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Federal Register / Vol. 86, No. 43 / Monday, March 8, 2021 / Notices
They would also add that the reference entity is assumed to enter in a state of default and thus create Loss Given Default LGD and that a reference entity is selected that creates the largest LGD exposure, rather than the greatest one-year EOD spread level.

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Extreme Market Scenarios The amendments would clarify that extreme steepening and extreme inverting scenarios would be created from crises steepening and crises inverting scenarios by doubling the shocks for inverting scenarios and applying a factor to steepening scenarios. The amendments would also incorporate the new COVID19
historical scenarios into the determination of extreme scenarios, similar to the calculation of extreme scenarios based on the LB default scenario.
With respect to the guaranty fund GF scenarios, greater specificity would be provided to clarify that the stress test scenarios would be designed to account for the occurrence of credit events for two Clearing Member risk factor groups RFGs and three nonClearing Member RFGs. The amendments would also clarify that the GF scenario considers an even more extreme case in which five RFGs undergo credit events changing a reference from single names to the more accurate RFG. The chart setting out the quantile ratios for the student t distributions with different shape parameters would be removed as unnecessary.
The GF adequacy analysis would be amended to state that as the number of defaults of reference entities is one of the major risks in the CDS clearing service, the Clearing Risk Department considers complementary extreme scenarios where a combination of up to five RFGs for up to five Clearing Members would be assumed to default before simulating spreads widening and tightening on the non-defaulting entities in order to fully deplete the GF. The amendments would explain that the scenario aims at providing estimates of the level of protection achieved through initial margin IM and GF in relation to multiple defaults. This amendment is intended to clarify the stress-testing description but does not reflect a change in current stress testing practice.
Portfolio Selection The description of the process for determination of sample portfolios for stress testing would be updated to reflect that ICE Clear Europe would derive the portfolio from the currently cleared portfolios by considering only
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positions in index RFs and sectors that exhibit a high degree of association with the considered Clearing Member, in particular indices, sovereigns and financials RFs rather than considering exactly the opposite positions from the currently cleared portfolio. The constructed sub-portfolios would be subject to the stress test analysis with the standard set of stress test scenarios.
The aim of the stress analysis with the sample portfolios would be to provide estimates to the potential exposure of Clearing Members to RFs generating general wrong way risk WWR. The current reference to special strategy sample portfolios would be deleted, and a new provision would address application of stress testing scenarios to expected future portfolios upon the launch of new services and RFs. The stress test analysis would be presented and reviewed by the CDS Product Risk Committee prior to launch of the new RFs.
Interpretation and Review of StressTesting Results The interpretation and review of the stress-testing results section would be amended to provide that enhancements to stress scenarios would be discussed and approved based on the governance outlined in the MRGF. The amendments would also clarify that the two greatest affiliate groups Cover-2
uncollateralized stress loss associated with scenarios characterized as extreme but plausible market scenarios should be covered by funded default resources excluding potential assessments. If Cover-2 protection under these scenarios is not achieved, additional funds could be required to cover the shortfall and enhancements to the current risk methodology would be considered. The amendments would further provide that the Board and its delegated committees instead of the CDS Risk Committee and Board Risk Committee would be provided with information as to the stress test results as necessary or appropriate to perform their duties. The amendments are intended to allow the Board the flexibility to determine the appropriate committees for review of stress testing.
Certain outdated statements would be removed, including matters relating to governance that are addressed in the MRGF as well as outdated references to certain examples or specific committees.
As discussed in the methodology section above, any related deficiency analysis and review would be undertaken by the MOC instead of the Executive Risk Committee, in accordance with the procedures of the MRGF. The stress testing report would
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be presented to the CDS Product Risk Committee instead of the CDS Risk Committee during scheduled meetings instead of scheduled monthly meetings.
The amendments would specifically remove the following statements:
The statement as to the stress scenarios that lead to model review include;
the statement that the hypothetical losses generated in response to stress scenarios are compared to the available margins on deposit and Guaranty Fund contributions and if applicable, the ICE
Clear Europe contribution to the risk waterfall and the funds available through the one-time limited assessment from each Clearing Member;
the statement that ICE Clear Europe is responsible for identifying in which zone a particular stress test result falls;
and statements as to certain functions of the Clearing Risk Department, Clearing Risk senior management, ERC, CDS RC, the BRC and the Board, which have been replaced by the role of the MOC
and the other revised governance arrangements discussed above.
Policy Governance and Reporting The policy governance and reporting section would be amended to remove the requirement that the policy be reviewed annually by the CDS Risk Committee and only would require review by the Board Risk Committee.
Material changes to the policy would be discussed by the MOC instead of the ERC and approved by the Board on the advice of the CDS Product Risk Committee and the Board Risk Committee prior to implementation.
These amendments are intended to be more consistent with other Clearing House governance processes and formalize existing arrangements to ensure that appropriate bodies are engaged in policy governance.
Appendix The FX stress test scenario amendments would reflect the greatest N-day relative depreciation instead of five-day and would remove the specific dates. This is intended to be a conforming change consistent with the other amendments to use an N-day period described above.
CDS Risk Policy The amendments to this policy would describe more fully the existing use of the Clearing Houses Monte Carlo MC simulation approach in the context of establishing initial margin and GF requirements. The amendments would also generally clarify the use and
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