[Federal Register Volume 85, Number 152 (Thursday, August 6, 2020)]
[Notices]
[Pages 47827-47831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17129]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89436; File No. SR-ICC-2020-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Exercise Procedures 
and ICC Clearing Rules

July 31, 2020.

I. Introduction

    On June 3, 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 thereunder,\2\ a proposed rule change to formalize 
and adopt the ICC Exercise Procedures (the ``Procedures'') and a 
related update to the ICC Clearing Rules (the ``Rules'') to accompany 
the clearing of options on index credit default swaps (``Index 
Swaptions'').\3\ The proposed rule change was published for comment in 
the

[[Page 47828]]

Federal Register on June 22, 2020.\4\ 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\ Capitalized terms used but not defined herein have the 
meanings specified in the Procedures or the Rules, as applicable.
    \4\ 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, Exchange Act Release No. 89072 (June 16, 2020); 85 
FR 37483 (June 22, 2020) (SR-ICC-2020-008) (``Notice'').
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II. Description of the Proposed Rule Change

    The proposed rule change would formalize and adopt the Procedures 
and make a related amendment to the Rules in connection with ICC's 
proposed clearing of 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 \5\ and January 14, 
2020.\6\ As described in those 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. As also 
described in those 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 proposed rule change, 
and would not commence clearing of Index Swaptions until all such 
policies and procedures have been approved by the Commission or 
otherwise become effective. As such, ICC filed the proposed rule change 
to formalize the Procedures and make the related change to the Rules 
effective as part of ICC's larger effort to adopt the necessary 
policies and procedures to the eventual launch of the clearing of Index 
Swaptions.\7\
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    \5\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Partial Amendment No. 1 and Order Granting Accelerated 
Approval of Proposed Rule Change, as Modified by Partial Amendment 
No. 1, Relating to the ICC Rules, ICC End-of-Day Price Discovery 
Policies and Procedures, and ICC Risk Management Framework, Exchange 
Act Release No. 87297 (Oct. 15, 2019); 84 FR 56270 (Oct. 21, 2019) 
(SR-ICC-2019-007) (``2019 Swaption Rule Amendments'').
    \6\ Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Risk Management 
Model Description, ICC Stress Testing Framework, ICC Liquidity Risk 
Management Framework, ICC Back-Testing Framework, and ICC Risk 
Parameter Setting and Review Policy, Exchange Act Release No. 89142 
(June 24, 2020); 85 FR 39226 (June 30, 2020) (SR-ICC-2020-002).
    \7\ Notice, 85 FR at 37483.
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A. The Procedures

    The Procedures would supplement the provisions of Subchapter 26R of 
the Rules \8\ with respect to Index Swaptions and provide further 
detail as to (i) which Swaption Buyers may exercise; (ii) how an Index 
Swaption is exercised, including detail as to the amount being 
exercised, circumstances in which an exercise is valid and irrevocable 
or invalid and rejected, and limitations ICC may impose upon exercise; 
(iii) how ICC would assign exercised positions to Swaptions Sellers; 
and (iv) what steps ICC would take in response to systems failures that 
inhibit ICC from accepting exercises and communications failures that 
inhibit a Swaption Buyer from exercising an Index Swaption.
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    \8\ ICC adopted Subchapter 26R of the Rules in a prior rule 
filing related to the clearing of Index Swaptions. See 2019 Swaption 
Rule Amendments, 84 FR at 56270.
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i. Who May Exercise
    First, the Procedures would specify who is authorized to exercise 
an Index Swaption. Under the Procedures, a Swaption Buyer that is a 
Clearing Participant owning an Index Swaption in its house account 
would be permitted to exercise that Index Swaption, and a Swaption 
Buyer that is a non-participant client of a Clearing Participant owning 
an Index Swaption carried in the Clearing Participant's Client Origin 
Account (i.e., the Clearing Participant's client account) would be able 
to exercise that Index Swaption (each an ``Exercising Party''). The 
Procedures would not permit a Clearing Participant to exercise on 
behalf of a non-participant client. Rather, the Procedures would permit 
only a non-participant client to exercise its Index Swaption. However, 
in the event of a default or termination event with respect to a non-
participant for which it carries an Index Swaption, the Procedures 
would permit a Clearing Participant to (i) exercise such Index Swaption 
on behalf of the non-participant party for the purpose of liquidating 
or closing out such position, or (ii) convert such Index Swaption into 
a position in the Clearing Participant's house account, which is 
consistent with existing ICC Rule 304. Finally, the Procedures would 
require a Clearing 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 the Procedures applicable 
to Index Swaptions.
ii. How to Exercise
    Next, the Procedures would specify the process for exercising an 
Index Swaption. To exercise an Index Swaption, the Exercising Party 
would deliver an exercise notice to ICC using an electronic system 
known as the Exercise System during the Exercise Period that specifies 
the notional amount being exercised (the ``Exercised Notional 
Amount''). Under the Procedures, the Exercise Period would be the time 
period during which an Exercising Party may deliver an exercise notice 
to ICC, i.e., 9:00 a.m. to 11:00 a.m. New York time for an Index 
Swaption referencing a CDX.NA index, and 9:00 a.m. to 4:00 p.m. London 
time for an Index Swaption referencing an iTraxx Europe index.
    With respect to the amount that an Exercising Party may exercise, 
the Procedures would provide that an open position may be exercised in 
whole or part. The Procedures would provide that ICC may elect to 
require a partial exercise be in a specified notional amount, which is 
designated as the Exercise Block. If ICC requires a specific notional 
amount as the Exercise Block, an Exercising Party must make any partial 
exercise in that notional amount, or in an integer multiple thereof. If 
ICC does not require any specific notional amount as the Exercise 
Block, the Exercise Block would be 0.01 in the currency of 
denomination. If an Exercising Party submits an exercise notice with an 
Exercised Notional Amount less than the notional amount of the Index 
Swaption, the Procedures would permit the Exercising Party to submit 
during the Exercise Period a subsequent exercise notice increasing the 
Exercised Notional Amount, but the Procedures would not permit an 
Exercising Party to reduce the Exercised Notional Amount of an exercise 
notice.
    The Procedures also would specify the circumstances in which an 
exercise notice would be treated as irrevocable. Once an exercise 
notice is submitted to ICC during the Exercise Period, it would be 
irrevocable and binding on the Exercising Party. ICC will then consider 
whether to validate the Exercise Notice, as discussed further below, 
and if it is validated, it would then be accepted by ICC and become 
binding on ICC and the Exercising Party (and, in the case of a non-
participant, its Clearing Participant). The Procedures would also allow 
ICC to establish a pre-exercise notification period during which an 
Exercising Party may submit, modify, or withdraw a preliminary exercise 
notice. If an Exercising Party submitted a preliminary exercise notice 
but does not

[[Page 47829]]

submit another exercise notice or withdraw the preliminary exercise 
notice, then the Procedures would treat the Exercising Party as having 
submitted an exercise notice with the Exercised Notional Amount 
specified under such preliminary notice.
    If ICC rejects an exercise notice as not valid, it would inform the 
submitting party, who may resubmit a corrected exercise notice within 
the Exercise Period. Under the Procedures, ICC would deem a Swaption 
Exercise Notice invalid if it has (i) an Exercised Notional Amount of 
less than zero, (ii) an Exercised Notional Amount greater than the 
notional amount of the Index Swaption, or (iii) an Exercised Notional 
Amount less than the notional amount of the Index Swaption and not an 
integer multiple of the Exercise Block.
    The Procedures would further provide that ICC may impose 
limitations on the speed, frequency, and notional amounts in which an 
Index Option may be exercised at certain times during the Exercise 
Period. Any attempted exercise in violation of these limitations would 
be rejected. The Procedures would also state that ICC would not be 
responsible for any failure or inability of a participant or non-
participant party to exercise any Index Swaption, instead providing 
that each Exercising Party would be responsible for monitoring 
submission requirements, exercise limitations, and pertinent deadlines.
iii. Assignment of Exercised Positions
    The Procedures also would explain how ICC would assign exercised 
positions of Index Swaptions. First, the Procedures would set forth 
ICC's process of netting all open positions in an expiring Index 
Swaption on the business day prior to the expiration date of an Index 
Swaption. Additionally, the Procedures would allow, but not obligate, 
ICC to estimate and provide the notional amount that it would assign to 
each open position in an Index Swaption of a Swaption Seller during the 
Exercise Period. These estimates would be purely for informational 
purposes and would not be binding on ICC.
    At the conclusion of the Exercise Period, ICC would determine the 
final assignments to open positions in Index Swaptions of Swaption 
Sellers and notify participants accordingly. The Procedures would 
specify that ICC would make assignments across all open positions of 
participants that are Swaption Sellers in the relevant Index Swaptions. 
ICC would make final assignments proportionally based on the notional 
amount of each open position of a Swaption Seller, relative to the 
total notional amount of all open positions of Swaption Sellers in a 
particular Index Swaption. Once issued, the final assignments would 
constitute ICC's exercise as Swaption Buyer of the Index Swaption held 
by a Swaption Seller, and ICC would not be required to provide any 
further notice of such exercise.
iv. System and Communications Failures
    The Procedures also would describe in detail what steps ICC would 
take in the event of technical issues disrupting the clearing of Index 
Swaptions and the processing of exercise notices. The Procedures would 
first define an Exercise System Failure as any failure of the Exercise 
System to be fully operational during the 45-minute period prior to the 
end of the Exercise Period or any other circumstance in which ICC 
determines that it is unable to process Swaption Exercise Notices in a 
timely manner. In case of an Exercise System Failure, the Procedures 
would require that ICC give notice and, at ICC's election: (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. The Procedures would 
further specify that if automatic exercise applies under the system 
failure provisions, ICC would automatically exercise any open positions 
determined by ICC to be in the money.\9\
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    \9\ The Procedures would explain that ICC would determine 
whether an open position is in the money based on the average of the 
end-of-day price of the underlying CDS Contract on the preceding 
Business Day and the end-of-day price of the underlying CDS Contract 
on the Expiration Date.
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    Similarly, the Procedures would specify the steps ICC would take in 
response to an Exercising Party's inability to submit notices to the 
Exercise System. Where an Exercising Party is affected by a significant 
communications or technological failure resulting in it being 
impossible or impracticable for the Exercising Party to deliver all, or 
substantially all, of its exercise notices electronically through the 
Exercise System (a ``Party Communication Failure''), and there is no 
Exercise System Failure, the Procedures would require that ICC take one 
of two steps. ICC could either (i) follow the normal process outlined 
in the Procedures for accepting exercise notices and assigning exercise 
notices to open positons described above notwithstanding such Party 
Communication Failure or (ii) take actions that it deems appropriate to 
allow the Exercising Party to effectively submit exercise notices and 
to allow ICC to assign such exercise notices to other participants.

B. Rule Amendments

    Finally, ICC also proposes to amend ICC Rule 304 related to offsets 
to incorporate a reference to the Procedures. Rule 304 describes ICC's 
ability to net a Clearing Participant's trades that constitute opposite 
positions in a single Contract that are identical in all material 
respects. The proposed rule change would not change the substance of 
Rule 304, but it would amend Rule 304(a) to clarify that netting of 
applicable offsetting positions in Index Swaptions would be subject to 
any provisions in the Procedures.

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.\10\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \11\ and Rules 17Ad-22(e)(1) and 17Ad-22(e)(17)(i) and 
(ii).\12\
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    \10\ 15 U.S.C. 78s(b)(2)(C).
    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i) and (ii).
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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.\13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission believes that the Procedures generally should 
facilitate the exercise of Index Swaptions and, therefore, the 
clearance and settlement of index credit swaps that would result from 
such exercise by enabling an electronic notice system for exercising 
Index Swaptions. In particular, specifying exactly who may submit 
exercise notices for Swaptions and requiring a Clearing Participant to 
obtain the agreement of each customer

[[Page 47830]]

for which it carries an Index Swaption to the Rules and the Procedures, 
as discussed in Part II.A.i above, should establish clear standards for 
determining which Swaption Buyers may exercise Index Swaptions, thereby 
helping to reduce any possible confusion in the exercise process. 
Similarly, providing a process for how an Index Swaption is exercised, 
as discussed in Part II.A.ii above, including preliminary exercise 
notices, partial exercises, and specifying when an exercise is valid 
and binding, should establish a clear and reliable process for 
exercising Index Swaptions and for determining the validity and 
finality of an exercise.
    Moreover, identifying how ICC would assign exercised positions to 
Swaption Sellers, as discussed in Part II.A.iii above, including 
providing a formal and clear method for determining the final 
assignment of open positions to Swaption Sellers and requiring that ICC 
determine all final assignments of open positions in the accounts of 
Swaption Sellers proportionally, should provide a transparent and 
predictable process for assignment thereby allowing Swaption Buyers and 
Swaption Sellers to anticipate and prepare for assignments. Finally, 
explaining the steps that ICC would take in the event of an Exercise 
System Failure and Party Communication Failure, as discussed in Part 
II.A.iv above, should provide a backup process that would allow ICC and 
Clearing Participants to continue exercising Index Swaptions in case of 
such failures, thereby further increasing the adaptability and 
reliability of the exercise process.
    Thus, the Commission believes that these aspects of the proposed 
rule change, by establishing a clear, transparent, predictable, and 
reliable process for exercising Index Swaptions through the Procedures, 
should facilitate the exercise of Index Swaptions and, in turn, the 
clearance and settlement of index credit default swaps that would 
result from such exercise.
    For similar reasons, the Commission believes that amending Rule 304 
related to offsets to incorporate a reference to the Procedures, as 
discussed in Part II.B above, should reduce any possible confusion in 
applying Rule 304 to Index Swaptions by clarifying that netting of 
applicable offsetting positions in Index Swaptions would be subject to 
any provisions in the Procedures, thereby further facilitating the 
exercise of Index Swaptions and, therefore, the clearance and 
settlement of index credit default swaps.
    Finally, the Commission believes that the Procedures should also 
assure the safeguarding of securities and funds in ICC's custody or 
control or for which it is responsible. Specifically, the Commission 
believes that identifying certain exercise notices as invalid that have 
obvious errors (e.g., an Exercise Notional Amount of less than zero), 
as described in Part II.A.ii above, should help to protect Exercising 
Parties from losses resulting from erroneous exercise notices. 
Similarly, cancelling and rescheduling the Exercise Period or 
automatically assigning Open Positions that are in the money during an 
Exercise System Failure should help to protect the positions of 
Exercising Parties that are in the money and allow those Exercising 
Parties to benefit from such positions. By allowing Exercising Parties 
to avoid losses and to benefit from in the money positions in the event 
of an Exercise System Failure, the Commission believes the Procedures 
should help safeguard Index Swaptions cleared and exercised at ICC and, 
therefore, should assure the safeguarding of securities or funds in 
ICC's custody or control or for which it is responsible.
    Therefore, the Commission finds that the proposed rule change 
should 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 or for which it is responsible, 
consistent with the Section 17A(b)(3)(F) of the Act.\14\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(1)

    Rule 17Ad-22(e)(1) requires that ICC 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.\15\ As discussed above, the Commission believes that the 
Procedures should provide clear guidance for ICC's clearance of Index 
Swaption by ensuring the accuracy of the exercise process, harmonizing 
the Procedures with existing ICC rules, and creating clear and 
transparent rules for determining legal liability. Similarly, in 
determining certain exercise notices to be invalid that have obvious 
errors, as described above, the Commission believes the Procedures 
should provide for a clear basis for the rejection of exercise notices. 
Additionally, in adding a reference to the Procedures to Rule 304, the 
Commission believes the proposed rule change should help to ensure that 
ICC's Rules and the Procedures are consistent with each other and 
should help to foreclose any opportunity for conflicting 
interpretations. Finally, the Commission believes the Procedures should 
clarify potential legal liability by specifying that ICC would not be 
responsible for any failure of a party to exercise a Swaption and that 
Exercising Parties would be responsible for tracking deadlines and 
ensuring that they comply with all requirements in the submission of 
exercise notices.
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    \15\ 17 CFR 240.17Ad-22(e)(1)
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    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(1).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rules 17Ad-22(e)(17)(i) and (ii)

    Rules 17Ad-22(e)(17)(i) and (ii) require that ICC 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.\17\ The Commission believes that by 
identifying certain exercise notices as invalid that have obvious 
errors, as described above, the Procedures should provide appropriate 
controls to mitigate the operational risk associated with erroneous 
exercise notices. Similarly, the Commission believes that by 
identifying the actions that ICC would take during an Exercise System 
Failure or Party Communication Failure, such as instituting automatic 
assignments and allowing ICC to permit an Exercising Party to submit 
exercise notices during a Party Communication Failure, the proposed 
rule change should allow the exercise and assignment of Index Swaptions 
to continue even during such failures, and thereby should help to 
ensure that the Exercise System has a high degree of resiliency and 
operational reliability.
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    \17\ 15 U.S.C. 17Ad-22(e)(17)(i) and (ii).
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    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(17)(i) and (ii).\18\
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    \18\ 15 U.S.C. 17Ad-22(e)(17)(i) and (ii).
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D. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the

[[Page 47831]]

requirements of the Act, and in particular, with the requirements of 
Section 17A(b)(3)(F) of the Act \19\ and Rules 17Ad-22(e)(1) and 17Ad-
22(e)(17)(i) and (ii).\20\
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    \19\ 15 U.S.C. 78q-1(b)(3)(F).
    \20\ 17 CFR 240.17Ad-22(e)(1), (e)(17)(i) and (ii).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\21\ that the proposed rule change (SR-ICC-2020-008) be, and hereby is, 
approved.\22\
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    \21\ 15 U.S.C. 78s(b)(2).
    \22\ 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.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-17129 Filed 8-5-20; 8:45 am]
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