[Federal Register Volume 84, Number 64 (Wednesday, April 3, 2019)]
[Notices]
[Pages 13087-13090]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06432]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85439; File No. SR-ICEEU-2019-005]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
To Adoption of a New Futures & Options Capital-to-Margin and Shortfall 
Margin Policy (the ``F&O Margin Shortfall Policy'')

March 28, 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 15, 2019, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule changes 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 \3\ 
and Rule 19b-4(f)(4) \4\ thereunder, such that the proposed rule change 
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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change Notice

    ICE Clear Europe proposes to adopt a new F&O Margin Shortfall 
Policy. These revisions do not involve any changes to the ICE Clear 
Europe Clearing Rules or Procedures.\5\
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    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules (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 such statements.

[[Page 13088]]

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe is proposing to adopt a new F&O Margin Shortfall 
Policy, which would set out certain additional margin requirements for 
F&O Contracts based on a Clearing Member's capital-to-margin ratio and 
certain uncovered stress loss thresholds. The policy is designed to 
reduce the potential market risk that the Clearing House would need to 
manage in the event of a Clearing Member default through limiting the 
size of positions that can be opened and carried by an F&O Clearing 
Member relative to its margin requirement and capital.
Capital to Margin Limits
    Under the F&O Margin Shortfall Policy, ICE Clear Europe would 
determine ratios of each F&O Clearing Member's balance sheet capital 
\6\ to its original margin (``OM'') requirement,\7\ referred to as 
``capital-to-margin'' ratios. For most house and customer accounts, the 
OM requirement would be determined on the basis of the net positions in 
the account (even if margin requirement for that type of account is 
otherwise determined on a gross basis).\8\ ICE Clear Europe believes 
this approach appropriately reflects the risk to the Clearing House in 
the case of F&O Clearing Member default for purposes of the capital-to-
margin ratio requirements. For each F&O Clearing Member, ICE Clear 
Europe would calculate three capital-to-margin ratios: (1) Capital to 
house account OM (based on the total OM requirement for all house 
accounts); (2) capital to customer account OM (based on the total OM 
requirement for all customer accounts); and (3) capital to total OM 
(based on the total OM requirement for all house and customer 
accounts).
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    \6\ Capital for this purpose would be as set out in the Clearing 
Member's financial statements provided to ICE Clear Europe in 
accordance with Rules 205 and 206.
    \7\ For energy contracts carried in a house or affiliate 
account, the OM requirement used for the calculation would include 
the additional Clearing Member EMIR charge applicable to such 
accounts based on a two-day margin period of risk. For customer 
accounts, the OM requirement used for the calculation would exclude 
any additional margin collected under the margin framework.
    \8\ For Sponsored Principal and Individually Segregated Margin-
flow Co-Mingled Accounts, the OM requirement for the Clearing Member 
would be the sum of each of the individual client's net OM 
requirements.
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    Pursuant to the proposed F&O Margin Shortfall Policy, Clearing 
Members would be expected to maintain ratios of at least the following:

 Capital to total OM: (1:3)
 Capital to house account OM: (1:2)
 Capital to customer account OM: (1:3)
    A Clearing Member would be in breach of the capital-to-margin 
limits if either the house or customer account limits were breached, 
even if the total OM limit were not breached.
    Pursuant to the proposed F&O Margin Shortfall Policy, if a Clearing 
Member breached a capital-margin ratio for a 30-day rolling period, it 
would be required to take one of the following actions: (1) Providing 
additional permitted cover (i.e., assets eligible to be provided to 
satisfy margin requirements) \9\ as buffer margin, (2) changing its 
positions to reduce its OM requirement, (3) increasing its capital or 
(4) providing a guarantee from a controlling entity. Additional buffer 
margin would be held for a minimum of one calendar month, and until the 
Clearing Member would no longer be in breach of the relevant limits set 
out in the policy. The policy provides that ICE Clear Europe has 
discretion to consider not taking action, on a case-by-case basis, in 
situations where the Clearing Member could provide detailed reasons as 
to why action would not be necessary. Any such decision would be 
reported to the F&O Product Risk Committee.
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    \9\ The list of permitted cover can be found in the following 
link: https://www.theice.com/publicdocs/clear_europe/list-of-permitted-covers.pdf.
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Shortfall Margin
    The policy would also require F&O Clearing Members to provide 
additional ``shortfall margin'' to limit the Clearing Member's 
potential uncovered stress loss. The Clearing House would establish a 
stress allowance for each F&O Clearing Member using a formula based on 
its capital (or in certain cases that of its parent). Shortfall margin 
complements the OM requirement and reduces the risk to the Clearing 
House from leveraged positions identified as presenting 
uncollateralized stress losses. The stress allowance would represent 
the Clearing House's risk tolerance for uncovered stress loss for that 
Clearing Member. The shortfall margin would be defined as the worst 
uncovered stress loss for the F&O Clearing Member out of all F&O stress 
testing scenarios, less the shortfall allowance. The worst stress 
typically differs for each F&O Clearing Member based on its risk factor 
sensitivity. ICE Clear Europe Credit Risk Department would review the 
model parameters for determining the stress allowance on a regular 
basis and any changes would be communicated to the F&O Product Risk 
Committee.
    Pursuant to the proposed F&O Margin Shortfall Policy, shortfall 
margin would be collected on a daily basis as part of the end-of-day 
margining process. Any changes in the total amount of shortfall margin 
collected that ICE Clear Europe management determine to be significant 
would be reported to the F&O Product Risk Committee as part of the 
regular reporting package. In evaluating the significance of the 
change, the Clearing House would consider the reason for the shortfall 
margin changes, and whether the changes were due to leverage, change in 
member capital allowance or other causes outside than the normal course 
of business.
    Models supporting the F&O Margin Shortfall Policy objectives would 
be subject to an annual independent validation and governance oversight 
in accordance with the ICE Clear Europe Model Risk Governance 
Framework. The Policy Owner would be responsible for ensuring the 
policy remains up-to-date with the support of the Risk Oversight 
Department. The policy would be reviewed annually by the F&O Risk 
Committee and Board Risk Committee in accordance with their terms of 
reference. At a minimum, any material policy changes would need to be 
discussed by the Executive Risk Committee and approved by the ICE Clear 
Europe Board on the advice of the F&O Risk Committee and the Board Risk 
Committee prior to implementation. The proposed F&O Margin Shortfall 
Policy would further set out a detailed escalation and notification 
protocol based on risk appetite metrics. Routine reporting and analysis 
demonstrating enforcement and adherence of the F&O Margin Shortfall 
Policy would need to be submitted to the F&O Risk Committee and where 
necessary, to the BRC, in a timely and appropriate manner.
    The policy also addresses escalation and reporting of deviations 
from the policy.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments are 
consistent with the requirements of Section 17A of the Act \10\ and the 
regulations thereunder applicable to it. In particular, Section 
17A(b)(3)(F) of the Act \11\ 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

[[Page 13089]]

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 new F&O Margin Shortfall Policy 
is intended to protect the Clearing House against an uncovered loss 
resulting from an F&O Clearing Member default, by limiting the OM 
requirement of Clearing Members as compared to their capital and 
imposing an additional shortfall margin requirement to cover potential 
stress losses in excess of the stress allowance level. The new policy 
thus would promote the risk management of the Clearing House and 
accordingly the prompt and accurate clearance and settlement of cleared 
contracts. The enhanced risk management would also generally be 
consistent with the protection of investors and the public interest in 
the safe operation of the Clearing House. In ICE Clear Europe's view, 
the policy would not affect the safeguarding of funds and securities in 
the custody or control of the Clearing House or for which it is 
responsible, as the changes would not affect the way in which margin 
provided is held or managed for Clearing Members by ICE Clear Europe. 
Accordingly, the amendments satisfy the requirements of Section 
17A(b)(3)(F).\12\
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    \10\ 15 U.S.C. 78q-1.
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, Rule 17Ad-22(e)(6)(i) \13\ requires that a clearing 
agency cover its credit exposures to its participants by establishing a 
risk-based margin system that, among other matters, produces margin 
levels commensurate with, the risks and particular attributes of each 
relevant product, portfolio, and market. The proposed F&O Margin 
Shortfall Policy would monitor the ratio of each Clearing Member's 
total OM requirement to capital to ensure that it remain within 
appropriate limits for the protection of the Clearing House from 
Clearing Member default. The proposed policy would also use the 
shortfall margin to limit a Clearing Member's uncovered stress losses 
by requiring additional collateralization of stress losses over the 
Clearing House's risk tolerance. The policy thus would enhance the 
ability of the Clearing House to tailor margin requirements to the 
risks posed by the Clearing Member, in light of its capitalization. In 
ICE Clear Europe's view, the proposed F&O Margin Shortfall Policy is 
thus consistent with the requirements of Rule 17Ad-22(e)(6).\14\
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    \13\ 17 CFR 240.17Ad-22(e)(6)(i).
    \14\ 17 CFR 240.17Ad-22(e)(6)(i).
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    Rule 17Ad-22(e)(2) \15\ requires clearing agencies to establish 
reasonably designed policies and procedures to provide for governance 
arrangements that are clear and transparent and specify clear and 
direct lines of responsibility. In compliance with this requirement, 
the proposed F&O Margin Shortfall Policy would explain the 
responsibility of the policy owner and the escalation and notification 
protocols. It would also require material changes to the policy 
discussed by the Executive Risk Committee and approved by the Board on 
the advice of the F&O Risk Committee and the Board Risk Committee prior 
to implementation. It would further set out reporting requirements. As 
such, the new F&O Margin Shortfall Policy is in compliance with Rule 
17Ad-22(e)(2).\16\
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    \15\ 17 CFR 240.17 Ad-22(e)(2). The rule states that ``[e]ach 
covered clearing agency shall establish, implement, maintain and 
enforce written policies and procedures reasonably designed to, as 
applicable:
    (2) Provide for governance arrangements that:
    (i) Are clear and transparent
    (ii) Clearly prioritize the safety and efficiency of the covered 
clearing agency;
    (iii) Support the public interest requirements in Section 17A of 
the Act (15 U.S.C. 78q-1) applicable to clearing agencies, and the 
objectives of owners and participants;
    (iv) Establish that the board of directors and senior management 
have appropriate experience and skills to discharge their duties and 
responsibilities;
    (v) Specify clear and direct lines of responsibility; and
    (vi) Consider the interests of participants' customers, 
securities issuers and holders, and other relevant stakeholders of 
the covered clearing agency.''
    \16\ 17 CFR 240.17 Ad-22(e)(2).
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    Rule 17Ad-22(e)(6)(vii) \17\ further requires that each covered 
clearing agency establish written policies and procedures that provide 
for a model validation for the covered clearing agency's margin system 
and related models to be performed not less than annually, or more 
frequently as may be contemplated by the covered clearing agency's risk 
management framework. The models underlying the F&O Margin Shortfall 
Policy would be subject to review, validation and oversight in 
accordance with the Model Risk Governance Framework. As a result, In 
ICE Clear Europe's view, the proposed policy is consistent with Rule 
17Ad-22(e)(6)(vii).\18\
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    \17\ 17 CFR 240.17Ad-22(e)(6)(vii).
    \18\ 17 CFR 240.17Ad-22(e)(6)(vii).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The amendments 
are being adopted further strengthen ICE Clear Europe risk management 
procedures and ensure that ICE Clear Europe appropriately monitors and 
limits risks relating to Clearing Members' capital to margin ratio and 
uncovered stress losses. The proposed F&O Margin Shortfall Policy may 
result in increased collateral, capital or other requirements for F&O 
Clearing Member, which would increase the costs of clearing for those 
Clearing Members. However, ICE Clear Europe believes that any such 
additional cost is tailored to the capital and risk presented by the 
particular F&O Clearing Member, and is appropriate to take into account 
that risk, consistent with the provisions of the Act and Commission 
regulations relating to margin requirements and methodologies as 
discussed above. The F&O Margin Shortfall Policy will apply to all F&O 
Clearing Members, and such Clearing Members will be able to manage 
their positions to limit potential additional requirements if they so 
choose. ICE Clear Europe does not believe that the new F&O Margin 
Shortfall Policy will otherwise impact competition among Clearing 
Members or other market participants, or affect the ability of market 
participants to access clearing generally. As a result, ICE Clear 
Europe believes that any impact on competition is appropriate 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 \19\ and paragraph (f) of Rule 19b-4 \20\ 
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

[[Page 13090]]

investors, or otherwise in furtherance of the purposes of the Act.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f).
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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-2019-005 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-2019-005. 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-2019-005 and should be 
submitted on or before April 24, 2019.
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    \21\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06432 Filed 4-2-19; 8:45 am]
BILLING CODE 8011-01-P