[Federal Register Volume 83, Number 64 (Tuesday, April 3, 2018)]
[Notices]
[Pages 14300-14302]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-06691]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82960; File No. SR-ICC-2018-002]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to ICC's End-of-Day Price 
Discovery Policies and Procedures

March 28, 2018.

I. Introduction

    On January 26, 2018, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a 
proposed rule change (SR-ICC-2018-002) to revise its End-of-Day Price 
Discovery Policies and Procedures (``Pricing Policy'') with respect to 
the bid-offer width (``BOW'') methodology applicable to single-name 
(``SN'') instruments. The proposed rule change was published for 
comment in the Federal Register on February 12, 2018.\2\ The Commission 
did not receive comments on the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule 
change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-82641 (February 6, 
2018), 83 FR 6078 (February 12, 2016) (SR-ICC-2018-002) 
(``Notice'').
    \3\ Capitalized terms used herein but not otherwise defined have 
the meaning set forth in the ICC rulebook, which is available at 
https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf, or in the Pricing Policy.
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II. Description of the Proposed Rule Change

    ICC proposes to revise its Pricing Policy to amend the methodology 
used to calculate end-of-day BOWs for its SN instruments. As part of 
its end-of-day pricing process, ICC calculates a BOW for each clearing-
eligible instrument. These BOWs are then used as an input in 
determining end-of-day levels, which are used for mark-to-market and 
risk

[[Page 14301]]

management purposes, including calculation of certain margin 
requirements, and for firm trade determinations.\4\ ICC's current 
approach to calculating a BOW for SN instruments starts by calculating 
a ``Consensus BOW,'' which is a spread-based BOW derived from intraday 
quotes (taken from trader emails) for the most actively traded 
instrument for a given SN instrument. Once the Consensus BOW has been 
determined, ICC applies a ``scrape factor'' to the Consensus BOW to 
capture differences between BOWs provided in intraday quotes taken from 
trader emails and BOWs achieved in the market. Thereafter, ICC applies 
additional scaling factors to capture differences in instrument 
liquidity for longer and shorter maturities, and for higher and lower 
coupons.\5\ Scaling across maturities is performed in spread terms, 
while scaling across coupons is performed in price terms.\6\ ICC uses 
the ISDA Standard Model for the transformations from spread to 
price.\7\
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    \4\ Notice, 83 FR at 6078. According to ICC, to encourage 
Clearing Participants to provide the best possible EOD submissions, 
ICC selects a sub-set of the potential-trades generated by the 
cross-and-lock algorithm and designates them as firm-trades, which 
Clearing Participants are entered into as cleared transactions. See 
Notice of Filing of Proposed Rule Change to Revise ICC End-of-Day 
Price Discovery Policies and Procedures, Securities Exchange Act 
Release No. 34-77771 (May 5, 2016), 81 FR 29309, 29310 (May 11, 
2016) (SR-ICC-2016-007).
    \5\ Id.
    \6\ Id.
    \7\ Id.
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    Under the proposed revisions, ICC would still start its calculation 
of end-of-day BOWs for SN instruments by calculating a Consensus BOW, 
but it would change the calculation of the Consensus BOW from being 
based on intraday quotes taken from trader emails to being computed as 
(i) a price-based floor, plus (ii) a relative BOW that is multiplied by 
the average of price-space mid-levels submitted by Clearing 
Participants through the end-of-day price discovery process.\8\
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    \8\ Id. at 6079. ICC would no longer apply a scrape factor to 
the Consensus BOW as the determination of Consensus BOWs would no 
longer rely on ``scraped'' intraday quotes. Id. at 6078.
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    The relative BOW would be determined by ICC's Risk Management 
Department in consultation with ICC's Trade Advisory Committee, and 
would be designed to reflect observed variability in SN instrument 
levels for the most actively traded instruments. The price-based floor 
would reflect BOWs established for index products representing baskets 
of the most distressed SN instruments.\9\ In addition, ICC proposes to 
extend the application of the price-based BOW floors from the 0/3-
month, 6-month, and 1-year benchmark tenors to cover the entire set of 
benchmark tenors from 0 month to 10 years.\10\
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    \9\ Id. at 6079. In addition, because ICC accepts SN instrument 
submissions from Clearing Participants only in price terms under the 
Pricing Policy, rather than in both spread and price terms, the need 
for spread-based BOWs would be eliminated, as would the need to use 
the ISDA Standard Model to achieve the transformations from spread 
to price during the scaling process. See id. at 6078.
    \10\ Id. at 6078.
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    Under the proposed enhancements, ICC would continue to apply 
certain scaling factors, other than the scrape factor, to the Consensus 
BOW. Specifically, ICC would apply a tenor scaling factor to the 
Consensus BOW for each benchmark instrument at the most actively traded 
coupon.\11\ For benchmark instruments at other coupons, ICC would apply 
a combination of tenor and coupon scaling factors. The coupon and tenor 
scaling factors would be determined by the ICC Risk Management 
Department in consultation with the Trading Advisory Committee.\12\ 
Once the applicable scaling factor or factors have been applied, ICC 
would then apply a Single Name Variability Factor, with the resulting 
BOW being deemed the ``systematic BOW.'' \13\
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    \11\ Id. at 6079.
    \12\ Id.
    \13\ Id.
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    ICC also proposes to introduce a new component to its Pricing 
Policy: The ``dynamic BOW,'' which would be the dispersion of price-
space mid-levels submitted as part of its end-of-day price discovery 
process.\14\ As the last step of its process, ICC would compare the 
systematic BOW with the dynamic BOW and would select the greater of the 
two as the end-of-day BOW for a given SN instrument.\15\
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    \14\ Id.
    \15\ Id.
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    In addition to the proposed changes regarding the computation of 
the end-of-day BOW for SN instruments, ICC also proposes changes to the 
Governance section of its Pricing Policy. Specifically, ICC proposes to 
amend the Governance section to provide that the responsibilities of 
the ICC Risk Management Department include determining the price-based 
floors, relative BOWs, and tenor and coupon scaling factors used as 
inputs into the BOW determination.\16\ ICC also proposes to amend 
language in the Governance section to provide that the ICC Risk 
Management Department has the responsibility of ensuring that 
appropriate end-of-day levels are determined, and to clarify that the 
parameters used in the end-of-day pricing process are to be established 
by the Risk Management Department in consultation with the Trading 
Advisory Committee.\17\ ICC also proposes revisions to the Governance 
section that would provide that the Trading Advisory Committee would 
review and provide input regarding revisions to the BOW price-based 
floors.\18\
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    \16\ Id.
    \17\ Id.
    \18\ Id.
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    Finally, ICC proposes certain clarifying edits. Specifically, ICC 
proposes to remove references to scrape factors, and to remove the 
requirement that the Trading Advisory Committee review scrape factors, 
as the scrape factors, which are applied to the Consensus BOW under 
ICC's current approach to account for differences between BOWs obtained 
from intraday quotes taken from trader emails and those achieved in the 
market, would no longer be applicable under the proposed changes as the 
Consensus BOW under the proposed amendments would not rely on such 
intraday quotes.\19\ Other clarifying edits include the addition of a 
footnote to the Pricing Policy describing ICC's use of the ISDA 
Standard Model, the removal of outdated references, correcting certain 
typographical errors, and updates to section numbering, as well as 
certain other minor edits as described in greater detail in the 
Notice.\20\
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    \19\ Id.
    \20\ Id.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed 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.\21\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act,\22\ and Rules 17Ad-22(b)(2) and (d)(8) thereunder.\23\
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    \21\ 15 U.S.C. 78s(b)(2)(C).
    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(b)(2) and (d)(8).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    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

[[Page 14302]]

securities transactions and, to the extent applicable, derivative 
agreements, contracts and transactions, and 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.\24\ As discussed above, 
the proposed rule change would enhance ICC's end-of-day price discovery 
process for SN instruments in a number of ways, including but not 
limited to incorporating a price-based floor which would be applied to 
a wider range of instruments, adopting a new dynamic BOW component, and 
taking into consideration the dispersion of price-space mid-levels 
received from Clearing Participants, all while continuing to apply 
scaling tenor, coupon, and variability scaling factors.
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    \24\ 15 U.S.C. 78q-1(b)(3)(F).
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    Taken as a whole, the Commission believes the proposed changes 
should enhance ICC's ability to determine the end-of-day BOW for SN 
instruments. First, the proposed changes should permit ICC to determine 
BOWs consistently across SN instruments on all reference entities, 
including those for which only sparse intraday data is available.\25\ 
In addition, by extending the application of the price-based BOW floor 
component to the entire set of benchmark tenors from the 0 month to 10 
years instead of solely the \0/3\ month, 6 month, and 1-year benchmark 
tenors, the Commission believes that ICC will be able to more 
consistently compute the end-of-day BOW for a wider range of SN 
instruments.
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    \25\ Notice, 83 FR at 6078.
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    Consequently, the Commission believes that the proposed changes 
will improve ICC's end-of-day pricing process as a whole as additional 
relevant information will be taken into consideration and a wider range 
of instruments will be considered in the pricing process. Based on 
these improvements, the Commission believes that ICC's risk management 
processes related to the end-of-day pricing process, including the 
calculation and collection of certain margin requirements, will also be 
improved, resulting in an improved ability to safeguard the positions 
that ICC maintains from the default of a Clearing Participant. As a 
result, the Commission believes that the proposed changes will promote 
the prompt and accurate clearance and settlement of the products 
cleared by ICC, and will enhance ICC's ability to assure the 
safeguarding of securities and funds which are in the custody or 
control of ICC or for which it is responsible. Therefore, the 
Commission finds that the proposed rule change is consistent with the 
requirements of Section 17A(b)(3)(F) of the Act.\26\
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    \26\ Id.
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B. Consistency With Rule 17Ad-22(b)(2)

    Rule 17Ad-22(b)(2) requires, in relevant part, a registered 
clearing agency that performs central counterparty services to 
establish implement, maintain, and enforce written policies and 
procedures reasonably designed to use margin requirements to limit its 
credit exposures to participants under normal market conditions. As 
noted above, ICC uses the end-of-day BOWs as part of its mark-to-market 
and risk management purposes, including the computation of certain 
margin requirements.\27\
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    \27\ 17 CFR 240.17Ad-22(b)(2).
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    The Commission believes that by improving the end-of-day pricing 
process, as described above, ICC will also improve its ability to 
calculate margin requirements that use the end-of-day BOWs as an input. 
Consequently, an improved margin calculation should lead to the 
collection of margin levels that enhance ICC's ability to limit its 
credit exposures to participants under normal market conditions. As a 
result, the Commission finds that the proposed rule change is 
consistent with the requirements of Rule 17Ad-22(b)(2).\28\
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    \28\ Id.
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C. Consistency With Rule 17Ad-22(d)(8)

    Rule 17Ad-22(d)(8) requires, in relevant part, that a registered 
clearing agency that is not a covered clearing agency to establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to, as applicable, have governance arrangements 
that promote the effectiveness of the clearing agency's risk management 
procedures.\29\ ICC proposed to amend the Governance section of its 
Pricing policy to clarify the responsibilities of the ICC Risk 
Management Department and the Trading Advisory Committee with respect 
to the determination of price-based floors, relative BOWs, and scaling 
factors. By updating the Governance section of the Pricing Policy to 
delineate the roles of the ICC Risk Management Department and the 
Trading Advisory Committee, the Commission believes that ICC will 
improve the governance structure surrounding the end-of-day pricing 
process.
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    \29\ 17 CFR 240.17Ad-22(d)(8).
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    Because the output of the end-of-day pricing process is used for 
mark-to-market and risk management purposes, the Commission believes 
that improvements to the governance structure of the end-of-day pricing 
process will have the effect of promoting greater effectiveness of 
ICC's risk management procedures overall. Therefore, the Commission 
finds that the proposed rule change is consistent with the requirements 
of Rule 17Ad-22(d)(8).\30\
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    \30\ Id.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act, 
and in particular with the requirements of Section 17A of the Act \31\ 
and Rules 17Ad-22(b)(2) and (d)(8) \32\ thereunder.
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    \31\ 15 U.S.C. 78q-1.
    \32\ 17 CFR 240.17Ad-22(b)(2) and (d)(8).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\33\ that the proposed rule change (SR-ICC-2018-002) be, and hereby is, 
approved.\34\
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    \33\ 15 U.S.C. 78s(b)(2).
    \34\ 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).
    \35\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Jill Peterson,
Assistant Secretary.
[FR Doc. 2018-06691 Filed 4-2-18; 8:45 am]
 BILLING CODE 8011-01-P