[Federal Register Volume 86, Number 118 (Wednesday, June 23, 2021)]
[Notices]
[Pages 32994-32997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-13102]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-92197; File No. SR-ICC-2021-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to the ICC End-of-Day Price 
Discovery Policies and Procedures

June 16, 2021.

I. Introduction

    On April 23, 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 
revise and update ICC's End-of-Day Price Discovery Policies and 
Procedures (the ``Pricing Policy''). The Pricing Policy formalizes 
ICC's end-of-day (``EOD'') price discovery process that provides prices 
for cleared credit default

[[Page 32995]]

swap (``CDS'') contracts based on submissions from ICC's Clearing 
Participants.\3\ The proposed rule change was published for comment in 
the Federal Register on May 6, 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 Pricing Policy.
    \4\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the ICC End-of-Day 
Price Discovery Policies and Procedures, Exchange Act Release No. 
91733 (April 30, 2021); 86 FR 24425 (May 6, 2021) (SR-ICC-2021-013) 
(``Notice'').
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II. Description of the Proposed Rule Change

    ICC proposes updates related to firm trade obligations and certain 
clarifications under the Pricing Policy.\5\ As part of ICC's current 
EOD price discovery process, ICC Clearing Participants (``CPs'') are 
required to submit daily EOD prices for cleared CDS instruments related 
to their open positions at ICC in accordance with the Pricing Policy. 
To encourage CPs to provide the best possible EOD submissions, ICC 
selects a subset of the potential trades generated and designates them 
as firm trades, which ICC then enters CPs into as cleared transactions. 
ICC selects specific dates on which it can require CPs to execute firm 
trades (``firm trade days''). For each firm trade day, ICC specifies 
the instruments that may become firm-trade eligible, subject to certain 
specified criteria. As described in more detail below, ICC proposes 
additional criteria in the Pricing Policy for EOD firm trades with the 
express purpose of maintaining the robustness of the established price 
discovery process and ensuring that on-market firm trades (i.e., firm 
trades resulting from price submissions close to EOD levels that 
reflect market expectations and thus do not provide any value-additive 
market information) do not incentivize CPs to correct their outlying 
submissions (i.e., off-market price submissions outside the proposed 
EOD range).\6\ By subjecting potential trades to its proposed new 
criteria for designating firm trades, ICC would avoid creating a high 
number of firm trades around its EOD levels that may unnecessarily 
introduce operational risks and inefficiencies into ICC's EOD price 
discovery process.
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    \5\ The description herein is substantially excerpted from the 
Notice.
    \6\ Notice, 86 FR at 24426.
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    Specifically, ICC proposes to amend Section 2.4.1 of the Pricing 
Policy (Selecting Firm-Trade Days and Firm-Trade Eligible Instruments) 
by adding a new subsection (d) (Trade Price Deviation Constraint) to 
Section 2.4.1. As proposed, new Section 2.4.1.d of the Pricing Policy 
would incorporate additional criteria that must be met for ICC to 
generate firm trades, which ICC refers to as the trade price deviation 
constraint (the ``constraint''). In addition to new subsection (d), the 
proposed rule change would add references to the constraint throughout 
the existing subsections of Section 2.4.1, specifically in subsection 
(a) with respect to firm trade days for index instruments, subsection 
(b) with respect to firm trade days for single name instruments, and 
subsection (c) with respect to firm trade days for index option 
instruments. The proposed rule change would describe the constraint in 
subsection (d) of Section 2.4.1 as follows. Under the proposed 
constraint, ICC would avoid creating a high number of trades around its 
EOD levels by not designating potential trades as firm trades if the 
magnitude of the hypothetical profit/loss is smaller in magnitude than 
the absolute value of the difference between the EOD level and either 
the bid price or offer price. To achieve the stated purpose of the 
constraint, ICC would only designate a potential trade as a firm trade 
if the trade level fell outside the EOD level plus/minus one half the 
EOD bid-offer width (``BOW'') for the given instrument. Such constraint 
would not apply when the potential firm trade is formed by crossing two 
outlying submission trades.
    With respect to credit default index swaptions (``Index Options''), 
ICC proposes additional language in amended subsection 2.4.1.c (Index 
Option Firm Trade Days) concerning the designation of a potential trade 
as a firm trade by subjecting strips of puts and/or calls to the CP 
open interest and ICC open interest requirements. The Pricing Policy 
currently incorporates similar open interest requirements for indices 
and single names. Under the proposed CP open interest requirement in 
amended subsection 2.4.1.c, for ICC to designate a potential trade as a 
firm trade, both parties must have a cleared open interest, as of the 
designated times, in one or more Index Option instrument sharing the 
same underlying index instrument, expiration date, strike convention, 
exercise style and transaction type. Under the proposed ICC open 
interest requirement, ICC would only designate a potential trade in a 
given Index Option instrument as a firm trade if ICC has a cleared open 
interest in that instrument.
    In addition, ICC proposes several clarifications to the Pricing 
Policy. In Section 2.2.2 (Non-Submission Assessments), ICC proposes to 
abbreviate the term ``ICC Board of Managers'' to ``Board.'' In Section 
2.6 (CP's Use of Third-Party Providers), ICC proposes revisions to 
clarify the circumstances under which a CP may participate in the EOD 
price discovery process on behalf of another CP. Section 2.6 currently 
provides that, subject to the prior consent of ICC, a CP may designate 
another CP to participate in the EOD price discovery process on its 
behalf. Amended Section 2.6 would remove ICC's prior consent and 
specify that a CP ``may allow an affiliated CP (CP B) to participate in 
the EOD price discovery process on its behalf.'' In Section 3 
(Governance), ICC proposes to memorialize its existing practice by 
adding a new sentence stating that the Pricing Policy document is 
subject to review by the Risk Committee and review and approval by the 
Board at least annually.

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\ For the reasons given below, the Commission finds that 
the proposed rule change is consistent with Section 17A(b)(3)(F) of the 
Act and Rules 17Ad-22(e)(2)(i) and (v) \8\ and 17Ad-22(e)(6)(iv) 
thereunder.\9\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \9\ 17 CFR 240.17Ad-22(e)(6)(iv).
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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.\10\
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    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    As noted above, the proposed rule change would amend Section 2.4.1 
of the Pricing Policy by adding new subsection (d) to incorporate a new 
trade price deviation constraint as additional criteria that must be 
met for the generation of firm trades for each type of cleared CDS 
instrument at ICC and to amend the existing subsections of

[[Page 32996]]

Section 2.4.1 to include references to the constraint where 
appropriate; namely, index instruments or indices in subsection (a), 
single name instruments in subsection (b), and Index Options in 
subsection (c). The Commission believes that by amending its Pricing 
Policy to include the proposed constraint in subsection (d) as 
described above, ICC would enhance its ability to maintain the 
accuracy, integrity, and effectiveness of the EOD price discovery 
process by not designating potential trades as firm trades if the 
magnitude of the hypothetical profit/loss is smaller in magnitude than 
the absolute value of the difference between the EOD level and either 
the bid price or offer price. This in turn could incentivize CPs to 
make EOD price submissions that help ICC maintain the robustness of its 
price discovery process and help ensure that on-market firm trades do 
not incentivize CPs to correct their outlying submissions. By 
subjecting potential trades to the proposed constraint, ICC would 
promote the prompt and accurate clearance and settlement of CDS 
contracts by avoiding the creation of an unnecessarily high number of 
firm trades around its EOD levels that could increase operational risks 
and inefficiencies in ICC's EOD price discovery process.
    The Commission also believes that the proposed amendments to 
subsection 2.4.1.c (Index Option Firm Trade Days), as described above, 
would ensure that the firm trade obligations for Index Options are 
subject to similar CP open interest and ICC open interest requirements 
as those that currently apply to indices and single names. These 
aspects of the proposed rule change should further enhance the 
consistency and integrity of ICC's EOD price discovery process across 
all three types of CDS instruments that ICC clears. Consequently, the 
Commission believes that all of the proposed changes to Section 2.4.1 
should promote the prompt and accurate clearance and settlement of CDS 
transactions by ICC.
    As noted above, ICC proposes other revisions to clarify that a CP 
may allow an affiliated CP to participate in the EOD price discovery 
process on its behalf without ICC's prior consent, to memorialize that 
the Pricing Policy is subject to review by the Risk Committee and 
review and approval by the Board at least annually, and to include the 
shorthand reference to the ``Board'' instead of the longer reference to 
the ICC Board of Managers in the Pricing Policy document. The 
Commission finds that these proposed drafting clarifications and 
improvements would enhance the clarity, transparency, and readability 
of the Pricing Policy for ICC management, employees, and CPs that, in 
turn, should help them understand their respective authorities, rights, 
and obligations regarding ICC's EOD price discovery process and its 
role in the clearance and settlement of CDS transactions.
    The Commission believes that the proposed changes, taken as a 
whole, should enhance ICC's ability to manage the overall EOD price 
discovery process and the risks of clearing CDS instruments, including 
the calculation and collection of margin requirements that will account 
for each type of specific instrument as part of its overall risk-based 
margin system and risk management processes which rely, in part, on the 
EOD prices submitted by ICC's CPs.\11\ Moreover, the Commission 
believes these risks, if mismanaged, could threaten ICC's ability to 
operate and therefore its ability to clear and settle transactions and 
safeguard funds. As a result, the Commission believes that these 
proposed changes should promote ICC's ability to assure the 
safeguarding of securities and funds which are in the custody or 
control of ICC or for which it is responsible.
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    \11\ See SEC Release No. 34-82960 (Mar. 28, 2018), 83 FR 14300, 
14302 (Apr. 3, 2018) (SR-ICC-2018-002) (finding improvements to 
ICC's end-of-day pricing process would improve ``ICC's risk 
management processes related to the end-of-day pricing process, 
including the calculation and collection of certain margin 
requirements'' and would ``promote the prompt and accurate clearance 
and settlement of the products cleared by ICC, and . . . enhance 
ICC's ability to assure the safeguarding of securities and funds 
which are in the custody or control of ICC or for which it is 
responsible'').
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    Therefore, the Commission believes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\12\
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    \12\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(2)(i) and (v) Under the Act

    Rules 17Ad-22(e)(2)(i) and (v) \13\ require each covered clearing 
agency to establish, implement, maintain and enforce written policies 
and procedures reasonably designed to, among other things, provide for 
governance arrangements that are clear and transparent and specify 
clear and direct lines of responsibility, respectively. As noted above, 
the proposed amendments to Section 3 (Governance) would memorialize 
that the Pricing Policy is subject to review by the Risk Committee and 
review and approval by ICC's Board of Managers at least annually. The 
Commission believes this aspect of the proposed rule change would 
improve the clarity and transparency of the Pricing Policy document and 
its governance processes by specifying relevant roles and lines of 
responsibility within ICC. The Commission believes that the proposed 
rule change is therefore consistent with Rules 17Ad-22(e)(2)(i) and 
(v).\14\
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    \13\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
    \14\ 17 CFR 240.17Ad-22(e)(2)(i) and (v).
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C. Consistency With Rule 17Ad-22(e)(6)(iv) Under the Act

    Rule 17Ad-22(e)(6)(iv) \15\ requires each covered clearing agency 
to 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, uses reliable sources of timely price data and uses procedures 
and sound valuation models for addressing circumstances in which 
pricing data are not readily available or reliable. The Commission 
believes the proposed changes to Section 2.4.1 to incorporate the 
proposed constraint in the firm trade provisions governing each type of 
cleared CDS instrument should help ICC manage the quality and quantity 
of EOD price submissions from CPs by only designating a potential trade 
as a firm trade if the trade level falls outside the proposed EOD range 
for the given CDS instrument. This, in turn, should help ICC establish 
and maintain accurate margin requirements that will account for the 
risks posed by each type of CDS instrument as part of its overall risk-
based margin system and risk management processes.
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    \15\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    Further, the proposed changes to subsection 2.4.1.c that would 
designate a potential trade as a firm trade by subjecting strips of 
puts and/or calls to both the CP open interest and ICC open interest 
requirements would help ensure that the firm trade obligations for 
Index Options are subject to similar open interest requirements as 
those that currently apply to indices and single names. The Commission 
believes these proposed changes should help ICC maintain the integrity 
and effectiveness of its EOD price discovery process for the provision 
of reliable prices for Index Options, which could, in turn, be used to 
further enhance ICC's ability to establish and maintain risk-based 
margin requirements for such instruments which rely, in part, on the 
EOD prices provided by CPs. The Commission believes that the proposed 
rule change is therefore consistent with Rule 17Ad-22(e)(6)(iv).\16\
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    \16\ 17 CFR 240.17Ad-22(e)(6)(iv).

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[[Page 32997]]

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 and Rules 17Ad-22(e)(2)(i) and (v) and 17Ad-22(e)(6)(iv) 
thereunder.\17\
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    \17\ 17 CFR 240.17Ad-22(e)(6)(iv).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\18\ that the proposed rule change (SR-ICC-2021-013), be, and hereby 
is, approved.\19\
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    \18\ 15 U.S.C. 78s(b)(2).
    \19\ 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.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-13102 Filed 6-22-21; 8:45 am]
BILLING CODE 8011-01-P