[Federal Register Volume 76, Number 246 (Thursday, December 22, 2011)]
[Notices]
[Pages 79729-79731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32781]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66001; File No. SR-ICC-2011-03]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change To Adopt ICC's Enhanced Margin
Methodology
December 16, 2011.
I. Introduction
On November 4, 2011, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change SR-ICC-2011-03 pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The
proposed rule change was published for comment in the Federal Register
on November 10, 2011.\3\ The Commission received three comment letters
regarding the proposal.\4\ For the reasons discussed below, the
Commission is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-65699 (November 7,
2011), 76 FR 70206 (November 10, 2011). In its filing with the
Commission, ICC included statements concerning the purpose of and
basis for the proposed rule change. The text of these statements is
incorporated into the discussion of the proposed rule change in
Section II below.
\4\ See comment letter from Michael Hisler, Swaps & Derivatives
Market Association, dated December 5, 2011 (``SDMA Letter'') and
comment letters from John Williams, Allen & Overy LLP, on behalf of
Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Citi,
Credit Suisse Securities (USA), Deutsche Bank AG, JPMorgan Chase &
Co., Morgan Stanley and UBS Securities LLC, dated December 1, 2011
and December 5, 2011 (``Allen & Overy Letters''). Allen & Overy
LLP's December 5, 2011 letter amended its December 1, 2011 letter,
with the sole change consisting of the addition of The Goldman Sachs
Group, Inc., Nomura Securities International, and The Royal Bank of
Scotland plc as signatories.
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II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
This rule permits ICC to make certain modifications to its Risk
Management Framework for clearing credit default swap (``CDS'')
contracts. These modifications are collectively referred to as the
``Portfolio Decomposition Model.'' A fundamental aspect of ICC's
Portfolio Decomposition Model is the recognition that CDS contracts
cleared by ICC referencing broad-based securities indices are
essentially compositions of specific single-name CDS contracts. Under
the Portfolio Decomposition Model, ICC would, among other things,
decompose CDS contracts referencing broad-based
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securities indices into single-name, index-derived positions with
notional amounts corresponding to their relative weight in the index.
In connection with the decomposition of CDS contracts referencing
broad-based securities indices, ICC will incorporate jump-to-default
risk as a component of the risk margin associated with the clearing of
CDS index products. Because ICC's prior methodology did not include
jump-to-default margin requirements for CDS index products, this change
will result in a better measurement of the risk associated with
clearing these contracts. ICC believes that the Portfolio Decomposition
Model also reflects a number of other enhancements to the ICC Risk
Management Framework. Examples of these changes include: Replacing
standard deviation with mean absolute deviation as a measure of spread
volatility, implementing an auto-regressive process to obtain multi-
horizon risk measures, expanding spread response scenarios, introducing
liquidity margin requirements for CDS index products, and base
concentration charges.
In addition, implementation of the Portfolio Decomposition Model
will also allow ICC to provide portfolio margin treatment between index
CDS contracts and offsetting single-name CDS contracts. These portfolio
benefits will generally involve ICC providing margin offsets across
single-name CDS contracts and index CDS contracts that are held in a
clearing participant's portfolio based on correlation measurements.
To date, ICC has not offered such portfolio margin treatment
strictly for operational reasons. However, ICC has informed the
Commission that it will be operationally ready to offer portfolio
margining with respect to its clearing participants' proprietary
positions sometime in mid-December 2011. In its filing with the
Commission, ICC noted that the portfolio margining treatment will only
be available to ICC clearing participants' proprietary positions
because ICC does not currently clear single-name CDS contracts for
customer-related transactions. Accordingly, there are currently no
customer-related positions in single-name CDS contracts that would
qualify for portfolio margining treatment. Because the portfolio
margining benefits afforded by the enhancements to the model are
available to all of ICC's participants with respect to their
proprietary positions, ICC believes that the proposed rule change does
not unfairly discriminate with respect to similarly-situated
participants.\5\
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\5\ ICC further indicated in its rule filing that it would
expect to offer portfolio margining treatment to customer-related
transactions following: (i) The commencement of clearing single-name
CDS contracts for customer-related transactions and (ii) the
granting of certain relief by the Commission and the Commodity
Futures Trading Commission (``CFTC'') in response to requests by
ICC. Specifically, on November 7, 2011, ICC formally filed with the
Commission a petition to provide portfolio margining treatment for
customer-related positions in anticipation of ICC offering clearing
of single-name CDS contracts for customer-related transactions in
the future. Available at: http://www.sec.gov/rules/petitions.shtml.
ICC filed a similar request with the CFTC on October 4, 2011,
available at: http://www.cftc.gov/PressRoom/PressReleases/pr6145-11.
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According to ICC, the enhancements effected by this proposed rule
change have been reviewed and/or recommended by the ICC Risk Working
Group, ICC Risk Committee, ICC Board of Managers, the Federal Reserve
Bank of New York and the New York State Banking Department. In
addition, ICC commissioned a third-party risk-management consultant to
complete a model assessment of ICC's Portfolio Decomposition Model.
III. Comments
The Commission received three comment letters on the proposed rule
change from two commenters, both of which were supportive of the
changes.\6\ Specifically, one commenter noted that by permitting
portfolio margining to occur with respect to clearing participants'
proprietary accounts, ICC's proposed Portfolio Decomposition Model
would optimize more efficient risk management through netting, thereby
promoting greater stability for central clearing.\7\ This commenter
noted that, because of the high degree of correlation between single-
name CDS contracts and index CDS contracts, market participants often
maintain hedged portfolios of these products, thereby increasingly the
impact that these changes are likely to have throughout the market. The
second commenter, which represented a group of eight large financial
firms, expressed a similar view with respect to the ability of
portfolio margining to bring about a more stable central clearing
regime and concluded that the proposed rule change represented ``an
initial positive step for the industry.'' \8\
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\6\ See supra note 4.
\7\ See SDMA Letter.
\8\ See Allen & Overy Letters.
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IV. Discussion
Section 19(b)(2)(B) 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.\9\ For example, Section 17A(b)(3)(F) of the Act \10\
requires, among other things, that the rules of a clearing agency be
designed to remove impediments to and perfect the mechanism of a
national system for the prompt and accurate clearance and settlement of
securities transactions and to assure the safeguarding of securities
and funds in the custody or control of the clearing agency or for which
it is responsible.
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\9\ 15 U.S.C. 78s(b)(2)(B).
\10\ 15 U.S.C. 78q-1(b)(3)(F).
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If approved, the proposed rule change would allow ICC to provide
portfolio margining offsets to its participants to the extent that the
participants maintain proprietary portfolios that hedge index CDS
products against single-name CDS products. ICC believes that these
changes promote greater capital efficiency and further contribute to
the development of a national system for the prompt and accurate
clearance and settlement of CDS contracts. The Commission carefully
reviewed the proposed changes to ICC's Risk Management Framework to
ensure that those changes continue to allow ICC to adequately manage
the risks associated with the clearing of both index and single-name
CDS contracts. In particular, the Commission notes that the Portfolio
Decomposition Model will introduce new requirements to provide
additional margin to address liquidity and jump-to-default risks in
connection with the clearing of index CDS products. After considering
these changes, including each of the representations made by ICC in the
filing, the Commission believes that the proposed rule change is
consistent with Section 17A(b)(3)(F) of the Act, including ICC's
obligation to ensure that its rules be designed to assure the
safeguarding of securities and funds in the custody or control of the
clearing agency or for which it is responsible.
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of Section 17A of the Act \11\ and the
rules and regulations thereunder.
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\11\ 15 U.S.C. 78q-1.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the
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proposed rule change (File No. SR-ICC-2011-03) be, and hereby is,
approved.\13\
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\12\ 15 U.S.C. 78s(b)(2).
\13\ 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).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-32781 Filed 12-21-11; 8:45 am]
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