[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Notices]
[Pages 40243-40248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15999]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69888; File No. SR-ICEEU-2013-09]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Amendment No. 3 and Order Approving Proposed Rule Change, 
as Modified by Amendment Nos. 1, 2 and 3 Thereto, To Clear Contracts 
Traded on the LIFFE Administration and Management Market

June 28, 2013.

I. Introduction

    On May 13, 2013, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-ICEEU-2013-09 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ 
and Rule 19b-4 thereunder \2\ to implement a clearing relationship in 
which ICE Clear Europe will clear contracts traded on the LIFFE 
Administration and Management (``LIFFE A&M'') market \3\ (``LIFFE 
Contracts'').\4\ On May 22, 2013, ICE Clear Europe filed Amendment No. 
1 to the proposed rule change.\5\ Notice of the proposed rule change, 
as modified by Amendment No. 1 thereto, was published for comment in 
the Federal Register on May 29, 2013.\6\ On June 4, 2013, ICE Clear 
Europe filed Amendment No. 2 to the proposed rule change.\7\ Notice of 
Amendment No. 2 to the proposed rule change was published for comment 
in the Federal Register on June 12, 2013.\8\ On June 20, 2013, ICE 
Clear Europe filed Amendment No. 3 to the proposed rule change.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ LIFFE A&M is a recognized investment exchange under the UK 
Financial Services and Markets Act of 2000.
    \4\ The LIFFE Contracts include interest rate and government 
bond futures and options, certain agricultural futures and options, 
and futures and options on underlying equity securities and equity 
indices.
    \5\ In Amendment No. 1, ICE Clear Europe, among other things, 
clarified the scope of products proposed to be cleared, added new 
Rule 207(f) prohibiting its U.S. Clearing Members from clearing 
LIFFE Contracts that are futures or options on underlying U.S. 
securities, added additional clarification surrounding the operation 
of the combined F&O Guaranty Fund and the margining of LIFFE 
Contracts, and supplemented the statutory basis for the proposed 
rule change.
    \6\ Exchange Act Release No. 69628 (May 23, 2013), 78 FR 32287 
(May 29, 2013) (SR-ICEEU-2013-09).
    \7\ In Amendment No. 2, ICE Clear Europe elaborated on certain 
aspects of the proposed clearing activities as they relate to LIFFE 
Contracts that are securities products and made 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.
    \8\ Exchange Act Release No. 69703 (Jun. 5, 2013), 78 FR 35335 
(Jun. 12, 2013) (SR-ICEEU-2013-09).
    \9\ In Amendment No. 3, ICE Clear Europe modified proposed Rule 
207(f) to further define the persons that are subject to the 
restriction from clearing U.S. securities to include any Clearing 
Member having a U.S. residence, based upon the location of its 
executive office or principal place of business, including, without 
limitation, (i) a U.S. bank (as defined by Section 3(a)(6) of the 
Exchange Act) and (ii) a foreign branch of a U.S. bank or U.S. 
registered broker-dealer. The amendment is technical in nature and 
meant to clarify the scope of Rule 207(f) so that it is consistent 
with prior Commission actions. See infra n. 11 and accompanying 
text. Amendment No. 3 therefore did not require an additional 
comment period. The initial rule filing and all subsequent 
amendments filed are collectively referred to hereinafter as the 
``Proposal.''
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    The Commission did not receive comments on the proposed rule 
change. This order approves the proposed rule change, as modified by 
Amendment Nos. 1, 2 and 3.

II. Description of the Proposed Rule Change

A. Background

    As announced on December 20, 2012, ICE Clear Europe has agreed to 
act as the clearing organization for futures and option contracts 
traded on LIFFE A&M, including contracts traded over-the-counter and 
processed through LIFFE A&M's BClear service.\10\ The LIFFE Contracts 
proposed to be cleared by ICE Clear Europe include instruments that 
constitute securities for the purposes of U.S. securities laws (``LIFFE 
Securities Products''), including U.S. securities, which for purposes 
of the Proposal, include futures or options on underlying U.S. equities 
and equity indices. The purpose of the Proposal is to implement this 
clearing relationship.
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    \10\ BClear is a service operated by LIFFE A&M, which enables 
LIFFE A&M Clearing Members to report certain bilaterally agreed off-
exchange trades to LIFFE A&M. After ICE Clear Europe launches its 
clearing business for LIFFE A&M, trades would be eligible for 
clearing by ICE Clear Europe upon being reported.
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    In the Proposal, ICE Clear Europe submitted revised Parts 1, 2, 4, 
5, 7, 8, 11, and 12 and new Part 18 of the ICE Clear Europe Clearing 
Rules (``Rules'') (along with other clarifying and conforming Rule 
amendments) and revisions to its Finance Procedures, Clearing 
Procedures, Delivery Procedures and Membership Procedures. The other 
proposed changes in the Rules and procedures reflect conforming changes 
to definitions and related provisions and other drafting 
clarifications, and do not affect the substance of the Rules and 
procedures.

B. ICE Clear Europe Clearing Rules

    The Proposal revises Part 1 of the Rules, in which Rule 101, which 
provides definitions for certain terms, is modified to add new defined 
terms and revise existing definitions. Included in the changes to Rule 
101 are the designation of LIFFE A&M as a Market for which ICE Clear 
Europe provides clearing services, the addition of defined terms and 
other revisions to cover LIFFE Contracts and the creation of a new 
category ``F&O Contracts'' that will include Energy Contracts and LIFFE 
Contracts (and related definitions). The Energy Guaranty Fund will be 
re-designated as the F&O Guaranty Fund, which fund will be sub-divided 
with respect to Energy Contracts and LIFFE Contracts.
    Part 2 of the Rules has been revised to address requirements for 
LIFFE Clearing Members and other conforming changes. New Rule 207(f), 
as modified by Amendment No. 3 of the Proposal,

[[Page 40244]]

would be adopted to provide that Clearing Members that are U.S. persons 
will not be permitted to clear LIFFE Contracts that are futures or 
options on underlying U.S. securities (other than futures contracts on 
broad-based security indices). Specifically, Rule 207(f) defines the 
persons that are subject to this restriction to include any (i) FCM/BD 
Clearing Members; (ii) other Clearing Members that are organized in the 
United States of America; and (iii) other Clearing Members having a 
U.S. residence, based upon the location of their executive office or 
principal place of business, including, without limitation, (a) a U.S. 
bank (as defined by Section 3(a)(6) of the Exchange Act) and (b) a 
foreign branch of a U.S. bank or U.S. registered broker-dealer. As 
modified by Amendment No. 3, the proposed rule would restrict the 
clearing of U.S. securities by U.S. participants consistent with prior 
Commission actions.\11\ In furtherance of this restriction, ICE Clear 
Europe, together with LIFFE A&M, 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. Furthermore, when a new 
U.S. clearing member is approved for clearing, LIFFE A&M and ICE Clear 
Europe will take the necessary steps in their respective systems to 
implement these access controls prior to granting the new member access 
to the clearing system.
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    \11\ See, e.g., Morgan Guaranty Trust Company of New York, 
Brussels Office, as Operator of the Euroclear System, Order 
Approving Application for Exemption From Registration as a Clearing 
Agency, Exchange Act Release No. 39643 (Feb. 11, 1998), 63 FR 8232 
(Feb. 18, 1998) (``Euroclear Order'') at n. 62 (defining ``U.S. 
participant'' in the context of granting an exemption from 
registration as a clearing agency under Section 17A in connection 
with performing the functions of a clearing agency for transactions 
involving U.S. government and agency securities for U.S. 
participants).
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    Part 3 of the Rules contain certain conforming changes.
    Changes to Part 4 of the Rules address the submission of LIFFE 
Contracts for clearing and related matters. A new Rule 410 has been 
added to set out a framework for Link Agreements, which are generally 
defined as agreements entered into between ICE Clear Europe and another 
exchange for which ICE Clear Europe does not otherwise provide clearing 
services that provides for the transfer of contracts to or from that 
exchange (or its clearing house) to ICE Clear Europe. LIFFE A&M 
currently has link arrangements with Tokyo Financial Exchange Inc. and 
Tokyo Stock Exchange Inc., which exchanges would constitute 
``Participating Exchanges'' pursuant to the new Rules.
    The Proposal revises Part 5 of the Rules, which addresses margin 
requirements. Existing Rule 502(d) addresses a number of margin 
requirements, including the assets eligible to be provided as Margin or 
Permitted Cover, and existing 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.
    Part 6 of the Rules contain no changes.
    The Proposal revises Part 7 of the Rules, which deals with 
settlement and delivery of futures, to address settlement of LIFFE 
Contracts. Specifically, Rule 703 has been amended to address the 
treatment of tenders delivered in relation to Futures that are not 
settled in cash. Additionally, Rule 704, which deals with the credit 
and debit of accounts, has been amended to provide that any payment or 
other allowance payable by or to either the Buyer or Seller under the 
terms of the Contract shall be paid by or to the Clearing House for 
onward payment to the Buyer or Seller, as the case may be.
    The Proposal revises Part 8 of the Rules, which deals with Options, 
to provide additional terms with respect to the exercise of option 
contracts other than options on futures. Specifically, new Rule 806 
provides that upon exercise of any Option with a Deliverable which is 
not a Future, a Contract for the sale and purchase of the relevant 
Deliverable (a ``Contract of Sale'') at the Strike Price (or such other 
price as is required pursuant to the Contract Terms) will arise 
pursuant to Rule 401 and in accordance with the Contract Terms for the 
Option and applicable Market Rules. Additionally, new Rule 806 provides 
that upon such Contract of Sale or Contracts of Sale having arisen and 
all necessary payments having been made by the Clearing Member and 
Clearing House pursuant to the Clearing Procedures, the rights, 
obligations and liabilities of the Clearing House and the relevant 
Clearing Member in respect of the Option shall be satisfied and the 
Option shall be terminated.
    The Proposal revises Part 8 of the Rules to include the addition of 
new Rule 809, which clarifies the delivery and settlement procedures 
with respect to Contracts of Sale arising from Options. Pursuant to new 
Rule 809, the Clearing House has the authority to direct a Clearing 
Member, who is a Seller under a Contract of Sale subject to delivery, 
to deliver the Deliverable under such Contract to another Clearing 
Member that is a Buyer. New Rule 809 further provides that if a Buyer 
under a Contract of Sale rejects a Deliverable delivered to it, the 
Clearing House as Buyer under the back-to-back Contract with the Seller 
shall be entitled, if to do so would be in accordance with the 
applicable Contract Terms, to take the same action as against the 
Seller under the equivalent Contract and the Clearing House shall not 
be deemed to have accepted such delivery until the relevant Buyer has 
accepted delivery under the first Contract.
    New Rule 810 addresses the cash settlement terms of Options with 
Deliverables other than Futures. New Rule 811 provides that the 
Clearing House shall make any necessary credits or debits to or from 
Clearing Members' Proprietary Margin Account and Customer Margin 
Accounts, as appropriate, arising as a result of each cash settlement 
and delivery in accordance with Part 3 of the Rules.
    Part 9 of the Rules contain certain conforming changes.
    Part 10 of the Rules contain no changes.

[[Page 40245]]

    The Proposal revises Part 11 of the Rules, which deals with the 
Guaranty Funds. The clearing of LIFFE Contracts will be supported by 
the existing Energy Guaranty Fund, which will be re-designated the 
``F&O Guaranty Fund.'' Contributions to the F&O Guaranty Fund will be 
primarily allocated to losses from either Energy Contracts or LIFFE 
Contracts, and secondarily allocated to the other such class of 
Contracts, as set forth in Rule 1103. The size of each segment will be 
determined separately based on ICE Clear Europe's risk assessment of 
the Energy Contracts and LIFFE Contracts, respectively, and each 
segment will be separately stress-tested in accordance with the 
clearing house's risk management policies and procedures. In the event 
of a default of a clearing member for which ICE Clear Europe needs to 
apply the F&O Guaranty Fund in accordance with the risk waterfall under 
the Rules, the energy segment will be applied first to losses resulting 
from Energy Contracts, and the LIFFE segment will be applied first to 
losses resulting from cleared LIFFE Contracts. Once a segment has been 
exhausted by losses in its product category, remaining assets from the 
other segment may be applied to those losses.
    The Proposal also revises Part 12 of the Rules, which addresses UK 
Settlement Finality Regulations and the Companies Act 1989. Conforming 
changes have been made to incorporate LIFFE Contracts in the provisions 
addressing various categories of transfer orders.
    The Proposal includes a new Part 18 of the Rules, which provide for 
transitional provisions concerning the novation of open contracts with 
LIFFE A&M and LCH.Clearnet Limited, under LIFFE A&M's existing clearing 
arrangements, to ICE Clear Europe, under the new clearing relationship, 
and the transfer of Clearing Member cash and securities from 
LCH.Clearnet Limited to ICE Clear Europe.

C. ICE Clear Europe Procedures

Membership Procedures
    The Proposal updates ICE Clear Europe's Membership Procedures to 
provide for the clearing of LIFFE Contracts and to reflect a new 
membership category, ``F&O Clearing Members'', which identify Clearing 
Members seeking to clear LIFFE Contracts as well as existing Energy 
Clearing Members. The amendments reflect various other updates and 
changes to conform to other provisions of the Rules and procedures. In 
Section 4 (``Matters Requiring Notification by Clearing Members''), the 
chart governing all notifications, their timing and their form 
requirements have been generally updated to address the changes to the 
numbering of provisions and otherwise to reflect the latest version of 
ICE Clear Europe's Clearing Rules. New subsections G (``Clearing 
Procedures''), H (``Finance Procedures''), I (``Complaint Resolution 
Procedures'') and J (``Business Continuity Procedures'') have also been 
added, reflecting the notifications, timing and form requirements 
contained in such procedures.
Finance Procedures
    The Proposal also contains revisions to Parts 2, 3, 4, 5, 6, 9 and 
13 of ICE Clear Europe's Finance Procedures, which reflect general 
updates as well as changes to the clearing of LIFFE Contracts.
    Section 2.1 has been revised to clarify the currencies supported by 
ICE Clear Europe in various contexts. Initial and Original Margin 
obligations may be met only in USD, GBP and EUR currency. CAD, CHF and 
SEK currency may be used by Clearing Members only for the receipt of 
income on non-cash Permitted Cover with coupons payable in those 
currencies. CAD may also be used for Variation Margin and settlement 
payments only for Energy Contracts which settle in CAD. Certain 
additional currencies may be used for Variation Margin and settlement 
payments for LIFFE Contracts which settle in such currencies.
    Similarly, Section 3.7 has been amended to clarify that currencies 
eligible for Triparty Collateral for Original or Initial Margin are 
limited to USD, GBP and EUR.
    Section 4.1 governing currency requirements for the accounts of the 
Clearing Members has been slightly modified: all F&O Clearing Members 
must have an account, denominated in USD; all CDS Clearing Members must 
have an account denominated in EUR; all F&O Clearing Members must 
additionally have at least one further account denominated in either 
GBP or EUR; all CDS Clearing Members must additionally have at least 
one further account denominated in either GBP or USD; a Clearing Member 
which has an Open Contract Position in a contract for which EUR, GBP, 
USD or CAD is the settlement currency must have an account denominated 
in such currency; a Clearing Member which transfers non-cash Permitted 
Cover to the Clearing House which pays a coupon, interest or 
redemptions in USD, EUR, GBP, CAD, CHF or SEK must have an account in 
that currency; and an F&O Clearing Member that is a LIFFE Clearing 
Member and is party to LIFFE Contracts which settle in CAD, CHF, CZK, 
DKK, HUF, JPY, NOK, PLN, SEK or TRY must have an account in each such 
currency.
    The procedures of the assured payment system have been updated 
under Section 5.5 of the Finance Procedures to conform to changes 
recently made to Rule 301(f) regarding the liability of Clearing 
Members for the remittance of funds through Approved Financial 
Institutions.
    Section 6.1(h), which addresses the various payments that may be 
included in a cash transfer, has been modified to address intra-day 
call of additional Initial or Original Margin Call, the proceeds of 
which may be applied against future Variation Margin or Mark-to-Market 
Margin calls. Intra-day Calls will now only be processed in USD, GBP or 
EUR. Section 6.1(h)(vi) has been revised to address general procedures 
for rebates, fee discounts and incentive programs that the Clearing 
House may adopt from time to time. In addition, the provisions on 
Currency Holidays and payments on other currencies, Section 
6.1(h)(viii), have also been updated and now include language on Force 
Majeure Events and Financial Emergencies.
    In Section 9, the definitions relating to the use of Emission 
Allowances and Permitted Cover have been updated to reflect changes in 
EU Law with respect to Registry Regulations. Certain conforming changes 
are made in Part 10 of the Finance Procedures. Finally, Section 12.1 
has been revised to reflect the sub-categories of Letters of Credit 
that might be used to satisfy Original Margin, being a ``Standard 
Letter of Credit'' and a ``Pass-Through Letter of Credit''. The 
relevant forms of the Letters of Credit have also been updated in 
Section 12.4.
    Section 13.6 of the Finance Procedures addresses the determination 
and change of original margin rates from time to time. Margin 
requirements for LIFFE Contracts will be calculated using the 
SPAN[supreg]1 v4 algorithm,\12\ with modifications for concentration 
charges and a trinomial model used with respect to certain LIFFE A&M 
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

[[Page 40246]]

ICEEU F&O Risk Committee. 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.
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    \12\ 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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Clearing Procedures
    The Proposal also updates ICE Clear Europe's Clearing Procedures to 
provide for the clearing of LIFFE Contracts as well as certain other 
updates and confirmations. Accordingly, amendments have been made to 
the provisions relating to ICE Clear Europe's post-trade 
administration, clearing and settlement systems, position management 
and position accounts in Sections 1, 2 and 3, respectively.
Delivery Procedures
    The Proposal revises ICE Clear Europe's Delivery Procedures to 
provide for the delivery of LIFFE Contracts. The following provisions 
have been added to the Delivery Procedures, which set out the new 
delivery arrangements:
     Section 8 (``Alternative Delivery Procedure: LIFFE White 
Sugar and Raw Sugar'');
     Section 17 (``LIFFE Guardian''), which describes the LIFFE 
Guardian electronic grading and delivery system which will be used in 
certain LIFFE deliveries; and
     Parts I-Q, which set out the delivery arrangements for the 
additional LIFFE Contracts as follows:

 Part I: ``LIFFE Cocoa Contracts''
 Part J: ``LIFFE Coffee Contracts''
 Part K: ``LIFFE White Sugar Contracts''
 Part L ``LIFFE Wheat Contracts''
 Part M: ``LIFFE Deliveries''
 Part N: ``LIFFE Common Delivery Procedures''
 Part O: ``LIFFE Gilt Contracts''
 Part P: ``LIFFE Japanese Government Bond Contracts''
 Part Q: ``LIFFE Equity Futures/Options''.

    Further, the Schedule of Forms and Reports has been updated and 
lists additional delivery forms used for the LIFFE Contracts.
    Part A of the Delivery Procedures relating to emissions contracts 
has also been amended, reflecting changes to EU legislation, certain 
new emission contracts previously launched by ICE Futures Europe and 
the use of a single EU registry together with additional conforming and 
updating changes to the Delivery Procedures generally.
    ICE Clear Europe believes that the proposed rule and procedure 
changes are consistent with the requirements of Section 17A of the Act 
\13\ and the regulations thereunder applicable to it, including the 
standards under Rule 17Ad-22.\14\ The amendments will provide for 
clearing of LIFFE Contracts by ICE Clear Europe, consistent with ICE 
Clear Europe's existing clearing arrangements and related financial 
safeguards, protections and risk management procedures, as discussed 
herein. ICE Clear Europe believes acceptance of LIFFE Contracts for 
clearing, and conditions set out in these rule and procedure 
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.\15\ The proposed amendments do not 
impact ICE Clear Europe's financial resources devoted to its security-
based swap related (i.e., credit default swap) clearing business. ICE 
Clear Europe believes the clearing of LIFFE Contracts will satisfy 
relevant requirements of Rule 17Ad-22,\16\ as discussed below.
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    \13\ 15 U.S.C. 78q-1.
    \14\ 17 CFR 240.17Ad-22.
    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 17 CFR 240.17Ad-22.
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    Financial Resources. As discussed above, ICE Clear Europe believes 
it has structured the F&O Guaranty Fund to provide sufficient 
additional financial resources to support the clearing of LIFFE 
Contracts consistent with the requirements of Rule 17Ad-22.\17\ The 
proposed amendments do not impact ICE Clear Europe's financial 
resources devoted to its security-based swap related (i.e., credit 
default swap) clearing business. Moreover, new policies were approved 
covering margin requirements, mark-to-market margin, capital to margin, 
membership, internal rating, backtesting, wrong-way risk, concentration 
charges, intraday margin and stress testing in respect of the LIFFE A&M 
clearing relationship. Relevant models applicable to the clearing of 
LIFFE Contracts were subjected to independent validation as required by 
ICE Clear Europe's model governance framework.
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    \17\ Id.
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    Operational Resources. ICE Clear Europe believes it will have the 
operational and managerial capacity to clear the LIFFE Contracts as of 
the commencement of clearing, consistent with the requirements of Rule 
17Ad-22(d)(4).\18\ Staffing levels and resources at ICE Clear Europe 
related to operational and technology needs for the clearing of LIFFE 
Contracts will be subject to ongoing review. ICE Clear Europe believes 
that its existing systems are appropriately scalable to handle the 
expected increase in volume. ICE Clear Europe may also enter into 
services arrangements with LIFFE A&M from time to time in connection 
with the clearing of LIFFE Contracts, under which LIFFE A&M or its 
personnel may assist with certain clearing functions, particularly with 
respect to contracts that go to delivery.
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    \18\ 17 CFR 240.17Ad-22(d)(4).
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    Participant Requirements. ICE Clear Europe believes that the 
Proposal and the clearing of LIFFE Contracts are consistent with the 
requirements of Rule 17Ad-22(d)(2) \19\ to provide fair and open access 
through participation requirements that are objective and publicly 
disclosed. ICE Clear Europe believes that the Proposal establishes fair 
and objective criteria for the eligibility to clear LIFFE Contracts. 
ICE Clear Europe clearing membership is available to participants that 
meet such criteria. ICE Clear Europe Clearing Members that wish to 
clear LIFFE Contracts will have to satisfy the financial resources 
requirements to clear these products and continue to do so in order to 
preserve their eligibility to clear LIFFE Contracts. Clearing Member 
compliance with the requirements to clear LIFFE Contracts will be 
monitored by ICE Clear Europe.
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    \19\ 17 CFR 240.17Ad-22(d)(2).
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    Settlement. ICE Clear Europe believes that the Proposal will 
improve the

[[Page 40247]]

finality and accuracy of its daily settlement process and reduce the 
risk to ICE Clear Europe of settlement failures, consistent with the 
requirements of Rule 17Ad-22(d)(5), (12) and (15).\20\ The Proposal 
would require ICE Clear Europe Clearing Members that clear LIFFE 
Contracts to maintain accounts at approved financial institutions and 
that are denominated in the settlement currency of the LIFFE Contracts 
such Clearing Member clears. Also, the proposed amendments to the 
Finance Procedures clarify the steps a Clearing Member (and its 
approved financial institutions) must take in order for the Clearing 
Member's obligations to pay ICE Clear Europe to be deemed satisfied and 
complete.
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    \20\ 17 CFR 240.17Ad-22(d)(5), (12) and (15).
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    Likewise, the proposed amendments to the Delivery Procedures 
clarify the obligations of ICE Clear Europe and its Clearing Members in 
respect of physically-settled LIFFE Contracts. The Proposal 
contemplates that ICE Clear Europe may, from time to time, enter into 
clearing services arrangements with LIFFE A&M, in respect of LIFFE 
Contracts, pursuant to which certain functions may be performed by 
LIFFE A&M for ICE Clear Europe. In general, the terms to be added to 
the ICE Clear Europe Delivery Procedures in large part reflect the 
terms currently applicable to the LIFFE Contracts under their existing 
clearing arrangements.
    ICE Clear Europe believes these changes are thus in furtherance of, 
and are consistent with, the requirements of Rule 17Ad-22 \21\ and will 
facilitate the continued operation of the clearing house's settlement 
process. ICE Clear Europe believes that its Rules and procedures 
related to settlements (including physical settlements), as amended, 
appropriately identify and manage the risks associated with settlements 
under LIFFE Contracts.
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    \21\ 17 CFR 240.17Ad-22.
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    Default Procedures. ICE Clear Europe believes that the Rules and 
its relevant procedures allow for it to take timely action to contain 
losses and liquidity pressures and to continue meeting its obligations 
in the event of Clearing Member insolvencies or defaults, including in 
respect of LIFFE Contracts, in accordance with Rule 17Ad-22(d)(11).\22\


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    \22\ 17 CFR 240.17Ad-22(d)(11).
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \23\ 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. Section 17A(b)(1) of the Act \24\ 
prohibits any clearing agency from directly or indirectly making use of 
the mails or any means or instrumentality of interstate commerce to 
perform the functions of a clearing agency with respect to any security 
(other than an exempted security), unless it is registered with the 
Commission. Section 17A(b)(3)(F) of the Act \25\ requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, to assure the safeguarding of securities and funds which 
are in the custody or control of the clearing agency or for which it is 
responsible.
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    \23\ 15 U.S.C. 78s(b)(2)(C).
    \24\ 15 U.S.C. 78q-1(b)(1).
    \25\ 15 U.S.C. 78q-1(b)(3)(F).
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    After careful review, the Commission finds that the Proposal, in 
conjunction with exemptive relief granted by the Commission to ICE 
Clear Europe (the ``Exemptive Order''),\26\ is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a registered clearing agency. Specifically, the 
Commission finds that the Proposal, in conjunction with the Exemptive 
Order, is consistent with the requirement of Section 17A(b)(1) of the 
Act \27\ regarding clearing agency registration. Section 17A(b)(1) of 
the Exchange Act requires a clearing agency that makes use of the mails 
or any means or instrumentality of interstate commerce to perform the 
functions of a clearing agency with respect to any security (other than 
an exempted security) to register with the Commission, unless an 
exemption is granted by the Commission. The Commission has required a 
foreign clearing agency to register or obtain an exemption from 
clearing agency registration if the foreign clearing agency provides 
clearance and settlement services for U.S. securities directly to U.S. 
persons.\28\
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    \26\ Order Pursuant to Section 17A of the Securities Exchange 
Act of 1934 Granting Exemption from the Clearing Agency Registration 
Requirement under Section 17A(b) of the Exchange Act for ICE Clear 
Europe Limited in Connection With its Proposal to Clear Contracts 
Traded on the LIFFE Administration and Management Market, Exchange 
Act Release No. 34-69872 (Jun. 27, 2013), 78 FR ------ (July ------, 
2013).
    \27\ 15 U.S.C. 78q-1(b)(1).
    \28\ See, e.g., Order Approving Application for Exemption from 
Registration as a Clearing Agency, Exchange Act Release No. 38328 
(Feb. 24, 1997), 62 FR 9225 (Feb. 28, 1997) (granting an exemption 
from registration as a clearing agency under Section 17A in 
connection with performing the functions of a clearing agency with 
respect to transactions involving U.S. government and agency 
securities for U.S. entities); Euroclear Order, supra n. 11; and 
Order Approving Application to Modify an Existing Exemption from 
Clearing Agency Registration, Exchange Act Release No. 43775 (Dec. 
28, 2000), 66 FR 819 (Jan. 4, 2001) (replacing MGT-Brussels with 
Euroclear Bank as operator of the Euroclear System).
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    ICE Clear Europe is a foreign clearing agency registered in the 
U.S. solely for the purpose of clearing SBS. In light of the 
Commission's precedents pertaining to registration requirements for 
foreign clearing agencies, ICE Clear Europe has proposed to amend its 
Rules to include new ICE Clear Europe Rule 207(f), which would prohibit 
Clearing Members that are U.S. participants \29\ from clearing U.S. 
securities. In addition, ICE Clear Europe has developed policies and 
procedures to enforce proposed Rule 207(f), including market access 
controls that prevent U.S. participants from creating or holding 
cleared positions in U.S. securities and, consequently, from engaging 
in any clearing-related activity (including give-ups or take-ups in 
respect of those products). In addition, when a new U.S. participant is 
approved for clearing, LIFFE A&M and ICE Clear Europe will be jointly 
responsible to ensure that these access limitations are properly in 
place.
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    \29\ The term ``U.S. participant'' was previously defined for 
the limited purposes of a clearing agency exemptive order as a 
person having a U.S. residence, based upon the location of its 
executive office or principal place of business, including, without 
limitation, (i) a U.S. bank (as defined by Section 3(a)(6) of the 
Exchange Act), (ii) a foreign branch of a U.S. bank or U.S. 
registered broker-dealer, and (iii) any broker-dealer registered as 
such with the Commission even if such broker-dealer does not have a 
U.S. residence. See Euroclear Order, supra n. 11, at n. 62. 
Consistent with this definition of U.S. participant, ICE Clear 
Europe's Proposal contains rule changes that would prohibit a person 
(i) that is a FCM/BD, (ii) organized in the United States of 
America, or (iii) having a U.S. residence, based on the location of 
its executive office or principal place of business, including, 
without limitation, a U.S. bank (as defined by Section 3(a)(6) of 
the Exchange Act) or a foreign branch of a U.S. bank or U.S. 
registered broker-dealer, from participating in clearing U.S. 
securities.
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    Notwithstanding new ICE Clear Europe Rule 207(f) and its attendant 
policies and procedures and operational controls, the Commission 
believes that the proposed clearing of the LIFFE Securities Products 
would exceed the scope of activities permitted by ICE Clear Europe's 
registration solely to clear SBS under Section 17A(l) of the Exchange 
Act. Thus, ICE Clear Europe must register or seek an exemption from 
registration as a clearing agency under Section 17A(b) of the Exchange 
Act in

[[Page 40248]]

order to provide clearing services for the LIFFE Securities Products. 
Accordingly, ICE Clear Europe has submitted, and the Commission has 
granted, ICE Clear Europe's application for exemptive relief from 
clearing agency registration under Section 17A(b) of the Exchange Act 
and Rule 17Ab2-1 thereunder solely with respect to ICE Clear Europe's 
provision of clearance and settlement services for LIFFE Securities 
Products.\30\ Given the Exemptive Order,\31\ the Commission finds that 
the Proposal is consistent with the requirement of Section 17A(b)(1) of 
the Act \32\ regarding clearing agency registration.
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    \30\ ICE Clear Europe's Form CA-1 incorporates a letter from 
Paul Swann, President, ICE Clear Europe, to Elizabeth Murphy, 
Secretary, SEC, dated June 11, 2013, requesting exemptive relief 
from clearing agency registration in connection with the clearing of 
LIFFE Securities Products.
    \31\ Supra n. 26.
    \32\ 15 U.S.C. 78q-1(b)(1).
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    In addition, the Commission finds that the Proposal is consistent 
with the requirement of the Exchange Act with respect to promoting the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions. The Proposal contains provisions designed to permit and 
facilitate LIFFE Contracts to be transitioned to and cleared on an 
ongoing basis by ICE Clear Europe, including changes to ICE Clear 
Europe's Rules, as well as its Finance Procedures, Clearing Procedures, 
Delivery Procedures, and Membership Procedures.
    In addition, the Commission finds that the Proposal is consistent 
with the requirements of Section 17A(b)(3)(F) of the Act \33\ regarding 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. Among 
other things, the Proposal revises margin requirements, establishes the 
F&O Guaranty Fund to accommodate the clearing of both LIFFE contracts 
and ICE Clear Europe's existing Energy Contracts, and revises ICE Clear 
Europe's risk management framework with respect to LIFFE contracts. The 
Proposal includes new policies covering margin requirements, mark-to-
market margin, capital to margin, membership, internal rating, 
backtesting, wrong-way risk, concentration charges, intraday margin and 
stress testing in respect of the LIFFE A&M clearing relationship. 
Relevant models applicable to the clearing of LIFFE Contracts were 
subjected to independent validation as required by ICE Clear Europe's 
model governance framework.
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
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IV. 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 \34\ and the 
rules and regulations thereunder.
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    \34\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change (File No. SR-ICEEU-2013-09) be, 
and hereby is, approved.\36\
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    \35\ 15 U.S.C. 78s(b)(2).
    \36\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-15999 Filed 7-2-13; 8:45 am]
BILLING CODE 8011-01-P