[Federal Register Volume 85, Number 166 (Wednesday, August 26, 2020)]
[Notices]
[Pages 52650-52654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18684]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-89621; File No. SR-ICEEU-2020-008]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to Amendments to the ICE Clear Europe Futures and Options Stress 
Testing Policy and the Adoption of the Futures and Options Stress 
Testing Methodology Document

August 20, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 6, 2020, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule changes described in 
Items I, II and III below, which Items have been prepared by ICE Clear 
Europe. ICE Clear Europe filed the proposed rule change pursuant to 
Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(4)(ii) 
thereunder,\4\ so that the proposal was immediately effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(4)(ii).
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The principal purpose of the proposed amendments is for ICE Clear 
Europe to modify its Futures and Options Stress Testing Policy (the 
``F&O Stress Testing Policy'' or ``Policy'') to update its F&O market 
stress scenarios to ensure all relevant products are covered and to 
make certain other updates and clarifications to be consistent with 
other ICE Clear Europe policies. In furtherance of these changes, ICE 
Clear Europe also proposes to adopt a Futures and Options Stress 
Testing Methodology Document (``F&O Stress Testing Methodology 
Document'') which describes ICE Clear Europe's methodology for 
systematically applying the F&O Stress Testing Policy in situations 
where the required historical price data is not available. The 
revisions to the F&O Stress Testing Policy and the adoption of the F&O 
Stress Testing Methodology Document do not involve any changes to the 
ICE Clear Europe Clearing Rules or Procedures.\5\
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    \5\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Clearing Rules.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe is proposing to amend its F&O Stress Testing 
Policy as follows: (i) With respect to historical stress-testing 
scenarios, to update the methodology to include additional product 
groups, benchmark contracts and default shock values, in order to 
ensure that every cleared instrument is covered in the historical 
scenarios; (ii) with respect to theoretical stress-testing scenarios, 
to improve scenario implementations to ensure appropriate coverage of 
all relevant instruments; (iii) to update provisions relating to policy 
reviews and breach management; and (iv) to make various drafting 
clarifications and improvements. ICE Clear Europe is also proposing to 
adopt an F&O Stress Testing Methodology Document which would provide 
further detail with respect to the methodology applied to the stress-
testing scenarios, particularly the historical stress-testing 
scenarios.
I. F&O Stress Testing Policy
General Drafting Clarifications and Improvements
    By way of general drafting clarification and improvements, the 
amendments to the F&O Stress Testing Policy would remove the background 
description of the board risk appetite and the limit appetite as these 
are addressed in other ICE Clear Europe documentation. Certain 
terminology would be updated throughout the F&O Stress Testing Policy: 
Original Margin would be updated to Initial Margin. Reference to the 
F&O Risk Committee would be updated to the F&O Product Risk Committee. 
Product Groups would

[[Page 52651]]

be referred to as Stress Groups. References to certain specific EMIR 
standards and provisions would be removed and the appendices relating 
to the existing stress testing methodology would be removed (as 
relevant detail would be instead contained in the F&O Stress Testing 
Methodology Document).
Stress Testing and Guaranty Fund
    The overall description of the method of testing the size of the 
Guaranty Fund would be simplified and clarified to state that stress 
tests are designed to cover the worst price moves over the last 30 
years (historical scenarios) and extreme, but as yet unobserved price 
moves based on potential future events or market moves to a confidence 
level of 99.9% (theoretical scenarios). A clarification would be added 
that historical scenarios that are more than 30 years old can only be 
decommissioned following the standard governance provisions for removal 
of any scenario. The description of the utilization of the Guaranty 
Fund would be removed as unnecessary for purposes of this policy. In 
addition, a diagram illustrating the existing stress testing 
methodology would be deleted as unnecessary.
    The calculation principles relating to stress testing would be 
amended as described below. Amendments would clarify that historical 
stress shocks would be calibrated using the official settlement prices 
history from ICE as well as external market sources. If such market 
data does not exist, then ICE Clear Europe would calculate shocks using 
the waterfall proxy methodology which is described in the F&O Stress 
Testing Methodology Document. The amendments would delete the statement 
that option pricing model calculations would assume theta decay over 
the holding period (as unnecessarily specific for purposes of the 
Policy).
    The amendments would further clarify that stress scenarios would 
use risk factor moves over stress periods of risk (``SPOR'') that take 
into account the time horizon for the relevant liquidation period 
(rather than a one or two day period under the current policy). The F&O 
Stress Testing Policy would note that where risk factor moves across 
periods shorter than the liquidation period time horizon are more 
extreme due to market reversion, it may be more conservative and 
appropriate to apply a shorter SPOR. With respect to historical data, 
the amendments would provide that where a risk factor does not have an 
internal or external data, ICE Clear Europe would rely on proxy 
mappings (which may vary depending on the scenario) to calibrate the 
stress shocks for instruments where historical data is not available or 
reliable. Such proxy mappings are proposed by the Clearing House's 
Credit Risk Department and require approval from the Clearing House's 
Model Oversight Committee. The proxy mappings would be addressed in 
further detail in the F&O Stress Testing Methodology Document. The 
amendments would also supplement the table of risk factors to address 
certain limitations of expiry-specific scenarios.
    With respect to Stress Groups (formerly referred to as Product 
Groups), the criteria for choosing such groups and their constituents 
would be expanded to include the fundamental relationships between 
products.
Stress Scenarios
    Pursuant to the proposed amendments, the definition of the two 
broad categories of historical scenarios would be clarified: (i) 
Historical Type A, which would replicate as accurately as possible the 
historical event; and (ii) Historical Type B which would reflect the 
intention of the historical stress events, but adjust the market 
movements either to make them plausible under current market 
conditions, better capture the stress period moves across different 
asset classes, or more appropriately reflect the existing risk factor 
exposures of the Clearing House. The description of historical stress 
scenarios would be amended to move certain additional scenarios 
regarding the energy segment and certain assumptions used to examine 
potential losses from significant changes in correlation relationships 
from the Policy to the F&O Stress Testing Methodology Document. The 
amended Policy would also remove certain general discussions of the use 
of proxies for particular markets, such as single stock equity futures 
products; proxy methodology would instead be discussed in the F&O 
Stress Testing Methodology Document.
    With respect to theoretical scenarios, ICE Clear Europe proposes to 
clarify that scenario implementations include a variety of approaches 
to create extreme but plausible scenarios that are not contained within 
the set of historical scenarios and which may utilize expert judgement 
in their construction. Theoretical scenarios may also include 
narrative-driven macro or idiosyncratic scenarios driven by broad 
macroeconomic or specific technical events. Regulatory-driven scenarios 
from prior supervisory stress testing exercises can also be included. 
The revised policy would remove a further definition of some 
theoretical scenarios as ``hypothetical'' (such that all scenarios 
would be categorized as either historical or theoretical). The 
amendments would provide that theoretical scenarios can be targeted and 
only shock certain instruments relevant to the design of the scenario 
(rather than all contracts).
    The provisions related to reverse stress testing would be revised 
to remove statements that reverse stress scenarios are generated on a 
daily basis and that the Clearing House runs daily reverse stress test 
reports. Under the revised Policy, reverse stress testing results would 
be presented to the F&O Product Risk Committee every other month, 
rather than monthly. ICE Clear Europe nonetheless believes the revised 
approach provides for sufficient reverse stress testing and internal 
review of the results of such testing, consistent with relevant 
regulatory requirements.
    The amendments would add a new section stating that the 
uncollateralized stress-testing losses would be compared to the segment 
of the Guaranty Fund that is relevant to that particular stress 
scenario. A scenario can be defined against the whole F&O Guaranty Fund 
or a particular segment (e.g., energy or financials and softs).
Governance
    ICE Clear Europe is also proposing to amend the F&O Stress Testing 
Policy to reflect changes to the Clearing House's document governance 
and exception handling, specifically to provide that (i) the document 
owner is responsible for ensuring that documents remain up-to-date and 
are reviewed in accordance with the Clearing House's governance 
processes, (ii) the document owner (as maintained in other relevant ICE 
Clear Europe internal policies) will report material breaches or 
unapproved deviations from the F&O Stress Testing Policy to their Head 
of Department, the Chief Risk Officer and the Head of Compliance (or 
their delegates) who will determine if further escalation will be made, 
and (iii) exceptions to the F&O Stress Testing Policy would be approved 
in accordance with the Clearing House's governance process for the 
approval of changes to such document.
II. F&O Stress Testing Methodology Document
    ICE Clear Europe is proposing to adopt the F&O Stress Testing 
Methodology Document in order to comprehensively describe ICE Clear 
Europe's methodology for applying the F&O Stress Testing Policy in 
situations where the required historical price data is not available, 
typically because the

[[Page 52652]]

products that exist currently did not exist on those historical dates 
and therefore do not have historical price data for those dates. This 
approach will permit the extension of historical stress testing 
scenarios to all products.
    The F&O Stress Testing Methodology Document would provide an 
overview of the stress testing approach, consistent with the F&O Stress 
Testing Policy, and include descriptions of the historical and 
theoretical stress scenarios. The methodology document would provide 
that ICE Clear Europe ensures product coverage for historical scenarios 
under the following approach:
    (i) Where input returns for a futures product or implied volatility 
for an options product are not available in a scenario, by using the 
same stress shock as the proxy benchmark such scenario has been mapped 
to;
    (ii) where the proxy benchmark does not have an input return in a 
scenario, by using the input return from that benchmark's proxy 
benchmark and such proxy process is repeated through the proxy 
waterfall until a benchmark with an input return is found;
    (iii) if, at the end of the proxy waterfall, the benchmark has no 
input returns to use, by using a default value for the return which is 
derived from the long term expected value of historical returns of the 
benchmark product (this default value would then be used for all 
products that ultimately proxy to that benchmark in that scenario); and
    (iv) where a default value is used in a historical scenario, 
running two variants of such scenario, one in which all the default 
prices are assumed to move up and the other all down, and in both, ICE 
Clear Europe would assume the default values of option volatility to 
move up given the lack of correlations between the stress groups. 
Default values would be recalibrated on at least an annual basis.
    The F&O Stress Testing Methodology Document would describe in 
further detail the proxy waterfall methodology referenced in the F&O 
Stress Testing Policy. The methodology would describe the techniques 
used to create price and volatility shocks for historical scenarios in 
situations where there is no reliable data for that price or volatility 
shock in the relevant historical period. The waterfall would be based 
on a series of proxy relationships based on proximity to the relevant 
products. For any product that does not have historical data required 
to define its shock under the given base scenario, the relevant proxy 
would be used instead. Should that proxy not have data, the proxy's 
proxy would be used, in recursive fashion, until reaching the terminal 
benchmarks. If there is no data available for the terminal benchmarks, 
a default value shock would be used. The methodology document would set 
out calculation of the risk returns used to stress test particular 
instruments, based on the SPOR, the relevant maturity and a series of 
price data. The document also sets out the default value calculation 
and explains the application of the shock for all products under each 
scenario using the proxy waterfall.
    The F&O Stress Testing Methodology Document would identify certain 
assumptions and limitations that ICE Clear Europe has identified with 
respect to the proxy waterfall mechanism and default values.
    The F&O Stress Methodology Document would also describe the 
governance and oversight responsibilities relating to the Policy and 
stress scenarios of each of the Board, the Client Risk Committee and 
the Model Oversight Committee. All changes to the Policy and the 
overall framework and methodology are subject to the approval of the 
Board, as are significant changes to the design, scope or definition of 
scenarios and the decommissioning of scenarios. The methodology 
document also addresses procedures for periodic ``business as usual'' 
recalibration of parameters for existing scenarios, and further 
provides that scenario recalibration will be done quarterly rather than 
semi-annually, but that default shocks which are predicated on average 
value over the long history would be subject to less frequent 
calibration
    Finally, the appendices to the F&O Stress Testing Methodology 
Document would include: (i) A list of the sources of data that ICE 
Clear Europe inputs into the stress testing methodology; (ii) a list of 
the Stress Groups used in the Policy and the methodology document; 
(iii) a list of the terminal benchmark products applied at the end of 
the proxy waterfall; (iv) the detailed proxy waterfall algorithm; and 
(v) a worked example of the Clearing House's historical scenario 
coverage process.
    ICE Clear Europe has evaluated the overall impact of the amended 
Policy and new framework documentation on its financial resources. ICE 
Clear Europe does not believe that the amendments would have a material 
impact on its total pre-funded resources or Guaranty Fund size. On 
average, ICE Clear Europe expects a non-material decrease in total pre-
funded resources, largely due to the expanded product coverage covering 
certain risk reducing trades that may not have been covered previously. 
On average, ICE Clear Europe expects that a small number of F&O 
Clearing Members may experience an increase in their Guaranty Fund 
requirements; although most would see a non-material decrease in 
requirements, on average.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments to the F&O 
Stress Testing Policy and the adoption of the F&O Stress Testing 
Methodology Document are consistent with the requirements of Section 
17A of the Act \6\ and the regulations thereunder applicable to it. In 
particular, Section 17A(b)(3)(F) of the Act \7\ requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, the safeguarding of securities and funds in the custody 
or control of the clearing agency or for which it is responsible, and 
the protection of investors and the public interest.
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    \6\ 15 U.S.C. 78q-1.
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    The proposed changes to the F&O Stress Testing Policy and the 
adoption of the F&O Stress Testing Methodology Document are designed to 
strengthen the ICE Clear Europe's stress testing methodology by 
updating the market stress scenarios to ensure that all of the relevant 
products are covered in each stress scenario. Specifically, the 
amendments would (i) update the stress shock calibration to include 
additional product groups for historical scenarios, (ii) improve 
scenario implementations for theoretical scenarios and (iii) 
systematically set out ICE Clear Europe's methodology for applying 
historical stress testing in situations where historical price data is 
not available. The clarification and other changes to the F&O Stress 
Testing Policy also enhance readability and ensure that the F&O Stress 
Testing Policy remains clear and up-to-date. ICE Clear Europe believes 
that the Policy as so amended and the adoption of the F&O Stress 
Testing Methodology Document will help ICE Clear Europe ensure that it 
maintains adequate financial resources to support its F&O clearing 
operations, enhance the stability of the Clearing House and thereby 
promote the prompt and accurate clearance and settlement of securities 
transactions and, derivative agreements, contracts, and transactions, 
the safeguarding of securities and funds in ICE Clear Europe's custody 
or control or for which ICE Clear Europe is responsible, and the public 
interest in the sound operation of clearing

[[Page 52653]]

agencies. Accordingly, the amendments satisfy the requirements of 
Section 17A(b)(3)(F).\8\
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    In addition, ICE Clear Europe believes that the proposed revisions 
to the F&O Stress Testing Policy and the adoption of the F&O Stress 
Testing Methodology Document are consistent with the relevant 
requirements of Rule 17Ad-22.\9\ Rule 17Ad-22(e)(4)(vi) \10\ requires 
ICE Clear Europe to identify, measure, monitor and manage its credit 
exposures to participants and those arising from its payment, clearing, 
and settlement processes, including by testing the sufficiency of its 
total financial resources available to meet the minimum financial 
resource requirements, including by conducting a comprehensive analysis 
of stress testing scenarios, models and underlying parameters and 
assumptions. The proposed changes to ICE Clear Europe's stress testing 
methodology amend the market stress scenarios to ensure that all of the 
relevant products are covered in each stress scenario, through 
including additional product groups for historical scenarios and 
improving scenario implementations for theoretical scenarios. Although 
adjustments are not expected to have an immediate material impact on 
required financial resources, ICE Clear Europe believes that the 
amendments will better calibrate its financial resource requirements to 
the particular risks of cleared positions and better adapt to evolving 
market conditions. The proposed revisions also improve the Clearing 
House's stress testing framework by providing a backup methodology for 
use of historical scenarios where market data is unavailable, 
increasing the coverage of its stress testing. Taken together the 
amendments further ensure that ICE Clearing House identifies, measures, 
monitors and manages its credit exposures, consistent with the 
requirements of Rule 17Ad-22(e)(4)(vi).\11\
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    \9\ 17 CFR 240.17Ad-22.
    \10\ 17 CFR 240.17Ad-22(e)(4)(vi).
    \11\ 17 CFR 240.17Ad-22(e)(4)(vi).
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    Rule 17Ad-22(e)(3)(i) \12\ requires clearing agencies to maintain a 
sound risk management framework that identifies, measures, monitors and 
manages the range of risks that it faces. The amendments to the F&O 
Stress Testing Policy and the adoption of the F&O Stress Testing 
Methodology Document are intended to better calibrate financial 
resources held by ICE Clear Europe to the risks faced by the Clearing 
House through improvements to the stress testing methodology. In ICE 
Clear Europe's view, the amendments are therefore consistent with the 
requirements of Rule 17Ad-22(e)(3)(i).\13\
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    \12\ 17 CFR 240.17 Ad-22(e)(3)(i).
    \13\ 17 CFR 240.17 Ad-22(e)(3)(i).
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    Rule 17Ad-22(e)(2) \14\ requires clearing agencies to establish 
reasonably designed policies and procedures to provide for governance 
arrangements that are clear and transparent and specify clear and 
direct lines of responsibility. The proposed amendments to the F&O 
Stress Testing Policy more clearly define the roles and 
responsibilities of the document owner, the Head of Department, the 
senior members of the Risk Oversight Department and the senior members 
of the Compliance Department. The proposed F&O Stress Testing 
Methodology Document describes the governance and oversight role of 
each of the Board, the Client Risk Committee and the Model Oversight 
Committee with respect to the F&O Stress Testing Policy and stress 
scenarios thereto. ICE Clear Europe believes that the amendments to the 
F&O Stress Testing Policy and the adoption of the F&O Stress Testing 
Methodology Document are therefore consistent with the requirements of 
Rule 17Ad-22(e)(2).\15\
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    \14\ 17 CFR 240.17 Ad-22(e)(2).
    \15\ 17 CFR 240.17 Ad-22(e)(2).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The amendments 
are being adopted to further strengthen ICE Clear Europe F&O stress 
testing methodology and would apply to all F&O Clearing Members. The 
proposed amendments are not expected to materially change F&O Guaranty 
Fund Contribution requirements for F&O Clearing Members (on average, it 
is expected that most Clearing Members would see a non-material 
decrease in requirements; while a few Clearing Members may see a non-
material increase). Although the change could thus modestly increase 
the costs of clearing for certain Clearing Members, ICE Clear Europe 
believes any such additional cost is appropriately tailored to the 
risks relating to the products being cleared by those Clearing Members, 
as illustrated through the revised stress testing policy. ICE Clear 
Europe does not otherwise believe the amendments would affect the costs 
of clearing, the ability to market participants to access clearing, or 
the market for clearing services generally. Therefore, ICE Clear Europe 
does not believe the proposed rule change imposes any burden on 
competition that is inappropriate in furtherance of the purposes of the 
Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    Written comments relating to the proposed amendments have not been 
solicited or received by ICE Clear Europe. ICE Clear Europe will notify 
the Commission of any written comments received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \16\ and paragraph (f) of Rule 19b-4 \17\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-ICEEU-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 20549-1090.

All submissions should refer to File Number SR-ICEEU-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 internet website (http://www.sec.gov/

[[Page 52654]]

rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change 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 Europe and on ICE Clear Europe's website at https://www.theice.com/notices/Notices.shtml?regulatoryFilings. 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-ICEEU-2020-008 and should be submitted 
on or before September 16, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-18684 Filed 8-25-20; 8:45 am]
BILLING CODE 8011-01-P