[Federal Register Volume 83, Number 32 (Thursday, February 15, 2018)]
[Notices]
[Pages 6909-6912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82678; File No. SR-ICEEU-2018-002]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission, or 
Advance Notice Relating to Amendments to the ICE Clear Europe Limited 
CDS Procedures, CDS Risk Policy, and CDS Risk Model Description

February 9, 2018.
    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 February 6, 2018, 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

    ICE Clear Europe Limited proposes to modify certain provisions of 
its CDS Procedures to support clearing of a new single-name CDS 
transaction type and to modify its CDS Risk Policy and CDS Risk Model 
Description to enhance risk management relating to CDS involving 
European banks.

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
    ICE Clear Europe proposes to modify certain provisions of its CDS 
Procedures to support clearing of a new single-name CDS transaction 
type. ICE Clear Europe also proposes to amend its CDS Risk Policy and 
CDS Risk Model Description to better address certain risks associated 
with CDS referencing European banks relating to the issuance of new 
debt structures by those banks. These revisions do not involve any 
changes to the ICE Clear Europe Clearing Rules.
Proposed Amendments to the CDS Procedures
    The purpose of the proposed changes to the CDS Procedures is to 
support clearing of a new single-name CDS transaction type: Standard 
European Senior Non-Preferred Financial Corporate. ICE Clear Europe 
understands that market participants generally propose to commence 
trading of this transaction type as of March 20, 2018, and relevant 
standard documentation for the transaction type has recently been 
published by the International Swaps and Derivatives Association, Inc. 
(``ISDA''). Transactions under such standard documentation, will be 
generally similar to Standard European Financial Corporate transactions 
currently cleared by the Clearing House, but will have a reference 
obligation that will be subordinated to other senior obligations, but 
will rank senior to so-called ``tier 2'' obligations that are 
subordinated for purposes of European Union bank regulatory capital 
requirements. ICE Clear Europe proposes amending its CDS Procedures to 
provide for the clearance of contracts referencing this new transaction 
type. ICE Clear Europe believes the addition of these contracts will 
benefit the market for credit default swaps by providing market 
participants the benefits of clearing, including reduction in 
counterparty risk and safeguarding of margin assets pursuant to 
Clearing House Rules.
    Specifically, ICE Clear Europe proposes amending Paragraph 
4.3(c)(ii) of the CDS Procedures to reference Standard European Senior 
Non-Preferred Financial Corporate as a transaction type eligible to be 
submitted for clearing. Similarly, Paragraph 11.3(i) is amended in the 
definition of `Non-STEC Single Name Contract' to include Standard 
European Senior Non-Preferred Financial Corporate in the list of types 
of Reference Entities eligible to be cleared by ICE Clear Europe. ICE

[[Page 6910]]

Clear Europe also proposes amending the definition of `Single Name 
Contract Reference Obligations' in Paragraph 11.3(j) to remove a 
requirement that the relevant obligation must be a ``senior level'' 
obligation, and add instead that the obligation be of the applicable 
seniority level for the terms of the contract (to accommodate the 
seniority level of Senior Non-Preferred transactions, as discussed 
above).
Proposed Amendments to the CDS Risk Model Description
    ICE Clear Europe's risk management methodology incorporates 
considerations of idiosyncratic credit events and the associated 
potential losses. These credit event losses are termed Loss-Given-
Default (``LGD''). In order to support clearing of the new transaction 
type, ICE Clear Europe proposes certain LGD enhancements to its risk 
model. A description of these changes is set forth below.
    ICE Clear Europe first proposes Risk Factor (``RF'') level LGD 
enhancements. These proposed RF level enhancements are designed to 
better capture the LGD risk associated with the issuance of new debt 
structures by European banks, and provide a consistent recovery rate 
scenario approach to different sub-factors.
    Under ICE Clear Europe's risk model, every Single Name (``SN'') 
reference entity is deemed an RF. Each combination of definition, doc-
clause, tier and currency for a given SN RF determines a SN Risk Sub-
Factor (``RSF''). Currently, ICE Clear Europe measures losses 
associated with credit events (``LGD'') by means of a stress-based 
approach, which utilizes three recovery rate (``RR'') scenarios: 
minimum RR, expected RR, and maximum RR. Outright and index-derived RSF 
exposures are combined at each RR scenario.
    The results of these RR scenarios are used as an input into the 
Profit/Loss-Given Default (``P/LGD'') calculations at both the RSF and 
RF levels. For each RSF, P/LGD is calculated as the worst credit event 
outcome, and for each RF, P/LGD is calculated as the sum of the worst 
credit outcomes per RSF. These final P/LGD results are used as part of 
the determination of risk requirements.
    ICE Clear Europe proposes enhancements to the RF level LGD 
calculation. Specifically, ICE Clear Europe proposes a change to the 
calculation by incorporating a more consistent approach in the 
calculation of the P/LGD by using the same RR scenarios applied to the 
different RSFs which form part of the considered RF.
    For each RF, ICE Clear Europe will continue to calculate an 
``extreme outcome'' as the sum of the worst RSF P/LGDs across all 
scenarios. ICE Clear Europe will also, for each RF, calculate an 
``expected outcome'' as the worst sum of all the RSF P/LGDs across all 
of the same scenarios. Under the proposed approach, ICE Clear Europe 
will then combine the results of the ``extreme outcome'' calculation 
and the ``expected outcome'' calculation to compute the total LGD for 
each RF.
    ICE Clear Europe also proposes to expand its LGD analysis to Risk 
Factor Groups (``RFG''). Under the proposed changes, a collection of 
related RFs will form a RFG. These related RFs will be defined as a RFG 
based on either (1) having a common majority parental sovereign 
ownership (e.g. quasi-sovereigns and sovereigns), or (2) being a 
majority owned subsidiary of a common parent entity according to the 
Bloomberg Related Securities Analysis. A RFG can consist of only one 
RF. This change will better capture the risk exposure dynamics of 
related RFs, and will allow ICE Clear Europe the ability to provide 
limited LGD benefits across RFs with opposite exposures, as well as 
allow for the ability to capture accumulation of directional exposure 
for related RFs.
    Under the proposed approach, the total quantity LGD will be 
calculated on a RFG level, and account for the exposure due to credit 
events associated with the reference entities within a given RFG. If a 
RFG contains only one RF, the LGD will continue to be computed as the 
risk exposure due to a credit event for a given underlying reference 
entity. Under the proposed approach, ICE Clear Europe will sum the P/
LGDs for each RF in a given RFG, with limited offsets in the event RFs 
exhibit positive PLGD. Using the results of the above calculation, ICE 
Clear Europe will obtain the RFG level LGD. The proposed approach also 
includes a calculation which allows for the RFG level LGD to be 
attributed to each RF within the considered RFG.
    ICE Clear Europe proposes changes to the `Loss Given Default Risk 
Analysis' section of the CDS Risk Model Description Document to reflect 
the described RF and RFG LGD calculation changes. ICE Clear Europe also 
proposes conforming changes to other sections of the CDS Risk Model 
Description to incorporate these methodology changes and reflect the 
RFG analysis.
    ICE Clear Europe proposes a revision to the `Uncollateralized Loss 
Given Default' calculation in order to incorporate the RFG level LGD 
attribution calculation mentioned above.
    ICE Clear Europe proposes changes to the `Idiosyncratic Jump-to-
Default Requirements' section of the CDS Risk Model Description 
document. Currently, the portfolio Jump to Default (``JTD'') approach 
collateralizes the worst uncollateralized LGD (``ULGD'') exposure among 
all RFs. Under the proposed approach, the portfolio JTD approach will 
collateralize, through the portfolio JTD IM requirement that accounts 
for the RFG-specific LGD collateralization, the worst ULGD exposure 
among all RFGs. The ULGD exposure for a given RFG will be calculated as 
a sum of the associated RF ULGDs.
    ICE Clear Europe also proposes minor edits to the `SWWR' (Specific 
Wrong Way Risk) and `GWWR' (General Wrong Way Risk) sections to update 
language and calculation descriptions to accommodate the introduction 
of the RFG to the `Idiosyncratic Jump-to-Default Requirements' section.
    ICE Clear Europe proposes changes to the `Guaranty Fund 
Methodology' section. ICE Clear Europe's risk management approach 
establishes GF to provide for the mutualization of losses under extreme 
credit market scenarios. Specifically, the ICE Clear Europe GF is 
designed to provide adequate funds to cover losses associated with the 
default of the two Clearing Member (``CM'') affiliate groups that would 
potentially cause the largest aggregate credit exposure to ICE Clear 
Europe under extreme, but plausible market conditions. ICE Clear 
Europe's current GF methodology includes, among other assumptions and 
adverse market conditions, the assumption that up to three credit 
events, different from the ones associated with CMs, occur during the 
established risk horizon. ICE Clear Europe proposes expanding this 
analysis to the RFG level. Under this proposed approach, it will be 
assumed that credit events associated with up to three RFGs, different 
from the ones associated with the CMs and the RFs that are in the RFGs 
as the CMs, occur during the established risk horizon. As such, the 
uncollateralized losses, used in the Guaranty Fund analysis, reflect 
the proposed expansion to the RFG level.
    ICE Clear Europe also proposes clarifications to the calculation 
for the Specific Wrong Way Risk component of the Guaranty Fund. 
Currently, for a given CM, the Specific Wrong Way Risk component is 
based on self-referencing positions arising from one or more RFs; ICE 
Clear Europe proposes clarifying

[[Page 6911]]

this analysis to be based on the RFG level.
    The amendments to the CDS Risk Model Description also contain 
typographical corrections and similar technical corrections and 
clarifications.
Proposed Amendments to the CDS Risk Policy
    ICE Clear Europe also proposes conforming changes to the CDS Risk 
Policy consistent with those described above.
    Specifically, the definition of a Risk Sub-Factor is proposed to be 
amended that it will be defined as a specific combination of SN, tier 
and currency (as well as documentation clause), where the union of all 
Risk Sub-Factors that share the same underlying SN forms a SN Risk 
Factor.
    The CDS Risk Policy is also being amended such that instead of the 
worst SN, the worst LGD associated with a Risk Factor Group (``RFG''), 
will be selected to establish the portfolio JTD requirement. The 
amendments also clarify that a Risk Factor Group is a set of Risk 
Factors related by a common parental ownership.
    With respect to the guaranty fund calculation, provisions in 
respect of two uncollateralized LGD relating to the guaranty fund 
calculation is being amended such that instead of the GF LGD being 
estimated for every SN based on the total portfolio positions in the 
SNs, the GF LGD will be estimated for every RFG based on the total 
portfolio positions in the SNs belonging to the same RFG.
    The amendments to the CDS Risk Policy also contain typographical 
corrections and similar technical corrections and clarifications.
(b) Statutory Basis
    Section 17A(b)(3)(F) of the Act \3\ 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 and to comply with the provisions of the Act and the rules 
and regulations thereunder. ICE Clear Europe believes that the proposed 
rule changes are consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to ICE Clear Europe, in 
particular, to Section 17(A)(b)(3)(F),\4\ because ICE Clear Europe 
believes that the proposed rule changes will promote the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions.
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    \3\ 15 U.S.C. 78q-1(b)(3)(F).
    \4\ Id.
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    In regards to the proposed amendments to the Procedures, contracts 
referencing the Standard European Senior Non-Preferred Financial 
Corporate transaction type are similar to the Non-STEC Single Name 
contracts currently cleared by ICE Clear Europe, and will be cleared 
pursuant to ICE Clear Europe's existing clearing arrangements and 
related financial safeguards, protections and risk management 
procedures (with the modifications to the CDS Risk Policy and CDS Risk 
Model Description discussed herein). Clearing of these contracts will 
allow market participants an increased ability to manage risk and will 
ensure the safeguarding of related margin assets pursuant to Clearing 
House Rules. ICE Clear Europe believes that acceptance of these 
contracts, on the terms and conditions set out in the Rules, is 
consistent with the prompt and accurate clearance of and settlement of 
securities transactions and derivative agreements, contracts and 
transactions cleared by ICE Clear Europe, the safeguarding of 
securities and funds in the custody or control of ICE Clear Europe, and 
the protection of investors and the public interest, within the meaning 
of Section 17A(b)(3)(F) of the Act.\5\
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    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    Clearing of contracts referencing the Standard European Senior Non-
Preferred Financial Corporate transaction type will also satisfy the 
requirements of Rule 17Ad-22.\6\ In particular, in terms of financial 
resources, ICE Clear Europe will apply its existing initial margin 
methodology to the contracts (with the modifications to the CDS Risk 
Policy and CDS Risk Model Description discussed herein). ICE Clear 
Europe believes that this model (as proposed to be amended) will 
provide sufficient initial margin requirements to cover its credit 
exposure to its Clearing Members from clearing such contracts, 
consistent with the requirements of Rule 17Ad-22(b)(2) and (e)(6).\7\ 
In addition, ICE Clear Europe believes its Guaranty Fund, under its 
methodology as proposed to be revised, will, together with the required 
initial margin, provide sufficient financial resources to support the 
clearing of the contracts consistent with the requirements of Rule 
17Ad-22(b)(3) and (e)(4).\8\ ICE Clear Europe also believes that its 
existing operational and managerial resources will be sufficient for 
clearing of the contracts, consistent with the requirements of Rule 
17Ad-22(e)(17),\9\ as the new contracts are substantially the same from 
an operational perspective as existing contracts. Similarly, ICE Clear 
Europe will use its existing settlement procedures and account 
structures for the new contracts, consistent with the requirements of 
Rule 17Ad-22(e)(8), (9) and (10) \10\, as to the finality and accuracy 
of its daily settlement process and addressing the risks associated 
with physical deliveries. ICE Clear Europe determined to accept the 
contracts for clearing in accordance with its governance process, 
consistent with the requirements of Rule 17Ad-22(e)(2).\11\ Finally, 
ICE Clear Europe will apply its existing default management policies 
and procedures for the contracts. ICE Clear Europe believes that these 
procedures allow for it to take timely action to contain losses and 
liquidity pressures and to continue meeting its obligations in the 
event of Clearing Member insolvencies or defaults in respect of the 
additional single names, in accordance with Rule 17Ad-22(e)(13).\12\
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    \6\ 17 CFR 240.17Ad-22.
    \7\ 17 CFR 240.17Ad-22(b)(2) and (e)(6).
    \8\ 17 CFR 240.17Ad-22(b)(3) and (e)(4).
    \9\ 17 CFR 240.17Ad-22(e)(17).
    \10\ 17 CFR 240.17Ad-22(e)(8), (9) and (10).
    \11\ 17 CFR 240.17Ad-22(e)(2).
    \12\ 17 CFR 240.17Ad-22(e)(13).
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    With regards to the LGD enhancements, the proposed risk model 
revisions enhance ICE Clear Europe's risk methodology and are expected 
to impose more conservative requirements, which would enhance the 
financial resources available to ICE Clear Europe and thereby 
facilitate its ability to promptly and accurately clear and settle its 
cleared CDS contracts. In addition, the proposed revisions are 
consistent with the relevant requirements of Rule 17Ad-22.\13\ In 
particular, the LGD related amendments will enhance the financial 
resources available to the Clearing House, and continue to ensure that 
ICE Clear Europe maintains sufficient financial resources to withstand 
a default by the two Clearing Member families to which it has the 
largest aggregate exposure in extreme, but plausible market conditions, 
and are therefore reasonably designed to meet the margin and financial 
resource requirements of Rule 17Ad-22(b)(2-3) and (e)(4) and 
(e)(6).\14\
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    \13\ 17 CFRSec.  240.17Ad-22.
    \14\ 17 CFRSec.  240.17Ad-22(b)(2-3) and (e)(4) and (e)(6).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed rule changes would 
have any

[[Page 6912]]

impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. Contracts 
referencing the Standard European Senior Non-Preferred Financial 
Corporate transaction type will be available to all ICE Clear Europe 
participants for clearing. The clearing of these contracts by ICE Clear 
Europe does not preclude the offering of the contracts for clearing by 
other market participants. Additionally, the LGD enhancements apply 
uniformly across all Clearing Members. Therefore, ICE Clear Europe does 
not believe the proposed rule changes impose any burden on competition 
that is inappropriate 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 amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any comments received with respect to the proposed 
rule change.

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.
    The proposal shall not take effect until all regulatory actions 
required with respect to the proposal are completed.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, security-based swap submission or advance notice 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-2018-002 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-2018-002. 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 website (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 website 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 website at https://www.theice.com/clear-europe/regulation#rule-filing.
    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-2018-002 and should be 
submitted on or before March 8, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-03112 Filed 2-14-18; 8:45 am]
BILLING CODE 8011-01-P