[Federal Register Volume 84, Number 231 (Monday, December 2, 2019)]
[Notices]
[Pages 66036-66039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-25960]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-87612; File No. SR-ICC-2019-013]
Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of
Filing of Proposed Rule Change Relating to the ICC Clearing Rules
November 25, 2019.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, 15 U.S.C. 78s(b)(1) and Rule 19b-4, 17 CFR 240.19b-4, notice is
hereby given that on November 15, 2019, ICE Clear Credit LLC (``ICE
Clear Credit'' or ``ICC'') filed with the Securities and Exchange
Commission the proposed rule change, security-based swap submission, or
advance notice 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.
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 make
certain changes to the ICC Clearing Rules (the ``Rules'') \1\ to
incorporate amendments to the industry-standard ISDA 2014 Credit
Derivatives Definitions (the ``2014 Definitions'') that are being
adopted in the broader CDS market to address so-called narrowly
tailored credit events and related matters.
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\1\ Capitalized terms used but not defined herein have the
meanings specified in the Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, 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
ICE Clear Credit proposes amendments to its Rules to incorporate
changes to the 2014 Definitions that are intended to address so-called
``narrowly tailored credit events''. In the wake of certain credit
events and potential credit events in the CDS market in recent years,
the International Swaps and Derivatives Association, Inc. (``ISDA''),
in consultation with market participants, has developed and published
the 2019 Narrowly Tailored Credit Event Supplement to the 2014 ISDA
Credit Derivatives Definitions (the ``NTCE Supplement'').\2\ The NTCE
Supplement, if applied to a CDS transaction, effects two principal
changes to the 2014 Definitions: (1) A change to the definition of the
``Failure to Pay'' credit event designed to exclude certain narrowly
tailored credit events and (2) a change to the process for determining
the Outstanding Principal Balance of an obligation to address certain
obligations of a reference entity that were issued at a discount.
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\2\ The NTCE Supplement is published on the ISDA website at
https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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As described by ISDA in the attached guidance to the NTCE
Supplement, the supplement was published in light of concerns among
market participants and regulators about ``instances of [CDS] market
participants entering into arrangements with corporations that are
narrowly tailored to trigger a credit event for CDS contracts while
minimizing the impact on the corporation, in order to increase payment
to the buyers of CDS protection.'' \3\ ISDA has expressed concern that
``narrowly tailored defaults . . . could negatively impact the
efficiency, reliability and fairness of the overall CDS market.''
Regulators have also expressed concern with narrowly tailored or
manufactured credit events, including a joint statement by the heads of
the Commission, the Commodity Futures Trading Commission and the UK
Financial Conduct Authority that
[[Page 66037]]
such strategies ``may adversely affect the integrity, confidence and
reputation of the credit derivatives markets, as well as markets more
generally. These opportunistic strategies raise various issues under
securities, derivatives, conduct and antifraud laws, as well as policy
concerns.'' \4\
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\3\ NTCE Supplement, Guidance on the interpretation of the
definition of ``Failure to Pay''.
\4\ Securities and Exchange Commission, Commodity Futures
Trading Commission and UK Financial Conduct Authority, Joint
Statement on Opportunistic Strategies in the Credit Derivatives
Markets (June 24, 2019); see also Update to June 2019 Joint CFTC-
SEC-FCA Statement on Opportunistic Strategies in the Credit
Derivatives Market (Sept. 19, 2019).
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With respect to the Failure to Pay credit event, the NTCE
Supplement adopts a concept of a ``Credit Deterioration Requirement.''
If applicable, this requirement will provide that a failure of a
reference entity to make a payment on an obligation will not constitute
a Failure to Pay Credit Event if the failure ``does not directly or
indirectly either result from, or result in, a deterioration in the
creditworthiness or financial condition'' of the reference entity. As
such, a ``narrowly tailored'' or ``manufactured'' failure to pay, which
does not reflect or result in a credit deterioration, would not
constitute a Credit Event for CDS Contracts that incorporate the NTCE
Supplement and apply the Credit Deterioration Requirement. The NTCE
Supplement also includes guidance as to factors relevant to the
determination of whether credit deterioration has occurred. That
determination would, under the 2014 Definitions, in the ordinary course
be made by the relevant Credit Derivatives Determinations Committee.
The NTCE Supplement also amends the method of calculating the
Outstanding Principal Balance of obligations. The amendments are
intended to address a potential scenario where a corporation agrees to
issue a bond at a substantial discount to its principal amount, where
the bond could be delivered in settlement of a CDS at its full
principal amount. Under the 2014 Definitions, the Quantum of the Claim
(which is used to determine the Outstanding Principal Balance used in
calculating settlement obligations) is determined taking into account
any applicable laws insofar as they reduce the size of the claim to
reflect the original issue price or accrued value of the obligation.
The NTCE Supplement clarifies that the applicable laws to be considered
include any bankruptcy or insolvency law or other law affecting
creditors' rights to which the relevant obligation is or may become
subject. In addition, the NTCE Supplement includes the concept of
``Fallback Discounting,'' which if designated to be applicable,
provides a method for discounting the Quantum of the Claim (where it is
not otherwise reduced under applicable law or pursuant to its own
terms) of an obligation that is issued at less than 95% of its
principal amount, based on straight-line interpolation between the
issue price and the principal amount.
ICE Clear Credit has been advised that CDS market participants are
expected to commence transacting in CDS incorporating the NTCE
Supplement (with Credit Deterioration Requirement and Fallback
Discounting applicable) on or about January 27, 2020. In addition, ISDA
has published, and opened for adherence, an NTCE Protocol pursuant to
which parties may, on a multilateral basis, agree to amend outstanding,
non-cleared CDS transactions to incorporate the NTCE Supplement. The
amendments made by the NTCE Protocol are also expected to have an
implementation date on or about January 27, 2020. Adherence to the
protocol will thus make existing transactions fungible with
transactions on the new terms. Accordingly, ICE Clear Credit is
proposing to amend its Rules for relevant products to incorporate the
NTCE Supplement, both for new and existing cleared transactions. For
this purpose, the proposed ICC amendments will apply to all cleared CDS
contracts with corporate (i.e., non-sovereign) reference entities,
consistent with the NTCE Protocol and the expected approach for new CDS
transactions. ICC proposes to make such changes effective by the
industry implementation date.
Specifically, ICC would amend Rule 20-102 to include new
definitions for ``NTCE Amending Contracts'', which would be those
Contracts being amended to incorporate the NTCE Supplement, as
specified in a list to be maintained by ICC, and ``NTCE Effective
Date'', which will be the date of implementation of the amendment. The
NTCE Effective Date will initially be January 27, 2020 (or such later
date as designated by ICC by Circular). Rule 20-102 would also include
a definition for the NTCE Supplement.
ICC would further amend each relevant subchapter of Chapter 26 of
the Rules to implement the NTCE Supplement. A set of amendments would
apply to index CDS transactions and a separate set of amendments would
apply to single-name CDS transactions.
In the case of index CDS, for CDX.NA Index CDS transactions, in
subchapter 26A, in Rule 26A-102, the definition of CDX.NA Untranched
Terms Supplement would be amended to include the new 2020 standard
terms supplement for such transactions, as published by ISDA, which
incorporates the NTCE Supplement, along with conforming changes to
cross-references. Rule 26A-316 would be amended by adding a new
paragraph (e), which provides that open positions in CDX.NA Untranched
Contracts that are NTCE Amending Contracts would be amended, effective
as of the NTCE Effective Date, to reference the updated 2020 standard
terms supplement in lieu of the standard terms supplement previously in
effect. This will have the effect of converting all existing CDX.NA
Untranched Contracts to reference the new standard terms supplement,
such that they will be fungible with new CDX.NA Untranched Contracts,
which will also reference the new standard terms supplement. New
paragraph (e) would also provide that the amendments will be effective
regardless of whether any transaction record in the Deriv/SERV
warehouse is updated to reflect the change.
Substantially similar changes for other categories of index CDS
would also be made in subchapters 26F (for iTraxx Europe Untranched
Contracts) and 26J (for iTraxx Asia/Pacific Untranched Contracts).
In the case of single-name CDS, for Standard North American
Corporate (SNAC) Contracts, in subchapter 26B, Rule 26B-616 would be
amended by adding a new paragraph (c), which provides that open
positions in SNAC Contracts that are NTCE Amending Contracts would be
amended, effective as of the NTCE Effective Date, to incorporate the
NTCE Supplement and specify that Fallback Discounting and Credit
Deterioration Requirement will be applicable. The contracts would also
be amended to reference the new ISDA physical settlement matrix, to be
published as of the NTCE Effective Date (or other relevant
implementation date as determined by ICC). The amendments will have the
effect of converting existing SNAC Contracts to reference the updated
physical settlement matrix, such that they will be fungible with new
SNAC Contracts, which will also reference that matrix. New paragraph
(c) would also provide that the amendments will be effective regardless
of whether any transaction record in the Deriv/SERV warehouse is
updated to reflect the change.
Substantially similar changes for other categories of single-name
CDS would also be made in subchapters 26G (for Standard European
Corporate Contracts), 26H (for Standard European Financial Corporate
Contracts), 26M (for
[[Page 66038]]
Standard Australian Corporate Contracts), 26N (for Standard Australia
Financial Corporate Contracts), 26O (for Standard Asia Corporate
Contracts), 26P (for Standard Asia Financial Corporate Contracts) and
26Q (for Standard Emerging Market Corporate Contracts).
(b) Statutory Basis
ICC believes that the proposed rule changes are consistent with the
requirements of Section 17A of the Act \5\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\6\ In particular, Section 17A(b)(3)(F) of the Act
requires that the rule change be consistent with the prompt and
accurate clearance and settlement of securities transactions and
derivative agreements, contracts and transactions cleared by ICC, the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible, and the protection of investors and the
public interest.\7\
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\5\ 15 U.S.C. 78q-1.
\6\ 17 CFR 240.17Ad-22.
\7\ 15 U.S.C. 78q-1(b)(3)(F).
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The amendments incorporate changes to the standard terms of CDS
Contracts that are being widely adopted by market participants to
address potential concerns that have arisen with so-called narrowly
tailored credit events. The amendments reflect amendments to the 2014
Definitions, specifically with respect to the Failure to Pay and
Outstanding Principal Balance definitions, that have been developed by
ISDA, in consultation with market participants in both the cleared and
uncleared CDS markets, and are set out in the NTCE Supplement. ICE
Clear Credit understands that for the uncleared swap market, these
amendments are expected to be widely implemented through the NTCE
Protocol. ICE Clear Credit notes that the heads of the Commission, the
Commodity Futures Trading Commission and the UK Financial Conduct
Authority have stated that they welcome the efforts to implement the
amendments set out in the NTCE Supplement and NTCE Protocol.\8\ ICE
Clear Credit is proposing to adopt amendments to its Rules to implement
these same changes for both new and existing contracts cleared by it.
As a result, in ICE Clear Credit's view, the amendments will enhance
the integrity of the credit derivatives markets and the confidence of
market participants in those markets, and will therefore facilitate the
prompt and accurate clearance and settlement of such contracts at ICC
and will further facilitate the protection of investors and the public
interest, within the meaning of Section 17A(b)(3)(F) of the Act. ICE
Clear Credit does not believe the amendments will materially affect the
safeguarding of securities and funds in the custody or control of ICC
or for which it is responsible.
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\8\ Update to June 2019 Joint CFTC-SEC-FCA Statement on
Opportunistic Strategies in the Credit Derivatives Markets (Sept.
19, 2019).
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The amendments will also satisfy relevant requirements of Rule
17Ad-22,\9\ as set forth in the following discussion.
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\9\ 17 CFR 240.17Ad-22.
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Legal Framework. Rule 17Ad-22(d)(1) requires a clearing agency to
establish, implement, maintain and enforce written policies and
procedures reasonably designed to ``provide for a well-founded,
transparent and enforceable legal framework for each aspect of its
activities in all relevant jurisdictions.'' \10\ The amendments to the
Rules are designed to supplement the contractual terms, consistent with
industry initiatives, to address and reduce the likelihood of certain
situations involving narrowly tailored credit events that have given
rise to concerns among market participants and regulators, as described
above. As such, ICC believes that the amendments will enhance the legal
framework for clearing of CDS Contracts, consistent with the
requirements of Rule 17Ad-22(d)(1).\11\
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\10\ 17 CFR 240.17Ad-22(d)(1).
\11\ 17 CFR 240.17Ad-22(d)(1).
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Operational Risk. Rule 17Ad-22(d)(4) requires a clearing agency 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.'' \12\ ICC believes the amendments, by
implementing the NTCE Supplement for existing and new CDS Contracts,
will be consistent with, and eliminate basis risk as compared to,
changes being made in the uncleared CDS markets. The changes will also
ensure the fungibility of new and existing contracts in light of the
NTCE Supplement amendments, which will facilitate ongoing risk
management by the clearing house and market participants. As a result,
in ICC's view, the amendments are consistent with the requirements of
Rule 17Ad-22(d)(4).\13\
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\12\ 17 CFR 240.17Ad-22(d)(4).
\13\ 17 CFR 240.17Ad-22(d)(4).
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(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Credit does not believe the proposed amendments would
have any impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purpose of the Act. The amendments
reflect an industry-wide initiative designed to apply to all CDS market
participants, in both the cleared and uncleared markets. ICC's specific
amendments to its Rules will apply consistently across all Participants
and Non-Participant Parties. ICC further expects that other market
participants will make similar changes to their contracts and terms of
trading. As a result, ICC does not expect that the proposed changes
will adversely affect access to clearing or the ability of
Participants, their customers or other market participants to continue
to clear contracts, including CDS Contracts. ICC also does not believe
the amendments would materially affect the cost of clearing or
otherwise limit market Participants' choices for selecting clearing
services. Accordingly, ICC does not believe the amendments would impose
any burden on competition not necessary or appropriate in furtherance
of the purpose of the Act.
(C) Clearing Agency's Statement on Comments on the Proposed Rule Change
Received From Members, Participants, or Others
ICC has not solicited or received written comments with respect to
the proposed rule changes. ICC will notify the Commission of any
written comments on the proposed rule changes received by ICC.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
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, security-based swap
[[Page 66039]]
submission, or advance notice 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-2019-013 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-2019-013. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's internet website (http://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549, on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of such filings will also be available for inspection
and copying at the principal office of ICE Clear 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-2019-013 and should be
submitted on or before December 23, 2019.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-25960 Filed 11-29-19; 8:45 am]
BILLING CODE 8011-01-P