[Federal Register Volume 80, Number 71 (Tuesday, April 14, 2015)]
[Notices]
[Pages 20058-20060]
[FR Doc No: 2015-08455]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74685; File No. SR-ICC-2014-24]

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

April 8, 2015.

I. Introduction

    On December 22, 2014, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change SR-ICC-2014-24 pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The
proposed rule change was published for comment in the Federal Register
on January 9, 2015.\3\ On February 20, 2015, the Commission extended
the time period in which to either approve, disapprove, or institute
proceedings to determine whether to disapprove the proposed rule change
to April 9, 2015.\4\ The Commission received no comment letters
regarding the proposed change. For the reasons discussed below, the
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-73980 (Jan. 5, 2015),
80 FR 1466 (Jan. 9, 2015) (SR-ICC-2014-24).
    \4\ Securities Exchange Act Release No. 34-74341 (Feb. 20,
2015), 80 FR 10551 (Feb. 26, 2015) (SR-ICC-2014-24).

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II. Description of the Proposed Rule Change

    ICC proposes revising the ICC Risk Management Framework to
incorporate risk model enhancements related to Recovery Rate
Sensitivity Requirements (``RRSR''), anti-procyclicality, and ICC's
Guaranty Fund (``GF'') allocation methodology. ICC also proposes
revisions which are intended to remove obsolete references and ensure
consistency.
    ICC proposes revising its Risk Management Framework to incorporate
risk model parameter estimation enhancements related to the RRSR
computations. ICC states that under its current ICC Risk Management
Framework, recovery rate stress scenarios are explicitly incorporated
in the RRSR computations and for Jump-to-Default (``JTD'')
considerations. The quantity RRSR is designed to capture fluctuations
due to potential changes of the market expected recovery rates. In
calculating the RRSR, all instruments belonging to a Risk Factor
(``RF'') or Risk Sub-Factor (``RSF'') are subjected to Recovery Rate
(``RR'') stress scenarios to obtain resulting Profit/Loss (``P/L'')
responses, and the worst scenario response is chosen for the estimation
of the RF/RSF RRSR. The JTD analysis is designed to capture the
unexpected potential losses associated with credit events for assumed
single-name-specific set of RR stress values. The JTD responses are
determined by using minimum and maximum RR levels. Currently, the RRSR
and JTD computations use the same RR stress levels.
    ICC proposes separating the RR stress levels for these two
computations in order to introduce more dynamic and appropriate
estimations of the RR stress levels for RRSR purposes. According to
ICC, the RR levels for RRSR purposes will reflect a 5-day 99% Expected
Shortfall (``ES'') equivalent risk measure associated with RR
fluctuations. The proposal will also, as stated by ICC, eliminate index
RRSR, as index RRs are not subject to market uncertainty, but rather
driven by market conventions. ICC states that the dynamic feature of
the RR stress level estimations is achieved by analyzing historical
time series of RRs in order to calibrate a statistical model with a
time varying volatility. Under this approach, ICC calculates, the RRSR
will capture the exposure to RR fluctuations over a 5-day risk horizon
described by 99% ES equivalent risk measure.
    Additionally, ICC proposes revising its Risk Management Framework
to incorporate a portfolio level anti-procyclicality analysis that
features price changes observed during and immediately after the Lehman
Brothers (``LB'') default. In order to achieve an anti-procyclicality
of Spread Response requirements, ICC proposes consideration of explicit
price scenarios derived from the greatest price decrease and increase
during and immediately after the LB default. According to ICC, these
scenarios capture the default of a major participant in the credit
market and the market response to the event. The introduced scenarios
are defined in price space to maintain the stress severity during
periods of low credit spread levels and high price when the Spread
Response requirements computed under the current framework are expected
to be lower.
    Further, as explained by ICC, the price scenarios derived from the
greatest price decrease and increase during and immediately after the
LB default are explicitly incorporated into the GF sizing to ensure an
anti-procyclical GF size behavior. ICC states that this enhancement
also addresses a regulatory requirement as described in Article 30 of
the Regulatory Technical Standards,\5\ European Market Infrastructure
Regulations.
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    \5\ Commission Delegated Regulation (EU) No. 153/2013 of 19
December 2012 Supplementing Regulation (EU) No. 648/2012 of the
European Parliament and of the Council with regard to Regulatory
Technical Standards on Requirements for Central Counterparties (the
``Regulatory Technical Standards'').
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    Furthermore, ICC proposes enhancements to its GF allocation
methodology. Currently, ICC states that the GF allocations reflect a
risk ``silo'' approach, which separates each GF risk component. Under
the current methodology, the allocation of GF reflects the Clearing
Participants' (``CPs'') own riskiness in proportion to each GF risk
component size and the increase or decrease of the ``silo'' size.
Therefore, GF allocations can significantly fluctuate in response to
position changes in the portfolios of the CPs that drive the GF size.
ICC proposes modifying its methodology so that the GF allocations
reflect the CPs' total uncollateralized losses across all GF risk
components. According to ICC, under the proposed approach, the GF
allocations are independent of the distribution of the uncollateralized
losses across various GF risk components or ``silos'' and the
fluctuation of each CP's uncollateralized losses within various GF risk
components or ``silos.'' Additionally, ICC added clarifying language
regarding how the GF computations are performed with explicit currency
dependent expressions.
    ICC also proposes certain non-substantive changes to the Risk
Management Framework to address CFTC recommendations. Specifically, ICC
proposes amending the Risk Management Framework to reflect ICC's
current approach towards portfolio diversification, by unifying
diversification and hedge thresholds and explicitly setting both to be
equal to the lowest estimated sector Kendall Tau correlation
coefficient. ICC also proposes clarifying language regarding how ICC
meets its liquidity requirements.
    Additionally, ICC proposes non-substantive changes throughout the
framework to correct obsolete references. Specifically, ICC is removing
language stating that the Chief Risk Officer is a dual employee of both
ICC and its sister company, The Clearing Corporation. ICC is also
removing language stating that The Clearing Corporation is the provider
of risk management services to ICC. Furthermore, ICC is removing
references to the ``U.K. Financial Services Authority'' and replacing
with references to the ``U.K. Prudential Regulatory Authority.''
Finally, ICC is adding ``The European Securities and Markets
Authority'' to the sample list of competent authorities for capital
adequacy regulation listed in the framework.
    ICC also proposes non-substantive changes throughout the Risk
Management Framework to ensure consistency. ICC is updating the mission
statement contained within the document to be consistent with ICC's
Board-approved mission statement. Also, ICC is modifying the frequency
by which the Risk Department monitors various risk metrics from a
quarterly basis to a monthly basis to reflect actual business
practices.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \6\ directs the Commission to
approve a proposed rule change of a self-regulatory organization if the
Commission finds that such proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to such self-regulatory organization. Section 17A(b)(3)(F)
of the Act \7\ requires, among other things, that the rules of a
clearing agency are designed to promote the prompt and accurate
clearance and

settlement of securities transactions and, to the extent applicable,
derivative agreements, contracts, and transactions and, in general, to
protect investors and the public interest.
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission finds that the proposed rule change is consistent
with Section 17A of the Act \8\ and the rules thereunder applicable to
ICC, including the requirements of Rule 17Ad-22.\9\ The Commission
believes that the part of the proposal separating the RR stress levels
for the JTD and RRSR computations would use a more robust and
quantitative driven approach for establishing the RR stress scenarios,
resulting in more dynamic and appropriate estimations of the RR stress
levels for RRSR purposes. The Commission finds that the incorporation
of the Lehman Brothers default price scenarios into the computation of
the Spread Response requirements enhances the anti-procyclical feature
of ICC's risk methodology. The Commission further finds that the
proposed rule change that modifies the current GF allocation
methodology to reflect the CPs' total uncollateralized losses across
all GF components regardless of the fluctuation of the CPs'
uncollateralized losses with respect to each GF component would result
in more stable attributions of GF contributions to individual CP/client
portfolios. Finally, the Commission finds that the proposed non-
substantive and clarification changes are each designed to more
accurately reflect ICC's current practices.
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    \8\ 15 U.S.C. 78q-1.
    \9\ 17 CFR 240.17Ad-22.
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    Therefore, the Commission believes that the proposal is designed to
promote the prompt and accurate clearance and settlement of securities
transactions and derivative agreements, contracts and transactions
cleared by ICC and, in general, to protect investors and the public
interest, consistent with Section 17A(b)(3)(F) of the Act \10\ and
Rules 17Ad-22(b)(1), (2) and (3).\11\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(1), (2) and (3).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \12\ and the
rules and regulations thereunder.
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    \12\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-ICC-2014-24) be,
and hereby is, approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition and
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08455 Filed 4-13-15; 8:45 am]
 BILLING CODE 8011-01-P