[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Notices]
[Pages 41118-41121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17741]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83832; File No. SR-ICC-2018-006]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating To Amending the ICC Clearing 
Rules Regarding Mark-to-Market Margin

August 13, 2018.

I. Introduction

    On June 13, 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\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to amend the ICC 
Clearing Rules (the ``ICC Rules'') \3\ to more clearly characterize 
Mark-to-Market Margin payments as settled-to-market rather than 
collateralized-to-market. The proposed rule change was published in the 
Federal Register on June 29, 2018.\4\ The Commission has not received 
any 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\ Available at https://www.theice.com/publicdocs/clear_credit/ICE_Clear_Credit_Rules.pdf. Capitalized terms used herein but not 
otherwise defined have the meaning set forth in the ICC Rules.
    \4\ Securities Exchange Act Release No. 34-83513 (June 25, 
2018), 83 FR 30802 (June 29, 2018) (SR-ICC-2018-006) (``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would revise Chapters 4, 8, and 20 of the 
ICC Rules to more clearly characterize Mark-to-Market Margin payments 
as settlement payments (``settled-to-market'') rather than collateral 
(``collateralized-to-market'').\5\ The proposed rule change would not 
change the manner in which Mark-to-Market Margin is calculated, or 
other current ICC operational practices.\6\ Rather, the proposed rule 
change would revise terminology to further clarify the legal 
characterization that payments of Mark-to-Market Margin represent 
settlement rather than collateral payments.\7\ ICC states that these 
clarifying changes are the result of ICC's analysis of the legal 
characterization of Mark-to-Market Margin payments, at the request of 
its Clearing Participants (``CPs'').\8\
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    \5\ Under the settled-to-market model, the transfer of Mark-to-
Market Margin constitutes a settlement of the contract's outstanding 
exposure, with the receiving party taking outright title to the 
Mark-to-Market Margin and the transferring party retaining no rights 
to such margin. Under the collateralized-to-market model, the 
transfer of Mark-to-Market Margin constitutes a pledge of 
collateral, such that the transferring party has a right to reclaim 
the collateral and the receiving party has an obligation to return 
the collateral. For further explanation of the settled-to-market 
model and collateralized-to-market model, see Notice, 83 FR at 
30803.
    \6\ Notice, 83 FR at 30803.
    \7\ Id.
    \8\ Id.
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    The proposed rule change would revise Rule 401 to reference Mark-
to-Market Margin Balance, a new term that is defined in Rule 404 to 
mean the aggregate amount of Mark-to-Market Margin paid or received.\9\ 
The new definition would be used in several calculations to describe 
specifics pertaining to the Mark-to-Market Margin calculation.\10\ For 
example, the proposed rule change would amend Rule 401(a), which 
governs House Margin, to state that ICC calculates a net amount of 
Mark-to-Market Margin by subtracting a CP's Mark-to-Market Margin 
Balance from a CP's Mark-to-Market Margin Requirement.\11\ The proposed 
rule change would make corresponding changes to reference

[[Page 41119]]

Mark-to-Market Margin Balance in Rule 401(b)(ii), which covers Client-
Related Mark-to-Market Margin.\12\
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    \9\ Id.
    \10\ Id.
    \11\ Notice, 83 FR at 30803.
    \12\ Id.
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    As stated above, the proposed rule change would not modify the 
current calculation of Mark-to-Market Margin, or other operational 
practices, but, instead, would replace certain specifics relating to 
ICC's Mark-to-Market Margin calculation with the new defined term Mark-
to-Market Margin Balance.\13\ In addition, the proposed rule change 
would not change the manner in which Initial Margin is calculated, 
posted and held.\14\
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    \13\ Id.
    \14\ Id.
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    Further, the proposed rule change would revise Rule 401(g) to 
specify that amounts ICC currently pays to CPs as interest on any Mark-
to-Market Margin would no longer be considered interest but instead 
would be treated as a new payment obligation between ICC and CPs and 
referred to as the ``price alignment amount.'' \15\ A price alignment 
amount would be economically equivalent to the ``interest'' that ICC 
pays or charges a CP for any net Mark-to-Market Margin transferred 
between the parties under current Rule 401(g).\16\ Because the term 
interest may be more typically associated with collateral, however, the 
proposed rule change would refer to such an amount as price alignment 
to avoid confusion over the proper characterization of Mark-to-Market 
Margin as settlement payments.\17\ ICC states that such change would 
not affect ICC's operations because ICC would continue to pay or charge 
a CP an amount, which would serve the same purpose and would be 
calculated identically, for any net Mark-to-Market Margin transferred 
between the parties.\18\
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    \15\ Id.
    \16\ Id.
    \17\ Notice, 83 FR at 30803.
    \18\ Id.
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    The proposed rule change would also clarify in proposed revisions 
to Rule 401(g) that the rate ICC may pay or charge a CP for a price 
alignment amount on any Mark-to-Market Margin or interest on any 
Initial Margin in the form of cash may be negative. This proposed 
revision is intended by ICC to more clearly address the effect negative 
market rate environments could have on how such amounts might be paid 
or charged by ICC to CPs.\19\
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    \19\ Id.
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    The proposed rule change would add and clarify references to 
amounts that ICC will continue to treat as collateral to avoid 
confusion over the proper characterization of Mark-to-Market Margin 
under the ICC Rules. Specifically, the proposed rule change would 
update Rule 401(h) to provide that CPs may substitute, in accordance 
with the ICC Procedures and applicable law, Eligible Margin only for an 
amount of Initial Margin.\20\ CPs would no longer be able to substitute 
Eligible Margin for Mark-to-Market Margin because under the proposed 
rule change, ICC would take outright title to the Mark-to-Market Margin 
and CPs would retain no substitution or other rights to such Mark-to-
Market Margin. The proposed changes to Rule 402, which governs ICC's 
rights with respect to the use of margin, would exclude Mark-to-Market 
Margin from subsections (a) and (b), would remove details relating to 
Mark-to-Market Margin from subsection (b), and would specify subsection 
(c)'s applicability to Initial Margin. Because ICC's rights with 
respect to Mark-to-Market Margin would now be set out in Rule 402(e), 
it would no longer be necessary to refer to Mark-to-Market Margin in 
Rule 402(a) and (b). To avoid uncertainty, the proposed rule change 
would clarify that the requirements set forth in Rule 406(c) regarding 
collateral for Client-Related Positions apply to Initial Margin.\21\
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    \20\ Id.
    \21\ Id.
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    The proposed rule change would similarly add and clarify references 
to amounts that ICC would treat as settled to avoid confusion over the 
proper characterization of Mark-to-Market Margin under the ICC Rules. 
The proposed rule change would add language to Rule 402(e) to describe 
ICC's rights with respect to Mark-to-Market Margin and more clearly 
state that Mark-to-Market Margin payments constitute a settlement. The 
proposed rule change would also update Rule 401(l) to refer to 
settlement finality in relation to Mark-to-Market Margin.\22\ Further, 
the proposed rule change would add new subsection (c) to Rule 404 to 
define Mark-to-Market Margin Balance as a sum equal to the Mark-to-
Market Margin value transferred by the CP to ICC minus the Mark-to-
Market Margin value transferred by ICC to the CP.\23\
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    \22\ Id.
    \23\ Id.
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    Finally, the proposed rule change would make clarifications and 
conforming changes to Chapters 8 and 20 of the ICC Rules. The proposed 
rule change would revise Rule 801(a)(i), which describes how ICC 
calculates a CP's Required Contribution to the General Guaranty Fund, 
to refer to the transfer of Mark-to-Market Margin.\24\ This change 
would characterize Mark-to-Market Margin as settled, rather than 
collateral, by referring to the amount of Mark-to-Market Margin 
transferred to ICC in respect of a defaulting CP's positions. The 
proposed rule change would not change ICC's calculation of a CP's 
Required Contribution, which would continue to take into account the 
expected loss to ICC associated with a CP's default after the 
application of Initial Margin and Mark-to-Market Margin.\25\
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    \24\ Notice, 83 FR at 30803.
    \25\ Id.
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    The proposed rule change would also replace, in the defined term 
MTM in Rule 808, the phrase ``amount of MTM held by any Participant or 
ICE Clear Credit'' with a conforming reference to the new defined term 
Mark-to-Market Margin Balance.\26\ This proposed change would not alter 
the operation of Rule 808, which describes how and when ICC would 
implement Reduced Gains Distributions.
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    \26\ Id.
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    The proposed rule change would replace terminology in Rule 810(e) 
that is commonly used in conjunction with collateral by changing the 
words ``posted'' to ``transferred'' and removing the phrase ``and be 
offset against''. This change would avoid confusion over the proper 
characterization of Mark-to-Market Margin as settlement payments.\27\ 
This proposed change would not alter the operation of Rule 810, which 
describes ICC's termination of clearing operations.
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    \27\ Id.
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    Finally, the proposed rule change would clarify in Rule 20-
605(c)(i)(B), which specifies the resources to be used to cover losses 
with respect to Client-Related Positions, that ICC would use the 
defaulting CP's Client-Related Mark-to-Market Margin, to the extent not 
previously applied to pay Mark-to-Market Margin to other CPs.\28\ 
Because Mark-to-Market Margin would be settled with ICC, ICC would 
obtain outright title to the Mark-to-Market Margin and would be able to 
use the Mark-to-Market Margin for purposes other than collateralizing a 
CP's position, in accordance with ICC's Rules and applicable regulatory 
requirements. The proposed rule change would make this point clear and 
therefore clarify that Mark-to-Market Margin payments constitute 
settlement rather than collateral.
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    \28\ Notice, 83 FR at 30803.

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[[Page 41120]]

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.\29\ For the reasons given below, the Commission finds 
that the proposal is consistent with Section 17A(b)(3)(F) of the Act 
\30\ and Rules 17Ad-22(b)(2) and 17Ad-22(d)(1) thereunder.\31\
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    \29\ 15 U.S.C. 78s(b)(2)(C).
    \30\ 15 U.S.C. 78q-1(b)(3)(F).
    \31\ 17 CFR 240.17Ad-22(b)(2), (d)(1).
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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 ICC be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, as well 
as to assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\32\
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    \32\ 15 U.S.C. 78q-1(b)(3)(F).
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    As described above, the proposed rule change would revise Chapters 
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral. 
To facilitate this characterization, the proposed rule change would 
introduce a new definition, Mark-to-Market Margin Balance, and a new 
concept, price alignment amount. Moreover, the proposed rule change 
would update the terminology used in certain rules, and the application 
of certain rules to Mark-to-Market Margin, in light of the 
characterization of Mark-to-Market Margin payments as settlement 
payments rather than collateral. The proposed rule change would not 
change the manner in which Mark-to-Market Margin is calculated, or 
other current ICC operational practices.
    The Commission believes that by clarifying the treatment of Mark-
to-Market Margin payments, the proposed rule change would help ensure 
that Mark-to-Market margin is treated as settled payments rather than 
collateral, consistent with ICC's intention. In doing so, the 
Commission further believes the proposed rule change would clarify that 
ICC has all rights and outright title to such Mark-to-Market Margin. 
The Commission believes the proposed rule change would clarify ICC's 
interest in and rights to Mark-to-Market Margin, thereby supporting 
ICC's ability to use Mark-to-Market Margin to cover credit and market 
losses.
    The Commission further believes that in this regard the proposed 
rule change would remove potential confusion regarding the treatment of 
Mark-to-Market Margin, thereby helping to improve the operation and 
effectiveness of ICC's margin system. Given that an effective margin 
system is necessary to manage ICC's credit exposures to its CPs and the 
risks associated with clearing security based swap-related portfolios, 
the Commission believes that the proposed rule change would help 
improve ICC's ability to avoid the losses that could result from the 
mismanagement of credit exposures and the risks associated with 
clearing security based swap-related portfolios. Because such losses 
could disrupt ICC's ability to promptly and accurately clear security 
based swap transactions, the Commission believes that the proposed rule 
change, by improving the operation and effectiveness of ICC's margin 
system, would thereby help promote the prompt and accurate clearance 
and settlement of securities transactions.
    Similarly, given that mismanagement of ICC's credit exposures to 
its CPs and the risks associated with clearing security based swap-
related portfolios could cause ICC to realize losses on such portfolios 
and threaten ICC's ability to operate, thereby threatening access to 
securities and funds in ICC's control, the Commission believes that the 
proposed rule change would help assure the safeguarding of securities 
and funds which are in the custody or control of the ICC or for which 
it is responsible. Finally, for both of these reasons, the Commission 
believes the Framework would, in general, protect investors and the 
public interest.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions, assure the safeguarding of securities and funds in ICC's 
custody and control, and, in general, protect investors and the public 
interest, consistent with the Section 17A(b)(3)(F) of the Act.\33\
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    \33\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(b)(2)

    Rule 17Ad-22(b)(2) requires that ICC 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 and use risk-based models and parameters to 
set margin requirements and review such margin requirements and the 
related risk-based models and parameters at least monthly.\34\
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    \34\ 17 CFR 240.17Ad-22(b)(2).
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    As described above, the proposed rule change would revise Chapters 
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral. 
Specifically, the Proposed Rule Change would revise Rule 401 to 
reference Mark-to-Market Margin Balance, a new term that is defined in 
Rule 404 to mean the aggregate amount of Mark-to-Market Margin paid or 
received. The new definition would be used in Rule 401(a), regarding 
House Margin, which would be revised to state that ICC calculates a net 
amount of Mark-to-Market Margin by subtracting a CP's Mark-to-Market 
Margin Balance from a CP's Mark-to-Market Margin Requirement. Moreover, 
under the proposed revised Rule 401(g), ICC would pay or charge a CP 
price alignment, which would be economically equivalent to interest, on 
any Mark-to-Market Margin and interest on any cash Initial Margin at a 
rate that may be negative. The proposed rule change would not modify 
the current calculation of Mark-to-Market Margin, or other operational 
practices, but, instead, would replace certain specifics relating to 
ICC's Mark-to-Market Margin calculation with the new defined term Mark-
to-Market Margin Balance.
    The Commission believes that by clarifying the treatment of Mark-
to-Market Margin payments, the proposed rule change would help ensure 
that Mark-to-Market margin is treated as settled payments rather than 
collateral. The Commission believes that in this regard the proposed 
rule change would help ensure that the margin system is operating 
consistently for all CPs and in a manner that is consistent with ICC's 
view on the treatment of Mark-to-Market Margin by confirming that all 
Mark-to-Market Margin would be treated as settlement payments. In doing 
so, the Commission further believes the proposed rule change would 
clarify that ICC has all rights and outright title to such Mark-to-
Market Margin. The Commission believes the proposed rule change would 
thereby clarify ICC's interest in and rights to Mark-to-Market Margin, 
thereby supporting ICC's ability to use Mark-to-Market to cover credit 
and market losses. The Commission therefore believes the proposed rule 
change would help ICC maintain and

[[Page 41121]]

enforce written policies and procedures reasonably designed to use 
margin requirements to limit its credit exposures to participants under 
normal market conditions.
    Moreover, as noted above, the proposed rule change resulted from a 
request by CPs for ICC to confirm it treats Mark-to-Market Margin as 
settlement payments. CPs therefore may hesitate to post Mark-to-Market 
Margin if ICC does not consistently treat such margin as settlement 
payments. Thus, the Commission believes the proposed rule change would 
help ICC enforce written policies and procedures reasonably designed to 
use margin requirements to limit its credit exposures to participants 
under normal market conditions.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(b)(2).\35\
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    \35\ 17 CFR 240.17Ad-22(b)(2).
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C. Consistency With Rule 17Ad-22(d)(1)

    Rule 17Ad-22(d)(1) requires that ICC establish, implement, maintain 
and enforce written policies and procedures reasonably designed to 
provide for a well-founded, transparent, and enforceable legal 
framework for each aspect of its activities in all relevant 
jurisdictions.\36\
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    \36\ 17 CFR 240.17Ad-22(d)(1).
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    As discussed above, the proposed rule change would revise Chapters 
4, 8, and 20 of the ICC Rules to more clearly characterize Mark-to-
Market Margin payments as settlement payments rather than collateral. 
The proposed rule change would also revise terminology to further 
clarify the legal characterization that payments of Mark-to-Market 
Margin represent settlement rather than collateral payments. These 
clarifying changes are the result of ICC's analysis of the legal 
characterization of Mark-to-Market Margin payments, at the request of 
its CPs.
    Thus, ICC intends to treat Mark-to-Market Margin payments as 
settled rather than collateral, and the Commission believes that the 
proposed rule change's clarifications and additions would help ensure 
that ICC's margin system operates consistently with this intention. The 
Commission further believes that the proposed rule change would help 
ensure that the margin system is operating consistently for all CPs by 
confirming that all Mark-to-Market Margin would be treated as 
settlement payments. In ensuring the consistent treatment of Mark-to-
Market Margin, the Commission believes that the proposed rule change 
would help ensure that the policies and procedures underlying ICC's 
margin system provide a well-founded, transparent, and enforceable 
legal framework.
    Therefore, for the above reasons the Commission finds that the 
proposed rule change is consistent with Rule 17Ad-22(d)(1).\37\
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    \37\ 17 CFR 240.17Ad-22(d)(1).
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act, and in 
particular, with the requirements of Section 17A(b)(3)(F) of the Act 
\38\ and Rules 17Ad-22(b)(2) and 17Ad-22(d)(1) thereunder.\39\
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    \38\ 15 U.S.C. 78q-1(b)(3)(F).
    \39\ 17 CFR 240.17Ad-22(b)(2), (d)(1).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\40\ that the proposed rule change (SR-ICC-2018-006) be, and hereby is, 
approved.\41\
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    \40\ 15 U.S.C. 78s(b)(2).
    \41\ 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).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-17741 Filed 8-16-18; 8:45 am]
 BILLING CODE 8011-01-P