[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