[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]
BILLING CODE 8011-01-P