[Federal Register Volume 85, Number 167 (Thursday, August 27, 2020)]
[Notices]
[Pages 53036-53040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18826]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89639; File No. SR-ICC-2020-009]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Risk Management
Framework, ICC Risk Management Model Description, ICC Risk Parameter
Setting and Review Policy, ICC Stress Testing Framework, and ICC
Liquidity Risk Management Framework
August 21, 2020.
I. Introduction
On July 1, 2020, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 19(b)(1) of the Securities Exchange Act of 1934 \1\ and Rule
19b-4,\2\ a proposed rule change to make changes to ICC's Risk
Management Framework (``RMF''), Risk Management Model Description
(``RMMD''), Risk Parameter Setting and Review Policy (``RPSRP''),
Stress Testing Framework (``STF''), and Liquidity Risk Management
Framework (``LRMF''). The proposed rule change was published for
comment in the Federal Register on July 16, 2020.\3\ The Commission did
not receive comments regarding the proposed rule change. For the
reasons discussed below, the Commission is approving the proposed rule
change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice
of Proposed Rule Change Relating to the ICC Risk Management
Framework, ICC Risk Management Model Description, ICC Risk Parameter
Setting and Review Policy, ICC Stress Testing Framework, and ICC
Liquidity Risk Management Framework, Exchange Act Release No. 89286
(July 10, 2020); 85 FR 43272 (July 16, 2020) (SR-ICC-2020-009).
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II. Description of the Proposed Rule Change
A. Updated Stress Scenario Naming Conventions and Clarifications
The proposed rule change would update certain stress scenario
naming conventions to be more generic, i.e., by replacing naming
conventions for stress scenarios associated with the Lehman Brothers
(``LB'') default with more generic naming conventions associated with
extreme price increases and decreases (the ``Extreme Price Change
Scenarios'').
1. Risk Management Framework
The proposed rule change would replace references to the LB default
in the RMF with more generic references to extreme market events. In
particular, to achieve anti-procyclicality (``APC'') of initial margin
requirements and to achieve APC of Guaranty Fund sizing, Sections
IV.B.1 and IV.E.1, respectively, of the RMF discuss two price-based
scenarios, associated with price decreases and increases, and currently
states that the considered stress price changes are derived from market
behavior during and after the LB default period. The proposed rule
change would replace the reference to the LB default in both sections
with a reference to extreme market events, stating that the considered
stress price changes are derived from extreme market events related to
the default of a large market participant, global pandemic problem, or
regional or global economic crisis.
2. Risk Management Model Description
The proposed rule change would incorporate the Extreme Price Change
Scenarios into the RMMD. Specifically, the proposal would replace
references and notations to the scenarios associated with the LB
default with references and notations to the Extreme Price Change
Scenarios in both the Initial Margin and Guaranty Fund Methodology
sections.
The proposed rule change would introduce the Extreme Price Change
Scenarios in Section VII.3.3, which discusses APC measures. Currently,
this section examines instrument price changes observed during the LB
default. The proposal would amend this section by replacing references
to the LB Default with references to extreme market events to examine
instrument price changes observed during extreme market events rather
than the LB Default and would include considerations related to the
greatest price decreases and increases over a number of consecutive
trading days during the period of extreme market events. This section
would also state that the Extreme Price Change Scenarios reflect
extreme market events related to the default of a large market
participant, global pandemic problem, regional or global economic
crisis and would explain how these scenarios are derived. Moreover,
this section would introduce a factor that would be associated with one
of the Extreme Price Change Scenarios and reference the RPSRP for
details on how it is set.
In the context of Index Swaptions, the formulas used would also be
updated to reference the Extreme Price Change Scenarios in Section
VII.3.3 and minor clarifications would be included for certain
descriptions associated with option instruments in respect of the
[[Page 53037]]
remaining time to expiry in Sections VII.3.3 and X.3.1.\4\
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\4\ The proposal would make other minor clarification or clean-
up changes to the RMMD. Specifically, ICC proposes to add language
to clarify a notation in an equation in Section VII.1.2.1 and update
cross-references in Section IX.
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3. Risk Parameter Setting and Review Policy
The proposal would also incorporate the Extreme Price Change
Scenarios into the RPSRP. Specifically, Table 1 in Section 1.1 contains
ICC's core model parameters and would be amended to incorporate the
abovementioned factor associated with one of the Extreme Price Change
Scenarios. In Section 1.7, the proposed rule change would add a new
subsection to include another category of parameters associated with
the integrated spread response model component, namely the APC level
parameters. The rule proposal would introduce the Extreme Price Change
Scenarios in this subsection because extreme stress scenarios
associated with historically observed extreme prices changes are inputs
in estimating the APC portfolio response.
As discussed above, the Extreme Price Change Scenarios would
consider the greatest observed price decreases and increases over a
number of consecutive trading days within the period of extreme market
events related to the default of a large market participant, global
pandemic problem, regional or global economic crisis. Moreover, ICC
would set out how the Extreme Price Change Scenarios are derived as
well as how the abovementioned factor is estimated. ICC would further
summarize the associated review and governance process for these
scenarios, including the reviewers and any prerequisites to the
implementation of parameter updates.
B. Introduction of New Stress Scenarios and Clarifications
The proposed rule change would also introduce the COVID-19/Oil
Crisis Scenarios and amend the LRMF to ensure scenario unification
among the STF and LRMF.
1. Stress Testing Framework
The proposal would amend the STF to introduce the COVID-19/Oil
Crisis Scenarios. Specifically, the proposal would amend the definition
of extreme market events to include the Coronavirus pandemic and the
simultaneous occurrence of the oil price war in Section 3.
In Section 5 of the STF, the proposed rule change would rename the
category of scenarios deemed as Historically Observed Extreme but
Plausible Market Scenarios: Severity of Losses in Response to a
Baseline Credit Event to the more general Historically Observed Extreme
but Plausible Market Scenarios: Severity of Losses in Response to
Baseline Market Events. The associated description of that category
would be updated to replace the LB default with a more general
description of extreme market events such as those related to the
default of a large market participant, global pandemic problem, and
regional or global economic crisis. The proposal would also make
conforming changes to Section 5.2, including updating the heading and
adding a general description of the category followed by the associated
scenarios, which would include the COVID-19/Oil Crisis Scenarios, in
bulleted form. ICC also proposes to incorporate reference to the COVID-
19/Oil Crisis Scenarios into the other categories of scenarios, namely
Hypothetically Constructed (Forward Looking) Extreme but Plausible
Market Scenarios and Extreme Model Response Test Scenarios in Sections
5.3 and 5.4, respectively, and to replace references to the LB default
with more general references to extreme market events and price changes
in Section 5.4.
In Section 13 of the STF, ICC proposes to add the COVID-19/Oil
Crisis Scenarios to the list of Historically Observed and
Hypothetically Constructed Extreme but Plausible Scenarios.
Additionally, in Section 13, ICC proposes to remove a footnote to avoid
redundancy as such information can be found in the text of Section 14.
2. Liquidity Risk Management Framework
The proposal would amend the LRMF to incorporate the COVID-19/Oil
Crisis Scenarios and ensure unification of the LRMF and STF, including
with respect to scenario descriptions and governance procedures.
Further, the proposal would amend Section 2 to provide additional
clarity on ICC's liquidity risk management practices. ICC would add
explanatory language classifying scenarios as ``extreme and not
expected to be realized'' and ``extreme but plausible'' based on risk
horizons in Section 2.3 and reference such classifications throughout
the document. ICC also would clarify actions that it can take only in
the event of a CP default, specifically related to pledgeable
collateral in Section 2.6, and actions that it can take irrespective of
a CP default or non-default scenario, specifically related to accessing
committed repurchase (``repo'') and committed foreign exchange (``FX'')
facilities in Section 2.7.
ICC also proposes revisions to Section 2.8, which describes ICC's
liquidity waterfall (i.e., the order, to the extent practicable, that
ICC uses its available liquid resources (``ALR'') to meet its currency-
specific cash payment obligations) to amend the determination of ALR.
ALR consist of the available deposits currently in cash of the required
denomination, and the cash equivalent of the available deposits in
collateral types that ICC can convert to cash, in the required currency
of denomination, rapidly enough to meet the relevant, currency-specific
deadlines by which ICC must meet its liquidity obligations (``ICC
Payout Deadlines''). The proposed rule change would revise Section 2.8
to specify that, to enable an assessment of the impact of a service
provider becoming unavailable and/or overnight investments not
unwinding by the relevant ICC Payout Deadlines, the cash on deposit
component of ALR considered across all levels of the liquidity
waterfall may be adjusted to be a portion, the Available Percentage, of
the actual cash on deposit. The proposed amendments would also discuss
the determinations of ALR if the analysis assumes the use of the
committed repo facilities.
ICC proposes amendments to Section 3.3 that either provide
additional clarity or promote consistency between the STF and LRMF. The
proposed changes would add background on ICC's stress testing analysis
and reorganize Section 3.3 into four parts. Proposed Section 3.3.1
would describe ICC's stress test methodology that uses a set of stress
scenarios and establishes if the ALRs are sufficient to cover
hypothetical liquidity obligations. This section would also include
language describing the Forward Looking (Hypothetically Constructed)
Scenarios that is consistent with the STF, such as details on their
construction and on the calculation of Loss-Given-Default (``LGD'') and
Expected LGD with respect to these scenarios. Proposed subpart (a)
would detail ICC's cover-2 analysis, which demonstrates to what extent
the required liquidity resources available to ICC were sufficient to
meet single and multi-day cover-2 liquidity obligations under the
considered scenarios.
Proposed Section 3.3.2 would set forth the predefined scenarios
that ICC maintains for liquidity stress testing and would be divided
into the following consistent with the STF: (a) Historically Observed
Extreme but Plausible Market Scenarios, (b) Historically Observed
Extreme but Plausible Market Scenarios: Severity of Losses in Response
to
[[Page 53038]]
Baseline Market Events, (c) Hypothetically Constructed (Forward
Looking) Extreme but Plausible Market Scenarios, and (d) Extreme Model
Response Tests. ICC would incorporate the COVID-19/Oil Crisis Scenarios
in part (b) and amend the terminology describing the LGD scenarios in
part (c), including by consistently referring to reference entity
groups as Risk Factor Groups (``RFGs''),\5\ more specifically defining
reference entities and CP RFGs, and specifying the reference entities
in a RFG for stress testing. In part (c), ICC would clarify its
description of the one-service-provider-down scenarios which consider a
reduction in ALR designed to represent ICC's exposure to service
providers at which it maintains cash deposits, invested cash deposits
or collateral against invested cash deposits, due to ICC's potential
inability to access those accounts when required. ICC also proposes to
update terminology to incorporate the Available Percentage in part (c)
and add details on the ICC Risk Department's analysis of the Available
Percentage.
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\5\ ICC deems each single name reference entity a Risk Factor.
ICC deems a set of single name Risk Factors related by a common
parental ownership structure a RFG.
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ICC proposes additional amendments to Section 3.3.3 regarding its
stress testing analysis approach. ICC proposes to add explanatory
language related to portfolios that present specific wrong way risk and
related to sequencing defaulting CP AGs for stress scenarios. Table 1,
which lists scenarios used in ICC's liquidity stress testing and
assigns each scenario to a group for reporting purposes, would be
amended to incorporate additional columns detailing the corresponding
report and classification/frequency and reorganized to add additional
groups and scenarios (i.e., the COVID-19/Oil Crisis Scenarios) for
completeness.
In proposed Section 3.3.4, ICC would discuss its interpretation of
liquidity stress test results, including governance procedures for
enhancing the liquidity risk management methodology and procedures to
meet its reporting obligations. Proposed Figure 2 would further
illustrate ICC's categorization of hypothetical losses. Specifically,
depending on whether there are sufficient liquidity resources across
certain levels of the liquidity waterfall, stress test results could be
in one of three zones (green, yellow, or red) that have different
reporting requirements. Results in the red zone would be considered
poor, and reporting to the ICC Risk Committee or the Board would be
required.
ICC proposes additional clarification changes to the LRMF.
Specifically, ICC proposes language in Section 4.3 regarding its
determination of poor stress testing and/or historical analysis, noting
the ICC personnel responsible for making such a determination, who
would be the same personnel designated in the STF as responsible for
determining poor stress testing performance. Proposed Section 6 would
be an appendix that sets forth the computation of liquidity resources
and remaining liquidity resources across the levels of the liquidity
waterfall, including formulas for calculating currency-specific cash
ALRs and currency-specific cash remaining ALRs. Such changes are
explanatory and do not amend the methodology. ICC also proposes to
update Table 2, which illustrates a specific report, to reorganize and
include additional groups to be consistent with amended Table 1.
The proposal would make other minor clarification or non-material
clean-up changes to the LRMF. Specifically, the proposed revisions
would update terminology to clarify an objective of the framework in
Section 1.3 and abbreviate a defined term in Section 1.4. The proposed
changes would also add quotation marks around a defined term in Section
2.3; clarify ICC's use of ALR in Section 2.8, including by moving two
sentences earlier in the section and incorporating reference to
required currencies of denomination; and rephrase a sentence for
clarity in Section 2.8.4. ICC proposes to include terminology updates
with respect to the scenarios described in Sections 3.1 and 3.3 for
consistency and clarity and to amend Section 3.3.2 to make certain
terms lowercase, renumber subsections, update formatting, and add and
update relevant cross-references. Additionally, ICC proposes minor
terminology clarifications in describing its stress test analysis in
Section 3.3.3 and ICC's governance procedures in Sections 4.1 through
4.3, such as making certain terms lowercase, more clearly describing
certain terms, and abbreviating defined terms.
III. Discussion and Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization.\6\ For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \7\ and Rules 17Ad-22(e)(2)(i) and (v),\8\ 17Ad-22 (e)(4)(ii),\9\
and 17Ad-22(e)(7)(i) \10\ thereunder.
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\6\ 15 U.S.C. 78s(b)(2)(C).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
\8\ 17 CFR 240.17Ad-22(e)(2)(i), (iii), and (v).
\9\ 17 CFR 240.17Ad-22(e)(4)(ii).
\10\ 17 CFR 240.17Ad-22(e)(7)(i).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible.\11\
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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As noted above, the proposed rule change would update certain
stress scenario naming conventions to be more generic and introduce
stress scenarios related to the Coronavirus pandemic and oil price war
in March 2020 in the RMF (discussed in Section II.A.1 above), the RMMD
(discussed in Section II.A.2 above), and the RPSRP (discussed in
Section II.A.3 above). The Commission believes that, by incorporating
more generically named stress scenarios that relate to extreme market
events, as opposed to the LB default, and introducing the COVID-19/Oil
Crisis Scenarios, ICC is updating the RMF, RMMD, and RPSRP in a way
that allows ICC to be more flexible and capable of considering a range
of events beyond the LB Default, which, in turn, enhances its ability
to manage risks and thereby maintain the financial resources necessary
to promptly and accurately clear and settle transactions and safeguard
securities and funds.
Additionally, the Commission believes that the various minor
clarification and clean-up changes to the RMMD and the summary of the
associated review and governance process, including the reviewers and
any prerequisites to the implementation of parameter updates, in the
RPSRP helps to strengthen ICC's risk management documentation with
clear guidance, which ultimately supports ICC's ability to promptly and
accurately clear and settle securities transactions.
The Commission also believes that the proposed changes to the STF
and the LRMF to introduce the COVID-19/Oil Crisis Scenarios and
renaming stress scenarios more generally, as described
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in Section II.B.1 and II.B.2 above, should also enhance ICC's ability
to manage risks in a way that makes it more flexible and capable of
considering a range of events. The Commission believes that this, in
turn, will help ICC manage financial resources and hence promote its
ability to promptly and accurately clear and settle trades and
safeguard securities and funds.
Additionally, the Commission believes that the various clarifying
amendments to the LRMF noted above in Section II.B.2, including
clarifying its ability to use repo or FX facilities in the event of
default or non-default scenarios, classifying scenarios based on
liquidity risk horizon as plausible or not, describing in the default
waterfall the ability to adjust the cash on deposit component of the
available liquid resources, and providing background on the stress
testing analysis, approach, interpretations and governance, should
enhance the policies and procedures used to support ICC's risk
management system by increasing transparency and clarity regarding its
practices. The Commission believes that this, in turn, should
strengthen ICC's ability to maintain adequate financial resources,
thereby promoting both the prompt and accurate clearance and settlement
of securities transactions and the ability to safeguard securities and
funds.
For these reasons, the Commission believes the proposed rule
changes are consistent with Section 17A(b)(3)(F) of the Act.
B. Consistency With Rule 17Ad-22(e)(2)(i) and (v)
Rules 17Ad-22(e)(2)(i) and (v) require that ICC establish,
implement, maintain, and enforce written policies and procedures
reasonably designed to, as applicable, provide for governance
arrangements that are clear and transparent and specify clear and
direct lines of responsibility.
As noted above in Section II.A.3, the proposed changes to the RPSRP
summarize the review and governance process to note the frequency that
the ICC Risk Department would review the stress scenarios of price
changes and their assumptions and with whom it clears APC level
parameter updates. Further, the proposed changes to the LRMF in Section
II.B.2 detail the frequency that ICC's Risk Department would perform an
analysis of the Available Percentage of the cash on deposit and whether
and when updates are performed. As noted above, the proposed changes to
the LRMF also discuss the interpretation of liquidity stress test
results, including governance procedures for enhancing the liquidity
risk management methodology and procedures to meet its reporting
obligations. Additionally, the proposed changes to the LRMF clarify the
individuals responsible for determining poor stress testing results and
the need for enhancements to the methodology.
The Commission believes that these changes clarify these particular
governance processes by specifying responsible parties, their duties,
and review frequency, thereby helping to ensure that ICC's policies and
procedures are clear and transparent with clear and direct lines of
governing responsibility. For these reasons, the Commission believes
that these aspects of the proposed rule change are consistent with
Rules 17Ad-22(e)(2)(i) and (v).\12\
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\12\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(4)(ii)
Rule 17Ad-22(e)(4)(ii) requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to, as applicable, effectively identify,
measure, monitor, and manage its credit exposures to participants and
those arising from its payment, clearing, and settlement processes,
including by maintaining additional financial resources at the minimum
to enable it to cover a wide range of foreseeable stress scenarios that
include, but are not limited to, the default of the two participant
families that would potentially cause the largest aggregate credit
exposure for the covered clearing agency in extreme but plausible
market conditions.\13\
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\13\ 17 CFR 240.17Ad-22(e)(4)(ii).
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The Commission believes that by introducing the COVID-19/Oil Crisis
Scenarios, the proposed rule change would complement the current
scenarios in the risk management policies and procedures and add
additional insight into potential weaknesses in the ICC risk management
methodology, thereby enhancing ICC's ability to manage its credit
exposures and financial resources. Additionally, as noted above, the
proposed rule change would replace naming conventions for stress
scenarios associated with the LB default with more generic naming
conventions associated with extreme price changes. The Commission
believes that this change, particularly when discussing scenarios used
to determine initial margin and guarantee fund sizing, would enhance
ICC's ability to manage risks and thereby maintain the appropriate
financial resources to enable it to cover a wide range of foreseeable
stress scenarios.
The Commission also believes that the proposed clarification and
clean-up changes enhance the readability and transparency of the
policies and procedures, thereby strengthening the documentation and
ensuring that it remains up-to-date, clear, and transparent to support
the effectiveness of ICC's risk management system.
The Commission believes that the proposed amendments are therefore
consistent with the requirements of Rule 17Ad-22(e)(4)(ii).\14\
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\14\ 17 CFR 240.17Ad-22(e)(4)(ii).
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D. Consistency With Rule 17Ad-22(e)(7)(i)
Rule 17Ad-22(e)(7)(i) requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed, as applicable, to effectively measure,
monitor, and manage the liquidity risk that arises in or is borne by
the covered clearing agency, including measuring, monitoring, and
managing its settlement and funding flows on an ongoing and timely
basis, and its use of intraday liquidity by maintaining sufficient
liquid resources at the minimum in all relevant currencies to effect
same-day and, where appropriate, intraday and multiday settlement of
payment obligations with a high degree of confidence under a wide range
of foreseeable stress scenarios that includes, but is not limited to,
the default of the participant family that would generate the largest
aggregate payment obligation for the covered clearing agency in extreme
but plausible market conditions.\15\
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\15\ 17 CFR 240.17Ad-22(e)(7)(i).
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The Commission believes that the proposed clarification changes to
the LRMF noted above in Section II.B.2 provide further clarity and
transparency regarding ICC's liquidity stress testing practices to
strengthen the documentation surrounding ICC's liquidity stress testing
methodology, including by providing additional scenario descriptions
and details on the computation of liquidity resources, and ensuring
consistency with the STF. Additionally, the proposed rule changes
clarify actions that ICC can take only in the event of a CP default,
specifically related to pledgeable collateral, and actions that it can
take irrespective of a CP default or non-default scenario, related to
accessing committed repo and committed FX facilities. The Commission
believes that these changes should enhance ICC's ability to monitor
[[Page 53040]]
and maintain necessary liquidity by preparing it for different stress
scenarios and clarifying when liquidity tools can be used. The
Commission also believes that the proposed changes to the LRMF noted
above related to categorization of stress test results should
strengthen ICC's approach to identifying potential weaknesses in the
liquidity risk management system with additional procedures related to
the determination and analysis of poor stress testing.
For the reasons stated above, the Commission believes that the
proposed rule changes are consistent with Rule 17Ad-22(e)(7)(i).\16\
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\16\ Id.
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E. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act \17\ and Rules 17Ad-22(e)(2)(i) and (v),\18\ 17Ad-22
(e)(4)(ii),\19\ and 17Ad-22(e)(7)(i) \20\ thereunder.
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(2)(i)and (v).
\19\ 17 CFR 240.17Ad-22(e)(4)(ii).
\20\ 17 CFR 240.17Ad-22(e)(7)(i).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\21\ that the proposed rule change (SR-ICC-2020-009), be, and hereby
is, approved.\22\
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\21\ 15 U.S.C. 78s(b)(2).
\22\ 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).
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18826 Filed 8-26-20; 8:45 am]
BILLING CODE 8011-01-P