[Federal Register Volume 85, Number 120 (Monday, June 22, 2020)]
[Notices]
[Pages 37483-37486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-13308]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89072; File No. SR-ICC-2020-008]
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 Exercise Procedures and ICC Clearing
Rules
June 16, 2020.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934,\1\ and Rule 19b-4,\2\ notice is hereby given that on June 3,
2020, ICE Clear Credit LLC (``ICC'') filed with the Securities and
Exchange Commission (the ``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 by ICC. The
Commission is publishing this notice to solicit comments on the
proposed rule change, security-based swap submission, or advance notice
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change, Security-Based Swap Submission, or Advance Notice
The principal purpose of the proposed rule change is to formalize
the ICC Exercise Procedures in connection with the clearing of credit
default index swaptions. ICC also proposes a related update to the ICC
Clearing Rules (the ``Rules'').\3\
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\3\ 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, Security-Based Swap Submission, or
Advance Notice
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, Security-Based Swap Submission, or
Advance Notice
(a) Purpose
ICC proposes to formalize the Exercise Procedures and to make a
related change to the Rules in connection with its proposed launch of
the clearing of credit default index swaptions (``Index Swaptions'').
ICC has previously filed with the Commission changes to certain other
policies and procedures related to the clearing of Index Swaptions on
June 28, 2019 \4\ and January 14, 2020 \5\ (the ``Swaption Rule
Filings''). As set out in the Swaption Rule Filings, ICC intends to
adopt certain related policies and procedures in preparation for the
launch of clearing of Index Swaptions, including those set out in this
filing, and does not intend to commence clearing of Index Swaptions
until all such policies and procedures have been approved by the
Commission or otherwise become effective. As such, ICC proposes to
formalize the Exercise Procedures and make the related changes to the
Rules effective following the approval of all such policies and
procedures and the completion of the ICC governance process surrounding
the Index Swaptions product expansion.
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\4\ SEC Release No. 34-87297; File No. SR-ICC-2019-007 (Oct. 15,
2019) (approval), 84 FR 56270 (Oct. 21, 2019).
\5\ SEC Release No. 34-88047; File No. SR-ICC-2020-002 (Jan. 27,
2020) (notice), 85 FR 5756 (Jan. 31, 2020).
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As discussed in the Swaption Rule Filings, pursuant to an Index
Swaption, one party (the ``Swaption Buyer'') has the right (but not the
obligation) to cause the other party (the ``Swaption Seller'') to enter
into an index credit default swap transaction at a pre-determined
strike price on a specified expiration date on specified terms. In the
case of Index Swaptions that would be cleared by ICC, the underlying
index credit default swap would be limited to certain CDX and iTraxx
Europe index credit default swaps that are accepted for clearing by
ICC, and which would be automatically cleared by ICC upon exercise of
the Index Swaption by the Swaption Buyer in accordance with its terms.
I. Exercise Procedures
The Exercise Procedures are intended to supplement the provisions
of Subchapter 26R of the Rules \6\ with respect to Index Swaptions and
provide further detail as to the manner in which Index Swaptions may be
exercised by Swaption Buyers, the manner in which ICC will assign such
exercises to Swaption Sellers, and certain actions that ICC may take in
the event of technical issues.
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\6\ Subchapter 26R of the Rules was proposed in the Swaption
Rule Filings. SEC Release No. 34-87297; File No. SR-ICC-2019-007
(Oct. 15, 2019) (approval), 84 FR 56270 (Oct. 21, 2019).
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In paragraph 1 of the Exercise Procedures, ICC proposes to set out
key definitions used for the exercise of Index Swaptions. Key defined
terms would include the Exercise Period, which would be the period on
the expiration date of an Index Swaption during which the Swaption
Buyer may deliver an exercise notice to ICC to exercise all or part of
such Index Swaption. The document would define the circumstances that
constitute the failure of the Exercise System (``Exercise System
Failure'') which is the electronic system established by ICC for
exercise. The Exercising Party would mean (i) with respect to an Index
Swaption carried in the house account of a Participant as Swaption
Buyer, such Participant, and (ii) with respect to an Index Swaption
carried in the client origin account of a Participant for a Non-
Participant Party as Swaption Buyer, such Non-Participant Party.
ICC proposes to describe the exercise and assignment process in
paragraph 2 of the Exercise Procedures. In paragraph 2.1, ICC states
that exercise notices would be delivered in accordance with the ICC
Rules and the Exercise Procedures and specifically references
Subchapter 26R of the Rules related to Index Swaptions.
Paragraph 2.2 of the proposed Exercise Procedures would address the
procedures for exercise and assignment of Index Swaptions. The document
sets forth ICC's process of netting all open positions in such expiring
Index Swaption, which takes place on the business day prior to the
expiration date of an Index Swaption and applies to house and client
origin accounts. To exercise an Index Swaption, the Exercising Party
would deliver an exercise notice to ICC during the Exercise Period
specifying the notional amount being exercised (``Exercised Notional
Amount''). ICC may also establish a Pre-Exercise Notification Period
during which an Exercising Party may submit, modify, and/or withdraw
preliminary exercise notices. The submission of an exercise notice
during the Exercise Period will be irrevocable
[[Page 37484]]
and binding on the Exercising Party and, once validated by ICC, will be
accepted by ICC and binding on ICC and the Exercising Party (and, in
the case of a Non-Participant Party, its Participant). If ICC rejects
an exercise notice as not valid, as described in the Exercise
Procedures, it will inform the submitting party, who may resubmit a
corrected notice within the Exercise Period. For informational purposes
only, within the Exercise Period, ICC may estimate and provide the
notional amount that it will assign to each open position in an Index
Swaption of a Swaption Seller. Moreover, if an Exercising Party did not
submit an exercise notice but submitted a preliminary exercise notice
in respect of such Index Swaption that was not withdrawn, the
Exercising Party will be deemed to have submitted an exercise notice
with the Exercised Notional Amount specified under such preliminary
notice. After the Exercise Period ends, ICC will determine final
assignments to open positions in Index Swaptions of Swaption Sellers
and notify Participants as described in the Exercise Procedures.
The proposed Exercise Procedures would address limitations and
clarifications regarding the exercise process. Paragraph 2.3 sets out
certain limitations, including limitations that ICC may impose during
the Exercise Period and limitations as to the responsibility for any
failure to exercise an Index Swaption. Paragraph 2.4 further clarifies
the party that is entitled to exercise. A Participant is not entitled
to provide a preliminary exercise notice or exercise notice on behalf
of Non-Participant Parties for which it carries Index Swaptions. A Non-
Participant Party will only be permitted to exercise an Index Swaption
in a portfolio belonging to the Non-Participant Party. Additionally,
under paragraph 2.4, a Participant may make certain elections as a
result of a default or termination event with respect to a Non-
Participant Party for which it carries an Index Swaption, and is
required to obtain the agreement of each Non-Participant Party for
which it carries an open position in Index Swaptions to the provisions
of the Rules and Exercise Procedures applicable to Index Swaptions.
The proposed Exercise Procedures would describe the Exercise System
and provide the steps that ICC would follow in case of technical
issues. Paragraph 2.5 explains the Electronic Notice Process which is
the process for the electronic delivery and assignment of exercise
notices or preliminary exercise notices through the Exercise System.
Exercise notices would only be submitted through the Exercise System
pursuant to the Electronic Notice Process, unless otherwise determined
by ICC pursuant to paragraph 2.6. Namely, in the event of an Exercise
System Failure affecting an Exercise Period, paragraph 2.6 provides ICC
with the following options: (i) Cancel and reschedule the Exercise
Period, (ii) determine that automatic exercise will apply; and/or (iii)
take such other action as ICC determines appropriate to permit
Exercising Parties to submit exercise notices and to permit ICC to
assign such notices. Paragraph 2.7 would address the situation where an
Exercising Party is affected by a significant communications or
information technology failure making it impossible or impractical to
deliver all, or substantially all, of its exercise notices in
accordance with the Electronic Notice Process during the Exercise
Period (``Party Communication Failure''). Paragraph 2.8 would address
the situation where Index Swaptions will be automatically exercised on
the expiration date due to an Exercise System Failure.
II. Rule Amendments
ICC proposes to amend ICC Rule 304 related to offsets to
incorporate a reference to the Exercise Procedures. Specifically, ICC
proposes a change to ICC Rule 304(a) to clarify that netting of
applicable offsetting positions in Index Swaptions would be subject to
any provisions in the Exercise Procedures.
(b) Statutory Basis
ICC believes that the proposed rule change is consistent with the
requirements of Section 17A of the Act \7\ and the regulations
thereunder applicable to it, including the applicable standards under
Rule 17Ad-22.\8\ In particular, Section 17A(b)(3)(F) of the Act \9\
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. The proposed rule change would formalize the Exercise
Procedures, which describe the exercise and assignment process and are
intended to supplement the provisions of Subchapter 26R of the Rules,
to support the clearing of Index Swaptions. ICC sets out procedures in
the document that are designed to protect users in the event of
technical issues or technology failures, including circumstances where
there is an Exercise System Failure and Party Communication Failure.
The procedures allow firms to submit preliminary exercise notices such
that the preliminary instructions can be used as the final exercise
instructions in the event of a communications failure during the
exercise window. The proposed rule change also proposes a related
update to Rule 304(a) to clarify that netting of applicable offsetting
positions in Index Swaptions would be subject to any provisions in the
Exercise Procedures. Accordingly, in ICC's view, the proposed rule
change will further ensure that ICC's Rules and policies and procedures
clearly reflect the terms and conditions applicable to Index Swaptions
and is thus consistent with the prompt and accurate clearing and
settlement of the contracts cleared by ICC, including Index Swaptions,
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, within the meaning of Section 17A(b)(3)(F) of the
Act.\10\
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\7\ 15 U.S.C. 78q-1.
\8\ 17 CFR 240.17Ad-22.
\9\ 15 U.S.C. 78q-1(b)(3)(F).
\10\ Id.
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The amendments would also satisfy relevant requirements of Rule
17Ad-22.\11\ Rule 17Ad-22(e)(1) \12\ requires each covered clearing
agency \13\ to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to provide for a well-
founded, clear, transparent, and enforceable legal basis for each
aspect of its activities in all relevant jurisdictions. The Exercise
Procedures are intended to supplement the provisions of Subchapter 26R
of the Rules with respect to Index Swaptions and would further ensure
that ICC's Rules clearly reflect the terms and conditions applicable to
Index Swaptions. The proposed rule change would support the legal basis
for the operation of the exercise and assignment process, including by
defining key terms; describing the validation and rejection of exercise
notices, including the party that is entitled to submit such notices;
and addressing situations where there are technical issues. As such,
the proposed rule change would satisfy the requirements of the Rule
17Ad-22(e)(1).\14\
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\11\ 17 CFR 240.17Ad-22.
\12\ 17 CFR 240.17Ad-22(e)(1).
\13\ ICC will be a covered clearing agency subject to Rule 17ad-
22(e) as of the effective date (July 13, 2020) as a result of the
amended definition. 17 CFR 240.17Ad-22; Release No. 34-88616; File
No. S7-23-16 (April 9, 2020), 85 FR 28853 (May 14, 2020).
\14\ 17 CFR 240.17Ad-22(e)(1).
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[[Page 37485]]
Rule 17Ad-22(e)(17) \15\ requires, in relevant part, each covered
clearing agency to establish, implement, maintain, and enforce written
policies and procedures reasonably designed to manage its operational
risks by (i) identifying the plausible sources of operational risk,
both internal and external, and mitigating their impact through the use
of appropriate systems, policies, procedures, and controls; and (ii)
ensuring that systems have a high degree of security, resiliency,
operational reliability, and adequate, scalable capacity. The proposed
rule change would allow ICC to manage the operational risks associated
with the exercise and assignment process by establishing procedures for
the exercise and assignment of Index Swaptions, which would allow ICC
to identify plausible sources of operational risks in clearing Index
Swaptions and minimize their impact through appropriate systems,
policies, procedures, and controls. To reduce operational risk, the
document includes procedures for validating and rejecting exercise
notices and procedures for exercise in the event of technical issues or
technology failures, including an Exercise System Failure and a Party
Communication Failure. Such procedures are designed to provide sound
alternatives in the case of technical issues and help mitigate the
impact from technical issues to ensure that the system has a high
degree of security, resiliency, operational reliability, and adequate,
scalable capacity. The proposed rule change is therefore reasonably
designed to meet the requirements of Rule 17Ad-22(e)(17).\16\
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\15\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
\16\ Id.
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Rule 17Ad-22(e)(18) \17\ requires each covered clearing agency to
establish, implement, maintain, and enforce written policies and
procedures reasonably designed to establish objective, risk-based, and
publicly disclosed criteria for participation, which permit fair and
open access by direct and, where relevant, indirect participants and
other financial market utilities, require participants to have
sufficient financial resources and robust operational capacity to meet
obligations arising from participation in the clearing agency, and
monitor compliance with such participation requirements on an ongoing
basis. The publically available Rules and the Exercise Procedures,
which would be publically available, would establish objective, risk-
based, and publicly disclosed criteria for participation in ICC's
exercise and assignment process. As discussed above, the Exercise
Procedures would provide further detail as to the manner in which Index
Swaptions may be exercised by Swaption Buyers and the manner in which
ICC will assign such exercises to Swaption Sellers. The document would
also specify the party entitled to exercise, stating that a Non-
Participant Party will only be permitted to exercise an Index Swaption
in a portfolio belonging to the Non-Participant Party. The amendments
to the Rules further incorporate reference to the Exercise Procedures
into Rule 304(a). Additionally, the proposed rule change would require
a Participant to obtain the agreement of each Non-Participant Party for
which it carries an open position in Index Swaptions to the provisions
of the Rules and Exercise Procedures applicable to Index Swaptions,
which are intended to ensure that participants have sufficient
financial resources and robust operational capacity to meet obligations
arising from participation in the clearing agency. Thus, the proposed
rule change would satisfy the requirements of Rule 17Ad-22(e)(18).\18\
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\17\ 17 CFR 240.17Ad-22(e)(18).
\18\ Id.
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(B) Clearing Agency's Statement on Burden on Competition
ICC does not believe the proposed rule change would have any
impact, or impose any burden, on competition not necessary or
appropriate in furtherance of the purpose of the Act. The proposed rule
change would support the clearing of Index Swaptions, including by
formalizing the Exercise Procedures and making a related Rule change
necessary to support the clearing of Index Swaptions. The proposed rule
change will apply uniformly across all market participants. ICC does
not believe acceptance of Index Swaptions for clearing would adversely
affect the trading markets for such contracts, and in fact acceptance
of such contracts by ICC would provide market participants with the
additional flexibility to have their Index Swaptions cleared.
Acceptance of Index Swaptions for clearing will not, in ICC's view,
adversely affect clearing of any other currently cleared product. ICC
does not believe the amendments would adversely affect the ability of
Participants, their customers or other market participants to continue
to clear contracts, including CDS Contracts. ICC also does not believe
the enhancements would adversely affect the cost of clearing or
otherwise limit market participants' choices for selecting clearing
services in Index Swaptions, credit default swaps or other products.
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, Security-Based Swap Submission, or Advance Notice Received From
Members, Participants or Others
Written comments relating to the proposed rule change have not been
solicited or received. ICC will notify the Commission of any written
comments received by ICC.
III. Date of Effectiveness of the Proposed Rule Change, Security-Based
Swap Submission, or Advance Notice 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 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-2020-008 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-2020-008. 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
[[Page 37486]]
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, security-based swap submission, or
advance notice that are filed with the Commission, and all written
communications relating to the proposed rule change, security-based
swap submission, or advance notice 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-2020-008
and should be submitted on or before July 13, 2020.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-13308 Filed 6-19-20; 8:45 am]
BILLING CODE 8011-01-P