Document ID: SEC-2019-0548-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: ICE Clear Credit, LLC
Posted Date: 2019-04-23T04:00Z

[Federal Register Volume 84, Number 78 (Tuesday, April 23, 2019)]
[Notices]
[Pages 16900-16903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08107]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85673; File No. SR-ICC-2019-004]

Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice Relating to ICC's Model Validation Framework

April 17, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on April 5, 2019, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission the proposed rule change, security-
based swap submission, or advance notice as described in Items I, II 
and III below, which Items have been prepared by ICC. The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
security-based swap submission, or advance notice from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice

    The principal purpose of the proposed rule change is to revise the 
ICC Model Validation Framework. These revisions do not require any 
changes to the ICC Clearing Rules (``Rules'').

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change, 
security-based swap submission, or advance notice and discussed any 
comments it received on the proposed rule change, security-based swap 
submission, or advance notice. 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),

[[Page 16901]]

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, Security-Based Swap Submission, or 
Advance Notice

(a) Purpose
    ICC proposes revisions to its Model Validation Framework. 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.
    The Model Validation Framework sets forth ICC's model validation 
procedures. Through the model validation procedures, ICC determines the 
appropriateness of changes to the risk modeling components (``Model 
Components'') of ICC's risk management system and the appropriateness 
of the configuration and calibration of ICC's risk management system. 
ICC's proposed changes consist of clarification updates related to the 
classification of Model Components, documentation requirements, the 
priority scale used by independent validators, and the annual 
validation of Model Components and related practices. ICC proposes to 
make such changes effective following Commission approval of the 
proposed rule change.
    ICC proposes to revise the `Risk Management System Models' section 
to account for Model Components that are no longer utilized. Currently, 
the Model Validation Framework notes new Model Components, which 
consider risk drivers that are not currently included in the risk 
management system, and enhancements to Model Components, which improve 
upon the methodologies used by the risk management system to consider a 
given risk driver or drivers (collectively, ``Model Change''). ICC 
proposes to amend the Model Validation Framework to also consider 
retired Model Components, which are no longer utilized in the risk 
management system.
    In the `Model Change Qualification and Materiality' section, ICC 
proposes to include a quantitative measure to define certain Model 
Changes. ICC classifies Model Changes as either Materiality A or 
Materiality B, depending on how substantially the Model Change affects 
the risk management system's assessment of risk for the related risk 
driver or drivers. ICC proposes to characterize any Model Change that 
leads to a decrease/increase of the total pre-funded financial 
resources over a certain percentage as a Materiality A Model Change.
    The proposed revisions to the `Documentation Requirements' section 
relate to the Model Inventory, which is maintained by the ICC Risk 
Department and contains key information about all Model Components and 
Model Changes. The Model Validation Framework specifies documentation 
requirements for the type of information maintained in the Model 
Inventory. ICC proposes updates to the documentation requirements to 
include retired Model Components and to remove information considered 
not relevant for purposes of the Model Inventory.
    The proposed updates to the `Independent Initial Validation' 
section relate to the priority scale used by independent validators. 
The Model Validation Framework requires independent initial validators 
to classify their findings based on a priority scale, consisting of 
high, medium, and low priority ratings. ICC proposes to amend the low 
priority rating to allow ICC, in consultation with the Risk Committee, 
to take no action with respect to the corresponding item if it does not 
reflect a potential deficiency.
    ICC proposes clarifying changes to the `Independent Periodic 
Review' section. ICC proposes to include additional information 
regarding how it tracks the annual validation of Model Components and 
related practices. The proposed changes specify that independent 
validators perform periodic reviews of Model Components and related 
practices at least every twelve months and that ICC relies on the date 
of the engagement letter to track this twelve month requirement. As 
part of the independent periodic review, the Model Validation Framework 
also directs independent validators to classify their findings based on 
the priority scale. ICC proposes amendments to the low priority rating 
to note that corresponding items may reflect deficiencies that create 
immaterial risks and that ICC, in consultation with the Risk Committee, 
may take no action with respect to the corresponding item if it does 
not reflect a potential deficiency.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \3\ 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; 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; 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) \4\, 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, and contribute to the safeguarding of securities and 
funds associated with security-based swap transactions in ICC's custody 
or control, or for which ICC is responsible. The Model Validation 
Framework provides assurances as to the suitability of changes to Model 
Components and the appropriateness of the configuration and calibration 
of ICC's risk management system, including the appropriateness of risk 
requirements. The proposed changes to the Model Validation Framework 
provide additional detail and transparency regarding ICC's model 
validation procedures, which enhance ICC's approach to identifying 
potential weaknesses in ICC's risk management system by providing a 
process for reviewing and enhancing ICC's risk management system. 
Moreover, ICC believes that having policies and procedures that clearly 
and accurately document ICC's model validation procedures are an 
important component to the effectiveness of ICC's risk management 
system, which promotes the prompt and accurate clearance and settlement 
of securities transactions, derivatives agreements, contracts, and 
transactions and the safeguarding of securities and funds which are in 
the custody or control of ICC or for which it is responsible. 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 and to contribute to the 
safeguarding of securities and funds associated with security-based 
swap transactions in ICC's custody or control, or for which ICC is 
responsible within the meaning of Section 17A(b)(3)(F) of the Act.\5\
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    \3\ 15 U.S.C. 78q-1(b)(3)(F).
    \4\ Id.
    \5\ Id.
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    In addition, the proposed rule change is consistent with the 
relevant requirements of Rule 17Ad-22.\6\ Rule

[[Page 16902]]

17Ad-22(b)(2) \7\ requires ICC to establish, implement, maintain and 
enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions and use risk-based models and parameters to 
set margin requirements and review such margin requirements and the 
related risk-based models and parameters at least monthly. As described 
above, the Model Validation Framework sets forth ICC's model validation 
procedures, which provide assurances as to the appropriateness of 
changes to Model Components; the appropriateness of the configuration 
and calibration of ICC's risk management system, including through 
ongoing monitoring and validation; and the use of independent initial 
and annual validations. Such procedures serve to promote the soundness 
of Model Components and to ensure that ICC's risk management system is 
effective and appropriate in addressing the risks associated with 
clearing security based swap-related portfolios. Namely, the Model 
Validation Framework provides a process for continually reviewing and 
enhancing ICC's risk management system, including risk requirements, 
thereby promoting ICC's use of margin requirements to limit its credit 
exposures to participants under normal market conditions and ICC's use 
of risk-based models and parameters to set margin requirements and 
review such margin requirements and the related risk-based models and 
parameters at least monthly, consistent with Rule 17Ad-22(b)(2).\8\
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    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(b)(2).
    \8\ Id.
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    Rule 17Ad-22(b)(3) \9\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to maintain sufficient financial resources to withstand, at a 
minimum, a default by the two Clearing Participant (``CP'') families to 
which it has the largest exposures in extreme but plausible market 
conditions. The Model Validation Framework supports ICC's ability to 
maintain sufficient risk requirements and enhances ICC's approach to 
identifying potential weaknesses in the risk management system by 
requiring ICC to review and improve its risk management system, 
including through the use of independent initial and annual 
validations, thereby ensuring that ICC continues to maintain sufficient 
financial resources to withstand, at a minimum, a default by the two CP 
families to which it has the largest exposures in extreme but plausible 
market conditions, consistent with the requirements of Rule 17Ad-
22(b)(3).\10\
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    \9\ 17 CFR 240.17Ad-22(b)(3).
    \10\ Id.
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    Rule 17Ad-22(b)(4) \11\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for an annual model validation consisting of 
evaluating the performance of the clearing agency's margin models and 
the related parameters and assumptions associated with such models by a 
qualified person who is free from influence from the persons 
responsible for the development or operation of the models being 
validated. The proposed changes to the Model Validation Framework 
require independent validators to perform periodic reviews of Model 
Components and related practices at least every twelve months and 
include additional detail regarding tracking the annual validation of 
Model Components and related practices, thereby ensuring that ICC 
provide for an annual model validation consisting of evaluating the 
performance of ICC's margin models and the related parameters and 
assumptions associated with such models by a qualified person who is 
free from influence from the persons responsible for the development or 
operation of the models being validated, consistent with Rule 17Ad-
22(b)(4).\12\
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    \11\ 17 CFR 240.17Ad-22(b)(4).
    \12\ Id.
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    Rule 17Ad-22(d)(8) \13\ requires ICC to establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to have governance arrangements that are clear and transparent 
to fulfill the public interest requirements in Section 17A of the 
Act.\14\ The Model Validation Framework clearly assigns and documents 
responsibility and accountability for oversight of the Model Validation 
Framework and the performance of model validation procedures. The 
proposed revisions allow ICC, in consultation with the Risk Committee, 
to take no action with respect to certain items from independent 
validator reports. As such, the governance arrangements in the Model 
Validation Framework are clear and transparent, such that information 
relating to the assignment of responsibilities and the requisite 
involvement of ICC personnel, ICC departments, the Risk Committee, and 
the Board is clearly documented, consistent with the requirements of 
Rule 17Ad-22(d)(8).\15\
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    \13\ 17 CFR 240.17Ad-22(d)(8).
    \14\ 15 U.S.C. 78q-1.
    \15\ 17 CFR 240.17Ad-22(d)(8).
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(B) Clearing Agency'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 proposed changes to 
ICC's Model Validation Framework will 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) Clearing Agency's Statement on Comments on the Proposed Rule 
Change, Security-Based Swap Submission, or Advance Notice 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, Security-Based 
Swap Submission, or Advance Notice 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, security-based swap submission, or advance notice 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 [email protected]. Please include 
File Number SR-ICC-2019-004 on the subject line.

[[Page 16903]]

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-ICC-2019-004. 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, security-based 
swap submission, or advance notice that are filed with the Commission, 
and all written communications relating to the proposed rule change, 
security-based swap submission, or advance notice 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 
such filings will also be available for inspection and copying at the 
principal office of ICE Clear Credit and on ICE Clear Credit's website 
at https://www.theice.com/clear-credit/regulation. 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-ICC-2019-004 and should be submitted on 
or before May 14, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary .
[FR Doc. 2019-08107 Filed 4-22-19; 8:45 am]
 BILLING CODE 8011-01-P