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Federal Register / Vol. 86, No. 208 / Monday, November 1, 2021 / Notices
to the FSP have been closed out and all legal agreements terminated.
The CMPs explain how ICC monitors the stability of its counterparties.
Section 4 includes the financial elements of ongoing CP monitoring and discusses monitoring of other CP
requirements, such as participation in ICCs price discovery process and default management simulations.
Section 4 details the procedures associated with the Risk Departments intraday and daily monitoring functions for CPs and FSPs and specifies how issues are escalated and resulting actions are documented. This includes intraday monitoring of Risk Filter Threshold RFT consumption to manage the intraday risk associated with incoming real-time position changes to a portfolio that may require pre-funding; a daily end-of-day review of initial margin and guaranty fund changes; intraday and daily monitoring of news and market metrics for CPs and FSPs; and monitoring and review of timely payments and notices from CPs.
This section discusses the preparation and review of a monthly credit report on the financial condition of ICCs counterparties as part of the monthly monitoring process. The monthly credit report includes, among other items, a summary of the data used for the analysis, current and historical counterparty credit scores and changes per credit risk factor, exposures of CPs with respect to their total requirements, exposures of FSPs and current allocation and investment limits, and counterparties on the Watch List.
Additional reviews of exposure to CPs and FSPs, counterparty qualitative analysis, RFT and investment allocations conducted as part of monthly monitoring are set out in Section 4 along with the procedures for escalating identified issues and documenting resulting actions.
Furthermore, Section 4 further discusses how ICC monitors and manages its aggregate exposure to entities and their affiliates with which ICC maintains multiple counterparty relationships, including through limits on FSPs and CPs which are reviewed on a specified basis and more frequently as warranted.
Exposures to FSPs are managed through investment allocations, which represent limits established by the Risk Department for entities and are reviewed at least once a year. With respect to CPs, ICC manages the risk that it is willing to take, considering realtime position changes, through the RFT
level which is reviewed at least once a month by the Risk Department.
Moreover, this section describes the risk
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reviews that ICC completes for its counterparties. All counterparties are subject to an initial risk review and periodic risk reviews, which allow ICC
to monitor the capacity of its counterparties to perform as required.
The periodicity of these reviews is within a four-year time frame. The timing of review, the steps for conducting a risk review, the possible review outcomes, and escalation procedures are detailed. Under the CMPs, more frequent risk reviews may be performed if the latest periodic risk review was considered unsatisfactory or the counterparty was recently placed on the highest Watch List level. Section 5
describes ICCs CRS that computes credit scores for counterparties and specifies the frequency of review of the credit scoring methodology.
The CMPs detail how ICC identifies counterparties that may pose additional risk to it and include additional information relevant to ICCs monitoring responsibilities. Section 6 sets out the criteria for placing counterparties on the Watch List and the procedures for adding and removing counterparties to and from the Watch List. Regarding Watch List criteria, this section distinguishes between automatic placement on the Watch List based on credit score and qualitative considerations of counterparty deterioration that may merit placement on the Watch List or movement to a higher Watch List level. A credit score of 3.0 or higher warrants a counterparty to be automatically placed on the Watch List. Qualitative considerations include decreasing levels of capitalization and failure to maintain operations, infrastructure, and personnel capable of meeting requirements. The CRO
determines if a counterparty should be added to the Watch List, except for automatic placement, and if a counterparty should be removed. The CRO may consider recommendations regarding which counterparties to add to the Watch List as well as counterparty Watch List level changes from the Subcommittee and PRC.
Section 7 details the actions available to ICC with respect to CPs or FSPs on the Watch List or for whom a deficiency is identified during the monitoring process. Actions the CRO may take include, among others, an increase in initial margin requirements, notification to the Board, recommendation for suspension of clearing privileges, or termination of the relationship with the FSP. Section 7 also discusses how such actions are determined, documented, and escalated. The Risk Department is responsible for contacting firms to
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discuss activity that raised concern. The CRO is responsible for documenting the details, rationale, and criteria used in determining actions taken against the CP, and the documentation is presented to the Subcommittee. For FSPs, concerns are escalated to ICC Senior Management to evaluate the issues and determine what, if any, additional actions should be taken. Finally, the CMPs include additional information regarding the confidentiality of credit scores in Section 8, record keeping responsibilities in Section 9, references in Section 10, and the revision history in Section 11.
CRS Policy The proposed CRS Policy describes ICCs CRS and provides additional clarity on the processes and procedures related to ICCs credit scoring approach.
The proposed document is divided into 9 sections, which are detailed below.
The CRS Policy contains background on ICCs CRS that computes credit scores for counterparties. Section 1
describes the CRS and sets out its purpose, which is to rate counterparties and identify counterparties that may exhibit inconsistent financial performance or that show signs of operational and risk management weaknesses and require more extensive analysis. The CRS estimates a credit score representative of the financial condition of the counterparty and relies on credit risk factors representing a combination of data and performance ratios derived from financial reporting and market information. Section 1
specifies that the ICC Risk Department is responsible for calibrating the credit risk factor metrics. Section 2 explains the scope of the CRS, which features two credit scoring models due to the variety of CPs and FSPs facing ICC.
Section 2 summarizes each credit scoring model and its corresponding model components and provides a range of possible credit scores and credit score interpretations. The credit scoring scale ranges from 1 to 5, with a score of 1
indicating the strongest financial stability and the level of least concern and a score of 5 indicating the weakest financial stability and the greatest level of concern. This section further summarizes the data required for the CRS and describes how implementation of the CRS is supported internally.
The CRS Policy describes the model components of each credit scoring model in detail. Section 3 discusses the selection of credit risk factors, which are divided into financial and market metrics. Financial metrics provide a point in time view of the state of the company, while market metrics are used
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