[Federal Register Volume 80, Number 61 (Tuesday, March 31, 2015)]
[Notices]
[Pages 17132-17135]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-07259]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74579; File No. SR-ICEEU-2015-007]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing of Proposed Rule Change Relating to Collateral and Haircut
Policy
March 25, 2015.
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 March 13, 2015, ICE Clear Europe Limited (``ICE Clear Europe'' or
``Clearing House'')
[[Page 17133]]
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared primarily by ICE Clear Europe. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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 rule change is to implement a
new collateral and haircut policy (the ``Haircut Policy''), which is
applicable to Permitted Cover posted by Clearing Members to meet the
Clearing House's Margin and Guaranty Fund requirements.
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. The text of these statements may be examined at the places
specified in Item IV below. ICE Clear Europe has prepared summaries,
set forth in sections A, B, and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Haircut Policy codifies and consolidates certain existing
practices of the Clearing House with respect to Permitted Cover.
Specifically, the policy is designed (i) to set out overall principles
with respect to the assets accepted by the Clearing House as Permitted
Cover; (ii) to establish a framework for determining absolute and
relative limits, as applicable, on the value of the collateral that may
be posted by a Clearing Member as Permitted Cover; (iii) to establish a
value-at-risk (``VaR'') based methodology for determining haircuts for
all Permitted Cover; (iv) to mitigate wrong-way risk from Permitted
Cover; (v) to address sources for pricing Permitted Cover; and (vi) to
set out certain related monitoring, reviewing and reporting procedures.
The Haircut Policy applies to Permitted Cover provided for all product
classes (F&O, CDS and FX).\3\ Following implementation, the Clearing
House will from time to time adjust the haircuts applicable to
Permitted Cover under the methodology set forth in the policy.
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\3\ Although the Haircut Policy generally also applies to
Permitted Cover posted with respect to Guaranty Fund requirements,
certain additional requirements apply to Guaranty Fund contributions
under the Rules and Finance Procedures. Those additional
requirements are not proposed to be changed in connection with the
Haircut Policy.
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The general aims of the Haircut Policy are to ensure that the
Clearing House can efficiently liquidate all forms of Permitted Cover,
that appropriate prices are used for valuation of Permitted Cover and
that appropriate haircuts (including, as applicable, cross-currency
haircuts) are used. The Haircut Policy also codifies certain general
principles considered by the Clearing House in accepting assets as
Permitted Cover, including availability of pricing information, the
existence of liquid and active markets for buyers and sellers of those
assets, the existence of sufficient price history, the ability to
liquidate Permitted Cover without causing a market disruption,
compliance with legal and regulatory requirements and sufficient
operational and technological framework to handle deposit, liquidation
and return of such assets as Permitted Cover. Cash collateral must be
in one of several specified currencies underlying contracts cleared by
the Clearing House. Additional general requirements apply to financial
instruments, including prohibitions on acceptance of instruments that
have non-``vanilla'' features such as embedded options, instruments
issued by a Clearing Member or its affiliate, instruments issued by a
CCP or by entities that provide critical services to the Clearing House
(other than central banks) and certain credit-based limits. Such limits
require that the issuer is rated at least ``BBB-'' by S&P (or its
equivalent), the average yield on the asset over the previous three
months is not greater than 8%, and the 5-year CDS spread of the issuer
has not exceeded 500 basis points over the previous three months. The
Haircut Policy provides that where market conditions warrant, or where
the Clearing House's sovereign risk model indicates deteriorating
credit below a certain threshold (i.e., ``BBB-'' by S&P), the Clearing
House may remove securities from the list of Permitted Cover and/or
vary applicable haircuts. The Clearing House will notify Clearing
Members and other market participants of such actions by Circular. The
Clearing House maintains the current List of Permitted Cover (along
with haircut rates, limits and restrictions) on its Web site, https://www.theice.com/publicdocs/clear_europe/list-of-permitted-covers.pdf.
The Haircut Policy contains a methodology for setting absolute
limits on the value of non-cash Permitted Cover that can be posted by a
Clearing Member. (The Clearing House does not, however, impose absolute
or relative limits on the use of US Treasury securities as Permitted
Cover.) Absolute collateral limits apply across a group of affiliated
Clearing Members and apply across all product categories cleared by
that group. Collateral provided by Sponsored Principals with the same
sponsoring member will be included in all collateral limit calculations
as part of the sponsoring member's client account. The policy also sets
out relative, or concentration, limits for Permitted Cover provided by
a Clearing Member. The Clearing House publishes on its Web site the
current absolute and relative limits on government bonds provided as
Permitted Cover. For government bonds, the absolute limit generally is
calculated pursuant to a formula based on data from the repo market for
the relevant government bond, taking into account both the overall size
of that market and the percentage of that market consisting of repos
with a one day maturity. The policy also specifies relevant sources of
repo market data for particular types of government securities
(including most European government bonds and Japanese government bonds
accepted by the Clearing House) and gold market data for gold Permitted
Cover. The policy also sets out alternative approaches for determining
the limit for certain government bonds, including for UK, Swiss and
Canadian government bonds. The policy sets out procedures for
monitoring of limits on a daily basis and for remediation of breach of
a limit by a Clearing Member. The risk management department monitors
all collateral limits on a daily basis using a collateral breakdown
report which flags limit breaches. Breaches will be reviewed internally
and the relevant Clearing Member will be contacted. Breaches can be
remediated by posting additional collateral, removal of collateral that
is in breach of a limit, or both of the above.
The policy also provides for a risk-based reduction in absolute
limits for government bonds based on the credit default swap (CDS)
spread for the relevant issuer. Once the spread exceeds a specified
level for a particular issuer, the absolute limit for Permitted
Collateral of that issuer is reduced pursuant to a defined formula. If
the spread exceeds a second level, the absolute limit is reduced to 5%
of the
[[Page 17134]]
otherwise applicable original limit. Spread levels are determined using
a five-day average to avoid excessive volatility. This reduction is
intended to mitigate wrong-way risk from government bond Permitted
Cover. The specified parameters will be reviewed on a quarterly basis.
Specific wrong-way risk arising in connection with clearing of
Western European sovereign CDS is addressed through a requirement that
US dollar denominated collateral be provided for initial margin and
that a portion of the CDS Guaranty Fund be US dollar-based (determined
based on the ratio between the dollar-denominated and Euro-denominated
initial margin requirements for CDS). In addition, where the member's
aggregate short position in sovereign CDS with respect to a sovereign
exceeds a specified threshold, the Clearing House may decline to accept
government bonds of that sovereign or any other sovereign bonds that
exhibit certain correlations with such government bonds.
The Haircut Policy also addresses potential wrong-way risk arising
from Permitted Cover more generally. The Clearing House monitors
collateral on a daily basis. Where the Clearing House considers there
to be strong general wrong-way risk between a Clearing Member and the
asset it is posting, the Clearing House will ask the member to change
the composition of collateral to mitigate that risk.
The Haircut Policy establishes a VaR-based methodology for
determining haircuts for Permitted Cover. The Clearing House calculates
six different estimations of VaR for each applicable risk factor. Two
estimations are based on a historical simulation approach (using a
1,000-business day (approximately 4 year) lookback period), and a one-
day or two-day liquidation period assumption. Four estimations are
based on a parametric methodology: Two using a 1,000-business day
lookback period and a one-day or two-day liquidation period assumption,
and two using a 60-business day (approximately 3 month) lookback period
and a one-day or two-day liquidation period assumption. Each estimation
is calculated using a 99.9% confidence interval (applicable to
Permitted Cover posted with respect to all product categories). The
proposed haircut will be based on the largest VaR of the 6 estimations.
Fixed income assets are divided into separate maturity buckets for each
issuer, with a separate haircut established for each bucket. The policy
specifies relevant price sources that will be used for the calculation
of haircuts for each type of Permitted Cover. Haircuts are determined
using the bid prices of Permitted Cover assets, in order to account for
higher liquidation costs in stressed markets. The model output is
rounded up to the nearest 0.25%, in order to limit unnecessary
variation in haircut levels. The applicable haircuts will be reviewed
on a monthly basis, or more frequently where the risk management
department deems it necessary.
The risk management department may further adjust the haircut
determined under the model as it determines prudent in light of
additional qualitative and quantitative factors. These include the
Clearing House's credit assessment of the issuer, current market
conditions and volatility, expected future volatility, the liquidity of
the underlying market for the asset, including bid/ask spread, wrong
way risk considerations, VaR estimates determined for a period of
stressed market conditions, and other factors that might affect the
liquidity or value of an asset in stressed market conditions. The
Clearing House anticipates that such adjustments to the value
calculated under the model would be used only in exceptional
circumstances and would expect to use such adjustments to increase
haircuts in stressed market circumstances. The Clearing House will make
judicious use of current market information to override the model but
anticipates exercising this ability in less than 5% of haircut rates.
The Haircut Policy also sets a minimum haircut level of 3%, in
order to avoid pro-cyclical variation in haircuts. (The minimum level
will be reviewed annually under the Haircut Policy.) In addition, a
haircut add-on of up to 1% will be applied during the period until the
next monthly review to issuers presenting increased credit risk. The
add-on is applied once the issuer's CDS spread exceeds a specified
level, and increases in steps of 0.25% up to a maximum of 1% where the
CDS spread exceeds higher thresholds. The add-on is generally designed
to anticipate potential haircut increases as part of the next monthly
review cycle.
The Clearing House also imposes cross-currency haircuts, which
address the exchange rate risk faced by the Clearing House where the
Permitted Cover is denominated in a different currency from the
currency of the applicable margin requirement. Under the Haircut
Policy, cross-currency haircuts are determined using the same
methodology described above for other haircuts, but are subject to a
minimum haircut of 4.5%. Cross-currency haircuts are applied in
addition to any applicable haircut for the relevant form of Permitted
Cover.
Haircuts are reviewed under the policy on at least a monthly basis,
although the risk department may do so more frequently in exceptional
circumstances. The Clearing House monitors Permitted Cover on a daily
and intraday basis. The Clearing House may, under its existing Rules
and the Haircut Policy, take action to mitigate any change in risk,
including by increasing haircuts, calling for additional collateral,
reducing concentration limits and removing an asset from eligibility as
Permitted Cover. The Clearing House monitors the value of Permitted
Cover deposited with it on a real time basis. Any change in a member's
intra-day cover value that is greater than 3% is flagged immediately by
the Risk Management intraday monitoring system that is monitored by the
Risk Management team throughout the business day. Any breach is
investigated and appropriate action taken where necessary. The Clearing
House also will backtest haircuts based on price moves observed in the
markets on a daily basis, and review haircut levels if a price move
breaches an existing haircut. The Clearing House prepares daily reports
with respect to Permitted Cover for purposes of internal monitoring and
provides monthly reports to the relevant Risk Committees and Board Risk
Committee. The Clearing House will review the Haircut Policy on an
annual basis (which will include review by the Board Risk Committee) or
where there is a material change to the risk exposure of the Clearing
House. The Haircut Policy will also be independently reviewed annually
under the Clearing House's model governance framework.
2. Statutory Basis
ICE Clear Europe believes that the proposed rule change is
consistent with the requirements of section 17A of the Act \4\ and the
regulations thereunder applicable to it.\5\ Section 17A(b)(3)(F) of the
Act \6\ 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, the safeguarding of
securities and funds in the custody or control of the clearing agency,
and the protection of investors and the public interest. ICE Clear
Europe is adopting the Haircut Policy to codify and consolidate its
procedures
[[Page 17135]]
and practices concerning the determination of haircuts and certain
other limitations applicable to Permitted Cover provided in respect of
initial and original margin requirements. These limitations include
establishment of general principles for the assets accepted as
Permitted Cover, valuation of Permitted Cover, absolute and relative
concentration limits on the amount of a particular bond a Clearing
Member (including any affiliated Clearing Members) may provide as
Permitted Cover as well as further measures designed to mitigate wrong-
way-risk. ICE Clear Europe believes that the policy provides a
conservative set of haircuts intended to protect the Clearing House
from a decline in collateral value or a change in exchange rates in
circumstances where it is required to liquidate Permitted Cover
following a Clearing Member default. In addition, the policy permits
the Clearing House to respond promptly and appropriately to changes in
market conditions by modifying haircuts or other limits on Permitted
Cover. ICE Clear Europe thus believes that the Haircut Policy will
enhance the stability of the clearing system and the Clearing House's
ability to manage a Clearing Member default and to continue to fulfill
its obligations in a Clearing Member default scenario. As a result, in
ICE Clear Europe's view, the proposed changes will facilitate the
prompt and accurate settlement of such transactions, assure the
safeguarding of securities and funds which are in the custody or
control of ICE Clear Europe or for which it is responsible, and promote
the public interest and the protection of investors, within the meaning
of section 17A(b)(3)(F).\7\
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\4\ 15 U.S.C. 78q-1.
\5\ 17 CFR 240.17Ad-22.
\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Self-Regulatory Organization's Statement on Burden on Competition
ICE Clear Europe does not believe the amendments would have any
impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purposes of the Act. The Haircut
Policy will be applicable to all Clearing Members with respect to
assets provided by those members as Permitted Cover. ICE Clear Europe
does not believe the adoption of the policy will adversely affect
competition among Clearing Members. Furthermore, ICE Clear Europe does
not anticipate that the changes will adversely affect the ability of
market participants to clear contracts generally, reduce access to
clearing generally, or limit market participants' choices for clearing
such contracts. Although it is possible that the application of the
Haircut Policy will result in higher haircuts or lower limitations for
certain categories of Permitted Cover, ICE Clear Europe believes that
the policy appropriately tailors the haircuts and limitations to the
particular market, liquidity and credit risks presented by particular
assets as Permitted Cover. As a result, in ICE Clear Europe's view, any
incremental increase in cost of using certain types of Permitted Cover
is warranted in light of the risks presented to the Clearing House. ICE
Clear Europe thus believes that any impact on competition from the new
model is appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICE Clear Europe will notify the Commission of
any written comments received by ICE Clear Europe.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove the proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
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-2015-007 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-ICEEU-2015-007. 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 will also 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/clear-europe/regulation.
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-2015-007
and should be submitted on or before April 21, 2015.
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\8\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\8\
Brent J. Fields,
Secretary.
[FR Doc. 2015-07259 Filed 3-30-15; 8:45 am]
BILLING CODE 8011-01-P