[Federal Register Volume 86, Number 98 (Monday, May 24, 2021)]
[Notices]
[Pages 27927-27929]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-10840]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-91918; File No. SR-ICC-2021-008]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC Risk Management 
Model Description

May 18, 2021.

I. Introduction

    On March 31, 2021, 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 amend the 
ICC Risk Management Model Description (the ``Model Description''). The 
proposed rule change was published for comment in the Federal Register 
on April 13, 2021.\3\ The

[[Page 27928]]

Commission did not receive comments regarding the proposed rule change. 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC Risk 
Management Model Description, Exchange Act Release No. 91493 (April 
7, 2021), 86 FR 19316 (April 13, 2021) (``Notice'').
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II. Description of the Proposed Rule Change

    The purpose of the proposed rule change is to amend the Model 
Description. The changes would (i) memorialize the review and approval 
process of the Model Description; (ii) enhance the liquidity charge 
methodology; and (iii) make other minor clarifications.\4\
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    \4\ This description is substantially excerpted from the Notice, 
86 FR at 19316. Capitalized terms not otherwise defined herein have 
the meanings assigned to them in the Model Description.
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A. Review and Approval Process

    First, the proposed rule change would amend the ``Initial Margin 
Methodology'' section of the Model Description to memorialize the 
review and approval process for the Model Description. As would be 
stated in the amended Model Description, this process would consist of 
review by the ICC Risk Committee and review and approval by the ICC 
Board of Managers at least annually.

B. Enhanced Liquidity Charge Methodology

    Second, the proposed rule change would make an enhancement related 
to the index liquidity charge (``LC'') methodology. Specifically, the 
proposed rule change would revise the ``Liquidity Charge for Index Risk 
Factors'' subsection (Subsection II.2) to amend a formula for the index 
series LC. Currently, to arrive at the index series LC, ICC takes into 
account the estimated LCs for the instruments that belong to the same 
index series and the sign of the notional amount of the instrument. 
Under the proposed rule change, ICC would establish the index series LC 
as the more conservative liquidity requirement associated with the sum 
of the bought and sold protection position LCs for the instruments that 
belong to the same index series. ICC represents that this change would 
unify the index LC with the single name and credit default index 
swaption (``Index Option'') LC methodologies.\5\
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    \5\ Notice, 86 FR at 19317.
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C. Additional Clarifications

    Finally, the proposed rule change would make additional 
clarifications in the Model Description. In the ``Liquidity Charge for 
Index Options'' subsection (Subsection II.2.1), the proposed rule 
change would specify that with respect to long Index Option 
instruments, the LC combined with the integrated spread response 
requirement will not exceed the end-of-day option instrument price. ICC 
represents that this amendment would reflect the maximum loss 
condition, given that the maximum loss would be the end-of-day option 
instrument price.\6\
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    \6\ Notice, 86 FR at 19317.
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    In the ``Anti-Procyclicality Measures'' subsection (Subsection 
VII.5.3), the proposed rule change would make clarifications regarding 
the scenarios associated with extreme price decreases and extreme price 
increases. Specifically, the proposed rule change would clarify that 
the extreme price decrease and increase scenarios for Index Options 
incorporate hypothetical forward price decreases and increases, 
respectively.
    Finally, in respect of the maximum loss condition, the proposed 
rule change would update formulas related to the final portfolio 
initial margin in the ``Portfolio Loss Boundary Condition'' section 
(Section IX) to reference the portfolio level integrated spread 
response.

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.\7\ After careful review, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to ICC. In particular, 
the Commission finds that the proposed rule change is consistent with 
Section 17A(b)(3)(F) of the Act,\8\ Rules 17Ad-22(e)(2)(i) and (v),\9\ 
Rule 17Ad-22(e)(4)(ii),\10\ and Rule 17Ad-22(e)(6)(i) thereunder.\11\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
    \9\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \10\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \11\ 17 CFR 240.17Ad-22(e)(6)(i).
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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.\12\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed above, the proposed rule change would make various 
improvements to the Model Description. Specifically, the Commission 
believes memorializing the annual review and approval process for the 
Model Description should help to ensure that the Model Description is 
maintained and improved, as needed, following the annual review. 
Moreover, unifying the index LC with the single name and Index Option 
LC methodologies, by establishing the index series LC as the more 
conservative liquidity requirement, should help to simplify the 
methodology and ensure a consistent application of the LC among all of 
the products that ICC clears. Specifying that, with respect to long 
Index Option instruments, the LC combined with the integrated spread 
response requirement will not exceed the end-of-day option instrument 
price, to reflect the maximum loss condition, should clarify the limit 
of this requirement given that the maximum loss would be the end-of-day 
option instrument price. Similarly, specifying that the extreme price 
decrease and increase scenarios for Index Options incorporate 
hypothetical forward price decreases and increases and updating 
formulas related to the final portfolio initial margin to reference the 
portfolio level integrated spread response, should clarify the 
applications of these requirements, helping to ensure the consistent 
application of ICC's risk methodology.
    Because ICC uses the Model Description to derive initial margin and 
guaranty fund requirements for its Clearing Participants, the 
Commission believes the proposed rule change, by improving the Model 
Description, should improve ICC's ability to derive such requirements. 
The Commission further believes the proposed rule change should improve 
ICC's ability to manage the risks associated with clearing transactions 
through application of its initial margin and guaranty fund 
requirements, as set forth in the Model Description. Moreover, the 
Commission believes the risks associated with clearing transactions, if 
not properly managed through the collection of initial margin and 
guaranty fund, could cause ICC to suffer losses which could inhibit its 
ability to clear and settle transactions and assure the safeguarding of 
securities and funds. Accordingly, the Commission believes

[[Page 27929]]

that by improving the Model Description and, therefore, ICC's ability 
to manage the risks associated with clearing transactions, 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.\13\
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rules 17Ad-22(e)(2)(i) and (v)

    Rule 17Ad-22(e)(2)(i) requires that ICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to provide for governance arrangements that are clear and 
transparent.\14\ Rule 17Ad-22(e)(2)(v) requires that ICC establish, 
implement, maintain and enforce written policies and procedures 
reasonably designed to provide for governance arrangements that specify 
clear and direct lines of responsibility.\15\ As discussed above, the 
proposed rule change would memorialize the process for approval of the 
Model Description (i.e., review by the ICC Risk Committee and review 
and approval by the ICC Board at least annually). The Commission 
believes that this change should establish a governance arrangement for 
review and approval of the Model Description that is clear and 
transparent and that imposes a direct line of responsibility on the ICC 
Risk Committee and ICC Board.
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    \14\ 17 CFR 240.17Ad-22(e)(2)(i).
    \15\ 17 CFR 240.17Ad-22(e)(2)(v).
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    For this reason, the Commission finds that the proposed rule change 
is consistent with Rules 17Ad-22(e)(2)(i) and (v).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(4)(ii)

    Rule 17Ad-22(e)(4)(ii) requires that ICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to effectively identify, measure, monitor, and manage its 
credit exposures to participants and those arising from its payment, 
clearing, and settlement processes, including by maintaining additional 
financial resources at the minimum to enable it to cover a wide range 
of foreseeable stress scenarios that include, but are not limited to, 
the default of the two participant families that would potentially 
cause the largest aggregate credit exposure for ICC in extreme but 
plausible market conditions (``Cover 2 Requirement'').\17\ As discussed 
above, the Commission believes the proposed rule change should improve 
the Model Description by: (i) Memorializing the annual review and 
approval process, thereby helping to ensure that the Model Description 
is maintained and improved; (ii) simplifying the methodology and 
ensuring a consistent application of the LC among all of the products 
that ICC clears; and (iii) clarifying the integrated spread response 
requirement, the extreme price decrease and increase scenarios, and the 
final portfolio initial margin, helping to ensure the transparent and 
consistent application of ICC's risk methodology. ICC uses the Model 
Description to derive its guaranty fund requirements and thereby 
maintain financial resources to meet its Cover 2 Requirement. The 
Commission therefore believes the proposed rule change, in improving 
the Model Description, should improve ICC's ability to satisfy its 
Cover 2 Requirement.
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    \17\ 17 CFR 240.17Ad-22(e)(4)(ii).
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    For these reasons, the Commission finds that the proposed rule 
change is consistent with Rules 17Ad-22(e)(4)(ii).\18\
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    \18\ 17 CFR 240.17Ad-22(e)(4)(ii).
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D. Consistency With Rule 17Ad-22(e)(6)(i)

    Rule 17Ad-22(e)(6)(i) requires that ICC establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to cover its credit exposures to its participants by 
establishing a risk-based margin system that, at a minimum, considers, 
and produces margin levels commensurate with, the risks and particular 
attributes of each relevant product, portfolio, and market.\19\ As 
discussed above, the Commission believes the proposed rule change 
should improve the Model Description by: (i) Memorializing the annual 
review and approval process, thereby helping to ensure that the Model 
Description is maintained and improved; (ii) simplifying the 
methodology and ensuring a consistent application of the LC among all 
of the products that ICC clears; and (iii) clarifying the integrated 
spread response requirement, the extreme price decrease and increase 
scenarios, and the final portfolio initial margin, helping to ensure 
the transparent and consistent application of ICC's risk methodology. 
ICC uses the Model Description to derive its margin requirements 
appropriately tailored to the risks presented by the products that ICC 
clears. The Commission therefore believes the proposed rule change, in 
improving the Model Description, should improve ICC's ability to 
consider, and produce margin levels commensurate with, the risks and 
particular attributes of each relevant product, portfolio, and market. 
For these reasons, the Commission finds that the proposed rule change 
is consistent with Rule 17Ad-22(e)(6)(i).\20\
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    \19\ 17 CFR 240.17Ad-22(e)(6)(i).
    \20\ 17 CFR 240.17Ad-22(e)(6)(i).
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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,\21\ Rules 17Ad-22(e)(2)(i) and (v) under the Act,\22\ Rule 17Ad-
22(e)(4)(ii) under the Act,\23\ and Rule 17Ad-22(e)(6)(i) under the 
Act.\24\
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    \21\ 15 U.S.C. 78q-1(b)(3)(F).
    \22\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \23\ 17 CFR 240.17Ad-22(e)(4)(ii).
    \24\ 17 CFR 240.17Ad-22(e)(6)(i).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\25\ that the proposed rule change (SR-ICC-2021-008) be, and hereby is, 
approved.\26\
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    \25\ 15 U.S.C. 78s(b)(2).
    \26\ 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.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-10840 Filed 5-21-21; 8:45 am]
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