[Federal Register Volume 83, Number 176 (Tuesday, September 11, 2018)]
[Notices]
[Pages 46005-46008]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-19640]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84033; File No. SR-ICEEU-2018-009]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change Relating to Amendments to the ICE Clear
Europe CDS End-of-Day Price Discovery Policy (``Price Discovery
Policy'')
September 5, 2018.
I. Introduction
On July 11, 2018, 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-2018-009) to revise ICE Clear Europe's CDS End-of-Day Price
Discovery Policy (``Price Discovery Policy'') related to the bid-offer
width (``BOW'') methodology for pricing single-name credit default swap
(``CDS'') instruments.\3\ The proposed rule change was published for
comment in the Federal Register on July 24, 2018.\4\ 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\ The Price Discovery Policy uses the term ``instrument'' to
refer to the complete set of contractual terms that affect the value
of a CDS contract. For single-name CDS contracts, these terms
include the reference entity, currency, debt tier, document clause,
coupon, and scheduled termination date.
\4\ Securities Exchange Act Release No. 34-83665 (July 18,
2018), 83 FR 35048 (July 24, 2018) (SR-ICEEU-2018-009) (``Notice'').
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II. Description of the Proposed Rule Change
Currently, ICE Clear Europe uses end-of-day (``EOD'') price levels
for risk management purposes.\5\ Each business day, ICE Clear Europe
determines EOD prices in accordance with its Price Discovery Policy.\6\
Specifically, ICE
[[Page 46006]]
Clear Europe uses BOWs to determine these EOD price levels.\7\ The BOW
is intended to estimate the bid-offer width for the market available
for each clearing-eligible instrument at a specified time on each
business day.\8\ The BOWs are then used in ICE Clear Europe's price
discovery process as inputs in the determination of EOD levels and
other risk management matters.\9\
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\5\ Capitalized terms used herein but not otherwise defined have
the meaning set forth in the ICE Clear Europe Clearing Rules, which
is available at https://www.theice.com/publicdocs/clear_europe/rulebooks/rules/Clearing_Rules.pdf, or in the Price Discovery
Policy.
\6\ Notice, 83 FR at 35049.
\7\ Id.
\8\ Id.
\9\ Id.
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ICE Clear Europe derives BOWs for single-name CDS instruments based
on observed intraday spread-quotes for the most actively traded
instrument (``MATI'') across the term structure and cleared coupons
(otherwise known as ``consensus BOW'').\10\ ICE Clear Europe calculates
the consensus BOW for each relevant CDS instrument based on specified
averages of the quotes provided by CDS Clearing Members. ICE Clear
Europe adjusts consensus BOWs by a ``scrape factor'' to reflect
differences between the BOWs provided by clearing members in intraday
quotes and BOWs achieved in the market.\11\ ICE Clear Europe also
applies various other adjustments to the consensus BOWs to reflect
differences in instrument liquidity at longer and shorter maturities,
and at higher and lower coupons.\12\ Moreover, ICE Clear Europe
currently uses the ISDA CDS Standard Model to convert price submissions
for single-name CDS instruments from the form of a yearly premium of a
CDS in basis points, per amount insured (``spread'') to price
submissions in the form of an upfront payment as a percentage of a
fixed premium (``price terms'').
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\10\ Id.
\11\ Id.
\12\ Notice, 83 FR at 35049.
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The proposed rule change would enhance the methodology ICE Clear
Europe uses to determine BOWs for single-name instruments by amending
the Price Discovery Policy to (1) compute a consensus BOW for each
benchmark single-name instrument; (2) determine the final EOD BOW as
the greater of an instrument's final systematic BOW and a dynamic BOW;
(3) eliminate the use of the ISDA CDS Standard Model from the
computation of BOWs for single-name instruments; and (4) update
associated governance provisions.
First, the proposed rule change would compute a consensus BOW for
each benchmark single-name CDS instrument. Specifically, Ice Clear
Europe would compute a consensus BOW for each benchmark instrument, as
compared to how Ice Clear Europe currently only computes a consensus
BOW for the most actively traded instrument.\13\ Likewise, rather than
deriving consensus BOWs only from intraday quotes, ICE Clear Europe
would compute consensus BOWs as a price-based floor plus a fraction of
the single-name CDS instrument's currently observed level (based on the
average of price-space levels submitted by CDS Clearing Members as part
of the EOD price discovery process).\14\ ICE Clear Europe would
continue to apply various factors to the most actively traded
instrument's consensus BOW to reflect differences in liquidity at
longer and shorter maturities and at higher and lower coupons.\15\ The
proposed rule change would also extend the application of price-based
BOW floors from the 0/3-month, 6-month and 1-year benchmark tenors to
the entire set of benchmark tenors.\16\
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\13\ Id.
\14\ Notice, 83 FR at 35049.
\15\ Id.
\16\ Id.
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ICE Clear Europe would then apply scaling factors to the consensus
BOWs.\17\ The amended Price Discovery Policy would refer to the BOWs,
after application of scaling factors, as ``systematic BOWs''. \18\ The
scaling factors would reflect differences in instrument liquidity at
longer and shorter maturities, and at higher and lower coupons.\19\ To
determine systematic BOWs for each benchmark instrument at the most
actively traded coupon (``MATC''), ICE Clear Europe would apply scaling
factors based upon the remaining time left in the CDS (``tenor
scaling'') to the corresponding consensus BOWs.\20\ The tenor scaling
factors would reflect the BOW of each tenor relative to the BOW of the
most actively traded tenor.\21\ ICE Clear Europe would determine
systematic BOWs for each benchmark instrument at other coupons by
applying a combination of tenor scaling factors and coupon scaling
factors to the corresponding consensus BOWs.\22\ Coupon scaling factors
would adjust the BOW to reflect decreased market activity at coupons
larger or smaller than the MATC, and accordingly would produce a wider
BOW for such coupons as compared to the MATC.\23\
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\17\ Id.
\18\ Id.
\19\ Id.
\20\ Id.
\21\ Id.
\22\ Notice, 83 FR at 35049.
\23\ Id.
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ICE Clear Europe would also apply a variability factor, which would
be an additional scaling factor to widen the BOW to account for
volatile or fast-moving market conditions.\24\ The variability factor
would be designed to reflect observed variability levels in intraday
quotes.\25\ ICE Clear Europe would determine the amount of the
variability factor on the basis of a market proxy variability band
(numbering 0-3).\26\ ICE Clear Europe would assign a single-name
instrument to a market proxy variability band based on the instrument's
market-proxy group, as determined by ICE Clear Europe. ICE Clear Europe
may apply a similar variability factor under the current approach on a
discretionary basis.\27\ After applying this variability factor, ICE
Clear Europe would arrive at the final systematic EOD BOW based on the
applicable variability band.\28\
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\24\ Id.
\25\ Id.
\26\ Id.
\27\ Id.
\28\ Id.
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Second, ICE Clear Europe would determine the final EOD BOW as the
greater of a single-name CDS instrument's final systematic EOD BOW, and
a BOW established for the instrument based on the dispersion of price-
based EOD submissions by CDS Clearing Members for the given instrument
(such BOW the ``dynamic BOW'').\29\
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\29\ Notice, 83 FR at 35049.
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Third, the proposed rule change would eliminate the use of the ISDA
CDS Standard Model from the computation of BOWs for single-name CDS
instruments. As ICE Clear Europe would now accept price submissions for
single-name CDS instruments only in price terms, ICE Clear Europe would
no longer need the ISDA CDS Standard Model to compute single-name
BOWs.\30\ ICE Clear Europe would continue to use the ISDA CDS Standard
Model for certain other purposes in which it may need to convert
between spread and price terms, however, and therefore the proposed
rule change would retain references to the model in the revised Price
Discovery Policy.\31\ Similarly, because ICE Clear Europe would now
accept price submissions for single-name CDS instruments only in price
terms, the proposed rule change would remove the requirement for ICE
Clear Europe to provide single-name BOWs in spread terms.\32\
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\30\ Id.
\31\ Notice, 83 FR at 35049 n.4.
\32\ Notice, 83 FR at 35049.
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Finally, the proposed rule change would revise the governance
provisions
[[Page 46007]]
of the Price Discovery Policy. Under the revisions, and consistent with
the amendments to the methodology described above, ICE Clear Europe's
clearing risk department, in consultation with the trading advisory
committee, would establish the parameters used in the EOD price
discovery process.\33\ ICE Clear Europe's clearing risk department
would also be responsible for determining the price-based floors and
scaling factors used to establish BOWs.\34\
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\33\ Id.
\34\ Notice, 83 FR at 35049.
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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.\35\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act,\36\ and Rules 17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv)
thereunder.\37\
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\35\ 15 U.S.C. 78s(b)(2)(C).
\36\ 15 U.S.C. 78q-1(b)(3)(F).
\37\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv).
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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 ICE Clear Europe 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 ICE Clear Europe or for
which it is responsible, and, in general, to protect investors and the
public interest.\38\
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\38\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, the proposed rule change would enhance ICE
Clear Europe's EOD price discovery process for single-name CDS
instruments by amending the Price Discovery Policy to (1) compute a
consensus BOW for each benchmark single-name instrument; (2) determine
the final EOD BOW as the greater of an instrument's final systematic
BOW and a dynamic BOW; (3) eliminate the use of the ISDA CDS Standard
Model from the computation of BOWs for single-name instruments; and (4)
update associated governance provisions.
Taken as a whole, the Commission believes the proposed rule change
would enhance ICE Clear Europe's ability to determine the EOD BOW for
single-name CDS instruments. The Commission believes the proposed rule
change would permit ICE Clear Europe to determine BOWs more
consistently across single-name instruments on all reference entities,
including those for which only sparse intraday data is available, by
computing a consensus BOW for each benchmark single-name instrument. In
addition, by extending the application of price-based BOW floors to the
entire set of benchmark tenors instead of solely the 0/3 month, 6
month, and 1-year benchmark tenors, the Commission believes that ICE
Clear Europe would be able to more consistently compute the EOD BOW for
a wider range of single-name CDS instruments. Moreover, the Commission
believes that the adoption of a new dynamic BOW would help the BOW to
better reflect current market conditions given that the dynamic BOW
would widen BOWs in response to the observed dispersion of price-space
levels submitted in the EOD price discovery process. Finally, the
Commission believes that updating the associated governance provisions
would help ensure that the EOD price discovery process remains
effective by making clear the responsibilities for establishing the
parameters, price-based floors, and scaling factors used in the EOD
price discovery process.
Consequently, the Commission believes that the proposed rule change
would help improve ICE Clear Europe's EOD pricing process as a whole by
considering additional relevant information and a wider range of
instruments. Based on these improvements, the Commission believes that
the proposed rule change would also help improve the operation and
effectiveness of ICE Clear Europe's margin system because ICE Clear
Europe uses EOD prices to calculate and collect such margin. Given that
an effective margin system is necessary to manage ICE Clear Europe's
credit exposures to its Clearing Members and the risks associated with
clearing security based swap-related portfolios, the Commission
believes that the proposed rule change would help improve ICE Clear
Europe's ability to avoid losses that could result from the
mismanagement of such credit exposures and risks. Because such losses
could disrupt ICE Clear Europe's ability to promptly and accurately
clear security based swap transactions, the Commission believes that
the proposed rule change, by improving the EOD price input to ICE Clear
Europe's margin system and thereby improving the operation and
effectiveness of such margin system, would help promote the prompt and
accurate clearance and settlement of securities transactions.
Similarly, given that mismanagement of ICE Clear Europe's credit
exposures to its Clearing Members and the risks associated with
clearing security based swap-related portfolios could cause ICE Clear
Europe to realize losses on such portfolios and threaten ICE Clear
Europe's ability to operate, thereby threatening access to securities
and funds in ICE Clear Europe'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 ICE Clear
Europe or for which it is responsible. Finally, for both of these
reasons, the Commission believes the proposed rule change is consistent
with protecting 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 ICE
Clear Europe's custody and control, and, in general, protect investors
and the public interest, consistent with the Section 17A(b)(3)(F) of
the Act.\39\
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\39\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)(i)
Rule 17Ad-22(e)(2)(i) requires that ICE Clear Europe establish,
implement, maintain and enforce written policies and procedures
reasonably designed to provide for governance arrangements that are
clear and transparent.\40\
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\40\ 17 CFR 240.17Ad-22(e)(2)(i).
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As discussed above, the proposed rule change would revise ICE Clear
Europe's Price Discovery Policy to update the responsibilities of ICE
Clear Europe's clearing risk department. Under the revised Price
Discovery Policy, the clearing risk department, in consultation with
the trading advisory committee, would establish the parameters used in
the EOD price discovery process, including determining the price-based
floors and scaling factors used to establish BOWs. The Commission
believes that the proposed rule change would thus help ICE Clear Europe
assign responsibility within ICE Clear Europe's existing governance
structure for important aspects of EOD price discovery, such as setting
parameters and scaling factors. The Commission further believes that
[[Page 46008]]
the proposed rule change would help improve the effectiveness of the
EOD price discovery process by specifically requiring the clearing risk
department to consult the trading advisory committee, which would
provide insight into current market dynamics and conditions.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(e)(2)(i).\41\
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\41\ 17 CFR 240.17Ad-22(e)(2)(i).
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C. Consistency With Rule 17Ad-22(e)(6)(ii)
Rule 17Ad-22(e)(6)(ii) requires that ICE Clear Europe establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that marks participant
positions to market and collects margin, including variation margin or
equivalent charges if relevant, at least daily and includes the
authority and operational capacity to make intraday margin calls in
defined circumstances.\42\
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\42\ 17 CFR 240.17Ad-22(e)(6)(ii).
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As discussed above, the proposed rule change would enhance ICE
Clear Europe's EOD price discovery by amending the Price Discovery
Policy to (1) compute a consensus BOW for each benchmark single-name
instrument; (2) determine the final EOD BOW as the greater of an
instrument's final systematic BOW and a dynamic BOW; and (3) eliminate
the use of the ISDA CDS Standard Model from the computation of BOWs for
single-name instruments.
The Commission believes that these changes, taken together, would
help enhance ICE Clear Europe's ability to determine the EOD BOW for
single-name CDS instruments. By eliminating the use of the ISDA CDS
Standard Model from the computation of single-name BOWs, accepting
submissions only in price terms, and computing a consensus BOW for each
benchmark single-name CDS instrument, the Commission believes the
proposed rule change would help ICE Clear Europe to determine BOWs more
consistently across single-name instruments on all reference entities,
including those for which little intraday data is available. In
addition, as noted above, the dynamic BOW would widen BOWs in response
to the observed dispersion of price-space levels submitted in the EOD
price discovery process. Thus, by determining the final EOD BOW as the
greater of an instrument's final systematic BOW and a dynamic BOW, the
Commission believes the proposed rule change would help the BOW to
better reflect current market conditions.
Consequently, the Commission believes that the proposed rule change
would help improve ICE Clear Europe's EOD pricing process by taking
into account additional relevant information and considering a wider
range of instruments in the pricing process. Because ICE Clear Europe
uses EOD prices to mark participant positions to market and establish
and collect margin, including variation margin, the Commission believes
that improvements to the EOD pricing process would also enhance ICE
Clear Europe's covering of credit exposures to its participants and
collection of margin. Moreover, the Commission believes the governance
enhancements described above would help ensure that ICE Clear Europe's
clearing risk department maintains an effective EOD price discovery
process and takes into account current market conditions by consulting
with the trading advisory committee. The Commission therefore believes
that the proposed rule change would help establish and maintain written
policies and procedures reasonably designed to cover ICE Clear Europe's
credit exposures to its participants by establishing a risk-based
margin system that marks participant positions to market and collects
margin, including variation margin.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(e)(6)(ii).\43\
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\43\ 17 CFR 240.17Ad-22(e)(6)(ii).
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D. Consistency With Rule 17Ad-22(e)(6)(iv)
Rule 17Ad-22(e)(6)(iv) requires that ICE Clear Europe establish,
implement, maintain and enforce written policies and procedures
reasonably designed to cover its credit exposures to its participants
by establishing a risk-based margin system that uses reliable sources
of timely price data and uses procedures and sound valuation models for
addressing circumstances in which pricing data are not readily
available or reliable.\44\
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\44\ 17 CFR 240.17Ad-22(e)(6)(iv).
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As discussed above, the proposed rule change would help improve the
pricing data that ICE Clear Europe uses in its margin system.
Specifically, the proposed rule change would, as discussed above,
enhance the computation of BOWs for single-name CDS instruments by
amending the Price Discovery Policy to (1) compute a consensus BOW for
each benchmark single-name instrument; (2) determine the final EOD BOW
as the greater of an instrument's final systematic BOW and a dynamic
BOW; and (3) eliminate the use of the ISDA CDS Standard Model from the
computation of BOWs for single-name instruments. Because ICE Clear
Europe uses BOWs to determine EOD price levels, the Commission believes
that improvements in the collection and calculation of BOWs would
improve the accuracy and reliability of ICE Clear Europe's EOD price
levels. Finally, because ICE Clear Europe uses its EOD price levels to
mark participant positions to market and establish and collect margin,
including variation margin, the Commission believes that the proposed
rule change would help ensure that the ICE Clear Europe's margin system
uses reliable sources of timely price data.
Therefore, for the above reasons the Commission finds that the
proposed rule change is consistent with Rule 17Ad-22(e)(6)(iv).\45\
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\45\ 17 CFR 240.17Ad-22(e)(6)(iv).
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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(b)(3)(F) of the
Act \46\ and Rules 17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv)
thereunder.\47\
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\46\ 15 U.S.C. 78q-1.
\47\ 17 CFR 240.17Ad-22(e)(2)(i), (e)(6)(ii), and (e)(6)(iv).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\48\ that the proposed rule change (SR-ICEEU-2018-009) be, and hereby
is, approved.\49\
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\48\ 15 U.S.C. 78s(b)(2).
\49\ 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.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-19640 Filed 9-10-18; 8:45 am]
BILLING CODE 8011-01-P