[Federal Register Volume 83, Number 80 (Wednesday, April 25, 2018)]
[Notices]
[Pages 18106-18108]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-08618]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83072; File No. SR-ICEEU-2018-006]


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 CDS End-
of-Day Pricing Policy

April 19, 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 April 5, 2018, ICE Clear Europe Limited (``ICE Clear Europe'' or the 
``Clearing House'') 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 proposes revisions to its CDS End-of-Day Price 
Discovery Policy (``Price Discovery Policy'') related to the bid-offer 
width (``BOW'') methodology for credit default swap (``CDS'') 
contracts.

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 revising its Price Discovery Policy to 
enhance the methodology used to determine bid-offer widths (``BOWs'') 
for CDS Contracts to incorporate a new variability band methodology, 
and to make certain other updates and clarifications.
    Each business day, ICE Clear Europe determines end-of-day (``EOD'') 
levels for CDS Contracts through its Price Discovery Policy, based on 
EOD submissions from its CDS Clearing Members. ICE Clear Europe uses 
these levels for mark-to-market and risk management purposes. As part 
of this price discovery process, ICE Clear Europe determines BOWs for 
each eligible CDS Contract. The BOW is intended to estimate the bid-
offer width for the two-way market available for each clearing-eligible 
instrument at the specified determination time on each business day. 
The BOWs are then used in ICE Clear Europe's price discovery process as 
inputs in the determination of EOD levels and firm trades, and other 
risk management matters.
    The current methodology for determining BOWs is based on observed 
intraday quotes and an assessment of the current level of market 
variability. Based on this information, ICE Clear Europe determines a 
consensus BOW for each relevant instrument. The amendments remove from 
the Price Discovery Policy an alternative approach for calculating 
consensus BOWs using exponentially weighting moving averages that was 
planned but never implemented. The amendments restate the current 
methodology in use (which is based on specified averages of BOW time 
series).
    The amendments also adopt a new variability band approach for 
widening BOWs in certain market conditions. Under volatile or fast-
moving market conditions, BOWs may temporarily be wider than observed 
in intraday quotes. Currently, ICE Clear Europe's clearing risk 
department monitors market conditions and may apply manual adjustments 
to BOWs as appropriate to take into account such conditions. ICE Clear 
Europe proposes to capture such market conditions in a more 
comprehensive and automated way through a methodology that computes a 
variability level and a variability band for each of the main risk 
factors based on a time series of intraday quote mid-levels for the 
most actively traded instrument (``MATI'') of the considered risk 
factor. The BOW will be automatically adjusted based on the variability 
band, as discussed herein.
    For index instruments, under the revised approach, ICE Clear Europe 
will compute a variability level for each of the main index risk 
factors. For each instrument, ICE Clear Europe's systems establish a 
time series of intraday quote mid-levels for the MATI. If the last mid-
level in the time series is below the prior day's EOD level by more 
than one pre-defined BOW for regime 3, the variability level is the 
difference between the prior day's EOD level and the minimum mid-level 
in the time series, divided by the pre-defined BOW. For intraday mid-
levels falling within one pre-defined regime 3 BOW from the prior day's 
EOD level, the variability level is set to 1.0 if the range of mid-
levels in the time series is less than or equal to the pre-defined 
regime 3 BOW, and set to 1.2 if the range of mid-levels in the time 
series is greater than the pre-defined regime 3 BOW.
    Under the revised policy, ICE Clear Europe will establish 
variability bands (from zero to three) that correspond to specific 
ranges of variability level (with band zero having the lowest range of 
variability level). ICE Clear Europe will then group index risk factors 
into specific market-proxy groups, CDX (covering the North American 
investment grade and high yield index risk factors) and iTraxx 
(covering the

[[Page 18107]]

iTraxx main, cross over, senior financial, sub financials and high 
volatility index risk factors). For each market proxy group, ICE Clear 
Europe will determine a market proxy variability band by using the 
largest variability band computed for the index risk factors within 
that proxy group.
    For index instruments, ICE Clear Europe will continue to maintain 
three different predefined BOWs, each of which corresponds to one of 
three specific market regimes (regime 1, regime 2 and regime 3, with 
the BOW for regime 1 being the smallest and regime 3 the largest). As 
under the current approach, ICE Clear Europe first selects the market 
regime for each index risk sub-factor based on its MATI. Under the 
revised approach, ICE Clear Europe will then adjust the regime for each 
index risk sub-factor's MATI depending on the applicable market proxy 
variability band for the instrument. The adjustment (referred to as an 
index variability increment) can be none, one regime (moving from 
Regime 1 to Regime 2 or from Regime 2 to Regime 3), or two regimes 
(moving from Regime 1 to Regime 3 or from Regime 2 to Regime 3). Higher 
market proxy variability bands result in a larger adjustment. The 
clearing risk department has the discretion to adjust market regimes as 
it determines best reflects current market conditions.
    For single-name instruments, the revised policy applies a new 
scaling factor, referred to as an SN variability factor, to the 
consensus EOD BOWs for single name instruments calculated under the 
existing methodology. The SN variability factor will be determined 
based on a market proxy variability band. ICE Clear Europe will assign 
each single name risk factor to a specific market proxy group (CDX for 
standard North American corporates, iTraxx for standard European 
corporates and standard Western European sovereigns). The scaling 
factor will range from 1 to 1.5, depending on the market proxy 
variability band (with higher bands having a higher variability 
factor). The clearing risk department also has discretion to override 
the scaling actor with any factor it deems appropriate to best reflect 
market conditions.
    In connection with these changes, ICE Clear Europe is removing from 
the policy an alternative approach to variability adjustments that was 
planned but had not been implemented.
    The amendments also contain various typographical corrections, 
updates to cross-references and similar clarifications.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \3\ and the 
regulations thereunder applicable to it. Section 17A(b)(3)(F) of the 
Act \4\ in particular 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, and the protection of investors and the public 
interest. The proposed amendments are designed to enhance the Clearing 
House's Price Discovery Policy, which is a key aspect of the risk 
management and daily settlement procedures of the Clearing House for 
CDS Contracts. The proposed amendments in particular will provide a 
more comprehensive and automated approach for adjusting BOWs used in 
the EOD price discovery process for both index and single-name CDS 
Contracts to reflect market conditions, particularly during periods of 
high market variability. ICE Clear Europe believes that the amendments 
will thus promote prompt and accurate clearing and settlement, within 
the meaning of Section 17A(b)(3)(F). For similar reasons, ICE Clear 
Europe believes that the amendments are also consistent with the risk-
based margining requirements of Commission Rule 17Ad-22(e)(6),\5\ 
including the requirement to use reliable sources of timely price data 
and procedures and sound valuation models for addressing circumstances 
in which pricing data are not readily available or reliable.
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    \3\ 15 U.S.C. 78q-1.
    \4\ 15 U.S.C. 78q-1(b)(3)(F).
    \5\ 17 CFR 240.17Ad-22(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 impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The proposed 
changes to the Price Discovery Policy, and in particular the revised 
BOW variability methodology for Single Name and Index instruments, will 
apply uniformly across all CDS Clearing Members and market 
participants. ICE Clear Europe does not believe the amendments will 
adversely affect competition among CDS Clearing Members, the cost of 
clearing, or the ability of market participants to clear CDS Contracts 
generally. Similarly, the Clearing House does not believe the 
amendments will reduce access to clearing of CDS Contracts or limit 
market participants' choices for clearing CDS Contracts. 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 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-2018-006 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-2018-006. This 
file number should be included on the

[[Page 18108]]

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 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 website viewing and printing in the Commission's Public 
Reference Section, 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/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-2018-006 and should be 
submitted on or before May 16, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-08618 Filed 4-24-18; 8:45 am]
 BILLING CODE 8011-01-P