model’s materiality is 

‘‘Medium’’ or ‘‘High,’’ such Model 

Validation would be reviewed by the 

MRGC and recommended by the MRGC 

to the Clearing Agencies’ management 

level committee responsible for Model 

Risk management matters, the 

Management Risk Committee (‘‘MRC’’), 

for approval.37

Regarding any proposed change to 

any backtesting methodology, prior to 

implementation thereof (and before any 

reporting thereof in any management 

and regulatory report), the Framework 

would provide that a description of the 

proposed change and impact study 

results would be presented to the MRGC 

for review and approval.38 If the impact 

study results reflect that 

implementation of the methodology 

would negatively impact any existing 

risk tolerance threshold range, such 

results would be escalated by the MRGC 

to the MRC, and subsequently to the 

Board Risk Committee (‘‘BRC’’), for 

approval prior to implementation.39

The Framework would provide that 

provisional approvals with respect to 

new Clearing Agency Models and 

material changes to existing Clearing 

Agency Models may be issued to allow 

a Model to be published for urgent 

business use prior to MVC’s Model 

Validation.40 Provisional approval 

requests for a Model along with 

appropriate control measures would be 

presented by the applicable Model 

Owners to MVC and the MRGC for 

review.41 The Framework would 

provide that Models would be 

provisionally approved by MVC for a 

limited period, not to exceed six months 

unless also approved by the MRGC.42

MVC would track all such provisional 

approvals and oversee compliance with 

control measures and provisional 

approval periods.43

The Framework would state that each 

periodic Model Validation would be 

presented to the MRGC for its review, 

and its recommendation for approval to 

the MRC.44 The Framework would 

further provide that MRC approval must 

be obtained in order for any such 

periodic validation to be deemed 

complete.45

F. Model Performance Procedures 

The Framework would state that MVC 

would be responsible for Model 

performance monitoring and for each 

Clearing Agency’s backtesting process.46

The MRGC would be the primary forum 

for MVC’s regular reporting of Model 

Validation activities and material Model 

Risks identified through regular Model 

performance monitoring.47 Reports and 

recommendations with respect to Model 

Risk management would be made to the 

MRC.48

The Framework would describe that 

periodic reporting to the BRC of each 

Clearing Agency with regard to Model 

Risk matters may include: 

• Updates of Model Validation 

findings and the status of annual 

validations; 

• updates on significant Model Risk 

matters, and on compliance matters 

with respect to Model Risk policies and 

procedures (including the Framework); 

and 

• escalation of Model Risk matters as 

set forth in the market risk tolerance 

statement, which establishes the 

Clearing Agencies’ Model Risk 

tolerances (‘‘Market Risk Tolerance 

Statement’’), and subsequent, regular 

updates with respect thereto.49

The Framework would provide that 

MVC would prepare Model performance 

monitoring reports on both a monthly 

and daily basis.50 On a monthly basis, 

MVC would (i) perform sensitivity 

analysis on each of the CCP’s margin 

Model, (ii) review the key parameters 

and assumptions for backtesting, and 

(iii) consider modifications to ensure 

the backtesting practices of FICC and 

NSCC, as CCPs, are appropriate for 

determining the adequacy of the 

applicable CCP’s margin resources.51

The Framework would state that 

MRGC would review the Model 

performance monitoring, which 

includes review of risk-based Models 

used to calculate margin requirements 

and relevant parameters/threshold 

indicators, sensitivity analysis, and 

Model backtesting results.52 Serious 

performance concerns would be 

escalated to the MRC.53

The Framework would further state 

that, in circumstances where the 

products cleared or the markets served 

by one or both of the CCPs display high 

volatility or become less liquid, or when 

the size or concentration of positions 

held by the applicable CCP’s members 

increases or decreases significantly, 

such sensitivity analysis and review of 

key Model parameters and assumptions 

would be conducted more frequently 

than monthly.54

The Framework would provide that 

VaR and Clearing Fund requirement 

(‘‘CFR’’) coverage backtesting for the 

CCPs would be performed by MVC on 

a daily basis or more frequently.55 CFR 

coverage would be backtested on an 

overall basis and for individual 

members and families of affiliated 

members.56 DTC backtesting would be 

performed by MVC on a daily basis for 

collateral group 57 collateral monitor 

coverage, collateral group level 

haircut 58 coverage, and security-level 

haircut coverage.59 The Framework 

would provide that thresholds for all 

backtests would be established for the 

rolling 12-month period coverage and 

calculated as the number of instances 

without deficiency over the total 

number of backtest instances, where 

deficiency is defined as the loss amount 

that exceeds the measure being tested 

(i.e., VaR, CFR, collateral monitor, or 


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60 Id. 

61 Id.; see 17 CFR 240.17Ad–22(e)(6)(iii). 17 CFR 

240.17Ad–22(a)(13) defines the term ‘‘potential 

future exposure’’ to mean the maximum exposure 

estimated to occur at a future point in time with an 

established single-tailed confidence level of at least 

99 percent with respect to the estimated 

distribution of future exposure. 

62Notice, 82 at 32033. 

63 Id. 

64Notice, 82 at 32034. 

65 Id. 

66 Id. 

67 Id. 

68 Id. 

69 Id. 

70 15 U.S.C. 78s(b)(2)(C). 

71 15 U.S.C. 78q–1(b)(3)(F). 

72 17 CFR 240.17Ad–22(e)(4)(vii), (e)(6)(vi) and 

(vii), and (e)(7)(vii). 

73 15 U.S.C. 78q–1(b)(3)(F). 

74 Id. 

haircut rate). Thresholds would be set as 

follows: 60

Applicable to Backtesting risk metrics Threshold 

(%) 

CCPs (FICC and NSCC) .......................... Overall CFR Coverage ................................................................................................. 99 

VaR Model Coverage ................................................................................................... 99 

Member Level CFR Coverage ..................................................................................... 99 

Family Level CFR Coverage ........................................................................................ 99 

DTC ........................................................... Collateral Group Collateral Monitor Coverage ............................................................. 99 

Collateral Group Level Haircut Coverage .................................................................... 99 

Security-Level Haircut Coverage ................................................................................. 95 

The Framework would provide that 

the CFR coverage thresholds for FICC 

and NSCC would be based on applicable 

regulatory requirements that require 

them, as CCPs, to cover their credit 

exposure to their participants by 

establishing a risk-based margin system 

that, among other things calculates 

margin sufficient to cover their potential 

future exposure to participants in the 

interval between the last margin 

collection and the close out of positions 

following a participant default.61 As for 

DTC, which is not a CCP, the 

Framework would provide that the 

collateral group collateral monitor 

coverage threshold, among other 

controls, would be set to support the 

requirement that DTC maintain 

sufficient financial resources to cover its 

credit exposures to each participant 

fully with a high degree of confidence.62

Meanwhile, the ‘‘VaR Model Coverage,’’ 

‘‘Collateral Group Level Haircut 

Coverage,’’ and ‘‘Security-Level Haircut 

Coverage’’ would be set and designed 

for Model performance monitoring 

purposes.63

The Framework would provide that, 

on at least a monthly basis, the key 

metrics relating to Model backtesting 

would be reviewed by the Market and 

Liquidity Risk Management unit within 

the Group Chief Risk Office and MVC, 

and reported to the MRC.64 Threshold 

breaches would be reviewed by the 

Managing Directors within the Financial 

Risk Management area (including the 

Market and Liquidity Risk Management 

unit) of the Group Chief Risk Office, and 

in the case of CFR coverage breaches by 

the CCPs and collateral group collateral 

monitor coverage by DTC, escalated to 

the BRC in accordance with the Market 

Risk Tolerance Statement.65

The Framework would state that the 

Managing Director of the Market and 

Liquidity Risk Management unit within 

the Group Chief Risk Office would be 

responsible for reviewing the Market 

Risk Tolerance Statement at least 

annually.66 The BRC would review and 

approve the Market Risk Tolerance 

Statement at least annually.67

The Framework would provide that 

all Model performance concerns would 

be escalated by MVC to the MRGC, 

including Model performance 

enhancement concerns.68 The MRGC 

may further recommend certain such 

matters for further escalation to the 

MRC, the BRC, or both.69

II. Discussion of 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 rules 

and regulations thereunder applicable to 

such organization.70 After carefully 

considering the Proposed Rule Changes, 

the Commission finds that the Proposed 

Rule Changes are consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

the Clearing Agencies. In particular, the 

Commission believes the proposal is 

consistent with Section 17A(b)(3)(F) of 

the Act,71 as well as Rules 17Ad– 

22(e)(4)(vii), 17Ad–22(e)(6)(vi) and (vii), 

and 17Ad–22(e)(7)(vii) thereunder.72

A. Consistency With Section 

17A(b)(3)(F) of the Act 

Section 17A(b)(3)(F) of the Act 

requires, in part, that the rules of a 

clearing agency be designed to assure 

the safeguarding of securities and funds 

which are in the custody and control of 

the Clearing Agencies or for which they 

are responsible.73

The Commission believes that by 

establishing and describing in the 

proposed Framework (i) governance of 

the Framework; (ii) key terms; (iii) 

Model Inventory procedures; (iv) Model 

Validation procedures; (v) Model 

approval process; and (vi) Model 

performance procedures, as described 

above, the proposal is designed to help 

safeguard securities and funds in the 

Clearing Agencies’ custody and control. 

Specifically, the comprehensive nature 

of the practices described in the 

Framework, both individually and 

collectively, are designed to help 

improve the Clearing Agencies’ ability 

to determine and evaluate the risk 

presented by many of the Clearing 

Agencies’ members by measuring, 

monitoring, and managing the risks 

from using quantitative Models. Clearly 

documenting the Clearing Agencies’ 

ability to evaluate risk in the proposed 

Framework could enable the Clearing 

Agencies to deploy more effectively 

their risk management tools to manage 

the credit, market, and liquidity risks 

presented by such members. By 

enabling the Clearing Agencies to use 

their risk management tools more 

effectively, the proposed Framework is 

designed to help mitigate the risk that 

the Clearing Agencies would suffer a 

loss from a member default. Therefore, 

the Commission believes that these 

Proposed Rule Changes are designed to 

help safeguard funds within the 

Clearing Agencies’ custody and control, 

consistent with Section 17A(b)(3)(F) of 

the Act.74

B. Consistency With Rule 17Ad– 

22(e)(4)(vii) 

The Commission believes that the 

changes proposed in the Proposed Rule 

Changes are consistent with Rule 17Ad– 

22(e)(4)(vii) under the Act, which 


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75 17 CFR 240.17Ad–22(e)(4)(vii). 

76 Id. 

77 17 CFR 240.17Ad–22(e)(6). 78 17 CFR 240.17Ad–22(e)(6). 

79 Id. 

80 17 CFR 240.17Ad–22(e)(6)(vii). 

81 Id. 

requires, in part, that the Clearing 

Agencies establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

effectively identify, measure, monitor, 

and manage their credit exposures to 

participants and those arising from their 

payment, clearing, and settlement 

processes by performing a Model 

Validation for their credit risk Models 

not less than annually or more 

frequently as may be contemplated by 

the Framework.75

As discussed above, the Framework 

would provide for validation of 

quantitative credit-risk Models. The 

Framework would describe the 

procedures for conducting a Model 

Inventory to determine which Models 

should be reviewed. The Framework 

would then describe the process for 

reviewing such Models, before they are 

implemented, so that the Clearing 

Agencies can ensure that their credit 

exposures are effectively and efficiently 

modeled. The Framework would further 

describe the validation process for the 

review of existing quantitative creditrisk Models to determine whether the 

Models accurately capture the Clearing 

Agencies’ credit exposures, which 

would be performed not less than 

annually. Because the proposal is 

designed to meet the requirements of 

Rule 17Ad–22(e)(4)(vii) by establishing 

the proposed Framework for performing 

a Model Validation for the Clearing 

Agencies’ credit risk Models, the 

Commission believes the Proposed Rule 

Changes are consistent with Rule 17Ad– 

22(e)(4)(vii) under the Act.76

C. Consistency With Rule 17Ad– 

22(e)(6)(vi) and (vii) 

The Commission believes that the 

changes proposed in the Proposed Rule 

Changes are consistent with Rules 

17Ad–22(e)(6) under the Act, 

specifically paragraphs (vi) and (vii) 

thereunder, as discussed below.77

Rule 17Ad–22(e)(6)(vi) under the Act 

requires, in part, that the Clearing 

Agencies that provide CCP services (i.e., 

FICC and NSCC) establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

cover their credit exposures to their 

participants by establishing a risk-based 

margin system that at minimum is 

monitored by management on an 

ongoing basis and is regularly reviewed, 

tested, and verified by (A) conducting 

backtests of their margin Models at least 

once each day using standard 

predetermined parameters and 

assumptions; (B) conducting a 

sensitivity analysis of their margin 

Models and a review of their parameters 

and assumptions for backtesting on at 

least a monthly basis, and considering 

modifications to ensure the backtesting 

practices are appropriate for 

determining the adequacy of the their 

margin resources; (C) conducting a 

sensitivity analysis of their margin 

Models and a review of their parameters 

and assumptions for backtesting more 

frequently than monthly during periods 

of time when the products cleared or 

markets served display high volatility or 

become less liquid, or when the size or 

concentration of positions held by their 

participants increases or decreases 

significantly; and (D) reporting the 

results of their analyses to appropriate 

decision makers at the clearing agencies, 

including but not limited to, their risk 

management committee or board of 

directors, and using these results to 

evaluate the adequacy of and adjust 

their margin methodology, Model 

parameters, and any other relevant 

aspects of their credit risk management 

framework.78

As discussed above, the Framework 

would provide that FICC and NSCC, as 

CCPs, would (a) perform VaR and CFR 

backtesting on a daily basis using 

standard predetermined parameters and 

assumptions; (b) as part of Model 

performance monitoring, on at least a 

monthly basis, perform sensitivity 

analysis on each of the margin Models 

of FICC and NSCC, review the key 

parameters and assumptions for 

backtesting, and consider modifications 

to ensure the backtesting practices of 

FICC and NSCC are appropriate for 

determining the adequacy of the 

applicable CCP’s margin resources; (c) 

in circumstances where the products 

cleared or the markets served by FICC, 

NSCC, or both display high volatility or 

become less liquid, or when the size or 

concentration of positions held by the 

applicable CCP’s members increases or 

decreases significantly, conduct 

sensitivity analysis and review of key 

Model parameters and assumptions 

more frequently than monthly; and (d) 

report the results of their analyses under 

(b) and (c) to key decision makers, 

including but not limited to, the MRC, 

the BRC, or both, which could use these 

results to evaluate the adequacy of and 

adjust their margin methodology, Model 

parameters, and any other relevant 

aspects of their credit risk management 

framework. By establishing the 

proposed Framework for a risk-based 

margin system to help cover the credit 

exposures of FICC and NSCC, as CCPs, 

that, at minimum, is monitored by 

management on an ongoing basis and is 

designed to address each of the 

enumerated requirements of Rule 17Ad– 

22(e)(6)(vi), the Commission believes 

the Proposed Rule Changes are 

consistent with Rule 17Ad– 

22(e)(6)(vi).79

Rule 17Ad–22(e)(6)(vii) under the Act 

requires, in part, that the Clearing 

Agencies that provide CCP services (i.e., 

FICC and NSCC) establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

cover their credit exposures to their 

participants by establishing a risk-based 

margin system that at minimum requires 

a model validation for their margin 

systems and related models to be 

performed not less than annually, or 

more frequently as may be contemplated 

by their risk management framework.80

As discussed above, the Framework 

would describe FICC and NSCC’s 

processes for determining which Models 

they should validate, including margin 

risk Models. After determining which 

Models to validate, FICC and NSCC 

would use the Model Validation 

processes for their margin systems and 

related Models, which would be 

performed not less than annually. In 

certain cases, FICC and NSCC may 

determine extra Model Validation 

activities are warranted based on 

previous Model Validation work and 

findings, changes in market conditions, 

or because a particular Model warrants 

extra validation. Because the proposal is 

designed to meet the requirements of 

Rule 17Ad–22(e)(6)(vii) by establishing 

the proposed Framework for a riskbased margin system to help cover the 

credit exposures of FICC and NSCC, as 

CCPs, that, at minimum, requires a 

Model Validation for the their margin 

systems and related Models to be 

performed not less than annually, the 

Commission believes the Proposed Rule 

Changes are consistent with Rule 17Ad– 

22(e)(6)(vii).81

D. Consistency With Rule 17Ad– 

22(e)(7)(vii) 

The Commission believes that the 

changes proposed in the Proposed Rule 

Changes are consistent with Rule 17Ad– 

22(e)(7)(vii) under the Act, which 

requires, in part, that the Clearing 

Agencies establish, implement, 

maintain and enforce written policies 

and procedures reasonably designed to 

effectively measure, monitor, and 

manage the liquidity risk that arises in 

or is borne by the Clearing Agencies, 


sradovich on DSK3GMQ082PROD with NOTICES
41438 Federal Register / Vol. 82, No. 168 / Thursday, August 31, 2017 / Notices 

82 17 CFR 240.17Ad–22(e)(7)(vii). 

83 Id. 

84 15 U.S.C. 78q–1. 

85 In approving the Proposed Rule Changes, the 

Commission considered the proposals’ impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

86 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Capitalized terms used but not defined herein 

shall have the meaning specified in the Rule Book, 

Clearing Supplement, Procedures, and Dispute 

Resolution Protocol, as applicable. 

including measuring, monitoring, and 

managing their settlement and funding 

flows on an ongoing and timely basis, 

and their use of intraday liquidity by 

performing a Model Validation of their 

liquidity risk Models not less than 

annually or more frequently as may be 

contemplated by their risk management 

framework.82

As discussed above, the Framework 

would describe the Clearing Agencies’ 

process for determining which Models 

they should validate, including liquidity 

risk Models. After determining which 

Models to validate, the Clearing 

Agencies would use the Model 

Validation processes for their margin 

systems and related Models, which 

would be performed not less than 

annually. In certain cases, the Clearing 

Agencies may determine extra Model 

Validation activities are warranted 

based on previous Model Validation 

work and findings, changes in market 

conditions, or because a particular 

Model warrants extra validation. 

Because the proposal is designed to 

meet the requirements of Rule 17Ad– 

22(e)(7)(vii) by establishing the 

proposed Framework to help measure, 

monitor, and manage the Clearing 

Agencies’ settlement and funding flows 

on an ongoing and timely basis, and the 

Clearing Agencies’ use of intraday 

liquidity by performing a Model 

Validation of their liquidity risk Models 

not less than annually, the Commission 

believes the Proposed Rule Changes are 

consistent with Rule 17Ad–22(e)(7)(vii) 

under the Act.83

III. Conclusion 

On the basis of the foregoing, the 

Commission finds that the Proposed 

Rule Changes are consistent with the 

requirements of the Act, in particular 

the requirements of Section 17A of the 

Act 84 and the rules and regulations 

promulgated thereunder. It is therefore 

ordered, pursuant to Section 19(b)(2) of 

the Act, that proposed rule changes SR– 

DTC–2017–008, SR–FICC–2017–014, 

and SR–NSCC–2017–008 be, and hereby 

are, approved.85

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.86

Eduardo A. Aleman, 

Assistant Secretary. 

[FR Doc. 2017–18448 Filed 8–30–17; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–81487; File No. SR–LCH 

SA–2017–006] 

Self-Regulatory Organizations; LCH 

SA; Notice of Filing of Proposed Rule 

Change Relating to Options on Index 

Credit Default Swaps 

August 25, 2017. 

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, August 

18, 2017, Banque Centrale de 

Compensation, which conducts 

business under the name LCH SA (‘‘LCH 

SA’’), filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change described in 

Items I, II, and III below, which Items 

have been prepared primarily by LCH 

SA. 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 

LCH SA is proposing to amend its (i) 

CDS Clearing Rule Book (the ‘‘Rule 

Book’’), (ii) CDS Clearing Supplement 

(the ‘‘Clearing Supplement’’), (iii) CDS 

Clearing Procedures (the ‘‘Procedures’’), 

and (iv) CDS Dispute Resolution 

Protocol (the ‘‘Dispute Resolution 

Protocol’’), to incorporate terms and to 

make conforming and clarifying changes 

to allow options on index credit default 

swaps (‘‘CDS’’) to be cleared by 

LCH SA.3

II. Clearing Agency’s Statement of the 

Purpose of, and Statutory Basis for, the 

Proposed Rule Change 

In its filing with the Commission, 

LCH SA 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. LCH SA 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 

1. Purpose 

The purpose of the proposed rule 

change is to revise LCH SA’s rules and 

procedures to allow LCH SA to clear 

options on index CDS. An option on 

index CDS is a contract that gives the 

option buyer the right (and not the 

obligation) to enter into a specified 

index CDS contract (i.e., the underlying) 

with the option seller at a predefined 

exercise price called the strike. Upon 

the launch of clearing options on index 

CDS, LCH SA will provide central 

counterparty services for options on 

index CDS that are accepted for clearing 

and become the option seller for each 

option buyer and the option buyer for 

each option seller with respect to an 

option on index CDS novated by LCH 

SA. 

The terms of the option contract on 

index CDS will provide the buyer the 

right to sell or buy protection on the 

underlying index CDS at expiry of the 

option. The index CDS resulting from 

the exercise of the option will be 

automatically cleared by LCH SA as the 

central counterparty. A credit event 

(including a restructuring event) may 

occur with respect to a constituent of an 

underlying index. If the credit event 

occurs before the option expiry, such 

credit event may affect the option 

buyer’s decision regarding whether to 

exercise the option upon expiry. On the 

other hand, if a credit event occurs after 

the buyer has exercised the option, a 

cleared index CDS contract has been 

created from the option exercise and the 

situation would be the same as a credit 

event occurring to any other index CDS 

contract currently cleared by LCH SA. 

Initially, LCH SA proposes to include 

European index CDS currently cleared 

by CDSClear as the underlying, i.e., CDS 

on Markit iTraxx Europe Index and 

iTraxx Crossover Index, and may 

subsequently extend the underlying to 

include other index CDS contracts 

cleared by LCH SA, such as CDS on 

iTraxx Senior Financial Index, CDX NA 

IG, and CDX NA HY, subject to 

additional regulatory approvals, if 

necessary. 

Each of the changes is described in 

further detail below. 


sradovich on DSK3GMQ082PROD with NOTICES