[Federal Register Volume 84, Number 171 (Wednesday, September 4, 2019)]
[Notices]
[Pages 46575-46578]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86783; File No. SR-ICEEU-2019-014]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Approving Proposed Rule Change Relating to the ICE Clear Europe CDS 
Default Management Framework

August 28, 2019.

I. Introduction

    On June 25, 2019, ICE Clear Europe Limited (``ICE Clear Europe,'' 
the ``Clearing House'' or ``ICEEU'') 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 revise its CDS Default 
Management Framework (the ``Framework''). The proposed rule change was 
published for comment in the Federal Register on July 16, 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. 86340 (July 10, 2019), 
84 FR 33996 (July 16, 2019) (SR-ICEEU-2019-014) (``Notice'').

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[[Page 46576]]

II. Description of the Proposed Rule Change

    ICE Clear Europe's proposed rule change would amend its Framework 
to be consistent with amendments to the ICE Clear Europe Clearing Rules 
(the ``Rules'') to address default management, recovery and wind-down 
for the CDS Contract Category (``Recovery Rule Amendments'').\4\ The 
proposed changes to the Framework relate primarily to auction 
procedures, reduced gains distribution, partial tear-up, Clearing 
Member withdrawal and termination, clearing service termination, and 
governance during a default. The changes would incorporate, summarize, 
and reflect these aspects of the Recovery Rule Amendments. The proposed 
changes would also make various clarifying changes and corrections to 
typographical errors.\5\
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    \4\ File No. SR-ICEEU-2019-003.
    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules or the 
Framework. The following description of the proposed rule change is 
excerpted from the Notice, 84 FR 33996.
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A. Auction Procedures

    In light of the Recovery Rule Amendments referenced above, the 
proposed rule change would revise several aspects of the Framework to 
adopt a set of new initial and secondary auction procedures. 
Specifically, the Framework amendments would do the following:
     Clarify that in determining the auction portfolios, the 
Clearing House would consider wrong-way risk to non-defaulting Clearing 
Members, among other listed factors;
     clarify that upon completion of the auction, submission of 
resulting trade to the Trade Information Warehouse would be done under 
normal Clearing House practices;
     Clearing Members would no longer be required to confirm to 
the Default Management Committee their intention to bid in a particular 
auction;
     no longer provide that the last bid submitted by the 
Clearing Member is the only bid considered once the bidding window is 
closed;
     set a range for the minimum bid requirement for Clearing 
Members. The Framework provides examples of the calculation of the 
minimum bid requirement for Clearing Members, based on their respective 
CDS Guaranty Fund contributions as compared to the total CDS Guaranty 
Fund size;
     provide several examples of the modified Dutch auction 
methodology used under the Proposed Auction Procedures;
     reflect the two means by which Customers would be able to 
participate in auctions under the Proposed Auction Procedures: (i) Via 
Clearing Member following mutual agreement on participation terms; and 
(ii) via direct participation following (subject to Customer 
contribution of [euro]7.5 million to default resources (in the case of 
initial auctions) and certain other requirements);
     summarize key distinctions between initial auctions and 
secondary auctions under the Proposed Auction Procedures;
     delete the existing Clearing House approach to non-
competitive bids, in light of the three tier methodology approach to 
juniorization of the Guaranty Fund contribution provided for in the 
Recovery Rule Amendments;
     remove the existing auction schedule in the Framework, as 
it would be superseded by the Proposed Auction Procedures; and
     remove the provisions in the existing Framework for forced 
portfolio allocation for positions for which ICE Clear Europe does not 
receive a formal bid from any Non-Defaulting Clearing Members, 
consistent with the Recovery Rule Amendments.

B. Reduced Gains Distribution

    The amendments would also add a new section to the framework that 
describes the use of reduced gains distribution (``RGD'') as a recovery 
tool. The Framework would incorporate and summarize key aspects of the 
Recovery Rule Amendments relating to the use of RGD, including the 
methodology for applying RGD to both the house and customer accounts 
and the five consecutive business day limitation on the use of RGD 
(following which partial tear-up may be conducted). The Framework would 
also provide examples of the use of RGD.

C. Partial Tear-Up

    The amended Framework would reflect the Recovery Rule Amendments 
that permit the Clearing House to proceed to partial tear-up as a final 
default tool where the Clearing House is unable to close out all of the 
defaulter's remaining positions through auctions within the Clearing 
House's remaining resources. In a partial tear-up, the Clearing House 
would terminate positions of non-defaulting Clearing Members that 
exactly offset those in the defaulting Clearing Member's remaining 
portfolio. The Framework would also describe procedures for the timing 
of partial tear-up and determination of the relevant termination price, 
in accordance with the Recovery Rule Amendments.

D. Clearing Member Withdrawal

    The proposed amendments to the Framework would reflect the 
procedures for Clearing Member withdrawal as set out in the Recovery 
Rule Amendments, including both an ordinary course of business 
termination outside of a default and termination during a cooling off 
period.

E. Clearing Service Termination

    The amended Framework would also reflect the Clearing House's 
ability, under Rule 916 as proposed to be modified by the Recovery Rule 
Amendments, to terminate the CDS clearing service under specified 
circumstances.

F. Governance

    Pursuant to the proposed amendments, the CDS Risk Committee would 
be consulted on establishing the terms of initial and secondary 
auctions (including defining different auction lots) and holding 
additional auctions and/or accepting a partial fill of an auction 
during the initial auction phase. The CDS Risk Committee would be 
consulted, with the ultimate decision to be made by the ICE Clear 
Europe Board (or their delegate), with respect to a number of matters, 
including:
     Whether to use CDS Guaranty Fund contributions of non-
defaulting Clearing Members to cover the cost of a direct liquidation 
outside of a default auction;
     Whether to determine that an initial default auction has 
failed due to insufficient default resources;
     Whether to invoke and/or continue RGD;
     Whether to hold a secondary auction, whether that auction 
has failed and in the event of failure, whether to hold additional 
secondary auctions;
     In a secondary auction, whether to reallocate default 
resources to a particular lot to permit a successful auction of that 
lot;
     In a final secondary auction, whether to accept a 
``partial fill'' to the extent of available default resources for the 
relevant lot;
     Whether to implement a partial tear-up;
     Whether to terminate the clearing service in full; and
     Whether to bypass an initial default auction or bypass 
secondary default management action(s).

G. Clarifying and Conforming Amendments

    The Framework would also make clarifications and fix typographical

[[Page 46577]]

errors. For example, the amendments would remove an unnecessary 
provision that hedging traders are responsible for ensuring all hedge 
trades are correctly reflected in the trade capture system by end of 
day (as the Clearing House is responsible for such matters in 
accordance with its current practices); remove unnecessary details 
about computer support for CDS Default Committee; remove an outdated 
trade workflow chart; clarify, consistent with current practice, that 
the Head of Clearing Risk may postpone the collateral sale with respect 
to liquidation of a defaulting Clearing Member's collateral without 
seeking advice of the CDS Default Committee; clarify that the risk team 
also consults with the CDS Default Committee with respect to 
establishing hedging positions with the non-defaulting Clearing 
Members, in addition to the Head of Clearing Risk; and removing certain 
parts of Appendix A such as an itemized example of auction position 
data and a standard bidding template.

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 and regulations thereunder applicable to the organization 
presenting it.\6\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \7\ and Rules 17Ad-22(e)(2) and (e)(13) thereunder.\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 17 CFR 240.17Ad-22(e)(2) and (e)(13).
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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.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would revise the 
Framework in order to conform it with recent changes to the Recovery 
Rule Amendments. Specifically, the proposed amendments would revise the 
Framework to include procedures for utilizing the default rules made 
available by the Recovery Rule Amendments. The Commission believes that 
by adding default procedures such as default auctions, RGDs, Clearing 
Member termination, and partial tear-up, ICEEU has included in its 
Framework multiple methods for managing losses and preserving resources 
in the default context. The Commission believes that this in turn will 
enhance ICEEU's ability to restore a matched book and limit its 
exposure to potential losses from clearing member defaults. For 
instance, the Commission believes that by amending the Framework to 
clarify that in determining auction portfolios, ICEEU will consider 
wrong-way risk to non-defaulting clearing members, ICEEU enables its 
auction procedures to cope with such risk. Additionally, by providing 
examples of a modified Dutch auction methodology, reflecting the two 
means by which customers would be able to participate in an auction, 
and summarizing the key distinctions between initial auctions and 
secondary auctions, the Commission believes that the Framework is 
enhanced by providing customers with enhanced detail and certainty 
regarding the auction procedures ICEEU would utilize under the 
Framework.
    The Commission also believes that by adding detail about RGD in the 
Framework, ICEEU strengthens the Framework with a tool that could limit 
losses in the event of a default. For instance, RGD can be utilized to 
obtain financial resources from non-defaulting clearing members in the 
event default resources are insufficient, thereby forestalling the 
deterioration of the clearing house's financial condition. Likewise, 
revising the Framework to reflect the partial tear-up tool provides 
ICEEU a final recovery tool in the event that it is unable to clear out 
a defaulter's remaining positions through auctions, which the 
Commission believes could reduce further utilization of clearing house 
resources.
    Further, the Commission believes that by including updated 
procedures reflecting the ability of clearing members to withdraw in 
both ordinary course and default situations, clearing members will be 
better informed regarding withdrawal procedures and ICEEU will be 
better prepared to manage this eventuality. Likewise, the Commission 
believes that, by including procedures related to clearing service 
termination in its Framework, ICEEU will be more prepared to address 
general business risk and operational risk in an orderly fashion.
    Taken together, the Commission believes that the proposed rule 
changes will enhance ICEEU's ability to preserve financial resources 
during default and address business and operational risk in an orderly 
manner, which in turn is consistent with Section 17A(b)(3)(F) of the 
Act's requirement for prompt and accurate settlement and safeguarding 
of securities and funds.
    For these same reasons, the Commission also believes that the 
proposed rule change is, in general, consistent with the protection of 
investors and the public interest.

B. Consistency With Rule 17Ad-22(e)(2)

    Rule 17Ad-22(e)(2) requires, in relevant part, 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.\10\
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    \10\ 17 CFR 240.17Ad-22(e)(2).
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    The Commission believes that the proposed rule change's description 
of the CDS Risk Committee and Board roles during a default event 
provide for governance arrangements that are clear and transparent and 
that specify clear and direct lines of responsibility. Specifically, 
the proposed rule change would revise the Framework to provide that the 
CDS Risk Committee would be consulted on establishing the terms of 
initial and secondary auctions, holding additional auctions, and/or 
accepting a partial fill of an auction during the initial auction 
phase. Further, the CDS Risk Committee would be consulted (with final 
decision residing with the Board) with respect to a variety of default 
matters described above, including whether to use the Guaranty Fund 
contributions of non-defaulting clearing members to cover the 
liquidation costs outside of a default auction, to determine that an 
initial default has failed, to invoke or continue RGD, to hold a 
secondary auction, to reallocate default resources to a particular lot, 
to accept partial fills, to permit partial tear-ups, to terminate 
clearing services in full, or to bypass an initial or secondary auction 
management actions. Accordingly, the Commission believes that the 
proposed revisions to the Framework are reasonably designed to provide 
for governance arrangements that are clear and transparent and that 
specify clear and direct lines of responsibility.

[[Page 46578]]

C. Consistency With Rule 17Ad-22(e)(13)

    Rule 17Ad-22(e)(13) requires ICE Clear Europe to, in relevant part, 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ensure that it has the authority and 
operational capacity to take timely action to contain losses and 
liquidity demands and continue to meet its obligations.
    By amending the Framework to include the new default management and 
recovery tools in the Recovery Rule Amendments, the Commission believes 
that the proposal is consistent with Rule 17Ad-22(e)(13) because the 
various recovery tools give ICEEU the authority and capacity to timely 
contain losses and liquidity demands. In particular, by adding to the 
Framework a new section that authorizes the use of RGD as a recovery 
tool applied to customer and house accounts in the event that its 
remaining default resources are insufficient to ensure solvency, ICEEU 
would strengthen its ability to meet obligations in the event of a 
default by preserving its resources and limiting its obligations to 
clearing members. Similarly, the proposed amendments that permit ICEEU 
to proceed with a partial tear-up as a default tool when it is unable 
to close out all of a defaulter's remaining positions through auctions 
would also enhance ICEEU's ability to manage defaults by terminating 
positions of non-defaulters that exactly offset those in the defaulting 
clearing member's remaining portfolio and restore a matched book. The 
Commission believes that these tools, along with the Framework 
amendments discussed above, would promote ICEEU's ability to preserve 
its resources and timely meet its obligations in extreme default events 
and are therefore consistent with Rule 17Ad-22(e)(13).

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 \11\ and Rules 17Ad-22(e)(2) and (e)(13) thereunder.\12\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(2) and (e)(13).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\13\ that the proposed rule change (SR-ICEEU-2019-014) be, and hereby 
is, approved.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-18998 Filed 9-3-19; 8:45 am]
 BILLING CODE 8011-01-P