[Federal Register Volume 85, Number 103 (Thursday, May 28, 2020)]
[Notices]
[Pages 32073-32075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-11401]


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SECURITIES AND EXCHANGE COMMISSION

[[Release No. 34-88925; File No. SR-ICC-2020-004]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC CDS Instrument On-
Boarding Policies and Procedures

May 21, 2020.

I. Introduction

    On March 30, 2020, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (the 
``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to update and 
formalize the ICC CDS Instrument On-boarding Policies and Procedures 
(``Instrument On-boarding Policy''). The proposed rule change was 
published for comment in the Federal Register on April 8, 2020.\3\ The 
Commission did not receive comments regarding 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\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change, Security-Based Swap Submission, 
or Advance Notice Relating to the ICC CDS Instrument On-boarding 
Policies and Procedures; Exchange Act Release No. 88545 (Apr. 2, 
2020); 85 FR 19785 (Apr. 8, 2020) (SR-ICC-2020-004) (``Notice'').

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II. Description of the Proposed Rule Change

    The proposed rule change would update and formalize the Instrument 
On-boarding Policy.\4\ The Instrument On-boarding Policy would describe 
ICC's procedures for selecting new products for clearing, and would 
organize those procedures into the following components: Instrument 
selection, on-boarding governance, operational setup, risk evaluation, 
pricing evaluation, and dress rehearsal.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in the Instrument On-boarding Policy or 
the ICC Rules, as applicable.
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    With respect to instrument selection, ICC would, as described in 
the Instrument On-boarding Policy, establish an initial universe of new 
products that it potentially could clear. ICC would establish this 
initial universe based on (1) its current business strategy, (2) 
products that are actively traded bilaterally between ICC Clearing 
Participants but not cleared at ICC, and (3) feedback from Clearing 
Participants and the Trading Advisory Group regarding the products they 
would like ICC to clear. From there, ICC would analyze the initial 
universe of new products that it potentially could clear to see which 
of those products met ICC's guiding principles. As described in the On-
boarding Policy, these guiding principles would require that ICC 
consider products that meet certain standards for open interest and 
volume, be capable of being cleared through ICC's existing systems and 
processes, and support industry wide initiatives and protocols.
    Once ICC has determined that a product meets its guiding 
principles, it would next proceed with the appropriate governance 
actions for clearing the proposed new product. As described in the 
Instrument On-boarding Policy, the specific governance actions required 
before clearing the product would depend on which of four categories 
the product falls into: (1) A new product that falls under a previously 
approved product category and type, such as a previously approved CDS 
corporate single name (e.g., North American Corporate Single Names) or 
a previously approved CDS sovereign single name type (e.g., Emerging 
Market Sovereign Single Names), (2) a new product that falls under an 
approved product category but is a new type that is not considered in 
the ICC Rules (e.g., a new type of single name CDS not already 
considered in the ICC Rules), (3) a new product that falls under a new 
product category that is not considered in the ICC Rules (e.g., a 
product in a category other than CDS on indices and CDS on single 
names), and (4) a new product that falls out of scope of the standard 
on-boarding process, such as a new CDS index issued after a credit 
event affecting one of the companies in the index. For each category, 
the Instrument On-boarding Policy would explain the governance process, 
including notification to and review and approval by relevant 
stakeholders such as ICC's Board, committees and working groups, and 
regulators. Moreover, for all of the categories, ICC would review with 
the Risk Committee a risk impact analysis and pricing analysis with 
respect to clearing the new product and would also review the risk and 
pricing parameters and evaluation results with the Trading Advisory 
Committee and Risk Working Group.
    The Instrument On-boarding Policy would also require that ICC 
complete an operational configuration before clearing a new product. 
Specifically, ICC would be required to configure its systems to 
evaluate and accept transactions, process and net transactions, and 
price the proposed product. Moreover, the On-boarding Policy would 
describe how ICC defines the reference obligation (meaning the 
particular bond that is either guaranteed or issued by the reference 
entity) for a new product and further would describe how ICC defines 
the legal and economic terms of a new product using the ISDA Credit 
Derivatives Physical Settlement Matrix.
    Regarding risk evaluation, the Instrument On-boarding Policy would 
describe how ICC would ensure that its risk model adequately captures 
the risks associated with the new product. As described in the 
Instrument On-boarding Policy, ICC would do so by performing back-
testing and stress-testing on portfolios containing the proposed new 
product. In doing so, ICC would seek to demonstrate that the risks 
associated with the proposed product are appropriately accounted for by 
ICC's risk models and that Initial Margin and Guaranty Fund 
requirements will provide adequate protection to ICC and its Clearing 
Participants.
    Similarly, for pricing evaluation, the Instrument On-boarding 
Policy would require that ICC ensure its end-of-day price discovery 
process operates effectively with the proposed product and adequately 
captures the price dynamics of the new product. Additional detail with 
respect to the end-of-day price discovery process would be available in 
ICC's End-of-Day Price Discovery Policies and Procedures.
    Finally, before launching clearing of a new product, the Instrument 
On-boarding Policy would require that ICC perform a dress rehearsal, 
lasting at least two weeks, during which the end-of-day price discovery 
process would be executed for the new product each business day. During 
the dress rehearsal, ICC would collect price submissions and fine tune 
pricing parameters, as needed.
    Once ICC has successfully completed this dress rehearsal and the 
other steps in the on-boarding process and received any required 
regulatory approvals, the Instrument On-boarding Policy would allow ICC 
to deem a product eligible for clearing and add it to the ICC Cleared 
Products list.

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 proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\5\ 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 Rule 17Ad-22(d)(4).\7\
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    \5\ 15 U.S.C. 78s(b)(2)(C).
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22(d)(4).
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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.\8\ As 
discussed above, the proposed rule change would update and formalize 
the Instrument On-boarding Policy. The Instrument On-boarding Policy 
would describe ICC's procedures for selecting new products for 
clearing, including instrument selection, governance, operational 
setup, risk evaluation, pricing evaluation, and dress rehearsal. In 
doing so, the Commission believes that the Instrument On-boarding 
Policy should provide a method for ICC to determine whether to clear 
new products and prepare for the clearance of such new products, 
thereby promoting the

[[Page 32075]]

accurate clearance and settlement of transactions in such products.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    Moreover, the Commission believes the Instrument On-boarding 
Policy, by setting standards for instrument selection, operational set 
up, risk and pricing evaluation, and governance for clearing new 
products would help to mitigate potential risks created by clearing new 
products, such as the risk that ICC's risk model would not adequately 
manage the risks associated with a new product. Similarly, the 
Commission believes that the required dress rehearsal would allow ICC 
to identify potential issues with the end-of-day pricing process before 
accepting a new product for clearing. The Commission believes that the 
risks associated with clearing a new product, including application of 
ICC's existing risk model and end-of-day pricing process, could, if not 
adequately managed, disrupt ICC's ability to clear and settle 
transactions in other products and safeguard securities and funds in 
its custody and control. Thus the Commission believes that, in 
providing ICC means for managing the risks associated with clearing a 
new product, the proposed rule change should help to promote the prompt 
and accurate clearance and settlement of securities transactions and 
assure the safeguarding of securities and funds in ICC's custody and 
control.
    Therefore, the Commission finds that the proposed rule change would 
promote the prompt and accurate clearance and settlement of securities 
transactions and assure the safeguarding of securities and funds in 
ICC's custody and control, consistent with the Section 17A(b)(3)(F) of 
the Act.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(d)(4)

    Rule 17Ad-22(d)(4) requires that ICC 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.\10\ As 
discussed above, the Commission believes that the Instrument On-
boarding Policy would help to mitigate potential risks associated with 
new products. In particular, the Commission believes that in requiring 
ICC to complete an operational configuration to evaluate and accept 
transactions, process and net transactions, and price the proposed new 
product, the Instrument On-boarding Policy should help ICC to identify 
potential operational risks before clearing the new product. Similarly, 
the Commission believes that the required dress rehearsal should allow 
ICC to identify potential operational issues with the end-of-day 
pricing process and settlement before accepting a new product for 
clearing. Taken together, the Commission believes the Instrument On-
boarding Policy should enable ICC to identify the operational risks 
associated with a new product and minimize those risks prior to 
clearing a new product. For these reasons, the Commission finds that 
the proposed rule change is consistent with Rule 17Ad-22(d)(4).\11\
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    \10\ 15 U.S.C. 17Ad-22(d)(4).
    \11\ 15 U.S.C. 17Ad-22(d)(4).
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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 \12\ and Rule 17Ad-22(d)(4).\13\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
    \13\ 17 CFR 240.17Ad-22(d)(4).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\14\ that the proposed rule change (SR-ICC-2020-004), be, and hereby 
is, approved.\15\
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 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.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-11401 Filed 5-27-20; 8:45 am]
BILLING CODE 8011-01-P