[Federal Register Volume 87, Number 173 (Thursday, September 8, 2022)]
[Notices]
[Pages 55045-55048]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-19348]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-95654; File No. SR-ICC-2022-012]


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

September 1, 2022.

I. Introduction

    On July 19, 2022, ICE Clear Credit LLC (``ICE Clear Credit'' or 
``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 its Rules to permit it to take advantage 
of certain settlement finality protections under applicable United 
Kingdom (``UK'') and European Union (``EU'') law. The proposed rule 
change was published for comment in the Federal Register on July 29, 
2022.\3\ 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\ Self-Regulatory Organizations; ICE Clear Credit LLC; Notice 
of Filing of Proposed Rule Change Relating to the Clearing Rules; 
Exchange Act Release No. 95357 (July 25, 2022); 87 FR 45840 (July 
29, 2022) (File No. SR-ICC-2022-012) (``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    The EU Settlement Finality Directive \4\ introduced various 
insolvency-related protections in relation to ``designated systems'' 
used by EU participants to transfer financial instruments and payments, 
and participation in those systems. The Settlement Finality Directive 
aims to ensure that as a matter of EU member state laws, transfer 
orders which enter into such systems are finally settled, regardless of 
whether the sending participant has gone into an insolvency process. 
Transfer orders for this purpose include instructions to make cash 
payments (including margin payments) and instructions to transfer 
securities (including as margin or in physical settlement of a cleared 
transaction, if applicable). Under the Settlement Finality Directive, 
transfer orders and related netting arrangements are enforceable, even 
in the event of insolvency proceedings against a participant, provided 
that the transfer

[[Page 55046]]

order was entered into the system before the opening of the insolvency 
proceeding. Further, under the Settlement Finality Directive, the right 
of the operator of a designated system to realize and apply collateral 
security provided by a participant would not be affected by insolvency 
proceedings against the participant.
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    \4\ EU Directive 98/26/EC.
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    ``Designated systems'' are defined as formal arrangements, governed 
by the law of an EU member state, between three or more participants 
with common rules and standard arrangements for clearing or execution 
of transfer orders between participants, and have been designated as a 
system and notified to the European Securities and Markets Authority 
(``ESMA''). Although the Settlement Finality Directive itself does not 
establish an equivalent regime for systems operated under the laws of a 
non-EU member state (``third-country systems''), such as United States 
(``US'') clearing houses, Recital 7 of the Settlement Finality 
Directive provides that member states may choose to apply the 
provisions of the Settlement Finality Directive to their domestic 
institutions that participate directly in third country systems, and to 
collateral security provided in connection with participation in such 
systems. As a result, in some EU member states it is possible for a 
third country system such as ICC to receive national designation or be 
otherwise protected as a designated system for the purposes of that 
member state's national law.
    The UK has implemented similar settlement finality regulations that 
continue to apply following the withdrawal of the UK from the EU, and 
which are also potentially applicable to UK institutions that 
participate in third country systems (such as a US clearing house).\5\
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    \5\ Financial Markets and Insolvency (Settlement Finality) 
Regulations 1999. As used herein, the EU Settlement Finality 
Directive, national implementing legislation and the UK Settlement 
Finality Regulations are collectively referred to as ``Settlement 
Finality Laws.''
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B. Proposed Rule Change

    The purpose of the proposed rule changes is to modify certain of 
ICC's Rules to introduce explicit provisions relating to the settlement 
finality of transfer orders in order to permit ICC to take advantage of 
certain protections for default rights and remedies under applicable 
Settlement Finality Laws.\6\ The proposed amendments are expected to be 
principally relevant in the case of an insolvency of an ICC Clearing 
Participant domiciled in the UK or an EU member state. The proposed 
amendments would rely on certain protections in such Settlement 
Finality Laws and regulations that provide additional support (on top 
of existing protections in applicable law) for the enforceability of 
the ICC's default rights and remedies under the Rules without 
interference in such an insolvency.
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    \6\ The description that follows is substantially excerpted from 
the Notice. Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICC's Rules, as applicable.
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    Specifically, the amendments would address which ``transfer 
orders'' arise in ICC's system, when they become irrevocable, who is 
bound by them, and when they terminate. ICC believes that the 
amendments would facilitate obtaining the relevant protections of the 
Settlement Finality Laws, which would principally be relevant in the 
case of an insolvency of a Participant domiciled in an EU member state 
or in the UK. The amendments would not otherwise affect ICC's rights 
and obligations under the Rules, including default rights and remedies, 
and would not be expected to be relevant to an insolvency proceeding 
involving a Participant organized in the US or otherwise outside of the 
EU or the UK.
    In the Rules, ICE Clear Credit would adopt a new Chapter 10 
addressing Settlement Finality Laws. Rule 1000 would add a number of 
related definitions, including definitions for relevant legislation and 
regulations, such as ``EMIR,'' ``Financial Collateral Directive,'' 
``Financial Collateral Regulations,'' ``FSMA,'' ``Settlement Finality 
Directive,'' ``Settlement Finality Regulations,'' and ``UK EMIR.'' The 
rule would also adopt key definitions relating to the settlement 
finality provisions, including ``ICE Systems'' (referencing ICE Clear 
Credit's trade registration, clearing processing and finance systems), 
``SFD System'' (referencing the third country system operated by ICE 
Clear Credit for purposes of the Settlement Finality Laws), ``Payment 
Transfer Order,'' ``Securities Transfer Order'' and ``Transfer Order'' 
(representing the types of transfer orders used in the ICE system and 
covered by the Settlement Finality Laws), ``SFD Participant'' 
(referencing ICE Clear Credit itself, its Participants organized in the 
European Economic Area (``EEA'') or in the UK, among certain other 
relevant persons), ``SFD Custodian'' (referencing a custodian located 
in the EEA or the UK used by ICE Clear Credit or a Participant for the 
holding or transfer of Non-Cash Collateral), ``SFD Financial 
Institution'' (referencing a financial institution located in the EEA 
or UK used by ICE Clear Credit or a Participant for purpose of the 
deposit or transfer of cash), ``SFD Security'' (referencing a security 
as defined in the Settlement Finality Laws), ``Indirect Participant'' 
(referencing Non-Participant Parties that fall within the definition of 
indirect participant under the Settlement Finality Laws), and ``Non-
Cash Collateral'' (referencing Margin or Collateral in the form of a 
security).
    New Rule 1001 would set out general principles relevant to 
implementation of the EU and UK settlement finality arrangements. 
Subsection (a) would provide that ICC is the operator of a third 
country system for purposes of relevant Settlement Finality Laws, and 
that Chapter 10 of the Rules would apply to ICE Clear Credit and SFD 
Participants to the extent that the Settlement Finality Laws are 
applicable to such persons. Subsection (b) would require SFD 
Participants to comply with actions taken by ICC pursuant to Chapter 10 
and the relevant Settlement Finality Laws, and to acknowledge that the 
Settlement Finality Laws modify certain otherwise applicable provisions 
of insolvency laws. Subsection (c) would provide that each SFD 
Participant is on notice of the provisions of Chapter 10, and by virtue 
of participating in the SFD System, is deemed to agree to the 
application of Chapter 10 (including in the event of any conflict with 
any other agreement or obligation). Subsection (d) would provide an 
additional acknowledgment that Margin and Collateral transferred to ICC 
under the Rules fall within certain protections for collateral 
arrangements under the Settlement Finality Laws.
    New Rule 1002 would address the timing and circumstances in which 
various types of Transfer Orders would arise for purposes of the ICC 
SFD System, specifically Payment Transfer Orders and Securities 
Transfer Orders in various circumstances, including for transfer of 
positions (``Position Transfer Orders''), transfer of non-cash 
collateral (``Collateral Transfer Orders''), submission of new trades 
for clearing (``New Transaction Clearing Orders''), backloading trades 
for clearing (``Backloaded Transaction Clearing Orders, and together 
with New Transaction Clearing Orders, ``Transaction Clearing Orders''), 
and physical settlement under cleared CDS contracts (``CDS Physical 
Settlement Orders''). The rule would also specify the subject matter of 
each type of Transfer Order (e.g., a payment in respect of a Payment 
Transfer Order) and the parties in respect of which each type of 
Transfer Order would apply and have effect (e.g., in the case of a 
Payment Transfer Order, the affected Participant (if it is an SFD 
Participant), ICE Clear Credit, and any affected SFD

[[Page 55047]]

Financial Institution). Rule 1002 would also address the possibility of 
multiple Transfer Orders existing in respect of the same obligation 
(which may exist, but would not result in the duplication of any 
obligation), and the fact that netting or close out of Contracts would 
not affect the status of Transfer Orders. The rule also states, 
consistent with the general approach of the Rules, that where a 
Transfer Order applies to an Indirect Participant, it would not affect 
the liability of any SFD Participant pursuant to the same Transfer 
Order.
    Rule 1003 would specify the time at which each type of Transfer 
Order (specifically, Payment Transfer Orders, Position Transfer Orders, 
Collateral Transfer Orders, Transaction Clearing Orders, and CDS 
Physical Settlement Orders) becomes irrevocable for purposes of the 
relevant Settlement Finality Laws. Payment Transfer Orders would become 
irrevocable at the earlier of the time payment is received or at the 
time the relevant financial institution used by ICC for this purpose 
sends a SWIFT or other confirmation that payment has been made. 
Collateral Transfer Orders similarly would become irrevocable at the 
earlier of the time the transfer is received or a related securities 
transfer order in a relevant securities transfer system becomes 
irrevocable. Position Transfer Orders would become irrevocable at the 
time the position transfer is recorded in the ICC systems, and 
Transaction Clearing Orders would become irrevocable at the applicable 
Novation Time under the Rules. CDS Physical Settlement Orders would 
become irrevocable at the earliest of (1) the time the Matched Delivery 
Buyer has irrevocably instructed its custodian to transfer the relevant 
securities to the Matched Delivery Seller, (2) the time the relevant 
instrument is delivered or assigned, or (3) the time notice is 
otherwise given under the Rules that the Matched Delivery Pair have 
settled the relevant Matched Delivery Contracts. Under the Rule, as 
from the time when the Transfer Order becomes irrevocable, it could not 
be revoked or purported to be revoked by any SFD Participant or ICE 
Clear Credit and would be binding on all SFD Participants.
    Rule 1004 would address variations or cancellations of Transfers 
Orders prior to the time they become irrevocable, in specified 
circumstances. These circumstances include, for any Transfer Order, 
cases where the order is affected by manifest or proven error or an 
error agreed to by all affected SFD Participants. Additional grounds 
for variation or cancellation apply for particular types of Transfer 
Order. In the case of a Payment Transfer Order or Collateral Transfer 
Order, these would include where the underlying Contract is void or 
avoided under the Rules or applicable law, or amended as a result of 
ICC exercising its discretion under the Rules. Transaction Clearing 
Orders may be subject to variation or cancellation where the underlying 
trade is not eligible for clearing or otherwise not accepted for 
clearing, and Backloaded Transaction Clearing Orders may be subject to 
variation or cancellation if an error or omission is noted to ICC prior 
to the Novation Time. Similarly, variation or cancellation of a CDS 
Physical Settlement Order may be made if a NOPS Amendment Notice is 
validly delivered under the Rules or ICE Clear Credit Procedures. Under 
Rule 1004, in these circumstances, ICC would be permitted to make 
appropriate modifications to the relevant Transfer Order, or in the 
alternative to cancel the relevant Transfer Order. Rule 1004 also would 
not preclude ICC from taking steps to give rise to a new Transfer Order 
with opposite effect to an existing Transfer Order or part thereof. 
Rule 1004 also would provide for notice of any modification or 
cancellation of a Transfer Order to affected SFD Participants.
    Rule 1005 would specify the circumstances under which Transfer 
Orders are deemed satisfied. Specifically, Payment Transfer Orders are 
satisfied upon all required payments being received in immediately 
available funds or full satisfaction of the underlying obligation is 
otherwise made and recorded in ICC's systems, free of any encumbrances. 
Position Transfer Orders would be deemed satisfied upon becoming 
irrevocable (at which time the relevant positions have been transferred 
under the Rules). Collateral Transfer Orders would be deemed satisfied 
upon ICC or the Participant, as applicable, receiving the Non-Cash 
Collateral in its account or upon the definitive record of the assets 
transferred by the Participant being updated to reflect the successful 
transfer of the relevant collateral. Transaction Clearing Orders would 
be deemed satisfied at the time the relevant cleared contracts arise 
under the Rules. A CDS Physical Settlement Order would be deemed 
satisfied at the time ICC updates its records to reflect that physical 
delivery of the relevant security has been completed or the delivery 
obligations of the parties are otherwise discharged or settled.
    Rule 1006 would set out certain acknowledgements of ICC, 
Participants, and Non-Participant Parties with respect to matters 
relating to Margin or Collateral to the extent they fall to be 
determined under the laws of an EEA member state or the UK. The 
amendments would clarify that such arrangements are subject to the EU 
Financial Collateral Directive or UK Financial Collateral Regulations, 
as applicable, and would provide that Participants and Non-Participant 
Parties would not dispute that characterization. The amendments would 
further provide that arrangements for the provision of cash Margin and 
Collateral constitute ``title transfer financial collateral 
arrangements'' and arrangements for the provision of Pledged Items 
constitute ``security financial collateral arrangements,'' in each case 
for purposes of the EU Financial Collateral Directive or UK Financial 
Collateral Arrangements, that all such Margin and Collateral constitute 
``financial collateral'' for purposes of such laws, and that ICC has 
possession or control of such Margin and Collateral for purposes of 
such laws. The amendments would also state that for purposes of UK law, 
the security arrangements under the Rules constitute a ``market 
charge'' for purposes of the Companies Act 1989, which provides certain 
protections for the enforceability of such arrangements in the event of 
the insolvency of a clearing participant.
    ICC also proposes to make certain amendments to Rule 611, which 
currently addresses the treatment of certain Rules under various 
insolvency laws and other protections for the enforceability of default 
remedies in the event of the insolvency of a clearing participant. The 
amendments would add a new subsection (f), which would provide that 
specified Rules providing for default rights and remedies would 
constitute default rules, procedures and similar arrangements as 
defined for purposes of relevant EU and UK law, including EMIR, UK 
EMIR, and the Settlement Finality Laws.

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 discussed below, the Commission finds 
that the proposed rule change is consistent with Section

[[Page 55048]]

17A(b)(3)(F) of the Act \8\ and Rule 17Ad-22(e)(1) thereunder.\9\
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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)(1).
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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 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.\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 changes would introduce 
provisions that support the operation of the settlement finality 
provisions of EU and UK law. These provisions ensure that transfer 
orders by a Clearing Participant that is domiciled in an EU member 
state or in the UK will be cleared even if that Clearing Participant 
enters into insolvency proceedings after the transfer order was entered 
into the system. As noted in more detail above, the proposed rule 
change would accomplish this by adopting key definitions relating to 
the Settlement Finality Laws, set out general principles relevant to 
implementation of the EU and UK settlement finality arrangements (such 
as participant acknowledgement of the applicability of the settlement 
finality rules to margin and collateral), specify timing that each 
transfer order becomes irrevocable for purposes of the relevant 
Settlement Finality Laws, circumstances under which transfer orders are 
deemed satisfied, and specify that Rules providing for default rights 
and remedies would constitute default rules, procedures and similar 
arrangements as defined for purposes of relevant EU and UK law, 
including EMIR, UK EMIR, and the Settlement Finality Laws.
    The Commission believes that these proposed rule changes, while not 
changing any of the existing default rights or remedies of ICC but 
rather by adopting explicit provisions relating to settlement finality 
of transfer orders of Clearing Participants in insolvency, will help 
support the payment and transfer of margin and collateral and thus the 
prompt and accurate clearance and settlement of securities transactions 
by ensuring that its rules facilitate explicit reference and 
participant awareness and acknowledgement of the applicability of EU 
and UK Settlement Finality Laws.
    For these reasons, the Commission believes that the proposed rule 
change is consistent with Section 17A(b)(3)(F) of the Act.\11\
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    \11\ 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 each covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed, as applicable, to provide for a well-
founded, clear, transparent and enforceable legal basis for each aspect 
of its activities in all relevant jurisdictions.\12\
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    \12\ 17 CFR 240.17Ad-22(e)(1).
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    As noted above, ICC proposes to rely on provisions of the 
Settlement Finality Laws regulations that provide additional support 
for the enforceability of the ICC's default rights and remedies. For 
example, under the Settlement Finality Directive, transfer orders and 
related netting arrangements are enforceable, even in the event of 
insolvency proceedings against a participant. The Commission believes 
that by proposing to align key definitions and rules to the Settlement 
Finality Laws as noted above and by requiring relevant Clearing 
Participants to comply with and acknowledge the settlement finality 
provisions, the proposed rule changes would provide a well-founded and 
clear legal basis for ICC to enforce its clearing rules during an 
insolvency of a Clearing Participant domiciled in the EU or the UK.
    For these reasons, the Commission believes that the proposed rule 
changes are consistent with Rule 17Ad-22(e)(1).\13\
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    \13\ 17 CFR 240.17Ad-22(e)(1).
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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 \14\ and Rule 17Ad-22(e)(1) hereunder.\15\
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    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240.17Ad-22(e)(1).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\16\ that the proposed rule change (SR-ICC-2022-012), be, and hereby 
is, approved.\17\
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 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.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2022-19348 Filed 9-7-22; 8:45 am]
BILLING CODE 8011-01-P