[Federal Register Volume 82, Number 214 (Tuesday, November 7, 2017)]
[Notices]
[Pages 51663-51665]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-24130]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81994; File No. SR-ICEEU-2017-013]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission or 
Advance Notice Relating to the ICE Clear Europe Procyclicality 
Framework

November 1, 2017.
    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 October 23, 2017, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes 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. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the changes is to adopt a new policy 
framework for addressing the procyclicality of its risk management 
policies by establishing such a framework that addresses the risk 
appetite, model design, monitoring and assessment and management of 
procyclicality in the risk models used by ICE Clear Europe to manage 
default risk.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    The purpose of the Procyclicality Framework is to establish an 
overall framework for the risk appetite, model design, monitoring and 
assessment and management of procyclicality in the risk models used by 
ICE Clear Europe to manage default risk. The European Market 
Infrastructure Regulation \3\ (``EMIR'') and related implementing 
standards require that a central counterparty (``CCP'') ensure that its 
margin framework provides, among other matters, stable and prudent 
margin requirements that limit procyclicality to the extent that the 
soundness and financial security of the central counterparty is not 
negatively affected.\4\ Those standards also require that central 
counterparties implement at least one of several specified options for 
mitigating procyclicality with respect to margin requirements.\5\
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    \3\ 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, as well as various 
implementing regulations and technical standards.
    \4\ Article 28 of 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.
    \5\ The CPMI-IOSCO Principles for Financial Market 
Infrastructures (``PFMIs'') similarly provide that a clearing house 
should limit procyclicality for margin requirements and haircuts. 
See Principles 5 (Collateral) and 6 (Margin).
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    Although ICE Clear Europe's current margin policies incorporate the 
anti-procyclicality (``APC'') measures required by EMIR (and ICE Clear 
Europe does not propose to change such measures at this time), it is 
proposing to adopt the Procyclicality Framework in order to provide a 
more defined framework for considering the impact of procyclicality on 
margining, membership, collateral haircuts, stress testing and 
concentration risk policies. The framework is designed to set out (1) 
the aspects of ICE Clear Europe risk policies relevant to 
procyclicality considerations, (2) how the clearing house will assess 
procyclicality (both as a qualitative and a quantitative matter) and 
(3) how the clearing house will factor considerations of procyclicality 
into its response to emerging risks.
    Although ``procyclicality'' is not expressly defined in EMIR, ICE 
Clear Europe considers procyclicality for purposes of the proposed 
framework to be the extent to which changes in market conditions can 
have an effect on a clearing member's ability to manage its liquidity 
to meet ICE Clear Europe's changing margin requirements. For example, a 
typical initial margin model would require increased margin in stressed 
margin conditions, and such increases may potentially occur rapidly 
and/or over-react to the change in conditions. Such margin increases, 
in turn, may stress a clearing member's ability to obtain liquidity to 
meet the increased requirements.
    The framework identifies sources of procyclicality, in particular 
in margin models, stress testing, and collateral haircut policies, and 
references existing mitigation strategies and stress testing 
arrangements used by the clearing house. Stress testing scenarios that 
are based on models similar to margin models but targeting a higher 
confidence quantile may also be procyclical due to changing market 
conditions, which may lead to increased stress shock results and 
therefore in default fund requirements. The framework also addresses 
how ICE Clear Europe intends to address procyclicality on an ongoing 
basis. Under the framework, ICE Clear Europe will assess procyclicality 
by monitoring the 95th percentile expected shortfall of the 5-day 
percentage change in initial margin (or other relevant risk mitigant) 
over a rolling 250-day window. ICE Clear Europe established this 
period, in consultation with Clearing Members, as an appropriate period 
to reflect short-term spikes in margin. ICE Clear Europe will also 
monitor the largest percentage changes to facilitate observation of 
both the maximum and a tail estimate to remove extreme outliers. A red-
amber-green (``R-A-G'') escalation framework will be used with respect 
to implementing APC measures based on certain defined thresholds for 
expected 95th percentile expected shortfall metric, which are detailed 
in an appendix to the framework. The escalation framework specifies 
appropriate responses where the expected shortfall level is at an amber 
or green level. ICE Clear Europe will assess procyclicality both on a 
regular basis in monitoring model performance and making margin rate 
adjustments as part of risk model design.
    The framework requires that the model design process take into 
consideration the procyclicality

[[Page 51664]]

characteristics of the model. This should include analysis of the 
performance of APC measures during periods of increasing volatility (in 
light of defined threshold conditions specified in the framework), in a 
range of market conditions, including stress periods.
    In addition to the quantitative metrics, there are a number of 
qualitative inputs that are given consideration under the framework. 
For example, ICE Clear Europe will take into consideration the 
periodicity of margin updates and will attempt to mitigate the effect 
of such updates by communicating any such updates to the cleared 
markets up to a week in advance. The framework also includes procedures 
for considering the impact of prospective margin changes on the 
portfolios of Clearing Members and communicating with Clearing Members 
that may be significantly affected by such changes. The framework also 
takes into account the activities of other CCPs in the relevant market 
(including whether they are implementing APC measures), expectations of 
market participants, the potential for moral hazard created by an 
expectation of gradual margin changes (which may not be possible in 
extreme situations), and the ability of the clearing house to override 
normal APC measures in extreme circumstances. The framework recognizes 
that different APC measures and thresholds may be appropriate in 
different markets based on their historical performance. ICE Clear 
Europe also takes into account the different liquidity resources and 
practices of different types of Clearing Members, including banks, 
broker-dealers and other traders, and the need for margin add-ons to 
mitigate particular liquidity and/or concentration risks. The framework 
also sets out APC considerations for new products and material changes 
in existing products.
    Appendices to the framework set out more specific analysis of 
procyclicality for F&O and CDS products. These analyses are calculated 
using several different measures of procyclicality, on both whole 
period and stressed period bases, and both taking into account price 
change effects and without price change effects, among other factors. 
The appendices also detail an ICE Clear Europe approach to back testing 
initial margin calculations, both with and without anti-procyclicality 
measures under its existing margin policies.
    Pursuant to the framework, ICE Clear Europe will disclose its APC 
methodology on its Web site. The framework further provides for ongoing 
governance, including the role of the chief risk officer, and review by 
the relevant product risk committees and board risk committee, as 
appropriate.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed APC framework is 
consistent with the requirements of Section 17A of the Act \6\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\7\ Section 17A(b)(3)(F) of the Act \8\ 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 or for which it is 
responsible, and the protection of investors and the public interest. 
The proposed amendments are designed to enhance and formalize the 
overall assessment and management of procyclicality in the clearing 
house's margin and haircut models, among other matters, consistent with 
regulatory requirements under EMIR. The model is thus intended to 
strengthen the risk models and procedures already used by the clearing 
house, particularly the margin model, and limit on an ongoing basis the 
risks of procyclicality for Clearing Members and the clearing house 
itself. The framework will also provide greater clarity and 
transparency for Clearing Members and others as to the clearing house's 
approach to managing procyclicality. As a result, ICE Clear Europe 
believes that the proposed changes will promote the prompt and accurate 
clearance and settlement of cleared transactions, and in general 
protect investors and the public interest, within the meaning of 
Section 17A(b)(3)(F).\9\ In addition, the changes are consistent with 
the requirements of Rule 17Ad-22(e)(2),\10\ which requires that a 
clearing agency have governance arrangements that are clear and 
transparent, prioritize the safety and efficiency of the clearing 
agency and support the public interest requirements of Section 17A of 
the Act applicable to clearing agencies and the objectives of owners 
and participants, among other matters. The amendments also generally 
strengthen the clearing house's risk management procedures, consistent 
with the requirements of Rule 17Ad-22(e)(3) and (6).\11\
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    \6\ 15 U.S.C. 78q-1.
    \7\ 17 CFR 240.17Ad-22.
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
    \10\ 17 CFR 240.17Ad-22(e)(2).
    \11\ 17 CFR 240.17Ad-22(e)(3) and (6).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
changes are designed to provide additional protections against the 
effects of procyclicality by setting forth a methodology to identify 
and mitigate such risks, consistent with the requirements of EMIR. As 
such, the changes are intended to reduce the potential liquidity burden 
for Clearing Members of increases in margin requirements during 
stressed scenarios. As a result, ICE Clear Europe does not believe the 
changes will adversely affect the cost to clearing members or other 
market participants of clearing services. The changes will otherwise 
not affect the terms or conditions of any cleared contract or the 
standards or requirements for participation in or use of the Clearing 
House. The changes should not, in the Clearing House's view, adversely 
affect competition among Clearing Members, or the ability of market 
participants to access clearing services generally. As a result, ICE 
Clear Europe believes that any impact on competition is appropriate in 
furtherance of the purposes of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed changes to the rules 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

    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.

[[Page 51665]]

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-2017-013 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-ICEEU-2017-013 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, security-
based swap submission or advance notice that are filed with the 
Commission, and all written communications relating to the proposed 
rule change, security-based swap submission or advance notice 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/notices/Notices.shtml?regulatoryFilings.
    All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2017-013 and should be 
submitted on or before November 28, 2017.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-24130 Filed 11-6-17; 8:45 am]
 BILLING CODE 8011-01-P