[Federal Register Volume 84, Number 136 (Tuesday, July 16, 2019)]
[Notices]
[Pages 34021-34025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15023]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86341; File No. SR-ICC-2019-008]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Clearing Participant
Default Management Procedures and ICC Risk Management Framework
July 10, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on June 28, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
primarily by ICC. 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
The principal purpose of the proposed rule change is to formalize
the ICC Clearing Participant (``CP'') Default Management Procedures
(``Default Management Procedures''). ICC also proposes related default
management enhancements to the ICC Risk Management Framework. These
revisions do not require any changes to the ICC Clearing Rules (the
``Rules'').
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, ICC included statements
concerning the purpose of and basis for the proposed rule change,
security-based swap submission, or advance notice and discussed any
comments it received on the proposed rule change, security-based swap
submission, or advance notice. The text of these statements may be
examined at the places specified in Item IV below. ICC 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
ICC proposes to formalize the Default Management Procedures. ICC
also proposes related default management enhancements to the Risk
Management Framework. ICC believes such revisions will facilitate the
prompt and accurate clearance and settlement of securities transactions
and derivative agreements, contracts, and transactions for which it is
responsible. ICC proposes to make such changes effective following
Commission approval of the proposed rule change. The proposed revisions
are described in detail as follows.
Default Management Procedures
The Default Management Procedures set forth ICC's default
management process, including the actions taken by ICC to determine
that a CP is in default as well as the actions taken by ICC in
connection with such default to close-out the defaulter's portfolio
(the ``Close-Out''). Currently, ICC's default management rules and
procedures, including the tools available to manage a default and
return to a matched book, are in several ICC documents, including the
ICC Rules, the Default Auction Procedures--Initial Default Auctions,
and the Secondary Auction Procedures. The Default Management Procedures
do not change ICC's existing default management rules and procedures.
Instead, the Default Management Procedures provide additional detail
with respect to ICC's existing default management rules and procedures,
such as assigning responsibility for default management actions and
adding instructions on how to perform default management actions. ICC's
default management process is comprised of the following sub-processes,
each of which is detailed in a section in the document: Monitoring CPs
to identify those that are at risk of defaulting or are in default
(``Default Risk CPs''); declaring a default; transferring a defaulter's
client portfolios (``Porting Portfolios'') to non-defaulting Futures
Commission Merchants (``Potential Receiving FCMs''); consulting with
the CDS Default Committee, which is comprised of representatives from
no more than three CDS Committee-Eligible Participants; \3\ performing
Standard Default Management Actions and Secondary Default Management
Actions to facilitate the Close-Out; and managing default resources.
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\3\ A CP that has been approved by the Board for participation
in the CDS Default Committee.
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The Default Management Procedures introduce ICC's default
management process. The document contains a list of defined terms that
are key for default management and an overview of ICC's default
management process that consists of descriptions of the abovementioned
sub-processes.
[[Page 34022]]
Moreover, the Default Management Procedures describe how ICC and its
CPs maintain operational readiness to execute the default management
process. ICC maintains a CDS Default Committee whose members consist of
experienced trading personnel at CDS Committee-Eligible Participants
that serve on the CDS Default Committee on a six-month rotating basis
and, upon the declaration of a CP default, are seconded to ICC to
assist with default management. The Default Management Procedures set
forth detailed procedures for performing tasks that are necessary to
maintain operational readiness, including administering the CDS Default
Committee rotation process, working with customers of CPs who want to
directly participate in auctions (``Direct Participating Customers''),
maintaining up-to-date contact information, and testing the default
management process (``Default Test''). ICC annually conducts a Default
Test, in coordination with its CPs, and reviews the results to identify
any issues or lessons learned.
The Default Management Procedures describe the sub-process of
monitoring CPs. As part of a counterparty monitoring program, ICC
performs daily, weekly, and quarterly monitoring designed, in part, to
identify Default Risk CPs. Upon identifying such CPs, the ICC President
(the ``President'') may take no action or may activate the team
responsible for overseeing the default management process, which is
composed of ICC management, the ICC Risk Oversight Officer, and the
most senior member of the Treasury Department (``Head of Treasury'')
(together, the ``Close-Out Team''), to move forward with the process of
declaring a default. The Default Management Procedures establish the
general procedures for identifying Default Risk CPs and activating the
Close-Out Team in addition to the procedures that are specific to
certain types of defaults and circumstances, including where a CP fails
to meet payment obligations to ICC; a CP has filed for bankruptcy or is
likely to fail to meet obligations due to dissolution, insolvency, or
bankruptcy related events; a CP has not complied, or is likely not to
comply, with certain limitations, conditions, or restrictions imposed
on it by ICC; and a CP or its guarantor has failed, or is likely to
fail, to meet obligations of ICC membership.
ICC's activities immediately after the identification of a
potential default comprise the default declaration sub-process. The
Default Management Procedures list the actions that the Close-Out Team
performs after activation but before a default declaration. The Close-
Out Team holds an initial meeting to discuss, among other matters, the
circumstances surrounding the Default Risk CP(s), ICC's strategy for
the Close-Out, and ICC's plans for meeting upcoming payment
obligations. When the ICC General Counsel (``General Counsel'') is
satisfied that all conditions for determining the Default Risk CP(s) to
be in default are met and all required approvals are secured, the
General Counsel confirms by email which Default Risk CP(s) are in
default. ICC then communicates the default(s), including to ICC's CPs,
regulators, Risk Committee chairman, and the public. The Default
Management Procedures also set forth the procedures applicable to the
Close-Out Team following a default declaration to prepare for the
Close-Out.
The Default Management Procedures discuss the CDS Default Committee
consultation sub-process. Certain matters are subject to consultation
with the CDS Default Committee, including the unwinding of the
defaulter's remaining portfolio and the structure and characteristics
of an auction, and certain actions may be delegated to the CDS Default
Committee, such as executing Initial Cover Transactions \4\ on ICC's
behalf. The Default Management Procedures establish procedures for
convening and adjourning a CDS Default Committee meeting in addition to
the actions taken at the initial CDS Default Committee meeting, which
include reviewing the defaulter's cleared portfolio, the Close-Out
strategy, the plan for transferring the Porting Portfolios to Potential
Receiving FCMs, and a schedule for re-convening the CDS Default
Committee over the period required to complete the Close-Out (the
``Close-Out Period'').
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\4\ As part of the Close-Out, ICC may enter into transactions
with CPs with respect to the defaulter's open positions to
facilitate an orderly unwind of the defaulter's open positions and
to mitigate damages to ICC and other CPs.
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To facilitate the Close-Out, ICC performs Standard Default
Management Actions during the Close-Out Period. ICC allows customers of
CPs who are not yet Direct Participating Customers to register as such
during the Close-Out Period to take part in auctions run by ICC. The
ICC Risk Department (``Risk Department'') and Close-Out Team work
together, in consultation with the CDS Default Committee, to implement
the Close-Out strategy through Standard Default Management Actions.
Specifically, the Default Management Procedures incorporate
instructions on executing Initial Cover Transactions by auction and
bilaterally, conducting Initial Default Auctions (``Initial
Auctions''),\5\ and executing bilateral direct liquidation transactions
in the market to liquidate positions. The document further assigns
responsibility for tracking the position changes that result from the
movement of positions or the creation of new positions.
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\5\ The Default Auction Procedures--Initial Default Auctions,
which govern Initial Auctions are available at: https://www.theice.com/publicdocs/ICC_Default_Auction_Procedures.pdf.
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In addition to Standard Default Management Actions, ICC may take
Secondary Default Management Actions to facilitate the Close-Out where
default resources are significantly depleted or no default resources
remain. ICC may call for assessment contributions, which CPs are
obligated to meet by providing additional amounts to the Guaranty Fund
(``GF''), in the event that the GF has been depleted or ICC anticipates
the need for additional funds related to a default. The Default
Management Procedures discuss the procedures for calling for assessment
contributions and initiating a Cooling-Off Period.\6\ During the
Cooling-Off Period, the Risk Department and Close-Out Team, in
consultation with the CDS Default Committee, continue to try to
liquidate the defaulter's remaining portfolio through Secondary
Auctions,\7\ which are subject to additional governance requirements.
If available default resources are exhausted and ICC has not returned
to a matched book, the Close-Out Team uses reasonable efforts to
consult with the Risk Committee and then seeks the Board's decision on
whether to (1) enter a Loss Distribution Period,\8\ (2) execute a
partial tear-up, \9\ (3) or terminate clearing services. The Default
Management Procedures detail the procedures for each of the
abovementioned Secondary Default Management Actions, including
notifying the public, CPs, and regulators; consulting with the Risk
Committee; obtaining the requisite
[[Page 34023]]
Board approvals; and executing the action.
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\6\ During a Cooling-Off Period, the aggregate liability of CPs
for ents of the GF and assessment contributions would be capped at
``3x'' their GF contribution for all defaults during that period.
\7\ The Secondary Auction Procedures, which govern Secondary
Auctions are available at: https://www.theice.com/publicdocs/ICC_Secondary_Auction_Procedures.pdf.
\8\ A Loss Distribution Period commences from and includes the
date specified by ICC in a notice following a reduced gains
distribution (``RGD'') determination. RGD allows ICC to reduce
payment of variation gains that would otherwise be owed to CPs as
ICC attempts a Secondary Auction or conducts a partial tear-up.
\9\ In a partial tear-up, ICC terminates positions of non-
defaulting CPs that exactly offset those in the defaulting CP's
remaining portfolio.
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The Default Management Procedures provide an overview of the post-
default porting sub-process. The Risk Department, in consultation with
the CDS Default Committee, determine which Porting Portfolios to try to
transfer to Potential Receiving FCMs. To facilitate the transfers, ICC
distributes the Porting Portfolios to Potential Receiving FCMs and asks
them to indicate which portfolios they are willing to receive by a
deadline (``Porting Response Deadline''). The Default Management
Procedures also discuss specific procedures for post-default porting in
the case of a bankruptcy-related default, which require ICC to
communicate and coordinate with the defaulter's trustee in bankruptcy.
Following the Porting Response Deadline, ICC determines which Porting
Portfolios to transfer to which Potential Receiving FCMs, communicates
to each Potential Receiving FCM its assigned Porting Portfolios (if
any), and executes the relevant transfers.
The Default Management Procedures set forth the default resource
management sub-process. The document includes procedures for the
identification and execution of collateral management activities that
are necessary for ICC to meet upcoming payment obligations. The Close-
Out Team meets daily during the Close-Out Period to review the
available liquid resources and determine how to meet upcoming payment
obligations. The Chief Operating Officer and Head of Treasury
coordinate the execution of collateral management activities, including
liquidating non-cash collateral in the defaulter's house and/or client
accounts or utilizing ICC's committed FX or committed repo facilities.
Further, the Default Management Procedures describe the maintenance of
a Default Management Ledger, which serves as a record to facilitate
decision making and implement ICC's default waterfall; the discussion
points during the Close-Out Team's daily meeting during the Close-Out
Period; and the application of any special payments during the Close-
Out Period.
Risk Management Framework
ICC proposes related default management enhancements to the ICC
Risk Management Framework. Specifically, ICC proposes to incorporate a
reference to the Default Management Procedures in the `Governance and
Organization' section to specify that the Default Management Procedures
contain details regarding default management roles and responsibilities
of the Board, ICC management, and relevant committees. Additionally,
ICC proposes changes to the `Waterfall Level 6: GF Replenishment' sub-
section to more clearly describe CPs' obligations with respect to
replenishment and assessment contributions to the GF. The proposed
edits provide additional detail regarding the aggregate liability of
CPs for replenishment and assessment contributions. If the cap on the
additional GF contributions is reached, ICC may apply additional
Initial Margin (``IM'') requirements if necessary to maintain
compliance with regulatory financial resources requirements. The
proposed changes further discuss how the additional IM requirements are
computed and communicated to CPs. ICC also proposes to clarify the
maximum contribution of a retiring CP that has given notice of its
intent to terminate its CP status. Given the proposed formalization of
the Default Management Procedures, ICC proposes replacing a reference
to Appendix 3 of the Risk Management Framework (``Appendix 3''), which
currently contains default management procedures, with a reference to
the Default Management Procedures in the `Default Treatment' sub-
section and removing Appendix 3 from the Risk Management Framework.
(b) Statutory Basis
Section 17A(b)(3)(F) of the Act \10\ 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; to assure the safeguarding of securities and funds which
are in the custody or control of the clearing agency or for which it is
responsible; in general, to protect investors and the public interest;
and to comply with the provisions of the Act and the rules and
regulations thereunder. ICC believes that the proposed rule change is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to ICC, in particular, to Section
17(A)(b)(3)(F), \11\ because ICC believes that the proposed rule change
enhances ICC's ability to manage the risk of a default by describing
the processes for declaring a default and facilitating the Close-Out
and by providing additional details regarding the roles and obligations
of various stakeholders, such as the Board, Risk Committee, Close-Out
Team, CPs, and the CDS Default Committee. Namely, the Default
Management Procedures provide more detail with respect to ICC's
existing default management rules and procedures, including assigning
responsibility for default management actions and adding instructions
on how to perform default management actions. The proposed changes to
the Risk Management Framework incorporate reference to the proposed
Default Management Procedures and more clearly describe CPs'
obligations and aggregate liability with respect to replenishment and
assessment contributions to the GF. ICC believes that the formalization
of the Default Management Procedures and the amendments to the Risk
Management Framework augment ICC's procedures relating to default
management and enhance ICC's ability to withstand defaults and continue
providing clearing services, thereby promoting the prompt and accurate
clearance and settlement of securities transactions, derivatives
agreements, contracts, and transactions; the safeguarding of securities
and funds which are in the custody or control of ICC or for which it is
responsible; and the protection of investors and the public interest.
As such, the proposed rule change is designed to promote the prompt and
accurate clearance and settlement of securities transactions,
derivatives agreements, contracts, and transactions; to contribute to
the safeguarding of securities and funds associated with security-based
swap transactions in ICC's custody or control, or for which ICC is
responsible; and, in general, to protect investors and the public
interest within the meaning of Section 17A(b)(3)(F) of the Act.\12\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
\11\ Id.
\12\ Id.
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In addition, the proposed rule change is consistent with the
relevant requirements of Rule 17Ad-22.\13\ Rule 17Ad-22(b)(3) \14\
requires ICC 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 CP
families to which it has the largest exposures in extreme but plausible
market conditions. The Default Management Procedures provide detailed
instructions regarding the process for managing a default and returning
to a matched book, including conducting Standard and Secondary
[[Page 34024]]
Default Management Actions, identifying and executing collateral
management activities to meet payment obligations, and tracking default
management resources. The proposed changes to the Risk Management
Framework provide additional clarity regarding CPs' obligations
regarding replenishment and assessment contributions as well as the
computation of additional IM requirements that allow ICC to maintain
compliance with regulatory financial resources requirements. ICC
believes that such changes enhance ICC's ability to manage a default by
providing additional detail, transparency and clarity with respect to
ICC's default management rules and procedures, thereby ensuring that
ICC continues to maintain sufficient financial resources 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).\15\
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\13\ 17 CFR 240.17Ad-22.
\14\ 17 CFR 240.17Ad-22(b)(3).
\15\ Id.
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Rule 17Ad-22(d)(4) \16\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to identify sources of operational risk and minimize them
through the development of appropriate systems, controls, and
procedures; implement systems that are reliable, resilient and secure,
and have adequate scalable capacity; and have business continuity plans
that allow for timely recovery of operations and fulfillment of a
clearing agency's obligations. The Default Management Procedures
describe how ICC and its CPs maintain operational readiness to execute
the default management process. The document sets forth ICC's processes
for carrying out an annual Default Test, reviewing the results of the
annual Default Test, and maintaining up-to-date contact information for
default contacts. Such testing and preparation allow ICC to identify
sources of operational risk and minimize them through the development
of appropriate systems, controls, and procedures and implement systems
that are reliable, resilient and secure, and have adequate scalable
capacity, consistent with the requirements of Rule 17Ad-22(d)(4).\17\
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\16\ 17 CFR 240.17Ad-22(d)(4).
\17\ Id.
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Rule 17Ad-22(d)(8) \18\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to have governance arrangements that are clear and transparent
to fulfill the public interest requirements in Section 17A of the
Act.\19\ The proposed changes to the Risk Management Framework
strengthen the governance arrangements set forth in the document by
incorporating reference to the Default Management Procedures to note
the default management roles and responsibilities of the Board, ICC
management, and relevant committees. Moreover, the Default Management
Procedures clearly assign and document responsibility and
accountability for default management actions and decisions. The
governance procedures provide for consultation with the Risk Committee
and the CDS Default Committee, approval from the Board, and
notification to the public, CPs, and regulators. As such, these
governance arrangements are clear and transparent, such that
information relating to the assignment of responsibilities and the
requisite involvement of the Board, Risk Committee, CDS Default
Committee, and Close-Out Team is clearly documented, consistent with
the requirements of Rule 17Ad-22(d)(8).\20\
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\18\ 17 CFR 240.17Ad-22(d)(8).
\19\ 15 U.S.C. 78q-1.
\20\ 17 CFR 240.17Ad-22(d)(8).
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Rule 17Ad-22(d)(11) \21\ requires ICC to establish, implement,
maintain and enforce written policies and procedures reasonably
designed to make key aspects of the clearing agency's default
procedures publicly available and establish default procedures that
ensure that the clearing agency can take timely action to contain
losses and liquidity pressures and to continue meeting its obligations
in the event of a participant default. ICC's default management rules
and procedures contained in the ICC Rules, the Default Auction
Procedures--Initial Default Auctions, and the Secondary Auction
Procedures are publically available on ICC's website. Additionally, the
proposed Default Management Procedures clarify and augment ICC's
existing rules and procedures relating to default management and
enhance ICC's ability to withstand defaults and continue providing
clearing services, including by assigning responsibility for default
management actions and adding instructions on how to perform default
management actions, to ensure that ICC can take timely action to
contain losses and liquidity pressures and to continue meeting its
obligations in the event of a participant default, consistent with the
requirements of Rule 17Ad-22(d)(11).\22\
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\21\ 17 CFR 240.17Ad-22(d)(11).
\22\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition. The proposed rule change
to formalize the ICC Default Management Procedures and to amend the ICC
Risk Management Framework will apply uniformly across all market
participants. Therefore, ICC does not believe the proposed rule change
imposes 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, Security-Based Swap Submission, or Advance Notice Received From
Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
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.
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-ICC-2019-008 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities and
Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-ICC-2019-008. This file
number should be included on the
[[Page 34025]]
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 Credit and on ICE Clear Credit's website
at https://www.theice.com/clear-credit/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-ICC-2019-008 and should be
submitted on or before August 6, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15023 Filed 7-15-19; 8:45 am]
BILLING CODE 8011-01-P