[Federal Register Volume 84, Number 173 (Friday, September 6, 2019)]
[Notices]
[Pages 47019-47023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19212]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-86838; File No. SR-ICC-2019-008]
Self-Regulatory Organizations; ICE Clear Credit LLC; Order
Approving Proposed Rule Change Relating to the ICC Clearing Participant
Default Management Procedures and ICC Risk Management Framework
August 30, 2019.
I. Introduction
On June 28, 2019, ICE Clear Credit LLC (``ICC'') filed with the
Securities and Exchange Commission pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the ``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change (SR-ICC-2019-008) to formalize
and enhance the ICC Clearing Participant (``CP'') Default Management
Procedures (``Default Management Procedures'') and enhance its Risk
Management Framework.\3\ The proposed rule change was published in the
Federal Register on July 16, 2019.\4\ 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\ Capitalized terms used herein but not otherwise defined have
the meaning set forth in the Default Management Procedures, the Risk
Management Framework and ICE Clear Credit rulebook, which is
available at https://www.theice.com/clear-credit/regulation.
\4\ Securities Exchange Act Release No. 34-86341 (July 10,
2019), 84 FR 34021 (July 16, 2019) (SR-ICC-2019-008) (``Notice'').
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II. Description of the Proposed Rule Change
Currently, ICC's default management rules and procedures are set
forth throughout several documents, including the ICC Rules, the
Default Auction Procedures--Initial Default Auctions, and the Secondary
Auction Procedures.\5\ In addition, Appendix 3 to the Risk Management
Framework (``Appendix 3'') includes a high-level, general description
of ICC's overall default management procedures, with citations and
cross-references throughout to the documents described above. The
proposed rule change would (i) formalize and enhance ICC's existing
Default Management Procedures by creating a stand-alone document that
replaces, restates, and substantially expands existing Appendix 3; (ii)
within the new Default Management Procedures, provide additional detail
and description with respect to ICC's existing rules and procedures;
and (iii) make related enhancements to the Risk Management Framework by
incorporating appropriate references to the proposed stand-alone
Default Management Procedures and making targeted changes clarifying
guarantee fund replenishment and assessment contributions. The proposed
Default Management Procedures would identify, describe, and provide
additional detail with respect to ICC's existing default management
rules and procedures, but would not make substantive changes to any of
those existing default management rules and procedures, which would
still reside in the ICC Rules and other locations.
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\5\ Notice, 84 FR at 34021.
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A. Default Management Procedures
The proposed Default Management Procedures would identify and
describe ICC's overall default management process, including (i) the
actions that ICC will take to determine if a CP is in default and (ii)
the actions ICC will take in connection with such a default and to
close-out the defaulting CP's positions. In describing ICC's overall
default management process, the Default Management Procedures would
restate and substantially expand Appendix 3, but would not
substantively change or otherwise replace ICC's existing default
management rules and procedures. Where appropriate, the proposed new
stand-alone Default Management Procedures would cross-reference and
cite to ICC's existing default management rules and procedures to avoid
duplication, and as discussed below, in some instances clarify and
enhance them by, for example, providing additional detail, such as
assigning responsibility for default management actions and adding
instructions on how to perform default management actions.\6\ In
describing the actions ICC will take to determine if a CP is in default
and, subsequently, in connection with such a default, the Default
Management Procedures document includes a list of defined terms that
are key for default management and an overview of ICC's default
management process. In describing and providing an overview of ICC's
default management process, the proposed Default Management Procedures
include descriptions of sub-processes such as identifying those
clearing members that are at risk of defaulting or are in default,
declaring a default, transferring a defaulter's client portfolios to
non-defaulting Futures Commission Merchants (``FCM''), consulting with
the CDS Default Committee, performing Standard Default Management
Actions and Secondary Default Management Actions to facilitate Close-
Out, and managing default resources.\7\ Further, the Default Management
Procedures describe how ICC and its CPs maintain operational readiness
to execute the default management process, including administering the
CDS Default Committee rotation process, working with customers of CPs
who want to directly participate in auctions, maintaining up-to-date
contact information, and testing the default management process.\8\
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\6\ Id.
\7\ Notice, 84 FR at 34021-34023.
\8\ Notice, 84 FR at 34022.
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The Default Management Procedures would also 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.\9\ Additionally, the Default
Management Procedures establish 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,
[[Page 47020]]
to meet obligations of ICC membership.\10\
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\9\ Id.
\10\ Id.
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The actions taken after the identification of a potential default
are the default declaration sub-process and the Default Management
Procedures list actions that the Close-Out Team performs after
activation but before a default declaration, such as initial meetings
to discuss circumstances surrounding the default risk, strategy for the
close-out, and plans for ICC to meet upcoming payment obligations.\11\
The Default Management Procedures also contain procedures taken after
declaration of default to prepare for a close-out.\12\
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\11\ Id.
\12\ Id.
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The Default Management Procedures also 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.\13\ 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.\14\
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\13\ Id.
\14\ Id.
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The ICC 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.\15\ Specifically,
the Default Management Procedures incorporate instructions on executing
Initial Cover Transactions by auction and bilaterally, conducting
Initial Default Auctions, and executing bilateral direct liquidation
transactions in the market to liquidate positions.\16\ The document
further assigns responsibility for tracking the position changes that
result from the movement of positions or the creation of new
positions.\17\
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\15\ Id.
\16\ Id.
\17\ Id.
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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.\18\ ICC may call for assessment contributions and the Default
Management Procedures discuss the procedures for calling for assessment
contributions and initiating a Cooling-Off Period.\19\ 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.\20\ 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 enter a Loss Distribution Period, execute a
partial tear-up, or terminate clearing services, which are detailed in
the Default Management Procedures.\21\
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\18\ Id.
\19\ Id.
\20\ Id.
\21\ Id.
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Further, the Default Management Procedures provide an overview of
the post-default porting sub-process.\22\ The Risk Department, in
consultation with the CDS Default Committee, determine which Porting
Portfolios to try to transfer to Potential Receiving FCMs.\23\ 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.\24\
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\22\ Notice, 84 FR at 34023.
\23\ Id.
\24\ Id.
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The Default Management Procedures set forth the default resource
management sub-process.\25\ The document includes procedures for the
identification and execution of collateral management activities that
are necessary for ICC to meet upcoming payment obligations.\26\ 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.\27\ 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.\28\ 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.\29\
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\25\ Id.
\26\ Id.
\27\ Id.
\28\ Id.
\29\ Id.
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B. Risk Management Framework
ICC is proposing related default management enhancements to the
Risk Management Framework. Specifically, ICC proposes to incorporate a
reference to the Default Management Procedures in the `Governance and
Organization' section of the Risk Management Framework to specify that
the Default Management Procedures contain details regarding default
management roles and responsibilities of the Board, ICC management, and
relevant committees.\30\ 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 Guarantee Fund (``GF''). The proposed edits
provide additional detail regarding the aggregate liability of CPs for
replenishment and assessment contributions. Specifically, the edits
clarify that 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.\31\ The proposed changes further discuss how the
additional IM requirements are computed and communicated to CPs.\32\
ICC also proposes to clarify the maximum contribution of a retiring CP
that has given notice of its intent to terminate its CP status.\33\
Finally, because the proposed Default Management Procedures would
restate and substantially expand existing Appendix 3 of the Risk
Management Framework, ICC proposes to remove Appendix 3 and replace a
reference to it in the Risk Management Framework with a reference to
the Default Management Procedures instead.\34\
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\30\ Id.
\31\ Id.
\32\ Id.
\33\ Id.
\34\ Id.
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III. Discussion and 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
such
[[Page 47021]]
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to such
organization.\35\ For the reasons given below, the Commission finds
that the proposed rule change is consistent with Section 17A(b)(3)(F)
of the Act \36\ and Rules 17Ad-22(b)(3),\37\ 17Ad-22(d)(4),\38\ 17Ad-
22(d)(8),\39\ and 17Ad-22(d)(11) \40\ thereunder.
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\35\ 15 U.S.C. 78s(b)(2)(C).
\36\ 15 U.S.C. 78q-1(b)(3)(F).
\37\ 17 CFR 240.17Ad-22(b)(3).
\38\ 17 CFR 240.17Ad-22(d)(4).
\39\ 17 CFR 240.17Ad-22(d)(8).
\40\ 17 CFR 240.17Ad-22(d)(11).
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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 ICC be designed to promote the prompt and accurate
clearance and settlement of securities transactions and, to the extent
applicable, derivative agreements, contracts, and transactions, as well
as to assure the safeguarding of securities and funds which are in the
custody or control of ICC or for which it is responsible, and, in
general, to protect investors and the public interest.\41\
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\41\ 15 U.S.C. 78q-1(b)(3)(F).
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The Commission believes that by creating a stand-alone document
that (i) formalizes and enhances ICC's existing default management
procedures; (ii) identifies and cross-references the existing default
management rules and procedures that currently are located in several
other ICC documents; and (iii) describes the sub-processes involved in,
and parties responsible for, those default management procedures, the
proposed rule change would provide additional clarity, transparency,
and detail with respect to ICC's default management procedures, which
in turn would help promote prompt and accurate clearance settlement and
the safeguarding of securities and funds in ICC's control.
Specifically, the Default Management Procedures describe several
default management sub-processes and the parties responsible. As
described above, ICC consults with the CDS Default Committee, whose
membership consists of experienced trading personnel at CDS clearing
participants, prior to taking default actions. Further, the Default
Management Procedures describe that the ICC President may activate the
team responsible for overseeing the default management process, the
Close-Out Team, as well as the various processes for managing default
such as the counterparty monitoring process, default declaration
process, and the standard and secondary default management actions. The
Commission believes that these processes provide ICC the ability to
regularly (daily, weekly, and quarterly) monitor those clearing
participants at risk of default, develop default management strategies
(standard or secondary), and execute default management actions (i.e.,
auctions, tear-ups). The Commission believes that this formalized
process for dealing with defaults before and after their declaration
prepares ICC with assigned personnel and requisite strategies for
effectively managing defaults. This level of detail in turn could help
enhance ICC's ability to manage losses and thus maintain adequate
financial resources necessary to promptly and accurately clear
securities transactions and safeguarding of securities and funds in its
custody and control.
Similarly, the Commission believes that the proposed changes to the
Risk Management Framework support ICC's ability to maintain adequate
financial resources. As described above, the changes to the Risk
Management Framework more clearly describe CPs' obligations with
respect to replenishment and assessment contributions to the guarantee
fund, and provide additional detail regarding the aggregate liability
of CPs for replenishment and assessment contributions. Further, the
proposed changes clarify that if the cap on the additional GF
contributions is reached, ICC may apply additional IM requirements if
necessary to maintain compliance with regulatory financial resources
requirements, and 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. The Commission believes that by
revising the Risk Management Framework with this additional detail, ICC
will ensure that it has the procedures in place to obtain additional
resources when necessary, thereby strengthening its financial position
and ability to promptly and accurately clear securities transactions
and safeguard funds and securities in its custody or control.
Therefore, the Commission believes that the proposed rule changes are
consistent with Section 17A(b)(3)(F) of the Act.
B. Consistency With Rule 17Ad-22(b)(3)
Rule 17Ad-22(b)(3) requires that ICC 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, in its capacity
as a central counterparty for security-based swaps.\42\
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\42\ 17 CFR 240.17Ad-22(b)(3).
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As described above, the proposed rule change would provide detailed
instructions for managing defaults. Specifically, the Default
Management Procedures discuss the responsible parties and actions taken
prior and in response to a default. The proposed rule change describes
ICC's counterparty monitoring program in which it performs daily,
weekly, and quarterly monitoring designed, in part, to identify Default
Risk CPs. The Commission believes that by formalizing procedures in
this way ICC strengthens its ongoing system for detecting and coping
with financial stress brought on by CP defaults and enhances its
ability to manage its financial resources to cope with events such as a
default by the two participant families to which it has the largest
exposures in extreme but plausible market conditions.
Additionally, as stated above, ICC's Default Management Procedures
would describe a variety of tools for dealing with defaults, for
example, unwinding a defaulter's position and structuring an auction or
executing bilateral direct liquidation transactions in the market;
calling for assessment contributions from CPs to the guarantee fund;
implementing reduced gains distributions; or executing a partial tear-
up when available default resources are exhausted. Further, the Default
Management Procedures set forth the process for default resource
management, which involves the identification and execution of
collateral management necessary for meeting upcoming payment
obligations. As mentioned above, liquid resources are reviewed and
decisions are made as to whether to liquidate non-cash collateral in
the defaulter's house and/or client accounts or to use ICC's committed
FX and repo facilities. The Commission believes that these procedures
offer tools to strengthen ICC's ability to manage its financial
resources and withstand the pressures of defaults. Consequently, the
Commission believes that the proposed rule change as relates to the
Default Management Procedures is consistent with the obligations of
Rule 17Ad-22(b)(3).
[[Page 47022]]
Similarly, the Commission believes that the proposed enhancements
to the Risk Management Framework will strengthen ICC's ability to
maintain sufficient financial resources to withstand a default by the
two participant families to which it has the largest exposures in
extreme but plausible market conditions. In particular, as described
above, ICC proposes to more clearly describe a CP's 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 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. The Commission believes that these
clarifications will enhance ICC's ability to obtain additional
financial resources by making parties aware of their financial
liabilities and will in turn help it withstand a default by the two
participant families to which it has the largest exposures in extreme
but plausible market conditions. The Commission believes, therefore,
that the changes to the Risk Management Framework are consistent with
Rule 17Ad-22(b)(3).
C. Consistency With Rule 17Ad-22(d)(4)
Rule 17Ad-22(d)(4) 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.\43\
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\43\ 17 CFR 240.17Ad-22(d)(4).
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As discussed above, the Default Management Procedures describe how
ICC conducts monitoring of CPs on a daily, weekly, and quarterly basis.
The Commission believes that the activities, as well as others set
forth in the Default Management Procedures, help ICC and its CPs
maintain operational readiness to execute the default management
process. For example, 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. Consequently, the Commission believes that the proposed rule
change is consistent with Rule 17Ad-22(d)(4).
D. Consistency With Rule 17Ad-22(d)(8)
Rule 17Ad-22(d)(8) requires, in relevant part, that 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 to support the objectives of owners and
participants, and to promote the effectiveness of the clearing agency's
risk management procedures.\44\
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\44\ 17 CFR 240.17Ad-22(d)(8).
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As described above, the Default Management Procedures discuss the
role of various parties, including ICC's President, Risk Committee, CDS
Default Committee, and Board. In particular, upon identifying default
risk CPs, the ICC President may take no action or 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 and which comprise the
Close-Out Team, to move forward with the process of declaring a
default. Further, 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 engage in secondary default management actions
such as entering a Loss Distribution Period, executing a partial tear-
up, or terminating clearing services. The Default Management Procedures
also provide an overview of the post-default porting sub-process in
which the Risk Department, in consultation with the CDS Default
Committee, determines which Porting Portfolios to try to transfer. The
Commission believes that these procedures represent comprehensive
governance arrangements that are clear and transparent and promote the
effectiveness of the clearing agency's risk management procedures by
laying out various responsibilities throughout the default management
process. Therefore, the Commission believes that the rule proposal is
consistent with Rule 17Ad-22(d)(8).
E. Consistency With Rule 17Ad-22(d)(11)
Rule 17Ad-22(d)(11) 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.\45\
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\45\ 17 CFR 240.17Ad-22(d)(11).
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The Commission believes that because 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 and because the
proposed Default Management Procedures clarify and augment ICC's
existing rules and procedures relating to default management, the
proposed rule change is consistent with the requirement to make key
aspects of the clearing agency's default procedures publicly available.
Additionally, because of the monitoring and governance procedures
prior to and directly after a default described above, the Commission
believes that the proposed rule changes are consistent with the
requirement to 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. The Commission believes that the frequency of the
monitoring system enhances ICC's ability to timely respond to default
risk. Consequently, the Commission believes that the proposed rule
change is consistent with Rule 17Ad-22(d)(11).
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'' \46\ and Rules 17Ad-22(b)(3), 17Ad-22(d)(4),
[[Page 47023]]
17Ad-22(d)(8), and 17Ad-22(d)(11) thereunder.\47\
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\46\ 15 U.S.C. 78q-1(b)(3)(F).
\47\ 17 CFR 240.17Ad-22(b)(3), 17 CFR 240.17Ad-22(d)(4), (8),
and (11).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\48\ that the proposed rule change (SR-ICC-2019-008) be, and hereby is,
approved.\49\
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\48\ 15 U.S.C. 78s(b)(2).
\49\ 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.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-19212 Filed 9-5-19; 8:45 am]
BILLING CODE 8011-01-P