[Federal Register Volume 84, Number 137 (Wednesday, July 17, 2019)]
[Notices]
[Pages 34241-34243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-15137]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86359; File No. SR-ICEEU-2019-010]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change to Clearing Membership Policy
July 11, 2019.
I. Introduction
On May 13, 2019, ICE Clear Europe Limited (``ICE Clear Europe'' or
``Clearing House'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend its Clearing Membership Policy. The
proposed rule change was published for comment in the Federal Register
on May 28, 2019.\3\ The Commission did not receive comments on the
proposed rule change. For the reasons discussed below, the Commission
is approving the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 85908 (May 21, 2019), 84
FR 24573 (May 28, 2019) (SR-ICEEU-2019-010) (``Notice'').
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II. Description of the Proposed Rule Change
ICE Clear Europe's proposed rule change would make three amendments
to its Clearing Membership Policy.\4\
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\4\ Notice, 84 FR at 24574. Capitalized terms not otherwise
defined herein have the meanings given to them in the ICE Clear
Europe Rules or the Clearing Membership Policy.
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First, the proposed rule change would specify that applications for
membership are formally considered and, as appropriate, approved and
rejected by, the Executive Risk Committee, through a delegation of
authority from the ICE Clear Europe Board of Directors, rather than the
F&O and CDS Product Risk Committees (collectively, the ``Product Risk
Committees''). The proposed rule change would also specify that the
Product Risk Committees would be notified of approved applications. The
Executive Risk Committee is made up of ICE Clear Europe management and
advises management on all key aspects of risk management and produces
proposals for review by the Board Risk Committee, Product Risk
Committees, and ICE Clear Europe Board, as appropriate.\5\ The Product
Risk Committees are made up of appointees nominated by ICE Clear
Europe's Clearing Members.\6\
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\5\ See ICE Clear Europe Disclosure Framework, available at
https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf (``The role of the ERC is
to advise the management team on all key aspects of risk management
and produce proposals for review by the Board Risk Committee, the
Product Risk Committees, the Client Risk Committee, the Audit
Committee and the Board as appropriate.'').
\6\ See ICE Clear Europe Disclosure Framework, available at
https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Disclosure_Framework.pdf (``The CDS PRC is
comprised of appointees nominated by CDS Clearing Members,
Independent Non-Executives and representatives of ICEU.'').
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Second, the proposed rule change would add a requirement that a
person applying to become a CDS Clearing Member (an ``Applicant'')
prove its ability to determine and submit end-of-day prices for CDS
instruments to fulfill the pricing capabilities requirements set out in
ICE Clear Europe's CDS End-Of-Day Price Discovery Policy. The proposed
rule change would further specify how ICE Clear Europe's Clearing Risk
Department would review and determine Applicants' pricing capabilities.
Thus, the proposed rule change would provide the Executive Risk
Committee, as the delegated committee responsible for approving or
rejecting an Applicant, with authority to reject an Applicant that
cannot demonstrate such pricing capabilities.
Finally, the proposed rule change would add an explicit requirement
that, in evaluating applications for membership, the Clearing Risk
Department consider the performance of Applicants in a Default
Management Test and review Applicants' internal policies and procedures
to assess the efficacy of their default management process. Thus, the
proposed rule change would provide the Executive Risk Committee, as the
delegated committee responsible for approving or rejecting an
Applicant, with authority to reject an Applicant that cannot
demonstrate the efficacy of its default management process.
III. Commission Findings
Section 19(b)(2)(C) of the Act directs the Commission to approve a
proposed rule change of a self-regulatory organization if it finds that
the proposed rule change is consistent with the requirements of the Act
and the rules
[[Page 34242]]
and regulations thereunder applicable to the organization presenting
it.\7\ For the reasons given below, the Commission finds that the
proposed rule change is consistent with Section 17A(b)(3)(F) of the Act
\8\ and Rules 17Ad-22(e)(2) and (e)(18) thereunder.\9\
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\7\ 15 U.S.C. 78s(b)(2)(C).
\8\ 15 U.S.C. 78q-1(b)(3)(F).
\9\ 17 CFR 240.17Ad-22(e)(2) and (e)(18).
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A. Consistency With Section 17A(b)(3)(F) of the Act
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of ICE Clear Europe 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 ICE Clear Europe or for which it is
responsible, and, in general, to protect investors and the public
interest.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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As discussed above, the proposed rule change would specify that
applications for membership are formally considered, and approved and
rejected by, the Executive Risk Committee, rather than the Product Risk
Committees. The proposed change would also specify the procedure by
which ICE Clear Europe would test and screen Applicants for their
ability to satisfy end-of-day pricing and default management
requirements. The Commission believes that ICE Clear Europe's end-of-
day pricing and robust and effective default management protocols both
are critical to its ability to contribute to the prompt and accurate
clearance and settlement of securities transactions and the
safeguarding of securities and funds. For example, ICE Clear Europe
relies on accurate end-of-day prices to generate margin requirements,
which it uses to manage the risks associated with clearing security-
based swap portfolios. Similarly, ICE Clear Europe relies on its
default management tools to help manage and reduce the risks associated
with a defaulting Clearing Member's portfolio. Such risks, if not
properly managed, could cause ICC to realize losses on such portfolios
and could disrupt ICE Clear Europe's ability to promptly and accurately
clear security based swaps transactions and safeguard securities and
funds which are in the custody or control of ICE Clear Europe or for
which it is responsible. For these reasons, the Commission believes
that the proposed rule change, in establishing a procedure by which ICE
Clear Europe would test and screen Applicants for their ability to
satisfy end-of-day pricing and default management requirements, and
providing the Executive Risk Committee authority to reject Applicants
that do not meet such requirements, would promote the prompt and
accurate clearance and settlement of securities transactions and help
assure the safeguarding of securities and funds which are in the
custody or control of the ICE Clear Europe or for which it is
responsible. For the same reasons, the Commission also believes the
proposed rule change would, in general, protect investors and the
public interest.
Section 17A(b)(3)(F) of the Act further requires that the rules of
ICE Clear Europe are not designed to permit unfair discrimination in
the admission of participants or among participants in the use of the
clearing agency.\11\ The Commission believes that the proposed changes
discussed above would establish procedures by which ICE Clear Europe
would test and screen Applicants for their ability to satisfy end-of-
day pricing and default management requirements on an objective basis,
without discriminating in the admission of Applicants.
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\11\ 15 U.S.C. 78q-1(b)(3)(F).
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Therefore, the Commission finds that the proposed rule change would
promote the prompt and accurate clearance and settlement of securities
transactions, assure the safeguarding of securities and funds in ICE
Clear Europe's custody and control, in general, protect investors and
the public interest, and not be designed to permit unfair
discrimination in the admission of participants or among participants
in the use of the clearing agency, consistent with the Section
17A(b)(3)(F) of the Act.\12\
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\12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) requires, among other things, that ICE Clear
Europe 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.\13\
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\13\ 17 CFR 240.17Ad-22(e)(2).
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The proposed rule change would specify that applications for
membership are formally considered, and approved and rejected by, the
Executive Risk Committee, rather than the Product Risk Committees and
that the Product Risk Committees are notified of approved applications.
The Commission believes that the proposed rule change would help to
ensure that the governance regarding approval of Applicants is clear
and transparent, and establishes a clear and direct line of
responsibility, by clearly specifying that the Executive Risk Committee
would approve or disapprove applications. Moreover, in establishing
that the Executive Risk Committee, through a delegation of authority
from the ICE Clear Europe Board of Directors, is responsible for
approving or rejecting Applicants, rather than the Product Risk
Committees, the Commission believes the proposed rule change would
consolidate, within ICE Clear Europe management, decisions regarding
admission of applicants for membership at ICE Clear Europe. The
Commission believes this would therefore clearly specify the
responsibility of ICE Clear Europe management in approving or rejecting
Applicants. Therefore, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(2).\14\
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\14\ 17 CFR 240.17Ad-22(e)(2).
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C. Consistency With Rule 17Ad-22(e)(18)
Rule 17Ad-22(e)(18) requires, among other things, that ICE Clear
Europe establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities.\15\
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\15\ 17 CFR 240.17Ad-22(e)(18).
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As discussed above, the proposed rule change would specify the
procedure by which ICE Clear Europe would test and screen Applicants
for their ability to satisfy end-of-day pricing and default management
requirements. The proposed rule change also would specifically require
that Applicants prove the ability to fulfill the pricing capabilities
requirements set out in ICE Clear Europe's CDS End-Of-Day Price
Discovery Policy and perform acceptably in a Default Management Test.
The Commission believes that, in doing so, the proposed rule change
would establish objective and disclosed procedures for approving
Applicants based on the risk of Applicants not being able to comply
with ICE Clear Europe's end-of-day pricing and default management
requirements. Moreover, the Commission believes that these procedures
represent objective criteria which any Applicant could potentially
satisfy, thereby permitting fair and open access to membership at ICE
Clear
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Europe. Therefore, the Commission finds that the proposed rule change
is consistent with Rule 17Ad-22(e)(18).\16\
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\16\ 17 CFR 240.17Ad-22(e)(18).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act,
and in particular, with the requirements of Section 17A(b)(3)(F) of the
Act \17\ and Rules 17Ad-22(e)(2) and (e)(18) thereunder.\18\
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\17\ 15 U.S.C. 78q-1(b)(3)(F).
\18\ 17 CFR 240.17Ad-22(e)(2) and (e)(18).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\19\ that the proposed rule change (SR-ICEEU-2019-010) be, and hereby
is, approved.\20\
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\19\ 15 U.S.C. 78s(b)(2).
\20\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-15137 Filed 7-16-19; 8:45 am]
BILLING CODE 8011-01-P