[Federal Register Volume 82, Number 242 (Tuesday, December 19, 2017)]
[Notices]
[Pages 60254-60255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-27232]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82313; File No. SR-ICEEU-2017-013]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe 
Procyclicality Framework

December 13, 2017.

I. Introduction

    On October 23, 2017, ICE Clear Europe Limited (``ICE Clear 
Europe'') 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-ICEEU-2017-013) to adopt a new policy 
framework for addressing the procyclicality (``Procyclicality 
Framework'') associated with its risk management policies. 
Specifically, the Procyclicality Framework would establish the risk 
appetite, monitoring and assessment, and management of procyclicality 
in the risk models used by ICE Clear Europe to manage default risk. The 
proposed rule change was published for comment in the Federal Register 
on November 7, 2017.\3\ The Commission did not receive comments on the 
proposed rule change. For the reasons discussed below, the Commission 
is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-81994 (Nov. 1, 2017), 
82 FR 51663 (Nov. 7, 2017) (SR-ICEEU-2017-013) (``Notice'').
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II. Description of the Proposed Rule Change

    ICE Clear Europe proposed to adopt a Procyclicality Framework that 
is intended to set forth, generally, (1) the aspects of ICE Clear 
Europe's risk policies that may exhibit procyclicality; (2) the manner 
in which ICE Clear Europe will assess procyclicality (using both 
qualitative and a quantitative metrics); and (3) how ICE Clear Europe 
will take procyclicality into account with respect to its consideration 
of and response to emerging risks. ICE Clear Europe proposed to define 
``procyclicality'' as 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.\4\
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    \4\ Notice, 82 FR at 51663.
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    ICE Clear Europe represented that although it has in place certain 
measures intended to mitigate procyclicality, as required by the 
European Market Infrastructure Regulation,\5\ it proposed to implement 
the Procyclicality Framework in order to establish a more defined 
approach to assessing procyclicality in its risk management policies 
and procedures.\6\ In particular, ICE Clear Europe proposed to identify 
the risk management policies that may introduce procyclical concerns, 
which includes margin models, stress testing, and collateral haircut 
policies. In addition, as part of the Procyclicality Framework, ICE 
Clear Europe also proposed to reference existing methods for mitigating 
procyclicality in the above mentioned areas, as well as certain stress 
testing arrangements.\7\
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    \5\ Article 28 of the 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.
    \6\ Notice, 82 FR at 51663.
    \7\ Id.
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    Furthermore, ICE Clear Europe proposed to incorporate into the 
Procyclicality Framework the measures by which it would assess the 
level of procyclicality. Specifically, ICE Clear Europe proposed to 
assess procyclicality by monitoring the 95th percentile expected 
shortfall of the 5-day

[[Page 60255]]

percentage change in initial margin (or other relevant risk mitigant) 
over a rolling 250-day window. ICE Clear Europe represented that this 
metric would be used to measure short term spikes in margin.\8\ In 
addition, ICE Clear Europe would also take into consideration the 
largest percentage changes, and use these observations, as well as the 
estimates of the expected shortfall, to detect and remove extreme 
outliers from the data.
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    \8\ Id.
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    In the event procyclicality is identified using this measure, ICE 
Clear Europe proposed an escalation process that provides for review 
and response obligations.\9\ The nature of the response would vary 
based on predetermined thresholds for the expected 95th percentile 
expected shortfall metric described above.\10\
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    \9\ Id.
    \10\ Id.
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    To further assess procyclicality, ICE Clear Europe also proposed to 
incorporate several qualitative factors into the Procyclicality 
Framework. These proposed qualitative factors include the periodicity 
of margin updates, the activities of other central counterparties in 
relevant markets, the expectations of market participants and related 
potential for moral hazard stemming from an expectation of gradual 
margin changes, and the ability of ICE Clear Europe to override, in 
extreme circumstances, standard measures designed to mitigate 
procyclicality.\11\ Moreover, ICEEU proposed to take into account 
differences across markets when implementing measures intended to 
mitigate procyclicality, as well as the varying liquidity resources and 
practices of the different types of Clearing Members that use the 
services of ICE Clear Europe.\12\
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    \11\ Notice, at 82 FR at 51664.
    \12\ Id.
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    With respect to future risk model design, ICE Clear Europe proposed 
to incorporate into the Procyclicality Framework a requirement that its 
model design process take into account any procyclicality 
characteristics that a model may exhibit, and that the model design 
process also take into account the impact of any steps designed to 
mitigate procyclicality.\13\
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    \13\ Notice, 82 FR at 51663-64.
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    Finally, ICE Clear Europe proposed to include in the Procyclicality 
Framework consideration of the procyclicality of new products and 
procyclicality arising from material changes in existing products. ICE 
Clear Europe has represented that much of its Procyclicality Framework 
will be available on its website.\14\
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    \14\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
propose rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\15\ Further, Section 17A(b)(3)(F) of the Act requires, 
among other things, that the rules of a registered 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, to assure the safeguarding of 
securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible, and, in general, to 
protect investors and the public interest.\16\ Rule 17Ad-22(e)(2) 
requires, in relevant part, that a covered clearing agency establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that are 
clear and transparent, that clearly prioritize the safety and 
efficiency of the covered clearing agency, and that support the public 
interest requirements of Section 17A of the Act, applicable to clearing 
agencies, and the objectives of owners and participants.\17\
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    \15\ 15 U.S.C. 78s(b)(2)(C).
    \16\ 15 U.S.C. 78q-1(b)(3)(F).
    \17\ 17 CFR 240.17Ad-22(e)(2).
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    The Commission finds that the proposed rule change, which would 
implement a new Procyclicality Framework, is consistent with the 
requirements of Section 17A of the Act and the relevant provisions of 
Rule 17Ad-22 thereunder. By establishing a Procyclicality Framework 
that (1) identifies risk management policies and procedures exhibiting 
procyclicality, (2) establishes a measure for assessing procyclicality 
in such risk management policies and procedures, and (3) provides for a 
process requiring review and defined responses in the event that 
certain procyclicality thresholds are exceeded, the Commission believes 
that ICE Clear Europe will have an increased ability to identify, 
assess and respond to procyclicality that arises in connection with the 
clearing services it provides. Consequently, the Commission believes 
that the Procyclicality Framework will enhance ICE Clear Europe's 
ability to mitigate the risks associated with procyclicality, thereby 
facilitating ICE Clear Europe's collection of the appropriate level of 
resources to manage its risks in a variety of market conditions, 
including stressed market conditions. This expected outcome, in turn, 
will permit ICE Clear Europe to provide prompt and accurate clearance 
and settlement of the products for which it offers clearing services, 
and more adequately protect its Clearing Members in the event of a 
default, which will enhance ICE Clear Europe's ability to safeguard the 
securities and funds which are in its custody or control. For these 
reasons, the Commission also believes that implementing the 
Procyclicality Framework is in the public interest. Therefore, the 
Commission finds that the proposed rule change implementing a new 
Procyclicality Framework is consistent with the requirements of Section 
17A.
    Additionally, by implementing the Procyclicality Framework, which 
includes a process for review and response to assessments of 
procyclicality based on quantitative and qualitative metrics and the 
relation of those metrics to predefined thresholds, and by publishing 
portions of the Procyclicality Framework on its website, the Commission 
believes that ICE Clear Europe is establishing policies and procedures 
that are consistent with the requirements of Rule 17Ad-22(e)(2).

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (ICEEU-2017-013) be, and hereby, 
is approved.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-27232 Filed 12-18-17; 8:45 am]
 BILLING CODE 8011-01-P