[Federal Register Volume 79, Number 25 (Thursday, February 6, 2014)]
[Notices]
[Pages 7250-7257]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-02496]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71450; File No. SR- ICEEU-2014-03]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change To Adopt 
Clearinghouse Recovery and Wind-Down Rules for Its Futures and Options 
and Foreign Exchange Product Categories

January 31, 2014.
    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 January 28, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC'') the proposed rule change described in Items I and II below, 
which Items have been prepared primarily by ICE Clear Europe. ICE Clear 
Europe filed the proposal pursuant to Section 19(b)(3)(A)(iii) of the 
Act,\3\ and Rules 19b-4(f)(4)(i) and (ii) thereunder,\4\ so that the 
proposal was effective upon filing with the Commission. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \4\ 17 CFR 240.19b-4(f)(4)(i) and (ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The principal purpose of the proposed changes is to amend the ICE 
Clear Europe Clearing Rules in order to adopt new procedures for 
clearinghouse recovery and wind-down in the event of exhaustion or 
potential exhaustion of clearinghouse resources following a clearing 
member default, as well as make other improvements to the default 
management process. As discussed below, the proposed amendments apply 
to the F&O and FX product categories, but, except for certain 
conforming and clarifying changes described below, do not apply to the 
CDS product category.

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 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 these statements.

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

1. Purpose
    ICE Clear Europe submits proposed amendments to its Rules in order 
to adopt new provisions relating to clearinghouse recovery and wind-
down following the exhaustion or potential exhaustion of available 
resources after a clearing member default or series of clearing member 
defaults. The amendments would, among other matters, (i) establish a 
``cooling-off period'' in cases of certain clearing member defaults 
that result in assessments, in which case the liability of clearing 
members for additional guaranty fund assessments would be capped for 
all defaults that trigger the period or occur during the period; (ii) 
establish new procedures under which a clearing member may terminate 
its clearing membership, both in the ordinary course of business and 
during a cooling-off period, and related procedures for unwinding all 
positions of such a clearing member and capping its continuing 
liability to the clearing house, (iii) provide for ``haircutting'' of 
mark-to-market margin gains by the clearing house in situations where 
the clearing house determines, following a clearing member default, 
that it is unlikely to have sufficient resources to make all such 
payments; (iv) revise procedures for the termination of clearing and 
wind-up of outstanding contracts of a particular product category in 
the event of exhaustion of clearing house resources available to 
support those contracts; (v) adopt a new set of procedures for default 
auctions and modify the order of allocation of guaranty funds of non-
defaulting clearing members to strengthen incentives of clearing 
members to

[[Page 7251]]

actively participate in default auctions; and (vi) in general limit the 
effect of losses in the covered product categories (F&O or FX) on 
ongoing clearing for other product categories.
    As described in the revised rules, and as described in a Circular 
to be published by the Clearing House with respect thereto, these 
proposed amendments would not apply to the CDS product category. 
Accordingly, ICE Clear Europe's existing rules will continue to apply 
to CDS contracts and to CDS Clearing Members (even if they are also F&O 
Clearing Members or FX Clearing Members), with certain conforming and 
clarifying changes described below.
    Pursuant to amendments made to the recognition requirements for 
recognized clearing houses under English law, ICE Clear Europe is 
required to have default rules addressing the allocation of losses in 
excess of clearing house resources and recovery plans establishing the 
steps it will take to maintain continuity of services if such 
continuity is threatened. These requirements will go into effect on 
February 1, 2014. Recovery and wind-down plans are also an element of 
the CPSS-IOSCO Principles for Financial Market Infrastructures (the 
``PFMIs'') and are therefore necessary for ICE Clear Europe to be 
treated as a qualified central counterparty (``QCCP'') for purposes of 
the applicable Basel III bank capital requirements that apply to 
clearing members and other market participants.
    The amendments are intended to enhance the clearing house's 
existing rules for the F&O and FX product categories by providing 
additional tools to assist the clearing house in addressing potential 
losses in excess of available clearing house resources. In each case, 
ICE Clear Europe, in consultation with its clearing members, has sought 
to balance a number of competing considerations in developing these 
additional tools. The clearing house needs to have sufficient resources 
to cover potential losses in extreme default situations and to have 
adequate flexibility in the management of defaults, consistent with the 
PFMIs and UK and U.S. regulatory requirements.\5\ At the same time, 
clearing members must be able to continue to manage appropriately their 
own risks from cleared transactions and their obligations to the 
clearing house, in light of the evolving regulatory and capital 
framework that applies to them. The amendments are designed to provide 
greater certainty (for both clearing members and the clearing house) as 
to the maximum liability of clearing members to the clearing house and 
as to the particular steps the clearing house may take to manage a 
default (and the responsibilities of the clearing members for default 
management), and to reduce the incentives for non-defaulting clearing 
members to withdraw from the clearing house following a default. The 
amendments are also intended to give clearing members appropriate 
incentives to participate actively in default management and to provide 
the clearing house adequate time and opportunity to resolve a default, 
while limiting the incentive for non-defaulting clearing members to 
withdraw from clearing membership following a default. The following 
discussion is intended to highlight the purpose and expected effects of 
the principal features of the proposed amendments:
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    \5\ See, e.g., 17 CFR 39.11, 39.16; 17 CFR 240.17Ad-22(b)(2)-
(3), (d)(11).
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Cooling-Off Periods and Assessment Limits
     Under various provisions of its existing rules,\6\ there 
are limits on ICE Clear Europe's ability to call for assessments from 
clearing members as a result of potential losses exceeding guaranty 
fund resources. Following extensive consultation with clearing members, 
and consideration of the impact on clearing house resources in extreme 
loss scenarios, ICE Clear Europe proposes to revise the assessment 
limit framework as set forth herein. In each product category, ICE 
Clear Europe proposes to maintain both (i) a per default assessment 
limit (which is twice the required guaranty fund contribution for the 
F&O and FX product categories) and (ii) an aggregate assessment limit 
for any cooling-off period (which is three times the required guaranty 
fund contribution for each such product category).
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    \6\ In particular, existing Rule 1105(b) provides for a per 
default assessment limit equal to twice the required guaranty fund 
contribution for the F&O product category. The existing rules do not 
contemplate a cooling-off period assessment limit. Under the 
existing rules, a clearing member can only limit its liability for 
further assessments by withdrawing from clearing membership in 
accordance with Rule 1105(h) or (i). Similar provisions exist for 
the FX product category under Rule 1107. As discussed herein, ICE 
Clear Europe proposes the addition of the cooling-off period, with 
the related assessment cap for the period, to provide greater 
certainty as to the maximum liability of a clearing member during a 
series of defaults and to avoid providing an incentive for clearing 
members to withdraw from clearing membership to limit their 
liability.
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     A cooling-off period will be triggered by a default or 
series of defaults that results in an assessment on clearing members or 
a sequential guaranty fund depletion (i.e., a series of defaults 
requiring replenishment in the aggregate in excess of the required 
guaranty fund contribution). The cooling-off period will initially run 
for 30 business days, but if a subsequent trigger event occurs during 
the period, the period will be extended until the 30th business day 
following that subsequent trigger. Once the cooling-off period is 
triggered and for the duration of such period, the guaranty fund will 
not be recalculated or replenished. Each clearing member will remain 
liable for assessments during the period, up to the relevant maximum 
for the period. Clearing members will remain liable to post initial 
margin during the cooling-off period.\7\
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    \7\ The clearing house expects that it would rely on additional 
initial margin during the cooling-off period, if necessary, in order 
to satisfy ongoing regulatory financial resources requirements 
(i.e., the ``cover 2'' requirement).
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     The combination of the assessment limit and the cooling-
off period is designed to provide certainty to clearing members as to 
their maximum liability to the clearing house with respect to the 
guaranty fund. Well-defined liability for guaranty fund contributions 
is an expected aspect of QCCP status and facilitates the risk 
management needs of clearing members under their own capital 
requirements and policies.\8\ By fixing the maximum contribution for 
all clearing members, the cooling-off period is designed to reduce the 
risk of a ``rush for the exit'' following a significant default, since 
all clearing members (whether or not they choose to withdraw from 
membership) will bear the same assessment liability in proportion to 
their guaranty fund requirements. The cooling-off period also gives the 
clearing house time to arrange an orderly close-out of the defaulter's 
or defaulters' positions and provides the clearing house greater 
certainty as to the resources it will have during that period. ICE 
Clear Europe believes that even with the assessment caps, the clearing 
house has sufficient financial resources to support its operations even 
in extreme market conditions.\9\ In ICE Clear Europe's view,

[[Page 7252]]

the assessment limits and cooling-off period arrangements strike an 
appropriate balance between its needs for financial resources in the 
case of an extreme default while providing desired certainty and 
protection for non-defaulting clearing members in light of their own 
capital, liquidity, risk management and commercial considerations.
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    \8\ ICE Clear Europe does not believe it is commercially 
feasible for an internationally active clearing house to require 
potentially unlimited guaranty fund contributions of its members. In 
this regard, we note that applicable bank capital guidelines under 
the Basel III capital framework contemplate that a qualified central 
counterparty, or QCCP, does not impose unlimited liability on its 
clearing members for contributions to the guaranty fund. See 
Regulatory Capital Rules, 78 FR 62018, 62099 (Oct. 11, 2013).
    \9\ In this regard, we note that ICE Clear Europe satisfies its 
regulatory ``cover 2'' financial resources requirement through the 
funded component of its guaranty funds, without consideration of 
assessment rights. Assessments provide additional financial 
resources in extreme scenarios beyond the cover 2 level, but the 
assessment caps will thus not impact the clearing house's ability to 
meet its regulatory financial resources requirements. Although ICE 
Clear Europe would not be permitted to call for replenishment of the 
guaranty fund during a cooling-off period, ICE Clear Europe retains 
the ability to call for initial margin (including additional initial 
margin) at all times during a cooling-off period in its discretion. 
ICE Clear Europe would expect to call for additional initial margin 
if necessary to satisfy regulatory financial resources requirements 
during such period.
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Procedures for Termination of Clearing Membership
     In connection with the adoption of the cooling-off period 
concept, ICE Clear Europe is proposing new procedures for withdrawal 
from clearing membership (other than for CDS Clearing Members). Under 
the revised rules, a withdrawing clearing member is required to close 
out all of its outstanding positions within a specified period. If it 
does so, it will not be responsible for losses from defaults occurring 
following the end of that period. In the case of a withdrawal during 
the cooling-off period, the revised rules provide for a specified 
cooling-off termination period during the beginning of the period. If 
notice is given within the cooling-off termination period, the clearing 
member generally has until the end of the cooling-off period to 
terminate its positions at the clearing house. If it does so, it will 
not be liable for further assessments beyond those owed during the 
cooling-off period, and will not have to replenish its guaranty fund at 
the end of the cooling-off period. The amendments are intended to 
provide clearing members, and the clearing house, greater certainty as 
to their respective rights and obligations in the case of withdrawal.
     The amendments are intended to benefit withdrawing 
clearing members by providing a clear procedure for withdrawal, and 
specifying the dates by which relevant actions must be taken in order 
for the clearing member to limit its liability for future defaults. For 
the clearing house, the amendments provide certainty as to those margin 
and guaranty fund contributions of a withdrawing clearing member that 
can be used for particular defaults, and also provide a series of 
remedies for the clearing house in the event that a withdrawing 
clearing member does not satisfy its obligations in respect of its 
withdrawal. By providing an appropriate delay for withdrawal, the 
procedures protect the clearing house and remaining clearing members by 
permitting an orderly exit from positions, and continuing liability for 
the clearing member until it has closed out its positions. For 
customers of a withdrawing clearing member, the rules provide a 
mechanism for facilitating the transfer of positions to a new, 
remaining clearing member prior to withdrawal. This should mitigate the 
impact of withdrawal on customers and the cleared derivative market in 
general.
Mark-to-Market Margin Haircutting
     The proposed rules permit the clearing house, in limited 
circumstances specified in the proposed rules where, as a result of a 
clearing member default, the clearing house has insufficient resources 
to pay all outgoing mark-to-market margin payments, to ``haircut'' such 
outgoing payments by the amount of the shortfall in resources. This 
authority only applies to the F&O and FX product categories. This 
approach allows the clearing house to avoid default in such situations 
where available resources are insufficient. The proposed rules permit 
mark-to-market margin haircutting in several situations following a 
default where amounts owed or, in the clearing house's determination, 
expected to be owed by the clearinghouse (including to make outward 
mark-to-market margin payments and to pay the costs of transferring 
positions to non-defaulting clearing members as part of the default 
management process) exceed available financial resources. Thus, 
haircutting may be appropriate following default (i) where the clearing 
house does not believe that it would otherwise have sufficient 
resources to run a successful default auction for the defaulter's 
positions, and (ii) where the clearing house has encountered difficulty 
or delay in collection of amounts owed to it (including assessments on 
clearing members that have not been paid) as a result of which it is 
unable to pay all amounts then owed. In such situations, mark-to-market 
margin haircutting allows the clearing house to continue operations, 
despite the potential lack of available resources, in circumstances 
where it might otherwise be forced to terminate contracts or default. 
In particular, where there is uncertainty as to the ultimate resources 
of the clearing house or the ultimate cost of resolving a default, 
haircutting may permit the clearing house to continue operations until 
such resources or costs are finally determined, following which the 
clearing house would expect to be able either to resume normal 
operations or proceed to termination of contracts as discussed below. 
In addition, mark-to-market margin haircutting can be conducted with 
respect to a particular product category (i.e., F&O or FX) that has 
been affected by a shortfall, allowing clearing in other product 
categories to continue unaffected. ICE Clear Europe anticipates that 
mark-to-market haircutting would only be imposed in extreme 
circumstances, as an alternative to clearinghouse default and a further 
preventive step to avoid or delay tear-up of relevant contracts.
     Haircutting will, of course, mean that clearing members 
and their customers that would otherwise have mark-to-market margin 
gains will not receive some or all of such gains. In ICE Clear Europe's 
view, this is an appropriate approach to loss allocation.\10\ In 
particular, haircutting is intended to mimic the way losses would be 
expected to be allocated in an actual insolvency, where parties with 
claims against an insolvent entity would share pro rata in available 
assets (and would thus have their claims ``haircut'' to the extent of 
any shortfall in assets). The haircutting rules are intended to achieve 
a similar result in an orderly, controlled manner without the need, 
expense or disruption of an insolvency proceeding. Although a tear-up 
of contracts is potentially an alternative (and is

[[Page 7253]]

permitted under the rule amendments), ICE Clear Europe believes that 
haircutting would be a useful alternative in the situations mentioned 
above, where it is possible that the clearing house will, as a result 
of haircutting, be able to maintain the clearing house as a going 
concern and run a successful auction that would permit clearing to 
continue and be less disruptive to the market than tear-up. Similarly, 
where there is a delay in obtaining financial resources following a 
default, and the clearing house believes it has a reasonable prospect 
of obtaining amounts owed to it, haircutting that allows cleared 
contracts to remain outstanding may be preferable to tear-up for market 
participants.
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    \10\ As proposed, haircutting would be performed separately for 
the proprietary and each customer account, and within a customer 
account, haircutting would be done on a ``gross'' basis across each 
customer portfolio, to the extent possible (although positions would 
be netted for this purpose within each such portfolio). Although 
this approach will impose a burden on customers as well as clearing 
members, ICE Clear Europe believes that it most equitably 
distributes the loss, as it treats each non-defaulting market 
participant with mark-to-market gains in the same manner with the 
same percentage haircut. Alternative approaches, such as calculating 
the customer haircut on a net basis for this purpose, would make a 
customer's treatment depend on the positions of other customers of a 
particular clearing member, and would thus lead to different 
treatment for the same positions when held at different clearing 
members. Another alternative approach, position-by-position 
haircutting could adversely affect the ability of market 
participants to net exposures for accounting and other purposes. 
Furthermore, ICE Clear Europe does not believe it would be 
appropriate for the clearing house to try to shift more of the loss 
to clearing members as opposed to customers, such as by not 
haircutting the customer account or haircutting the proprietary 
account before the customer account. Such a preference for some 
market participants over others would divorce the haircutting 
treatment from the positions held, and would penalize clearing 
members (including self-clearing members) for the benefit of 
customers, even in circumstances where the customer is holding 
potentially riskier, more directional positions.
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Termination of Clearing
     As a final tool, the proposed rules would provide more 
detailed procedures under which ICE Clear Europe could terminate 
clearing in the F&O or FX product category. This would permit ICE Clear 
Europe to arrange an orderly wind-down of cleared contracts in that 
category in the event that there are insufficient financial resources 
to support continued clearing of that product and ICE Clear Europe 
determines that termination for that product category is appropriate 
under the circumstances. Upon termination, available resources for that 
product category (including the relevant guaranty fund) will be used, 
together with amounts owed to the clearing house, to pay amounts owed 
by the clearing house on the terminated contracts. To the extent such 
resources are insufficient, the shortfall will be shared among clearing 
members and their customers on a pro rata basis.
     Termination of contracts, particularly where resources are 
insufficient, will thus impose a loss on certain clearing members and 
their customers, similar to that imposed under mark-to-market margin 
haircutting. ICE Clear Europe believes that this approach is generally 
similar to the result that would obtain in an actual insolvency 
proceeding. Furthermore, ICE Clear Europe believes that this approach 
is an appropriate means of allocating the loss, consistent with the 
goals of avoiding unlimited liability for clearing members.
New Default Auction Procedures
     ICE Clear Europe has determined to adopt a new auction 
methodology for unwinding the F&O or FX positions of a defaulting 
clearing member. The terms of the auction methodology are set forth in 
default auction procedures established by ICE Clear Europe. Under the 
auction methodology, the defaulting clearing member's open positions 
may be divided in to one or more lots, each of which will be auctioned 
separately. Each clearing member will be required to participate in 
each auction in a minimum bid amount based on the relative size of its 
guaranty fund contribution. (Clearing members will be permitted to 
submit bids on behalf of their customers as well, and in certain cases 
customers may be permitted to directly bid in the auction.)
     Based on the bids submitted, ICE Clear Europe will 
determine an auction clearing price for the relevant portfolio, subject 
to any maximum or minimum price established by the clearing house for 
that auction. The auction procedures use a ``Dutch'' auction 
methodology to establish an auction clearing price at which the 
defaulter's portfolio will be unwound. The Dutch auction methodology is 
similar to that used in determining auction settlement values under 
credit default swaps and in general is widely used in numerous other 
financial market contexts.
     In connection with the auction methodology, and to provide 
an incentive for active participation in the auction, the proposed 
rules also provide for a specific priority of use of guaranty fund 
contributions based on bids in the auction (sometimes referred to as 
``juniorization''). Under this approach, to the extent the guaranty 
funds of non-defaulting clearing members are to be used to pay the 
auction price,\11\ ICE Clear Europe will begin with the guaranty fund 
contributions of any such clearing member that failed to participate in 
the auction. The guaranty fund contributions (and, if necessary, 
assessments) of other non-defaulting clearing members are split into a 
subordinate and a senior tranche based on the competitiveness of their 
respective bids. The subordinate tranche will be applied next to the 
auction costs, followed by the senior tranche (and followed by a 
subordinate tranche of assessments and senior tranche of assessments, 
if necessary). Within each tranche, guaranty fund contributions will be 
applied on a pro rata basis.
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    \11\ Consistent with the existing default management waterfall, 
resources of the defaulting clearing member and certain resources 
provided by ICE Clear Europe itself would be used prior to the use 
of guaranty fund contributions of non-defaulting clearing members as 
described herein.
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     Bidders whose bids were more competitive than a specified 
``senior threshold price'' (determined based on a specified range from 
the auction clearing price) will have their guaranty fund contributions 
assigned to the senior tranche; bidders whose bids were less 
competitive than a specified ``subordinate threshold price'' 
(determined based on a specified range from the auction clearing price) 
will have their guaranty fund contributions assigned to the subordinate 
tranche. Bidders whose bids were between the senior threshold price and 
subordinate threshold price will have their guaranty fund contributions 
split between the two tranches based on a formula. Where the 
defaulter's positions are divided into multiple lots, the above 
calculations will be performed for each lot, and an aggregate senior 
and subordinate tranche calculated based on the results of individual 
lots. (In such case, a bidder's guaranty fund contribution may be split 
between the aggregate senior and subordinate tranches depending on its 
bidding for each lot.)
     ICE Clear Europe believes that the new default auction 
methodology, together with the guaranty fund priority described above, 
will provide a strong incentive for clearing members to participate 
actively in the auction and will result in the allocation of the 
defaulter's positions at a fair, market-clearing price. Although 
clearing members that fail to participate, or that provide non-
competitive bids, will be adversely affected as compared to an approach 
in which all clearing members are affected equally, ICE Clear Europe 
believes that this approach appropriately takes into account 
participation in the auction. The rules of the auction are established 
in advance, and all clearing members have an equal opportunity to 
participate. By giving clearing members an incentive to bid 
competitively, ICE Clear Europe believes that its default auctions will 
result in more competitive and accurate pricing for the defaulter's 
portfolios, which will benefit the clearing members as a whole and make 
it more likely that the clearing house will be able to manage a default 
successfully.
Separation of Product Categories
     The rule amendments are also designed to further the 
separation of the F&O and FX product categories cleared by ICE Clear 
Europe. Under its existing rules, ICE Clear Europe maintains separate 
guaranty funds for each product category, each of which is intended to 
support only that product category. The amendments will enhance this 
separation of products by allowing the clearing house to use the 
recovery tools separately for each of the F&O and FX product 
categories. As a result, an extreme loss in one such product category 
can be addressed by those tools, without adversely affecting clearing 
operations in another product

[[Page 7254]]

category. In an extreme situation, even if the clearing house has to 
implement mark-to-market margin haircutting or termination for one such 
product category, that will not in itself require termination of the 
other category. Although segregation of the different product 
categories in some sense may limit the aggregate resources that could 
be used to cover a default, it will protect the market, and market 
participants, in each category from events outside that market. ICE 
Clear Europe believes that preventing contagion of defaults in this way 
will further the operation of the clearing system more generally. Such 
separation is particularly important for market participants that may 
participate in one product category, but not others.
Use of Recovery Tools
     The recovery and wind-down tools set forth in the proposed 
rules are expected to be used only in extreme default scenarios where 
the clearing house has exhausted the margin and guaranty fund resources 
provided by the defaulter and has used guaranty fund contributions 
provided by non-defaulting clearing members (or might reasonably expect 
such contributions to be used). Default scenarios, especially such 
extreme default scenarios, vary, and as a result the proposed rules 
have been designed to provide the clearing house with flexibility as to 
how, whether and the extent to which the additional default tools are 
implemented in a particular case. However, where ICE Clear Europe has 
discretion as to implementing such measures, such as mark-to-market 
margin haircutting or termination, ICE Clear Europe expects that it 
would make such a decision in accordance with its default management 
procedures and governance process more generally. This would include, 
where practicable under the circumstances, consultation of clearing 
members through the relevant product risk committee.
    As noted above, these new resolution and recovery tools will not 
apply to CDS contracts. The proposed Rule amendments are described in 
detail as follows.
    In Part 1 of the Rules, various conforming changes have been made 
to definitions, including the definitions of ``FX Default Amount'', 
``Termination Close-Out Deadline Date'', ``Termination Close-Out 
Time'', ``Termination Date'' and ``Termination Notice Time''. Rule 
105(c) (``Termination'') has been revised to conform to new termination 
provisions in part 9 of the Rules and to clarify the use of the term 
``Termination Notice Time'' in connection with a termination of 
clearing house services in connection with F&O and FX products. A new 
subsection (f) has been added to Rule 110 which permits ICE Clear 
Europe to delay making outgoing mark-to-market margin payments for F&O 
and FX products on an intra-day basis in certain circumstances where a 
clearing member has failed to make a mark-to-market margin payment to 
the clearing house on such day.
    In Rule 209 (``Termination of clearing membership''), certain 
provisions addressing the termination of clearing membership and a 
clearing house default and the consequences thereof have been moved to 
Rules 912 and Rule 918, as discussed below, with conforming changes 
being made to the remainder of Rule 209. (These amendments will not 
apply to CDS Clearing Members. Existing Rules 209 and 912 will continue 
to apply to CDS Clearing Members.) \12\ In Rule 301(f) certain cross-
references have been corrected. Various conforming and non-substantive 
changes are made in Part 4 of the Rules.
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    \12\ Pursuant to a telephone conversation among Geoffrey 
Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special Counsel, 
SEC; and Justin Byrne, Attorney-Advisor, SEC on January 30, 2014, 
ICE Clear Europe notes that these Continuing CDS Rule Provisions, 
which continue to be in effect with respect to the CDS Contract 
Category, will be available on ICE Clear Europe's Web site at 
https://www.theice.com/Rulebook.shtml?clearEuropeRulebook=.
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    Part 9 of the Rules has been revised to incorporate the new 
recovery and wind-down provisions discussed above. In addition, several 
provisions that were previously in other parts of the Rules have been 
moved into Part 9 to consolidate the relevant provisions. Conforming 
and cross-reference changes have also been made throughout Part 9.
    The former Rule 1103 (``Application of Assets upon Event of 
Default'') has been moved to Rule 908. As moved, relative to former 
Rule 1103, Rule 908 also contains various conforming changes, 
corrections to cross-references and non-substantive drafting 
improvements and clarifications to terms used, including to promote 
consistency across the rulebook, such as to change references to ``any 
loss or shortfall'' to ``any shortfall, loss or liability'' in relevant 
provisions.\13\ In Rule 908(e), which addresses the calculation of a 
separate default amount for each product category in the case of a 
defaulting clearing member that cleared in multiple product categories, 
a reference in clause (iv) to guaranty fund contributions has been 
moved, and new clause (v) has been added, to clarify the allocation, 
for purposes of determining the default amounts, of the defaulter's 
guaranty fund contributions across the product categories in which the 
defaulter acted, consistent with the other provisions of Rule 908. (A 
conforming change is also made in Rule 908(e)(vi) to clarify that the 
allocation of guaranty fund contributions, which is addressed in new 
clause (e)(v), is not addressed in clause (vi).) With respect to the 
F&O and FX product categories, Rule 908(g) also removes a timing 
limitation on the use of a defaulter's guaranty fund contributions from 
one product category to cover its losses from another product category. 
In the proviso to clause (v) of Rule 908(g), conforming references to 
relevant defined terms have been added and a cross-reference in 
subclause (2) of the prior provision in former Rule 1103 has been 
corrected.\14\ In Rule 908(g)(vii), additional clarifying language has 
been included that states explicitly the extent to which assessment 
contributions in each product category may be used, consistent with the 
use of guaranty fund contributions under other clauses of Rule 908(g) 
and with the purposes for which (and amounts in which) assessments may 
be called under Rules 909-911. New Rule 908(i) provides that with 
respect to the F&O and FX product categories, if a non-defaulting 
clearing member fails to participate in a default auction or does not 
comply with its obligations under any such auction, its guaranty fund 
contributions will be applied prior to the guaranty fund contributions 
of other non-defaulting clearing members. Rule 908(i) also imposes the 
default auction priority for the use of guaranty fund contributions and 
any assessment contributions in the case of default auctions in the F&O 
and FX product categories, as discussed above.
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    \13\ Commission staff made clarifying edits to this sentence 
pursuant to a telephone conversation on January 30, 2014, among 
Geoffrey Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special 
Counsel, SEC; and Justin Byrne, Attorney-Advisor, SEC.
    \14\ Commission staff made clarifying edits to this sentence 
pursuant to a telephone conversation on January 30, 2014, among 
Geoffrey Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special 
Counsel, SEC; and Justin Byrne, Attorney-Advisor, SEC.
---------------------------------------------------------------------------

    Former Rules 1105 (``Powers of Assessment: Energy''), 1106 
(``Powers of Assessment: CDS'') and 1107 (``Powers of Assessment: FX'') 
have been moved to new Rules 909, 910 and 911, respectively. In 
addition to certain conforming changes, new Rules 909 (for F&O) and 911 
(for FX) have been revised (i) to provide that the clearing house may 
call for assessments where it determines that a shortfall in relevant 
resources either has arisen or is likely to arise, (ii) to clarify the 
existing per

[[Page 7255]]

default maximum assessment liability in each product category, as 
described above, and (iii) to provide that assessments called in excess 
of the amounts actually required will be treated as surplus collateral 
provided by the relevant clearing member until such time as such amount 
is required or the clearing house determines that it will not be 
required. In Rule 910, certain cross-references have been revised as a 
result of the movement of other provisions in the proposed rules. In 
addition, relative to former Rule 1106, Rule 910(a) contains certain 
non-substantive drafting improvements and clarifications to terms used 
across the rulebook, including to promote consistency across the 
rulebook, such as to change references to ``any loss or shortfall'' to 
``any shortfall, loss or liability'' in relevant provisions.\15\ Rule 
910(a) has also been revised to correct cross-references to new Rule 
908(g) and remove certain unnecessary cross-references. Rule 910(b) 
removes certain text concerning the calculation of the CDS Assessment 
Amount that is unnecessary in light of the provisions of Rule 910(a) 
and further removes a superfluous reference to the Clearing House CDS 
Contribution.
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    \15\ Commission staff made clarifying edits to this sentence 
pursuant to a telephone conversation on January 30, 2014, among 
Geoffrey Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special 
Counsel, SEC; and Justin Byrne, Attorney-Advisor, SEC.
---------------------------------------------------------------------------

    Certain provisions addressing the termination of transactions in 
the event of an ICE Clear Europe insolvency or other default (formerly 
in Rule 209) have been moved to new Rule 912, with certain conforming 
changes and a clarification relating to a default that affects some but 
not all product categories. Such changes will not apply to CDS Clearing 
Members (regardless of whether they are also F&O Clearing Members or FX 
Clearing Members), and existing Rules 209 and 912 will continue to 
apply to CDS Clearing Members.\16\
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    \16\ See supra note 12.
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    New Rules 913 to 918 will not apply to the CDS product category.
    New Rule 913 contains various new definitions used in the new 
recovery and wind-down provisions, including the haircutting provisions 
in Rule 914, the termination provisions of Rule 916, the cooling-off 
period provisions of Rule 917 and the clearing member withdrawal 
provisions of Rule 918.
    New Rule 914 establishes the haircutting mechanism. The core of 
Rule 914 is the procedure for ``haircutting'' the mark-to-market margin 
and certain other contractual payments owed by the clearing house to 
clearing members for a contract category, to the extent of a shortfall 
in available resources for that contract category, when ICE Clear 
Europe issues a ``Haircutting Determination''. Such determination may 
be made, once certain conditions are satisfied:

    (i) one or more clearing member defaults have occurred but ICE 
Clear Europe has not yet declared and either paid or submitted a 
claim in respect of all net sums due to or from the defaulter in 
respect of its proprietary account and all of its customer accounts; 
and (ii) ICE Clear Europe determines, based on one of several 
relevant tests, that its available resources are insufficient to pay 
all relevant outward mark-to-market margin and contractual payments 
and/or its available resources would be insufficient to cover the 
losses or shortfalls to the clearing house from close-out of the 
defaulter's positions.

    A Haircutting Determination will not be made if clearing in the 
relevant contracts is being terminated under Rule 916 or a clearing 
house insolvency or failure to pay has occurred. In the event of a 
Haircutting Determination, on day during the ``loss distribution 
period'' specified by the clearing house, the net amount owed on such 
day to each clearing member that is deemed to be a ``cash gainer'' in 
respect of an account class (i.e. a member that would otherwise be 
entitled to receive mark-to-market margin or other payments in respect 
of such account class) will be subject to a percentage haircut. 
Corresponding adjustments are also made for ``cash losers'' (i.e., 
those who owe the clearing house) to the extent amounts previously owed 
to them have been haircut.
    New Rule 916 permits the clearing house to terminate a set of 
contracts where (i) its obligations to meet mark-to-market margin 
payments or the cost of auctioning off the positions of a defaulting 
clearing member will not be satisfied through the haircutting procedure 
in Rule 914, (ii) following the declaration of all net sums in respect 
of a particular default, the clearing house may be rendered insolvent, 
(iii) there has been a failed auction in a relevant contract category, 
or (iv) the clearing house determines that because of the termination 
of clearing members, there will be insufficient clearing members for 
clearing of the relevant contract category to remain viable. Rule 916 
provides a procedure for determining the termination price for all 
contracts in a particular set. To the extent the termination value 
payable by the clearing house for the terminated contract set exceeds 
available resources for that contract set, the clearing house's 
obligations will be limited to the available resources. This will 
permit clearing activity to continue in other contract categories.
    Rule 917 implements the ``cooling-off period'' concept discussed 
above. A cooling-off period is triggered by certain defaults that 
result in a guaranty fund assessment or a sequential guaranty fund 
depletion. During a cooling-off period, the assessment liability of a 
clearing member is capped with respect to all defaults occurring during 
the period. In addition, the guaranty fund is not recalculated or 
rebalanced during the cooling-off period, and replenishment of guaranty 
fund contributions for continuing clearing members is not required 
until the end of the cooling-off period.
    Rule 918 implements the revised procedures discussed above for 
clearing members (other than CDS clearing members) that wish to 
terminate their clearing membership (including during a cooling-off 
period). Clearing members that have submitted a termination notice are 
required to close out their open contracts by a specified deadline. 
Rule 918 also provides for the calculation and payment of a net amount 
to or from the terminating clearing member for each of its accounts in 
respect of the close out of all of its positions. As discussed above, 
terminating clearing members are not responsible for additional 
guaranty fund contributions for defaults occurring after the effective 
termination date.
    Various conforming changes are also made to the Rules, including in 
Part 11 of the Rules. Rule 1102(g), addressing the return of the 
guaranty fund, has been revised to provide for the return of F&O and FX 
guaranty fund contributions consistent with the new termination 
provisions in Rule 918. The amendments do not affect the return of CDS 
guaranty fund contributions, to which the existing rules continue to 
apply. Revised Rule 1102(i) also revises the timing of replenishment of 
guaranty fund contributions for the F&O and FX product categories, but 
not for the CDS product category. Certain conforming changes to cross-
references in revised Rule 1102(i) are also made. Former Rule 1104, 
which addresses use of guaranty fund contributions, has been 
redesignated as Rule 1103, and various conforming changes to cross-
references have been made. Rule 1204(j) has been revised to correct a 
cross-reference to Rule 1204(a). Other conforming changes have been 
made in parts 12 and 15 of the Rules. In part 17, Rule 1710 has been 
removed as it has been replaced by Rule 918.

[[Page 7256]]

2. Statutory Basis
    ICE Clear Europe believes that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \17\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\18\ Section 17A(b)(3)(F) of the Act \19\ 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. ICE Clear Europe believes that the 
proposed rule changes are consistent with the Act and the regulations 
thereunder applicable to ICE Clear Europe, in particular, Section 
17(A)(b)(3)(F) \20\, because ICE Clear Europe believes that the new 
recovery and wind-down rules will facilitate the prompt and accurate 
settlement of derivatives and contribute to the safeguarding of 
securities and funds associated with derivative transactions which are 
in the custody or control of ICE Clear Europe or for which it is 
responsible, as set forth herein. In addition, except for certain 
conforming and clarifying changes described above, the proposed 
amendments do not affect security-based swaps (i.e., the CDS product 
category), which will continue to be subject to the existing rules.\21\
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    \17\ 15 U.S.C. 78q-1.
    \18\ 17 CFR 240.17Ad-22.
    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ Commission staff made clarifying edits to this sentence 
pursuant to a telephone conversation on January 30, 2014, among 
Geoffrey Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special 
Counsel, SEC; and Justin Byrne, Attorney-Advisor, SEC.
---------------------------------------------------------------------------

    ICE Clear Europe has developed the new recovery and wind-down rules 
in response to issues raised by the Bank of England as overseer of its 
payment arrangements and following extensive consultation with the Bank 
of England and clearing members. Recovery rules are required to be in 
place by February 2014 under recent amendments to the clearing house 
recognition requirements under applicable English law. Recovery and 
wind-down rules are also contemplated under the PFMIs and accordingly 
are necessary to maintain QCCP status.
    Consistent with these legal and regulatory requirements, the 
proposed rules are designed to address extreme loss scenarios following 
one or more clearing member defaults, and are not generally intended to 
affect the ordinary course operation of the clearing house or its 
existing protections for the securities and funds in its custody or 
control or for which it is responsible. ICE Clear Europe believes that 
the proposed rule changes will enhance the stability of ICE Clear 
Europe following the default of one or more clearing members and reduce 
the risk of ICE Clear Europe failure or insolvency. The revisions will 
in particular facilitate the orderly wind-down or termination of 
contracts affected by a default. Further, ICE Clear Europe, as a 
clearing house for multiple products, also believes that the changes 
will permit the clearing house to address a default in one market while 
minimizing the effect on other categories of contracts, for which 
clearing should be able to continue. This will reduce the risk of a 
systemic problem in one cleared market causing contagion or creating 
risks for other cleared markets. The amendments also provide clearer 
limitations on the liability of clearing members for assessments 
following defaults, and a clearer procedure for termination of clearing 
member status. Taken together, the amendments will thus promote the 
prompt and accurate clearance and settlement of contracts cleared by 
ICE Clear Europe, consistent with the requirements of Section 
17A(b)(3)(F).\22\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    As discussed above, most of the proposed amendments do not affect 
the clearing of security-based swaps (i.e., CDS). These changes, which 
principally include the implementation of new Rules 912-918, as well as 
revisions to Rules 209, 909, 911, 1102 and 1103 and related definitions 
and conforming changes, primarily affect ICE Clear Europe's clearing 
operations with respect to products that are not securities 
(specifically, the F&O and FX product categories) and do not 
significantly affect the securities clearing operations of ICE Clear 
Europe (i.e., the CDS product category) or the rights or obligations of 
ICE Clear Europe and its clearing members with respect to securities 
clearing activities.
    Certain other rule changes discussed above (which are applicable to 
all product categories or specific to the CDS product category) involve 
the movement and/or reorganization of existing provisions, as well as 
conforming changes, clarifications and non-substantive drafting 
improvements. These include the changes described above that relate to 
the CDS product category in Rules 908 and 910, as well as certain other 
conforming changes in Part 11 of the Rules. These proposed amendments 
do not affect the substance of the existing requirements for the 
clearing of CDS or the rights and obligations of CDS Clearing Members 
with respect to that product category. As a result, in ICE Clear 
Europe's view, they do not adversely affect the safeguarding of 
securities or funds relating to CDS in the custody or control of ICE 
Clear Europe or for which it is responsible, and do not significantly 
affect the rights or obligations of ICE Clear Europe or persons using 
its clearing service with respect to the CDS product category. As such, 
ICE Clear Europe believes the proposed rule changes are consistent with 
the requirements of Section 17(A)(b)(3)(F) of the Act \23\ and the 
rules thereunder, as well as filing requirements under Section 
19(b)(3)(A)(iii) of the Act \24\ and Rules 19b-4(f)(4)(i) and (ii) 
thereunder.\25\
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    \23\ 15 U.S.C. 78q-1(b)(3)(F).
    \24\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \25\ 17 CFR 240.19b-4(f)(4)(i) and (ii). Commission staff made 
clarifying edits to this sentence pursuant to a telephone 
conversation on January 30, 2014, among Geoffrey Goldman, Shearman & 
Sterling LLP; Gena Lai, Senior Special Counsel, SEC; and Justin 
Byrne, Attorney-Advisor, SEC.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any material impact, or impose any material burden, on competition 
not necessary or appropriate in furtherance of the purposes of the Act. 
The proposed rule changes either (i) affect only the F&O and FX product 
categories or (ii) involve conforming or clarifying changes of general 
application (including the CDS product category) that will not 
significantly affect the rights or obligations of the Clearing House or 
clearing members.\26\ Accordingly, in either case, the proposed 
amendments should not have any effect on the competition in the CDS 
market. Moreover, any effects on competition would not be on securities 
and therefore ICE Clear Europe does not believe that the proposed rule 
changes would have any material impact or impose any material burden on 
competition that is inappropriate in furtherance of the purposes of the 
Act.
---------------------------------------------------------------------------

    \26\ Commission staff made clarifying edits to this sentence 
pursuant to a telephone conversation on January 30, 2014, among 
Geoffrey Goldman, Shearman & Sterling LLP; Gena Lai, Senior Special 
Counsel, SEC; and Justin Byrne, Attorney-Advisor, SEC.
---------------------------------------------------------------------------

    As noted above, most of the proposed changes are intended to 
address extreme loss scenarios with respect to the FX and F&O product 
categories, and not affect the ordinary securities clearing operation 
of the clearing house. As such, ICE Clear Europe does not believe the 
changes will reduce access by CDS clearing members to the clearing 
house.

[[Page 7257]]

ICE Clear Europe also does not believe the rule amendments will 
adversely affect the ability of market participants to continue to 
clear securities transactions or otherwise limit market participants' 
choices for clearing securities transactions. ICE Clear Europe expects 
that, in light of the PFMIs and applicable regulatory requirements in 
the U.S. and EU, other clearing organizations will similarly need to 
develop recovery and wind-down plans. The rule amendments are intended 
to provide a stronger framework for the clearing house to deal with 
extreme loss events in the FX and F&O product categories. By helping 
segregate losses in one of these product categories from another, and 
from the CDS product category, the amendments are designed to keep 
unaffected CDS clearing services in operation despite losses in another 
area. This should generally enhance the ability of market participants 
to continue to clear CDS products, and reduce the risk of failure of 
the clearing house (which would generally be expected to have an 
adverse impact on competition). To the extent market participants have 
greater certainty as to how extreme loss events in the F&O and FX 
categories would be handled by the clearing house, they may have 
greater confidence in clearing generally (including for CDS), which 
will also tend to enhance the stability and strength of the market for 
cleared securities products, consistent with the goals of the Act.
    With respect to those of the proposed amendments that do affect the 
CDS product category or CDS clearing members generally, such changes 
are in the nature of clarifying and conforming amendments that will not 
significantly affect the substantive rights or obligations of the 
Clearing House or clearing members in respect of CDS. As a result, ICE 
Clear Europe does not believe such changes would impose any burden on 
competition.
    For the foregoing reasons, ICE Clear Europe does not believe that 
the proposed amendments will impose any burden on competition not 
necessary or appropriate in furtherance of the purpose of the Act.

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

    Written comments relating to the rule changes have been solicited 
from clearing members through a public consultation and as part of the 
clearing house governance process. ICE Clear Europe received various 
comments during this consultation and took such comments into account 
in making further modifications to the proposed rules. The rule changes 
also reflect discussions with the Bank of England. ICE Clear Europe 
will notify the Commission of any additional written comments received 
by ICE Clear Europe.

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

    The foregoing rule change has become effective upon filing pursuant 
to Section 19(b)(3)(A)(iii) \27\ of the Act, and Rules 19b-4(f)(4)(i) 
and (ii) \28\ thereunder. At any time within 60 days of the filing of 
the proposed rule change, the Commission summarily may temporarily 
suspend such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \27\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \28\ 17 CFR 240.19b-4(f)(4)(i) and (ii).
---------------------------------------------------------------------------

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-2014-03 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-2014-03. 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/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-2014-03 
and should be submitted on or before February 27, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
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    \29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-02496 Filed 2-5-14; 8:45 am]
BILLING CODE 8011-01-P