[Federal Register Volume 88, Number 84 (Tuesday, May 2, 2023)]
[Notices]
[Pages 27539-27542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09207]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-97383; File No. SR-ICEEU-2023-012]
Self-Regulatory Organizations; ICE Clear Europe Limited; Notice
of Filing and Immediate Effectiveness of Proposed Rule Change Relating
to Amendments to the Futures and Options Default Management Policy
April 26, 2023.
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 April 13, 2023, 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\ such that the proposed rule change 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
ICE Clear Europe Limited (``ICE Clear Europe'' or the ``Clearing
House'') is proposing to adopt a new Futures and Options Default
Management Policy (``Policy''),\5\ to replace its existing Futures and
Options Default Management Policy. The new Policy is intended to
provide clearer procedures and guidance for managing a default by one
or more Clearing Members.
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\5\ Capitalized terms used but not defined herein have the
meanings specified in the ICE Clear Europe Clearing Rules and the
Futures and Options Management Policy.
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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 adopt a new Futures and Options
Default Management Policy, which would address procedures and
requirements for the Clearing House's management of an Event of Default
with respect to an F&O Clearing Member consistent with the requirements
of Clearing House's Rules and Procedures. The Policy would replace the
existing Futures and Options Default Management Policy. The new Policy
is designed to more clearly reflect and describe various aspects of the
Clearing House's existing default management practices and procedures
for F&O Contracts (and would not generally change those practices and
procedures). The new Policy would also clarify and enhance certain
governance matters relating to F&O default management, as well as
certain practices relating to hedging strategy following a default, as
discussed below. The new Policy would also provide for certain
additional scenarios to be used in default testing drills, as discussed
below. The new Policy would also eliminate certain outdated or
superseded provisions or the provisions that are no longer applicable.
The Policy would include a background section describing the
overall purpose of the document, which is to provide structure and
guidance for ICE Clear Europe's management of an Event of Default
within the framework
[[Page 27540]]
of the Rules and applicable law, and without attempting to specify the
actions the Clearing House would take in all or any particular
situations. The background section would also set out the scope of the
Policy, which is to set out the key factors to consider in declaring
and managing an Event of Default. In addition, it would present the
Clearing House's three lines of defense model for managing risks. The
First Line of defense would be responsible for ensuring the Policy
requirements are met and would consist of the Clearing Risk, Treasury,
Operations, Legal, Compliance and Finance Departments. The Second Line
of defense would be responsible for challenging the First Line on
adherence to the requirements of the Policy and would be the Risk
Oversight Department. The Third Line would provide independent and
objective assurance to the Board and would be the Internal Audit
Function.
The Policy would set out the Clearing House's overall objectives
when declaring and managing an Event of Default, which are generally to
take timely action to return the Clearing House, as soon as reasonably
practicable, to a matched book while aiming to contain losses and
liquidity pressures. Depending on the circumstances, other objectives
may include ensuring timely completion of settlement, limiting
disruption to the market and closing out the defaulter's positions and
liquidating collateral in a prudent and orderly manner. The objectives
reflect that the default management framework will be guided by the
relevant Rules as well as the Policy and any supporting procedures that
may be adopted.
The Policy would detail the governance and responsibilities of
various personnel and committees with respect to default management.
(These provisions are intended to more clearly document existing
practice, rather than change that practice.) The Policy would in
particular reflect the following: the Board of Directors has delegated
to the President the authority to declare an Event of Default and take
all actions the Clearing House may take under the rules in managing an
event of default. The President has the discretion to consult the ERC
Default Management Committee (``DMC''), which is a subcommittee of the
Executive Risk Committee. The President has the authority to make final
decisions but may delegate powers as appropriate. The DMC would also
assume the responsibilities of the President in the declaration and
management of an Event of Default if the President is unavailable. The
DMC would require a quorum of the majority of voting members of the
Executive Risk Committee for the DMC to make decisions and the
decisions would have to be by unanimous agreement of the voting members
of the Executive Risk Committee present in the meeting. If there are
dissenting views at the DMC level, the issue must be escalated to the
Board. Consistent with the requirements of the Rules, the Policy would
state that a declaration of an Event of Default would be limited to
circumstances where an event in Rule 901(a) has occurred with respect
to a Clearing Member.
The Policy would also outline various aspects of default management
for which processes and procedures should be in place (which processes
and procedures are not set out in the Policy itself). The Policy would
state that procedures for pre-default monitoring must be in place in
order to identify early circumstances that may develop into Events of
Default, and procedures should be in place to quickly suspend a
defaulting Clearing Member's access to trading and prevent payments or
collateral transfers to the defaulting Clearing Member. Furthermore,
the Policy would set out that management information would have to be
available on short notice to support the President and must be
sufficiently detailed to allow for risk management decisions, including
key risk details on positions, collateral and liquidity. The Policy
would also state that processes should be in place to establish hedging
strategies and support timely liquidation of positions. Pursuant to the
existing Rules, the Clearing House may engage in hedging trades ahead
of liquidating the defaulter's portfolio. The Policy would provide that
advice on hedging strategy may be sought from relevant exchanges or
market participants. Any hedging strategy would need to be approved by
the President before execution. In terms of liquidation, the Policy
would provide that a process to liquidate positions via auctions or
private sale would have to be in place. For an auction, the Policy
would state that factors such as participation and possible risk of
auction failure should be considered in determining auction
composition. If there is a dependency on a third party, arrangements
would have to be in place in case the third party is not available.
The Policy would also address the need for a defined process for
client porting (and for liquidation where porting cannot occur). A
notification of the opening of the porting window would also have to be
communicated to the market in order to allow clients of the defaulting
Clearing Member to participate in the porting process. A process would
have to be defined to support the porting of client positions and
collateral pursuant to the Rules and Standard Terms but subject to
applicable law.
The Policy would also address the Clearing House's communication
strategy around defaults. Prior to an Event of Default, the Clearing
House would endeavor to prevent communications with the concerned
Clearing Member becoming public, unless allowed under Rule 106 or
required by the Clearing Member's regulators, the Clearing House's
regulators, and/or other government authorities. The Clearing House
would serve a default notice on the defaulter as soon as practicable
after declaring a default and issue a circular in respect of any
default notice, consistent with the Rules. ICE Clear Europe would
engage with other ICE exchanges, clearing organizations, and external
legal advisors when appropriate.
The Policy would reflect the requirement of the Rules that post-
default, a net sum would to be calculated according to the methodology
in the Rules.
The policy would also require the test and review of the default
procedures on a quarterly basis, through practicing certain aspects of
the default management process. In addition, the Clearing House would
have to conduct a default test on an annual basis with mandatory
participation of the Clearing Members. Moreover, a multi-year default
management plan would have to be maintained and approved by the
Executive Risk Committee and shared with the Board Risk Committee. The
multi-year default management plan would have to consider Default
Member Scenarios (looking at representative credit and market risk
scenarios over the testing cycle), Other Variables (such as the timing
of the default and other potential constraints), Liquidity Management
(including liquidity issues arising from sourcing liquidity, collateral
liquidation and investment counterparty failure), End of Default and
Recovery (including testing powers of assessment and recovery
mechanisms), People (including relevant personnel and testing the
ability of departments to support default management), and Governance
(including testing executive governance, communication with the Board
and Board approval). Additional testing should be conducted following
material changes in the default management process or otherwise where
necessary, and more extreme scenarios
[[Page 27541]]
or combinations of scenarios should be considered to identify weakness
in the default management process. The multi-year default management
plan along with the scope, results and lessons learned of each default
test would be shared with the Board Risk Committee and the Board. In
order to ensure the Board maintains oversight of the default management
process, the default drills that include direct participation of the
Board members would be done at least on an annual basis.
Finally, the Policy would describe governance, breach management
and exception handling, in a manner generally consistent with other ICE
Clear Europe policies. The document owner identified by the Clearing
House would be responsible for ensuring that the Policy remains up-to-
date and reviewed in accordance with the Clearing House's governance
processes. Document reviews would encompass at the minimum regulatory
compliance, documentation and purpose, implementation, use and open
items from previous validations or reviews. Results of the review would
have to be reported to the Executive Risk Committee or in certain cases
to the Model Oversight Committee. The document owner would also aim to
remediate the findings, complete internal governance and receive
regulatory approvals before the following annual review is due. The
document owner would also be responsible for reporting any material
breaches or deviations to the Head of Department, Chief Risk Officer
and Head of Regulation and Compliance in order to determine the
appropriate governance escalation and notification requirements.
Exceptions to the Policy would also be approved in accordance with such
governance processes.
The Policy would also recognize that the management of any
particular default will depend on factors and circumstances that may be
difficult to predict. As a result, the President would be allowed to
override elements of the Policy to declare and manage an Event of
Default in accordance with the provisions of the Rules.
(b) Statutory Basis
ICE Clear Europe believes that the Policy is consistent with the
requirements of Section 17A of the Securities Exchange Act of 1934
(``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 Policy is designed to set out the objectives and overall
practices and processes of the Clearing House in declaring and managing
an Event of Default, recognizing that the details of any particular
default will vary. The new Policy would more clearly set out the
responsibilities of the President and DMC in declaring and managing a
default. The Policy would also outline various aspects of the default
management process, including communications, hedging, client porting
and liquidation. The Policy would also address default testing, and the
Clearing House's multi-year testing plan to address various scenarios
and aspects of the default management process. In ICE Clear Europe's
view, the Policy will thus facilitate management of the risks related
to a default or anticipated default from a Clearing Member, so that the
Clearing House can promptly restore a matched book and contain losses.
The new Policy will thus promote the prompt and accurate clearing and
settlement of cleared transactions and is consistent with the
protection of investors and the public interest in the continued
operation of the Clearing House in the event of a Clearing Member
default. (ICE Clear Europe would not expect the adoption of the Policy
to materially affect the safeguarding of securities and funds in ICE
Clear Europe's custody or control or for which it is responsible.)
Accordingly, the Policy satisfies 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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The Policy is also consistent with relevant provisions of Rule
17Ad-22.\9\ Rule 17Ad-22(e)(2) provides that ``[e]ach covered clearing
agency shall establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable [. . .]
provide for governance arrangements that are clear and transparent''
\10\ and ``[s]pecify clear and direct lines of responsibility.\11\ As
discussed, the Policy would clearly state certain responsibilities of
the President, Board, DMC, and Executive Risk Committee, among others,
in relation to oversight of the Clearing House's declaration and
management of an Event of Default. Specifically, and consistent with
current practice, the President would have full authority in declaring
and managing an Event of Default, with the ability to delegate if
necessary or for the DMC to assume certain responsibilities if the
President is unavailable. In line with the Clearing House's other
policies and procedures, the Policy would also describe the
responsibilities of the document owner and appropriate escalation and
notification requirements for responding to exceptions and deviations
from the Policy. In ICE Clear Europe's view, the Policy is therefore
consistent with the requirements of Rule 17Ad-22(e)(2).\12\
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\9\ 17 CFR 240.17 Ad-22.
\10\ 17 CFR 240.17 Ad-22(e)(2)(i).
\11\ 17 CFR 240.17 Ad-22(e)(2)(v).
\12\ 17 CFR 240.17 Ad-22(e)(2).
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Rule 17A-22(e)(13) [sic] provides that the ``covered clearing
agency shall establish, implement, maintain and enforce written
policies and procedures reasonably designed to, as applicable [. . .]
ensure that [sic] the covered clearing agency has the authority and
operational capacity to take timely action to contain losses and
liquidity demands and continue to meet its obligations by, at a
minimum, requiring the covered clearing agency's participants and,
where [sic] practicable, other stakeholders to participate [sic] the
testing and review of its default procedures, including any close-out
procedures, at least annually and following material changes thereto.''
\13\ As discussed above, the Policy would address the Clearing House's
procedures for testing its default management framework, which includes
annual default tests in which participation by Clearing Members is
mandatory, and further provides for additional testing in the event of
material changes in the default management process. The new Policy
would outline the Clearing House's overall multi-year testing plan and
address key scenarios and considerations to be included in the default
testing process. In ICE Clear Europe's views, these testing procedures,
together with the other aspects of the Policy and the underlying Rules,
will facilitate its ability to take timely action to contain losses and
liquidity pressure in the event of a Clearing Member default. As such,
the Policy is consistent with the requirements of Rule 17Ad-
22(e)(13).\14\
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\13\ 17 CFR 240.17Ad-22(e)(13).
\14\ 17 CFR 240.17Ad-22(e)(16). [sic]
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[[Page 27542]]
(B) Clearing Agency's Statement on Burden on Competition
ICE Clear Europe does not believe the Policy would have any impact,
or impose any burden, on competition not necessary or appropriate in
furtherance of the purposes of the Act. The Policy is being adopted to
document the Clearing House's practices relating to declaring and
managing an Event of Default of a Clearing Member. The Policy does not
change the rights or obligations of Clearing Members or the Clearing
House under the Rules or Procedures. The Policy does set out certain
requirements for Clearing Members to participate in annual default
testing (reflecting current practice), but the Clearing House does not
believe this requirement would impose a material burden on Clearing
Members (and in any event such participation is required of all
Clearing Members under Commission regulations as set out above).
Accordingly, ICE Clear Europe does not believe that adoption of the
Policy would adversely affect competition among Clearing Members,
materially affect the costs of clearing, adversely affect the ability
of market participants to access clearing or the market for clearing
services generally, or otherwise adversely affect competition in
clearing services. Therefore, ICE Clear Europe does not believe the
proposed rule change imposes any burden on competition that is not
necessary or appropriate 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 amendment has not been
solicited or received by ICE Clear Europe. ICE Clear Europe will notify
the Commission of any 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 \15\ and paragraph (f) of Rule 19b-4 \16\
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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\15\ 15 U.S.C. 78s(b)(3)(A).
\16\ 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, security-based swap submission or advance notice is consistent
with the Act. Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml) or
Send an email to [email protected]. Please include
File Number SR-ICEEU-2023-012 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-2023-012. 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 (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change, security-
based swap submission or advance notice that are filed with the
Commission, and all written communications relating to the proposed
rule change, security-based swap submission or advance notice 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.
Do not include personal identifiable information in submissions;
you should submit only information that you wish to make available
publicly. We may redact in part or withhold entirely from publication
submitted material that is obscene or subject to copyright protection.
All submissions should refer to File Number SR-ICEEU-2023-012 and
should be submitted on or before May 23, 2023.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09207 Filed 5-1-23; 8:45 am]
BILLING CODE 8011-01-P