[Federal Register Volume 77, Number 218 (Friday, November 9, 2012)]
[Notices]
[Pages 67427-67429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-27355]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68152; File No. SR-ICEEU-2012-09]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change To Provide for a Customer Clearing 
Model for CDS Products and To Amend, Clarify and Consolidate Certain 
Rules and Procedures

November 5, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 22, 2012, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change described in Items I, II and III below, which 
items have been prepared primarily by ICE Clear Europe. The Commission 
is publishing this Notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(2).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of Terms of Substance of 
the Proposed Rule Change

    ICE Clear Europe proposes rule changes to provide for a clearing 
model for CDS products whereby customers of ICE Clear Europe have the 
ability to clear CDS products through ICE Clear Europe (the ``Customer 
CDS Clearing Model''). Additionally, ICE Clear Europe also seeks to 
amend, clarify and consolidate the terms of certain rules and 
procedures, including those that relate to default and membership 
requirements.

II. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.\3\
---------------------------------------------------------------------------

    \3\ The Commission has modified the text of the summaries 
prepared by ICE Clear Europe.
---------------------------------------------------------------------------

A. Self-Regulatory Organization's Statement of Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    As noted above, the principal purpose of the proposed rule change 
is to provide for a Customer CDS Clearing Model whereby customers of 
ICE Clear Europe Clearing Members have the ability to clear CDS 
products through ICE Clear Europe. In addition, ICE Clear Europe 
proposes to amend its Rules and CDS Procedures in order to implement 
certain rule changes that are unrelated to Customer CDS Clearing Model.
    Currently, ICE Clear Europe Clearing Members are only able to clear 
CDS products at ICE Clear Europe through their proprietary accounts and 
not on behalf of their customers. The Customer CDS Clearing Model will 
extend ICE Clear Europe's customer clearing models that are currently 
available for other products to CDS products, with certain 
modifications appropriate for the nature of the product.
    ICE Clear Europe has identified customer clearing of CDS products 
as a service that has become increasingly important for market 
participants to manage risk and express views with respect to the 
credit markets. In addition, the CFTC has proposed, pursuant to the 
Dodd-Frank Act, that clearing of certain CDS products, including iTraxx 
index CDS currently cleared by ICE Clear Europe, will become subject to 
mandatory clearing under Section 2(h) of the Commodity Exchange Act, 
including for customers. Customers subject to the clearing mandate will 
therefore need access to clearing in order to comply with their own 
clearing obligations. Moreover, ICE Clear Europe believes that 
extending CDS clearing to customers of its Clearing Members will 
facilitate the prompt and accurate settlement of swaps and contribute 
to the safeguarding of securities and funds associated with swap 
transactions.
    The Customer CDS Clearing Model builds on the customer clearing 
framework available for other products at ICE Clear Europe. For US 
customers, clearing would have to occur through a registered futures 
commission merchant and/or broker-dealer (depending on whether the 
product is an index CDS or single-name CDS), consistent with the 
requirements of the Commodity Exchange Act and Securities Exchange Act 
of 1934. Non-US customers would be permitted to clear through a non-US 
clearing member in accordance with applicable local laws or through a 
registered futures commission merchant and/or broker-dealer.
    The terms of the Customer CDS Clearing Model, as well as various 
related enhancements to the clearing model, are being proposed as 
amendments to the ICE Clear Europe Rules and CDS Procedures. Proposed 
changes to Part 1 of the Rules contain various clarifying and 
conforming amendments to definitions, various new CDS-specific 
definitions used in new operative provisions, clarifications to 
customer and proprietary account class definitions that will now be 
relevant to CDS, and clarifications to general standards of Clearing 
Member responsibility and liability requested by CDS Clearing Members. 
Other proposed changes reflect the incorporation into the Rules of 
provisions that used to be in a separate master agreement entered into 
between the Clearing Member and ICE Clear Europe. Proposed changes to 
Part 2 of the Rules provide updates related to anti-money laundering 
legislation applicable to customers, clarify membership standards for 
Clearing Members, clarify the obligations of Clearing Members with 
respect to customer accounts and proprietary accounts and clarify and/
or restate certain provisions relating to Clearing Member default and 
termination of clearing membership.

[[Page 67428]]

The proposed changes in Part 3 of the Rules clarify certain payment 
mechanics for Clearing Members with respect to amounts owed by their 
customers and include a waiver of set-off by Clearing Members. Part 4 
of the Rules contains proposed changes related to the obligations of 
Clearing Members with respect to formation of contracts, including 
whether such contract is being entered into for the customer account or 
proprietary account, particularly in the context of the clearing of CDS 
on behalf of customers. The proposed changes in Part 5 of the Rules 
address the delivery of margin from customers to Clearing Members and 
add provisions dealing with transfer of margin by security interest 
rather than title transfer. The proposed changes to Part 6 of the 
Rules, which governs position limits, clarify the procedures for 
providing notice of such position limits. Some proposed minor technical 
changes clarify further how position limits apply in instances where 
contracts arise due to firm trades, voiding or error policies. The 
proposed changes in Parts 7 and 8 of the Rules clarify that references 
in those parts of the Rules (covering Settlement and Delivery of 
Futures (Part 7) and Options (Part 8)), which relate solely to Energy 
contracts, do not apply to CDS Customer Accounts or Customers in the 
context of CDS clearing. Part 9 of the Rules contain various proposed 
changes to consolidate and clarify the respective rights and 
obligations of ICE Clear Europe and Clearing Members, in the case of a 
Clearing Member or ICE Clear Europe default and the procedures to be 
followed in determining a net sum payable to or receivable from a 
defaulting Clearing Member. Part 10 of the Rules contains proposed 
clarifying language providing more detail as to how a disciplinary or 
appeals panel could impose a sanction on a customer and to determine 
liability or responsibility appropriately in any instance where there 
is joint misfeasance. Part 11 contains proposed conforming changes 
related to the operation of the ICE Clear Europe guaranty funds, 
including proposed changes relating to the introduction of customer 
clearing. ICE Clear Europe will continue to operate separate guaranty 
funds for CDS products and for energy products. Part 12 of the Rules on 
settlement finality contains proposed updates to conform to and be 
consistent with the new terms and definitions that are part of the 
Customer CDS Customer Model. Part 15 of the Rules, which governs 
clearing of CDS generally, contains proposed updates to include various 
additional provisions dealing with CDS contracts cleared in the 
customer account (including the representation of customer transactions 
in relevant books and records and treatment of customer transactions in 
the case of credit events) and elimination of the separate master 
agreement previously entered into between CDS Clearing Members and ICE 
Clear Europe. Part 16 of the Rules contains certain proposed amendments 
to the ICE Clear Europe FCM customer clearing model that address the 
addition of CDS clearing and certain other clarifications and 
enhancements requested by CDS Clearing Members.
    In connection with the proposal of the Customer CDS Clearing Model, 
ICE Clear Europe proposes to establish in Exhibit 1 of the Rules 
certain standard terms (the Customer-CM CDS Transactions Standard 
Terms) that will be applicable to Customer-CM CDS Transactions, which 
are CDS transactions between a Non-FCM/BD Clearing Member and a non-
U.S. customer. Under the proposed changes to Rule 1516, all Non-FCM/BD 
Clearing Members must agree to the applicability of these terms as 
between them and each of their Customers. The Standard Terms provisions 
inter alia would ensure that the terms of Customer-CM CDS Transactions 
mirror the terms of the cleared transaction, enable a clearing member 
to pass on clearing house performance (or non-performance) to their 
Customers, facilitate the provision of margin to ICE Clear Europe and 
amend provisions in underlying agreements relating to events of default 
and close-out in order to ensure that the porting of contracts and 
margin under the default rules will be effective. In addition, various 
consents would be supplied for ICE Clear Europe to update customer 
records in DTCC and receive other information as required relating to 
customers. As noted above, US customers would clear through an FCM/BD 
Clearing Member, and the Customer-CM CDS Transactions Standard Terms 
would not apply to that relationship.
    The adoption of the Customer CDS Clearing Model will also require 
changes to ICE Clear Europe's CDS Procedures. Part 1 of the CDS 
Procedures contains various proposed clarifying and conforming 
amendments to definitions, as well as new definitions used in new 
operative provisions. Part 2 of the CDS Procedures also contains 
various proposed clarifying and conforming amendments to membership 
requirements, largely resulting from implementation of the Dodd-Frank 
Act. Part 3 of the CDS Procedures also contains certain proposed 
conforming changes. Proposed changes in Part 4 of the CDS Procedures 
contain updates concerning information that must be provided with 
respect to CDS contracts and procedures for submission of CDS contracts 
for clearing. Proposed changes in Part 5 of the CDS Procedures have 
been made in furtherance of the Customer CDS Clearing Model to address 
customer clearing in the context of the CDS Default Committee 
procedures. Part 6 of the CDS Procedures would be removed as no longer 
necessary in light of the clearinghouse's use of determinations made by 
the ISDA Determinations Committees with respect to credit and 
succession events. Proposed changes in Part 7 address restructuring as 
a credit event with respect to CDS contracts cleared in the customer 
account, including the processing for triggering settlement of such 
contracts. Part 8 of the CDS Procedures contains proposed clarifying 
changes to the procedures for listing new CDS Contracts, in particular 
to enable the clearing house to respond in timely fashion to any 
prohibition on trading in CDS imposed under the EU Short Selling 
Regulation (Regulation 236/2012 dated 14 March 2012). Part 9 of the CDS 
Procedures would be updated to include various provisions previously 
included in the separate master agreement between CDS Clearing Members 
and ICE Clear Europe as well as certain tax provisions relevant to 
customer clearing. These updated provisions would apply to all CDS 
Contracts, both customer positions and proprietary positions of CDS 
Clearing Members. Part 10 of the CDS Procedures would be revised to 
update the cross-references and definitions relevant to customer 
clearing as they relate to index CDS Contracts. Part 11 of the CDS 
Procedures also would be revised to update the cross-references and 
definitions relevant to customer clearing as they relate to Single Name 
CDS Contracts. Similarly, Part 12 of the CDS Procedures would include 
updates to the cross-references and the definitions relevant to 
customer clearing with respect to Sovereign Contracts. Finally, Part 13 
of the CDS Procedures would add certain general procedures relating to 
customer clearing of CDS contracts, including as to transfer of 
customer positions.
    ICE Clear Europe believes that the proposed Customer CDS Clearing 
Model is consistent with the requirements of Section 17A of the Act and 
the CDS procedures and regulations thereunder applicable to it. 
Specifically, the Customer CDS Clearing Model would

[[Page 67429]]

promote market transparency for derivatives markets, promote the prompt 
and accurate clearance of securities transactions, and derivative 
agreements, contracts, and transactions, and protect investors and the 
public interest. The Customer CDS Clearing Model is designed to permit 
customers of Clearing Members to clear CDS transactions, thereby 
permitting the increased use of clearing and the prompt and accurate 
clearance and settlement of securities transactions in furtherance of 
the goals of Section 17A of the Act. ICE Clear Europe also believes the 
proposed changes are specifically designed to protect investors and the 
public interest. The non-Customer CDS Clearing Model proposed rule 
changes also achieve such ends by clarifying the rights and obligations 
of Clearing Members and ICE Clear Europe with respect to key aspects of 
the clearance and settlement process.

B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe that the proposed rule change 
will have any impact or impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    ICE Clear Europe has consulted extensively with CDS Clearing 
Members and others in developing the Customer CDS Clearing Model. ICE 
Clear Europe has not solicited and does not intend to solicit comments 
regarding this proposed rule change. ICE Clear Europe has not received 
any unsolicited written comments from interested parties. ICE Clear 
Europe will notify the Commission of any written comments received by 
ICE Clear Europe.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
     Electronic comments may be submitted by using the 
Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml), or send an email to [email protected]. Please include 
File No. SR-ICEEU-2012-09 on the subject line.
     Paper comments should be sent in triplicate to Elizabeth 
M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street 
NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-ICEEU-2012-09. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of ICE Clear Europe 
and on ICE Clear Europe's Web site at https://www.theice.com/notices/Notices.shtml?regulatoryFilings.
    All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-ICEEU-2012-09 
and should be submitted on or before November 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\4\
---------------------------------------------------------------------------

    \4\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-27355 Filed 11-8-12; 8:45 am]
BILLING CODE 8011-01-P