[Federal Register Volume 88, Number 90 (Wednesday, May 10, 2023)]
[Notices]
[Pages 30187-30194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-09903]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97429; File No. SR-ICEEU-2023-010]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to Amendments to the Clearing Rules

May 4, 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 21, 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 primarily prepared by 
ICE Clear Europe. On May 2, 2023, ICE Clear Europe filed Amendment No. 
1 to the proposed rule change to make certain changes to the Form 19b-4 
and Exhibit 1A.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as modified by Amendment No. 1 
(hereafter, ``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\ Amendment No. 1, amends and restates in its entirety the 
Form 19b-4 and Exhibit 1A in order to correct the narrative 
description of the proposed rule change.
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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'')

[[Page 30188]]

proposes to amend its Clearing Rules (the ``Rules'') \4\ to address 
more consistently the treatment of certain losses that do not result 
from Clearing Member default, including certain investment losses and 
custodial losses.
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the Rules.
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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 amend its Rules to address more 
consistently the treatment of certain losses that do not arise from the 
default of a Clearing Member, generally referred to as non-default 
losses, including certain investment losses and custodial losses, as 
discussed in more detail herein.
I. Summary of Proposed Amendments \5\
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    \5\ The amendments are intended to comprehensively and 
consistently address non-default losses in a manner consistent with 
relevant UK law applicable to the Clearing House and relevant 
internationally accepted principles for clearing organizations. See 
Financial Services and Markets Act 2000 (Recognition Requirements 
for Investment Exchanges, Clearing Houses and Central Securities 
Depositories) Regulations 2001/995, Schedule, Pt. 5, para. 29A, 
which requires the central counterparty to maintain effective 
arrangements for ensuring that losses that arise otherwise than as a 
result of clearing member default and threaten the solvency of the 
central counterparty are allocated with a view to ensuring that the 
central counterparty can continue to operate. See also CPMI-IOSCO, 
Principles for Financial Market Infrastructures (Principles 15 and 
16); CPMI-IOSCO, Discussion Paper on Central Counterparty Practices 
to Address Non-Default Loss (Aug. 2022).
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    As amended, the Rules would, among other matters:
     Define several exclusive categories of relevant losses: 
(1) Investment Losses, (2) Custodial Losses, (3) Pledged Collateral 
Losses, (4) Title Transfer Collateral Losses and (5) Non-Default 
Losses.
     Specify the resources of the Clearing House, if 
applicable, that will be applied to cover such categories of losses.
     Specify the responsibility of Clearing Members, in defined 
circumstances, to make contributions with respect to Investment Losses 
and Custodial Losses.
     Specify the responsibility of Clearing Members for Pledged 
Collateral Losses and Title Transfer Collateral Losses.
     Address the treatment of recoveries by the Clearing House 
with respect to such categories of losses.

II. Definitions of Relevant Loss Categories

    In Rule 101, new definitions would be added for ``Custodial 
Losses,'' ``Pledged Collateral Losses,'' ``Title Transfer Collateral 
Loss'' (and related terms) and the definitions of ``Investment Losses'' 
and ``Non-Default Losses'' (and related terms) would be revised, as 
follows.
Custodial Losses
    Custodial Losses would be defined as losses suffered by the 
Clearing House with respect to Custodial Assets, including from 
declines in the value thereof, arising as a result of or in connection 
with (1) a default, insolvency, system failure, force majeure event or 
similar event with respect to a Custodian or Delivery Facility, a 
breach of agreement by the Custodian or Delivery Facility or pursuant 
to any loss allocation or contribution provisions of the Custodian or 
Delivery Facility, or (2) any theft, cyber attack or similar event with 
respect to Custodial Assets by any person (other than the Clearing 
House and its directors, officers or employees). Custodial Losses are 
defined to exclude both Pledged Collateral Losses or Title Transfer 
Collateral Losses. Custodial Losses would also exclude any losses 
subject to a power of assessment for default losses under Rule 909 or 
any mechanism that has the effective of reducing such losses pursuant 
to reduced gains distributions under Rule 914, partial tear-up under 
Rule 915 or contract termination under Rule 916. The existing 
definition of Custodian would be revised to specifically reference 
approved financial institutions, concentration banks, intermediary 
financial institutions, investment agent banks, system banks and 
TARGET2 Concentration Banks, as defined in the Rules (in additional to 
the more general categories of financial institution currently 
included). The changes reflect the currently understood scope of the 
Custodian definition in its existing form but would provide greater 
clarity in light of the amendments discussed herein. Custodial Assets 
would be defined as any asset or property of the Clearing House (or any 
person acting on its behalf or holding assets for it) representing 
original or initial margin, variation margin, guaranty fund 
contributions or permitted cover, deliverables or settlement amounts. 
As discussed below, Custodial Losses would be allocated through the use 
of Custodial Loss Assets of the Clearing House and thereafter 
contributions of Clearing Members under Rule 919.
Pledged Collateral Losses
    The amendments would define Pledged Collateral Losses as those 
losses arising out of or relating to the holding of Pledged Collateral 
\6\ or the assets in any Pledged Collateral Account. Such losses with 
respect to Pledged Collateral are addressed in the existing Rules, and 
the amendments would not change the treatments of such losses. (Under 
the existing Rules, and as discussed below for the Rules as proposed to 
be amended, such losses would be solely the responsibility of the 
relevant Clearing Member under the Rules.) For clarity and consistency, 
a defined term for Pledged Collateral Losses would be added in Rule 101 
(based on the existing defined term for ``Custodial Losses'' in Rule 
502(j), which would be deleted). Relevant existing provisions 
addressing such losses would be moved to Rule 919, as discussed below, 
so that all non-default losses are addressed in the same section of the 
Rules.
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    \6\ Pledged Collateral and Pledged Collateral Accounts are 
currently only used in connection with the Customer Accounts of FCM/
BD Clearing Members.
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Title Transfer Collateral Losses
    Title Transfer Collateral Losses would be defined as losses 
resulting from a reduction in value or change of exchange rates of 
initial or original margin, guaranty fund contributions or permitted 
cover, which have been transferred to the Clearing House (other than as 
Pledged Collateral) \7\ and which are not invested or reinvested by the 
Clearing House but are held with a Custodian. Such losses are not 
currently subject to an express loss-sharing mechanism under the Rules. 
Accordingly, ICE Clear Europe is proposing to formally define this 
category of loss, and as discussed below, such losses would be solely 
the responsibility of the relevant Clearing Member under the Rules. In 
this respect, the resulting treatment would be

[[Page 30189]]

generally consistent with that applicable to Pledged Collateral Losses 
under the current and revised Rules.
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    \7\ Currently, most collateral received by the Clearing House is 
pursuant to a title transfer collateral arrangement.
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Investment Losses
    Conforming changes would be made to the definition of Investment 
Losses, an existing category of loss identified in the Rules, to 
expressly exclude Custodial Losses, Pledged Collateral Losses and Title 
Transfer Collateral Losses. A sentence excluding losses from the 
default of a Custodian would be deleted as such losses would be 
expressly covered by the Custodial Loss definition (which in turn would 
be excluded from the Investment Loss definition as noted above). For 
consistency with the other new definitions, the definition would also 
explicitly reference losses from assets representing variation margin 
and settlement amounts in addition to the other listed categories.
Non-Default Losses
    Conforming changes to the definition of Non-Default Losses would be 
made to exclude Custodial Losses, Pledged Collateral Losses and Title 
Transfer Collateral Losses. The definition would also expressly exclude 
losses incorporated in the calculation of the ICE Deposit Rate under 
the Finance Procedures (such as arising from negative interest rates). 
The amendments would eliminate a requirement that the Non-Default 
Losses threaten the Clearing House's solvency in order to qualify as 
such. ICE Clear Europe does not believe the limitation to losses that 
threaten solvency is needed (as all such Non-Default Losses should be 
addressed by the Rules).
Loss Assets and Other Definitions
    The amendments would add new defined terms for Investment Loss 
Assets and Custodial Loss Assets, which are assets of the Clearing 
House available to be applied to Investment Losses or Custodial Losses, 
respectively, and Non-Default Losses. The existing term Loss Assets 
would be revised accordingly to refer to Investment Loss Assets and 
Custodial Loss Assets. New defined terms for Investment Loss Amount and 
Custodial Loss Amount would also be added, reflecting the amount of 
Investment Losses or Custodial Losses, as applicable, as determined 
under Rule 919 after application of applicable Loss Assets.
III. Treatment of Losses in Various Categories
    The proposed amendments to Rule 919 would incorporate the concepts 
of Custodial Loss, Pledged Collateral Loss and Title Transfer 
Collateral Loss.
    Rule 919(b) would be amended to provide that Non-Default Losses 
will be met first by Investment Loss Assets and Custodial Loss Assets 
available to the Clearing House. The amendments would clarify that the 
first portion of any Investment Loss will be met by the Clearing House 
applying Investment Loss Assets available to it at the time of the 
relevant event giving rise to the loss. Similarly, a new provision 
would be added that the first portion of any Custodial Loss would be 
met by the Clearing House applying Custodial Loss Assets available to 
it at the time of the relevant event. Rule 919(b) would also provide 
that the obligations in the subsection only apply to the extent the 
relevant Loss Assets remain available to the Clearing House and have 
not themselves been subject to an event similar to a Custodial Loss, 
Investment Loss, Pledged Collateral Loss or Title Transfer Collateral 
Loss. Rule 919(c) would be amended to address Custodial Losses in 
addition to Investment Losses, such that if there are Investment Losses 
or Custodial Losses exceeding the available amount of Investment Loss 
Assets or Custodial Loss Assets, respectively, Clearing Members would 
be required to pay Collateral Offset Obligations to the Clearing House. 
The relevant formula for calculating Collateral Offset Obligations 
under Rule 919(d) would be amended to reflect Custodial Losses as well 
as Investment Losses, as applicable. In addition, the relevant fraction 
for purposes of determining a particular Clearing Member's obligation 
in respect of Collateral Offsets Obligations would be revised to take 
into account amounts recorded as variation margin, deliverables and 
settlement amounts. In addition, a clarification would be made that, in 
the case of a Defaulter, the calculation would include the Defaulter's 
Guaranty Fund Contributions only to the extent not used to offset 
default losses, an approach which is consistent with the treatment of 
other specified assets of the Defaulter. Similarly, under Rule 919(e), 
the maximum Collateral Offset Obligation would be amended to include 
the variation margin, deliverables and settlement amounts transferred 
(or due to be transferred) to the Clearing House. Rule 919(f) would be 
amended to provide that Collateral Offset Obligations may be offset or 
netted against obligations to pay or return variation margin, 
deliverables or settlement amounts in addition to other margin payments 
and guaranty fund contributions.
    Rule 919(g) would provide that Collateral Offset Obligations 
resulting from an Investment Loss could be applied solely to Investment 
Losses, and Collateral Offset Obligations resulting from a Custodial 
Loss could be applied solely to Custodial Losses. Rule 919(h), which 
addresses the allocation by the Clearing House of recoveries in respect 
of Investment Losses, would be expanded to cover recoveries from 
Custodial Losses as well. Certain additional clarifications in this 
subsection would be made to contemplate recovery and allocation of 
assets other than cash and to state that the Clearing House's 
obligation to reimburse for recoveries only applies to the extent the 
relevant assets remain available to the Clearing House. Rule 919(i), 
which provides, among other things, that Clearing Members remain liable 
to make margin and guaranty fund contributions notwithstanding 
Collateral Offset Obligations, would be revised to reference payment of 
variation margin, payment of settlement amounts and delivery of 
deliverables as well. A drafting clarification would also be made 
regarding Clearing Members' obligations to make and receive timely 
delivery to improve readability of the provision. Rule 919(j), which 
provides for return of excess Collateral Offset Obligations, would be 
revised to account for Collateral Offset Obligations in respect of 
Custodial Losses and to clarify that the obligation to return only 
applies to the extent the relevant amounts remain available to the 
Clearing House. Rule 919(k) would clarify that Collateral Offset 
Obligations are independent of obligations in respect of Assessment 
Contributions, Cash Loser Adjustments or Cash Gainer Adjustments, 
Partial Tear-Up Prices or Product Termination Amounts. A clarifying 
cross-reference to Rule 209 would be added to an existing statement 
that caps on Assessment Contributions under relevant rules do not limit 
liability for Collateral Offset Obligations. A statement that the 
conditions for contract termination under Rule 916(a)(ii)(B)(2) will 
not be met solely because of a Non-Default Loss or Investment Loss 
would be removed as unnecessary in light of the other amendments to 
Rule 919(k). A conforming change would be made in Rule 919(n), which 
provides that Rule 919 does not require the Clearing House is not 
required to pursue any litigation against any Person, to specifically 
reference Delivery Facilities.
    Pursuant to revised Rule 919(p), the Clearing House would be 
obligated to

[[Page 30190]]

notify Clearing Members by Circular of the amount of Investment Loss 
Assets and Custodial Loss Assets as determined by ICE Clear Europe from 
time to time. ICE Clear Europe has removed a specific reference to the 
total amount of Loss Assets from the Rule. ICE Clear Europe believes 
that it is appropriate for the Clearing House to have the flexibility 
to update the amount of Investment Loss Assets and Custodial Loss 
Assets from time to time in light of its ongoing business and other 
relevant factors, without the need to amend the Rules. Such updates 
may, for example, reflect changes in relevant components of its capital 
requirements, in particular the capital requirements for credit, 
counterparty and market risks and operational and legal risks, that ICE 
Clear Europe considers in determining the appropriate level of such 
loss assets. Market participants would be notified of any change 
through published Circular. ICE Clear Europe intends that with the 
adoption of the amendments, the amount of Investment Loss Assets would 
be increased to USD 195 million and the initial amount of Custodial 
Loss Assets would be set at USD 80 million, as would be confirmed by 
Circular. Such amounts will remain in effect until a subsequent 
Circular, and the Clearing House's liability under Rule 919(b) would be 
limited to the notified amount of such assets.
    Rule 919(q) would be amended to provide for notification of the 
amount of Loss Assets applied in connection with Non-Default Losses, 
Investment Losses or Custodial Losses, as applicable. The amendments 
would further clarify that replenishment of regulatory capital may be 
made using the resources of third parties (in addition to the Clearing 
House and its Affiliates). The Clearing House would be obligated to 
issue a new Circular pursuant to Rule 919(p) following any such 
replenishment. In the case of replenishment, the replenished or new 
Loss Assets or capital would not be applied to any pre-existing Non-
Default Loss, Custodial Loss or Investment Loss. Various conforming and 
clarifying changes would be made to Rule 919(r), including to refer to 
Delivery Facilities and to remove an unnecessary reference to Approved 
Financial Institutions.
    Under Rule 919(s), the Clearing House would not be liable to any 
Clearing Member, Customer or other Person for any Pledged Collateral 
Losses. Accordingly, the Clearing Member (or its Customer) would bear 
the risks of Pledged Collateral Losses, except to the extent directly 
resulting from fraud, bad faith, gross negligence or willful misconduct 
by the Clearing House or its directors, officers, employees or 
committees. While a new provision, Rule 919(s) would essentially be 
equivalent in substance to the relevant part of current Rule 502(j). 
The corresponding portions of current Rule 502(j) would be deleted as 
unnecessary in light of Rule 919(s). Under Rule 919(t), if the Clearing 
House recovers any amount in respect of Pledged Collateral Losses (less 
expenses), it would be obligated to pay such amounts to the Clearing 
Members that bore such losses on a pro rata basis, after application of 
any amounts applied by the Clearing House or other Person to meet such 
losses.
    For Title Transfer Collateral Losses, Rule 919(u) would provide 
that the Clearing House would not be liable to any Clearing Member, 
Customer or other Person for such losses. The provision would expressly 
be without limitation of the Clearing House's ability to charge a 
negative ICE Deposit Rate under the Finance Procedures. Rule 919(u) 
would further provide that where title transfer collateral is provided, 
the Clearing Member is entitled to the redelivery of an equivalent 
asset, without any compensation for Title Transfer Collateral Losses or 
other losses, and accordingly the Clearing Member (or its Customer, if 
applicable) would bear the risk of Title Transfer Collateral Losses.
    Rule 919(v) would clarify that a negative yield or interest rate on 
assets provided as initial or original margin, guaranty fund 
contributions, permitted cover or a deliverable will not constitute an 
Investment Loss or Non-Default Loss and will be for the account of the 
Clearing Member (or its Customer, if applicable). Under Rule 919(w), 
ICE Clear Europe would have no liability for any loss relating to any 
investment decision by any Clearing Member, Customer or other person, 
including any choice as between different kinds of Permitted Cover, or 
for the results of any such choices or investments.
IV. Additional Amendments
    In various locations in the Rules, clarifications would be made 
that obligations of the Clearing House to return or provide certain 
funds or property to Clearing Members apply only to the extent such 
assets are received by and remain available to the Clearing House, 
reflecting the consequences of Rule 919. This includes Rules 301(f), 
908(b)(iii), 908(c)(iii), 908(d)(iii), 908(g)(iii), 913(a)(iv), 914(j) 
and 916(n). In the case of Rule 301(f), 914(j) and 916(n), the 
amendments would further provide that the relevant funds or assets must 
not have been subject to an event similar to a Custodial Loss, 
Investment Loss, Pledged Collateral Loss or Title Transfer Collateral 
Loss. Similarly, Rule 1102(k) would provide that the obligation of the 
Clearing House to apply amounts received from the Defaulter to repay 
guaranty fund contributions used in the default, retain assets in 
respect of Clearing House Contributions or reimburse insurers for 
default insurance proceeds, as applicable, would be subject to the 
Clearing House not having suffered a loss equivalent to an Investment 
Loss, Custodial Loss, Pledged Collateral Loss or Title Transfer 
Collateral Loss in respect of such amounts. Rule 1103(e) would be 
amended to address the potential situation where amounts received in 
respect of default insurance may themselves be subject to losses 
similar to a Custodial Loss, Investment Loss, Pledged Collateral Loss 
or Title Transfer Collateral Loss. Accordingly, application of such 
amounts could only be made to the extent that such amounts remain 
available to the Clearing House, reflecting the consequences of Rule 
919.
    A number of other non-substantive drafting and formatting updates 
would also be made.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed amendments to the Rules 
are consistent with the requirements of Section 17A of the Act \8\ and 
the regulations thereunder applicable to it. In particular, Section 
17A(b)(3)(F) of the Act \9\ 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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    \8\ 15 U.S.C. 78q-1.
    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    As discussed herein, the proposed rule changes are designed to 
address the risks posed to ICE Clear Europe by a significant loss event 
not resulting from a default by one or more Clearing Members. These 
events may include investment, custodial and collateral losses with 
respect to margin, guaranty fund contributions, deliverables and 
settlement amounts as well as other losses resulting from general 
business risk, operational risk or other non-default scenarios. ICE 
Clear Europe, like all clearing organizations, faces the risk that such 
a loss event could affect its

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ability to continue orderly clearing operations or otherwise affect its 
viability as a going concern. The amendments are thus intended to 
enhance the ability of ICE Clear Europe to manage those risks by 
providing for a comprehensive framework to address such losses. The 
amendments enhance and clarify the existing procedures for handling 
Investment Losses and adopt parallel procedures to address Custodial 
Losses. As amended, the Rules would provide a mechanism for fully 
allocating Investment Losses and Custodial Losses, first to Loss Assets 
provided by the Clearing House and thereafter to Clearing Members by 
way of Collateral Offset Obligations. The amendments would distinguish 
such losses from Pledged Collateral Losses and Title Transfer 
Collateral Losses, which would remain the responsibility of the 
Clearing Member that provided such assets (or its customer), consistent 
with the existing Rules for Pledged Collateral. The amendments would 
also clarify the responsibility of ICE Clear Europe for Non-Default 
Losses. The amendments thus enhance ICE Clear Europe's ability to 
address general business risk and other risks that may otherwise 
threaten the viability of the clearing house as a going concern. The 
amendments also enhance the ability of ICE Clear Europe to manage 
custody and investment risk (and similar risks from delivery 
facilities, settlement systems and the like) in the remote 
circumstances where its ordinary course procedures are insufficient and 
a custodian, investment counterparty, settlement bank, delivery 
facility or similar system fails. Overall, the amendments will 
strengthen the ability of the Clearing House to manage the risks of, 
and withstand and/or recover from, significant non-default loss events.
    The amendments also more clearly allocate certain losses as among 
ICE Clear Europe and Clearing Members, which will provide greater 
clarity, consistency and legal certainty. ICE Clear Europe believes 
that the amendments reflect the legitimate interests of Clearing 
Members and their customers. As proposed to be amended, the Rules would 
be designed to plan for remote and unprecedented, but potentially 
extreme, types of loss event, including Investment Losses, Custodial 
Losses, Pledged Collateral Losses, Title Transfer Collateral Losses and 
Non-Default Losses. In particular, Investment Losses and Custodial 
Losses, to the extent they exceed Loss Assets dedicated by the Clearing 
House for such purposes, will necessarily and adversely affect some or 
all Clearing Members, customers or other stakeholders. ICE Clear Europe 
believes that the amendments take a balanced approach that distributes 
potential Investment Losses and Custodial Losses to both ICE Clear 
Europe and Clearing Members. With respect to Pledged Collateral Losses, 
by contrast, and consistent with the existing Rules, ICE Clear Europe 
believes it is appropriate for Clearing Members (or their customers, if 
applicable) to continue to bear such losses. The treatment of Pledged 
Collateral Losses reflects the position that the providing Clearing 
Member (or its customer) remains the beneficial owner of such assets 
notwithstanding that they are pledged to ICE Clear Europe. ICE Clear 
Europe believes that such persons, rather than ICE Clear Europe, should 
bear such losses. ICE Clear Europe believes that Title Transfer 
Collateral Losses should be treated similarly. Title Transfer 
Collateral Losses reflect a potential diminution of value of particular 
non-cash assets provided as collateral; the allocation of the loss to 
Clearing Members reflects the fact that the Clearing Member is entitled 
only to the return of an equivalent asset, even if it has declined in 
value.
    ICE Clear Europe also believes that the amendments further the 
interests of Clearing Members and their customers in having greater 
certainty as to the consequences of such losses, their potential 
liability for them and the resources that would be available to support 
clearing operations, to allow stakeholders to evaluate more fully the 
risks and benefits of clearing.
    For the foregoing reasons, ICE Clear Europe believes that the 
amendments provide an appropriate and equitable method to allocate the 
loss from an extreme non-default loss scenario. ICE Clear Europe 
further believes that the approach taken will facilitate the ability of 
the Clearing House to allocate such losses so that it can continue 
clearing operations. The amendments therefore further the prompt and 
accurate clearance and settlement of cleared transactions. In so doing, 
in light of the importance of clearing houses to the financial markets 
they serve, the policy in favor of clearing of financial transactions 
as set out in the Act, and the potential consequences of a clearing 
house failure, the amendments will support the stability of the broader 
financial system and the public interest. Accordingly, in ICE Clear 
Europe's view, the amendments are consistent with the prompt and 
accurate clearance and settlement of securities transactions, 
derivatives agreements, contracts, and transactions, the safeguarding 
of securities and funds in the custody or control of ICE Clear Europe 
or for which it is responsible, and the protection of investors and the 
public interest, within the meaning of 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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    The amendments are also consistent with relevant requirements of 
Rule 17Ad-22,\11\ as set forth in the following discussion.
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    \11\ 17 CFR 240.17Ad-22.
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    Rule 17Ad-22(b)(3) \12\ provides that a clearing agency ``that 
performs central counterparty services shall establish, implement, 
maintain and enforce written policies and procedures reasonably 
designed to . . . maintain sufficient financial resources to withstand, 
at a minimum . . . a default by the two participant families to which 
it has the largest exposure in extreme but plausible market 
conditions.'' ICE Clear Europe does not propose in these amendments to 
change the amount or composition of financial resources required of 
Clearing Members as margin or guaranty fund contributions. ICE Clear 
Europe is also not proposing to change its own resources that it 
contributes to default resources. The amendments are designed, however, 
to address and mitigate the risk to the Clearing House that its 
financial resources available to cover Clearing Member defaults could 
be lost or reduced in value as a result of Custodial Losses, Investment 
Losses or other types of non-default loss.
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    \12\ 17 CFR 240.17Ad-22(b)(3).
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    Specifically, under the amendments, with respect to Custodial 
Losses, ICE Clear Europe would be responsible for losses up to the 
amount of Custodial Loss Assets, which is to be determined by ICE Clear 
Europe from time to time. ICE Clear Europe has determined the initial 
level of Custodial Loss Assets taking into account components of its 
capital requirements applicable to central counterparties, in 
particular the capital requirements for credit, counterparty and market 
risks.
    The amendments would provide for allocation of Custodial Losses in 
excess of Custodial Loss Assets to Clearing Members, who would be 
obligated to pay Collateral Offset Obligations to the extent of such 
excess. ICE Clear Europe's existing policies are intended to mitigate 
the risk of Custodian failure and Custodial Loss through appropriate 
selection and ongoing monitoring of Custodians. These procedures are 
designed to permit the Clearing House to hold assets in a manner that 
minimizes the risk of loss or delay in the access of ICE Clear Europe 
to such

[[Page 30192]]

assets. Nonetheless, a Custodial Loss from a custodial failure is 
ultimately outside the control of the Clearing House. ICE Clear Europe 
is not itself a depository but is rather an intermediary. It is 
ultimately not in a position to backstop or guarantee performance by 
third-party Custodians. If ICE Clear Europe were responsible for all 
Custodial Losses in excess of the defined resources, a custodial 
failure could lead to a clearing house failure or other interference 
with clearing operations. As a result, ICE Clear Europe believes it is 
appropriate for Clearing Members to share in Custodial Losses that 
exceed Custodial Loss Assets as set out in the proposed Rules. Further, 
as set forth above, ICE Clear Europe believes that Title Transfer 
Collateral Losses and Pledged Collateral Losses, given the particular 
nature of such losses, are outside the control of the Clearing House, 
since they result from the choice of asset provided by the Clearing 
Member, and are appropriately borne by Clearing Members.
    Under the amendments, Custodial Losses in excess of the amount of 
Custodial Loss Assets would be shared among Clearing Members 
proportionally based on their respective aggregate margin, guaranty 
fund contributions, deliverables and settlement amounts recorded across 
all account categories. This approach is largely consistent with the 
allocation of Investment Losses under the current Rules, with certain 
clarifications intended to capture variation margin, deliverable and 
settlement amounts in the calculation. The approach mutualizes both 
Investment Losses and Custodial Losses across all Clearing Members, in 
these remote loss scenarios where such losses exceed applicable 
Clearing House resources allocated to such losses. While Clearing 
Members may be required to make Collateral Offset Obligations that are 
independent of the particular mix of cash and securities provided by 
the Clearing Member as margin or guaranty fund contributions, ICE Clear 
Europe believes that the approach is appropriate in light of the remote 
nature of the potential losses, the fact that margin and guaranty fund 
assets are invested and custodied collectively in accordance with 
investment policies that are reviewed by the applicable risk committee 
and are transparent to Clearing Members, and the practical and 
operational considerations that would be required for an approach that 
attempted to allocate losses based on a Clearing Member's particular 
assets and elections. All Clearing Member assets are held and invested 
on an aggregate basis (such that investments cannot be allocated to 
particular Clearing Member), and all Clearing Members receive a blended 
rate of return on cash assets based on aggregate clearing house 
investment activity. As a result, ICE Clear Europe does not believe it 
would be operationally feasible, or beneficial to Clearing Members, to 
attempt to allocate Investment Losses or Custodial Losses based on the 
particular mix of assets provided by individual Clearing Members. 
Instead, ICE Clear Europe believes it is more appropriate, in light of 
these operational and other considerations, to allocate Investment 
Losses and Custodial Losses, if any, to Clearing Members based on their 
respective aggregate amount of margin and guaranty fund contributions 
and deliverables and settlement amounts recorded in its accounts at the 
Clearing House.
    As a result, the amendments clarify the resources available to 
address Investment Losses, Custodial Losses and other losses not 
resulting from Clearing Member default. The provisions relating to 
Investment and Custodial Losses, in effect, provide protection against 
the loss of the financial resources provided by Clearing Members to 
support the default waterfall. The amendments thus enhance the ability 
of ICE Clear Europe to manage the risk of certain losses that do not 
arise from Clearing Member default or defaults, thereby ensuring that 
ICE Clear Europe continues to maintain sufficient financial resources 
to withstand, at a minimum, a default by the two participant families 
to which it has the largest exposures in extreme but plausible market 
conditions, consistent with the requirements of Rule 17Ad-22(b)(3).\13\
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    \13\ 17 CFR 240.17Ad-22(b)(3).
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    Rule 17Ad-22(e)(3)(ii) provides that the ``covered clearing agency 
shall establish, implement, maintain and enforce written policies and 
procedures reasonable designed to, as applicable . . . maintain a sound 
risk management framework that . . . includes plans for the recovery 
and orderly wind-down of the covered clearing agency necessitated by 
credit losses, liquidity shortfalls, losses from general business risk 
or any other losses. . . .'' \14\ Specifically, the amendments are 
intended to address, and to fully cover, Investment Losses, Custodial 
Losses, Pledged Collateral Losses, Title Transfer Collateral Losses and 
Non-Default Losses. The amendments will thus facilitate recovery from 
such potential losses, even if extreme, and permit the continued 
operation of the Clearing House. In ICE Clear Europe's view, the 
amendments are therefore consistent with the requirements of Rule 17Ad-
22(e)(3)(ii).\15\
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    \14\ 17 CFR 240.17Ad-22(e)(3)(ii).
    \15\ 17 CFR 240.17Ad-22(e)(3)(ii).
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    Rule 17Ad-22(e)(9) provides that a ``covered clearing agency shall 
establish, implement, maintain and enforce written policies and 
procedures reasonable designed to, as applicable [. . .] minimize and 
manage credit and liquidity risk arising from conducting its money 
settlements in commercial bank money if central bank money is not used 
by the covered clearing agency.'' \16\ The new provisions relating to 
Custodial Losses would, among other matters, protect against the risk 
of losses relating to a failure of a settlement bank, and provide a 
means for allocating such losses to the Clearing House, to the extent 
of Custodial Loss Assets, and thereafter to Clearing Members through 
Collateral Offset Obligations. As such, the amendments will help the 
Clearing House manage and mitigate the risks of settlement bank 
failure, consistent with the requirements of Rule 17Ad-22(e)(9).\17\
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    \16\ 17 CFR 240.17Ad-22(e)(9).
    \17\ 17 CFR 240.17Ad-22(e)(9).
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    Rule 17Ad-22(e)(15) requires that a ``covered clearing agency shall 
establish, implement, maintain and enforce written policies and 
procedures reasonable designed to, as applicable [. . .] identify, 
monitor and manage the covered clearing agency's general business risk 
and hold sufficient liquid net assets funded by equity to cover 
potential general business losses so that the covered clearing agency 
can continue operations and services as a going concern if those losses 
materialize. . . .'' \18\ Under the amended Rules, Loss Assets 
(including both Investment Loss Assets and Custodial Loss Assets) will 
be available to cover Non-Default Losses, which include losses from 
general business risk. Such losses will thereafter be covered by the 
Clearing House's capital and other assets. ICE Clear Europe does not 
propose to change the level of its own equity capital, which supports 
its operations and covers general business losses. As a result, in ICE 
Clear Europe's view, the amendments are consistent with the 
requirements of Rule 17Ad-22(e)(15).\19\
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    \18\ 17 CFR 240.17Ad-22(e)(15).
    \19\ 17 CFR 240.17Ad-22(e)(15).
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    Rule 17A-22(e)(16) provides that the ``covered clearing agency 
shall establish, implement, maintain and enforce written policies and 
procedures reasonable designed to, as applicable

[[Page 30193]]

[. . .] safeguard [its] own and its participants' assets, minimize the 
risk of loss and delay in access to these assets, and invest such 
assets in instruments with minimal credit, market and liquidity 
risks.'' \20\ ICE Clear Europe's existing investment policies and 
procedures provide for the investment of cash provided by Clearing 
Members as margin or guaranty fund contributions in investments with 
minimal credit, market and liquidity risks. Similarly, the policies 
provide for the use by ICE Clear Europe of Custodians to hold cash and 
securities in a manner designed to minimize the risk of loss or delay 
in access to such assets. ICE Clear Europe is not proposing to change 
such policies and procedures in connection with these amendments. 
Rather, the amendments address the remote scenario where, despite the 
protections under such procedures, there is a failure by an investment 
issuer or counterparty or custodian resulting in an Investment Loss or 
Custodial Loss. Such a circumstance would be remote in ICE Clear 
Europe's view, and in any event, outside its control. In such 
circumstances, the amendments would allocate the loss as between ICE 
Clear Europe and Clearing Members, with ICE Clear Europe being 
responsible for a first loss position up to the amount of defined Loss 
Assets and with Clearing Members being responsible for the remaining 
loss, in proportion to their margin, guaranty fund and other relevant 
deposits to the Clearing House. The amendments would thus enhance the 
protection of funds and assets provided to ICE Clear Europe as margin 
or guaranty fund contributions and are therefore consistent with the 
requirements of Rule 17Ad-22(e)(16).\21\
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    \20\ 17 CFR 240.17Ad-22(e)(16).
    \21\ 17 CFR 240.17Ad-22(e)(16).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purposes of the Act. The amendments 
are designed to allocate Investment Losses and Custodial Losses between 
ICE Clear Europe and Clearing Members, to allocate Pledged Collateral 
Losses and Title Transfer Collateral Losses to Clearing Members, and to 
allocate Non-Default Losses to the Clearing House. Although the 
amendments may thus impose certain potential losses and costs upon 
Clearing Members, ICE Clear Europe believes that such result is 
appropriate in the case of significant investment, custodial and other 
non-default loss events in order to permit the continued operation of 
the Clearing House. The amendments to the Rules will apply uniformly 
across Clearing Members. ICE Clear Europe does not believe that the 
proposed amendments will impact competition among Clearing Members or 
other market participants or affect the ability of market participants 
to access clearing generally. Therefore, ICE Clear Europe does not 
believe the proposed rule change imposes any burden on competition that 
is inappropriate or unnecessary 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

    ICE Clear Europe conducted a public consultation with respect to 
the proposed amendments.\22\ ICE Clear Europe did not receive any 
written responses to the public consultation. In addition, prior to the 
consultation, ICE Clear Europe engaged in a number of discussions 
concerning the proposed amendments with an industry group representing 
numerous market participants. Through this process, market participants 
raised a number of questions concerning the amount of resources being 
allocated as Investment Loss Assets and Custodial Loss Assets and the 
basis for the determination of such amounts. Market participants also 
raised questions about the scope of Custodial Losses subject to 
allocation under the proposed Rules and the overall approach to the 
treatment of Custodial Losses in light of the manner in which ICE Clear 
Europe holds assets. As discussed with market participants, ICE Clear 
Europe believes that the approach taken is appropriate in light of the 
fact that assets are generally held either with relevant central banks 
or central securities depositories. The Clearing House also believes 
that the definition of Custodial Losses is appropriate to cover the 
appropriate range of risks of custodian failure, which are inherently 
fact- and situation-specific and may be difficult to predict in 
advance. ICE Clear Europe further explained in these discussions the 
basis for determination of relevant amounts, in light of the applicable 
capital requirements for credit, counterparty and market risks and 
operational and legal risks under relevant UK and EU law. ICE Clear 
Europe did not ultimately change the approach to Custodial Losses or 
the amount specified as Loss Assets in connection with these 
discussions. ICE Clear Europe will notify the Commission of any 
additional written comments received with respect to the proposed rule 
change.
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    \22\ See ICE Clear Europe Circular No. C22143 (Dec. 15, 2022).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-ICEEU-2023-010 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-2023-010. 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 (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change 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

[[Page 30194]]

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/clear-europe/regulation.
    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-2023-010 and 
should be submitted on or before May 31, 2023.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-09903 Filed 5-9-23; 8:45 am]
BILLING CODE 8011-01-P