[Federal Register Volume 83, Number 243 (Wednesday, December 19, 2018)]
[Notices]
[Pages 65195-65197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-27405]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84810; File No. SR-ICEEU-2018-021]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change Relating
to the F&O Stress Testing Policy \1\
December 13, 2018.
---------------------------------------------------------------------------
\1\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
---------------------------------------------------------------------------
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is hereby given that
on December 6, 2018, ICE Clear Europe Limited (``ICE Clear Europe'' or
``The Clearing House'') filed with the Securities and Exchange
Commission (``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by ICE Clear
Europe. ICE Clear Europe filed the proposed rule change pursuant to
Section 19(b)(3)(A) of the Act,\4\ and Rule 19b-4(f)(4)(ii)
thereunder,\5\ so that the proposal was immediately effective upon
filing with the Commission. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(4)(ii).
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
ICE Clear Europe proposes to update and formalize its Futures and
Options Stress Testing Policy (the ``F&O Stress Testing Policy'').
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 these 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 update and formalize its F&O Stress
Testing Policy. The Clearing Risk Department is the owner of the F&O
Stress Testing Policy and is responsible for ensuring that it remains
up-to-date and that it is reviewed in accordance with policy
requirements. The policy is to be reviewed annually by the F&O Risk
Committee and the Board Risk Committee.
The objective of the F&O Stress Testing Policy is to ensure the F&O
Guaranty Fund is adequate to cover at least the two largest Clearing
Member uncollateralised losses (i.e., losses over Clearing Member
account's requirements). The F&O Guaranty Fund protects the Clearing
House against losses over and above margin that may be experienced
during periods of extreme market volatility. Stress tests are used to
test the adequacy of the F&O Guaranty Fund size.
The F&O Stress Testing Policy describes ICE Clear Europe's stress
test principles, including frequency and reporting. The stress test
results of Clearing Member portfolios are calculated daily and reported
internally on a daily basis. The F&O Risk Committee reviews historical
daily stress test results on a bi-monthly basis. The Clearing House
will review internally the stress scenarios on a regular basis and
inform the F&O Risk Committee where additions or changes to the
scenarios employed have a material impact on the stress results. The
F&O Stress Testing Policy also provides an overview of ICE Clear
Europe's stress loss calculation and stress shock calibration
methodologies.
The F&O Stress Testing Policy describes and defines the types of
F&O stress testing scenarios and their application. The Clearing House
has two types of scenarios used to size the F&O Guaranty Fund:
Historical and theoretical scenarios. The historical stress scenarios
aim to select the most significant historic events in terms of extreme
price movement of the relevant underlyings, and then replicate as
accurately as possible the historic event that has been selected across
the full range of cleared products and apply these stress tests to
contemporary positions. Theoretical scenarios are constructed using
plausible combinations of extreme price moves that are not contained
within the set of historical scenarios, including group or sector
specific stresses. The development of these hypothetical and extreme
scenarios is tailored to the specific risks of the products and markets
served. They are designed to measure the response of Clearing Members'
portfolios to extreme conditions, and to assess the sufficiency of the
available Guaranty Fund. Additionally, for other theoretical scenarios,
ICE Clear Europe constructs theoretical scenarios, which are
constructed of changes to macroeconomic events that are considered
plausible given qualitative analysis of current market and geopolitical
conditions. These scenarios are labelled ``hypothetical''.
The policy also describes ICE Clear Europe's reverse stress testing
practices, which act as a tool to supplement existing stress analysis.
Such scenarios follow the similar frequency and reporting as the
standard stress test scenarios. Rather than sizing the F&O Guaranty
Fund, these scenarios examine the magnitude of the stress required to
exhaust the F&O Guaranty Fund size. Both historical reverse stress
tests and theoretical reverse stress tests are performed. Reverse
stress test scenarios results are reviewed and presented monthly to the
F&O Risk Committee.
The F&O Stress Testing Policy describes how ICE Clear Europe
aggregates stress test results. The uncollateralised stress losses
across all scenarios per Clearing Member and sub-account \6\ are
calculated. The worst case result for each Clearing Member, by sub-
account including segregated sponsored principal accounts, is then
compared with the margin account's requirements in respect of the
Clearing Member. Where the stress testing result is greater than the
margin account's requirements, by sub-account, this modelled loss above
requirement or shortfall is recorded as an uncollateralised stress
testing loss. In order to derive the two largest uncollateralised
losses, individual uncollateralised stress loss at each Clearing Member
account is aggregated into the financial institution group.
---------------------------------------------------------------------------
\6\ Sub-account refers to the definition of Margin Account as
per the Rules.
---------------------------------------------------------------------------
The F&O Stress Testing Policy also describes how stress test
results are reviewed and escalated. As noted above, daily stress
testing results must be
[[Page 65196]]
reviewed daily by Senior Clearing Risk Department staff. A bi-monthly
summary of any significant events in the stress testing will be
presented to the F&O Risk Committee. Further, trigger levels will be
set to flag certain events, e.g. when a Clearing Member's stressed
losses exceed a predetermined percentage of its Original Margin
requirement (but the change is not affecting the Guaranty Fund). In the
event of a trigger of such event, Senior Clearing Risk Department staff
will determine what action to follow, dependent on the nature of the
event and Clearing Member to which it applies. The F&O Stress Testing
Policy contains a non-exhaustive list of available actions.
The F&O Stress Testing Policy also includes reference to the Board
risk appetite, and lists the escalation and notification protocols for
each risk appetite metric. Each risk appetite metric is calculated as
per its predetermined frequency, has a defined threshold in accordance
with the latest calibration process, and is routinely reported to the
Board and its committees as part of the Risk Appetite Metric Dashboard.
(b) Statutory Basis
ICE Clear Europe believes that the proposed rule change is
consistent with the requirements of Section 17A of the Act \7\ and the
regulations thereunder applicable to it, including the standards under
Rule 17Ad-22.\8\ Section 17A(b)(3)(F) of the Act \9\ 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 or for which it is
responsible, and the protection of investors and the public interest.
The F&O Stress Testing Policy sets forth the methodology by which ICE
Clear Europe ensures that the Guaranty Fund is adequate to cover at
least the two largest Clearing Member uncollateralised losses (i.e.
losses over Clearing Member account's requirements), in order to
identify any potential deficiencies. Such testing ensures that ICE
Clear Europe maintains the appropriate level of risk management
resources to cover losses in the case of a default. As such, the
proposed changes enhance ICE Clear Europe's ability to manage risk, and
therefore enhance ICE Clear Europe's ability to promote the prompt and
accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions and contribute to
the safeguarding of securities and funds in ICE Clear Europe's custody
or control, within the meaning of Section 17A(b)(3)(F) of the Act.\10\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78q-1.
\8\ 17 CFR 240.17Ad-22.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ Id.
---------------------------------------------------------------------------
In addition, the proposed rule change is consistent with the
relevant requirements of Rule 17Ad-22,\11\ and in particular Rule 17Ad-
22(e)(4).\12\ Rule 17Ad-22(e)(4)(ii) \13\ requires, in relevant part,
that a covered clearing agency establish, implement, maintain and
enforce written policies and procedures reasonably designed to
effectively identify, measure, monitor, and manage its credit exposures
to participants and those arising from its payment, clearing, and
settlement processes, including by, for covered clearing agencies that
are clearing agencies involved in activities with a more complex risk
profile, maintaining additional financial resources at the minimum to
enable it to cover a wide range of foreseeable stress scenarios that
include, but are not limited to, the default of the two participant
families that would potentially cause the largest aggregate credit
exposure for the covered clearing agency in extreme but plausible
market conditions. The F&O Stress Testing Policy contains stress
testing practices designed to test the sufficiency of ICE Clear
Europe's F&O Guaranty Fund, and 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, in accordance with Rule
17Ad-22(e)(4)(ii).\14\
---------------------------------------------------------------------------
\11\ 17 CFR 240.17Ad-22.
\12\ 17 CFR 240.17Ad-22(e)(4).
\13\ 17 CFR 240.17Ad-22(e)(4)(ii).
\14\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(4)(vi)(A) \15\ requires, in relevant part, that a
covered clearing agency establish, implement, maintain, and enforce
written policies and procedures reasonably designed to test the
sufficiency of its total financial resources available to meet the
minimum financial resource requirements under Rule 17Ad-22(e)(4)(i)
through (iii) \16\ by conducting stress testing of its total financial
resources once each day using standard predetermined parameters and
assumptions. The F&O Stress Testing Policy describes and defines the
types of F&O stress testing scenarios and their application. ICE Clear
Europe uses the results of the stress testing scenarios to determine
the sufficiency of its financial resources on a daily basis. Thus, the
proposed rule change is consistent with the requirement of Rule 17Ad-
22(e)(4)(vi)(A).\17\
---------------------------------------------------------------------------
\15\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
\16\ 17 CFR 240.17Ad-22(e)(4)(i)-(iii).
\17\ 17 CFR 240.17Ad-22(e)(4)(vi)(A).
---------------------------------------------------------------------------
Rules 17Ad-22(e)(4)(vi)(B) through (D) \18\ require, in relevant
part, that a covered clearing agency establish, implement, maintain and
enforce written policies and procedures reasonably designed to: (i)
Conduct a comprehensive analysis on at least a monthly basis of the
existing stress testing scenarios, models, and underlying parameters
and assumptions, and consider modifications to ensure they are
appropriate for determining the covered clearing agency's required
level of default protection in light of current and evolving market
conditions; (ii) conduct a comprehensive analysis of stress testing
scenarios, models, and underlying parameters and assumptions more
frequently than monthly when the products cleared or markets served
display high volatility or become less liquid, or when the size or
concentration of positions held by the covered clearing agency's
participants increases significantly; and (iii) report the results of
the analyses described above to appropriate decision makers at the
covered clearing agency, including but not limited to, its risk
management committee or board of directors.
---------------------------------------------------------------------------
\18\ 17 CFR 240.17Ad-22(e)(4)(vi)(B)-(D).
---------------------------------------------------------------------------
Specifically, the F&O Stress Testing Policy contains certain
requirements regarding routine review of the policy, including a
requirement that the policy be kept up-to-date and annual review by ICE
Clear Europe's F&O Risk Committee and the Board Risk Committee. The F&O
Stress Testing Policy also includes a notification and escalation
process, which could, depending on the extent of the breach of pre-
established thresholds could require a particular response and review
of the response by the Executive Risk Committee or the Board Risk
Committee. Further, the F&O Stress Testing Policy describes how stress
test results are reviewed and escalated. Daily stress testing results
must be reviewed daily by Senior Clearing Risk Department staff, and
stress testing results are reported to the F&O Risk Committee. The F&O
Stress Testing Policy also includes reference to Board escalation and
notification protocols, based on pre-defined risk appetite metrics. As
described above, the F&O
[[Page 65197]]
Stress Testing Policy sets forth ICE Clear Europe's processes for
review of the policy and stress testing results, and oversight by ICE
Clear Europe's Board and certain of its committees. As such, the
proposed rule change is consistent with the requirement of Rule 17Ad-
22(e)(4)(vi)(B) through (D).\19\
---------------------------------------------------------------------------
\19\ Id.
---------------------------------------------------------------------------
Rule 17Ad-22(e)(2) \20\ requires, in relevant part, that a covered
clearing agency establish, implement, maintain and enforce written
policies and procedures reasonably designed to provide for governance
arrangements that are clear and transparent and that specify clear and
direct lines of responsibility. As detailed above, the F&O Stress
Testing Policy sets forth the governance process for changes to the
policy, as well as details the oversight by ICE Clear Europe's Board
and certain of its committees of the stress testing results. As such,
ICE Clear Europe believes the changes are reasonably designed to meet
the requirements of 17Ad-22(e)(2).\21\
---------------------------------------------------------------------------
\20\ 17 CFR 240.17Ad-22(e)(2).
\21\ Id.
---------------------------------------------------------------------------
(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 purposes of the Act. The F&O Stress
Testing Policy applies uniformly across all F&O Clearing Members. ICE
Clear Europe does not believe that the formalization of the F&O Stress
Testing Policy will otherwise impact competition among Clearing Members
or other market participants, or affect the ability of market
participants to access clearing generally. 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 and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act and paragraph (f) of Rule 19b-4 thereunder. At
any time within 60 days of the filing of the proposed rule change, the
Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act.
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-2018-021 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-2018-021. 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 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 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.
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-2018-021 and should be
submitted on or before January 9, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
---------------------------------------------------------------------------
\22\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2018-27405 Filed 12-18-18; 8:45 am]
BILLING CODE 8011-01-P