[Federal Register Volume 86, Number 93 (Monday, May 17, 2021)]
[Notices]
[Pages 26745-26748]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10277]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91834; File No. SR-ICC-2021-006]


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

May 11, 2021.

I. Introduction

    On March 25, 2021, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange 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 revise the ICC Clearing Rules 
(the ``Rules'') and the ICC Exercise Procedures (``Exercise 
Procedures'') in connection with the clearing of credit default index 
Swaptions (``Index Swaptions'').\3\ The proposed rule change was 
published for comment in the Federal Register on April 7, 2021.\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 Rules.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Proposed Rule Change Relating to the ICC Clearing Rules and ICC 
Exercise Procedures, Exchange Act Release No. 91450 (April 1, 2021), 
86 FR 18087 (April 7, 2021) (``Notice'').
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II. Description of the Proposed Rule Change

    ICC proposes revising its Rules and Exercise Procedures related to 
the clearing of Index Swaptions.\5\ In the case of Index Swaptions 
cleared by ICC, the underlying index credit default swap is limited to 
certain CDX and iTraxx 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. ICC proposes minor revisions to support 
the clearing of Index Swaptions, including updates related to iTraxx 
Index Swaptions, an enhancement to the exercise and assignment process, 
and other clarifications.
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    \5\ The description of the proposed rule change is excerpted 
from the Notice.
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A. Rule Amendments

    The proposed amendments consist of minor revisions to Rule 26R-319, 
which addresses procedures for settlement of an exercised Index 
Swaption.

[[Page 26746]]

Additional settlements may be required under Rule 26R-319(b) if one or 
more Credit Events has occurred with respect to the underlying index at 
or prior to the expiration date of the Index Swaption. Regarding the 
determination of Index Swaption settlement amounts, Rule 26R-319(b)(ii) 
currently contemplates the inclusion of an additional accrual-related 
component (``Additional Accrual''). However, ICC Circular 2020/070 
describes how ICC determines settlement amounts for cleared Index 
Swaptions and states that, in light of industry discussions, the 
Additional Accrual for such transactions will be zero. Amended Rule 
26R-319(b)(ii) would omit the description of the Additional Accrual, 
which would be zero for settlement of Index Swaptions. The circular and 
presentation on the determination of Index Swaption settlement amounts 
would remain on ICC's website.
    Regarding iTraxx Index Swaptions, ICC proposes to amend Rule 26R-
319(c), which applies in the case of a relevant M(M)R Restructuring 
Credit Event, which is when the restructuring of debt constitutes a 
credit event that triggers a CDS contract. Minor streamlining revisions 
to the exercise process rules include the proposed omission of 
paragraph (i) related to the delivery of MP Notices by Swaption Buyer 
and Swaption Sellers. Further, ICC does not propose any changes to 
paragraph (ii), which details how an Underlying New Trade comes into 
effect. An Underlying New Trade remains defined in Rule 26R-102 as a 
new single name CDS trade that would arise upon exercise of an Index 
Swaption where a relevant Restructuring Credit Event, if applicable, 
has occurred with respect to a reference entity in the relevant index. 
ICC also proposes to amend paragraph (iii) and remove paragraph (iv) 
which currently discuss the treatment of the Underlying New Trade in 
respect of the Event Determination Date. Instead, amended paragraph 
(iii) would discuss the treatment of the Underlying New Trade depending 
on whether the expiration date occurred prior to, or on or following, 
the commencement of the Credit Event Notice Triggering Period (as 
defined in the Restructuring Procedures). If the expiration date occurs 
prior to commencement of the period, the Underlying New Trade will be 
subject to the provisions of the CDS Restructuring Rules in Subchapter 
26E (and may become a Triggered Restructuring CDS Transaction 
thereunder). If the Expiration Date occurs on or following commencement 
of such period, neither party will be permitted to deliver an MP 
Notice, the Underlying New Trade cannot become a Triggered 
Restructuring CDS Transaction and no Event Determination Date or 
settlement will occur.

B. Exercise Procedures

    The Exercise Procedures supplement the provisions of Subchapter 26R 
of the Rules 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.
    The proposal would enhance the exercise and assignment process in 
the Exercise Procedures. Specifically, the proposal would revise the 
definition of Pre-Exercise Notification Period in Paragraph 1 to 
reference Paragraph 2.2(e) in respect of the Pre-Exercise Notification 
Period. Paragraph 2.2(e) describes the Pre-Exercise Notification Period 
during which an exercising party can submit, modify, and/or withdraw 
preliminary exercise notices. The Exercise 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 changes would allow ICC to identify each exercising party's 
``in the money'' Index Option open positions for the relevant 
expiration date and submit, on behalf of the exercising party, 
preliminary exercise notices for all such in ``the money'' positions. 
Such preliminary exercise notices submitted by ICC for an exercising 
party may be modified or withdrawn by the exercising party during the 
Pre-Exercise Notification Period. Additionally, the proposal would make 
a related change to Paragraph 2.2(i) to reference ICC's ability to 
submit, on behalf of an exercising party, a preliminary exercise 
notice.
    The proposal would also update Paragraphs 2.6 and 2.8, which 
include procedures to address a failure of the electronic system 
established by ICC for exercise. In such case, Paragraph 2.6 provides 
ICC with several options including, canceling and rescheduling the 
Exercise Period (i.e., 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 proposed 
changes would clarify that canceling and rescheduling the Exercise 
Period may include scheduling a new Pre-Exercise Notification Period, 
in which case any preliminary exercise notices and exercise notices 
submitted prior will be ineffective. Paragraph 2.8 addresses the 
situation where ICC will automatically exercise on the expiration date 
each open position (of all exercising parties) in an Index Swaption 
that is determined by ICC to be ``in the money'' on such date. The 
proposal would include additional language relating to its 
determination of whether an Index Swaption is ``in the money'' in 
connection with the clearing of iTraxx Index Swaptions.

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 
the proposed rule change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\6\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act \7\ and Rules 17Ad-22(e)(1) and 17Ad-22(e)(17)(i) and (ii) 
thereunder.\8\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
    \8\ 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, to 
assure the safeguarding of securities and funds which are in the 
custody or control of ICC or for which it is responsible, and, in 
general, to protect investors and the public interest.\9\
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would make minor 
revisions to the Rules for settlement of an exercised Index Swaption. 
Specifically, the proposal would revise Rule 26R-319(b)(ii) to remove 
the description of the Additional Accrual in the determination of Index 
Swaption settlement amounts. The Commission believes this minor 
revision helps to simplify ICC's settlement rules with respect to 
settlement of Index Swaptions, for which the Additional Accrual will be 
zero, which could make it easier to understand the potential Index 
Swaption settlement amounts easier, thereby promoting the prompt

[[Page 26747]]

and accurate settlement of securities transactions.
    Additionally, the proposal would amend ICC's Rules to omit and 
revise certain other information. Specifically, the proposal would 
amend Rule 26R-319(c), which applies in the case of a relevant M(M)R 
Restructuring Credit Event, by omitting a paragraph (i) related to the 
delivery of MP Notices by Swaption Buyers and Sellers, and removing 
paragraph (iv), which currently discusses the treatment of the 
Underlying New Trade in respect of the Event Determination Date. 
Instead, the proposed language in paragraph (iii) would discuss the 
treatment of the Underlying New Trade depending on whether the 
expiration date occurred prior to, or on or following, the commencement 
of the CEN Triggering Period. If the expiration date occurs prior to 
commencement of the period, the Underlying New Trade will be subject to 
the provisions of the CDS Restructuring Rules in Subchapter 26E. If the 
Expiration Date occurs on or following commencement of such period, 
neither party will be permitted to deliver an MP Notice, the Underlying 
New Trade cannot become a Triggered Restructuring CDS Transaction and 
no Event Determination Date or settlement will occur. The Commission 
believes that this proposed revision will ensure that only trades 
meeting the timing of the triggering period will be settled. This, in 
turn, promotes accurate clearance and settlement during specified 
periods as well as assuring the safeguarding of securities or funds in 
ICC's custody or control or for which it is responsible by ensuring 
only appropriate securities and funds are exchanged.
    Further, as noted above, the Exercise Procedures supplement the 
provisions of Subchapter 26R of the Rules 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. First, the 
definition of Pre-Exercise Notification Period has been revised to 
include a reference to Paragraph 2.2(e), which itself describes the 
Pre-Exercise Notification Period during which an exercising party can 
submit, modify, and/or withdraw 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 Commission believes that this proposed change 
enhances the definition of this term by cross-referencing a more 
complete description of this period. Additionally, the proposal would 
revise Paragraph 2.2(e), which would allow ICC to identify each 
exercising party's ``in the money'' Index Option open positions for the 
relevant expiration date and submit, on behalf of the exercising party, 
preliminary exercise notices for all such ``in the money'' positions. 
Further, such preliminary exercise notices submitted by ICC for an 
exercising party may be modified or withdrawn by the exercising party 
during the Pre-Exercise Notification Period. Additionally, the proposal 
would make a related change to Paragraph 2.2(i) to reference ICC's 
ability to submit, on behalf of an exercising party, a preliminary 
exercise notice. The Commission believes that these proposed changes to 
the procedures related to the pre-exercise notification period would 
enhance the procedures by clarifying ICC's role in identifying each 
Exercising Party's ``in the money'' Index Option Open Positions for the 
relevant Expiration Date and submitting preliminary notices. The 
Commission believes that this should help the preliminary notification 
process operate smoothly and ensure that the preliminary instructions 
can be used as the final exercise instructions in the event of a 
communications failure during the exercise window, thereby increasing 
reliability of the process and helping to ensure prompt and accurate 
clearance and settlement of securities upon the exercise of Index 
Swaptions.
    The proposed rule change would further revise the Exercise 
Procedures to account for the Pre-Exercise Notification Period during a 
systems failure. Specifically, as noted above, paragraph 2.6 provides 
ICC with several options including canceling and rescheduling the 
Exercise Period in the event of an exercise systems failure. The 
proposed changes would clarify that canceling and rescheduling the 
Exercise Period may include scheduling a new Pre-Exercise Notification 
Period, in which case any preliminary exercise notices and exercise 
notices submitted prior will be ineffective. The Commission believes 
that this proposed change would enhance the procedures by ensuring that 
pre-notifications do not result in erroneous exercises when there is a 
systems failure, thereby aiming to ensure accurate settlement and the 
safeguarding of securities and funds.
    Paragraph 2.8 of the Exercise Procedures addresses the situation in 
which ICC will automatically exercise on the expiration date each open 
position in an Index Swaption that is determined by ICC to be ``in the 
money'' on such date. As noted above, the Exercise Procedures would be 
amended to include additional language in this paragraph relating to 
its determination of whether an Index Swaption is ``in the money.'' The 
Commission believes that this proposed change ensures that each of 
ICC's cleared products are appropriately and accurately exercised when 
there has been a systems failure, which in turn supports ICC's ability 
to promptly and accurately clear and settle securities transactions and 
safeguard securities and funds in its custody or control.
    For the reasons stated above, 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.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(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.\11\ As discussed above, the proposed changes to the 
Rules and Procedures should provide clear guidance for ICC's clearance 
and settlement of Index Swaptions by removing from the rules the 
reference to the Additional Accrual in the determination of Index 
Swaption settlement amounts. Similarly, amending Rule 26R-319(c) as 
noted above, which applies in the case of a relevant M(M)R 
Restructuring Credit Event, should provide a clear basis for the 
treatment of the Underlying New Trade depending on whether the 
expiration date occurred prior to, or on or following, the commencement 
of the CEN Triggering Period.
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    \11\ 17 CFR 240.17Ad-22(e)(1).
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    Further, the Commission believes that in proposing changes to the 
procedures related to the pre-exercise notification period clarifying 
ICC's role in identifying each Exercising Party's ``in the money'' 
Index Option Open Positions for the relevant Expiration Date and 
submitting preliminary notices, the procedures would provide a clear 
basis for the use of the preliminary instructions such as the final 
exercise instructions in the event of a communications failure during 
the exercise window.

[[Page 26748]]

    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rule 17Ad-22(e)(1).\12\
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    \12\ 17 CFR 240.17Ad-22(e)(1).
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C. Consistency With Rule 17Ad-22(e)(17)

    Rules 17Ad-22(e)(17)(i) and (ii) require that ICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to, as applicable, 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.\13\ The 
Commission believes that by allowing ICC to identify each exercising 
party's ``in the money'' Index Option open positions for the relevant 
expiration date and submit preliminary exercise notices for all such in 
``the money'' positions, ICC can mitigate the impact of a technology or 
communication error because they can be used as the final exercise 
instructions in the event of a communications failure during the 
exercise window. The Commission believes that such procedures should 
help mitigate the impact from technical issues to ensure that the 
system has a high degree of security, resiliency, and operational 
reliability. Similarly, the Commission believes that the proposed 
changes to the Exercise Procedures that, in the event of an exercise 
system failure, clarify that canceling and rescheduling the Exercise 
Period may include scheduling a new Pre-Exercise Notification Period, 
in which case any preliminary exercise notices and exercise notices 
submitted prior will be ineffective, enhances operational reliability 
of ICC's systems.
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    \13\ 17 CFR 240.17Ad-22(e)(17)(i)-(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).\14\
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    \14\ 17 CFR 240.17Ad-22(e)(17)(i)-(ii).
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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 \15\ and Rules 17Ad-22(e)(1) and 17Ad-22(e)(17)(i) and (ii).\16\
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    \15\ 15 U.S.C. 78q-1(b)(3)(F).
    \16\ 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 
\17\ that the proposed rule change (SR-ICC-2021-006), be, and hereby 
is, approved.\18\
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ 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.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10277 Filed 5-14-21; 8:45 am]
BILLING CODE 8011-01-P