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Federal Register / Vol. 86, No. 43 / Monday, March 8, 2021 / Notices
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intended to more clearly reflect the current model, and would not represent a change in methodology.
The Risk Measures section was amended to reflect existing practice that each cleared portfolio would be initially split into sub-portfolios based on common features in order to obtain risk estimates reflective of the market behavior and default management practices. The definitions of the subportfolios and their respective risk horizons would be periodically reviewed by the ICE Clear Europe Risk Management department and updated upon consultation with the Product Risk Committee.
More detail was provided with respect to the use of simulated P/L
scenarios, combined with the postindex-decomposition positions related to a given RF, to generate a currencyspecific RF P/L vector. Each risk factor will be attributed to only one sub portfolio and all instruments related to a given risk factor would be denominated in the same currency. The multi-currency risk aggregation approach will be applied to risk factors within the European Corporate and U.S.
Corporate sub-portfolios denominated in EUR and USD currencies, respectively. A diagram would be added to demonstrate a bivariate simulation aspect of the risk aggregation approach.
This change was intended to document existing practices.
The Monte Carlo Engine Setups subsection and Conclusion subsection to the Monte Carlo Implementation section were deleted for improved clarity as content relevant to the implementation is addressed more clearly in other sections, and the prior description of the system or engine does not, in ICE Clear Europes view, add useful information beyond the other aspects of model description.
Overall, these amendments generally did not represent a change in current operation of the MC component of the risk model.
Time Series for IM and GF Distribution A section explaining the existing use of the same time series for IM and GF
distribution was added. The approach is designed to be conservative and ensure that the portfolio loss at 99.75%
quantile used for GF determination would be always greater than 99.5%
quantile loss used for IM
determination. The approach also avoids unnecessary operational complexity. The validity of the assumption is monitored through the stress test impact analysis. The amendments were intended to document existing practices and
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therefore were not expected to have a material impact.
Current Amendments The following is a description in further detail of the Current Amendments to the CDS Risk Model.
Initial Margin Methodology The amendments clarify the source of certain market risk transfer activity data used in the concentration charge threshold parameterization. The amendments also update the loss threshold calculation in the determination of specific WWR and general WWR to be based on price minus recovery rate as opposed to one minus recovery rate. Although the change makes the WWR calculation more precise, the monetary impact on margin requirements is expected to be immaterial and near zero. The amendments would generally strengthen the precision of the Initial Margin methodology based upon independent validation findings.
The amendments would provide additional detail with respect to the volatility floor value used in the IM
methodology. The amended description would provide that the volatility floor is estimated based on the average overlapping five-day absolute change of recovery rates RRs for a set of defaulted names. The defaulted names have a long time series of observed RRs i.e. more than a year and comprise a stress period of 20092012. The Clearing Risk Department would be able to review the estimated parameters in case of the availability of sufficient long time series of observed RRs. This is consistent with existing practice and intended to strengthen the IM
methodology by more clearly documenting the practice.
The amendments would also clarify that with respect to the concentration charge threshold, the market risk transfer activity data obtained from the Depository Trust & Clearing Corporation specifically contains both bilateral positions and ICE cleared positions.
This is consistent with existing practice and intended to strengthen the IM
methodology by more clearly documenting the practice.
Anti-Procyclicality Measures The amendments would modify the approach to anti-procyclicality of spread response requirements to be calibrated based on historically observed extreme but plausible stress test scenarios in price space defined in the revised CDS
Stress Testing Policy, as discussed above, which include various stress scenarios including the Lehman
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Brothers default and COVID19
outbreak. This broadens the current anti-procyclicality approach, which is based specifically on the Lehman Brothers default scenario. The amendments are intended to enhance the anti-procyclicality approach to address multiple price-based scenarios as the Lehman Brothers default scenario alone may not be sufficient. In particular, the amendments are intended to incorporate the Covid19
stress scenario, in light of experience during the pandemic. Amendments also reflect the 20% portfolio gross margin floor required under relevant European regulation.3
Monte Carlo Implementation The amendments would clarify that in the MC implementation, distributions are based on simulated constant maturity CDS spread scenarios, and that instrument profits or losses are calculated by re-pricing instruments at their coupons as well as their implied recovery rates.
This change is intended to document existing practices.
Data The amendments would clarify certain data fallbacks used by the Clearing House when the normal established EOD spread data is not available. Consistent with current practice, the amendments would provide that if CDS spreads are not available using the usual data sources, then the ICE Clear Europe Clearing Risk Department would use proxy log-returns of existing clearable risk sub-factors from a similar or correlated industry/
sector. In case ICE Clear Europe rolls out risk factors already cleared at ICE Clear Credit, the existing CDS spreads time series would be used directly after reviewing the back-test results. The amendments would also clarify that certain CDS spread time series are available by risk sub-factor for the relevant benchmark tenors.
The amendments would provide additional detail as to the collection, analysis and back testing of relevant data for new risk sub-factors. Pursuant to the amendments, if new risk subfactors are to be rolled out, ICE Clear Europe would collect prices from the Clearing Members on the benchmark tenors as per normal EOD price discovery process before making the contracts clearing eligible. The Clearing Risk department would be responsible for reviewing the fixed maturity time 3 European Market Infrastructure Regulation EMIR Article 27.

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