[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