[Federal Register Volume 88, Number 111 (Friday, June 9, 2023)]
[Notices]
[Pages 37910-37913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-12299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-97647; File No. SR-ICC-2023-004]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to Clearance of Additional 
Credit Default Swap Contracts

June 5, 2023.

I. Introduction

    On April 3, 2023, ICE Clear Credit LLC (``ICC''), filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to provide for the 
clearance of Standard Subordinated European Insurance Corporate Single 
Name CDS contracts (``STSEIC Contracts''). The Proposed Rule Change was 
published for comment in the Federal Register on April 21, 2023.\3\ The 
Commission has not received any comments on 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\ Securities Exchange Act Release No. 97318 (Apr. 17, 2023), 
88 FR 24647 (Apr. 21, 2023) (File No. SR-ICC-2023-004) (``Notice'').
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II. Description of the Proposed Rule Change

A. Background

    ICC is registered with the Commission as a clearing agency for the 
purpose of clearing CDS contracts.\4\ Chapter 26 of ICC's Clearing 
Rules covers the CDS contracts that ICC clears, with each subchapter of 
Chapter 26 defining the characteristics and Rules applicable to the 
various specific categories of CDS contracts that ICC clears. The 
purpose of the proposed rule change is to add a new subchapter to 
Chapter 26 to permit ICC to clear an additional contract type. 
Specifically, new Subchapter 26S would provide the basis for ICC to 
clear STSEIC Contracts.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICC's Clearing Rules.
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    New Subchapter 26S has nine associated Rule provisions, with each 
described further below. Overall, ICC based new Subchapter 26S on 
existing Subchapter 26G, which applies to Standard European Corporate 
Single Name contracts (``STEC Contracts''), because STSEIC Contracts 
and STEC Contracts have similar terms.
    That said, new Subchapter 26S would differ from existing Subchapter 
26G as needed to account for differences between the two types of 
contracts. For example, Subchapter 26S does not include several 
provisions that relate to Modified Modified Restructuring found in 
Subchapter 26G. This is the case because the market convention is that 
Modified Modified Restructuring does not apply to STSEIC Contracts, 
unlike STEC Contracts cleared under Subchapter 26G.\5\ Additionally, 
Subchapter 26G includes references to 2003-Type CDS Contracts \6\ as 
well as 2014-Type CDS \7\ Contracts.\8\ Subchapter 26S references 2014-
Type Contracts only and eliminates unnecessary references to 2014 Type 
Contracts because ICC does not anticipate that any STSEIC Contract 
would incorporate the 2003 ISDA definitions.\9\
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    \5\ Id. at 24648.
    \6\ A 2003-Type CDS Contract is a CDS Contract that incorporates 
the 2003 Credit Derivatives Definitions, as published by the 
International Swaps and Derivatives Association (``ISDA'').
    \7\ A 2014-Type CDS Contract is a CDS Contract incorporating the 
2014 ISDA Credit Derivatives Definitions.
    \8\ ICE Clear Credit Clearing Rules Subchapter 26G.
    \9\ Notice, 88 FR at 24648.
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    The remaining differences are discussed with each of the nine 
associated rule provisions below.
1. Rule 26S-102 (Definitions)
    New Rule 26S-102 would set out the defined terms used in Subchapter 
26S. For example, Rule 26S-102 would define an STSEIC Contract as a CDS 
Contract in respect of any Eligible STSEIC Reference Entity having a 
combination of characteristics listed as eligible for such Eligible 
STSEIC Reference Entity in, and permitted by, the List of Eligible 
STSEIC Reference Entities. Eligible STSEIC Reference Entities would be 
defined as each particular Reference Entity included in the List of 
Eligible STSEIC Reference Entities (a list of eligible reference 
entities that ICE Clear Credit maintains on its website). Similarly, 
for each of those Eligible STSEIC Reference Entities, ICE Clear Credit 
would determine which of their obligations (such as bonds) are 
considered to be Eligible STSEIC Reference Obligations.
    This section differs from its counterpart in Subchapter 26G in that 
it does not have a definition that corresponds to the definition of 
Eligible STEC Sector in Rule 26G-102. Rule 26G-102 lays out a number of 
permitted industrial sectors for STEC reference entities in STEC 
Contracts, such as energy and healthcare.\10\ Subchapter

[[Page 37911]]

26S does not need a similar definition because there are no further 
sectors to identify. STSEIC Contracts already apply at a sector level 
of insurance. Thus, identifying eligible sectors for STSEIC Contracts 
is not necessary.\11\ Additionally, this section is updated to remove 
references to 2003-Type CDS Contracts, unnecessary references to 2014-
Type CDS Contracts, and provisions relating to restructuring as 
discussed above.
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    \10\ ICE Clear Credit Clearing Rule 26G-102.
    \11\ Notice, 88 FR at 24647-48.
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2. Rule 26S-203 (Restriction on Activity)
    New Rule 26S-203 would allow ICE Clear Credit to auction off a CDS 
Participant's open STSEIC Contracts where that CDS Participant, among 
other things, merges with or becomes an affiliate of an Eligible STSEIC 
Reference Entity. This provision would be functionally equivalent to 
the corresponding provision in Subchapter 26G. The purpose of this 
provision is to prevent ICE Clear Credit's CDS Participants from being 
parties to STSEIC Contracts where the CDS Participants are, or could 
become, the reference entity of the contract.
3. Rule 26S-206 (Notices Required of Participants With Respect to 
STSEIC Contracts)
    New Rule 26S-206 would require that CDS Participants provide notice 
to ICE Clear Credit if they or their customer, among other things, 
merge with or become an affiliate of an Eligible STSEIC Reference 
Entity. In such a situation, as discussed above, new Rule 26S-203 would 
allow ICE Clear Credit to auction off a CDS Participant's open STSEIC 
Contracts. This provision would be functionally equivalent to the 
corresponding provision in Subchapter 26G. Like Rule 26S-203, this 
provision would help prevent ICE Clear Credit's CDS Participants from 
becoming reference entities to STSEIC Contracts.
4. Rule 26S-303 (STSEIC Contract Adjustments)
    New Rule 26S-303 would explain how ICC would treat certain 
contracts submitted for clearing that appear to be submitted as STSEIC 
Contracts, but may be missing certain information or appear to contain 
certain incorrect information. For example, if ICC accepts a contract 
for an Eligible STSEIC Reference Entity but the contract specifies a 
type of transaction other than Standard Subordinated European Insurance 
Corporate, then ICC will treat the contract as an open position in an 
STSEIC Contract that is otherwise equivalent, but that specifies 
Standard Subordinated European Insurance Corporate as the transaction 
type. Again, this provision is functionally equivalent to the 
corresponding provision in Subchapter 26G.
5. Rule 26S-309 (Acceptance of STSEIC Contracts by ICE Clear Credit)
    New Rule 26S-309 would impose certain additional requirements on 
CDS Participants when they submit a STSEIC Contract for clearing. ICC 
Rule 309 describes ICC's general process for accepting trades for 
clearing,\12\ and Rule 26S-309 would prescribe additional provisions 
specific to STSEIC Contracts. These provisions would be based on the 
existing provisions for Rule 26G-309, but updated to remove references 
to 2003-Type Contracts, unnecessary references to 2014-Type Contracts, 
and provisions relating to restructuring as discussed above.
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    \12\ ICE Clear Credit Clearing Rule 309.
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    For example, under Rule 26S-309, if the CDS Participant is or is an 
Affiliate of the Eligible STSEIC Reference Entity for a STSEIC Contract 
at the time of the Trade submission or Novation Time, it may not submit 
such Trade for clearance as a STSEIC Contract and ICC does not have to 
accept the Trade for clearance. Rule 26S-309 also would require CDS 
Participants to give ICC notice of certain circumstances as soon as 
reasonably practicable and would govern the contents of certain ICC 
notices to CDS Participants notifying them that ICC has accepted a 
Trade submitted for clearance. Additionally, under this rule ICC would 
give effect to circumstances giving rise to a Successor and a 
Succession Date (i.e., in the event of a corporate merger, acquisition, 
or similar transaction that could require a change in a CDS contract's 
Reference Entity). Rule 26S-309(e) would explain when ICC would give 
effect to a Successor and Succession Date, and the actions ICC would 
take to do so.
6. Rule 26S-315 (Terms of the Cleared STSEIC Contract)
    New Rule 26S-315 would explain what the terms of each STSEIC 
Contract would be. Generally, Rule 26S-315 would incorporate the 2014 
Definitions into the STSEIC Contracts but also would define and set 
certain terms that would be specific to STSEIC contracts. For example, 
Rule 26S-315(f) would define the Transaction Type as being a Standard 
Subordinated European Insurance Corporate for the Eligible STSEIC 
Reference Entity. Rule 26S-315(g) would indicate which terms would be 
determined according to the particular STSEIC Contract submitted for 
clearing, subject to Rule 26S-303. For example, the Trade Date is a 
term that will be determined according to the particular STSEIC 
Contract submitted for clearing, subject to Rule 26S-303. Rule 26S-
315(e) would provide that the Settlement Method for particular STSEIC 
Contracts will be Auction Settlement and the Fallback Settlement Method 
will be Physical Settlement in accordance with the CDS Physical 
Settlement Rules. For the most part, these provisions would be based on 
the existing provisions for Rule 26G-315, but updated to remove 
references to 2003-Type Contracts, unnecessary references to 2014-Type 
Contracts, and provisions relating to restructuring as discussed above.
    The proposed rule change adds one sentence to new Rule 26S-315 that 
is not present in the corresponding section of existing 26G-315. That 
sentence, in new Rule 26S-315(f), ensures that the Subordinated 
European Insurance Terms will apply to each STSEIC Contract. 
Subordinated European Insurance Terms are part of the market-standard 
provisions that apply under the 2014 Definitions.\13\ According to the 
definition for List of Eligible STSEIC Reference Entities in Rule 26S-
102, Eligible STSEIC Reference Entities must use the 2014 Definitions 
in their STSEIC Contracts.
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    \13\ Id. at 24648.
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7. Rule 26S-316 (Relevant Physical Settlement Matrix Updates)
    New Rule 26S-316 would describe how ICC would handle ISDA updates 
to the Relevant Physical Settlement Matrix. For example, Rule 26S-
316(a) indicates that in certain circumstances when ISDA publishes a 
newer version of the Credit Derivatives Physical Settlement Matrix 
(``New Matrix'') than the Relevant Physical Settlement Matrix for any 
STSEIC Contract, STSEIC Contracts with previous versions of the Matrix 
(``Superseded Matrix'') shall become STSEIC Contracts referencing the 
New Matrix as the Relevant Physical Settlement Matrix, and the List of 
Eligible STSEIC Reference Entities shall be updated accordingly. Any 
STSEIC Contract referencing a Superseded Matrix and submitted for 
clearing shall, upon acceptance for clearing, become a STSEIC Contract 
referencing the New Matrix. This provision is functionally equivalent 
to the corresponding provision in Subchapter 26G.
8. Rule 26S-502 (Specified Actions)
    ICC Rule 502 defines certain actions as Specified Actions and 
prohibits ICC

[[Page 37912]]

from taking or permitting to be taken any Specified Action without 
first consulting with the Risk Committee.\14\ For example, modification 
of the ICC Rules, Procedures, or any other governing provisions related 
to Margin would be a Specified Action.\15\ New Rule 26S-502 provides 
that certain actions are not Specified Actions. For example, adding 
and/or Modifying Permitted STSEIC Fixed Rates and adding new Eligible 
STSEIC Reference Entities each would not constitute a Specified Action. 
This provision is functionally equivalent to the corresponding 
provision in Subchapter 26G.
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    \14\ ICE Clear Credit Clearing Rule 502.
    \15\ ICE Clear Credit Clearing Rule 502(f).
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9. Rule 26S-616 (Contract Modification)
    ICC Rule 616 prohibits ICC from carrying out a Contract 
Modification without first providing Participants at least ten ICE 
Business Days' notice prior to the effective date of such Contract 
Modification. Under ICC Rule 616 a Contract Modification is defined as 
a Modification that ``would, in the determination of ICC, (i) 
reasonably be expected to have a material effect on the Mark-to-Market 
Price (as defined in Rule 404) of such Contract or (ii) materially 
increase the basis risk of such Contract relative to the over-the-
counter agreement equivalent to such Contract referred to in Rule 
301.'' \16\ New Rule 26S-616 would provide that it will not constitute 
a Contract Modification if ICC's Board or its designee updates the List 
of Eligible STSEIC Reference Entities (and modifies the terms and 
conditions of related STSEIC Contracts) to give effect to 
determinations by the Regional CDS Committee (or applicable Dispute 
Resolver) or a Credit Derivatives Determinations Committee. 
Additionally, the determination that ``Standard Reference Obligation'' 
will be applicable to an Eligible STSEIC Reference Entity will not 
constitute a Contract Modification.
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    \16\ ICE Clear Credit Clearing Rule 616(a).
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    Rule 26S-616 would contain two differences from the corresponding 
provision in Subchapter 26G. First, Rule 26S-616 would not include a 
provision applicable to 2003-Type Contracts that convert to 2014-Type 
Contracts. As mentioned above, ICC does not anticipate that any STSEIC 
Contract would be a 2003-Type Contract, so this provision is not 
necessary.
    Second, Rule 26S-616 would not include a provision that 
incorporates the NTCE Supplement to the 2014 Definitions.\17\ ISDA has 
issued the NTCE Supplement and previously incorporated it into the 2014 
Definitions. Thus, the NTCE Supplement would automatically apply to any 
STSEIC Contracts going forward, and 26S-616 would not need to 
specifically incorporate it into the terms of the contracts.\18\
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    \17\ The NTCE Supplement is the 2019 Narrowly Tailored Credit 
Event Supplement to the 2014 ISDA Credit Derivatives Definitions 
published by ISDA. For more information on this supplement, see 
Self-Regulatory Organizations; ICE Clear Credit LLC; Order Approving 
Proposed Rule Change Relating to the ICC Clearing Rules To Reflect 
the ISDA NTCE Supplement, Exchange Act Release No. 87971 (Jan. 5, 
2020), 85 FR 3724 (Jan. 22, 2020) (SR-ICC-2019-013).
    \18\ Notice, 88 FR at 24648.
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III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act requires the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
the Proposed Rule Change is consistent with the requirements of the Act 
and the rules and regulations thereunder applicable to the 
organization.\19\ For the reasons given below, the Commission finds 
that the Proposed Rule Change is consistent with Section 17A(b)(3)(F) 
of the Act \20\ and Rule 17Ad-22(e)(1).\21\
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    \19\ 15 U.S.C. 78s(b)(2)(C).
    \20\ 15 U.S.C. 78q-1(b)(3)(F).
    \21\ 17 CFR 240Ad-22(e)(1).
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A. Consistency With Section 17A(b)(3)(F) of the Act

    Under Section 17A(b)(3)(F) of the Act, ICC's rules, among other 
things, must be ``designed to promote the prompt and accurate clearance 
and settlement of securities transactions and, to the extent 
applicable, derivative agreements, contracts, and transactions, to 
assure the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible . . . and, in general, to protect investors and the public 
interest . . . .'' \22\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes that ICC's proposed 
rule change is consistent with Section 17A(b)(3)(F) of the Act because 
ICC's clearing of STSEIC Contracts will allow market participants an 
increased ability to manage risk and the provisions of Subchapter 26S 
would help ensure that ICC has in place rules to appropriately govern 
the clearing of STSEIC Contracts and manage the risk related to 
clearing STSEIC Contracts.
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
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    ICC's clearing of STSEIC Contracts will provide market participants 
an increased ability to manage risk through the contracts. ICC will 
clear STSEIC Contracts pursuant to its existing clearing arrangements 
and related financial safeguards, protections and risk management 
procedures.\23\ For example, ICC will apply its existing initial margin 
methodology to the clearing of STSEIC Contracts.\24\ The Commission 
believes these safeguards, protections, and risk management procedures 
will lower the risk that a party to a STSEIC Contract transaction will 
default, which, in turn, would promote the prompt and accurate 
clearance and settlement of STSEIC Contracts and help to ensure the 
safeguarding of margin assets.
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    \23\ Notice, 88 FR at 24648.
    \24\ Id.
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    Moreover, combined with ICC's current safeguards, Subchapter 26S 
promotes the prompt and accurate clearance and settlement of STSEIC 
Contracts. Subchapter 26S would amend the ICC Clearing Rules to 
accommodate the clearing of STSEIC Contracts. Among other things, these 
amendments would provide definitions and contract terms with respect to 
STSEIC Contracts, which would help ensure that ICC has in place rules 
to appropriately govern the clearing of STSEIC Contracts. In addition, 
ICC will clear STSEIC Contracts pursuant to its existing clearing 
arrangements and related financial safeguards, protections, and risk 
management procedures. This will allow ICC to appropriately manage the 
risk of STSEIC Contracts. Accordingly, the Commission believes that the 
addition of Subchapter 26S, taken together with ICC's existing 
safeguards, would promote the prompt and accurate clearance and 
settlement of STSEIC Contracts.
    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\25\
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    \25\ 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 ICC to establish, implement, maintain, 
and enforce written policies and procedures reasonably designed to 
provide for a well-founded, clear, transparent, and enforceable legal 
basis for each aspect of its activities in all relevant 
jurisdictions.\26\ When it adopted Rule 17Ad-22(e)(1), the Commission 
noted that, in addressing legal risk, a covered clearing agency should 
consider whether its rules, policies and procedures, and contracts are 
clear,

[[Page 37913]]

understandable, and consistent with relevant laws and regulations.\27\
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    \26\ 17 CFR 240.17Ad-22(e)(1).
    \27\ Securities Exchange Act Release No. 78961 (Sept. 28, 2016), 
81 FR 70786, 70802 (Oct. 13, 2016) (File No. S7-03-14).
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    The Commission believes that ICC's addition of Subchapter 26S to 
its clearing rules helps ensure that ICC's rules are clear and 
understandable with respect to its clearance of STSEIC Contracts. Among 
other things, Subchapter 26S defines relevant terms, provides 
provisions relevant to STSEIC Contracts, and clarifies how ICC will 
handle and process certain potential lifecycle and other events in 
connection with relevant STSEIC Contracts, including a CDS 
Participant's merger or affiliation with an Eligible STSEIC Reference 
Entity and certain ISDA updates to the Relevant Physical Settlement 
Matrix. Through its provisions, Subchapter 26S provides a reasonable 
level of certainty related to, and a clear legal basis for, outcomes 
related to its clearance of STSEIC Contracts.
    The Commission believes, therefore, that the Proposed Rule Change 
is consistent with the requirements of Rule 17Ad-22(e)(1) of the 
Act.\28\
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    \28\ 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, Section 17A(b)(3)(F) of the Act and Rule 17Ad-
22(e)(1) thereunder.\29\
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    \29\ 15 U.S.C. 78q-1(b)(3)(F).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the Proposed Rule Change (SR-ICC-2023-004) be, and hereby is, 
approved.\30\
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    \30\ In approving the Proposed Rule Change, the Commission 
considered the proposal's impacts 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.\31\
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    \31\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-12299 Filed 6-8-23; 8:45 am]
BILLING CODE 8011-01-P