[Federal Register Volume 85, Number 77 (Tuesday, April 21, 2020)]
[Notices]
[Pages 22191-22197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-08369]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88639; File No. SR-DTC-2020-008]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Modify the Clearing Agency
Model Risk Management Framework
April 15, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 10, 2020, 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. 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.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
(a) The proposed rule change of DTC would amend the Clearing Agency
Model Risk Management Framework (``Framework'') of DTC and its
affiliates 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'').\3\ Specifically, the proposed
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rule change would amend the Framework to (i) change the governance
structure for approval of a model \4\ validation (``Model
Validation''), (ii) incorporate a model risk tolerance statement
(``Model Risk Tolerance Statement'') and related provisions, (iii)
clarify the definition of Model Owner (as defined below), (iv) reflect
changes in the role of the Model Risk Governance Committee and a change
of its name, (v) redefine the first and second line responsibilities
and incentives relating to model performance monitoring and oversight
and (vi) make other technical and clarifying changes to the text, as
more fully described below.
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\3\ The Framework sets forth the model risk management practices
adopted by the Clearing Agencies, which have been designed to assist
the Clearing Agencies in identifying, measuring, monitoring, and
managing the risks associated with the design, development,
implementation, use, and validation of quantitative models. See
Securities Exchange Act Release No. 81485 (August 25, 2017), 82 FR
41433 (August 31, 2017) (File Nos. SR-DTC-2017-008; SR-FICC-2017-
014; SR-NSCC-2017-008) (``2017 Notice''). The Framework is managed
by the Clearing Agencies' risk management areas generally
responsible for model validation and control matters, DTCC Model
Validation and Control (``MVC''), on behalf of each Clearing Agency,
with review and oversight by senior management and the Risk
Committee of the Board of Directors of each of DTC, FICC, and NSCC
(collectively, ``Boards''). See Id.
\4\ The Clearing Agencies have adopted the following definition
for the term ``model'': ``[M]odel'' refers to a quantitative method,
system, or approach that applies statistical, economic, financial,
or mathematical theories, techniques, and assumptions to process
input data into quantitative estimates. A ``model'' consists of
three components: An information input component, which delivers
assumptions and data to the model; a processing component, which
transforms inputs into estimates; and a reporting component, which
translates the estimates into useful business information. The
definition of ``model'' also covers quantitative approaches whose
inputs are partially or wholly qualitative or based on expert
judgment, provided that the output is quantitative in nature. See
Supervisory Guidance on Model Risk Management, SR Letter 11-7, dated
April 4, 2011, issued by the Board of Governors of the Federal
Reserve System and the Office of the Comptroller of the Currency, at
3.
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Although the Clearing Agencies consider the Framework to be a rule,
the proposed rule change does not require any changes to the Rules, By-
Laws and Organization Certificate of DTC (``DTC Rules''), the Rulebook
of the Government Securities Division (``GSD'') of Fixed Income
Clearing Corporation (such Rulebook hereinafter referred to as ``GSD
Rules''), the Clearing Rules of the Mortgage-Backed Securities Division
(``MBSD'') of Fixed Income Clearing Corporation (``such Clearing Rules
hereinafter referred to as ``MBSD Rules''), or the Rules & Procedures
of NSCC (``NSCC Rules''), as the Framework would be a standalone
document.\5\
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\5\ Capitalized terms not defined herein are defined in the DTC
Rules, NSCC Rules, GSD Rules or MBSD Rules, as applicable, available
at http://dtcc.com/legal/rules-and-procedures.
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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) change
the governance structure for approval of a Model Validation, (ii)
incorporate the Model Risk Tolerance Statement with respect to related
forward-looking provisions associated with maintaining multiple model
risk-related tolerance statements, (iii) clarify the definition of
Model Owner, (iv) reflect changes in the role of the Model Risk
Governance Committee and a change of its name, (v) redefine the first
and second line responsibilities and incentives relating to model
performance monitoring and oversight and (vi) make other technical and
clarifying changes to the text, as more fully described below.
Although the Clearing Agencies consider the Framework to be a rule,
the proposed rule change does not require any changes to the DTC Rules,
GSD Rules, MBSD Rules, or NSCC Rules, as the Framework would be a
standalone document.
Background
The Framework is maintained by the Clearing Agencies for compliance
with Rule 17Ad-22(e)(4)(i), (e)(4)(vii), (e)(6)(iii), (e)(6)(vi),
(e)(6)(vii), and (e)(7)(vii) under the Act,\6\ and sets forth the model
risk management practices adopted by the Clearing Agencies, which have
been designed to assist the Clearing Agencies in identifying,
measuring, monitoring, and managing the risks associated with the
design, development, implementation, use, and validation of
quantitative models. The Framework is managed by MVC, on behalf of each
Clearing Agency, with review and oversight by senior management of each
Clearing Agency and the Boards.\7\
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\6\ 17 CFR 240.17Ad-22(e)(4)(i), (e)(4)(vii), (e)(6)(iii),
(e)(6)(vi), (e)(6)(vii), and (e)(7)(vii). Each of DTC, NSCC and FICC
is a ``covered clearing agency'' as defined in Rule 17Ad-22(a)(5)
and must comply with subsection (e) of Rule 17Ad-22. References to
Rule 17Ad-22(e)(6) and its subparagraphs cited herein, and
compliance therewith, apply to the CCPs only and do not apply to
DTC.
\7\ The parent company of the Clearing Agencies is The
Depository Trust & Clearing Corporation (``DTCC''). DTCC operates on
a shared services model with respect to the Clearing Agencies. Most
corporate functions are established and managed on an enterprise-
wide basis pursuant to intercompany agreements under which it is
generally DTCC that provides a relevant service to a Clearing
Agency.
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Pursuant to the Framework, a model developed for use by any of the
Clearing Agencies and meeting the above definition for the term
``model'' is included and tracked within a model inventory (``Model
Inventory'') maintained by MVC.\8\
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\8\ See 2017 Notice, supra note 3.
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As Model Validation and the process for approval of Model
Validations is a key concept that flows through the Framework, DTC is
providing the following background regarding Model Validation to
supplement the proposed rule changes discussed further below.
Model Validation
Pursuant to Section 3.3 (Full Model Validation) of the Framework,
each new model undergoes a Model Validation (unless provisionally
approved, as discussed below) pursuant to which MVC verifies that the
model is performing as expected in accordance with its design
objectives and business purpose. The Model Validation standards,
referred to in the Framework as the full Model Validation standards for
any new model include, but are not be limited to, the following core
Model Validation activities, as listed in the Framework:
Evaluation of the model development documentation and
testing;
evaluation of model theory and assumptions, and
identification of potential limitations;
evaluation of data inputs and parameters;
review of numerical implementation including replication
for certain key model components, which would vary from model to model;
independent testing: Sensitivity analysis, stress testing,
and benchmarking, as appropriate; and
evaluation of model outputs, model performance, and back
testing.
Pursuant to the Framework, Full Model Validation is applied under
the following circumstances: (i) For all new models prior to their use
in production; (ii) during periodic Model Validations (as described
below); and (iii) when model changes are made that require independent
Model Validation (as further described below).
Pursuant to Section 3.4 (Periodic Model Validation) of the
Framework, models approved for use in production are subject to what is
currently referred to in the Framework as periodic Model Validations
for purposes of confirming that the models continue to operate as
intended, identifying any deficiencies that would call into question
the continuing validity of any such model's
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original approval and evaluating whether the model and its prior
validation remain valid within the dynamics of current market
conditions.
In this regard, the Framework describes that MVC performs a Model
Validation for each model approved for use in production not less than
annually (or more frequently as may be contemplated by such Clearing
Agency's established risk management framework), including each credit
risk model,\9\ liquidity risk model,\10\ and in the case of FICC and
NSCC, as central counterparties, on their margin systems and related
models.\11\
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\9\ See Rule 17Ad-22(e)(4)(vii). See supra note 6.
\10\ See Rule 17Ad-22(e)(7)(vii). See supra note 6.
\11\ See Rule 17Ad-22(e)(6)(vi) and (vii). See supra note 6.
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Periodic Model Validations and a full Model Validation follow
identical standards. The Framework states that in certain cases, MVC
may determine extra Model Validation activities are warranted based on
previous Model Validation work and findings, changes in market
conditions, or because performance monitoring of a model warrants extra
validation.
Pursuant to the Framework all findings that result from a new Model
Validation, a change Model Validation, a periodic Model Validation, or
in connection with implementation of a new model or model change, are
centrally tracked by MVC.
Proposed Rule Changes
Section 3.1 Model Inventory
Section 3.1 of the Framework currently explains how any model
developed for use by any of the Clearing Agencies and meeting the above
definition for the term ``model'' would be subject to tracking within
the Model Inventory. MVC is charged with responsibility for adding
models to the Model Inventory and for tracking models listed in the
Model Inventory. Section 3.1 also describes how a Model Inventory
survey is conducted at least annually across the Clearing Agencies to
confirm the Model Inventory is current. During the Annual Model
Inventory Survey, any business area or support function intending to
have a model developed for Clearing Agency use will submit materials
relevant to such proposed model for MVC to review and assess whether
such proposed model will be added to the Model Inventory.
Proposed Change To Enhance Flow and Readability of Text
Pursuant to the proposed rule change, DTC would remove the use of
the modifier ``Clearing Agency'' with respect to references to models
in this section and throughout the Framework. The Framework relates
solely to models of the Clearing Agencies and the use of this modifier
is redundant. This change would enhance the flow and readability of the
text by eliminating a redundancy.
Model Owner
Also, the proposed rule change would move the first reference to
the defined term ``Model Owner'' from the last paragraph of the section
to the second paragraph of the section and clarify the meaning of the
term. This reference would appear in a new sentence that would describe
that a Model Owner is the person designated by the applicable business
area or support function to be responsible for a particular model, and
that the Model Owner is recorded as the Model Owner for such model by
MVC in the Model Inventory. The Framework currently describes the Model
Owner as responsible for the development or operation of the model
being validated by MVC, without noting that the Model Owner is an
individual designated by the applicable business unit or support
function. In this regard, the proposed change would provide
clarification that an individual is designated as the Model Owner by
the applicable business area or support function.
The proposed rule change would also change the Clearing Agency
title of the individual that is the head of MVC that is referred to in
a footnote in this section from being an Executive Director to Managing
Director of each Clearing Agency to reflect that a more senior officer
of the Clearing Agencies would be responsible for supervising the
MVC.\12\ The footnote also states that the head of MVC reports to the
Group Chief Risk Officer \13\ rather than to any Model Owner.\14\ This
statement would be amended to clarify the independence of the MVC
extends so that it is independent from anyone who develops and operates
a model and not only a Model Owner. Also relating to the status of the
head of MVC within the governance structure of the Clearing Agencies,
this footnote would note that the head of MVC is a member of the
Management Risk Committee (``MRC'').
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\12\ A Managing Director is senior to an Executive Director.
\13\ The Clearing Agencies' Model Risk management standards and
practices are subject to the oversight and direction of the Group
Chief Risk Officer, who is the head of the Group Chief Risk Office.
\14\ The purpose of the footnote is to make clear that MVC
management has an independent reporting line to the Group Chief Risk
Office, without potential conflict of reporting to any person that
could be a Model Owner.
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Replacement of Term ``Vendor'' With ``Externally Purchased''
Section 3.1 currently contains a paragraph which describes that all
models, whether internally developed or purchased from a ``vendor,''
are subject to Model Validation. Pursuant to the proposed rule change,
DTC would revise the text of this paragraph to replace the term
``vendor'' with ``externally purchased.'' DTC believes use of the term
``externally purchased'', rather than vendor, would provide clarity
with respect to sections of the Framework that apply to models
developed internally versus externally.
Section 3.2 Model Materiality and Complexity
Section 3.2 of the Framework outlines that MVC assigns a
materiality rating and a complexity rating to each model after it is
added to the Model Inventory and describes that the applicable rating
impacts the model's validation in terms of prioritization and approval
authority.
As more fully described below regarding Section 3.6 of the
Framework, the proposed rule change would provide for the delegation of
approval authority for all Model Validations from the Clearing
Agencies' management level committee responsible for model risk
management matters to MVC, and the authority to approve model
validations would vest solely in MVC.\15\
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\15\ Currently, Model Validations that have a materiality rating
of `Medium' or `High,' must be approved by the MRC, after the model
has been reviewed and recommended to the MRC for approval by the
MRGC. Additionally, all periodic Model Validations must currently be
approved by the MRC to be deemed complete through review and
recommendation by the MRGC.
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In this regard, a materiality rating and complexity rating would no
longer be determinative of approval authority and the text that
describes approval authority as impacted by materiality and complexity
ratings would be deleted.
As a related change in the model governance structure, the forum
currently referred to as the Model Risk Governance Committee would no
longer maintain oversight authority in the model validation process and
the text in this section would reflect that it is the forum for review
of Model Risk matters rather than the formal forum for addressing Model
Risk matters. The Model Risk Governance Committee's name would be
revised in this section and throughout to refer to it instead as the
Model Risk Governance Council (``MRGC'') to reflect its proposed role
as an advisory body rather than being part of the formal model
governance process. In this regard, the text of Section 3.2 would be
revised to reflect that the
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MRGC is a forum for review of, rather than addressing, Model Risk
matters and a footnote would be added to state that MRGC is an advisory
body that has no decision-making authority but would discuss and/or
review certain model risk related matters which could result in advice
and/or recommendation, which is generally directed to the interested
party of a given model that brings the matter, as applicable.
The proposed change to shift responsibility for Model Risk matters,
including approval of Model Validations, to MVC would ensure that MVC
has sole responsibility for approving Model Validations, as MVC is best
suited within the Clearing Agencies to manage the quantitative and
technical expertise to carry out the related functions.
Section 3.5--Model Change Management
Section 3.5 (Model Change Management) currently states that an
active model may require changes in either structure or technique.
Details for any model change request are provided to MVC for review and
a determination of whether full Model Validation is required. This
section also includes text that states to the extent that a vendor's
version change may impact any existing model used in production, an
impact study of the version change along with any other analysis/
benchmarking shall be conducted as appropriate in MVC's reasonable
business discretion.
The process described in this section will not be amended pursuant
to the proposed rule change, however, to remain consistent with the use
of terminology as described with respect to Section 3.1 above,
references to ``vendor'' models in this section would be revised to
reflect that models not developed by the Clearing Agencies would
instead be referred to as externally purchased.
Section 3.6--Model Approval and Control
Section 3.6 (Model Approval and Control) currently provides that
all new models, and all material changes to existing models, undergo
Model Validation by MVC and must be approved prior to business use.
Currently, in cases where such model's materiality is ``Medium'' or
``High,'' such Model Validation is reviewed by the MRGC and recommended
by the MRGC to MRC, for approval.
As stated above, the proposed rule change would redefine the first
and second line responsibilities and incentives relating to model
performance monitoring and oversight.
With respect to the first line, the proposed rule change would
remove a reference to the Financial Engineering Unit (``FEU'') within
Quantitative Risk Management (``QRM''). QRM is a risk management
function within the Group Chief Risk Office, and a representative of
QRM is the Model Owner for all margin Models used by the CCPs under the
Standards for Covered Clearing Agencies (``Standards'') under the
Securities Exchange Act of 1934. Because the Model Owner resides in
QRM, QRM is responsible for developing, testing, and signing-off on new
models and enhancements to existing models before submitting any such
model to MVC for Model Validation and approval. Due to an
organizational restructuring, FEU was eliminated, and pursuant to the
proposed rule change, the responsibilities of FEU described above would
vest in the Model Owners, who as described with respect to the proposed
changes to Section 3.1 above, would have responsibility for the models.
With respect to the second line, the proposed rule change would
revise this section to remove the requirement that MRC approve any
Model Validation. In this regard, MVC would have the sole and exclusive
authority to approve a model. As stated above, the Clearing Agencies'
believe that the MVC is best suited to address Model Validation issues
based on its quantitative and technical expertise and knowledge, and
the section would be revised accordingly to reflect MVC's proposed role
in this regard. As such, the proposed rule change would remove any text
that indicates that MRC approval is required for any Model Validation
to be complete and/or for a model to remain in production.
Also, consistent with the change in the role of MRGC from one of
oversight to instead acting in an advisory capacity, as described
above, the proposed rule change would also remove text indicating that
MRGC would review and recommend Model Validations to MRC or have any
role in provisional approvals \16\ of models.
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\16\ In this regard, Section 3.6 that states that models may be
provisionally approved by MVC for a limited period, not to exceed
six months unless also approved by the MRGC, would be revised to
delete the reference to MRGC's role. Consistent with the changes
relating to the second line as described above, MVC would assume
full responsibility for provisional approvals and, and consistent
with text in Section 3.6, would continue to track all provisional
approvals to confirm provisional periods and control measures are
met.
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Section 3.8--Model Performance Monitoring
Pursuant to the Framework, MVC is currently responsible for model
performance monitoring and for each Clearing Agency's backtesting
process, which are integral parts of each Clearing Agency's model risk
management framework. In this regard, Section 3.8 (Model Performance
Monitoring) of the Framework states that model performance monitoring
is the process of (i) evaluating an active model's ongoing performance
based on theoretical tests, (ii) monitoring the model's parameters
through the use of threshold indicators, and/or (iii) backtesting using
actual historical data/realizations to test a Value-at-Risk (``VaR'')
model's predictive power.
The proposed rule change would eliminate references to
``theoretical tests'' and ``threshold indicators'' and ``historical
data/realizations'' to represent a real-world depiction of the model
performance monitoring process. These changes are being proposed
because the process of model performance monitoring does not always
take into account theoretical tests, threshold indicators, and/or
historical data/realizations, but ``could'' take some or all of these
into account and appropriate under the circumstances. Therefore, the
elimination of the ties to these tests, thresholds and use of
historical data/realizations are a more accurate representation of the
model performance monitoring process.
In addition, Section 3.8 would be revised to reflect changes to the
roles of Model Owners and the MVC consistent with the roles of the
first and second lines described above, and add text stating that Model
Owners are responsible for the design and execution of model
performance monitoring and preparation of model performance monitoring
reports. The proposed text would also state that MVC is responsible for
providing oversight of model performance monitoring activities by
setting organizational standards and providing critical analysis for
identifying Model issues and/or limitations.\17\
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\17\ The organizational standards apply to DTCC's subsidiaries,
as applicable.
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One paragraph within Section 3.8 contains a statement that MVC is
responsible for model performance monitoring, including review of risk-
based models used to calculate margin requirements and relevant
parameters/threshold indicators, sensitivity analysis, and model
backtesting results, and preparation of related reports. It
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also states that review of these model performance measures is subject
to review by MRGC. To remain consistent with the change in the role of
MRGC and the related consolidation of primary responsibility for
oversight in the model governance process in MVC, as described above,
this paragraph would be deleted.
Also, consistent with the shift of the responsibility in this
regard to Model Owners, Section 3.8 would be clarified to indicate that
QRM, because the Model Owner for all margin models used by the CCPs
under the Standards would reside in QRM, would be responsible for model
performance monitoring the CCP's margin models
Section 3.9--Backtesting
Section 3.9 states that MVC is responsible for each Clearing
Agency's VaR backtesting processes for the central counterparties,
including for model backtesting and Clearing Fund Requirement (``CFR'')
backtesting. Consistent with the changes described above, this section
would be revised to state that this backtesting function for models and
CFR would reside with QRM, as it is the owner of margin models and
would be responsible for performance monitoring functions with respect
to margin models.
Section 4.1--Board of Directors and Senior Management Reporting
Section 4.1 describes MRGC as the primary forum for MVC's regular
reporting of Model Validation activities and material Model Risks
identified through regular Model performance monitoring. Reports and
recommendations with respect to Model Risk management are made to the
MRC as described in Section 3.
Periodic reporting to the Risk Committee of the Clearing Agencies'
Boards (``BRC'') regarding Model Risk matters may include:
Updates of Model Validation findings and the status of
annual validations.
Updates on significant Model Risk matters, and on
compliance matters with respect to Model Risk policies and procedures
(including this Framework).
Escalation of Model Risk matters as set forth in the
Market Risk Tolerance Statement, and subsequent, regular updates with
respect thereto.
The proposed rule change would revise Section 4.1 to reflect the
changes to the roles of MVC and MRGC as described above. In this
regard, the proposed rule change would delete the description of MRGC's
role as it would no longer have oversight of Model Validation and model
performance monitoring and would add MRC as a recipient of periodic
reporting. The proposed rule change would also generalize the statement
relating to escalation of matters as set forth in the Market Risk
Tolerance Statement to instead refer to ``the Risk Tolerance
Statements'' to reflect the addition of a reference to the Model Risk
Tolerance Statement as a supporting document for the Framework, as more
fully described below.
Section 4.2--Escalation
Section 4.2 describes, among other things, how on at least a
monthly basis, the key metrics identified in Section 3.9 (Backtesting)
are reviewed by the Market and Liquidity Risk Management unit within
the Group Chief Risk Office and MVC and reported to MRC. Given MVC's
reduced role with respect to backtesting in this regard, the proposed
rule change would eliminate the provision that MVC would review the
metrics.\18\
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\18\ Text would be added to clarify that the risk metrics are
reported to MRC by the group within Group Chief Risk Office
responsible for risk reporting. Currently, this function is known as
Risk Reporting.
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The proposed rule change would also revise text for clarity and
readability with respect to statements on the review of the Market Risk
Tolerance Statement, to reference ``Risk Tolerance Statements'' more
generally to reflect the changes described herein. Also, the proposed
rule change would remove MRGC's role in review and approval of changes
to backtesting methodology and instead vest that responsibility with
MVC, to reflect the change in oversight of Model Validation from MRGC
to MVC.
Also, to enhance the readability and flow of the text in this
section, the proposed rule change would move text describing that (i)
the review of the Risk Tolerance Statements by the Managing Director of
the Market and Liquidity Risk Management unit (``MDMLRM'') within the
Group Chief Risk Office will occur on an at least annual basis, and
(ii) the BRC's review and approval of the Risk Tolerance Statements
will occur on an at least annual basis, to the end of Section 4.2.\19\
The proposed change would also replace the reference to specific title
of the MDMLRM to instead refer to the owner of the Risk Tolerance
Statements, to provide for more generic terminology that would not
require formal amendment in the Framework if the title of the MDMLRM
were to change.
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\19\ The Risk Tolerance Statements are also reviewed on an at
least annual basis by Operational Risk Management, which, among
other things, is the business line responsible for enabling the
identification of the Clearing Agencies' plausible sources of
operational risk in order to mitigate the impact of a potential
event related to those sources using tailored risk profiles and
monitoring risk profiles in accordance with the relevant Risk
Tolerance Statements.
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Other Changes
The Framework inconsistently uses the term ``model'' without and
with initial capitalization, but currently refers throughout to the
risks relating to models referred to in the Framework as a defined term
using initial capitalization--``Model Risk.'' To remain consistent with
the usage of ``model'' throughout the Framework, DTC would conform all
references to the term ``model'', so they appear without initial
capitalization and change references to Model Risk throughout the
Framework to eliminate the initial capitalization of the term and refer
to it as ``model risk.''
The Executive Summary of the Framework includes a description of
internal DTCC policies and procedures that support the Framework,
including the (a) DTCC Model Risk Management Policy, (b) DTCC Model
Validation Procedures, (c) DTCC Model Risk Performance Monitoring
Procedures, (d) the DTCC Backtesting Procedures and (e) Market Risk
Tolerance Statement (``Related Procedures''). In addition to the
policies and procedures described in the Executive Summary, the
proposed rule change would list in the Executive Summary as a
supporting policy, the Model Risk Tolerance Statement. The Model Risk
Tolerance Statement articulates, among other things, risk tolerance
levels covering model design and implementation, including
consideration of a model's intended purpose and/or its adequacy of
performance. The conclusion, based on risk tolerance levels, focuses on
model remediation.
Since the risk tolerance levels in both the Market Risk Tolerance
Statement \20\ and the Model Risk Tolerance Statement consider model
remediation as the basis of risk control, both are applicable to the
Framework. In this regard, the proposed rule change would add a
footnote after the listing of the Model Risk Tolerance Statement and
the existing reference to the Market Risk Tolerance Statement to
describe that with respect to the key risks \21\ of model risk and
market risk,
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each risk tolerance statement documents the overall risk reduction or
mitigation objectives as it relates to model risk and market risk
activities and documents the risk controls and other measures used to
manage such activities, including escalation requirements in the event
of risk metric breaches. The footnote would also state that the Risk
Tolerance Statements are reviewed, revised, retired, and/or replaced,
as the case may be, and approved by the BRC (as defined herein)
annually, based upon the circumstances, and the reasonable best
judgement of management, then existing relating to model risk
management matters. Consistent with proposed terminology described
above with respect to Sections 4.1 and 4.2, the Model Risk Tolerance
Statement and the Market Risk Tolerance Statement would be referred to
collectively in the Executive Summary as the ``Risk Tolerance
Statements.''
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\20\ The Market Risk Tolerance Statement articulates, among
other things, risk tolerance levels covering margin backtests
covering backtest coverage and stress tests covering exposure to
extreme market moves. The conclusion, based on tolerance levels,
focuses on model enhancement or model remediation, as applicable.
\21\ DTCC has identified a set of key risks to better guide the
content, measurement, frequency, and focus of our discussion and
management of risk generally across the Organization.
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The Executive Summary also indicates that the Related Procedures
may be updated or amended. The Clearing Agencies regularly review their
internal policies and procedures, and in addition to updating or
amending them as an administrative matter as they deem appropriate, may
also retire or replace internal policies and procedures as they deem
appropriate. In this regard, the proposed rule change would also
include text to the effect that each of the Related Procedures and the
Model Risk Tolerance Statement may retired or replaced (in addition to
updated or amended).
Effective Date
The proposed rule change would become effective upon approval by
the Commission.
2. Statutory Basis
The Clearing Agencies believe that the Framework is consistent with
Section 17A(b)(3)(F) of the Act,\22\ as well as Rule 17Ad-
22(e)(4)(vii), and (e)(7)(vii) thereunder,\23\ for the reasons
described below.
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\22\ 15 U.S.C. 78q-1(b)(3)(F).
\23\ Supra note 6.
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Section 17A(b)(3)(F) of the Act \24\ requires, inter alia, that the
rules of a clearing agency be designed to assure the safeguarding of
securities and funds which are in the custody or control of the
clearing agency or for which it is responsible. As described above, the
Framework describes the process by which the Clearing Agencies
identify, measure, monitor, and manage the risks associated with the
design, development, implementation, use, and validation of
quantitative models. The quantitative models covered by the Framework
are applied by the Clearing Agencies, as applicable, to evaluate and
address their respective risk exposures associated with their
settlement activity and facilitate their ability to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. In this
regard, the proposed changes to the Framework support their ability to
develop models that are applied to evaluate and address risk exposure
and facilitate the safeguarding of securities and funds which are in
the custody or control of the Clearing Agencies or for which they are
responsible by (i) changing the governance structure for approval of a
Model Validation to transfer the responsibility for approval of model
validations to the MVC, which is composed of individuals with a higher
level of expertise relating to model validations than members of the
MRC, which is currently responsible for such approvals, thereby
enhancing the ability of the group conducting Model Validations to
evaluate risk exposures relating to models, (ii) incorporating the
Model Risk Tolerance Statement into the Framework which describes risk
tolerance levels covering model design and implementation, including
consideration of a model's intended purpose and/or its adequacy of
performance, and therefore including a cross-reference to a document
which describes an important gauge with respect to the level of risk
that may be tolerated as part of managing the risk presented to the
Clearing Agencies relating to models, (iii) clarifying the definition
of Model Owner, therefore defining the first line responsible for
evaluating risk exposure, (iv) reflecting changes in the role of the
Model Risk Governance Committee and a change its name, which relates to
the change in governance structure that is designed to enhance the
independence in its new role of responsibility for approval of Model
Validations which would support the Clearing Agencies' ability to
evaluate risk exposure, (v) redefining the first and second line
responsibilities and incentives relating to model performance
monitoring and oversight, therefore enhancing the process by which risk
relating to models is evaluated, and (vi) making other technical and
clarifying changes to the text, as described above, to improve the text
in defining roles and responsibilities for the processes established by
the Clearing Agencies to monitor risk. Therefore, DTC believes the
proposed rule change is consistent with the requirements of Section
17A(b)(3)(F) of the Act,\25\ because it would facilitate the ability of
the Clearing Agencies to continue to develop models that are applied to
evaluate and address risk exposure and allow them to maintain a
Framework that facilitates the ability of the Clearing Agencies to
assure the safeguarding of securities and funds which are in the
custody or control of the clearing agency or for which it is
responsible, as described above.
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\24\ 15 U.S.C. 78q-1(b)(3)(F).
\25\ Id.
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Rule 17Ad-22(e)(4)(vii) \26\ and (e)(7)(vii) \27\ under the Act
requires, inter alia, that a covered clearing agency establish,
implement, maintain and enforce written policies and procedures
reasonably designed to perform Model Validations on its credit risk
models and liquidity risk models not less than annually or more
frequently as may be contemplated by the clearing agency's risk
management framework established pursuant to Rule 17Ad-22(e)(3).\28\ As
discussed above, the proposed rule change would amend the Framework to
provide for enhanced clarity in the text and enhanced efficiency with
respect to the approval process for Model Validations at least
annually. In this regard, and as noted above, pursuant to the
Framework, Model Validations are performed not less than annually on
its credit risk models and liquidity risk models. Therefore, the
Clearing Agencies believe that the proposed changes to the Framework
are consistent with Rule 17Ad-22(e)(4)(vii) \29\ and (e)(7)(vii) \30\
under the Act.
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\26\ 17 CFR 240.17Ad-22(e)(4) (in particular, 17 CFR 240.17Ad-
22(e)(4)(vii)). See supra note 6.
\27\ 17 CFR 240.17Ad-22(e)(7) (in particular, 17 CFR 240.17Ad-
22(e)(7)(vii)). See supra note 6.
\28\ 17 CFR 240.17Ad-22(e)(3). See supra note 6.
\29\ Supra note 6.
\30\ Supra note 6.
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(B) Clearing Agency's Statement on Burden on Competition
None of the Clearing Agencies believe that the Framework would have
any impact, or impose any burden, on competition because the proposed
rule change reflects clarifying changes and provides for a more
efficient internal governance process and would not effectuate any
changes to the Clearing Agencies' model risk management tools as they
currently apply to their respective Members or Participants.
[[Page 22197]]
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
The Clearing Agencies have not solicited or received any written
comments relating to this proposal. The Clearing Agencies will notify
the Commission of any written comments received by the Clearing
Agencies.
III. Date of Effectiveness of the Proposed Rule Change, and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-DTC-2020-008 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-2020-008. 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-2020-008 and should be submitted on
or before May 12, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\31\
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\31\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-08369 Filed 4-20-20; 8:45 am]
BILLING CODE 8011-01-P