[Federal Register Volume 79, Number 153 (Friday, August 8, 2014)]
[Notices]
[Pages 46479-46481]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-18752]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72756; File No. SR-ICEEU-2014-10]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Granting Accelerated Approval of Proposed Rule Change to CDS Policies 
Relating to EMIR

August 4, 2014.

I. Introduction

    On June 30, 2014, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-ICEEU-2014-10 pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder.\2\ The proposed rule change was published for comment in 
the Federal Register on July 10, 2014.\3\ The Commission received no 
comment letters regarding the proposed change. For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-72544 (July 3, 2014), 
79 FR 39421 (July 10, 2014) (SR-ICEEU-2014-10).
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II. Description of the Proposed Rule Change

    ICE Clear Europe is proposing this change to amend certain of the 
ICE Clear Europe credit default swaps (``CDS'') risk policies (``Risk 
Policy Amendments'') in order to facilitate compliance with 
requirements under the European Market Infrastructure Regulation 
(including regulations thereunder, ``EMIR'') \4\ that will apply to ICE 
Clear Europe as an authorized central counterparty.
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    \4\ Regulation (EU) No 648/2012 of the European Parliament and 
of the Council of 4 July 2012 on OTC derivatives, central 
counterparties and trade repositories.
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    ICE Clear Europe states that the relevant policies being modified 
by the proposed change are (i) the CDS Risk Policy (``Risk Policy''); 
(ii) the Risk Model Description (``Model Description''); (iii) the CDS 
Clearing Back-Testing Framework (``Back-Testing Framework''); (iv) the 
CDS Clearing Stress-Testing Framework (``Stress-Testing Framework''); 
and (v) the CDS Default Management Framework (``Default Management 
Framework'').
    ICE Clear Europe states that the changes to the Risk Policy amend 
the calculation of CDS initial margin requirements to comply with 
margin requirements under EMIR Article 41 and Article 24 of the 
implementing Regulatory Technical Standards.\5\ ICE Clear Europe 
contends that, as revised, the initial margin methodology is designed 
to provide portfolio risk coverage against at least 5-day market 
realizations that would occur with probability 99.5% (previously 
99.0%), that is, the estimated requirements provide risk protection 
equivalent to at least a 5-day 99.5% Value-at-Risk measure. In 
addition, ICE Clear Europe states that in order to address requirements 
under EMIR related to procyclicality (Article 28 of the Regulatory 
Technical Standards) changes were made to the maximum scale used for 
the initial margin approach by adding a volatility scale that assigns a 
25% weight to stressed period observations during the lookback period 
from April 2007 to the present (consistent with Article 28(b) of the 
Regulatory Technical Standards). ICE Clear Europe expects the revised 
initial margin requirement, including certain portfolio benefit 
assumptions, to result in more conservative initial margin requirements 
than under the previous approach.
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    \5\ Commission Delegated Regulation (EU) No. 153/2013 of 19 
December 2012 Supplementing Regulation (EU) No. 648/2012 of the 
European Parliament and of the Council with regard to Regulatory 
Technical Standards on Requirements for Central Counterparties (the 
``Regulatory Technical Standards'').
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    ICE Clear Europe states that similar amendments to those described 
above are also made to the Model Description. ICE Clear Europe contends 
that under the revised Model Description, the

[[Page 46480]]

overall initial margin methodology, post portfolio benefits and other 
risk components (e.g. jump-to-default and wrong way risk), will provide 
portfolio risk coverage against at least 5-day market realizations that 
would occur with probability 99.5% or higher. ICE Clear Europe states 
that conforming changes with respect to the 99.5% confidence interval 
are also made in the Model Description. ICE Clear Europe also states 
that the revised Model Description reflects the use of stressed 
observations described above to limit procyclicality. Furthermore, ICE 
Clear Europe states that the Model Description has also been revised to 
include the Clearing House's Monte Carlo Approach for Risk Management 
(``MC''), which has previously been applied to Western European 
sovereign CDS and is proposed to be extended to all CDS.
    ICE Clear Europe states that the CDS MC approach aims to model the 
spread risk component of initial margin by combining individual risk 
factors (``RFs''), i.e., single name or index family of instruments, 
into a copula. ICE Clear Europe further states that marginal 
distributions for individual RFs are joined together under a Student-t 
copula. In this way, ICE Clear Europe contends, the model preserves 
historical behavior of RFs and their dependencies and that the value-at 
risk (VaR) for the profit and loss distribution can be estimated by 
sampling from this copula.
    ICE Clear Europe contends that the MC method offers a number of 
advantages over the existing scenario-based spread response method (the 
``Decomp SR''), in that (1) the dependence structure of RFs is encoded 
into the copula, as opposed to the long-short offsets algorithm used to 
determine portfolio benefits under the Decomp SR; and (2) the copula 
can also capture tail dependence, such that various extreme scenarios 
can be easily simulated.
    ICE Clear Europe states that the scenario-based approach of the 
spread risk component with its portfolio benefit assumptions is 
generally expected to result in a more conservative requirement when 
compared to the MC VaR approach for the same coverage level. ICE Clear 
Europe further states that in order to ensure compliance with the 99.5% 
confidence interval requirement for OTC derivatives under EMIR, the 
final spread response charge will be determined as the more 
conservative of the Decomp SR and the MC VaR calculated at a 99.5% 
confidence interval.
    ICE Clear Europe also states that the CDS pricing model, used since 
the inception of clearing, has also been attached to the Risk Model 
Description as an annex.
    ICE Clear Europe states that the changes to the Back-Testing 
Framework are also meant to implement the 99.5% confidence interval. 
ICE Clear Europe states that the historical volatility calculation has 
changed in the Back-Testing Framework to use data from, at minimum, the 
most recent year (or, if shorter, the period in which the relevant 
contract has been cleared). In addition, ICE Clear Europe contends 
that, per the amendments, on at least a monthly basis, the CDS Risk 
Department will report the CDS back testing results and analysis to the 
CDS Risk Committee in order to seek their review and, if needed, their 
recommendations of the CDS margin model. ICE Clear Europe also states 
that CDS back testing results and analyses are made available to all 
CDS Clearing Members and clients (where known to ICE Clear Europe) for 
their own portfolios and that disclosed information is aggregated in a 
form that does not breach confidentiality. ICE Clear Europe also 
contends that the policy also provides a framework for monitoring and 
remediating breaches that arise during back-testing, based on the so-
called ``Basel Traffic Light System,'' depending on the number and 
magnitude of the exceedances. Finally, ICE Clear Europe states that the 
Back-Testing Framework will be reviewed and approved by the CDS Risk 
Committee and ICE Clear Europe Board at least annually.
    ICE Clear Europe states the Stress-Testing Framework is amended to 
provide further detail as to its use of daily stress testing, which 
allows ICE Clear Europe to discover any potential weaknesses in the 
risk methodologies as well as to exercise short-term measures if the 
tests reveal that any counterparties are inadequately collateralized. 
ICE Clear Europe contends that a detailed analysis of the stress 
testing and sensitivity testing results is to be performed by the CDS 
Risk Department at least on a monthly basis, or more frequently in 
stressed market conditions, to ensure the adequacy of the existing 
stress test scenarios and framework. ICE Clear Europe states the 
Stress-Testing Framework amendments would also add pure historical 
scenarios, as required under EMIR, that are applied at the single name 
level, using the same date across all instruments. ICE Clear Europe 
also states that single-name specific stress scenarios are based on the 
same 5-day period when the on-the-run indices had the greatest observed 
related spread increases or decreases. ICE Clear Europe also states 
that the guaranty fund stress scenario has also been clarified, and is 
designed to account for: (1) The occurrence of credit events for two 
Clearing Members and three reference entities on which the defaulted 
Clearing Members sold protection, (2) adverse contracting or widening 
credit spread scenarios, (3) adverse widening of Index-single name 
``basis,'' and (4) adverse changes of the default-free discount terms 
structure. ICE Clear Europe contends that CDS stress testing results 
and analyses are made available to all CDS Clearing Members and clients 
(where known to ICE Clear Europe) for their own portfolios and 
disclosed information is aggregated in a form that does not breach 
confidentiality. Finally, ICE Clear Europe states the CDS Stress 
Testing framework is to be reviewed and approved by the CDS Risk 
Committee and ICE Clear Europe Board at least annually.
    ICE Clear Europe contends that minor improvements have been made to 
the Default Management Framework, namely, (1) ICE Clear Europe will 
conduct a quarterly (rather than annual) review of its Default 
Management Framework, and (2) ICE Clear Europe will perform a mock 
Clearing Member default test at least annually.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \6\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if the 
Commission finds that such proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to such self-regulatory organization. Section 17A(b)(3)(F) 
of the Act \7\ requires, among other things, that the rules of a 
clearing agency are 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 and, in general, to protect investors and the public 
interest. In addition, Rule 17Ad-22(b)(1)-(3) requires a registered 
clearing agency that performs central counterparty services to 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to, among other things, measure its 
credit exposures to its participants at least once a day and

[[Page 46481]]

limit its exposures to potential losses from defaults by its 
participants, use margin requirements to limit its credit exposures to 
participants under normal market conditions, and if it performs central 
counterparty services for security-based swaps, maintain sufficient 
financial resources to withstand, at a minimum, a default by the two 
participant families to which it has the largest exposures in extreme 
but plausible market conditions.\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(b)(1)-(3).
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    The Commission finds that the proposed rule change is consistent 
with Section 17A of the Act \9\ and the rules thereunder applicable to 
ICE Clear Europe. ICE Clear Europe represents that the proposed rule 
change will enhance the financial resources available to the Clearing 
House by imposing more conservative initial margin requirements, while 
also reducing the risk of loss to market participants resulting from a 
default by a Clearing Member or other customer. ICE Clear Europe 
further states that the proposed rule change will impose more frequent 
reviews and tests of its risk management procedures. The Commission 
therefore believes that the proposed enhancements to ICE Clear Europe's 
risk policies are designed 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 consistent with Section 17A(b)(3)(F).\10\ In 
addition, the Commission believes the proposed Risk Policy Amendments 
are reasonably designed to ensure that ICE Clear Europe continues to 
meet the risk management requirements of Rule 17Ad-22(b)(1)-(3).\11\
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    \9\ 15 U.S.C. 78q-1.
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
    \11\ 17 CFR 240.17Ad-22(b)(1)-(3).
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    Section 19(b)(2)(C)(iii) of the Act \12\ allows the Commission to 
approve a proposed rule change earlier than 30 days after the date of 
publication of the notice of the proposed rule change in the Federal 
Register where the Commission finds good cause for so doing and 
publishes the reason for the finding. In its filing, ICE Clear Europe 
requested that the Commission approve the proposed rule change on an 
accelerated basis for good cause shown. ICE Clear Europe has 
represented that the proposed Risk Policy Amendments are necessary in 
order to comply with requirements under EMIR in connection with its 
authorization as a central counterparty under EMIR. ICE Clear Europe 
further notes that failure to have the amendments in effect, and to be 
in compliance with the EMIR requirements, may adversely affect the 
approval of its authorization application and therefore its ability to 
do business as a recognized central counterparty. Accordingly, the 
Commission finds that good cause exists to approve the proposed rule 
change on an accelerated basis pursuant to Section 19(b)(2)(C)(iii) of 
the Act.\13\
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    \12\ 15 U.S.C. 78s(b)(2)(C)(iii).
    \13\ 15 U.S.C. 78s(b)(2)(C)(iii).
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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 \14\ and the 
rules and regulations thereunder.
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    \14\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-ICEEU-2014-10) be, 
and hereby is, approved on an accelerated basis.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18752 Filed 8-7-14; 8:45 am]
BILLING CODE 8011-01-P