[Federal Register Volume 84, Number 56 (Friday, March 22, 2019)]
[Notices]
[Pages 10869-10871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-05465]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85350; File No. SR-ICEEU-2019-006]


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 CDS Risk Management Model 
Description Document

March 18, 2019.
    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 March 13, 2019, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change 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 to make certain amendments to its CDS 
Risk Model Description document to incorporate risk model enhancements 
related to the single name credit default swap (``CDS'') liquidity 
charge methodology.\3\
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    \3\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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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
    The ICE Clear Europe CDS risk model includes explicit provision to 
account for the additional liquidation cost due to the exposure to Bid/
Offer Width (``BOW'') as, in the event of Clearing Member default, the 
Clearing House might incur in additional costs to unwind the positions. 
Specifically, a bid/offer risk requirement, named liquidity charge, is 
introduced. Such liquidity charges are computed separately for single 
names and indices.
    ICE Clear Europe proposes a revised approach to computing single 
name CDS liquidity charges. Specifically, ICE Clear Europe proposes to 
introduce minimum instrument liquidity requirements independent of 
instrument maturities. ICE Clear Europe's current spread-based 
liquidity charge approach features instrument liquidity requirements 
that decay with time to maturity for fixed credit spread levels. The 
proposed approach introduces minimum liquidity requirements for 
individual instruments, independent of time to maturity for the 
considered instruments, and thus establishes minimum liquidity charges 
that do not decay over time as contract maturity is approached. The 
proposed calculation for single name CDS liquidity charges at the 
instrument level incorporates a price-based bid-offer width floor 
component to provide stability and anti-procyclicality requirements, as 
well as a dynamic spread-based BOW component to reflect the additional 
risk associated with distressed market conditions. The values of such 
price-based BOW and spread-based BOW are fixed factors, which are 
subject to at least monthly reviews and updates by ICE Clear Europe 
Risk Management Department with consultation with the Risk Working 
Group.
    ICE Clear Europe also proposes enhancements to the liquidity charge 
calculation at the single name level. The current liquidity charge 
approach at the single name level accounts for the liquidation cost 
across the curve. All positions are aggregated and priced at each 
maturity interval separately as a synthetic forward CDS instrument. 
This current approach introduces potential sub-additivity at the single 
name level, as it may result in a higher liquidity charge than the sum 
of the single name instrument requirements.
    Under the proposed calculation, liquidity charges at single name 
level will be computed by first calculating the liquidity requirements 
for each individual instrument position in the portfolio, and then 
summing all instrument liquidity requirements for positions with the 
same directionality, i.e. bought or sold protection. The liquidity 
charge requirements at the single name level will be the greatest 
liquidity requirement associated with either the sum of all bought 
protection position liquidity requirements, or the sum of all sold 
protection position liquidity requirements. Under this proposed 
approach, the portfolios' liquidity charge cannot exceed the sum of the 
individual instrument's requirements. There are no changes to the 
liquidity charge calculation at the portfolio level.
    ICE Clear Europe expects these enhancements will ensure more stable 
liquidity requirements for instruments across the curve. Further, the 
enhancements simplify ICE Clear Europe's liquidity charge methodology, 
which promotes ease of understanding. As stated above, the current 
single name level liquidity requirements are based on forward CDS 
spread levels and are, in general, more difficult to calculate as 
forward spread levels are not observable across the term structure 
(``curve''). ICE Clear Europe, as part of its end-of-day price 
discovery process, provides end-of-day pricing data for instruments in 
which clients have open positions, which will, under the proposed 
approach, allow for easier replication for clients who wish to estimate 
liquidity charges for hypothetical and current positions.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \4\ and the 
regulations thereunder applicable to it, including the standards under 
Rule 17Ad-22.\5\ Section

[[Page 10870]]

17A(b)(3)(F) of the Act \6\ 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 proposed 
changes enhance ICE Clear Europe's risk methodology by better capturing 
the proper liquidation cost for portfolios. The changes are expected to 
promote the stability and conservative bias of margin requirements, 
which would enhance the financial resources available to ICE Clear 
Europe and ensure 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 facilitate its ability to promptly and accurately 
clear and settle its cleared CDS contracts 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.\7\
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    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ Id.
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    In addition, the proposed revisions are consistent with the 
relevant requirements of Rule 17Ad-22.\8\ Rule 17Ad-22(b)(2) \9\ 
requires ICE Clear Europe 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. The proposed changes will improve ICE Clear Europe's 
ability to calculate margin requirements and establish margin 
requirements commensurate with the risk and characteristics presented 
by each portfolio, thereby improving ICE Clear Europe's ability to 
limit its credit exposures to participants under normal market 
conditions, consistent with the requirements of Rule 17Ad-22(b)(2).\10\
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    \8\ 17 CFR 240.17Ad-22.
    \9\ 17 CFR 240.17Ad-22(b)(2).
    \10\ Id.
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    Rule 17Ad-22(b)(3) \11\ requires ICE Clear Europe to establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to maintain sufficient financial resources to 
withstand, at a minimum, a default by the two participant families to 
which it has the largest exposures in extreme but plausible market 
conditions. Rule 17Ad-22(e)(4) \12\ requires a covered clearing, in 
relevant part, to effectively identify, measure, monitor, and manage 
its credit exposures to participants and those arising from its 
payment, clearing, and settlement processes, by maintaining sufficient 
financial resources to cover its credit exposure to each participant 
fully with a high degree of confidence. The changes to the single name 
liquidity charge will enhance the financial resources available to ICE 
Clear Europe by enhancing its margin computation such that ICE Clear 
Europe is better able to capture portfolio risk and generate more 
stable and conservative margin requirements. As such, ICE Clear Europe 
will continue to ensure that it maintains sufficient financial 
resources to cover its credit exposure to each participant fully with a 
high degree of confidence and to withstand, at a minimum, a default by 
the two CP families to which it has the largest exposures in extreme 
but plausible market conditions, consistent with the requirements of 
Rule 17Ad- 22(b)(3) \13\ and (e)(4).\14\
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    \11\ 17 CFR 240.17Ad-22(b)(3).
    \12\ 17 CFR 240.17Ad-22(e)(4).
    \13\ 17 CFR 240.17Ad-22(b)(3).
    \14\ 17 CFR 240.17Ad-22(e)(4).
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    Rule 17Ad-22(e)(6)(i) \15\ requires a covered clearing agency that 
provides central counterparty services to, in relevant part, cover its 
credit exposures to its participants by established a risk-based margin 
system that, at a minimum, considers and produces margin levels 
commensurate with the risks and particular attributes of each relevant 
product, portfolio, and market. Further, Rule 17Ad-22(e)(6)(v) \16\ 
requires a covered clearing agency that provides central counterparty 
services to, in relevant part, to cover its credit exposures to its 
participants by established a risk-based margin system that, at a 
minimum uses an appropriate method for measuring credit exposure that 
accounts for relevant product risk factors and portfolio effects across 
products. As previously noted the changes to the single name CDS 
liquidity charge calculation are designed to better capture the proper 
liquidation cost for portfolios, which allows ICE Clear Europe to 
appropriately capture the overall risk of portfolios and ensure that 
ICE Clear Europe establishes margin requirements that are commensurate 
with the risks and characteristics of each portfolio, consistent with 
Rule 17Ad-22(e)(6)(i) and (v).\17\
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    \15\ 17 CFR 240.17Ad-22(e)(6)(i).
    \16\ 17 CFR 240.17Ad-22(e)(6)(v).
    \17\ 17 CFR 240.17Ad-22(e)(6)(i), (v).
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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 purposes of the Act. The revised 
approach may result in increased single name liquidity charge 
requirements for CDS Clearing Members, and so may increase the cost of 
clearing for those Clearing Members. However, ICE Clear Europe believes 
that any such additional cost is appropriate to take into account the 
risk posed to the Clearing House by such Clearing Members, consistent 
with the provisions of the Act and Commission regulations relating to 
financial resource and margin requirements and methodologies as 
discussed above. The risk model enhancements related to the single name 
CDS liquidity charge methodology apply uniformly to all CDS Clearing 
Members, and such Clearing Members will be able to manage their 
positions to limit potential single name liquidity charges if they so 
choose. ICE Clear Europe does not believe that the revised methodology 
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 
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 such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 10871]]

    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-2019-006 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-2019-006. 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-2019-006 and should be 
submitted on or before April 12, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-05465 Filed 3-21-19; 8:45 am]
 BILLING CODE 8011-01-P