[Federal Register Volume 85, Number 29 (Wednesday, February 12, 2020)]
[Notices]
[Pages 8075-8078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02748]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-88136; File No. SR-ICEEU-2019-019]
Self-Regulatory Organizations; ICE Clear Europe Limited; Order
Approving Proposed Rule Change Relating to the ICE Clear Europe
Collateral and Haircut Policy and Collateral and Haircut Procedures
February 6, 2020.
I. Introduction
On December 4, 2019, ICE Clear Europe Limited (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 replace the existing
Collateral and Haircut Policy (the ``Existing Policy''), which
currently exists as a single document, with two new documents: (i) A
revised Collateral and Haircut Policy (the ``Revised Policy'') that
would specify high-level policy details and (ii) a new Collateral and
Haircut Procedures (the ``Collateral Procedures'') that would provide
supporting operational and other details for the Revised Policy. The
proposed rule change was published for comment in the Federal Register
on December 23, 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. 87771 (December 17,
2019), 84 FR 70584 (December 23, 2019) (SR-ICEEU-2019-019)
(``Notice'').
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II. Description of the Proposed Rule Change
ICEEU is proposing to adopt the Revised Policy and new Collateral
Procedures, which, taken together, would replace and supersede the
Existing Policy.\4\ The Existing Policy sets out ICEEU's overall
approach to defining the types, amounts and composition of cash and
non-cash collateral that ICEEU accepts from Clearing Members (``CMs'')
to cover their guaranty fund and margin requirements. The Existing
Policy also sets out ICEEU's overall goal of mitigating price risk it
may face when liquidating collateral of a defaulting CM by setting and
enforcing a list of acceptable collateral (``Permitted Cover'');
setting and applying risk-based haircuts to the value of the collateral
(``Haircuts''); setting and enforcing concentration limits on the
amount of collateral a CM may post, to provide diversification of the
collateral pool (``Concentration Limits''); and ensuring Permitted
Cover, Haircuts and Concentration Limits are aligned to the ICEEU's
risk appetite and compliant with applicable legal and regulatory
requirements.
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\4\ The following description of the proposed rule change is
excerpted from the Notice, 84 FR 70584.
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The approach of the proposed rule change is the creation of two
documents so that elements of the Existing Policy are split between the
Revised Policy and the Collateral Procedures. The new documents would
retain the high-level policy details from the Existing Policy in the
Revised Policy and place supporting detail from the Existing Policy
into the new Collateral Procedures. The amendments would also remove
certain operational details in the Existing Policy that ICEEU has
determined are not needed in the Revised Policy or Collateral
Procedures because they are contained in other Clearing House
documentation. Further, the proposed rule change would not itself
result in material changes to the overall purpose of the policy, the
underlying haircut model, or to the eligible collateral, haircuts and
concentration limitations that the Clearing House currently imposes.
The discussion below describes the information from the Existing Policy
that is either being retained in the Revised Policy and Collateral
Procedures or information not repeated in these documents because they
are duplicative of information contained in other Clearing House
documents.
A. Revised Policy
The Revised Policy is retaining the high-level policy goals from
the Existing Policy related to Permitted Cover, Haircuts, and
Concentration Limits described below.
1. Permitted Cover
The Revised Policy would restate the Existing Policy's overall
requirements that Permitted Cover assets be highly liquid with low
credit and market risk; are priced in an eligible currency; and entail
risks limited to those that ICEEU is able to identify, measure, monitor
and mitigate. The specific list of Permitted Cover would not be
contained in the Revised Policy (or Collateral Procedures) itself but
would continue to be available on the ICEEU website. The specific
principles for accepting Permitted Cover discussed in the Existing
Policy would reside the Collateral Procedures as discussed below.
2. Haircuts
The Revised Policy would restate the Existing Policy's overall
requirements that Haircuts be based on a model that includes the
creditworthiness of the issuer; the asset's market risk and liquidity
risk; and market conditions and volatility. Certain details such as
those relating to the determination of minimum haircuts discussed in
the Existing Policy would be specified in the Collateral Procedures, or
in related model documentation. The Revised Policy would also state the
general principal from the Existing Policy that wrong way risk with
respect to posting of collateral (i.e., the risk that the value of a
particular CM's collateral is likely to decline at the same time the
Clearing House's risk to the CM increases) would be mitigated through
member-specific restrictions and actions rather than Haircuts.
3. Concentration Limits
The Revised Policy would restate the Existing Policy's overall
framework for setting CM Concentration Limits. It
[[Page 8076]]
would provide that ICEEU may limit (i) the absolute amount of each type
of collateral that CMs may lodge to minimize concentration and enable
liquidity and (ii) the relative amount of each collateral type in a
CM's collateral portfolio to prevent overexposure to price movements in
individual asset classes. Details regarding collateral management, data
and reporting and legal review of enforceability of collateral found in
the Existing Policy would be split across the Collateral Procedures,
ICEEU's Collateral and Haircut Schedule of Parameters and Reviews (the
``Parameters'') and the Model Documentation for Collateral Haircut
Model. Where details from the Existing Policy such as intraday and end
of day valuation of collateral, ICEEU's investment program, or custody
arrangements for non-cash collateral are included in other Clearing
House policies, procedures and documentation, such as the Treasury &
Banking Services Policy, Investment Management Policy, F&O Risk Policy,
Document Governance Schedule and Risk Appetite Framework, to avoid
duplication, they would not be covered in the Revised Policy or
Collateral Procedures.
4. Policy Governance
The Revised Policy would restate the Existing Policy's high level
overall arrangements for policy governance, reviews and exception
handling.
B. Collateral Procedures
The new Collateral Procedures would function as the application of
the principles of the Revised Policy by describing the operational
details and related governance processes for Permitted Cover, Haircuts
and Concentration Limits that are currently in the Existing Policy and
described below.
1. Permitted Cover
Detail regarding Permitted Cover requirements from the Existing
Policy, and the adoption of the new Collateral Procedures, would not
result in a change in the list of Eligible Permitted Cover. The
Collateral Procedures would apply general eligibility criteria to
Permitted Cover from the Existing Policy such as highly liquid assets,
price history, capacity to revalue, etc. The Collateral Procedures also
describe the additional criteria applied to financial instruments and
gold assets currently in the Existing Policy.
The sovereign rating model has been retired by ICEEU and instead,
the Procedures and related Parameters address sovereign quality. The
elements related to sovereign rating are the same as in the Existing
Policy and discussed in the new Collateral Procedures and Parameters.
Several other matters from the Existing Policy would not be
described in the Collateral Procedures because they are found in other
documents. Certain additional details and parameters would be set out
in an annex to the Procedure or in the List of Permitted Cover, which
is an operational document that is published on the ice.com website.\5\
Unlike the Existing Policy, the Collateral Procedures would not have a
section specifically addressing restrictions on Guaranty Fund
collateral as this is already addressed in the Finance Procedures and
List of Permitted Cover.
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\5\ Available at: https://www.theice.com/publicdocs/clear_europe/list-of-permitted-covers.pdf.
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2. Haircuts
As is currently the case with the Existing Policy, the proposed
Collateral Procedures would apply conservative haircuts to Permitted
Cover to ensure that, even in stressed market conditions, the
collateral could be liquidated at least at the value it would be used
to cover, and would also continue to apply cross-currency haircuts to
mitigate foreign exchange risk where the currency applicable to the
collateral would be different from the currency of the requirements it
would be covering.
As is currently the case with the Existing Policy, the Collateral
Procedures would state that ICEEU determines Haircuts using a
combination of a model, analytical tools and/or qualitative overlays.
The model would be described in the collateral and haircut model
documentation and related parameters rather than being repeated in the
Collateral Procedures or Revised Policy. As is currently the case with
the Existing Policy, the Collateral Procedures would provide that
consistent with the existing model, Haircuts would further be based on
a number of factors, including, but not limited to credit assessment of
the issuer, market conditions, volatility, and liquidity of the
underlying market.
These factors are substantially the same as those set out in the
Existing Policy, other than the wrong way risk factor, which is
addressed through an operational report, and is addressed through CM-
specific measures rather than Haircuts.
Several other matters covered in the Existing Policy would not be
included in the Revised Policy and Collateral Procedures. Haircuts
would be subject to minimum values which would be addressed in the
Parameters, instead of the Revised Policy or Collateral Procedures, and
the final Haircut value would be rounded up to the nearest ``Haircut
Rounding Interval.'' Certain additional requirements relating to
Haircuts on bonds and gold bullion, as well as collateral pricing,
which are currently addressed in the Existing Policy, would be removed
from the Existing Policy as they are already addressed, and will
continue to be addressed, in the Model and the Parameters. The list of
data used in collateral pricing that is currently set out in the
Existing Policy would instead be set out in the Parameters. The
description of exceptions would be set out in Clearing House
operational documentation.
As is currently the case with the Existing Policy, the Collateral
Procedures would call for ICEEU to limit the likelihood of procyclical
impact from Haircuts as issuer creditworthiness deteriorates and
haircuts increase by applying a conservative minimum haircut,
identifying potential future events, and providing notice of changes to
haircuts.
3. Concentration Limits
The approach to Concentration Limits contained in the proposed
Collateral Procedures would be substantially similar to the Existing
Policy. However, certain details regarding the collateral breakdown
report currently in the Existing Policy would not be included in the
Collateral Procedures (as they are inconsistent with the level of
detail in the Collateral Procedures generally) but would instead be set
out in operational documentation. The report itself, which details how
collateral values are produced at an operational level, will continue
to be produced as part of the normal reporting cycle.
As is currently the case with the Existing Policy, the Collateral
Procedures describe the framework for how ICEEU determines the absolute
amount of each type of collateral that can be accepted from a CM
(``Absolute Limits'') and the relative amount of each type of
collateral within a CM's collateral portfolio (``Relative Limits''). As
compared to the Existing Policy, the Collateral Procedures would
clarify that all markets cleared by ICEEU would be included in the
calculation methodology for Absolute Limits. The description of the
Absolute Limits in the Collateral Procedures would otherwise generally
be consistent with the description of the Absolute Limits set out in
the Existing Policy.
[[Page 8077]]
Additionally, unlike the Existing Policy, the Collateral Procedures
would not take into account ICEEU's committed repo facility as a basis
for allowing Clearing Members to exceed otherwise applicable Absolute
Limits.
4. Further Restrictions
As is currently the case with the Existing Policy, the Collateral
Procedures would apply additional restrictions and measures with
respect to collateral such as reducing Absolute Limits once the CDS
spread of the issuer breaches pre-defined levels and analyzing CMs'
non-cash collateral to identify WWR daily.
The Collateral Procedures would also address cross clearing house
concentration limits consistently with the manner in which they are
addressed in the Existing Policy.
5. Data Management
While the Collateral Procedures restate from the Existing Policy
that the sources of data used for collateral valuation and for Haircuts
and Concentration Limits are approved and reviewed periodically at a
senior level, valuation of collateral is outside the scope of the
Collateral and Haircut Policy and Procedures and covered in the model
documentation. The Existing Policy discussed the manner in which ICEEU
monitored the value of collateral.
6. Daily Monitoring
Pursuant to the proposed Collateral Procedures, ICEEU would
continue, from the Existing Policy, daily monitoring processes to
ensure the eligibility of the list of Permitted Cover, to ensure the
adequacy of Haircuts and to enforce the Concentration Limits
Certain details under Data and Reporting in the Existing Policy
concerning the reports that are available to various stakeholders in
the form of periodic Collateral Reports, will not be included in the
Revised Policy or Collateral Procedures. The back testing of the
haircut parameters currently set out in the Existing Policy would be
instead set out in the Parameters (and the substance of those
parameters is not proposed to be changed). Likewise, the description of
the Risk Committee collateral reporting would be governed through the
Terms of Reference for committees instead of through the Revised Policy
or Collateral Procedures (and is not otherwise proposed to be changed).
7. Governance
Governance relating to Permitted Cover, collateral and Haircuts
would generally remain the same as in the Existing Policy, though the
Collateral Procedures would add that competent authorities would be
notified of any material breaches. Additionally, requirements under the
Existing Policy relating to independent validation and policy review
are covered in the Model Risk Governance Framework and Documentation
Governance Schedule, and would not be addressed in the Revised Policy
or Collateral Procedures.
8. Other Existing Policy Matters
Certain matters currently set out in the Existing Policy would be
removed and addressed in documentation other than the Revised Policy or
Collateral Procedures. Collateral management would be set out in the
Treasury and Banking Services Policy and the Investment Management
Procedures. The monitoring schedule would be set out in the Parameters.
The description of the legal review of enforceability of collateral
that was set out in the Existing Policy is generally considered to be
business as usual work for the legal team and would no longer be
covered through policies.
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
such proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to such
organization. For the reasons given below, the Commission finds that
the proposed rule change is consistent with Section 17A(b)(3)(F) of the
Act \6\ and Rules 17Ad-22(e)(2), (e)(3), and (e)(5) thereunder.\7\
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\6\ 15 U.S.C. 78q-1(b)(3)(F).
\7\ 17 CFR 240.17Ad-22(e)(2),(e)(3)(i),(e)(5).
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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 ICEEU 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 ICEEU or for which it is responsible, and, in
general, to protect investors and the public interest.\8\
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\8\ 15 U.S.C. 78q-1(b)(3)(F).
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As described above, ICEEU's Existing Policy document is being split
into the following two documents: (i) Revised Policy and new Collateral
Procedures. The two new documents will separate the higher level policy
principles from the specific procedures. In addition, neither the
Revised Policy nor the new Collateral Procedures will contain
information that is currently in other operational level documents. As
a result of the proposed rule change, the Revised Policy and new
Collateral Procedure will streamline but not materially alter the
Existing Policy.
By clarifying and restating in a separate document its overall
policy approach to the types, amounts and composition of cash and non-
cash collateral that ICEEU accepts from CMs to cover their guaranty
fund and margin requirements and by detailing the current procedures
for applying that approach, the Commission believes the proposed rule
change would continue, in an effective and focused way, ICEEU's ability
to manage financial resources and ultimately its ability to clear and
settle transactions. For example, the Collateral Procedures detailing
eligibility criteria for Permitted Cover describe conservative
standards such as assets that are highly liquid, have sufficient price
history, have the capacity for daily revaluation, and are in eligible
currency.
The Commission believes that this will help ICEEU focus
procedurally to meet its obligations when liquidating collateral.
Further, the factors upon which Haircuts will be based that are
detailed in the Collateral Procedures include credit assessment of the
issuer, maturity of the asset, volatility, liquidity of underlying
market, stressed market conditions, preemptive application of potential
future events, and application of conservative minimum haircut level to
all collateral types. The Commission believes that this level of detail
will help ICEEU continue to apply conservative haircuts to Permitted
Cover to ensure that, even in stressed market conditions, the
collateral could be liquidated to meet obligations while also limiting
the likelihood of procyclical impacts from Haircuts as issuer
creditworthiness deteriorates and haircuts increase.
Similarly, the approach to Concentration Limits detailed in the
Collateral Procedures noted above sets a framework for how the limits
are set and clarifies that all markets cleared by ICEEU would be
included in the calculation methodology for Absolute Limits and that an
individual CM's collateral portfolios would be balanced between
different assets based on a qualitative assessment of the different
types of collateral, taking into account factors such as the types of
issuers, issuer credit risk and collateral liquidity and price
volatility. The Commission believes that this sort of information
[[Page 8078]]
within its procedures continues and focuses ICEEU's ability to manage
financial resources with a conservative approach to the permissible
collateral pool.
The Commission also notes that it has previously found these
policies and procedures consistent with the Act \9\ and because there
are no material changes, believes that it continues to be consistent
with the Act.
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\9\ Securities Exchange Act Release No. 74955 (May 13, 2015), 80
FR 28733 (May 19, 2015) (SR-ICEEU-2015-007).
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Therefore, for the reasons discussed above, 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 ICEEU's custody or control,
and, in general, protect investors and the public interest, consistent
with the Section 17A(b)(3)(F) of the Act.\10\
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\10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(3)(i)
Rule 17Ad-22(e)(3)(i) requires that ICEEU establish, implement,
maintain, and enforce written policies and procedures reasonably
designed to, as applicable, maintain a sound risk management framework
that identifies, measures, monitors, and manages the range of risks
that it faces.
As described above, ICEEU's proposed Collateral Procedures, similar
to the Existing Policy, continues to list various eligibility criteria
for Permitted Cover, factors for determining Haircuts, and sets the
framework for the amount of each type of collateral that can be
accepted from a CM. The Commission believes that by proposing
Collateral Procedures to follow in this regard, ICEEU will be able to
continue, in a streamlined and focused fashion, to mitigate collateral
price and liquidation risk through setting acceptable Permitted Cover,
Haircuts and Concentration Limits and providing guidelines for
monitoring these measures and managing any deviations or related
issues. The Commission also believes that by documenting the management
of its collateral liquidation risks in this way, ICEEU generally
enhances its financial stability by ensuring that the collateral it
accepts from CMs continues to adequately meet its obligations.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(3)(i).\11\
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\11\ 17 CFR 240.17Ad-22(e)(3)(i).
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C. Consistency With Rule 17Ad-22(e)(5)
Rule 17Ad-22(e)(5) requires that ICEEU establish, implement,
maintain and enforce written policies and procedures reasonably
designed to, as applicable, limit the assets it accepts as collateral
to those with low credit, liquidity, and market risks, and set and
enforce appropriately conservative haircuts and concentration limits if
the covered clearing agency requires collateral to manage its or its
participants' credit exposure; and require a review of the sufficiency
of its collateral haircuts and concentration limits to be performed not
less than annually.\12\
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\12\ 17 CFR 240.17Ad-22(e)(5).
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The Commission believes that the factors and other considerations
noted above as described in the proposed Collateral Procedures with
respect acceptable Permitted Cover, Haircuts, and Concentration Limits,
including low credit risk of assets, transferability of assets, market
conditions, and expectations of future volatility, will continue to
maintain ICEEU's ability to limit the assets it accepts as collateral
to those with low credit, liquidity, and market risks, and set and
enforce appropriately conservative haircuts and concentration limits.
Further, the Revised Policy and Collateral Procedures continue to
provide that Concentration Limits be reviewed at least monthly at a
senior level and Permitted Cover, Haircuts and Concentration Limits are
subject to regular reviews and monitoring and changed ad-hoc if needed.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(5).\13\
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\13\ 17 CFR 240.17Ad-22(e)(5).
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D. Consistency With Rule 17Ad-22(e)(2)
Rule 17Ad-22(e)(2) requires, among other things, that ICEEU
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to provide for governance arrangements
that are clear and transparent and specify clear and direct lines of
responsibility.\14\
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\14\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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As noted above, similar to the Existing Policy, the proposed
Revised Policy and the Collateral Procedures continue to describe the
governance relating to Permitted Cover, Haircuts, and Concentration
Limits. Specifically, the Revised Policy provides that the document
owner is responsible for ensuring that it remains up-to-date and is
reviewed in accordance with ICEEU's governance processes and will
report material breaches or unapproved deviations from this Policy to
their Head of Department, the Chief Risk Officer and the Head of
Compliance (or their delegates) who together will determine if further
escalation should be made to relevant senior executives, the Board and/
or competent authorities. Further, the proposed Collateral Procedures
state that proposals to add, remove, change, or set Permitted Cover,
Haircuts or Concentration Limits are reviewed and approved at a senior
level and amendments would be published where practicable by circular
in advance of taking effect to CMs and relevant competent authorities.
The Commission therefore believes that this continues to maintain
ICEEU's policies and procedures in a manner reasonably designed to
provide for governance arrangements that are clear and transparent and
specify clear and direct lines of responsibility.
For these reasons, the Commission finds that the proposed rule
change is consistent with Rule 17Ad-22(e)(2).\15\
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\15\ 17 CFR 240.17Ad-22(e)(2).
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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 \16\ and Rules 17Ad-22(e)(3)(i), (e)(5), and (e)(2) thereunder.\17\
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\16\ 15 U.S.C. 78q-1(b)(3)(F).
\17\ 17 CFR 240.17Ad-22(e)(3)(i),(e)(5),(e)(2).
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It is therefore ordered pursuant to Section 19(b)(2) of the Act
\18\ that the proposed rule change (SR-ICEEU-2019-019) be, and hereby
is, approved.\19\
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\18\ 15 U.S.C. 78s(b)(2).
\19\ 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.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-02748 Filed 2-11-20; 8:45 am]
BILLING CODE 8011-01-P