[Federal Register Volume 87, Number 37 (Thursday, February 24, 2022)]
[Notices]
[Pages 10395-10401]
[FR Doc No: 2022-03875]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94273; File No. SR-DTC-2022-001]

Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Amend the Clearing Agency Model Risk Management Framework

February 17, 2022.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 11, 2022, The Depository Trust Company (``DTC'') 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. DTC filed the proposed rule
change pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 19b-
4(f)(6) thereunder.\4\ The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change

    The proposed rule change consists of amendments to the Clearing
Agency Model Risk Management Framework (``Framework'') of DTC and its
affiliates that are central counterparties, National Securities
Clearing Corporation (``NSCC'') and Fixed Income Clearing Corporation
(``FICC,'' and together with NSCC, the ``CCPs,'' and the CCPs together
with DTC, the ``Clearing Agencies'').\5\ The Framework has been adopted
by the Clearing Agencies to support their compliance with Rule 17Ad-
22(e) (the ``Covered Clearing Agency Standards'') under the Act,\6\
and, in this regard, applies solely to models \7\ utilized by the
Clearing Agencies that are subject to the model risk management
requirements set forth in Rules 17Ad-22(e)(4), (e)(6), and (e)(7) under
the Act.\8\
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    \5\ The Framework sets forth the model risk management practices
that the Clearing Agencies follow to identify, measure, monitor, and
manage the risks associated with the design, development,
implementation, use, and validation of quantitative models. The
Framework is filed as a rule of the Clearing Agencies. See
Securities Exchange Act Release Nos. 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''); 88911 (May 20, 2020), 85
FR 31828 (May 27, 2020) (File Nos. SR-DTC-2020-008, SR-FICC-2020-
004, SR-NSCC-2020-008); and 92379 (July 13, 2021), 86 FR 38143 (July
19, 2021) (File No. SR-DTC-2021-013), 92381 (July 13, 2021), 86 FR
38163 (July 19, 2021) (File No. SR-NSCC-2021-008), and 92380 (July
13, 2021), 86 FR 38140 (July 19, 2021) (File No. SR-FICC-2021-006)
(collectively, the ``MRMF Filings'').
    \6\ 17 CFR 240.17Ad-22(e). Each of DTC, NSCC and FICC is a
``covered clearing agency'' as defined in Rule 17Ad-22(a)(5) and
must comply with Rule 17Ad-22(e).
    \7\ Pursuant to Section 3.1 of the Framework, the Clearing
Agencies have adopted the following definition of ``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:
(i) An information input component, which delivers assumptions and
data to the model; (ii) a processing component, which transforms
inputs into estimates; and (iii) 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 2017 Notice,
supra note 5. See also Supervisory Guidance on Model Risk
Management, SR Letter 11-7 Attachment, dated April 4, 2011, issued
by the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency, available at https://www.federalreserve.gov/supervisionreg/srletters/sr1107a1.pdf, page
3.
    \8\ 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC because DTC is not a central counterparty.
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    The proposed rule change would amend the Framework \9\ to (i)
harmonize the terminology used in the Framework relating to model
validation, with the definition used by the Covered Clearing Agency
Standards, by deleting ``full'' where it appears as a modifier to
``model validation'' in the Framework; (ii) provide that provisional
approvals of models may be extended if approved by the Managing
Director of Model Risk Management (``MRM'') and notice thereof is given
to the Group Chief Risk Officer; however, in no event shall any
provisional approval, together with any extension(s) granted, exceed
one year and (iii) make other technical and clarifying changes to the
text, as described below.
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    \9\ Amending the Framework does not require any changes to the
Rules, By-Laws and Organization Certificate of DTC (available at
http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf) (the ``DTC Rules''), the Rulebook of the Government
Securities Division of FICC (available at https://www.dtcc.com/~/
media/Files/Downloads/legal/rules/ficc_gov_rules.pdf) (the ``GSD
Rules''), the Clearing Rules of the Mortgage-Backed Securities
Division of FICC (available at http://www.dtcc.com/~/media/Files/
Downloads/legal/rules/ficc_mbsd_rules.pdf) (the ``MBSD Rules''), or
the Rules & Procedures of NSCC (available at http://www.dtcc.com/~/
media/Files/Downloads/legal/rules/nscc_rules.pdf) (the ``NSCC
Rules,'' and collectively with the DTC Rules, GSD Rules, and MBSD
Rules, the ``Rules''), because the Framework is a standalone
document. See MRMF Filings, supra note 5.
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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) harmonize
the terminology used in the Framework relating to model validation,
with the definition used by the Covered Clearing Agency Standards, by
deleting ``full'' where it appears as a modifier to ``model
validation'' in the Framework; (ii) provide that provisional approvals
of models may be extended if approved by the Managing Director of MRM
and notice thereof is given to the Group Chief Risk Officer; however,
in no event shall any provisional approval, together with any
extension(s) granted, exceed one year and (iii) make other technical
and clarifying changes to the text, as described below.
Background
    The Covered Clearing Agency Standards require that the Clearing
Agencies take steps to manage the models that they employ in
identifying, measuring, monitoring, and managing their respective
credit exposures and liquidity risks, including that the Clearing
Agencies conduct daily backtesting of model performance, periodic
sensitivity analyses of models, and annual validation of models.\10\
The Framework is maintained by the Clearing Agencies to support their
compliance with the requirements of the Covered Clearing Agency
Standards relating to model risk management.
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    \10\ See 17 CFR 240.17Ad-22(e)(4), (e)(6) and (e)(7). References
to Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs
only and not to DTC.
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    The Framework outlines the applicable regulatory requirements
mentioned above, describes the risks that the Clearing Agencies' model
risk management program are designed to mitigate, and sets forth
specific model risk management practices and requirements adopted by
the Clearing

Agencies to ensure compliance with the Covered Clearing Agency
Standards. These practices and requirements include, among other
things, the maintenance of a model inventory (``Model Inventory''), a
process for rating model materiality and complexity, processes for
performing model validations and resolving findings identified during
model validation, and processes for model performance monitoring,
including backtesting and sensitivity analyses. The Framework also
describes applicable internal ownership and governance
requirements.\11\
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    \11\ See MRMF Filings, supra note 5, for additional information
on the contents of the Framework.
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    The proposed rule change would harmonize the terminology used in
the Framework relating to model validation, with the definition used by
the Covered Clearing Agency Standards, by deleting ``full'' where it
appears as a modifier to ``model validation'' in the Framework. The
proposed rule change would also amend the Framework to provide the
Clearing Agencies with the ability to make limited time extensions for
provisional approvals of models. In this regard, the proposed rule
change is designed to facilitate the Clearing Agencies' ability to
prudently manage contingencies relating to events or changes of
circumstance that may impact the Clearing Agencies' management of
credit risk, margin, and liquidity risk management models, in
accordance with the Framework. Additionally, the proposed rule change
would make technical and clarifying changes to the text of the
Framework, as described below.
Proposed Rule Change
Eliminate References to ``Full'' Model Validation
    With respect to model validation, the Covered Clearing Agency
Standards refer to the term simply as ``model validation,'' as defined
by Rule 17Ad-22(a)(9) under the Act.\12\ However, the Framework refers
to model validation both as a ``full model validation'' and ``model
validation,'' and as an undefined and defined term depending on usage.
For example, Section 1 (Executive Summary) of the Framework describes
Section 3 (Model Risk Management Framework), among other things, as
including a discussion on ``full model validation.'' Yet, ``Model
Validation'' is first defined in Section 3 as the definition used by
the Covered Clearing Agency Standards, which does not use the modifier
``full.'' Moreover, references to full model validation and model
validation in the Framework have the same meaning, as the Framework
does not distinguish between the two.
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    \12\ The term ``model validation'' means an evaluation of the
performance of each material risk management model used by a covered
clearing agency (and the related parameters and assumptions
associated with such models), including initial margin models,
liquidity risk models, and models used to generate clearing or
guaranty fund requirements, performed by a qualified person who is
free from influence from the persons responsible for the development
or operation of the models or policies being validated. 17 CFR
240.17Ad-22(a)(9).
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    To address these unnecessary variations, the Clearing Agencies
propose to harmonize the terminology used in the Framework relating to
model validation, with the applicable term used in the Covered Clearing
Agency Standards, by deleting ``full'' in all instances where it
appears as a modifier to ``model validation'' in the Framework. In this
regard, the word ``full'' preceding ``model validation'' would be
deleted from the Framework in all instances where it appears, including
(i) from the reference in Section 1 of the Framework, mentioned above,
(ii) renaming Section 3.3 of the Framework, named Full Model
Validation, as ``Model Validation,'' and (iii) deleting four
appearances of the word ``full'' before ``Model Validation'' in the
text of Section 3.
Extension of Provisional Approvals of Models
    The Covered Clearing Agency Standards require that the Clearing
Agencies identify, measure, monitor, and manage their respective credit
exposures and liquidity risks by performing model validations of their
respective credit risk and liquidity risk models not less than annually
or more frequently as may be contemplated by the applicable Clearing
Agency's established risk management framework.\13\ A covered clearing
agency that is a central counterparty must perform a model validation
for its margin system and related models not less than annually or more
frequently as may be contemplated by such central counterparty's risk
management framework.\14\
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    \13\ See 17 CFR 240.17Ad-22(e)(4)(vii) and (e)(7)(vii).
    \14\ See 17 CFR 240.17Ad-22(e)(6)(vii).
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    Section 3.6 of the Framework (Model Approval and Control) provides
that new models, and material changes to existing models, shall undergo
model validation by MRM and then be approved by MRM prior to business
use.
    In the absence of a Model Validation, provisional approvals with
respect to new models and material changes to existing models may be
issued to allow a model to be used for urgent business purposes prior
to the completion of MRM's Model Validation. Such provisional approval
requests must be presented by the applicable Model Owner \15\ to MRM,
which may provisionally approve the model for a limited period not to
exceed six months.
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    \15\ Pursuant to Section 3.1 of the Framework, the ``Model
Owner'' is the person designated by the applicable business area or
support function to be responsible for a particular model. The Model
Owner is recorded in the Model Inventory.
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    The Framework does not provide for extensions of this six-month
provisional approval period. However, MRM has observed, over time and
since the Framework was initially filed,\16\ that it could take longer
than six months to complete a model validation in accordance with the
timeframe set forth in Section 3.3 of the Framework. For example, a
model that has been provisionally approved and put into use while
undergoing further modification and/or enhancement by a third-party
developer, cannot undergo validation by MRM until such time as the
developer has completed its process and made the enhanced model
available to the Clearing Agencies. Considering the amount of time it
may take for the developer to complete and deliver the modification
and/or enhancement to the Clearing Agencies, as well as MRM's
validation process itself, it may be necessary for the model to operate
under provisional approval for a period greater than six months.
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    \16\ Supra note 5.
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    Therefore, pursuant to the proposed rule change, the Clearing
Agencies would amend Section 3.6 of the Framework to provide that
provisional approvals of models may be extended if approved by the
Managing Director of MRM and notice thereof is given to the Group Chief
Risk Officer; however, in accordance with the Covered Clearing Agency
Standards requirements that credit, liquidity and margin models, as
applicable, be validated at least annually,\17\ in no event shall any
provisional approval, together with any extension(s) granted, exceed
one year. In this regard, the proposed rule change would accommodate
the incorporation of any modifications and enhancements identified by a
developer into a provisionally approved model prior to model
validation, and still allow the model validation to be completed within
a timeframe that would be consistent with the requirements of both

the Framework and the Covered Clearing Agency Standards.
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    \17\ See 17 CFR 240.17Ad-22(e)(4)(vii), (e)(6)(vii) and
(e)(7)(vii).
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Technical and Clarifying Changes
Section 1 (Executive Summary)
    A sentence in Footnote 8 under Section 1 (Executive Summary) of the
Framework would be revised for clarity and grammatical usage. The
footnote describes the Model Risk Tolerance Statement and the Market
Risk Tolerance Statement, which are listed in Section 1 among a series
of documents used by the Clearing Agencies to support their execution
of the Framework. In describing the Market Risk Tolerance Statement,
the footnote states: ``. . . the Market Risk Tolerance Statement, which
articulates, among other things, risk tolerance levels covering margin
backtests covering backtest coverage and stress tests covering exposure
to extreme market moves.'' The proposed rule change would eliminate
certain repetitive usage of ``covering'' and ``coverage'' in the text
quoted above such that the applicable text would read as follows: ``. .
. the Market Risk Tolerance Statement, which articulates, among other
things, risk tolerance levels covering margin backtests and stress
tests related to exposure to extreme market moves.''
Section 2 (Model Risk Management Requirements)
    The first paragraph of Section 2 is intended by the Clearing
Agencies to describe that in compliance with Rules 17Ad-
22(e)(4)(vii),\18\ and (e)(7)(vii) \19\ of the Covered Clearing Agency
Standards, each Clearing Agency is required to 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).\20\ The main text of the
paragraph contains typographical errors, in that in place of the
reference to section (e) in each of the three rules citied in the
paragraph, it instead includes an erroneous reference to a section (C).
However, the footnotes to these references contain the correct
citations. The Clearing Agencies would revise the main text of the
paragraph to correct the erroneous references to section (C) to instead
refer to section (e).
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    \18\ 17 CFR 240.17Ad-22(e)(4)(vii).
    \19\ 17 CFR 240.17Ad-22(e)(7)(vii).
    \20\ 17 CFR 240.17Ad-22(e)(3).
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Section 3.1 (Model Inventory)
    Section 3.1 (Model Inventory) (i) sets forth the definition of
model adopted by the Clearing Agencies,\21\ (ii) defines MRM as
responsible for model risk management as a second-line function that is
charged with determining whether any proposed method, system, or
approach designed for Clearing Agency use meets the definition of
model, (iii) provides a definition of Model Inventory as the definitive
list of models subject to the Framework, (iv) describes a model
inventory survey that is conducted at least annually across the
Clearing Agencies to confirm that the Model Inventory is current, and
(v) describes that all models subject to the Framework are validated,
as described in the Framework.
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    \21\ See supra note 7.
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    The proposed rule change would make technical and clarifying
changes to the second paragraph of this section, which states:

    The Model unit within the Group Chief Risk Office that is
responsible for model risk management as a second-line function
(``MRM'') is charged with determining whether any proposed method,
system, or approach designed for Clearing Agency use meets the above
definition. All models subject to this Framework will be added to
the definitive list of models (``Model Inventory'') and tracked by
MRM. A Model Inventory Survey is conducted at least annually across
the Clearing Agencies to confirm the Model Inventory is current
(``Annual Model Inventory Survey''). 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 MRM to review and assess whether
such proposed model will be added to the Model Inventory. The person
designated by the applicable business area or support function to be
responsible for a particular model (``Model Owner'') is recorded as
the Model Owner for such model by MRM in the Model Inventory.

    First, for enhanced clarity, the first sentence of the paragraph
would be revised to replace the initial reference to ``The Model'' with
``Model Risk Management'' and define the term as ``MRM'' directly after
it is mentioned, rather than after additional descriptive text that
follows in the sentence. The proposed rule change would also eliminate
the reference to MRM as a ``unit'' because this reference is redundant
given the context describing the functionality of MRM implies that it
is a unit or group. Conforming grammatical changes would also be made
to delete ``that'' after ``Group Chief Risk Office'' and add ``and''
after ``second-line function.'' The third sentence of the paragraph
would be revised to make the initial letters in the words ``Model
Inventory Survey'' lower case (i.e., ``model inventory survey'') as the
term is not defined, but rather the reference is part of the
description of the defined term ``Annual Model Inventory Survey'' that
appears at the end of the sentence. The fourth sentence of the
paragraph would be revised for consistency by replacing ``business area
or support function'' with ``business line or functional unit,'' as the
latter reflects usage of text in underlying MRM internal procedures.
    Second, the Clearing Agencies believe that adding to the Model
Inventory certain methodologies used to implement configuration choices
made by the Clearing Agencies, such as data sources, model parameters,
and model performance monitoring, including but not limited to
backtesting, that are not inherent to model selection or design and
that do not materially impact a model's results, and are not models
subject to this Framework, may provide benefits for the Clearing
Agencies in terms of monitoring and tracking of such methodologies. In
this regard, the Clearing Agencies would add text to reflect that such
methodologies may be added to the Model Inventory at MRM's discretion.
    Finally, in the third paragraph of this section, the Clearing
Agencies would change a reference to ``risk management standards'' to
``Standards'' to conform to the defined term for the Covered Clearing
Agency Standards used throughout the Framework.
Section 3.2 (Model Materiality and Complexity)
    Section 3.2 of the Framework describes that a model's output can
affect decision making (e.g., decisions with respect to Clearing Fund/
Participants Fund, backtesting, and stress testing measures), which may
have a material impact on the Clearing Agency, and that each model
subject to the Framework is assigned a materiality/complexity rating in
this regard. The section states that ``[m]ateriality/complexity index
assignments are made at the time the applicable model is added to the
Model Inventory and are used by MRM for Model Validation
prioritization. All model materiality/complexity index assignments are
reviewed at least annually by MRM, as well as by the Model Risk
Governance Council (``MRGC''), the forum for review of model risk
matters.'' Pursuant to the proposed rule change, the Clearing Agencies
would replace both appearances of the words ``index assignments'' in
these two sentences

with ``scores.'' This change would align the text of the Framework with
MRM's practice, whereby MRM reviews materiality and complexity scores
of a model, which directly determine the applicable materiality/
complexity rating, at least annually.\22\
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    \22\ Specifically, the Clearing Agencies use the ``DTCC Model
Development Standards,'' which is a document describing that
materiality and complexity scores for a model, which scores are
based on certain factors, underlie the determination of the
materiality/complexity rating of the model. In accordance with the
DTCC Model Development Standards, factors relating to the
materiality score include model usage, model hierarchy and model
exposure. The factors relating to the complexity score include
structural complexity, and data availability and treatment.
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Section 3.3 (Full Model Validation)
    In addition to deleting ``full'' where it appears as a modifier to
``model validation'' in Section 3.3 of the Framework, as described
above, including in the title of the section, the proposed rule change
would make other technical and clarifying changes to this section.
    In a paragraph that describes Model Validation activities performed
for new models:

    (i) A reference to ``model development documentation and
testing'' would be changed to ``model documentation and development
testing'';
    (ii) a reference to ``evaluation of data inputs and parameters''
would be changed to ``evaluation of model inputs and parameters'';
    (iii) a reference to ``review of numerical implementation
(including replication for certain key model components, which will
vary from model to model)'' would be changed to ``review of model
implementation for consistency with documentation'';
    (iv) a reference to ``independent testing: sensitivity analysis,
stress testing, and benchmarking, as appropriate'' would be changed
to ``independent testing: model output evaluation, backtesting,
sensitivity analysis, stress testing, and benchmarking, as
appropriate''; and
    (v) a reference to ``evaluation of model outputs, model
performance, and back testing'' would be changed to ``evaluation of
model performance monitoring (or ``MPM'') plan and results.''
Similarly, a reference to ``model performance monitoring reports''
in Section 3.8 of the Framework (Model Performance Monitoring) would
be revised to consider the definition of the term MPM described
above. In this regard, this reference in Section 3.8 would be
revised to instead refer to ``MPM reports.''

    In the second paragraph of this section, the third sentence states:
``The Application Development Department for the Clearing Agencies will
perform certain production release quality assurance checks (e.g., user
acceptance testing/systems integration testing (UAT/SAT)).'' Pursuant
to the proposed rule change, this sentence would be revised to delete
``Application Development Department for the'' and ``(UAT/SAT)''. This
change would generalize the text to eliminate the need to revise the
document in the event the name of the area that performs such testing
changes.
    The Clearing Agencies would also revise this paragraph with respect
to text relating to ratings assigned to a model upon validation. In
this regard, the Framework currently describes that the result of each
Model Validation is a model validation report prepared by MRM (``Model
Validation Report''), a key section of which is the summary of all
findings and recommendations ranked according to the findings' severity
level, inclusive of any identified model limitations and compensating
controls for the model. This text would be revised to remove the
reference to recommendations as part of the Model Validation Report
because, pursuant to MRM's procedures, while the Model Validation
Report includes findings, it does not include recommendations. In
addition, the severity level of the findings is described in this
section to be classified as H, M or L, which the Clearing Agencies
intend as abbreviations for ``High,'' ``Medium,'' and ``Low.'' However,
as these abbreviations are not otherwise defined in the Framework, the
Clearing Agencies would replace the abbreviations with the full
spelling of the classifications, such that the instances in the text of
``H,'' ``M,'' and ``L'' would be replaced with ``High,'' ``Medium,''
and ``Low,'' respectively.
    This paragraph also describes that MRM will provide an overall
assessment for each model having undergone a Model Validation (``Model
Grade'').\23\ The Clearing Agencies propose to clarify this text such
that it describes each model that has been approved, as being rated (in
the form of a Model Grade) by MRM, rather than providing an overall
assessment.
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    \23\ The Clearing Agencies' current grading scale consists of
three grades--``A,'' ``B,'' and ``C.'' Any Clearing Agency may add
or remove grading levels in its discretion, the parameters of which
shall be reflected in written procedures established by such
Clearing Agency.
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    This paragraph states further that the Model Grade, together with
the model materiality/complexity index assignment, serves to provide
context for MRM's overall assessment of the model's suitability and
performance for its intended purpose. As with the revision described
immediately above, the Clearing Agencies would remove the reference to
a Model Grade as representing an overall assessment of the model. In
its place, the proposed rule change would provide a description that
the Model Grade outlines the overall assessed quality of the model
developer's efforts to develop the model and the extent to which the
model developer has effectively reduced model risk during model
development.
    In addition, it is the Model Grade that rates these development
quality considerations and risk factors, and the Model Grade does not
depend on the model materiality/complexity index assignment and is not
intended to signify the overall suitability of the model for its
intended purpose. Therefore, the Clearing Agencies would clarify this
point to remove the reference to model materiality and complexity as
being a factor in determining the Model Grade, as well as delete text
that indicates the Model Grade reflects the suitability of a model for
its intended purpose.
Section 3.4 (Periodic Model Validation)
    Section 3.4 of the Framework describes that MRM shall perform a
Model Validation for each model subject to this Framework that is
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,\24\ each
liquidity risk model,\25\ and each CCP's margin systems and related
models,\26\ as required by the risk management standards set forth in
the Framework. This type of Model Validation is referred to generally
in the Framework as ``periodic'' Model Validation. In this regard, for
the sake of clarity, the Clearing Agencies would insert the word
``periodic'' as a modifier for Model Validation in the first sentence
of the first paragraph of this section.
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    \24\ See 17 CFR 240.17Ad-22(e)(4)(vii).
    \25\ See 17 CFR 240.17Ad-22(e)(7)(vii).
    \26\ See 17 CFR 240.17Ad-22(e)(6)(vii).
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    In addition, the Clearing Agencies would delete a paragraph from
this section that states: ``Periodic Model Validations follow full
Model Validation standards. In certain cases, MRM 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 particular model warrants extra
validation.'' This text would be deleted because, as noted above, the
Framework recognizes one definition of Model Validation and the
provisions relating to how Model Validation is conducted apply to all

models regardless of timing, and it is unnecessary to state that
periodic Model Validation follows the same standards as ``full'' Model
Validation since there is only one concept of Model Validation. In
addition, the reference to extra Model Validation activities is
duplicative as the Framework contains other text indicating that Model
Validations may be performed for a given model more frequently than on
the minimum annual basis.
Section 3.5 (Model Change Management)
    Section 3.5 of the Framework describes provisions relating to
changes in models. The text of this section refers to a ``version
change'' of a model in describing changes to third-party models. The
section is intended to apply to any changes to a model and it is
unnecessary to modify the word change, including with ``version.''
Therefore, the Clearing Agencies would delete the word ``version''
where it appears before ``change'' in this section.
Section 3.6 (Model Approval and Control)
    In addition to the proposed change described above to extend the
period allowable for a provisional approval to remain in effect, the
Clearing Agencies would revise a sentence in Section 3.6 of the
Framework that states: ``Provisional approval requests along with
appropriate control measures must be presented by the applicable Model
Owner to MRM.'' The sentence as written is duplicative as the first
paragraph of Section 3.6 states that models must be submitted to MRM
for approval. However, given the focus of this section on the approval
of models, the Clearing Agencies believe that the section should more
clearly state where the approval authority resides for provisional
models. As stated above, it is MRM's responsibility to approve models.
Therefore, the Clearing Agencies would revise the sentence described
above to read: ``Provisional approval requests along with appropriate
control measures must be approved by MRM.''
    A sentence that states: ``All new models, and all material changes
to existing models, shall undergo Model Validation by MRM and then be
approved by MRM prior to business use'' would be revised to replace the
word ``then'' with ``must'' to clarify the requirement that a model
must be approved by MRM prior to use.
Section 3.7 (Resolution of Model Validation Findings)
    Consistent with the proposed change described above to remove the
description of a group within the Group Chief Risk Office as a
``unit,'' the Clearing Agencies would revise a reference to ``the
Operational Risk Management unit'' to delete the word ``unit'' from
this reference. Also, the Clearing Agencies would delete the word
``the'' before ``Operational Risk'' because it would not be
grammatically correct when ``unit'' is deleted. In addition, the group
name of ``Operational Risk Management,'' as set forth in this
reference, would be revised to ``Operational Risk'' to reflect a recent
name change of this group from Operational Risk Management to
Operational Risk. In connection with this name change, the term ``ORM''
that is used in this section to define ``Operational Risk Management''
would be deleted. Also, in this regard, two subsequent references to
ORM in the Framework, which appear in Section 3.7 and Section 4.2,
respectively, would be removed and replaced with ``Operational Risk.''
Section 3.8 (Model Performance and Monitoring)
    In addition to a change relating to the definition of MRM described
above, the Clearing Agencies would revise a footnote in Section 3.8 of
the Framework. The footnote 29 describes the role Quantitative Risk
Management (``QRM'') performs with respect to the CCPs' margin models.
A sentence within the note states that a representative of QRM self-
elects as the owner of a margin model. In fact, the CCPs' procedures
would require the representative to be appointed as the owner of a
model. Therefore, the Clearing Agencies would revise this footnote to
reflect that a representative of QRM is appointed as the owner of a
model.
    This section also contains a statement that MRM 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. This statement has a
footnote that states the organizational standards apply to DTCC's \27\
subsidiaries, as applicable. This footnote is unnecessary because the
Framework applies only to the Clearing Agencies and no other
subsidiaries of DTCC, and the mention to DTCC's subsidiaries in general
is extraneous. Therefore, pursuant to the proposed rule change, the
Clearing Agencies would delete this footnote.
---------------------------------------------------------------------------

    \27\ The Depository Trust & Clearing Corporation (``DTCC'') is
the parent company of the Clearing Agencies.
---------------------------------------------------------------------------

Section 3.9 (Backtesting)
    Section 3.9 of the Framework contains a description of backtesting
performed by the Clearing Agencies. Pursuant to the proposed rule
change, this section would be revised to delete references to
backtesting performed by DTC and related text, including applicable
metrics and thresholds, and a related footnote that describes the
designation of DTC account families by DTC Participants for purposes of
managing Collateral Monitor and Net Debit Cap. The proposed change
would be consistent with the Covered Clearing Agency Standards, which
pursuant to Rule 17Ad-22(e)(6) \28\ requires certain backtesting to be
performed by the CCPs. As indicated above, this rule does not apply to
DTC.\29\ In this regard, a reference to a backtesting metric
(Collateral Group Collateral Monitor Coverage) mentioned in Section 4.2
of the Framework (Escalation) would also be deleted.
---------------------------------------------------------------------------

    \28\ See 17 CFR 240.17Ad-22(e)(6).
    \29\ See supra note 8.
---------------------------------------------------------------------------

Section 4.2 (Escalation)
    A paragraph within Section 4.2 of the Framework states: ``On at
least a monthly basis, the key metrics identified in Section 3.9 are
reviewed by the Market and Liquidity Risk Management unit within the
Group Chief Risk Office and reported to the MRC \30\ by the group
within the Group Chief Risk Office responsible for risk reporting.
Threshold breaches will 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
applicable Risk Tolerance Statement.''
---------------------------------------------------------------------------

    \30\ MRC refers to the Management Risk Committee of the Boards
of Directors of the Clearing Agencies.
---------------------------------------------------------------------------

    Pursuant to the proposed rule change, first, the reference to a
Market and Liquidity Risk Management unit would be revised to reflect
only the Market Risk Management unit. Today, the Market Risk Management
and Liquidity Risk Management areas are under separate management, and
Market Risk Management is the area that performs the review of key
metrics described in the paragraph.

    Second, the Clearing Agencies would revise the paragraph to remove
the parenthetical that states, ``including the Market and Liquidity
Risk Management unit,'' after a reference to the Financial Risk
Management area's role in the review of threshold breaches of key
metrics, as both units are part of Financial Risk Management, and
therefore the parenthetical is unnecessary. In this regard, the
proposed modification would enhance readability.
    Third, the Clearing Agencies would remove the text ``by the group
within the Group Chief Risk Office responsible for risk reporting'' as
it is unnecessary since it can be inferred that reports would be
provided by the group responsible for such reporting.
2. Statutory Basis
    The Clearing Agencies believe that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act,\31\ as well as Rules
17Ad-22(e)(4), (e)(6), and (e)(7) thereunder,\32\ for the reasons
described below.
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    \31\ 15 U.S.C. 78q-1(b)(3)(F).
    \32\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC.
---------------------------------------------------------------------------

    Section 17A(b)(3)(F) of the Act \33\ 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
proposed rule change enhances (i) the Clearing Agencies' ability to
complete modifications to a provisionally approved model prior to the
performance of a model validation and (ii) the text of the Framework to
facilitate clarity for the areas within the Clearing Agencies that
perform responsibilities with regard to model risk management and
compliance with the Framework. By enhancing the Framework in this
regard, the proposed rule change supports the Clearing Agencies'
performance of their responsibilities under the Framework, including
but not limited to assuring that models developed function as intended
to support the Clearing Agencies in identifying, measuring, monitoring,
and managing their respective credit exposures, liquidity risks and, as
applicable, the maintenance of sufficient margin to cover these risks.
In this regard, the proposed rule change would promote the safeguarding
of securities and funds which are in the custody or control of the
Clearing Agencies or for which they are responsible, by promoting the
ability of the Clearing Agencies to manage credit exposures and
liquidity risk that may impact the safeguarding of those funds and
securities.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    Rules 17Ad-22(e)(4), (e)(6), and (e)(7) under the Act \34\ require,
inter alia, that a covered clearing agency establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to manage risks associated with its credit risk management
models, margin models, and liquidity risk management models,
respectively, as applicable. As discussed above, the proposed rule
change enhances (i) the Clearing Agencies' ability to complete
modifications to a provisionally approved model prior to the
performance of a model validation and (ii) the text of the Framework to
facilitate clarity for the areas within the Clearing Agencies that
perform responsibilities with regard model risk management and
compliance with the Framework. By enhancing the Framework in this
regard, the proposed rule change supports the Clearing Agencies'
performance of their responsibilities under the Framework, including
but not limited to assuring that models developed function as intended
to support the Clearing Agencies in identifying, measuring, monitoring,
and managing their respective credit exposures, liquidity risks and, as
applicable, the maintenance of sufficient margin to cover these risks.
Therefore, the Clearing Agencies believe that the proposed changes to
the Framework are consistent with Rules 17Ad-22(e)(4), (e)(6), and
(e)(7).\35\
---------------------------------------------------------------------------

    \34\ 17 CFR 240.17Ad-22(e)(4), (e)(6), and (e)(7). References to
Rule 17Ad-22(e)(6) and compliance therewith apply to the CCPs only
and not to DTC.
    \35\ Id.
---------------------------------------------------------------------------

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

    The Clearing Agencies do not believe that the proposed rule change
would have any impact, or impose any burden, on competition because the
proposed rule change simply modifies the Framework governing the
management of model risk by the Clearing Agencies and (a) would not
effectuate any changes to the Clearing Agencies' model risk management
tools as they apply to their respective Members or Participants and (b)
would not have an effect with respect to the obligations of
participants utilizing Clearing Agency services.

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

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

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

    Because the foregoing proposed rule change does not:

    (i) Significantly affect the protection of investors or the
public interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \36\ and
Rule 19b-4(f)(6) thereunder.\37\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78s(b)(3)(A).
    \37\ 17 CFR 240.19b-4(f)(6).

    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.

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 [email protected]. Please include
File Number SR-DTC-2022-001 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-DTC-2022-001. 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 DTC 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-DTC-2022-001 and should be submitted on
or before March 17, 2022.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-03875 Filed 2-23-22; 8:45 am]
BILLING CODE 8011-01-P


ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [ EPA R06 OAR 2005 TX 0033; FRL  ]

Approval and Promulgation of State Implementation Plans; Texas; Highly Reactive Volatile Organic Compound Emissions Cap and Trade Program for the Houston/ Galveston/ Brazoria Ozone Nonattainment Area AGENCY: Environmental Protection Agency ( EPA).

ACTION: Final Rule.

SUMMARY: EPA is approving revisions to the Texas State Implementation Plan concerning the Highly Reactive Volatile Organic Compound Emissions Cap and Trade Program for the Houston/ Galveston/ Brazoria ozone nonattainment area.

DATE: This rule is effective on [ FEDERAL REGISTER OFFICE: Insert date 30 days from date of publication in the Federal Register].

ADDRESSES: EPA has established a docket for this action under Docket ID No. EPA R06

OAR 2005 TX 0033. All documents in the docket are listed on the www. regulations. gov web site. Although listed in the index, some information is not publicly available, e. g., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. 2 Publicly available docket materials are available either electronically through www. regulations. gov or in hard copy at the Air Permitting Section ( 6PD R), Environmental Protection Agency, 1445 Ross Avenue, Suite 700, Dallas, Texas 75202 2733. The file will be made available by appointment for public inspection in the Region 6 FOIA Review Room between the hours of 8: 30am and 4: 30pm weekdays except for legal holidays. Contact the person listed in the FOR FURTHER INFORMATION CONTACT paragraph below to make an appointment. If possible, please make the appointment at least two working days in advance of your visit. There will be a 15 cent per page fee for making photocopies of documents. On the day of the visit, please check in at the EPA Region 6 reception area at 1445 Ross Avenue, Suite 700, Dallas, Texas.

The State submittal related to this SIP revision, and which is part of the EPA docket, is also available for public inspection at the State Air Agency listed below during official business hours by appointment:

Texas Commission on Environmental Quality, Office of Air Quality,

12124 Park 35 Circle, Austin, Texas 78753.

FOR FURTHER INFORMATION CONTACT: Adina Wiley, Air Permitting Section (

6PDR EPA Region 6, 1445 Ross Avenue, Dallas, Texas 75202 2733, telephone 214 665 2115,

wiley. adina@ epa. gov.

SUPPLEMENTARY INFORMATION: 3 Throughout this document wherever " we," " us," or " our" is used, we mean EPA.

Outline:

I. What action is EPA taking?

II. What is the background for this action?

III. What are EPA's responses to comments received on the proposed action?

IV. What does Federal approval of a State regulation mean to me?

V. Statutory and Executive Order Reviews I. What action is EPA taking?

EPA is approving the Highly Reactive Volatile Organic Compound Emissions Cap and Trade ( HECT) Economic Incentive Program ( EIP), published at Texas Administrative Code ( TAC) Title 30, Chapter 101 General Air Quality Rules, Subchapter H Emissions Banking and Trading, Division 6, sections 101.390   101.394, 101.396, 101.399   101.401, and 101.403.

These revisions were adopted by the Texas Commission on Environmental Quality ( TCEQ) on December 01, 2004, and submitted to EPA on December 17, 2004, as a revision to the State Implementation Plan ( SIP). As discussed in our proposed action at 70 FR 58144, we conclude that the HECT program is consistent with section 110( l) of the Clean Air Act. We proposed approval of the HECT program as an element of the Texas SIP for the Houston/ Galveston/ Brazoria ( HGB) ozone nonattainment area on October 5, 2005 ( 70 FR 58138). 4 II. What is the background for this action?

The HECT program was adopted as a state regulation on December 01, 2004. The TCEQ developed the program as part of its mid course review of the 1 hour ozone attainment plan for the HGB ozone nonattainment area. The mid course review showed that ozone reductions comparable to those achieved by the 90 percent reduction in industrial nitrogen oxide ( NOx)

emissions and the enforceable commitments for an additional 42 tons per day of NOx reductions required in the November 2001 ( 66 FR 57160) approved SIP could be achieved through a combination of 80 percent reduction in industrial NOx emissions and additional targeted control of certain highly reactive volatile organic compounds ( HRVOCs). TCEQ has chosen to revise its attainment strategy accordingly, decreasing the emphasis on NOx control and requiring additional reductions of HRVOCs.

In our proposed approval of the HECT program, we stated that final action on the HECT would not occur until we published final approval of the attainment demonstration, which is being processed concurrently with this approval. For a further discussion of the attainment demonstration and EPA's responses to comments on this action, please see our action on the attainment demonstration ( EPA R06 OAR 2005 TX 0018), which is being published elsewhere in today's Federal Register.

III. What are EPA's responses to comments received on the proposed action? 5 EPA's responses to comments submitted by Galveston Houston Association for Smog Prevention ( GHASP), Environmental Defense ( Texas Office), the Lone Star Chapter of the Sierra Club, and Public Citizen ( Texas Office) on November 4, 2005, are as follows. EPA has summarized the comments below; the complete comments can be found in the administrative record for this action ( EPA R06 OAR 2005 TX 0033). While the comments generally discuss VOC trading programs, we are only addressing comments specific to HRVOCs and the HECT. 1 Comment 1: The EPA uses the term " less reactive VOC", but the TCEQ term " other VOC" ( OVOC) is preferable. Some of the other VOCs are actually highly reactive on a molar basis, but are not emitted as widely or in as great a quantity as the designated HRVOCs.

Response to Comment 1: We agree that the term " other VOC" ( OVOC) will more accurately define VOCs that are not categorized by TCEQ as highly reactive. We are using the term OVOC instead of " less reactive VOC" in our final actions on the HGB attainment demonstration and associated rulemakings.

1 During the comment period, EPA did not receive comments regarding environmental justice and the HECT program. However, during the finalization process we have reevaluated our interpretation of the definition of Environmental Justice as found in Executive Order 12898. In our proposed approval of the HECT program, we stated that " environmental justice concerns arise when a trading program could result in disproportionate impacts on communities populated by racial minorities, people with low incomes, or Tribes." On further review, we believe the following description is more consistent with E. O. 12898: " Environmental justice concerns can arise when a final rule, such as a trading program, could result in disproportionate burdens on particular communities, including minority or low income communities." This revised language does not alter our determination that the HECT program does not raise environmental justice concerns. 6 Comment 2: There are problems with the inventory of VOC and HRVOC emissions in the HGB nonattainment area.

Response to Comment 2: While EPA acknowledges that there have been past VOC emission inventory problems from sources associated with the petrochemical industry ( see our proposed approval of the revisions to the HGB attainment demonstration, 70 FR 58119), EPA believes that the emission inventory developed by TCEQ for the HGB nonattainment area is an acceptable approach to characterizing the emissions in the HGB nonattainment area. In addition,

we are incorporating by reference our responses to comments provided in our approval of the attainment demonstration for the HGB ozone nonattainment area ( EPA R06 OAR 2005 TX

0018). Those responses more specifically address the commenters' concerns regarding the development and use of the imputed inventory, characterization of other VOCs in the inventory,

and appropriate emissions monitoring techniques for flares, fugitive emissions, and upsets. Also,

as will be discussed more fully in our responses to Comments 3 and 4, the implementation of the HECT and the associated monitoring and reporting requirements will serve to improve the emissions inventory for HRVOCs in the HGB nonattainment area.

Comment 3: The VOC and HRVOC trading programs use unreliable data, which cannot be replicably measured. There are problems with current methods for measurement of HRVOC and VOC emissions; therefore, the VOC and HRVOC trading programs do not meet EPA's EIP Guidance for quantification.

Response to Comment 3: EPA disagrees. The proposed HECT rule, at 70 FR 58138,

describes the basis for EPA's conclusion that the HECT rule satisfies the EIP Guidance 7 (" Improving Air Quality with Economic Incentive Programs" EPA 452/ R 01 001, January 2001)

criteria on quantifiability, which are found in Chapter 4 (" Fundamental Principles of All EIPs").

Emissions and emission reductions attributed to an EIP are quantifiable if they can be reliably and replicably measured: the source must be able to reliably calculate the amount of emissions and emission reductions from the EIP strategy, and must be able to replicate the calculations. Under the HECT program, sources address the element of quantification by using a quantification protocol that has been approved by TCEQ and EPA. Both agencies have important roles in ensuring these protocols provide reliable and replicable emission measurements. The approved quantification protocols for calculating annual HRVOC emissions for compliance with the HECT program are contained in sections 115.725 and 115.764 of 30 TAC Chapter 115, Control of Air Pollution from Volatile Organic Compounds. Additionally,

VOC emission reduction credits ( ERCs) that are eligible for conversion into HECT allowances must also be quantified using the monitoring and testing methods required in sections 115.725 and 115.764 and certified under the Emission Credit Banking and Trading program. The monitoring and testing protocols in sections 115.725 and 115.764 all require continuous monitoring systems; EPA considers continuous monitoring systems reliable and replicable ( see Section 5.3( a) of the EIP Guidance). If the monitoring and testing data required under sections 115.725 and 115.764 are unavailable, sources can calculate HRVOC emissions for HECT compliance during this time period through continuous monitoring data, periodic monitoring data, testing data, data from manufacturers, and engineering calculations. This measurement hierarchy agrees with the emission measurement protocol hierarchy that EPA recommends in the EIP Guidance ( see Section 5.2( d)). 8 Comment 4: TCEQ and EPA lack confidence in current methods for measuring emissions. This lack of confidence increases the risks associated with a market based trading program, until the TCEQ is able to reconcile ambient monitoring with industry emission inventories. For example, trading could exacerbate the challenge of identifying the cause of any program failures because comparisons of ambient monitoring trend data to emission inventory data will require consideration of the timing and magnitude of trades.

Response to Comment 4: EPA disagrees. We have discussed above in response to Comments 2 and 3 our conclusion that the methods used for measuring emissions under the HECT program are consistent with EPA policy and guidance, and that the emissions inventory developed by TCEQ is an acceptable approach to characterizing the emissions in the HGB nonattainment area. Further, to the extent there are concerns related to differences between ambient monitoring data and the HGB industrial emissions inventory, the operation of the HECT will serve to increase rather than decrease the level of certainty. Specifically, the use of approved quantification methods required under the HECT will extend monitoring to vent gas streams, flares, and cooling tower heat exchanges systems that might not have been adequately monitored before. Accordingly, accounting for actual emissions under the HECT   which is required of each source subject to this program   should improve the industrial emissions inventory.

Comment 5: The EPA should find that it is premature for TCEQ to allow trading of unquantifiable emissions of VOCs in the HGB nonattainment area. If either the source or the 9 recipient incorrectly estimates the emissions involved in a trade, the region is at risk of a net increase in emissions as a result of the trade. Until refineries and chemical plants are able to routinely quantify their VOC emissions, EPA should not allow trading of these VOC emissions.

Response to Comment 5: EPA disagrees that VOC emissions should be ineligible for trading in the HGB nonattainment area. EPA believes that allowing the petrochemical industry to trade VOC emissions under the HECT program is appropriate because the TCEQ has made changes in regulatory requirements to require that certain sources of VOC emissions comply with continuous emissions monitoring requirements by the end of 2006. Additionally, as discussed in the EIP Guidance, we have concluded that cap and trade programs can be effective ways to reduce emissions, especially from large stationary sources. Each trade is part of a system designed to significantly reduce emissions of the pollutants subject to the cap. EPA also believes that allowing the petrochemical industry to trade HRVOC emissions under the HECT program is appropriate notwithstanding the commenter's concern about emissions estimates,

because the HECT program satisfies the EIP Guidance criteria for quantification. In the HECT program, sources trading HECT allowances must quantify their emissions using the approved protocols in 30 TAC Chapter 115. The use of approved protocols ensures that sources correctly estimate their excess allowances or the amount of allowances needed to cover actual emissions.

Additionally, TCEQ included a five percent safety margin in setting the overall level of annual emissions allowed under the HECT, which should produce a net annual average HRVOC emissions decrease in the HGB nonattainment area below the level set by the cap. 10 Comment 6: EPA should not approve the exclusion of emissions above the short term limit from the annual cap if a trading program is approved.

Response to Comment 6: EPA disagrees. We requested specific comment on this feature of the program because, as noted by us and the commenters, it departs from past practices with cap and trade programs. The commenters made one specific point in this regard, which we address in Comment 7. Our response to the more general comment follows.

A key feature of the HGB attainment strategy is the two part approach to HRVOC emissions. Routine HRVOC emissions are targeted and reduced through an annual cap

andtrade program, while the non routine emissions from emission events, maintenance, start up and shutdown are controlled through a short term limit of 1200 lb/ hour. When exceedances of the short term limit occur, the hourly emissions above 1200 lb/ hr are not counted toward compliance with the annual cap but are still subject to enforcement as a violation of the short term limit.

EPA expects that the root cause of the conditions giving rise to any particular exceedance of the short term limit will be identified and corrected as expeditiously as practicable. The source is still required to use good air pollution control practices consistent with the applicable NSPS ( 40 CFR 60.11( d)) and MACT standards or other applicable Federal or State programs.

TCEQ concluded that separating the two control elements was an appropriate means of protecting smaller sources subject to the HECT from depending on market availability of allowances or facing enforcement action if all emissions from an exceptionally large release exhausted their HECT allowances. Additionally, this separation of the annual cap and the short 11 term limit establishes a clear procedure for handling emissions during non routine events. We believe the annual cap in conjunction with the short term limit will achieve the goals of the attainment demonstration as indicated by TCEQ's modeling analysis. Please see our action and TSD on the attainment demonstration ( EPA R06 OAR 2005 TX 0018) for further explanation.

An additional advantage of separating these two control elements is that counting all emissions toward the annual cap could result in a loss of the incentives and cost effectiveness associated with cap and trade programs. In EPA's experience with cap and trade programs,

some sources will always overcontrol emissions, which they in turn will most likely sell to other sources that cannot achieve such reductions without making greater expenditures. Through the functioning of the cap and trade market, reductions will tend to be made by the sources able to make them in the most cost effective manner, and therefore the program will tend to promote the achievement of the maximum amount of emission reductions per dollar of resources expended.

In the HGB area, however, an additional important factor is present, in that a significant number of sources have the potential for large emissions events or " spikes." In such circumstances, if a cap and trade program counts all emissions towards the cap, then overcontrolling sources will tend to retain all of their reductions as insurance against the possibility of consuming their entire annual allowance through an unforeseeable emissions event.

Therefore, eligible reductions will not be traded as allowances, which will impair the market function of the cap and trade program and thereby weaken its tendency to cost effectively achieve emission reductions. The two part structure of the Texas program offsets this disadvantage. 12 Comment 7: EPA's analysis suggests that the HECT program could lead to results that flout the intent of an EIP. An example would be a company that invests in efforts to dramatically reduce its routine HRVOC emissions below its annual cap, but fails to invest in efforts to reduce its risk of a major upset. This company could be the largest single emitter of HRVOCs in a year while also being a major seller of HECT allowances.

Response to Comment 7: EPA disagrees. The proposed HECT rule, at 70 FR 58143,

describes EPA's analysis and our determination that, on balance, the HECT program is approvable. The intent of the HECT is to reduce routine emissions of HRVOCs. The scenario presented by the commenters actually supports the design of the HECT, in that the routine HRVOC emissions have been controlled because the company has been able to " dramatically reduce" these emissions below the facility's annual allocation level. The emissions associated with a major upset that are exempted from the annual cap ( emissions above 1200 lb/ hr) would be violations of the short term emissions limit and subject to enforcement. We believe that this two part approach to control of HRVOC emissions recognizes the uniqueness of the HGB nonattainment area and is appropriate to demonstrate attainment. Additional information on our analysis of the attainment demonstration is available in the rulemaking docket for this action ( EPA R06 OAR 2005 TX 0018).

As noted in our proposed approval, the exemption of hourly limit exceedances from the annual cap is not provided for in EPA's EIP Guidance, but the scenario provided by the commenters is unlikely to occur. Based on the final HECT allocation scheme updated March 20, 13 2006, the largest allocation is 441.9 tons. This allocation is approximately equivalent to 100.9 lb/ hr, assuming the facility will operate with the allocation as an hourly average to represent routine emissions. Therefore, the largest HECT allocation will be approximately twelve times smaller than the 1200 lb/ hr short term limit. For every other source under the HECT, the disparity would be even greater. Based on this difference between the short term limit and presumed routine emissions levels, no source would be able to operate at the hourly limit for an extended period of time without pushing its emissions total close to or above the annual cap   in which case it would not be able to sell allowances. Therefore, as discussed in our proposal, only truly non routine emissions will exceed the hourly limit. Such exceedances are subject to enforcement as a violation of the 1200 lb/ hr limit. Thus, two factors militate against the existence of the commenters' hypothetical high emitting allowance seller: ( 1) the improbability of a source operating for long above the hourly limit without consuming a large part of its annual allocation, and ( 2) the fact that each time it did exceed the hourly limit, it could be subject to enforcement. Because we find that the result cited by the commenters is unlikely to occur, we continue to believe that the relative advantages and disadvantages of the structure of the HECT program support approval.

Also, while the structure of the HECT and the HRVOC rules anticipates that emission events will not be completely eradicated, EPA believes that in combination these programs provide sufficient disincentives that sources will sufficiently reduce the frequency and magnitude of large emissions events such that emission events would not be expected to impact peak ozone levels. The University of Texas report " Variable Industrial VOC Emissions and Their Impact on Ozone Formation in the Houston Galveston Area," April 16, 2004, estimated from historic 14 information that it is probable that at least one event will occur annually at a time and location to impact peak ozone. TCEQ determined, and EPA concurs, that it is therefore necessary to reduce the frequency of emission events so that emission events do not interfere with attainment of the 1 hour NAAQS, which only allows an average of one exceedance per year. Based on this study,

we believe the hourly emission limit will achieve this goal. Because facilities would be expected to take action to avoid emissions events exceeding the short term limit of 1200 lbs/ hr, we anticipate that the frequency of such events in the future will be lower than in the past and on average less than 1 event per year impacting peak ozone should be expected. The University of Texas study also supports our belief that even if the scenario presented by the commenters does actually occur, it is unlikely to impact attainment of the 1 hour ozone NAAQS.

Comment 8: If EPA approves the exclusion of emissions above the short term cap from the annual cap, it should at least condition its approval on the TCEQ adopting a requirement that a company may not be a net seller of HECT allowances in the same year that it makes use of the exclusion.

Response to Comment 8: EPA disagrees. The condition described by the commenters is not necessary to ensure that the HECT functions properly. As described in our response to Comment 7 above, it is unlikely that a source would be a net seller of allowances and also exempt emissions above the hourly limit from its annual cap. 15 Comment 9: If EPA approves the HECT program as adopted by the TCEQ, EPA should commit to independently auditing the program annually during its first several years to determine whether implementation of the rule meets EIP Guidance.

Response to Comment 9: EPA disagrees that an independent audit of the HECT is necessary. As proposed by EPA ( 70 FR 58138), the HECT does have a formal audit provision that provides sufficient oversight to identify and address potential areas of concern. The audit provision is in section 101.403( a) of the HECT rules and requires TCEQ to conduct an audit every three years, beginning in 2007. The audit will evaluate the impact of the program on the State's ozone attainment demonstration, the availability and cost of allowances, compliance by the participants, and any other elements the TCEQ Executive Director may choose to include.

The TCEQ Executive Director will recommend measures to remedy any problems identified during the audit, including discontinuing allowances trading. The audit data and results must be completed and submitted to EPA and made available for public inspection within six months from the beginning of the audit. EPA will receive the audit reports and will have the opportunity through the SIP process to require any necessary changes. Additionally, facilities that do not have enough allowances to cover their actual HRVOC emissions during a control period will have their allowances for the next control period reduced by an amount equal to the emissions exceeding the allowances, plus an additional ten percent of the exceedance. Also, the TCEQ Executive Director has the authority to initiate enforcement actions if necessary to correct violations of the HECT program. 16 The HECT audit provisions described above are consistent with EPA's expectations for evaluating the results of an economic incentive program ( EIP), as outlined in section 5.3( b) of the EIP Guidance. Section 5.3( b) explains that an appropriate schedule for program evaluations is at least every three years, which coincides with other periodic reporting requirements such as those applicable to emission inventory requirements required by the CAA. EPA believes that the triennial HECT audit schedule and the required annual report ( section 101.403( b)) that summarizes all HECT trades completed in the most recent control period will be sufficient to ensure the HECT does not jeopardize the HGB area's attainment strategy.

EPA's response to Texas Industry Project ( TIP) comments made on November 4, 2005,

is as follows:

Comment: TIP supports EPA's proposed approval of the HECT program and urges EPA to finalize its approval as soon as practicable.

Response: EPA acknowledges the support of TIP for our approval of the HECT program.

EPA's response to comments made by the BCCA Appeal Group ( BCCAAG) on November 4, 2005, is as follows:

Comment 1: BCCAAG supports EPA's proposed approval of the HECT program and urges EPA to finalize its approval as soon as practicable. 17 Comment 2: BCCAAG supports the establishment of a separate short term limit on HRVOC emissions, and the exclusion of short term limit exceedances from the HECT program.

Response to Comment 1 and 2: EPA acknowledges the support of BCCAAG for our approval of the HECT program and the specific feature of the HECT that allows exceedances of the short term limit to be exempt from the HECT.

We note that BCCAAG also submitted a set of comments on November 4, 2005, that were specific to our proposed action on the revisions to the HGB attainment demonstration. On page 8 of this submittal, the commenter references the HECT, but gives no additional information relevant to our rulemaking on the HECT. We are addressing this separate BCCAAG submittal in our action on the attainment demonstration ( EPA R06 2005 TX 0018).

IV. What does Federal approval of a State regulation mean to me?

Enforcement of the State regulation before and after it is incorporated into the Federally approved SIP is primarily a State function. However, once the regulation is Federally approved,

EPA and the public may take enforcement action against violators of these regulations.

V. Statutory and Executive Order Reviews 18 Under Executive Order 12866 ( 58 FR 51735, October 4, 1993), this action is not a " significant regulatory action" and therefore is not subject to review by the Office of Management and Budget. For this reason, this action is also not subject to Executive Order 13211, " Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution,

or Use" ( 66 FR 28355, May 22, 2001). This action merely approves state law as meeting Federal requirements and imposes no additional requirements beyond those imposed by state law.

Accordingly, the Administrator certifies that this rule will not have a significant economic impact on a substantial number of small entities under the Regulatory Flexibility Act ( 5 U. S. C.

601 et seq.). Because this rule approves pre existing requirements under state law and does not impose any additional enforceable duty beyond that required by state law, it does not contain any unfunded mandate or significantly or uniquely affect small governments, as described in the Unfunded Mandates Reform Act of 1995 ( Public Law 104 4).

This rule also does not have tribal implications because it will not have a substantial direct effect on one or more Indian tribes, on the relationship between the Federal Government and Indian tribes, or on the distribution of power and responsibilities between the Federal Government and Indian tribes, as specified by Executive Order 13175 ( 65 FR 67249, November 9, 2000). This action also does not have Federalism implications because it does not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government, as specified in Executive Order 13132 ( 64 FR 43255, August 10, 1999). This action merely approves a state rule implementing a Federal standard, and does not alter the relationship or the distribution of power and responsibilities established in the CAA. This rule 19 also is not subject to Executive Order 13045 A Protection of Children from Environmental Health Risks and Safety Risks @

( 62 FR 19885, April 23, 1997), because it is not economically significant.

In reviewing SIP submissions, EPA =

s role is to approve state choices, provided that they meet the criteria of the CAA. In this context, in the absence of a prior existing requirement for the State to use voluntary consensus standards ( VCS), EPA has no authority to disapprove a SIP submission for failure to use VCS. It would thus be inconsistent with applicable law for EPA,

when it reviews a SIP submission, to use VCS in place of a SIP submission that otherwise satisfies the provisions of the CAA. Thus, the requirements of section 12( d) of the National Technology Transfer and Advancement Act of 1995 ( 15 U. S. C. 272 note) do not apply. This rule does not impose an information collection burden under the provisions of the Paperwork Reduction Act of 1995 ( 44 U. S. C. 3501 et seq.).

The Congressional Review Act, 5 U. S. C. section 801 et seq., as added by the Small Business Regulatory Enforcement Fairness Act of 1996, generally provides that before a rule may take effect, the agency promulgating the rule must submit a rule report, which includes a copy of the rule, to each House of the Congress and to the Comptroller General of the United States. EPA will submit a report containing this rule and other required information to the U. S.

Senate, the U. S. House of Representatives, and the Comptroller General of the United States prior to publication of the rule in the Federal Register. A major rule cannot take effect until 60 days after it is published in the Federal Register. This action is not a A major rule @

as defined by 5 U. S. C. section 804( 2). 20 Under section 307( b)( 1) of the CAA, petitions for judicial review of this action must be filed in the United States Court of Appeals for the appropriate circuit by [ FEDERAL REGISTER OFFICE: insert date 60 days from date of publication of this document in the Federal Register]. Filing a petition for reconsideration by the Administrator of this final rule does not affect the finality of this rule for the purposes of judicial review nor does it extend the time within which a petition for judicial review may be filed, and shall not postpone the effectiveness of such rule or action. This action may not be challenged later in proceedings to enforce its requirements. ( See section 307( b)( 2).)

List of Subjects 40 CFR Part 52 Environmental protection, Air pollution control, Intergovernmental relations, Nitrogen oxides, Ozone, Reporting and recordkeeping requirements, Volatile organic compounds.

Dated: August 24, 2006 Richard E. Greene,

Regional Administrator, Region 6. 21 40 CFR part 52 is amended as follows:

PART 52[ AMENDED]

1. The authority citation for Part 52 continues to read as follows:

Authority: 42 U. S. C. 7401 et seq.

Subpart SS  Texas 2. The table in § 52.2270( c) entitled " EPA Approved Regulations in the Texas SIP" is amended under Chapter 101   General Air Quality Rules, Subchapter H   Emissions Banking and Trading, by adding in numerical order a new centered heading " Division 6   Highly Reactive Volatile Organic Compound Emissions Cap and Trade Program" followed by new entries for sections 101.390, 101.391, 101.392, 101.393, 101.394, 101.396, 101.399, 101.400, 101.401 and 101.403.

The additions read as follows:

§ 52.2270 Identification of plan.

* * * * *

( c) * * * 22 EPA Approved Regulations in the Texas SIP State Citation Title/ Subject State approval/ submittal date EPA approval date Explanation Chapter 101   General Air Quality Rules * * * * * * * Subchapter H   Emissions Banking and Trading * * * * * * * Division 6   Highly Reactive Volatile Organic Compound Emissions Cap and Trade Program Section 101.390 Definitions 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.391 Applicability 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.392 Exemptions 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.393 General Provisions 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.394 Allocation of Allowances 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.396 Allowance Deductions 12/ 01/ 04 [ Insert date of FR publication] 23 [ Insert FR page number where document begins] Section 101.399 Allowance Banking and Trading 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.400 Reporting 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.401 Level of Activity Certification 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] Section 101.403 Program Audits and Reports 12/ 01/ 04 [ Insert date of FR publication] [ Insert FR page number where document begins] * * * * * * *