Document ID: SEC-2020-0616-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Fixed Income Clearing Corp.
Posted Date: 2020-04-21T04:00Z

[Federal Register Volume 85, Number 77 (Tuesday, April 21, 2020)]
[Notices]
[Pages 22228-22233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08377]

[[Page 22228]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-88636; File No. SR-FICC-2020-004]

Self-Regulatory Organizations; Fixed Income Clearing Corporation; 
Notice of Filing of Proposed Rule Change To Modify the Clearing Agency 
Model Risk Management Framework

April 15, 2020.
    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 April 10, 2020, Fixed Income Clearing Corporation (``FICC'') 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 by the clearing agency. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    (a) The proposed rule change of FICC would amend the Clearing 
Agency Model Risk Management Framework (``Framework'') of FICC and its 
affiliates The Depository Trust Company (``DTC'') and National 
Securities Clearing Corporation (``NSCC,'' and NSCC together with FICC, 
the ``CCPs,'' and the CCPs together with DTC, the ``Clearing 
Agencies'').\3\ Specifically, the proposed rule change would amend the 
Framework to (i) change the governance structure for approval of a 
model \4\ validation (``Model Validation''), (ii) incorporate a model 
risk tolerance statement (``Model Risk Tolerance Statement'') and 
related provisions, (iii) clarify the definition of Model Owner (as 
defined below), (iv) reflect changes in the role of the Model Risk 
Governance Committee and a change of its name, (v) redefine the first 
and second line responsibilities and incentives relating to model 
performance monitoring and oversight and (vi) make other technical and 
clarifying changes to the text, as more fully described below.
---------------------------------------------------------------------------

    \3\ The Framework sets forth the model risk management practices 
adopted by the Clearing Agencies, which have been designed to assist 
the Clearing Agencies in identifying, measuring, monitoring, and 
managing the risks associated with the design, development, 
implementation, use, and validation of quantitative models. See 
Securities Exchange Act Release No. 81485 (August 25, 2017), 82 FR 
41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008) (``2017 Notice''). The Framework is managed 
by the Clearing Agencies' risk management areas generally 
responsible for model validation and control matters, DTCC Model 
Validation and Control (``MVC''), on behalf of each Clearing Agency, 
with review and oversight by senior management and the Risk 
Committee of the Board of Directors of each of DTC, FICC, and NSCC 
(collectively, ``Boards''). See Id.
    \4\ The Clearing Agencies have adopted the following definition 
for the term ``model'': ``[M]odel'' refers 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. A ``model'' consists of 
three components: An information input component, which delivers 
assumptions and data to the model; a processing component, which 
transforms inputs into estimates; and a reporting component, which 
translates the estimates into useful business information. The 
definition of ``model'' also covers quantitative approaches whose 
inputs are partially or wholly qualitative or based on expert 
judgment, provided that the output is quantitative in nature. 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.
---------------------------------------------------------------------------

    Although the Clearing Agencies consider the Framework to be a rule, 
the proposed rule change does not require any changes to the Rules, By-
Laws and Organization Certificate of DTC (``DTC Rules''), the Rulebook 
of the Government Securities Division (``GSD'') of Fixed Income 
Clearing Corporation (such Rulebook hereinafter referred to as ``GSD 
Rules''), the Clearing Rules of the Mortgage-Backed Securities Division 
(``MBSD'') of Fixed Income Clearing Corporation (``such Clearing Rules 
hereinafter referred to as ``MBSD Rules''), or the Rules & Procedures 
of NSCC (``NSCC Rules''), as the Framework would be a standalone 
document.\5\
---------------------------------------------------------------------------

    \5\ Capitalized terms not defined herein are defined in the DTC 
Rules, NSCC Rules, GSD Rules or MBSD Rules, as applicable, available 
at http://dtcc.com/legal/rules-and-procedures.
---------------------------------------------------------------------------

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 proposed rule change would amend the Framework to (i) change 
the governance structure for approval of a Model Validation, (ii) 
incorporate the Model Risk Tolerance Statement with respect to related 
forward-looking provisions associated with maintaining multiple model 
risk-related tolerance statements, (iii) clarify the definition of 
Model Owner, (iv) reflect changes in the role of the Model Risk 
Governance Committee and a change of its name, (v) redefine the first 
and second line responsibilities and incentives relating to model 
performance monitoring and oversight and (vi) make other technical and 
clarifying changes to the text, as more fully described below.
    Although the Clearing Agencies consider the Framework to be a rule, 
the proposed rule change does not require any changes to the DTC Rules, 
GSD Rules, MBSD Rules, or NSCC Rules, as the Framework would be a 
standalone document.
Background
    The Framework is maintained by the Clearing Agencies for compliance 
with Rule 17Ad-22(e)(4)(i), (e)(4)(vii), (e)(6)(iii), (e)(6)(vi), 
(e)(6)(vii), and (e)(7)(vii) under the Act,\6\ and sets forth the model 
risk management practices adopted by the Clearing Agencies, which have 
been designed to assist the Clearing Agencies in identifying, 
measuring, monitoring, and managing the risks associated with the 
design, development, implementation, use, and validation of 
quantitative models. The Framework is managed by MVC, on behalf of each 
Clearing Agency, with review and oversight by senior management of each 
Clearing Agency and the Boards.\7\
---------------------------------------------------------------------------

    \6\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(4)(vii), (e)(6)(iii), 
(e)(6)(vi), (e)(6)(vii), and (e)(7)(vii). Each of DTC, NSCC, and 
FICC is a ``covered clearing agency'' as defined in Rule 17Ad-
22(a)(5) and must comply with subsection (e) of Rule 17Ad-22. 
References to Rule 17Ad-22(e)(6) and its subparagraphs cited herein, 
and compliance therewith, apply to the CCPs only and do not apply to 
DTC.
    \7\ 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. 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.
---------------------------------------------------------------------------

    Pursuant to the Framework, a model developed for use by any of the 
Clearing Agencies and meeting the above definition for the term 
``model'' is

[[Page 22229]]

included and tracked within a model inventory (``Model Inventory'') 
maintained by MVC.\8\
---------------------------------------------------------------------------

    \8\ See 2017 Notice, supra note 3.
---------------------------------------------------------------------------

    As Model Validation and the process for approval of Model 
Validations is a key concept that flows through the Framework, FICC is 
providing the following background regarding Model Validation to 
supplement the proposed rule changes discussed further below.
Model Validation
    Pursuant to Section 3.3 (Full Model Validation) of the Framework, 
each new model undergoes a Model Validation (unless provisionally 
approved, as discussed below) pursuant to which MVC verifies that the 
model is performing as expected in accordance with its design 
objectives and business purpose. The Model Validation standards, 
referred to in the Framework as the full Model Validation standards for 
any new model include, but are not be limited to, the following core 
Model Validation activities, as listed in the Framework:
     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: Sensitivity analysis, stress testing, 
and benchmarking, as appropriate; and
     evaluation of model outputs, model performance, and back 
testing.
    Pursuant to the Framework, Full Model Validation is applied under 
the following circumstances: (i) For all new models prior to their use 
in production; (ii) during periodic Model Validations (as described 
below); and (iii) when model changes are made that require independent 
Model Validation (as further described below).
    Pursuant to Section 3.4 (Periodic Model Validation) of the 
Framework, models approved for use in production are subject to what is 
currently referred to in the Framework as 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's original approval and 
evaluating whether the model and its prior validation remain valid 
within the dynamics of current market conditions.
    In this regard, the Framework describes that MVC performs a Model 
Validation for each 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,\9\ liquidity risk model,\10\ and in the case of FICC and 
NSCC, as central counterparties, on their margin systems and related 
models.\11\
---------------------------------------------------------------------------

    \9\ See Rule 17Ad-22(e)(4)(vii). See supra note 6.
    \10\ See Rule 17Ad-22(e)(7)(vii). See supra note 6.
    \11\ See Rule 17Ad-22(e)(6)(vi) and (vii). See supra note 6.
---------------------------------------------------------------------------

    Periodic Model Validations and a full Model Validation follow 
identical standards. The Framework states that 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 performance monitoring of a model warrants extra 
validation.
    Pursuant to the Framework all findings that result from a new Model 
Validation, a change Model Validation, a periodic Model Validation, or 
in connection with implementation of a new model or model change, are 
centrally tracked by MVC.
Proposed Rule Changes
Section 3.1 Model Inventory
    Section 3.1 of the Framework currently explains how any model 
developed for use by any of the Clearing Agencies and meeting the above 
definition for the term ``model'' would be subject to tracking within 
the Model Inventory. MVC is charged with responsibility for adding 
models to the Model Inventory and for tracking models listed in the 
Model Inventory. Section 3.1 also describes how a Model Inventory 
survey is conducted at least annually across the Clearing Agencies to 
confirm the Model Inventory is current. During the Annual Model 
Inventory Survey, any business area or support function intending to 
have a model developed for Clearing Agency use will submit materials 
relevant to such proposed model for MVC to review and assess whether 
such proposed model will be added to the Model Inventory.
Proposed Change To Enhance Flow and Readability of Text
    Pursuant to the proposed rule change, FICC would remove the use of 
the modifier ``Clearing Agency'' with respect to references to models 
in this section and throughout the Framework. The Framework relates 
solely to models of the Clearing Agencies and the use of this modifier 
is redundant. This change would enhance the flow and readability of the 
text by eliminating a redundancy.
Model Owner
    Also, the proposed rule change would move the first reference to 
the defined term ``Model Owner'' from the last paragraph of the section 
to the second paragraph of the section and clarify the meaning of the 
term. This reference would appear in a new sentence that would describe 
that a Model Owner is the person designated by the applicable business 
area or support function to be responsible for a particular model, and 
that the Model Owner is recorded as the Model Owner for such model by 
MVC in the Model Inventory. The Framework currently describes the Model 
Owner as responsible for the development or operation of the model 
being validated by MVC, without noting that the Model Owner is an 
individual designated by the applicable business unit or support 
function. In this regard, the proposed change would provide 
clarification that an individual is designated as the Model Owner by 
the applicable business area or support function.
    The proposed rule change would also change the Clearing Agency 
title of the individual that is the head of MVC that is referred to in 
a footnote in this section from being an Executive Director to Managing 
Director of each Clearing Agency to reflect that a more senior officer 
of the Clearing Agencies would be responsible for supervising the 
MVC.\12\ The footnote also states that the head of MVC reports to the 
Group Chief Risk Officer \13\ rather than to any Model Owner.\14\ This 
statement would be amended to clarify the independence of the MVC 
extends so that it is independent from anyone who develops and operates 
a model and not only a Model Owner. Also relating to the status of the 
head of MVC within the governance structure of the Clearing Agencies, 
this footnote would note that the head of MVC is a member of the 
Management Risk Committee (``MRC'').
---------------------------------------------------------------------------

    \12\ A Managing Director is senior to an Executive Director.
    \13\ The Clearing Agencies' Model Risk management standards and 
practices are subject to the oversight and direction of the Group 
Chief Risk Officer, who is the head of the Group Chief Risk Office.
    \14\ The purpose of the footnote is to make clear that MVC 
management has an independent reporting line to the Group Chief Risk 
Office, without potential conflict of reporting to any person that 
could be a Model Owner.
---------------------------------------------------------------------------

Replacement of Term ``Vendor'' With ``externally purchased''
    Section 3.1 currently contains a paragraph which describes that all

[[Page 22230]]

models, whether internally developed or purchased from a ``vendor,'' 
are subject to Model Validation. Pursuant to the proposed rule change, 
FICC would revise the text of this paragraph to replace the term 
``vendor'' with ``externally purchased.'' FICC believes use of the term 
``externally purchased'', rather than vendor, would provide clarity 
with respect to sections of the Framework that apply to models 
developed internally versus externally.
Section 3.2 Model Materiality and Complexity
    Section 3.2 of the Framework outlines that MVC assigns a 
materiality rating and a complexity rating to each model after it is 
added to the Model Inventory and describes that the applicable rating 
impacts the model's validation in terms of prioritization and approval 
authority.
    As more fully described below regarding Section 3.6 of the 
Framework, the proposed rule change would provide for the delegation of 
approval authority for all Model Validations from the Clearing 
Agencies' management level committee responsible for model risk 
management matters to MVC, and the authority to approve model 
validations would vest solely in MVC.\15\
---------------------------------------------------------------------------

    \15\ Currently, Model Validations that have a materiality rating 
of `Medium' or `High,' must be approved by the MRC, after the model 
has been reviewed and recommended to the MRC for approval by the 
MRGC. Additionally, all periodic Model Validations must currently be 
approved by the MRC to be deemed complete through review and 
recommendation by the MRGC.
---------------------------------------------------------------------------

    In this regard, a materiality rating and complexity rating would no 
longer be determinative of approval authority and the text that 
describes approval authority as impacted by materiality and complexity 
ratings would be deleted.
    As a related change in the model governance structure, the forum 
currently referred to as the Model Risk Governance Committee would no 
longer maintain oversight authority in the model validation process and 
the text in this section would reflect that it is the forum for review 
of Model Risk matters rather than the formal forum for addressing Model 
Risk matters. The Model Risk Governance Committee's name would be 
revised in this section and throughout to refer to it instead as the 
Model Risk Governance Council (``MRGC'') to reflect its proposed role 
as an advisory body rather than being part of the formal model 
governance process. In this regard, the text of Section 3.2 would be 
revised to reflect that the MRGC is a forum for review of, rather than 
addressing, Model Risk matters and a footnote would be added to state 
that MRGC is an advisory body that has no decision-making authority but 
would discuss and/or review certain model risk related matters which 
could result in advice and/or recommendation, which is generally 
directed to the interested party of a given model that brings the 
matter, as applicable.
    The proposed change to shift responsibility for Model Risk matters, 
including approval of Model Validations, to MVC would ensure that MVC 
has sole responsibility for approving Model Validations, as MVC is best 
suited within the Clearing Agencies to manage the quantitative and 
technical expertise to carry out the related functions.
Section 3.5--Model Change Management
    Section 3.5 (Model Change Management) currently states that an 
active model may require changes in either structure or technique. 
Details for any model change request are provided to MVC for review and 
a determination of whether full Model Validation is required. This 
section also includes text that states to the extent that a vendor's 
version change may impact any existing model used in production, an 
impact study of the version change along with any other analysis/
benchmarking shall be conducted as appropriate in MVC's reasonable 
business discretion.
    The process described in this section will not be amended pursuant 
to the proposed rule change, however, to remain consistent with the use 
of terminology as described with respect to Section 3.1 above, 
references to ``vendor'' models in this section would be revised to 
reflect that models not developed by the Clearing Agencies would 
instead be referred to as externally purchased.
Section 3.6--Model Approval and Control
    Section 3.6 (Model Approval and Control) currently provides that 
all new models, and all material changes to existing models, undergo 
Model Validation by MVC and must be approved prior to business use. 
Currently, in cases where such model's materiality is ``Medium'' or 
``High,'' such Model Validation is reviewed by the MRGC and recommended 
by the MRGC to MRC, for approval.
    As stated above, the proposed rule change would redefine the first 
and second line responsibilities and incentives relating to model 
performance monitoring and oversight.
    With respect to the first line, the proposed rule change would 
remove a reference to the Financial Engineering Unit (``FEU'') within 
Quantitative Risk Management (``QRM''). QRM is a risk management 
function within the Group Chief Risk Office, and a representative of 
QRM is the Model Owner for all margin Models used by the CCPs under the 
Standards for Covered Clearing Agencies (``Standards'') under the 
Securities Exchange Act of 1934. Because the Model Owner resides in 
QRM, QRM is responsible for developing, testing, and signing-off on new 
models and enhancements to existing models before submitting any such 
model to MVC for Model Validation and approval. Due to an 
organizational restructuring, FEU was eliminated, and pursuant to the 
proposed rule change, the responsibilities of FEU described above would 
vest in the Model Owners, who as described with respect to the proposed 
changes to Section 3.1 above, would have responsibility for the models.
    With respect to the second line, the proposed rule change would 
revise this section to remove the requirement that MRC approve any 
Model Validation. In this regard, MVC would have the sole and exclusive 
authority to approve a model. As stated above, the Clearing Agencies' 
believe that the MVC is best suited to address Model Validation issues 
based on its quantitative and technical expertise and knowledge, and 
the section would be revised accordingly to reflect MVC's proposed role 
in this regard. As such, the proposed rule change would remove any text 
that indicates that MRC approval is required for any Model Validation 
to be complete and/or for a model to remain in production.
    Also, consistent with the change in the role of MRGC from one of 
oversight to instead acting in an advisory capacity, as described 
above, the proposed rule change would also remove text indicating that 
MRGC would review and recommend Model Validations to MRC or have any 
role in provisional approvals \16\ of models.
---------------------------------------------------------------------------

    \16\ In this regard, Section 3.6 that states that models may be 
provisionally approved by MVC for a limited period, not to exceed 
six months unless also approved by the MRGC, would be revised to 
delete the reference to MRGC's role. Consistent with the changes 
relating to the second line as described above, MVC would assume 
full responsibility for provisional approvals and, and consistent 
with text in Section 3.6, would continue to track all provisional 
approvals to confirm provisional periods and control measures are 
met.
---------------------------------------------------------------------------

Section 3.8--Model Performance Monitoring
    Pursuant to the Framework, MVC is currently responsible for model 
performance monitoring and for each Clearing Agency's backtesting 
process,

[[Page 22231]]

which are integral parts of each Clearing Agency's model risk 
management framework. In this regard, Section 3.8 (Model Performance 
Monitoring) of the Framework states that 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.
    The proposed rule change would eliminate references to 
``theoretical tests'' and ``threshold indicators'' and ``historical 
data/realizations'' to represent a real-world depiction of the model 
performance monitoring process. These changes are being proposed 
because the process of model performance monitoring does not always 
take into account theoretical tests, threshold indicators, and/or 
historical data/realizations, but ``could'' take some or all of these 
into account and appropriate under the circumstances. Therefore, the 
elimination of the ties to these tests, thresholds and use of 
historical data/realizations are a more accurate representation of the 
model performance monitoring process.
    In addition, Section 3.8 would be revised to reflect changes to the 
roles of Model Owners and the MVC consistent with the roles of the 
first and second lines described above, and add text stating that Model 
Owners are responsible for the design and execution of model 
performance monitoring and preparation of model performance monitoring 
reports. The proposed text would also state that MVC is responsible for 
providing oversight of model performance monitoring activities by 
setting organizational standards and providing critical analysis for 
identifying Model issues and/or limitations.\17\
---------------------------------------------------------------------------

    \17\ The organizational standards apply to DTCC's subsidiaries, 
as applicable.
---------------------------------------------------------------------------

    One paragraph within Section 3.8 contains a statement that MVC is 
responsible for model performance monitoring, including review of risk-
based models used to calculate margin requirements and relevant 
parameters/threshold indicators, sensitivity analysis, and model 
backtesting results, and preparation of related reports. It also states 
that review of these model performance measures is subject to review by 
MRGC. To remain consistent with the change in the role of MRGC and the 
related consolidation of primary responsibility for oversight in the 
model governance process in MVC, as described above, this paragraph 
would be deleted.
    Also, consistent with the shift of the responsibility in this 
regard to Model Owners, Section 3.8 would be clarified to indicate that 
QRM, because the Model Owner for all margin models used by the CCPs 
under the Standards would reside in QRM, would be responsible for model 
performance monitoring the CCP's margin models.
Section 3.9--Backtesting
    Section 3.9 states that MVC is responsible for each Clearing 
Agency's VaR backtesting processes for the central counterparties, 
including for model backtesting and Clearing Fund Requirement (``CFR'') 
backtesting. Consistent with the changes described above, this section 
would be revised to state that this backtesting function for models and 
CFR would reside with QRM, as it is the owner of margin models and 
would be responsible for performance monitoring functions with respect 
to margin models.
Section 4.1--Board of Directors and Senior Management Reporting
    Section 4.1 describes MRGC as the primary forum for MVC's regular 
reporting of Model Validation activities and material Model Risks 
identified through regular Model performance monitoring. Reports and 
recommendations with respect to Model Risk management are made to the 
MRC as described in Section 3.
    Periodic reporting to the Risk Committee of the Clearing Agencies' 
Boards (``BRC'') regarding 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 this Framework).
     Escalation of Model Risk matters as set forth in the 
Market Risk Tolerance Statement, and subsequent, regular updates with 
respect thereto.
    The proposed rule change would revise Section 4.1 to reflect the 
changes to the roles of MVC and MRGC as described above. In this 
regard, the proposed rule change would delete the description of MRGC's 
role as it would no longer have oversight of Model Validation and model 
performance monitoring and would add MRC as a recipient of periodic 
reporting. The proposed rule change would also generalize the statement 
relating to escalation of matters as set forth in the Market Risk 
Tolerance Statement to instead refer to ``the Risk Tolerance 
Statements'' to reflect the addition of a reference to the Model Risk 
Tolerance Statement as a supporting document for the Framework, as more 
fully described below.
Section 4.2--Escalation
    Section 4.2 describes, among other things, how on at least a 
monthly basis, the key metrics identified in Section 3.9 (Backtesting) 
are reviewed by the Market and Liquidity Risk Management unit within 
the Group Chief Risk Office and MVC and reported to MRC. Given MVC's 
reduced role with respect to backtesting in this regard, the proposed 
rule change would eliminate the provision that MVC would review the 
metrics.\18\
---------------------------------------------------------------------------

    \18\ Text would be added to clarify that the risk metrics are 
reported to MRC by the group within Group Chief Risk Office 
responsible for risk reporting. Currently, this function is known as 
Risk Reporting.
---------------------------------------------------------------------------

    The proposed rule change would also revise text for clarity and 
readability with respect to statements on the review of the Market Risk 
Tolerance Statement, to reference ``Risk Tolerance Statements'' more 
generally to reflect the changes described herein. Also, the proposed 
rule change would remove MRGC's role in review and approval of changes 
to backtesting methodology and instead vest that responsibility with 
MVC, to reflect the change in oversight of Model Validation from MRGC 
to MVC.
    Also, to enhance the readability and flow of the text in this 
section, the proposed rule change would move text describing that (i) 
the review of the Risk Tolerance Statements by the Managing Director of 
the Market and Liquidity Risk Management unit (``MDMLRM'') within the 
Group Chief Risk Office will occur on an at least annual basis, and 
(ii) the BRC's review and approval of the Risk Tolerance Statements 
will occur on an at least annual basis, to the end of Section 4.2.\19\ 
The proposed change would also replace the reference to specific title 
of the MDMLRM to instead refer to the owner of the Risk Tolerance 
Statements, to provide for more generic terminology that would not 
require formal amendment in the Framework if the title of the MDMLRM 
were to change.
---------------------------------------------------------------------------

    \19\ The Risk Tolerance Statements are also reviewed on an at 
least annual basis by Operational Risk Management, which, among 
other things, is the business line responsible for enabling the 
identification of the Clearing Agencies' plausible sources of 
operational risk in order to mitigate the impact of a potential 
event related to those sources using tailored risk profiles and 
monitoring risk profiles in accordance with the relevant Risk 
Tolerance Statements.

---------------------------------------------------------------------------

[[Page 22232]]

Other Changes
    The Framework inconsistently uses the term ``model'' without and 
with initial capitalization, but currently refers throughout to the 
risks relating to models referred to in the Framework as a defined term 
using initial capitalization--``Model Risk.'' To remain consistent with 
the usage of ``model'' throughout the Framework, FICC would conform all 
references to the term ``model'', so they appear without initial 
capitalization and change references to Model Risk throughout the 
Framework to eliminate the initial capitalization of the term and refer 
to it as ``model risk.''
    The Executive Summary of the Framework includes a description of 
internal DTCC policies and procedures that support the Framework, 
including the (a) DTCC Model Risk Management Policy, (b) DTCC Model 
Validation Procedures, (c) DTCC Model Risk Performance Monitoring 
Procedures, (d) the DTCC Backtesting Procedures and (e) Market Risk 
Tolerance Statement (``Related Procedures''). In addition to the 
policies and procedures described in the Executive Summary, the 
proposed rule change would list in the Executive Summary as a 
supporting policy, the Model Risk Tolerance Statement. The Model Risk 
Tolerance Statement articulates, among other things, risk tolerance 
levels covering model design and implementation, including 
consideration of a model's intended purpose and/or its adequacy of 
performance. The conclusion, based on risk tolerance levels, focuses on 
model remediation.
    Since the risk tolerance levels in both the Market Risk Tolerance 
Statement \20\ and the Model Risk Tolerance Statement consider model 
remediation as the basis of risk control, both are applicable to the 
Framework. In this regard, the proposed rule change would add a 
footnote after the listing of the Model Risk Tolerance Statement and 
the existing reference to the Market Risk Tolerance Statement to 
describe that with respect to the key risks \21\ of model risk and 
market risk, each risk tolerance statement documents the overall risk 
reduction or mitigation objectives as it relates to model risk and 
market risk activities and documents the risk controls and other 
measures used to manage such activities, including escalation 
requirements in the event of risk metric breaches. The footnote would 
also state that the Risk Tolerance Statements are reviewed, revised, 
retired, and/or replaced, as the case may be, and approved by the BRC 
(as defined herein) annually, based upon the circumstances, and the 
reasonable best judgement of management, then existing relating to 
model risk management matters. Consistent with proposed terminology 
described above with respect to Sections 4.1 and 4.2, the Model Risk 
Tolerance Statement and the Market Risk Tolerance Statement would be 
referred to collectively in the Executive Summary as the ``Risk 
Tolerance Statements.''
---------------------------------------------------------------------------

    \20\ The Market Risk Tolerance Statement articulates, among 
other things, risk tolerance levels covering margin backtests 
covering backtest coverage and stress tests covering exposure to 
extreme market moves. The conclusion, based on tolerance levels, 
focuses on model enhancement or model remediation, as applicable.
    \21\ DTCC has identified a set of key risks to better guide the 
content, measurement, frequency, and focus of our discussion and 
management of risk generally across the Organization.
---------------------------------------------------------------------------

    The Executive Summary also indicates that the Related Procedures 
may be updated or amended. The Clearing Agencies regularly review their 
internal policies and procedures, and in addition to updating or 
amending them as an administrative matter as they deem appropriate, may 
also retire or replace internal policies and procedures as they deem 
appropriate. In this regard, the proposed rule change would also 
include text to the effect that each of the Related Procedures and the 
Model Risk Tolerance Statement may retired or replaced (in addition to 
updated or amended).
Effective Date
    The proposed rule change would become effective upon approval by 
the Commission.
2. Statutory Basis
    The Clearing Agencies believe that the Framework is consistent with 
Section 17A(b)(3)(F) of the Act,\22\ as well as Rule 17Ad-22 
(e)(4)(vii), and (e)(7)(vii) thereunder,\23\ for the reasons described 
below.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ Supra note 6.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act \24\ requires, inter alia, that the 
rules of a clearing agency be designed 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. As described above, the 
Framework describes the process by which the Clearing Agencies 
identify, measure, monitor, and manage the risks associated with the 
design, development, implementation, use, and validation of 
quantitative models. The quantitative models covered by the Framework 
are applied by the Clearing Agencies, as applicable, to evaluate and 
address their respective risk exposures associated with their 
settlement activity and facilitate their ability 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. In this 
regard, the proposed changes to the Framework support their ability to 
develop models that are applied to evaluate and address risk exposure 
and facilitate the safeguarding of securities and funds which are in 
the custody or control of the Clearing Agencies or for which they are 
responsible by (i) changing the governance structure for approval of a 
Model Validation to transfer the responsibility for approval of model 
validations to the MVC, which is composed of individuals with a higher 
level of expertise relating to model validations than members of the 
MRC, which is currently responsible for such approvals, thereby 
enhancing the ability of the group conducting Model Validations to 
evaluate risk exposures relating to models, (ii) incorporating the 
Model Risk Tolerance Statement into the Framework which describes risk 
tolerance levels covering model design and implementation, including 
consideration of a model's intended purpose and/or its adequacy of 
performance, and therefore including a cross-reference to a document 
which describes an important gauge with respect to the level of risk 
that may be tolerated as part of managing the risk presented to the 
Clearing Agencies relating to models, (iii) clarifying the definition 
of Model Owner, therefore defining the first line responsible for 
evaluating risk exposure, (iv) reflecting changes in the role of the 
Model Risk Governance Committee and a change its name, which relates to 
the change in governance structure that is designed to enhance the 
independence in its new role of responsibility for approval of Model 
Validations which would support the Clearing Agencies' ability to 
evaluate risk exposure, (v) redefining the first and second line 
responsibilities and incentives relating to model performance 
monitoring and oversight, therefore enhancing the process by which risk 
relating to models is evaluated, and (vi) making other technical and 
clarifying changes to the text, as described above, to improve the text 
in defining roles and responsibilities for the processes established by 
the Clearing Agencies to monitor risk. Therefore, FICC believes the 
proposed rule change is consistent with the requirements of Section 
17A(b)(3)(F) of the Act,\25\ because it

[[Page 22233]]

would facilitate the ability of the Clearing Agencies to continue to 
develop models that are applied to evaluate and address risk exposure 
and allow them to maintain a Framework that facilitates the ability of 
the Clearing Agencies 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, as described above.
---------------------------------------------------------------------------

    \24\ 15 U.S.C. 78q-1(b)(3)(F).
    \25\ Id.
---------------------------------------------------------------------------

    Rule 17Ad-22(e)(4)(vii) \26\ and (e)(7)(vii) \27\ under the Act 
requires, inter alia, that a covered clearing agency establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to perform Model Validations on its credit risk 
models and liquidity risk models not less than annually or more 
frequently as may be contemplated by the clearing agency's risk 
management framework established pursuant to Rule 17Ad-22(e)(3).\28\ As 
discussed above, the proposed rule change would amend the Framework to 
provide for enhanced clarity in the text and enhanced efficiency with 
respect to the approval process for Model Validations at least 
annually. In this regard, and as noted above, pursuant to the 
Framework, Model Validations are performed not less than annually on 
its credit risk models and liquidity risk models. Therefore, the 
Clearing Agencies believe that the proposed changes to the Framework 
are consistent with Rule 17Ad-22(e)(4)(vii) \29\ and (e)(7)(vii) \30\ 
under the Act.
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(e)(4) (in particular, 17 CFR 240.17Ad-
22(e)(4)(vii)). See supra note 6.
    \27\ 17 CFR 240.17Ad-22(e)(7) (in particular, 17 CFR 240.17Ad-
22(e)(7)(vii)). See supra note 6.
    \28\ 17 CFR 240.17Ad-22(e)(3). See supra note 6.
    \29\ Supra note 6.
    \30\ Supra note 6.
---------------------------------------------------------------------------

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

    None of the Clearing Agencies believe that the Framework would have 
any impact, or impose any burden, on competition because the proposed 
rule change reflects clarifying changes and provides for a more 
efficient internal governance process and would not effectuate any 
changes to the Clearing Agencies' model risk management tools as they 
currently apply to their respective Members or Participants.

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

    The Clearing Agencies have not solicited or received any written 
comments relating to this proposal. The Clearing Agencies will notify 
the Commission of any written comments received by the Clearing 
Agencies.

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

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FICC-2020-004 on the subject line.

Paper Comments

     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-2020-004. 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-2020-004 and should be submitted on 
or before May 12, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\31\
---------------------------------------------------------------------------

    \31\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08377 Filed 4-20-20; 8:45 am]
BILLING CODE 8011-01-P