FICC,DTC,NSCC Alert! Notice of Filing and Immediate Effectiveness of Proposed Rule [REDACTED] to Amend the Clearing Agency Model Risk Management Framework.

They state it is to better manage risk, despite believing that their existing model risk assessment metrics continue to be sufficient measures.

https://www.sec.gov/rules/sro/ficc/2023/34-97890.pdf

Wut mean?

• The proposed rule change pertains to the amendment of the Clearing Agency Model Risk Management Framework of FICC, NSCC, and DTC. The Framework was adopted by the Clearing Agencies to support their compliance with Rule 17Ad-22(e) under the Act.
• The Framework outlines the model risk management practices that the Clearing Agencies follow to identify, measure, monitor, and manage the risks associated with the design, development, implementation, use, and validation of quantitative models.

1. The Model Risk Management (MRM) group within the DTCC Group Chief Risk Office is responsible for the model risk management program of the Clearing Agencies. This includes a periodic Model Validation for each model approved for use in production, including credit risk models, liquidity risk models, and each CCP’s margin systems and related models.
2. The Clearing Agencies also monitor model performance. The model owner is responsible for composing a Model Performance Monitoring (MPM) Plan for each model as part of model development, executing MPM activities according to each model’s MPM Plan, and reporting MPM results to MRM. MRM provides oversight of MPM activities by setting organizational standards and providing critical analysis for identifying model issues and/or limitations.
3. The Clearing Agencies propose to enhance their model performance monitoring processes with the addition of Model Health Index (MHI), despite believing that their existing model risk assessment, performance monitoring reports, and other metrics continue to be sufficient measures of the Clearing Agencies’ model risk.

• The MHI would evaluate various measurable indicators of a model's fitness, such as its performance and how well any issues found are being managed. It would track these indicators over time and combine them into a single score, the MHI score.
• Each model would have its own MHI score, allowing for a detailed look into its health as needed. Additionally, an aggregate MHI score would be calculated for all models together, providing an overall view of model health.
• The indicators and factors used to calculate the MHI score could be added or removed as needed, but any changes would be documented in the Clearing Agency's written procedures. Some of the factors that could be used include the model's grade, approval status, number and status of findings, performance monitoring results, compensating controls, and model dependencies.
• The MHI scores and related information would be reported to the management and the Board of Directors of the Clearing Agency, including the Board Risk Committee, Management Risk Committee, and the Model Risk Governance Council.
• To implement this change, a new section would be added to the Framework, Section 3.9, which would detail the MHI.

the change is designed to boost the Clearing Agencies' risk management capabilities and the security of the assets they oversee.

Rule 17Ad-22(e)(4) requires covered clearing agencies to have policies and procedures in place to manage risks associated with their credit risk management models. The proposed rule change would revise the Framework to include the Model Health Index (MHI).

Rule 17Ad-22(e)(6) requires covered clearing agencies to have policies and procedures to manage risks associated with their margin risk management models. The proposed rule change would add the Model Health Index (MHI) to the Framework.

Rule 17Ad-22(e)(7) requires covered clearing agencies to establish policies and procedures to manage risks associated with their liquidity risk management models. The proposed rule change would add the Model Health Index (MHI) to the Framework.

Details about the Model Health Index (MHI)? Redacted of course!

How to comment:

• Use the Commission’s internet comment form available at this link

or

• Send an email to [email protected]. Please include the file number SR-FICC-2023-008 in the subject line.
• Do not include personal identifiable information in submissions
• you should submit only information that you wish to make available publicly.

TLDRS:

• The big change they're proposing is the addition of a Model Health Index (MHI)--REDACTED of course!

This is a tool that would give an overall health score to each model, based on things like how well the model is performing and how many issues have been found with it.

• This score would be used to monitor the model's performance between the regular check-ups (or "validations") that are already done.
• They believes this change will help them better manage risks and ensure the models are working as intended despite believing that their existing model risk assessment, performance monitoring reports, and other metrics continue to be sufficient measures.

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