[Federal Register Volume 88, Number 154 (Friday, August 11, 2023)]
[Notices]
[Pages 54690-54699]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-17210]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98071; File No. SR-ICEEU-2023-010]


Self-Regulatory Organizations; ICE Clear Europe Limited; Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 and Amendment No. 2, to the ICE Clear Europe Clearing 
Rules Relating to Non-Default Losses

August 7, 2023.

I. Introduction

    On April 21, 2023, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4,\2\ a proposed rule change to amend 
the ICE Clear Europe Clearing Rules (the ``Rules'') regarding the 
treatment of non-default losses. On May 2, 2023, ICE Clear Europe filed 
Amendment No. 1 to the proposed rule change.\3\ Notice of the proposed 
rule change, as modified by Amendment No. 1, was published for comment 
in the Federal Register on May 10, 2023.\4\ On June 21, 2023, the 
Commission designated a longer period for Commission action on the 
proposed rule change until August 8, 2023.\5\ On June 30, 2023, ICE 
Clear Europe filed Amendment No. 2 to the proposed rule change.\6\ 
Notice of Amendment No. 2 to the proposed rule change was published for 
comment in the Federal Register on July 12, 2023.\7\ The Commission did 
not receive comments regarding the proposed rule change, as modified by 
Amendment Nos. 1 and 2 (hereafter, the ``proposed rule change''). For 
the reasons discussed below, the Commission is approving the proposed 
rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 amended and restated in its entirety the 
Form 19b-4 and Exhibit 1A in order to correct the narrative 
description of the proposed rule change.
    \4\ 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, Exchange Act 
Release No. 97429 (May 4, 2023); 88 FR 30187 (May 10, 2023) (SR-
ICEEU-2023-010) (``Notice'').
    \5\ Self-Regulatory Organizations; ICE Clear Europe Limited; 
Notice of Designation of Longer Period for Commission Action on 
Proposed Rule Change, as Modified by Amendment No. 1, Relating to 
Amendments to the Clearing Rules; Exchange Act Release No. 97780 
(June 21, 2023), 88 FR 41711 (June 27, 2023) (File No. SR-ICEEU-
2023-010).
    \6\ Amendment No. 2 modified Exhibit 5 to clarify when certain 
funds are considered available to ICE Clear Europe to be applied in 
accordance with the Rules as proposed to be amended.
    \7\ Self-Regulatory Organizations; ICE Clear Europe Limited; 
Notice of Amendment No. 2 to Proposed Rule Change, as Modified by 
Amendment No. 1, Relating to Amendments to the Clearing Rules, 
Exchange Act Release No. 97851 (July 7, 2023); 88 FR 44418 (July 12, 
2023) (SR-ICEEU-2023-010).
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II. Description of the Proposed Rule Change

A. Background

    ICE Clear Europe is registered with the Commission as a clearing 
agency for the purpose of clearing security-based swaps.\8\ In its role 
as a clearing agency for clearing security-based swaps, ICE Clear 
Europe provides services to its Clearing Members, and Clearing Members 
in turn transfer assets to ICE Clear Europe. For example, ICE Clear 
Europe's Clearing Members transfer to ICE Clear Europe cash and other 
assets to satisfy their margin and Guaranty Fund requirements. ICE 
Clear Europe maintains these assets at banks for settlement and 
custodianship and also invests the assets on behalf of Clearing 
Members.
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    \8\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICE Clear Europe's Clearing Rules.
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    Maintaining and investing Clearing Members' assets exposes those 
assets to risk. For example, if ICE Clear Europe's custodial bank were 
to default, ICE Clear Europe could lose access to, or suffer a decline 
in value of, assets that it maintains at the bank. Similarly, if an 
investment counterparty were to default, ICE Clear Europe could lose 
access to, or suffer a decline in value of, assets invested with that 
counterparty. These potential losses can be described generally as non-
default losses because they do not arise from the default of a Clearing 
Member, but rather from the default of another counterparty to which 
ICE Clear Europe is exposed through its custody and investment of 
assets.
    As explained in more detail below, ICE Clear Europe's Rules 
currently define and categorize non-default losses. The Rules also 
specify ICE Clear Europe's responsibility to pay for such losses, set 
aside financial resources to cover such losses, and allocate non-
default losses among Clearing Members in certain situations.
    The proposed rule change would amend the Rules to revise this 
overall framework for non-default losses. As described more fully 
below, the proposed rule change would: (i) add new types of non-default 
losses and amend the definitions of the existing types; (ii) define the 
responsibilities of ICE Clear Europe and of Clearing Members with 
respect to the different types of non-default losses, including the 
amount of financial resources put

[[Page 54691]]

forth by ICE Clear Europe to cover non-default losses; and (iii) make 
other clarifications related to the treatment of non-default losses.

B. Types of Non-Default Losses

    The Rules currently divide non-default losses into two categories. 
First, there are Investment Losses. Investment Losses are losses that 
ICE Clear Europe incurs in connection with the investment of a Clearing 
Member's assets representing Original/Initial Margin,\9\ Guaranty Fund 
Contributions,\10\ or Permitted Cover \11\ otherwise provided to cover 
margin and Guaranty Fund requirements. Second, there are Non-Default 
Losses. Non-Default Losses are all losses that (i) are not Investment 
Losses, (ii) ICE Clear Europe incurs other than by an Event of 
Default,\12\ and (iii) threaten ICE Clear Europe's solvency.
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    \9\ Original Margin means Permitted Cover provided to ICE Clear 
Europe as collateral for the obligations of a Clearing Member in 
respect of F&O Contracts. Initial Margin means Permitted Cover 
provided to ICE Clear Europe as collateral for the obligations of a 
Clearing Member in respect of CDS Contracts. See ICE Clear Europe 
Rule 101.
    \10\ Guaranty Fund Contribution means Permitted Cover 
transferred by a Clearing Member to the Clearing House as a 
contribution to the Guaranty Fund. See ICE Clear Europe Rule 101.
    \11\ Permitted Cover means cash in Eligible Currencies and other 
assets determined by ICE Clear Europe as permissible for Margin or 
Guaranty Fund Contributions. See ICE Clear Europe Rule 101.
    \12\ Rule 901(a) lists certain events that constitute an Event 
of Default with respect to a Clearing Member, such as a Clearing 
Member being unable, or likely to be unable, to meet its obligations 
under the Rules or in respect of any of its Contracts.
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    The proposed rule change would add three new types of losses: 
Custodial Losses, Pledged Collateral Losses, and Title Transfer 
Collateral Loss.
    A Custodial Loss would include a loss that ICE Clear Europe incurs 
with respect to Custodial Assets in connection with two events: (i) the 
default, Insolvency, failure, or similar event with respect to a 
Custodian \13\ or Delivery Facility \14\ and (ii) the embezzlement, 
theft, defalcation of, or similar event affecting, Custodial Assets. 
The proposed rule change would define Custodial Assets as any cash, 
deposit, holding, and similar property that is or represents a Clearing 
Member's Original/Initial Margin, Variation Margin, Guaranty Fund 
Contributions, Permitted Cover, proceeds thereof, Deliverables, or 
settlement amounts. The definition of Custodial Losses would 
specifically exclude any Pledged Collateral Losses or Title Transfer 
Collateral Losses.
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    \13\ The term Custodian would mean, among other entities, any 
bank, custodian, sub-custodian, registry, nominee, agent, depository 
or settlement system. See ICE Clear Europe Rule 101.
    \14\ The term Delivery Facility means any Person or facility 
used for the delivery of Deliverables, such as warehouses, balancing 
systems, gas networks, central securities depositories, settlement 
systems, designated systems, and vessels. See ICE Clear Europe Rule 
101.
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    While a Custodial Loss would arise from the default of a Custodian 
or theft of Custodial Assets, a Title Transfer Loss would arise from a 
reduction in value of collateral held at a Custodian, due to, for 
example, a change in market value or exchange rates. Specifically, the 
proposed rule change would define a Title Transfer Collateral Loss as 
losses, liabilities, and damages incurred in connection with a 
reduction in value of a Clearing Member's Original/Initial Margin, 
Guaranty Fund Contributions, or other Permitted Cover that: (i) 
Clearing Members have transferred to ICE Clear Europe other than by way 
of Pledged Collateral and (ii) ICE Clear Europe has not invested or 
reinvested.
    This category would include, for example, losses related to 
collateral held at a Custodian, rather than invested. This category 
would be limited, however, to losses that arise from a reduction in 
value, such as one resulting from a change in exchange rates. It does 
not cover losses arising from the default of a Custodian. Those losses, 
to the extent incurred by ICE Clear Europe, would be Custodial Losses.
    Unlike a Title Transfer Loss, a Pledged Collateral Loss would 
include any losses related to Pledged Collateral, and not just those 
incurred in connection with a reduction in value or change in exchange 
rates. The proposed rule change would define a Pledged Collateral Loss 
as any losses, liabilities, and damages arising out of or relating to 
holding any Pledged Collateral or the assets in any Pledged Collateral 
Account. Pledged Collateral is a Clearing Member's margin or Permitted 
Cover that is provided in a Pledged Collateral Account. With a Pledged 
Collateral Account, the Clearing Member provides ICE Clear Europe a 
security interest in the margin rather than transferring title in the 
margin to ICE Clear Europe outright. Because a Clearing Member never 
actually transfers such collateral to ICE Clear Europe, the Clearing 
Member remains responsible for any losses related to such collateral. 
This is the case both under ICE Clear Europe's current Rule 502(j),\15\ 
and under the proposed rule change.
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    \15\ ICE Clear Europe Rule 502(j) currently provides that ICE 
Clear Europe ``shall not be liable to any Clearing Member's Customer 
or other Person for any losses, liabilities, damages, costs, claims, 
shortfalls or expenses arising out of or relating to the holding of 
any Pledged Collateral or the assets in any Pledged Collateral 
Account . . . except to the extent such [losses] result from the 
gross negligence or wilful misconduct of the Clearing House.'' As 
discussed below, the proposed rule change would delete this 
provision from Rule 502(j) and move it into new Rule 919(s).
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    In addition to establishing these new categories of losses, the 
proposed rule change would amend the existing definitions of Investment 
Losses and Non-Default Losses. With respect to the definition of 
Investment Losses, the proposed rule change would exclude Custodial 
Losses, Pledged Collateral Losses, and any Title Transfer Collateral 
Loss. The proposed rule change also would delete language, currently in 
the definition, that Investment Losses do not include losses incurred 
as a result of a default of a Custodian. This language is no longer 
needed because those losses would be Custodial Losses, as discussed 
above.
    With respect to the definition of Non-Default Losses, the proposed 
rule change similarly would exclude Custodial Losses, Pledged 
Collateral Losses, and any Title Transfer Collateral Loss (the 
definition already excludes Investment Losses). The proposed rule 
change also would exclude any losses that are included in the 
calculation of the ICE Deposit Rate.\16\ Finally, the proposed rule 
change would delete the caveat that to be a Non-Default Loss, the loss 
must threaten ICE Clear Europe's solvency.
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    \16\ ICE Clear Europe generally pays Clearing Members interest 
on the cash balances from their margin deposits. It is possible, 
however, the ICE Clear Europe may charge a negative interest rate in 
certain circumstances.
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    Taken together, these changes would remove certain losses from the 
definition of Non-Default Losses, thereby narrowing the definition. For 
example, the current definition of Non-Default Loss could include the 
sorts of losses that would be captured in the new term Custodial 
Losses. This could occur, for example, if a Custodian of ICE Clear 
Europe defaults, causing ICE Clear Europe to suffer a loss that 
threatens ICE Clear Europe's solvency. Moving such losses out of the 
definition of Non-Default Losses and into a new definition of Custodial 
Losses means, as discussed below, ICE Clear Europe's financial 
responsibility for such losses would be limited to certain 
predetermined financial assets.
    At the same time, the proposed rule change would remove the 
requirement that Non-Default Losses threaten ICE Clear Europe's 
solvency. Under the proposed rule change, a Non-Default Loss would be 
any loss not incurred as part of an Event of Default, other than an 
Investment Loss, Custodial Loss, Pledged Collateral Loss, or Title

[[Page 54692]]

Transfer Collateral Loss. ICE Clear Europe could seemingly categorize 
less significant losses as Non-Default Losses because Non-Default 
Losses would no longer need to threaten ICE Clear Europe's solvency. As 
discussed below, this means ICE Clear Europe could cover losses using 
certain predetermined financial assets.

C. Responsibilities of ICE Clear Europe and Clearing Members for Losses

1. Current Rule 919
    Rule 919 defines the responsibilities of ICE Clear Europe and 
Clearing Members with respect to losses not related to a Clearing 
Member's default. As discussed above, ICE Clear Europe currently 
categorizes such losses as either Investment Losses or Non-Default 
Losses. Accordingly, current Rule 919 applies to Investment Losses and 
Non-Default Losses only.
    Rule 919 only applies where (i) there has been a Non-Default Loss 
or Investment Loss and (ii) there has not been a Clearing House 
Event.\17\ In that situation, Rule 919 makes ICE Clear Europe 
responsible for a Non-Default Loss and the first portion of an 
Investment Loss. With respect to a Non-Default Loss, ICE Clear Europe 
meets that loss first with any available Loss Assets and satisfies any 
remaining loss using its own capital or assets. With respect to an 
Investment Loss, ICE Clear Europe meets that loss first with any 
available Loss Assets and apportions any remaining loss among Clearing 
Members. Loss Assets are assets of ICE Clear Europe that are set aside 
to cover Non-Default Losses and Investment Losses.\18\
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    \17\ A Clearing House Event generally occurs if ICE Clear Europe 
is insolvent or otherwise fails to make a payment when due. See ICE 
Clear Europe Rule 913.
    \18\ As discussed in the next section, the proposed rule change 
would eliminate the current set of Loss Assets and set aside two 
separate amounts to cover losses, one for Investment Losses and one 
for Custodial Losses.
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    The apportionment of the remaining Investment Loss works as 
follows. First, ICE Clear Europe publishes a circular certifying that 
the Investment Loss is greater than the Loss Assets. Then, ICE Clear 
Europe determines the amount that each Clearing Member is required to 
pay to satisfy that loss, which Rule 919 calls a Collateral Offset 
Obligation. Each Clearing Member's Collateral Offset Obligation is 
determined by multiplying the amount of the remaining Investment Loss 
by a fraction, the numerator of which is the total of the Clearing 
Member's Original/Initial Margin, Guaranty Fund Contributions, and 
Permitted Cover, and the denominator of which is the total of such 
amounts among all Clearing Members. Thus, each Clearing Member's 
Collateral Offset Obligation would be derived from its proportionate 
share of Original/Initial Margin, Guaranty Fund Contributions, and 
Permitted Cover. Under current Rule 919(e), a Clearing Member's total 
Collateral Offset Obligation could not exceed its total Original/
Initial Margin, Guaranty Fund Contributions, and Permitted Cover.
2. Amended Rule 919
    The proposed rule change would maintain this framework for 
satisfying and apportioning losses but would add the additional 
categories of losses discussed above. Like the current rule, Rule 919 
as amended would only apply where (i) there has been a Non-Default 
Loss, Investment Loss, Custodial Loss, Pledged Collateral Loss, or 
Title Transfer Collateral Loss and (ii) there has not been a Clearing 
House Event. How amended Rule 919 would treat each of these categories 
of losses is discussed below.
    With respect to a Non-Default Loss, ICE Clear Europe would meet 
that loss first with any available Investment Loss Assets \19\ and 
Custodial Loss Assets.\20\ After those sources are exhausted, ICE Clear 
Europe would satisfy any remaining Non-Default Loss using its own 
capital or assets. Rule 919 as amended therefore would treat Non-
Default Losses the same as it does now, except that ICE Clear Europe 
could meet the loss first with any Investment Loss Assets and Custodial 
Loss Assets, instead of just Loss Assets.
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    \19\ As discussed in the next section, Investment Loss Assets 
would be assets of ICE Clear Europe set aside to cover Investment 
Losses.
    \20\ As discussed in the next section, Custodial Loss Assets 
would be assets of ICE Clear Europe set aside to cover Custodial 
Losses.
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    With respect to an Investment Loss, ICE Clear Europe would meet 
that loss first with any available Investment Loss Assets. With respect 
to a Custodial Loss, ICE Clear Europe would meet that loss first with 
any available Custodial Loss Assets. After using the Investment Loss 
Assets or Custodial Loss Assets, ICE Clear Europe would apportion any 
remaining Investment Loss or Custodial Loss among Clearing Members. ICE 
Clear Europe would use the same method and formula to apportion this 
loss among Clearing Members discussed above, with a few additions. 
Under the proposed rule change, each Clearing Member's share would 
still be based on its portion of total Original/Initial Margin, 
Guaranty Fund Contributions, and Permitted Cover, but the proposed rule 
change would add Variation Margin, Deliverables, and settlement amounts 
to this formula.\21\ A Clearing Member's total Collateral Offset 
Obligation could not exceed its total Original/Initial Margin, Guaranty 
Fund Contributions, Permitted Cover, Variation Margin, Deliverables, 
and settlement amounts, which is essentially the same as the current 
rule.
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    \21\ For the explanation of this particular change, see infra 
Section II.D.2 below.
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    With respect to a Pledged Collateral Loss, a Clearing Member would 
be responsible for that loss except in certain circumstances. New Rule 
919(s) would specify that ICE Clear Europe would not be liable to any 
Clearing Member, Customer or other Person for any Pledged Collateral 
Losses and the Clearing Member or Customer would bear the risk of loss. 
ICE Clear Europe could be liable for a Pledge Collateral Loss, however, 
if the loss resulted directly from its fraud, bad faith, gross 
negligence or wilful misconduct. New Rule 919(s) would mirror a 
provision found in current Rule 502(j).\22\ As such, the proposed rule 
change would delete this provision from Rule 502(j).
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    \22\ Under current Rule 502(j), ICE Clear Europe is not liable 
to any Clearing Member's Customer or other Person for any losses, 
liabilities, damages, costs, claims, shortfalls, or expenses arising 
out of or relating to the holding of any Pledged Collateral or the 
assets in any Pledged Collateral Account, except to the extent such 
Custodial Losses result from the gross negligence or wilful 
misconduct of ICE Clear Europe.
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    With respect to a Title Transfer Collateral Loss, a Clearing Member 
would be solely responsible for that loss but would be entitled to get 
back assets equivalent to those it transferred to ICE Clear Europe. New 
Rule 919(u) would specify that ICE Clear Europe would not be liable to 
any Clearing Member, Customer or other Person for any Title Transfer 
Collateral Loss and the Clearing Member or Customer would bear the risk 
of loss. Where a Clearing Member has delivered collateral via title 
transfer, the Clearing Member would be entitled to get back an 
equivalent asset but would not be entitled to any compensation in 
respect of any losses. As discussed above, a Title Transfer Collateral 
Loss covers losses resulting from a decline in value of collateral that 
a Clearing Member has transferred to ICE Clear Europe, but which ICE 
Clear Europe has not invested, instead keeping that collateral at a 
Custodian. Thus, it follows that a Clearing Member would bear the risk 
of a Title Transfer Collateral Loss but would be entitled to the return 
of its collateral or an equivalent asset.

[[Page 54693]]

3. Amount of ICE Clear Europe Resources To Cover Losses
    Rule 919(p) currently provides that ICE Clear Europe will notify 
Clearing Members of the amount of Loss Assets by circular from time to 
time. Loss Assets are assets of ICE Clear Europe that it would use to 
first satisfy a Non-Default Loss or Investment Loss. Current Rule 
919(p) further provides that the amount of Loss Assets is $90 million.
    The proposed rule change would delete the term Loss Assets and 
replace it with two separate terms: Investment Loss Assets and 
Custodial Loss Assets. Investment Loss Assets would be assets of ICE 
Clear Europe set aside to cover Investment Losses, while Custodial Loss 
Assets would be assets of ICE Clear Europe set aside to cover Custodial 
Losses.
    The proposed rule change also would delete the set amount of such 
assets from Rule 919(p). Amended Rule 919(p) would no longer specify 
that Loss Assets are set at a level of $90 million and amended Rule 
919(p) would not specify any particular amount for Investment Loss 
Assets or Custodial Loss Assets. As under the current rule though, ICE 
Clear Europe would be required to notify Clearing Members from time to 
time, by circular, of the total amount of such assets. After issuing 
such a circular, ICE Clear Europe's liability for any subsequent 
Investment Loss or Custodial Loss would be limited to the amount of 
Investment Loss Assets and Custodial Loss Assets, as applicable, set 
out in the circular.
    Despite deleting the set amount from Rule 919(p), ICE Clear Europe 
announced in the Notice that it is setting the current amount of 
Investment Loss Assets at $195 million and Custodial Loss Assets at $80 
million.\23\ Thus, the proposed rule change would increase the amount 
of Investment Loss Assets and Custodial Loss Assets from the current 
$90 million, while maintaining ICE Clear Europe's ability to change 
this amount by circular notification.
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    \23\ Notice, 88 FR at 30190.
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    Rule 919(q) sets out further details regarding the assets set aside 
to cover non-default losses. Currently Rule 919(q) requires that ICE 
Clear Europe notify Clearing Members of the total amount of Loss Assets 
applied in connection with any Investment Loss prior to using such 
assets. Rule 919(q), as amended, would similarly require that ICE Clear 
Europe notify Clearing Members of the total amount of Investment Loss 
Assets applied in connection with any Investment Loss or Non-Default 
Loss prior to using such assets. Likewise, amended Rule 919(q) would 
require that ICE Clear Europe notify Clearing Members of the total 
amount of Custodial Loss Assets applied in connection with any 
Custodial Loss or Non-Default Loss prior to using such assets.
    Rule 919(q) also allows ICE Clear Europe to replenish its capital 
and resources following an Investment Loss or Non-Default Loss. Such 
recapitalization does not reduce any Clearing Member's Collateral 
Offset Obligation or the amount of an Investment Loss. Similarly, ICE 
Clear Europe may replenish its Loss Assets by applying retained 
earnings, but doing so does not increase its liability beyond the 
amounts already set aside for Loss Assets (i.e., $90 million under the 
current rule). The proposed rule change would generally maintain these 
provisions, with amendments to incorporate the new defined terms, such 
as Custodial Losses and Custodial Loss Assets. Moreover, the proposed 
rule change would require that ICE Clear Europe, after replenishing its 
resources, issue a new circular pursuant to Rule 919(p) to notify 
Clearing Members of the amount of Investment Loss Assets and Custodial 
Loss Assets going forward. In such a situation though, ICE Clear Europe 
would not be obligated to apply the new amounts to any prior Non-
Default Loss, Custodial Loss, or Investment Loss.
4. Other Sections of Rule 919
    In addition to the provisions discussed above, other sections of 
Rule 919 affect the responsibilities of ICE Clear Europe and Clearing 
Members for non-default losses, the apportionment of such losses, and 
the financial resources to cover such losses. The proposed rule change 
would amend some of these other sections to be consistent with the 
overall changes discussed above. This section discusses these 
amendments in the order in which they appear in Rule 919.
    Current Rule 919(f) provides details related to Collateral Offset 
Obligations. All Collateral Offset Obligations arise on the date 
specified in the circular published by ICE Clear Europe announcing the 
obligations. ICE Clear Europe collects the Collateral Offset 
Obligations using the same process for collecting additional cash 
Margin or Guaranty Fund Contributions. Moreover, ICE Clear Europe may 
offset any Collateral Offset Obligation against an obligation of ICE 
Clear Europe to return or pay any Original/Initial Margin, Guaranty 
Fund Contributions, or other Permitted Cover to a Clearing Member. The 
proposed rule change would maintain these provisions largely as they 
are currently written, but would add Variation Margin, Deliverables, or 
settlement amounts to Rule 919(f).\24\
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    \24\ For the explanation of this particular change, see infra 
Section II.D.2 below.
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    Current Rule 919(g) requires that ICE Clear Europe apply Collateral 
Offset Obligations solely to meet Investment Losses. This provision is 
based on the current allocation framework explained above, where losses 
are either Non-Default Losses or Investment Losses, and Clearing 
Members are only liable for Investment Losses. Given that the proposed 
rule change would expand the categories of non-default losses, the 
proposed rule change also would amend this provision. As amended, Rule 
919(g) would require that ICE Clear Europe apply Collateral Offset 
Obligations resulting from Investment Losses solely to meet those 
Investment Losses and Collateral Offset Obligations resulting from 
Custodial Losses solely to those Custodial Losses.
    Current Rule 919(h) requires that ICE Clear Europe, if it recovers 
any money or assets that reduce an Investment Loss, pay the same amount 
to the Clearing Members that met their Collateral Offset Obligations, 
pro rata. In paying such recovered amounts to Clearing Members, ICE 
Clear Europe is allowed to pay itself back for any expenses it incurred 
and for any assets, other than Loss Assets, that it applied to meet the 
Investment Loss. The proposed rule change would largely retain this 
provision as written, with some edits. First, it would amend Rule 
919(h) to apply to Custodial Losses, in addition to Investment Losses. 
Second, it would limit ICE Clear Europe's obligation to pay any money 
or assets to those assets that it recovers and that are received by and 
remain available to ICE Clear Europe. The proposed rule change also 
would add a more general caveat that the obligation to return amounts 
to Clearing Members only applies to the extent that such amounts or 
assets remain available to ICE Clear Europe in cleared funds and have 
not been subject to an event similar to a Custodial Loss, Investment 
Loss, Pledged Collateral Loss or Title Transfer Collateral Loss. This 
particular change would help to recognize the possibility that such 
amounts could be subject to a loss before ICE Clear Europe is able to 
distribute them to Clearing Members. Finally, the proposed rule change 
would add, in new Rule 919(t), an identical provision to Rule 919(h), 
as amended,

[[Page 54694]]

except that Rule 919(t) would apply to a Pledged Collateral Loss.
    Current Rule 919(i) generally prohibits a Clearing Member from 
offsetting its Collateral Offset Obligation against other obligations 
that it owes to ICE Clear Europe. For example, Rule 919(i) provides 
that a Collateral Offset Obligation does not reduce or otherwise affect 
the liability of a Clearing Member to make Guaranty Fund Contributions, 
to replenish any of its Guaranty Fund Contributions, or to pay 
Assessment Contributions. Clearing Members remain liable for margin, 
Guaranty Fund Contributions, Assessment Contributions, and amounts they 
may owe to ICE Clear Europe. On the other hand, ICE Clear Europe must 
pay or release Margin and Permitted Cover in the usual way, subject to 
netting to take into account any Collateral Offset Obligation. The 
proposed rule change would retain Rule 901(i) largely as written, but 
would add references to Variation Margin, Deliverables, and settlement 
amounts.\25\ For example, the proposed rule change would require that a 
Clearing Member, despite a Collateral Offset Obligation, continue to 
pay Variation Margin and make and receive timely delivery of all 
Deliverables.
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    \25\ For the explanation of this particular change, see infra 
Section II.D.2 below.
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    Current Rule 919(j) requires that ICE Clear Europe, if it 
determines that it has provided for Collateral Offset Obligations in 
excess of that required or actually applied against an Investment Loss, 
or makes a recovery under Rule 919(h), credit the excess or recovered 
amount to the Clearing Member's Proprietary Account. The proposed rule 
change would largely retain this provision as written, with two 
amendments. First, it would amend Rule 919(j) to apply to Custodial 
Losses, in addition to Investment Losses. Second, it would add a 
general caveat that the obligation only applies to the extent that such 
amounts or assets remain available to ICE Clear Europe in cleared funds 
and have not been subject to an event similar to a Custodial Loss, 
Investment Loss, Pledged Collateral Loss, or Title Transfer Collateral 
Loss. Similar, to amended Rule 919(h) described above, this particular 
change would help to recognize the possibility that such amounts could 
be subject to a loss before ICE Clear Europe is able to distribute them 
to Clearing Members.
    Current Rule 919(k) clarifies that a Clearing Member's liability 
for a Collateral Offset Obligation is independent from ICE Clear 
Europe's power of assessment under Rule 909.\26\ None of the caps on 
assessment liabilities found in Rule 909 or elsewhere limit any 
liability for a Collateral Offset Obligation. The proposed rule change 
would amend this provision to also refer to Rule 914,\27\ Rule 915,\28\ 
and Rule 916,\29\ in addition to Assessment Contributions under Rule 
909. Thus, a Clearing Member's liability for a Collateral Offset 
Obligation would be independent of any of its obligations under Rule 
909, Rule 914, Rule 915, and Rule 916.
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    \26\ Following the default of a Clearing Member, and if certain 
other conditions are satisfied, Rule 909 allows ICE Clear Europe to 
assess Clearing Members for additional amounts as needed to resolve 
any shortfall resulting from the default.
    \27\ Following the default of a Clearing Member, and if certain 
other conditions are satisfied, Rule 914 allows ICE Clear Europe to 
reduce variation margin payments, as needed to retain cash and 
resolve any shortfall resulting from the default.
    \28\ Following the default of a Clearing Member, and if certain 
other conditions are satisfied, Rule 915 allows ICE Clear Europe to 
terminate open contracts that offset the defaulting Clearing 
Member's open contracts.
    \29\ Following the default of a Clearing Member, and if certain 
other conditions are satisfied, Rule 916 allows ICE Clear Europe to 
cease clearing specific categories of contracts.
---------------------------------------------------------------------------

    Current Rule 919(l) provides a general exception to the definition 
of Clearing House Event.\30\ Specifically, if ICE Clear Europe 
exercises any of its authority or rights under Rule 919, then such 
exercise shall not be deemed to be any kind of Clearing House Event. 
The proposed rule change would retain this provision as written.
---------------------------------------------------------------------------

    \30\ As discussed above, a Clearing House Event generally occurs 
if ICE Clear Europe is insolvent or otherwise fails to make a 
payment when due. See ICE Clear Europe Rule 913.
---------------------------------------------------------------------------

    Current Rule 919(m) allows Clearing Members to make payments of 
Collateral Offset Obligations pursuant to Part 3 of the Rules and the 
Finance Procedures. Rule 919(m) further provides that Rule 919 does not 
prejudice ICE Clear Europe's right to set off any sum owed by a 
Clearing Member to ICE Clear Europe against sum payable by ICE Clear 
Europe to the Clearing Member. The proposed rule change would retain 
this provision as written.
    Current Rule 919(n) provides that nothing in Rule 919 obligates ICE 
Clear Europe to pursue any litigation, claim, or other action against a 
Clearing Member, Defaulter, Custodian, or any other Person. The 
proposed rule change would retain this provision as written, with one 
amendment. It would further specify that ICE Clear Europe is not 
required to pursue any claim against a Delivery Facility, in addition 
to a Clearing Member, Defaulter, Custodian, or any other Person. This 
particular change would account for the new definition of Custodial 
Losses, which includes losses in connection with the default of a 
Delivery Facility, as discussed above.
    Current Rule 919(o) allows ICE Clear Europe to convert any amounts 
denominated in one currency to another currency, when making any 
calculations or determinations under Rule 919. The proposed rule change 
would retain this provision as written.
    Current Rule 919(r) limits ICE Clear Europe's liability for the 
failure of any payment or securities services provider, including any 
Custodian or central securities depository. ICE Clear Europe is not 
liable to any Clearing Member, Customer or other Person for any losses, 
liabilities, damages, costs, claims, shortfalls or expenses arising out 
of or relating to any failure, in whole or in part, of any payment or 
securities services provider, including without limitation any 
Custodian, central securities depository, or central bank. This 
disclaimer of liability is subject to Rule 111, which generally limits 
ICE Clear Europe's liability to Clearing Members, except in certain 
circumstances. The proposed rule change would make a few edits to this 
provision. First, it would specify that the limitation applies to such 
losses that are incurred by a Clearing Member, Customer, or Person. It 
also would add a Delivery Facility to the list of entities. Thus, under 
Rule 919(r), as amended, ICE Clear Europe would not be liable to any 
Clearing Member, Customer or other Person for any losses, liabilities, 
damages, costs, claims, shortfalls or expenses incurred by such 
Clearing Member, Customer, or other Person arising out of or relating 
to any failure, in whole or in part, of any payment or securities 
services provider, including without limitation any Custodian, Delivery 
Facility, central securities depository or central bank.
    Finally, Rule 919(w) generally would limit ICE Clear Europe's 
liability for investments made by Clearing Members and their clients. 
ICE Clear Europe would have no liability for any loss, liability, cost, 
claim, shortfall, or expense relating to any investment decision by any 
Clearing Member, Customer, or any other Person, such as choosing cash 
in a particular currency to satisfy a margin requirement, or for the 
results of any such choices or investments. New Rule 919(w) would 
mirror a provision currently found in Rule 502(j). As such, the 
proposed rule change would delete this provision from Rule 502(j).

[[Page 54695]]

D. Other Clarifications Related to Non-Default Losses

    In addition to making amendments to the types of non-default losses 
and the framework for covering and apportioning such losses, the 
proposed rule change would make other related amendments, as discussed 
in this section. These amendments would (i) confirm ICE Clear Europe's 
ability to charge a negative interest rate; (ii) add references to the 
terms Variation Margin, Deliverables, and settlement amounts; and (iii) 
clarify that ICE Clear Europe's responsibility to repay certain assets 
is limited to the extent those assets remain available to ICE Clear 
Europe.
1. Negative Interest Rate
    The proposed rule change would clarify that certain provisions of 
Rule 919 would not limit ICE Clear Europe's ability to charge a 
negative interest rate. ICE Clear Europe generally pays Clearing 
Members interest on the cash balances from their margin deposits. It is 
possible, however, that ICE Clear Europe may charge a negative interest 
rate in certain circumstances. New Rules 919(s) and 919(u) each would 
specify that nothing there would limit ICE Clear Europe's ability to 
charge a negative or reduced ICE Deposit Rate pursuant to the Finance 
Procedures. Similarly, as discussed above, the revised definition of 
Non-Default Losses would exclude any losses that are included in the 
calculation of the ICE Deposit Rate. Finally, new Rule 919(v) would 
provide that a negative yield, negative interest rate, negative coupon 
or pre-agreed reduced principal repayment on a non-cash asset being or 
representing Original/Initial Margin, Guaranty Fund Contributions, 
Permitted Cover or any Deliverable would not be an Investment Loss or 
Non-Default Loss and would only be for the account of the relevant 
Clearing Member and/or its customer.
2. Variation Margin, Deliverables, and Settlement Amounts
    The proposed rule change would add the terms Variation Margin,\31\ 
Deliverables,\32\ and settlement amounts to various definitions and 
provisions of the Rules. For example, the proposed rule change would 
include these terms in the new definition of Custodial Assets and add 
the terms Variation Margin and settlement amounts to the definition of 
Investment Losses. These amendments would have the effect of treating 
any losses of Variation Margin, Deliverables, and settlement amounts as 
Custodial Losses or Investment Losses (assuming the losses otherwise 
meet the definitions of those terms). Thus, losses of Variation Margin, 
Deliverables, and settlement amounts that meet the definition of 
Custodial Losses or Investment Losses could be satisfied using 
Investment Loss Assets and Custodial Loss Assets and, if necessary, 
apportioned among Clearing Members using the framework discussed above.
---------------------------------------------------------------------------

    \31\ Variation Margin is the cash transferred by Clearing 
Members to ICE Clear Europe, and vice versa, to reflect the change 
in the market value of a CDS contract. See ICE Clear Europe Rule 
101.
    \32\ Deliverables include any property, right, interest, 
register or book entry, commodity, certificate, property entitlement 
or Investment, which is capable of being delivered pursuant to an 
F&O Contract or with respect to which settlement amounts are 
calculated. See ICE Clear Europe Rule 101.
---------------------------------------------------------------------------

    The proposed rule change also would add Variation Margin, 
Deliverables, and settlement amounts to the formula in Rule 919(d). As 
discussed above, ICE Clear Europe would use this formula to determine 
each Clearing Member's Collateral Offset Obligation. The Collateral 
Offset Obligation is effectively each Clearing Member's share of any 
remaining Investment Loss or Custodial Loss. Adding Variation Margin, 
Deliverables, and settlement amounts to this formula would therefore 
take into account the value of these holdings in determining each 
Clearing Member's share of an Investment Loss or Custodial Loss.
    Relatedly, the proposed rule change would add Variation Margin, 
Deliverables, and settlement amounts to 919(e). As discussed above, 
Rule 919(e) limits the amount of a Clearing Member's Collateral Offset 
Obligation. Specifically, the Clearing Member would not be obligated to 
pay any amount greater than the total of its Original/Initial Margin, 
Variation Margin, Guaranty Fund Contributions, Permitted Cover, 
Deliverables and settlement amounts. Thus, this change would include 
the value of a Clearing Member's Variation Margin, Deliverables, and 
settlement amounts in capping its overall liability for any Investment 
Loss or Custodial Loss.
    For the sake of consistency with these amendments, the proposed 
rule change also would add Variation Margin, Deliverables, and 
settlement amounts to Rules 919(f) and (i). Rule 919(f) generally 
permits ICE Clear Europe to offset Collateral Offset Obligations owed 
to it by Clearing Members against amounts that ICE Clear Europe owes to 
Clearing Members. Currently, this offset applies to any obligation that 
ICE Clear Europe may have to return Original/Initial Margin, Guaranty 
Fund Contributions, or other Permitted Cover. The proposed rule change 
would add Variation Margin, Deliverables, and settlement amounts.
    Relatedly, Rule 919(i) generally prohibits a Clearing Member from 
offsetting its Collateral Offset Obligation against other obligations 
that it owes to ICE Clear Europe, as discussed above. The proposed rule 
change would add references to Variation Margin, Deliverables, and 
settlement amounts to Rule 919(i). This change would mean Clearing 
Members would remain liable to pay or transfer Variation Margin and 
Deliverables to ICE Clear Europe, despite a Collateral Offset 
Obligation.
3. Amendments to Rules Regarding Assets That Remain Available to ICE 
Clear Europe
    In certain situations, ICE Clear Europe may recover funds on behalf 
of its Clearing Members. In those circumstances, ICE Clear Europe is 
generally required to return those funds to its Clearing Members. For 
example, Rule 301(f) describes how Clearing Members should make 
payments to ICE Clear Europe. Among other things, Rule 301(f) requires 
that all Clearing Members make payments by electronic transfer through 
an Approved Financial Institution.\33\ Rule 301(f) further describes 
what happens when an Approved Financial Institution fails to make a 
payment to ICE Clear Europe. In that situation, the Clearing Member 
generally remains liable to ICE Clear Europe, while the Approved 
Financial Institution remains liable to ICE Clear Europe and the 
Clearing Member that submitted the payment. If ICE Clear Europe 
eventually receives money to make up the failed payment and certain 
other conditions are met, then Rule 301 requires ICE Clear Europe to 
pay back affected Clearing Members the money, net of costs and 
expenses, pro rata.
---------------------------------------------------------------------------

    \33\ ICE Clear Europe Rule 101 defines ``Approved Financial 
Institution'' as ``a credit institution, bank, trust company or 
other institution . . . which has been designated as an approved 
financial institution by the Clearing House for purposes of making 
and receiving cash transfers to and from the Clearing House. . . .''
---------------------------------------------------------------------------

    The proposed rule change would revise Rule 301(f) with respect to 
this last part, ICE Clear Europe's obligation to pay back to the 
Clearing Member the amount of money it recovered. Specifically, the 
proposed rule change would add a caveat that limits the obligation to 
return the funds to the Clearing Member. Under the proposed rule 
change, ICE Clear Europe would only be obligated to return the money to 
the extent such assets are received by and remain available to ICE 
Clear Europe in cleared funds, not having

[[Page 54696]]

been subject to an event similar to a Custodial Loss, Investment Loss, 
Pledged Collateral Loss or Title Transfer Collateral Loss.
    The proposed rule change would add this same or a similar caveat to 
Rules 908, 913, 914, 916, 919, 1102, and 1103, each as described 
further below.
    Rule 908(b) explains the order in which ICE Clear Europe may apply 
assets to meet the obligations, liabilities, and any shortfall of a 
defaulting Clearing Member that was an F&O Clearing Member or a 
Sponsored Principal that was authorised to clear F&O (but was not a CDS 
Clearing Member, an FX Clearing Member, nor authorised to clear CDS or 
FX). In such a circumstance, Rule 908(b)(iii) provides that any claims 
under any default insurance come third in the order of priority, after 
the defaulting Clearing Member's resources and ICE Clear Europe's own 
contribution. Currently, Rule 908(b)(iii) makes available any claims 
under any default insurance policies (including the proceeds of any 
claim) of which ICE Clear Europe is the beneficiary that have been 
received by ICE Clear Europe as a result of the Event of Default. Under 
the proposed rule change, Rule 908(b)(iii) would make available any 
claims under any default insurance policies (including the proceeds of 
any claim) of which ICE Clear Europe is the beneficiary that have been 
received by and remain available to ICE Clear Europe in Cleared Funds, 
not having been subject to an event similar to a Custodial Loss, 
Investment Loss, Pledged Collateral Loss, or Title Transfer Collateral 
Loss. The proposed rule change would make an identical amendment to 
Rules 908(c),\34\ 908(d),\35\ and 908(g).\36\
---------------------------------------------------------------------------

    \34\ Like Rule 908(b), Rule 908(c) explains the order in which 
ICE Clear Europe may apply assets to meet a defaulting Clearing 
Member's obligations, liabilities, and shortfall. Rule 908(c) 
specifically applies to a defaulting Clearing Member that is a CDS 
Clearing Member or a Sponsored Principal authorized to clear CDS 
(but not an F&O Clearing Member, FX Clearing Member, nor authorized 
to clear F&O or FX).
    \35\ Like Rule 908(b), Rule 908(d) explains the order in which 
ICE Clear Europe may apply assets to meet a defaulting Clearing 
Member's obligations, liabilities, and shortfall. Rule 908(d) 
specifically applies to a defaulting Clearing Member that is a FX 
Clearing Member or a Sponsored Principal authorized to clear FX (but 
not an F&O Clearing Member, CDS Clearing Member, nor authorized to 
clear F&O or CDS).
    \36\ Like Rule 908(b), Rule 908(g) explains the order in which 
ICE Clear Europe may apply assets to meet a defaulting Clearing 
Member's obligations, liabilities, and shortfall. Rule 908(g) 
specifically applies to a defaulting Clearing Member that falls in 
multiple membership categories at ICE Clear Europe, such a CDS 
Clearing Member that is also an F&O Clearing Member.
---------------------------------------------------------------------------

    Rule 913 sets out the definitions that are used in Rules 914 
through 919. These rules generally describe steps ICE Clear Europe 
could take to offset losses it may incur as a result of a Clearing 
Member's default or otherwise not as a result of a default (in the case 
of Rule 919, as discussed above). For example, as discussed above, Rule 
914 authorizes ICE Clear Europe, in certain circumstances, to 
distribute losses to Clearing Members by implementing a haircut to 
variation margin payments. Rule 913 includes a formula for determining 
the losses incurred by ICE Clear Europe. This formula takes into 
account, among other things, ICE Clear Europe's Available Non-Defaulter 
Resources. Currently, that term as defined means the cash proceeds or 
equivalent cash value (as calculated by ICE Clear Europe) of the 
Guaranty Fund Contributions, Clearing House Contributions, Assessment 
Contributions, and any claims under any default insurance policies 
which are available to be applied pursuant to Rule 908, following a 
particular Event of Default. The definition also stipulates that 
Assessment Contributions and any claims under any default insurance 
policies only count as Available Non-Defaulter Resources if they have 
been received by the ICE Clear Europe in cleared funds at the time it 
calculates its resources. The proposed rule change would modify this 
stipulation, such that Assessment Contributions and any claims under 
any default insurance policies would only count if they have been 
received by and remain available to ICE Clear Europe, not having been 
subject to an event similar to a Custodial Loss, Investment Loss, 
Pledged Collateral Loss, or Title Transfer Collateral Loss.
    Following the default of a Clearing Member, and if certain other 
conditions are satisfied, Rule 914 allows ICE Clear Europe to reduce 
variation margin payments as needed to retain cash and resolve any 
shortfall resulting from the default. This process of reducing 
variation margin payments is also known as haircutting. If the 
requirements of Rule 914 are met, ICE Clear Europe can use such 
haircuts to distribute losses resulting from a Clearing Member's 
default to non-defaulting Clearing Members. Rule 914(j) generally 
requires that ICE Clear Europe distribute to Clearing Members certain 
funds that would increase ICE Clear Europe's resources and therefore 
reduce the amount of loss that it is sharing via the haircuts. These 
funds could include, for example, payments made to ICE Clear Europe by 
the defaulting Clearing Member, by a non-defaulting Clearing Member, or 
an insurer. Under the proposed rule change, ICE Clear Europe would be 
obligated to distribute these funds only to the extent they remain 
available to ICE Clear Europe in cleared funds, not having been subject 
to an event similar to a Custodial Loss, Investment Loss, Pledged 
Collateral Loss, or Title Transfer Collateral Loss.
    Following the default of a Clearing Member, and if certain other 
conditions are satisfied, Rule 916 allows ICE Clear Europe to cease 
clearing specific categories of contracts. If the requirements of Rule 
916 are met, ICE Clear Europe can terminate the contracts. ICE Clear 
Europe then calculates an amount owed to each Clearing Member with 
respect to the terminated contracts (or which each Clearing Member owes 
to ICE Clear Europe, in the case of a negative amount). Rule 916(n) 
generally requires that ICE Clear Europe distribute to Clearing Members 
certain funds that would increase this amount paid in respect of a 
contract termination (or decrease the amount owed by a Clearing 
Member). These funds could include, for example, payments made to ICE 
Clear Europe by the defaulting Clearing Member, by a non-defaulting 
Clearing Member, or an insurer. Under the proposed rule change, ICE 
Clear Europe would be obligated to distribute these funds only to the 
extent they remain available to ICE Clear Europe in cleared funds, not 
having been subject to an event similar to a Custodial Loss, Investment 
Loss, Pledged Collateral Loss, or Title Transfer Collateral Loss.
    The proposed rule change would add the same caveat to rules 919(b), 
919(h), 919(j), and 919(t), as discussed above.\37\
---------------------------------------------------------------------------

    \37\ For a discussion of Rule 919, see supra Section II.C above.
---------------------------------------------------------------------------

    Rule 1102 describes generally Clearing Members' obligations to 
contribute to ICE Clear Europe's Guaranty Funds, and how ICE Clear 
Europe will collect, use, and in some circumstances, return the 
contributions. Rule 1102(k) explains that if (i) ICE Clear Europe has 
used the non-defaulting Clearing Members' Guaranty Fund Contributions, 
ICE Clear Europe's own contribution to the Guaranty Fund, or insurance 
proceeds, and (ii) subsequently has received payments or other monetary 
amounts from the defaulting Clearing Member, then (iii) ICE Clear 
Europe must repay the non-defaulting Clearing Members, retain assets to 
replenish its own contribution to the Guaranty Fund, or repay its 
insurers, in the reverse order to that specified in Rule 908. Rule 
1102(k) sets out a number of conditions on such

[[Page 54697]]

repayments. The proposed rule change would add a new condition that ICE 
Clear Europe has not suffered any loss equivalent to an Investment 
Loss, Custodial Loss, Pledged Collateral Loss, or Title Transfer 
Collateral Loss with respect to the amounts received from the 
defaulting Clearing Member.
    Rule 1103(e) applies to ICE Clear Europe's use of default insurance 
policies. The rule explains how ICE Clear Europe will apply the 
proceeds of any claim under a default insurance policy. The rule also 
explains certain limitations and conditions to ICE Clear Europe's use 
of default insurance, such as the policies being limited to a certain 
set of contracts cleared by ICE Clear Europe. The proposed rule change 
would add another condition, that any amounts that ICE Clear Europe 
receives from an insurer may be subject to losses similar to an 
Investment Loss, Custodial Loss, Pledged Collateral Loss, or Title 
Transfer Collateral Loss prior to ICE Clear Europe being able to use 
the proceeds to offset losses.
    Rule 1103(e) also explains how ICE Clear Europe would apply the 
proceeds of a claim under default insurance among multiple defaulting 
Clearing Members. The proposed rule change would not alter this 
explanation, but it would add an additional caveat. ICE Clear Europe 
would only apply the proceeds of a claim under default insurance among 
multiple defaulting Clearing Members to the extent that the proceeds 
remain available to ICE Clear Europe in cleared funds, not having been 
subject to an event similar to a Custodial Loss, Investment Loss, 
Pledged Collateral Loss, or Title Transfer Collateral Loss.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act directs the Commission to approve a 
proposed rule change of a self-regulatory organization if it finds that 
such proposed rule change is consistent with the requirements of the 
Act and the rules and regulations thereunder applicable to such 
organization.\38\ For the reasons discussed below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(D) 
of the Act,\39\ Section 17A(b)(3)(F) of the Act,\40\ and Rule 17Ad-
22(e)(17)(i) thereunder.\41\
---------------------------------------------------------------------------

    \38\ 15 U.S.C. 78s(b)(2)(C).
    \39\ 15 U.S.C. 78q-1(b)(3)(D).
    \40\ 15 U.S.C. 78q-1(b)(3)(F).
    \41\ 17 CFR 240.17Ad-22(e)(17)(i).
---------------------------------------------------------------------------

A. Consistency With Section 17A(b)(3)(D) of the Act

    Section 17A(b)(3)(D) of the Act requires that the rules of ICE 
Clear Europe provide for the equitable allocation of reasonable dues, 
fees, and other charges among its participants.\42\ Based on its review 
of the record, and for the reasons discussed below, the Commission 
believes the proposed rule change is consistent with the equitable 
allocation of reasonable dues, fees, and other charges among ICE Clear 
Europe's Clearing Members.
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    As explained above, the proposed rule change would add three new 
categories of non-default losses. ICE Clear Europe would continue to be 
responsible for Non-Default Losses, and it first would pay for 
Investment Losses and Custodial Losses out of the assets it has set 
aside for that purpose. ICE Clear Europe would apportion any remaining 
Investment Losses and Custodial Losses among Clearing Members using the 
same method as it does now, with the additional consideration of 
Variation Margin, Deliverables, and settlement amounts. ICE Clear 
Europe would allocate losses based on each Clearing Member's share of 
total Original/Initial Margin, Guaranty Fund Contributions, Permitted 
Cover, Variation Margin, Deliverables, and settlement amounts. 
Moreover, each Clearing Member's liability could not exceed the total 
of its Original/Initial Margin, Guaranty Fund Contributions, Permitted 
Cover, Variation Margin, Deliverables, and settlement amounts.
    The Commission believes this allocation of losses is equitable 
because it would distribute Investment Losses and Custodial Losses 
based on each Clearing Member's share of the assets that could 
potentially be depleted by such losses. As discussed above, the 
definition of Investment Losses would cover certain losses to Original/
Initial Margin, Guaranty Fund Contributions, Permitted Cover, Variation 
Margin, and settlement amounts. The definition of Custodial Losses 
would move over certain losses to Custodial Assets, which would be 
defined to include assets being or representing Original/Initial 
Margin, Variation Margin, Guaranty Fund Contributions or Permitted 
Cover, or the proceeds of any of the foregoing, Deliverables or 
settlement amounts. Finally, each Clearing Member's liability could not 
exceed its total amount with respect to these assets. Thus, the 
Commission believes this should help to ensure that Clearing Members 
only contribute to the recovery from such losses in amounts 
commensurate with their Original/Initial Margin, Guaranty Fund 
Contributions, Permitted Cover, Variation Margin, Deliverables, and 
settlement amounts in the first instance.
    The Commission also believes that it is consistent with 
17A(b)(3)(D) of the Act \43\ to make Clearing Members responsible for 
any Pledged Collateral Losses and a Title Transfer Collateral Loss as 
discussed above. Specifically, because a Pledged Collateral Loss 
relates to Pledged Collateral, the Commission believes it is consistent 
with 17A(b)(3)(D) of the Act \44\ that a Clearing Member bear the risk 
of such loss and that ICE Clear Europe be liable only because of its 
fraud, bad faith, gross negligence, or other willful misconduct. The 
Commission believes this because, as discussed above, ICE Clear Europe 
only maintains a security interest in such collateral. Moreover, as 
discussed above, the new provision in Rule 919 regarding Pledged 
Collateral is essentially the same as an existing provision in Rule 
502(j).
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78q-1(b)(3)(D).
    \44\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    Because a Title Transfer Collateral Loss would result from a 
reduction in value or change of exchange rate of Original/Initial 
Margin, Guaranty Fund Contributions or Permitted Cover, the Commission 
believes it is consistent with 17A(b)(3)(D) of the Act \45\ to allocate 
these losses to Clearing Members. Clearing Members are responsible for 
transferring assets to ICE Clear Europe to satisfy their margin and 
Guaranty Fund obligations. Clearing Members incur these obligations 
because of the transactions they submit for clearing at ICE Clear 
Europe. A decline in value of collateral that a Clearing Member 
transfers to ICE Clear Europe to satisfy its margin obligation would 
necessarily require the Clearing Member to transfer additional 
collateral to make up for that decline in value. Thus, allocating a 
Title Transfer Collateral Loss to a Clearing Member follows from ICE 
Clear Europe's overall risk management framework.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    The Commission further believes the proposed rule change would not 
substantially alter ICE Clear Europe's responsibility for losses. ICE 
Clear Europe would remain responsible for Non-Default Losses. The 
proposed rule change would remove the caveat that a Non-Default Loss 
must threaten ICE Clear Europe's insolvency. This change would expand 
the losses for which ICE Clear Europe would be liable as Non-Default 
Losses, while also giving ICE

[[Page 54698]]

Clear Europe access to financial resources to pay for those losses. As 
discussed above, ICE Clear Europe could pay for a Non-Default Loss 
first out of Investment Loss Assets and Custodial Loss Assets.
    While that would be the case, ICE Clear Europe also would set aside 
more assets to cover these losses than it does currently. Currently, 
ICE Clear Europe has set aside $90 million to cover a Non-Default Loss 
and/or an Investment Loss. Under the proposed rule change, $195 million 
would be available for an Investment Loss and $80 million would be 
available for a Custodial Loss. As under the current rule, ICE Clear 
Europe could use these amounts to cover a Non-Default Loss as well.
    Finally, as discussed above in Section II.D.3, the proposed rule 
change would amend various ICE Clear Europe rules that require ICE 
Clear Europe to return money to Clearing Members in certain 
circumstances. As amended, these rules generally would require that ICE 
Clear Europe only return money to the extent ICE Clear Europe has 
received the assets and they remain available to ICE Clear Europe in 
cleared funds, not having been subject to an event similar to a 
Custodial Loss, Investment Loss, Pledged Collateral Loss or Title 
Transfer Collateral Loss. The Commission believes adding these caveats 
to the existing rule provisions would help to recognize the possibility 
that such assets could be subject to a loss before ICE Clear Europe is 
able to distribute them to Clearing Members. In that situation, the 
Commission believes not requiring ICE Clear Europe to return the assets 
to Clearing Members is consistent with 17A(b)(3)(D) of the Act \46\ 
given that ICE Clear Europe would no longer possess such assets.
---------------------------------------------------------------------------

    \46\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

    On balance then, the Commission believes the proposed rule change 
would establish an equitable allocation of losses not relating to the 
default of a Clearing Member as between ICE Clear Europe and its 
Clearing Members and among ICE Clear Europe's Clearing Members.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(D) of the Act.\47\
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78q-1(b)(3)(D).
---------------------------------------------------------------------------

B. Consistency With Section 17A(b)(3)(F) of the Act

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of ICE Clear Europe be designed to promote the prompt and 
accurate clearance and settlement of securities transactions and, to 
the extent applicable, derivative agreements, contracts, and 
transactions.\48\ Based on its review of the record, and for the 
reasons discussed below, the Commission believes the proposed rule 
change is consistent with the promotion of the prompt and accurate 
clearance and settlement of securities transactions.
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change would help 
enhance ICE Clear Europe's ability to manage non-default losses and 
continue operating as a going concern if it incurs losses not relating 
to a Clearing Member's default. Specifically, the proposed rule change 
would maintain ICE Clear Europe's existing framework for covering and 
sharing in such losses, while expanding the framework to cover new 
types of losses. The proposed rule change would add new categories of 
non-default losses, namely Custodial Losses, Pledged Collateral Losses, 
and a Title Transfer Collateral Loss. At the same time, the proposed 
rule change would cover losses to additional categories of assets, 
specifically Variation Margin, Deliverables, and settlement amounts.
    The proposed rule change would also limit ICE Clear Europe's 
liability for Custodial Losses, Investment Losses, Pledged Collateral 
Losses, and a Title Transfer Collateral Loss. For Custodial Losses and 
Investment Losses, the proposed rule change would limit ICE Clear 
Europe's liability to the assets it has set aside, with any remaining 
losses apportioned among Clearing Members. ICE Clear Europe generally 
would have no liability for any Pledged Collateral Losses and a Title 
Transfer Collateral Loss except in the limited circumstances discussed 
above. Similarly, under new Rule 919(w), ICE Clear Europe generally 
would have no liability for investment decisions made by Clearing 
Members and their clients.
    Relatedly, the proposed rule change would increase the amount of 
ICE Clear Europe's resources available to cover Non-Default Losses, 
Custodial Losses, and Investment Losses, and enhance ICE Clear Europe's 
ability to replenish those resources. Under the proposed rule change, 
ICE Clear Europe would set aside $90 million to cover Custodial Losses 
and $195 million to cover Investment Losses. This is an increase from 
the $80 million set aside currently to cover Investment Losses. As 
noted above, ICE Clear Europe could also use these amounts to cover 
Non-Default Losses. Moreover, Rule 919(q) would allow ICE Clear Europe 
to replenish its capital and resources following an Investment Loss, 
Non-Default Loss, or Custodial Loss.
    Finally, the Commission believes that various aspects of the 
proposed rule change would help to ensure that Non-Default Losses, 
Investment Losses, and Custodial Losses would not affect ICE Clear 
Europe's ability to collect other amounts owed by Clearing Members. For 
example, under Rule 919(i), Clearing Members would continue to be 
liable for Guaranty Fund Contributions, Assessment Contributions, and 
margin, including Variation Margin. ICE Clear Europe also would 
continue to be able to charge its Clearing Members a negative interest 
rate, as needed. The Commission believes that these provisions would 
help ensure that ICE Clear Europe's treatment and allocation of losses 
not arising from the default of a Clearing Member do not hinder its 
ability to enforce Clearing Members' other financial obligations, 
including those related to the default of a Clearing Member.
    Taken together, the Commission believes that the various components 
of the proposed rule change discussed above would enhance ICE Clear 
Europe's ability to cover and allocate losses not related to a Clearing 
Member's default. The Commission believes that doing so would help ICE 
Clear Europe to avoid disruptions to its operations, which could occur 
if non-default losses are not fully covered or allocated. The 
Commission therefore believes the proposed rule change would be 
consistent with the promotion of the prompt and accurate clearance and 
settlement of securities transactions by helping ensure that ICE Clear 
Europe can continue to clear and settle securities transactions even 
when faced with non-default losses.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act.\49\
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    \49\ 15 U.S.C. 78q-1(b)(3)(F).
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C. Consistency With Rule 17Ad-22(e)(17)(i) Under the Act

    Rule 17Ad-22(e)(17)(i) requires that ICE Clear Europe establish, 
implement, maintain, and enforce written policies and procedures 
reasonably designed to manage its operational risks by identifying 
plausible sources of operational risk, both internal and external, and 
mitigating their impact through the use of appropriate systems, 
policies, procedures, and controls.\50\
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    \50\ 17 CFR 240.17Ad-22(e)(17)(i).
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    The Commission believes that non-default losses, meaning losses 
that do not arise from the default of a Clearing Member, are a 
plausible source of

[[Page 54699]]

operational risk at ICE Clear Europe. For example, a theft of ICE Clear 
Europe's assets could threaten its ability to operate. The Commission 
therefore believes that by adding new categories of non-default losses 
and covering losses to additional categories of assets, as discussed 
above, the proposed rule change would identify plausible sources of 
operational risk.
    The Commission further believes that the proposed rule change would 
mitigate the impact of non-default losses by establishing appropriate 
procedures for categorizing, covering, and allocating such losses. For 
example, as discussed above, the proposed rule change would amend the 
existing framework for allocating non-default losses to cover Custodial 
Losses. The proposed rule change also would increase the amount of ICE 
Clear Europe's resources available to cover Non-Default Losses, 
Custodial Losses, and Investment Losses, and enhance ICE Clear Europe's 
ability to replenish those resources. Finally, as discussed above, the 
proposed rule change help ensure that ICE Clear Europe can enforce 
Clearing Members' other financial obligations, including those related 
to the default of a Clearing Member, despite any non-default losses.
    Taken together, the Commission believes the proposed rule change 
would identify non-default losses as a plausible source of operational 
risk and mitigate the impact of such losses through the use of 
appropriate procedures.
    Therefore, the Commission finds that the proposed rule change is 
consistent with Rule 17Ad-22(e)(17)(i).\51\
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    \51\ 17 CFR 240.17Ad-22(e)(17)(i).
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IV. Accelerated Approval of the Proposed Rule Change as Modified by 
Amendment Nos. 1 and 2

    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act,\52\ to approve the proposed rule change, as modified by 
Amendment Nos. 1 and 2, prior to the 30th day after the date of 
publication of Amendment No. 2 in the Federal Register. As discussed 
above, Amendment No. 1 amended and restated in its entirety the Form 
19b-4 and Exhibit 1A in order to correct the narrative description of 
the proposed rule change. Amendment No. 2 modified the Exhibit 5 to 
clarify when certain funds are considered available to ICE Clear Europe 
to be applied in accordance with the Rules as proposed to be amended. 
By so doing, Amendment Nos. 1 and 2 provide for a more clear and 
comprehensive understanding of the proposed changes.
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    \52\ 15 U.S.C. 78s(b)(2).
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    For the reasons discussed above, the Commission finds that the 
proposed rule change, as modified by Amendment Nos. 1 and 2, is 
consistent with the Act and the applicable rules thereunder. 
Accordingly, the Commission finds good cause for approving the proposed 
rule change, as modified by Amendment Nos. 1 and 2, on an accelerated 
basis, pursuant to Section 19(b)(2) of the Act.\53\
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    \53\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as modified by Amendment No. 1 and Amendment No. 
2, is consistent with the requirements of the Act, and in particular, 
with the requirements of Section 17A(b)(3)(D) of the Act,\54\ Section 
17A(b)(3)(F) of the Act,\55\ and Rule 17Ad-22(e)(17)(i) thereunder.\56\
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    \54\ 15 U.S.C. 78q-1(b)(3)(D).
    \55\ 15 U.S.C. 78q-1(b)(3)(F).
    \56\ 17 CFR 240.17Ad-22(e)(17)(i).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
\57\ that the proposed rule change, as modified by Amendment Nos. 1 and 
2 (SR-ICEEU-2023-010), be, and hereby is, approved on an accelerated 
basis.\58\
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    \57\ 15 U.S.C. 78s(b)(2).
    \58\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-17210 Filed 8-10-23; 8:45 am]
BILLING CODE 8011-01-P