[Federal Register Volume 82, Number 8 (Thursday, January 12, 2017)]
[Notices]
[Pages 3831-3837]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-00491]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79750; File No. SR-ICC-2016-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing Amendment No. 1 and Order Granting Accelerated Approval of 
Proposed Rule Change To Amend the ICE Clear Credit Clearing Rules, as 
Modified by Amendment No. 1, Relating to Default Management, Clearing 
House Recovery and Wind-Down

January 6, 2017.

I. Introduction

    On November 4, 2016, ICE Clear Credit LLC (``ICC'' or ``clearing 
house'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change (SR-ICC-2016-013) to amend the ICC Clearing Rules 
(``ICC Rules'' or ``Rules'') relating to clearing house default 
management, recovery, and wind-down, and to adopt certain related 
default auction procedures. The proposed rule change was published for 
comment in the Federal Register on November 22, 2016.\3\ The Commission 
received one comment letter to the proposed rule change.\4\ On December 
19, 2016, ICC filed Amendment No. 1 to the proposed rule change. The 
Commission is publishing this notice to solicit comment on Amendment 
No. 1 from interested persons and, for the reasons stated below, is 
approving the proposed rule change, as modified by Amendment No. 1, on 
an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-79324 (Nov. 16, 
2016), 81 FR 83906 (Nov. 22, 2016) (SR-ICC-2016-013) (``Notice'').
    \4\ See letter from Jacqueline H. Mesa, Senior Vice President of 
Global Policy, FIA (Dec. 2, 2016) (``FIA Comment'').
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change and Notice of Filing of 
Amendment No. 1

    ICC has proposed changes to the ICC Rules, as modified by Amendment 
No. 1, relating to clearing house default management, recovery, and 
wind-down to address uncovered losses from a clearing participant 
(``Participant'') default or series of Participant defaults. The 
proposed changes consist of three aspects. First, ICC proposes to 
revise its auction procedures and tools for returning to a matched-book 
after a Participant default or series of Participant defaults and to 
implement a different approach to allocating uncovered losses stemming 
from such Participant default(s) that provides more certainty to 
Participants by limiting their exposure to ICC. Second, ICC proposes to 
collect additional initial margin to ensure that it maintains minimum 
pre-funded financial resources in compliance with applicable regulatory 
requirements. Third, ICC proposes to clarify the governance 
requirements relating to the use of ICC's proposed default management 
tools, including matched-book tools and loss allocation tools, as well 
as clarify the Rules to enhance transparency and specificity.

A. Revised Auction Procedures, Tools for Returning ICC to a Matched-
Book and Tools for Default Loss Allocation

    ICC proposes substantial changes in the way it returns to a 
matched-book following a Participant default or series of defaults. 
Specifically, ICC proposes to maintain its existing default management 
practices,\5\ such as the practice of auctioning a defaulting 
Participant's positions to its non-defaulting Participants, but 
proposes to eliminate its ability to forcibly allocate a defaulting 
Participant's positions to other non-defaulting Participants, in the 
event an auction is unsuccessful. In lieu of these forced allocations, 
ICC has proposed a revised set of auction procedures and an additional 
matched-book tool. The revised auction procedures include initial and 
secondary auctions, each of which include a number of features designed 
to incentivize Participants and their customers to bid competitively. 
In the event that the default management auctions are unsuccessful in 
returning ICC to a matched-book, ICC proposes to terminate any 
positions of non-defaulting Participants (or their customers) that 
exactly offset the unsuccessfully auctioned positions in the defaulting 
Participant's portfolio. ICC refers to this termination of a discrete 
set, as opposed to all, of its outstanding positions as ``partial tear-
up.'' Separately, ICC proposes to revise its authority to seek 
unlimited guaranty fund assessments from its Participants and implement 
a ``cooling-off period,'' during which its ability to call for 
additional Participant contributions to the guaranty fund is capped. In 
addition, ICC proposes, in a highly limited set of circumstances, to 
allocate losses by reducing the amount of variation margin that would 
otherwise be owed to Participants or their customers as a tool to 
assist in ICC's recovery, which ICC refers to as ``reduced gains 
distributions.'' These provisions are described more fully below.\6\
---------------------------------------------------------------------------

    \5\ ICC's existing default remedies, as amended by this proposed 
rule change, are referred to as ``Standard Default Management 
Actions.'' By contrast, additional, new default management tools 
adopted as part of this proposed rule change are referred to as 
``Secondary Default Management Actions.'' See Notice, 81 FR at 
83906.
    \6\ See Notice, 81 FR at 83906-10, unless otherwise noted.
---------------------------------------------------------------------------

1. Revised Auction Procedures
    Under the proposed changes, ICC will use an auction to dispose of a 
defaulting Participant's portfolio.\7\ Ordinarily, ICC will begin with 
an initial default auction and if necessary or appropriate proceed to a 
secondary auction. But, in consultation with the Risk Committee, if 
practicable, and upon a majority vote of ICC's Board, ICC may bypass 
the initial auction and proceed directly to a secondary auction.
---------------------------------------------------------------------------

    \7\ Although the auction procedures will not be published, ICC 
will make such procedures available to all Participants, subject to 
existing confidentiality arrangements between ICC and Participants 
and the confidentiality provisions set forth in the auction 
procedures. ICC will also make such procedures available to 
customers of Participants at the request of such customers (and/or 
permit Participants to do so), subject to confidentiality 
arrangements.
---------------------------------------------------------------------------

    In the initial auction, ICC management will divide the defaulting 
Participant's portfolio into one or more lots, and each non-defaulting 
Participant will be subject to a minimum bid requirement for each lot. 
In addition, ICC proposes to permit customers of Participants to 
participate in the initial auction either by bidding indirectly through 
a Participant or by bidding directly in the auction, provided that such 
customers (1) agree to the terms of the auction, (2) accept the same 
confidentiality agreements concerning the auction as a Participant; and 
(3) make a minimum deposit to be applied by ICC in the same manner as 
Participants' guaranty fund contributions. ICC will use all available 
default resources to cover the costs associated with the initial 
default

[[Page 3832]]

auction. These resources include all mutualized guaranty fund 
contributions, whether pre-funded or assessed, including ICC's ``pro 
rata'' contribution. In an effort to encourage competitive bidding, ICC 
will ``juniorize,'' i.e., apply the guaranty fund contributions of 
Participants who fail to bid and those who bid non-competitively to the 
costs of the auction before it applies those of Participants who bid 
competitively, as set forth in the default auction procedures.
    As part of this proposed rule change, ICC proposes to move its 
contribution to the guaranty fund higher in the default waterfall such 
that ICC's contribution will be used prior to the application of 
guaranty fund contributions of non-defaulting Participants.
    In the event an initial auction does not fully dispose of a 
defaulting Participant's portfolio, ICC may conduct one or more 
secondary auctions. At the secondary auction stage, ICC will endeavor 
to auction off the remaining portfolio in a single lot, though ICC 
retains the discretion to break the portfolio into separate lots if 
certain non-defaulting Participants are not able to bid on particular 
positions or ICC otherwise determines that doing so would facilitate 
the auction process. Moreover, customers of Participants are permitted 
to bid in secondary auctions directly without the need for a minimum 
deposit, so long as a Participant has confirmed that it would clear any 
resulting transactions of the customer. (Customers of Participants 
continue to retain the option of bidding indirectly through a 
Participant as well.) As with initial auctions, ICC will apply all 
remaining default resources to fund the secondary auction(s), and it 
will continue to juniorize guaranty fund contributions that remain, if 
any. A secondary auction for any lot is deemed successful if it results 
in a price that is within ICC's remaining default resources. If a 
secondary auction is unsuccessful for any lot, ICC may run another 
secondary auction for that lot on a subsequent business day, unless ICC 
has invoked reduced gains distributions, in which case secondary 
auctions may not extend beyond the five business-day reduced gains 
distributions period.
2. Removal of Forced Allocation and Addition of Partial Tear-Up
    ICC further proposes to eliminate its rules regarding forced 
allocation, in which all positions not successfully auctioned through 
the default auction process are allocated to non-defaulting 
Participants, and instead, implement pro rata partial tear-up to return 
to a matched book. Partial tear-up entails terminating the positions of 
non-defaulting Participants (and their customers) that exactly offset 
those in the defaulting Participant's remaining portfolio (i.e., 
positions in the identical contracts and in the same aggregate notional 
amount). Partial tear-up will be employed on both house and customer 
origin accounts across all non-defaulting Participants that have such 
positions on a pro rata basis. ICC proposes to base the partial tear-up 
price on the last established end-of-day mark-to-market settlement 
price and terminate selected contracts contemporaneously with the 
determination of such price (i.e., at 5 p.m., New York time). Thus, ICC 
proposes to collect and pay the tear-up price by application of mark-
to-market margin posted (or that would have been posted but for reduced 
gains distributions) as part of its end-of-day settlement process. 
After a partial tear-up is executed, ICC would return to a matched-book 
and would be positioned to continue offering clearing services for all 
remaining Participants and their customers.
    ICC may invoke partial tear-up as a matched-book tool only after a 
number of prerequisites have been satisfied. First, ICC may not resort 
to partial tear-up until it has attempted one or more initial or 
secondary auctions. In addition, ICC must consult with its Risk 
Committee, which is comprised of a supermajority of Participants, if 
practicable, before it may proceed to partial tear-up. If consultation 
with the Risk Committee is impracticable prior to taking action, ICC 
must use its reasonable best efforts to consult with the Risk Committee 
as soon as practicable thereafter regarding any further relevant 
actions. Moreover, only ICC's Board, which is comprised of a majority 
of directors independent of ICC and includes directors chosen by 
Participants and may also include Participant representatives, may 
invoke partial-tear up.
3. Cooling-Off Period, Participant Withdrawal, and Reduced Gains 
Distributions
    ICC's current rules permit the clearing house to seek unlimited 
guaranty fund assessments from its Participants, but the proposed rule 
change would eliminate the clearing house's unlimited power of 
assessment. Instead, ICC proposes to implement a ``cooling-off 
period,'' during which its ability to call for additional Participant 
contributions to the guaranty fund is limited. During a cooling-off 
period, non-defaulting Participants will not be required to pay more 
than one time their required guaranty fund contribution per default. 
And during the cooling-off period, non-defaulting Participants' 
liability for mutualized guaranty fund contributions is capped at three 
times the required guaranty fund contribution, based on the last 
guaranty fund calculation before the cooling-off period was triggered, 
regardless of the number of defaults that occur during this period. 
Similarly, ICC's contributions to the guaranty fund are subject to 
limits of one times its contribution per default and three times its 
contribution during the cooling-off period. Participants may terminate 
their membership during a cooling-off period by providing ICC with an 
irrecoverable notice of withdrawal and closing out all positions by a 
specified deadline. Participants who withdraw during a cooling-off 
termination period must continue to meet their obligations to ICC, 
including guaranty fund assessments with respect to defaults and 
potential defaults that occur before such Participants' withdrawal 
becomes effective, subject to the limits described above.
    ICC further proposes to use reduced gains distributions as a tool 
to allocate losses stemming from the defaulting Participant's variation 
margin obligations while ICC attempts a secondary auction or conducts a 
partial tear-up during default management and recovery. Currently, 
holders of positions opposite those of a defaulting Participant are 
entitled to receive variation margin each day such positions appreciate 
in value. Under the proposed rule change, ICC may reduce variation 
margin that would be otherwise owed to both Participants and their 
customers. ICC proposes to use reduced gains distributions for no more 
than five business days. On each day when reduced gains distributions 
are invoked, ICC will calculate a haircut that is applied pro rata to 
house and customer origin accounts and applied pro rata to each 
customer portfolio such that each customer portfolio receives the same 
haircut.
    Under the proposed rule change, the use of reduced gains 
distributions is subject to certain conditions. ICC may not resort to 
reduced gains distributions unless it has exhausted all available 
financial resources and expects that there will be favorable conditions 
for completing a successful secondary auction, subject to the 
limitation that reduced gains distributions may not extend for more 
than five business days. In the event ICC conducts a successful 
secondary auction, reduced gains distributions will end on that day. If 
ICC has been unable to conduct a successful secondary auction by the 
end of the five

[[Page 3833]]

business day reduced gains distributions period, ICC will proceed to 
partial tear-up, as described above, at the close of business on such 
fifth business day. Moreover, as further clarified in Amendment No. 1, 
reduced gains distributions will not be available to provide additional 
funds for a secondary auction, and projected auction costs will not be 
factored into the amount of reduced gains distributions. Finally, as 
with partial tear-up, ICC must consult with its Risk Committee before 
invoking reduced gains distributions, to the extent practicable, and 
the ultimate decision to do so must be made by the Board.

B. Additional Initial Margin

    ICC further proposes to levy additional initial margin, if 
necessary, during a cooling-off period when Participants' obligations 
to replenish the guaranty fund and to make required guaranty fund 
contributions (i.e., assessments) have reached the cap described above, 
in order to maintain sufficient financial resources that would enable 
the clearing house to withstand a default by the two Participant 
families to which it has the largest exposure in extreme but plausible 
market conditions (i.e. the ``cover two'' standard), as required by 
Exchange Act Rule 17Ad-22(b)(3). The additional initial margin will be 
calculated in an amount such that ICC has collected sufficient 
financial resources to meet the regulatory requirement.

C. Governance

    ICC further proposes enhanced governance requirements for the use 
of certain default management tools as part of the proposed rule 
change. Under the proposed rule change, ICC is required to consult with 
the Risk Committee (which consists of a supermajority of Participant 
representatives) on whether to conduct a secondary auction, employ 
reduced gains distributions, implement partial tear-up, or proceed to 
wind-down the service. If such consultation is impracticable, ICC must 
use its reasonable best efforts to consult with the Risk Committee as 
soon as practicable thereafter regarding any further relevant actions. 
In addition, ICC's management is not permitted to invoke partial tear-
up or reduced gains distributions on its own authority. Those decisions 
may only be undertaken after majority vote of the ICC Board, which 
itself is composed of a majority of directors independent of ICC.
    To complement its governance provisions, ICC has also proposed 
several clarifications to enhance the transparency of its Rules. With 
respect to clearing service termination, ICC proposes to establish more 
specific procedures governing a number of matters, such as the notice 
of and timing of clearing service termination, the calculation of 
termination prices, and the determination of the net amount owed to or 
by each Participant. In addition, ICC has made a number of additional 
changes to the existing rules to clarify that its emergency authority 
does not override the limitations on Participant obligations to make 
guaranty fund contributions during a cooling-off period or permit 
resort to partial tear-up, unless otherwise permitted under the Rules, 
as well as a number of more minor drafting enhancements.

D. Notice of Filing of Amendment No. 1

    In Amendment No. 1, ICC proposes to clarify certain aspects of the 
proposed rule change. In particular, as noted above, ICC explains that 
reduced gains distributions will not be used to provide additional 
funds for a secondary auction, and that expected auction costs will not 
be factored into the determination of the haircut used for reduced 
gains distributions. In addition, ICC clarifies that additional initial 
margin called after the cap on guaranty fund replenishments and 
assessments in a cooling-off period is reached will be calculated not 
only for the house account, but also customer accounts (on a net basis 
across customers). Any margin amounts charged, however, will be charged 
to the house account of the Participant, with no charge against any 
customer accounts. Finally, ICC notes that the ability to call for the 
additional initial margin after the cap on guaranty fund replenishments 
and assessments has been reached may have a procyclical impact on 
Participants and their customers. However, ICC believes that any 
additional initial margin called will likely not exceed the amount of 
initial margin otherwise on deposit, and will be commensurate with the 
range of initial margin variation experienced in the ordinary course.

III. Summary of Comment Letter

    The Commission received one comment letter in response to the 
proposed rule change.\8\ The commenter, a trade association, provided 
general comments on three broad issues: (1) The use of variation margin 
gains haircutting (``VMGH'') and partial tear-ups; (2) compensation for 
losses beyond mutualized resources; and (3) full clearing service 
termination,\9\ but did not take a position regarding any of these 
three issues or provide any legal analysis regarding whether ICC's use 
of VMGH, i.e., reduced gains distributions, or partial-tear up or other 
aspects of ICC's proposal is consistent with the Exchange Act. The 
commenter did suggest that ICC be required to consult not only with its 
Risk Committee, but also with all members when ``invoking tools that 
impact loss distributions after the exhaustion of funded and unfunded 
resources.'' \10\
---------------------------------------------------------------------------

    \8\ See FIA Comment, supra note 4.
    \9\ With regard to the use of VMGH and partial tear-up, the 
commenter noted that its members have varying, sometimes 
inconsistent views on the desirability of using VMGH or partial 
tear-up in recovery. Similarly, the commenter noted that there is a 
disagreement within its membership as to whether ICC should be able 
to terminate all trades without recourse to ICC capital. With regard 
to compensation for losses beyond mutualized resources, the 
commenter expects to engage ICC on this topic and does not argue 
that this is a basis upon which the proposed rule change can or 
should be disapproved. See id.
    \10\ See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    Pursuant to section 19(b)(2)(C) \11\ of the Act, the Commission 
must 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. After 
careful consideration, the Commission believes that the proposed rule 
changes are consistent with the Act and the rules and regulations 
thereunder applicable to ICC.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2)(C).
---------------------------------------------------------------------------

    Specifically, Section 17A(b)(3)(F) of the Act requires,\12\ 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, as well as to assure the safeguarding of 
securities and funds and to protect investors and the public interest. 
Exchange Act Rule 17Ad-22(d)(11) requires,\13\ in part, each registered 
clearing agency to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to make key aspects of the 
clearing agency's default procedures publicly available and establish 
default procedures that ensure that the clearing agency can take timely 
action to contain losses and liquidity pressures and to continue 
meeting its obligations in the event of a participant

[[Page 3834]]

default. Furthermore, Exchange Act Rule 17Ad-22(b)(3) requires, in 
part, each registered clearing agency providing central counterparty 
services to establish, implement, maintain, and enforce written 
policies and procedures reasonably designed to maintain certain 
financial resource requirements at all times,\14\ including during the 
default management process and in the clearing house recovery scenario. 
Finally, Exchange Act Rule 17Ad-22(d)(8) requires a clearing agency to 
establish, implement, maintain, and enforce written policies and 
procedures reasonably designed to have governance arrangements that are 
clear and transparent to fulfill the public interest requirements in 
Section 17A of the Act, to support the objectives of owners and 
participants, and to promote the effectiveness of the clearing agency's 
risk management procedures.\15\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(11).
    \14\ 17 CFR 240.17Ad-22(b)(3).
    \15\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    The Commission discusses each aspect of ICC's proposed rule change 
and its findings below.

A. Revised Auction Procedures, Tools for Returning ICC to a Matched-
Book and Tools for Default Loss Allocation

1. Revised Auction Procedures
    The Commission finds the revised auction procedures, as proposed by 
ICC, consistent with Section 17A(b)(3)(F) and Exchange Act Rule 17Ad-
22(d)(11). As described above, under the proposed rule change, in the 
event of a Participant default, ICC will ordinarily conduct an initial 
auction as part of its Standard Default Management Actions.\16\ Under 
the proposed auction procedures, Participants will be required to bid 
in the initial auction for each lot in a minimum amount determined by 
ICC. In addition, the revised auction procedures will permit customers 
of Participants to participate in auctions by either bidding indirectly 
through a Participant or by bidding directly in the auction, provided 
that such customers (1) agree to the terms of the auction, (2) accept 
the same confidentiality agreements concerning the auction as a 
Participant; and (3) make a minimum deposit to be applied by ICC in the 
same manner as Participants' guaranty fund contributions. Furthermore, 
the guaranty fund and assessment contributions of non-defaulting 
Participants will be subject to juniorization and applied using a 
defined default auction priority set out in the default auction 
procedures based on the competitiveness of their bids.
---------------------------------------------------------------------------

    \16\ In consultation with the Risk Committee, if practicable, 
and with a majority vote of the Board, ICC may proceed directly to 
Secondary Default Management Actions if appropriate.
---------------------------------------------------------------------------

    If the initial auction fails, as described above, ICC may conduct a 
secondary auction to maximize the opportunities of disposing of the 
defaulting Participant's portfolio and returning to a matched-book. 
Similar to the initial auction, ICC would juniorize the guaranty fund 
and assessment contributions that remain, if any, of non-defaulting 
Participants with less competitive bids in order to incentivize 
competitive bidding by such Participants. In addition, at the secondary 
auction stage, ICC will apply all remaining clearing house default 
resources and endeavor to auction off the remaining portfolio in a 
single lot, although it may break the portfolio into separate lots if 
certain Participants are not able to bid on particular contracts or it 
otherwise determines that doing so would facilitate the auction 
process. A secondary auction for a lot will be deemed successful if it 
results in a price for the lot that is within ICC's remaining default 
resources. The secondary auction procedures would make it even easier 
for customers to bid directly by eliminating the need for a minimum 
deposit, so long as a Participant has confirmed that it would clear any 
resulting transactions of the customer. (As with initial auctions, 
customers retain the option of bidding through a Participant.) If a 
secondary auction is unsuccessful for any lot, ICC may repeat this 
process and run another secondary auction for that lot on a subsequent 
business day, unless ICC has invoked reduced gains distributions, in 
which case, the secondary auctions may not extend beyond the five-
business-day reduced gains distributions period.\17\
---------------------------------------------------------------------------

    \17\ See ICC Rule 808(e).
---------------------------------------------------------------------------

    Taken together, the Commission believes that the revised default 
auction procedures, including the assignment of minimum bid 
requirements to Participants during the initial auction, broadening 
participation in both the initial auction and the secondary auctions by 
permitting customers of Participants to bid directly or indirectly, and 
juniorization of the guaranty fund and assessment contributions of non-
defaulting Participants and the minimum deposit of customers, provide 
Participants and applicable customers of Participants who elect to 
participate in the auction a strong incentive to bid competitively. The 
revised auction procedures should significantly increase the likelihood 
of reaching an efficient auction clearing price that permits ICC 
successfully to dispose of the defaulting Participant's portfolio 
within the resources of the clearing house. Therefore, Commission 
believes that the revised auction procedures are reasonably designed to 
establish default procedures that ensure that the clearing agency can 
take timely action to contain losses and to continue meeting its 
obligations in the event of a participant default, as well as promoting 
safeguarding securities and funds, consistent with the requirements in 
Section 17A(b)(3)(F) of the Act and Exchange Act Rule 17Ad-22(d)(11).
    In addition, the Commission finds the proposal to move ICC's 
contribution to the guaranty fund to the beginning of the waterfall is 
consistent with the Act. Subordination of ICC's guaranty fund 
contribution reinforces its incentives to manage risk appropriately and 
safeguard the securities and funds with which it has been entrusted, 
and therefore, is consistent with the requirements in Section 
17A(b)(3)(F) of the Act.
2. Removal of Forced Allocation and Addition of Partial Tear-Up
    The Commission further finds that the removal of forced allocation 
and addition of partial tear-up, as proposed by ICC, are consistent 
with the Exchange Act. As described above, if any positions are not 
successfully auctioned through the default auction process, ICC 
proposes pro-rata partial tear-up in lieu of the existing forced 
allocation.\18\ As a result of the partial tear-up, ICC would return to 
a matched book.
---------------------------------------------------------------------------

    \18\ See ICC Rules 809 and 20-605(f)(iii).
---------------------------------------------------------------------------

    The Commission recognizes that the replacement of forced allocation 
with partial tear-up as a matched-book tool would result in termination 
of positions of non-defaulting Participants across both the house and 
customer origin accounts that exactly offset those in the defaulting 
Participant's portfolio that are not successfully auctioned off during 
the initial and/or secondary auctions. However, the Commission also 
recognizes that the forced allocation of positions in a defaulting 
Participant's remaining portfolio that cannot be successfully disposed 
of with the clearing house's financial resources would potentially 
result in non-defaulting Participants taking unmeasurable and unlimited 
losses beyond their risk tolerance or risk management capability. 
Because ICC will only be permitted to use partial tear-up to return to 
a matched book after it has attempted initial and/or secondary 
auctions, as appropriate, and the proposed auction procedures would 
significantly improve the likelihood of successful auctions, the use of 
the

[[Page 3835]]

partial tear-up would only arise in an extreme stress scenario. In such 
a stress scenario, the forced allocation of a defaulting Participant's 
remaining positions that could not be auctioned off also could pose 
risk to non-defaulting Participants and threaten systemic financial 
stability by, among other things, precipitating further defaults among 
such Participants. On the other hand, use of partial tear-up could 
potentially return the clearing house to a matched book quickly, 
thereby containing the clearing house's losses. Pursuant to the 
proposed rule change, ICC would base the partial tear-up price on the 
last established end-of-day mark-to-market settlement price and 
terminate selected contracts contemporaneously with the determination 
of such price (i.e., at 5 p.m., New York time).\19\ This would enable 
ICC to collect and pay the tear-up price by application of mark-to-
market margin posted (or that would have been posted but for reduced 
gains distributions) as part of its end-of-day settlement process. Once 
the partial tear-up is completed through the end-of-day mark-to-market 
settlement process, ICC would have the ability to promptly return the 
initial margin associated with the terminated positions to the 
Participants and customers whose positions have been terminated 
pursuant to ICC's existing rules. Finally, pursuant to the proposed 
rule change, ICC must consult with the Risk Committee, if practicable, 
and obtain the Board's approval before invoking partial tear-up, which 
ensures that Participants have the opportunity to provide input in the 
decision-making process with respect to whether the clearing house 
should initiate partial tear-up.
---------------------------------------------------------------------------

    \19\ See ICC Rules 809(b)(iv) and (d).
---------------------------------------------------------------------------

    The Commission believes that these provisions regarding the use of 
partial tear-up and the removal of forced allocation are designed to 
provide greater certainty to Participants in the estimation of their 
potential risks and losses in their use of the clearing agency, while 
enabling ICC to promptly return to a matched book. The Commission 
believes that returning to a matched book pursuant to these provisions 
in the context of ICC's default management and recovery, facilitates 
the timely containment of default losses and liquidity pressures and is 
consistent with the safeguarding of assets and funds and, to the extent 
of limiting contagion to the broader financial system, is consistent 
with the protection of investors and the public interest as well--
consistent with Section 17A(b)(3)(F) and Exchange Act Rule 17Ad-
22(d)(11).
3. Cooling-Off Period, Participant Withdrawal, and Reduced Gains 
Distributions
    With respect to financial resources available during default 
management and clearing house recovery, ICC also proposes to impose a 
cooling-off period, to permit Participants to withdraw from ICC during 
the cooling-off period, and to use reduced gains distributions when all 
the other default resources have been exhausted. The Commission 
believes that these changes, subject to the conditions and the 
governance arrangements proposed by ICC in conjunction therewith, are 
consistent with the requirements of prompt and accurate clearance and 
settlement, safeguarding securities and funds and promoting public 
interest and investor protection in the Act, and the rules and 
regulations thereunder.
    As described above, during the proposed cooling-off period, 
Participants' obligations for assessments would be capped at ``1x'' the 
required guaranty fund contribution per default, and each Participant's 
total amount of replenishments and assessment contributions would be 
capped at three times the required guaranty fund contribution, 
regardless of the number of defaults during the period. In addition, 
Participants who seek to withdraw from ICC during a cooling-off period 
must generally provide ICC with an irrecoverable notice of withdrawal 
and close out all positions by a specified deadline. The Commission 
recognizes that these provisions would effectively limit the amount of 
financial resources available to ICC for covering default losses, even 
though a withdrawing Participant will continue to meet its obligations, 
including guaranty fund assessments, with respect to defaults and 
potential defaults before such withdrawal becomes effective, subject to 
the cap described above. However, these provisions also provide 
certainty regarding Participants' ultimate exposure to the clearing 
house in connection with their use of clearing services and provide 
clarity with respect to the distinction between additional guaranty 
fund contributions (i.e., assessment) and replenishment obligations, as 
well as when participant withdrawal is effective. In an extreme stress 
scenario, where multiple calls for assessments or sequential guaranty 
fund depletion have occurred, capping Participants' obligations and 
permitting Participant withdrawal could well have stabilizing effects 
on the financial market.
    Because the proposed rule change would not subject Participants to 
unlimited assessment calls, ICC further proposes reduced gains 
distributions as a tool to manage the limitation the proposed rule 
change places on its financial resources while the clearing house 
attempts a secondary auction or conducts a partial tear-up during 
default management and recovery.\20\ Since reduced gains distributions 
will allow ICC to reduce payment of variation margin, or mark-to-
market, gains that would otherwise be owed to Participants or their 
customers, reduced gains distributions will be used only on an 
extremely limited basis, with appropriate input from the Risk Committee 
in order to minimize the negative impact on Participants or customers. 
Pursuant to the proposed rule change, the implementation of reduced 
gains distributions will be subject to certain conditions, including 
the condition that ICC has exhausted all other available default 
resources and has determined that reduced gains distributions are 
appropriate in connection with a secondary auction or partial tear-up. 
As described above, ICC must, to the extent practicable, consult with 
the Risk Committee, which is predominantly comprised of Participants, 
before using reduced gains distributions, and any decision to use 
reduced gains distributions must be made by the ICC Board, which as 
noted above, is independent of ICC and must include members chosen by 
Participants and may also include Participant representatives.\21\
---------------------------------------------------------------------------

    \20\ See ICC Rules 20-605(f)(i) and 808.
    \21\ See ICC Rules 20-605(l)(iv) and (v).
---------------------------------------------------------------------------

    It should also be noted that under the proposed rule change, as 
clarified by Amendment No. 1, the use of reduced gains distributions is 
not intended to pay for the auction costs; rather, it is designed to 
provide additional time and liquidity needed (no more than five 
business days) to enable completion of a successful secondary auction 
or partial tear-up that would not otherwise be possible because all 
other default resources have been exhausted. Thus, reduced gains 
distributions will not be used as a source of funds for a secondary 
auction, and projected auction costs will not be factored into the 
amount of any reduced gains distributions.
    The proposed rule change also limits the use of reduced gains 
distributions to no more than five business days, and even during this 
limited period, ICC may not continue to invoke reduced gains 
distributions to keep the clearing house going if there is no 
reasonable

[[Page 3836]]

prospect of a successful auction. Pursuant to the proposed rule change, 
at the end of each day in the five-business-day period, ICC must 
determine whether it expects that there will be favorable conditions 
for completing a successful secondary auction.\22\ If so, ICC may 
continue the reduced gains distributions for that day. The proposed 
rule change also provides that, if ICC conducts a successful secondary 
auction on any day, any reduced gains distributions period that is in 
effect will end. If ICC has been unable to conduct a successful 
secondary auction by the end of the five business day reduced gains 
distributions period, ICC will proceed to conduct a partial tear-up 
described above, as of the close of business on such fifth business 
day.\23\ As such, the Commission believes the cooling-off period, 
Participant withdrawal, and reduced gains distributions, taken together 
with the other components of ICC's default management procedures and 
recovery rules, are reasonably designed to provide ICC with financial 
resources it needs to cover default losses and to ensure that ICC can 
take timely Standard Default Management Actions and/or Secondary 
Default Management Actions, including auctions, to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of Participant defaults, in accordance with Exchange Act Rule 
17Ad-22(d)(11),\24\ while at the same time providing Participants and 
their customers with greater certainty and predictability with respect 
to the amount of losses they must bear as a result of a Participant 
default, which could potentially limit loss contagion in the broader 
financial system, consistent with the public interest requirement under 
Section 17A(b)(3)(F).\25\
---------------------------------------------------------------------------

    \22\ See ICC Rule 808(d).
    \23\ See Rule 808(e).
    \24\ 17 CFR 240.17Ad-22(d)(11).
    \25\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

B. Additional Initial Margin

    The Commission further finds the aspect of the proposed rule change 
that would require Participants to provide additional initial margin 
during the cooling-off period is consistent with applicable rules. 
Exchange Act Rule 17Ad-22(b)(3) provides, in part, that a registered 
clearing agency that performs central counterparty services for 
security-based swaps must establish, implement, maintain, and enforce 
written policies and procedures reasonably designed to maintain 
sufficient financial resources to meet the cover two standard.\26\
---------------------------------------------------------------------------

    \26\ 17 CFR 240.17Ad-22(b)(3).
---------------------------------------------------------------------------

    As described above, the proposed rule change will require 
Participants to provide additional initial margin in the event the cap 
on Participant guaranty fund assessments and replenishment during a 
cooling-off period described above is reached. The amount of such 
initial margin would be determined by ICC based on the applicable 
regulatory financial resources requirements during the remainder of the 
cooling-off period. The Commission finds that the additional initial 
margin requirement is reasonably designed to ensure that ICC would 
maintain sufficient financial resources meeting the cover two standard 
and therefore, consistent with the requirement of Exchange Act Rule 
17Ad-22(b)(3).\27\
---------------------------------------------------------------------------

    \27\ 17 CFR 240.17Ad-22 (b)(3).
---------------------------------------------------------------------------

C. Governance

    The Commission also finds the aspects of proposed rule change 
concerning amendments to ICC's governance provisions with respect to 
default management, use of recovery tools and clearing service 
termination are consistent with the Act. As described above, key 
decisions by the clearing house in connection with recovery or wind-
down, including the use of partial tear-up and reduced gains 
distributions, or clearing service termination, are subject to specific 
governance requirements. These governance requirements include 
consultation with the Risk Committee, when practicable, and the 
requirement that certain enumerated decisions on the deployment of end-
of-waterfall recovery tools, such as reduced gains distributions, 
partial tear-up, or clearing service termination, must be made by the 
Board and cannot be delegated to ICC management. In addition to the 
governance requirements regarding key decision-making, the proposed 
rule change also specifies the conditions to the invocation and 
continuation of reduced gains distributions. Moreover, the proposed 
rule change further clarifies that ICC's emergency authority does not 
permit overriding the limitations on Participant obligations during the 
cooling-off period, or permit ICC's management to invoke partial tear-
up of positions without going through the required governance processes 
as described above. With respect to clearing service termination, as 
described above, ICC also proposes to establish more specific 
procedures, such as the timing of termination and calculation of 
termination prices.
    Accordingly, the Commission believes that these governance changes 
and related clarifications provide greater specificity, transparency, 
fair representation of Participants, and a sound process for 
Participants' input with respect to ICC's default management, recovery, 
and wind-down, as applicable, and are reasonably designed to establish 
governance arrangements that are clear and transparent to fulfill the 
public interest and support the objectives of owners and participants, 
and promote the effectiveness of the clearing agency's risk management 
procedures, consistent with the requirements in Section 17A of the Act 
and Exchange Act Rule 17Ad-22(d)(8).\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 240.17Ad-22(d)(8).
---------------------------------------------------------------------------

    The Commission notes that a commenter urged that ICC implement 
greater governance requirements with regard to the invocation of 
certain loss allocation methods. In particular, the commenter suggested 
that ICC be required to consult not only with its Risk Committee, but 
also with all Participants when ``invoking tools that impact loss 
distributions after the exhaustion of funded and unfunded resources.'' 
\29\ The commenter did not provide any analysis regarding whether the 
governance changes proposed by ICC are consistent with the applicable 
requirements under the Exchange Act and applicable rules and 
regulations thereunder. As stated above, ICC must consult, if 
practicable, with its Risk Committee on key decisions regarding ICC's 
default management, recovery, and wind-down, such as the initiation and 
continuation of reduced gains distributions, and partial tear-up. 
Moreover, the decision to invoke these end-of-waterfall measures must 
be made by the ICC Board, which itself consists of a majority of 
directors that are independent of ICC. As noted above, ICC's Risk 
Committee consists of a supermajority of Participant members, and it in 
turn has the right to name four members to the ICC Board, two of which 
may be Participant representatives.\30\
---------------------------------------------------------------------------

    \29\ See FIA Comment, supra note 4.
    \30\ See ICC Rules 503 and 508.
---------------------------------------------------------------------------

    The Commission also notes that this proposed rule change has been 
developed over the course of several years, and throughout that time 
ICC has regularly consulted at length with Participants (individually 
and as a group) on both the overall design and drafting of this 
proposed rule change. In particular, the introduction of partial tear-
up and reduced gains distributions as recovery tools have been 
discussed in detail with Participants, and have been

[[Page 3837]]

crafted to take into account suggestions and issues raised by 
Participants, including to limit the circumstances in which those tools 
may be used, to limit the adverse impact of such tools on netting, 
regulatory capital, and other matters, and to consult with Risk 
Committee in major decisions.\31\ In addition, as described above, the 
proposed rule change clarifies that ICC's senior management would not 
be permitted to invoke emergency authority to initiate these recovery 
tools without consulting the Risk Committee, if practicable, and 
obtaining the Board's approval.
---------------------------------------------------------------------------

    \31\ See Notice, 81 FR 83914-15. The Commission also notes that 
in addition to consulting Participants on the proposed rule change 
and the governance surrounding the use of recovery tools, ICC also 
consulted with the customers of Participants. In particular, ICC 
discussed the proposed rule change individually with members of its 
buy-side advisory committee, which consists of customers of 
Participants. ICC also considered the views of industry groups 
representing customers of Participants, both through discussions 
with members of such groups and through the public statements and 
positions of such groups. ICC has taken these views into account and 
incorporated them into the proposed rule change, including limiting 
the use of reduced gains distributions to scenarios where all other 
financial resources of the clearing house have been exhausted, and 
moving the priority of ICC's contributions in the waterfall such 
that they are used prior to the guaranty fund contributions of non-
defaulting Participants. See id. at 83915.
---------------------------------------------------------------------------

    Based on the extensive ex ante consultation with Participants at 
the proposal development stage and the enhanced governance provisions 
surrounding ICC's invoking tools that impact loss distributions after 
the exhaustion of funded and unfunded resources, the Commission does 
not believe that the proposed rule change is inconsistent with the Act 
because it does not require ICC to consult with all Participants when 
it invokes loss distribution tools. As discussed above, the Commission 
finds that the governance provisions and related clarification changes 
as part of the proposed rule change are reasonably designed to 
establish governance arrangements that are clear and transparent to 
fulfill the public interest and support the objectives of owners and 
participants, and promote the effectiveness of the clearing agency's 
risk management procedures, consistent with the requirements in Section 
17A of the Act and Exchange Act Rule 17Ad-22(d)(8).

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as modified by Amendment No. 1, 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-ICC-2016-013 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-ICC-2016-013. 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 Credit 
and on ICE Clear Credit's Web site at https://www.theice.com/clear-credit/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-ICC-2016-013 
and should be submitted on or before February 2, 2017.

VI. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause, pursuant to section 19(b)(2) of 
the Act,\32\ to approve the proposed rule changes, as modified by 
Amendment No. 1, prior to the 30th day after the publication of 
Amendment No. 1 in the Federal Register. As discussed above, Amendment 
No.1 clarifies various aspects of ICC's proposal to utilize reduced 
gains distributions, as well as its proposal to collect additional 
initial margin after the cap on replenishments and assessments to the 
guaranty fund is reached. Amendment No. 1 does not raise any novel 
regulatory issues, nor does it materially alter the substance of ICC's 
proposed rule changes.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    Accordingly, on its own motion, the Commission finds good cause for 
approving the proposed rule changes, as modified by Amendment No. 1, on 
an accelerated basis, pursuant to section 19(b)(2) of the Act.

VII. 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 \33\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\34\ that the proposed rule changes (File No. SR-ICC-2016-013), as 
modified by Amendment No. 1, be, and hereby is, approved on an 
accelerated basis.\35\
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).
    \35\ In approving the proposed rule changes, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78s(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
---------------------------------------------------------------------------

    \36\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-00491 Filed 1-11-17; 8:45 am]
 BILLING CODE 8011-01-P