[Federal Register Volume 78, Number 113 (Wednesday, June 12, 2013)]
[Notices]
[Pages 35335-35338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-13859]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69703; File No. SR-ICEEU-2013-09]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Amendment No. 2 to Proposed Rule Change To Clear Contracts 
Traded on the LIFFE Administration and Management Market

June 5, 2013.
    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 June 4, 2013, ICE Clear Europe Limited (``ICE Clear Europe'') filed 
with the Securities and Exchange Commission (``Commission'') Amendment 
No. 2 to its previously submitted proposed rule changes to implement a 
clearing relationship in which ICE Clear Europe will clear contracts 
traded on the LIFFE Administration and Management (``LIFFE A&M'') 
market (the ``LIFFE Clearing Proposed Amendments'').\3\ Amendment No. 2 
is intended to elaborate on certain aspects of the proposed clearing 
activities as they relate to LIFFE securities products and make a 
partial amendment to certain rules and procedures that would clarify 
the considerations under which certain margin and risk management 
requirements would be established and modified from time to time, as 
described in Items I, II, and III below, which Items have been prepared 
primarily by ICE Clear Europe. Except as described in this Amendment 
No. 2, the LIFFE Clearing Proposed Amendments, as described in the 
LIFFE Clearing Rule Notice, are unchanged. The Commission is publishing 
this notice to solicit comments on Amendment No. 2 to the proposed 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On May 13, 2013, ICE Clear Europe initially filed the LIFFE 
Clearing Proposed Amendments. On May 22, 2013, ICE Clear Europe 
submitted Amendment No. 1 to the proposed rule change to, among 
other things, clarify the scope of products proposed to be cleared, 
add new Rule 207(f) prohibiting FCM/BD Clearing Members and other 
Clearing Members organized in the U.S. from clearing LIFFE Contracts 
that are futures or options on underlying U.S. securities, add 
additional clarification surrounding the operation of the combined 
F&O Guaranty Fund and the margining of LIFFE Contracts, and 
supplement the statutory basis for the proposed rule change. See 
Securities Exchange Act Release No. 69628 (May 23, 2013), 78 FR 
32287 (May 29, 2013) (SR-ICEEU-2013-09) (``LIFFE Clearing Rule 
Notice'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    As described in the LIFFE Clearing Rule Notice, ICE Clear Europe 
has agreed to act as the clearing organization for futures and option 
contracts traded on LIFFE Administration and Management, a recognized 
investment exchange under the UK Financial Services and Markets Act of 
2000. Capitalized terms used but not defined herein have the meanings 
specified in the LIFFE Clearing Rule Notice. In this Amendment No. 2, 
ICE Clear Europe submits revisions to Rule 502 and Sections 13.6 and 
13.7 of the Finance Procedures that are intended to clarify the 
considerations under which ICE Clear Europe would establish and modify 
certain margin requirements that may be applicable to cleared LIFFE 
Contracts and energy contracts, including the assets eligible as Margin 
and Permitted Cover and related haircuts.

II. Self-Regulatory Organization's Statement of the 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 additional rule 
change in Amendment No. 2. 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 significant 
aspects of these statements.

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

(a) Purpose
    ICE Clear Europe submits revisions to its margin requirements under 
Rule 502 and Sections 13.6 and 13.7 of the Finance Procedures. As 
discussed in the LIFFE Clearing Rule Notice, Margin requirements for 
LIFFE Contracts will be calculated using the SPAN[supreg]1 v4 
algorithm,\4\ with modifications for

[[Page 35336]]

concentration charges and a trinomial model used with respect to 
certain LIFFE option transactions. ICE Clear Europe will determine the 
margin parameters used in the SPAN algorithm for LIFFE Contracts 
cleared by ICE Clear Europe, and make appropriate modifications to 
those parameters from time to time, within the framework of the margin 
requirement policy approved by the ICE Clear Europe F&O Risk Committee. 
The margin parameters applicable from time to time will be issued and 
amended by ICE Clear Europe via a circular posted on its Web site.
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    \4\ SPAN is a registered trademark of Chicago Mercantile 
Exchange Inc. and used by ICE Clear Europe under license. SPAN is a 
risk evaluation and margin framework algorithm.
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    Rule 502(d) addresses a number of margin requirements, including 
the assets eligible to be provided as Margin or Permitted Cover, and 
Rule 502(e) addresses haircuts that the clearing house may apply to 
such assets. Under the existing Rules, changes to such requirements may 
be determined by the clearing house from time to time and notified by 
Circular (which will also be posted on the clearing house's Web site). 
ICE Clear Europe proposes to add a new Rule 502(k) to provide that for 
F&O Contracts, changes to the matters set forth in Rules 502(d) and 
(e), including assets eligible as Margin or Permitted Cover and the 
haircuts established with respect to such assets, will be based on an 
analysis of appropriate factors as determined by the clearing house. 
These factors will include, without limitation, historical and implied 
price volatility of those assets, current and anticipated conditions in 
the market for those assets, spreads and correlations between assets, 
liquidity in the trading market for those assets, composition of the 
relevant market, default risk (including sovereign risk) with respect 
to those assets, relevant foreign exchange market conditions and other 
relevant information as determined by ICE Clear Europe. Consistent with 
its existing policies and procedures, ICE Clear Europe regularly 
reviews its current eligible Margin and Permitted Cover assets and 
related haircuts and makes any necessary adjustments.
    Proposed new Rule 502(k) reads as follows:

    (k) With respect to F&O Contracts, changes to the matters 
described in Rules 502(d) and (e) above, including assets eligible 
as Margin or Permitted Cover and the haircuts established with 
respect thereto, will be based on an analysis of appropriate factors 
as determined by the Clearing House, including historical and 
implied price volatility of such assets, current and anticipated 
conditions in the market for those assets, spreads and correlations 
between relevant assets, liquidity in the trading market for those 
assets, composition of the relevant market, default risk (including 
sovereign risk) with respect to those assets, relevant foreign 
exchange market conditions and other relevant information.

    Similarly existing Section 13.6 of the Finance Procedures addresses 
the determination and change of original margin rates from time to 
time. As set forth in existing Section 13.6, ICE Clear Europe regularly 
reviews its margin rates in light of market conditions and makes 
appropriate modifications. ICE Clear Europe proposes to amend Section 
13.6 to provide that changes to original margin rates for F&O Contracts 
will be based on an analysis of appropriate factors as determined by 
the clearing house. These include market prices, historical and implied 
volatilities of relevant contracts, spreads and correlations between 
related commodities, other current and anticipated conditions 
(including liquidity) in the market for the contracts and other 
relevant information as determined by ICE Clear Europe. ICE Clear 
Europe believes that Section 13.6 provides it the flexibility to adjust 
the calculation of margin rates in order to react to changes in market 
conditions, particularly changes in volatility. These changes may occur 
suddenly, and failure to update margin rates to take into account such 
changes may lead to insufficient margin being collected by the clearing 
house. The proposed revisions to Section 13.7 of the Finance Procedures 
are substantially the same as the amendments to Rule 502(k), and are 
being made for the reasons discussed above in connection with that rule 
change.
    Proposed amended Sections 13.6 and 13.7 of the Finance Procedures 
read as follows (new text italicized):

    13.6 Margin Parameters The Clearing House monitors market 
volatilities on a daily basis. The Clearing House will review 
Original Margin rates on a periodic and ad hoc basis. Changes to 
Original Margin rates will be notified to Clearing Members by 
Circular. With respect to F&O Contracts, ad hoc rate changes will 
become effective on the next Business Day. Routine rate changes will 
be implemented on the date given in the Circular announcing such 
changes, normally five Business Days after the date of the Circular. 
With respect to F&O Contracts, changes to Original Margin rates will 
be based on an analysis of appropriate factors as determined by the 
Clearing House, including market prices, historical and implied 
volatilities of relevant contracts, spreads and correlations between 
related commodities, other current and anticipated conditions 
(including liquidity) in the market for the contracts and other 
relevant information.
    13.7 Haircuts The Clearing House will review haircuts applicable 
for Permitted Cover on a periodic and ad hoc basis. Changes to 
haircuts will be notified to Clearing Members by Circular. With 
respect to Permitted Cover for F&O Contracts, ad hoc rate changes 
will become effective on the next Business Day. Routine rate changes 
will be implemented on the date given in the Circular announcing 
such changes, normally five Business Days after the date of the 
Circular. With respect to Permitted Cover for F&O Contracts, changes 
to haircuts will be based on an analysis of appropriate factors as 
determined by the Clearing House, including historical and implied 
price volatility of such assets, current and anticipated conditions 
in the market for those assets, spreads and correlations between 
relevant assets, liquidity in the trading market for those assets, 
composition of the relevant market, default risk (including 
sovereign risk) with respect to those assets, relevant foreign 
exchange market conditions and other relevant information.

    ICE Clear Europe believes that the proposed revisions to Rule 502 
and Sections 13.6 and 13.7 of the Finance Procedures will provide 
clearing members with additional predictability as to potential changes 
to margin requirements, and the reasons for such changes, without 
adversely affecting the clearing house's ability to adjust margin 
requirements as warranted by its risk management policies and market 
conditions. In addition, this additional guidance should permit 
clearing members to better anticipate potential changes in margin 
requirements and manage their own liquidity requirements, which may 
reduce the likelihood that a clearing member will be unable to satisfy 
its margin requirements and thereby improve the financial stability of 
the clearing house.
(b) Statutory Basis
    As discussed in the LIFFE Clearing Rule Notice, ICE Clear Europe 
proposes to clear, among other LIFFE contracts, the LIFFE securities 
products. Currently, the LIFFE securities products are cleared by LIFFE 
A&M, with certain clearing functions performed by LCH Clearnet Limited, 
as described in the no-action relief previously provided to LIFFE A&M 
and its predecessor entities by Commission staff.\5\ ICE Clear Europe 
proposes to provide substantially the same clearing functions for the 
LIFFE securities products, pursuant to the LIFFE Clearing Proposed 
Amendments,

[[Page 35337]]

as are currently being provided by LIFFE A&M and LCH Clearnet.
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    \5\ See, e.g., SEC No-Action Letter to LIFFE A&M, dated July 29, 
2009; SEC No-Action Letter to LIFFE A&M, dated March 6, 1996; SEC 
No-Action Letter to LIFFE A&M, dated May 1, 1992.
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    ICE Clear Europe is currently registered with the Commission as a 
securities clearing agency for purposes of clearing security-based 
swaps, pursuant to Section 17A(l) of the Act.\6\ With respect to the 
clearing of other securities products, such as the options on 
securities and security indices that constitute LIFFE securities 
products, the Commission has historically taken the position that a 
foreign clearing agency would be required to register as a securities 
clearing agency (or obtain an exemption from registration) only if it 
provides clearing services for U.S. securities directly to U.S. 
persons.\7\ Conversely, the Commission has recognized that a foreign 
clearing agency is not required to register, or obtain an exemption 
from registration, with respect to clearing services involving non-U.S. 
securities, even if such services may be provided directly to U.S. 
persons.\8\
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    \6\ 15 U.S.C. 78q-1(l).
    \7\ See, e.g., Cross-Border Security-Based Swap Activities, 
Securities Exchange Act Release No. 69490 (May 1, 2013), 78 FR 
30967, 31039 n. 682 (May 23, 2013).
    \8\ See, e.g., Morgan Guaranty Trust Company of New York, 
Brussels Office, as Operator of the Euroclear System, Securities 
Exchange Act Release No. 38589 (May 9, 1997), 62 FR 26833, 26835 n. 
16 (May 15, 1997) (``Euroclear Order'').
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    Consistent with these Commission positions, ICE Clear Europe 
believes that its proposed clearing of the LIFFE securities products 
does not require further registration of ICE Clear Europe or an 
exemption from the registration requirement. With respect to those 
LIFFE securities products that constitute foreign securities (i.e., 
futures and options on underlying non-U.S. securities), ICE Clear 
Europe (as a foreign clearing organization) may, consistent with the 
approach taken under Euroclear Order, provide clearing services, 
including to U.S. clearing members, without registration. With respect 
to those LIFFE securities products that may constitute U.S. securities 
(i.e., futures and options on underlying U.S. securities), ICE Clear 
Europe will not provide clearing services to U.S. clearing members, as 
provided in proposed new Rule 207(f) and as described in the LIFFE 
Clearing Rule Notice. As a result, these clearing activities do not 
implicate the registration requirement under Section 17A(b) of the 
Act.\9\
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    \9\ 15 U.S.C. 78q-1(b).
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    In ICE Clear Europe's view, the fact that it is registered as a 
securities clearing agency for purposes of clearing security-based 
swaps does not change this analysis. ICE Clear Europe's security-based 
swap clearing activities are for relevant purposes separate from the 
proposed LIFFE securities product clearing activities, and in 
particular are supported by a separate guaranty fund. ICE Clear Europe 
believes that they can be treated separately as a regulatory matter as 
well. The Commission has recognized in the Euroclear Order, for 
example, that a foreign clearing organization may have activities for 
which registration (or exemption) is needed and activities for which 
neither registration nor exemption is required. Similarly, ICE Clear 
Europe's registration for security-based swap clearing should not 
preclude it from engaging in other clearing activities that would 
otherwise be permissible without registration under the Exchange Act. 
(ICE Clear Europe notes that in any event, because of its status as a 
registered clearing agency, it will in practice be subject to 
additional requirements under the Act in respect of the LIFFE 
securities products, notably the rule approval requirements under 
Section 19(b) of the Act.)
    As described in the LIFFE Clearing Rule Notice, ICE Clear Europe's 
clearing operations with respect to the LIFFE securities products, and 
particularly those relating to U.S. securities, will be conducted 
outside the United States (with the exception of certain information 
technology services obtained from U.S. affiliates). Although ICE Clear 
Europe obtains certain services from some of its U.S. affiliates in 
connection with its security-based swap clearing activities, those 
services are not relevant to the clearing of the LIFFE securities 
products. Accordingly, ICE Clear Europe does not believe such 
arrangements would affect the analysis discussed above.
    As noted above, ICE Clear Europe's proposed new Rule 207(f) will 
prohibit U.S. clearing members from clearing LIFFE securities products 
involving underlying U.S. securities (other than broad-based security 
index futures contracts). In furtherance of this restriction, ICE Clear 
Europe, together with LIFFE, will implement operational controls to 
restrict the activities of U.S. clearing members. Specifically, the 
clearing system to be used for the LIFFE securities products will have 
market access controls that prevent U.S. clearing members from creating 
or holding cleared positions in LIFFE securities products involving 
underlying U.S. securities. This is intended to prevent U.S. clearing 
members from engaging in any clearing-related activity (including give-
ups or take-ups) in respect of those products. When a new U.S. clearing 
member is approved for clearing, LIFFE and ICE Clear Europe will be 
jointly responsible to ensure that these access limitations are 
properly in place.
    With respect to the proposed changes to Rule 502 and Sections 13.6 
and 13.7 of the Finance Procedures in this Amendment No. 2, ICE Clear 
Europe believes that such amendments are consistent with the 
requirements of Section 17A of the Act \10\ and the regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22.\11\ The amendments will promote the prompt and accurate clearance 
of and settlement of securities transactions, the safeguarding of 
securities and funds in the custody or control of ICE Clear Europe, and 
the protection of investors and the public interest, within the meaning 
of Section 17A(b)(3)(F) of the Act.\12\ Specifically, ICE Clear Europe 
believes that the amendments will facilitate the safeguarding of 
securities and funds in the custody or control of ICE Clear Europe, 
including the F&O Guaranty Fund that applies to LIFFE contracts and 
energy contracts, in a manner that is consistent with the financial 
resources and risk management requirements of Rule 17Ad-22 \13\ and the 
rule change approval requirements of Section 19(b)(1) of the Act \14\ 
and Commission Rule 19b-4.\15\ In addition, ICE Clear Europe believes 
that its other risk management practices applicable to clearing in the 
F&O Contracts can be conducted consistent with its rule change approval 
requirements of Section 19(b)(1) of the Act \16\ and Commission Rule 
19b-4.\17\
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    \10\ 15 U.S.C. 78q-1.
    \11\ 17 CFR 240.17Ad-22.
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22.
    \14\ 15 U.S.C. 78s(b)(1).
    \15\ 17 CFR 240.19b-4.
    \16\ 15 U.S.C. 78s(b)(1).
    \17\ 17 CFR 240.19b-4.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes in this 
Amendment No. 2 would have any impact, or impose any burden, on 
competition. ICE Clear Europe does not anticipate that the rule changes 
will adversely affect the trading market for the LIFFE contracts on 
LIFFE A&M. Moreover, ICE Clear Europe does not believe that the 
proposed amendments will impose any burden on competition among 
clearing members.

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

    Written comments relating to Amendment No. 2 have not been 
solicited or received. 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 the LIFFE Clearing 
Rule Notice \18\ 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:
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    \18\ See supra note 3.
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    (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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-ICEEU-2013-09 on the subject line.

Paper Comments

     Send paper comments 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-2013-09. 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 filings 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/publicdocs/regulatory_filings/ICEU_SEC_060413.pdf.
    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-2013-09 
and should be submitted on or before June 27, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-13859 Filed 6-11-13; 8:45 am]
BILLING CODE 8011-01-P