[Federal Register Volume 88, Number 190 (Tuesday, October 3, 2023)]
[Notices]
[Pages 68211-68214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-21796]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-98572; File No. SR-ICC-2023-013]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change Relating to ICC's Treasury Operations 
Policies and Procedures

September 27, 2023.

I. Introduction

    On August 15, 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 revise the ICC 
Treasury Operations Policies and Procedures (``Treasury Policy''). The 
proposed rule change was published for comment in the Federal Register 
on August 28, 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. 98200 (Aug. 22, 2023), 
88 FR 58628 (Aug. 28, 2023) (File No. SR-ICC-2023-013) (``Notice'').
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II. Description of the Proposed Rule Change

    ICC is registered with the Commission as a clearing agency for the 
purpose of

[[Page 68212]]

clearing CDS contracts.\4\ ICC requires that its Clearing Participants 
post margin to collateralize their credit exposure to ICC, based on the 
size and risk of their cleared positions. On a daily basis, ICC 
determines margin requirements (i) for a Clearing Participant's own 
cleared positions (referred to as ``house'' positions) and (ii) for the 
cleared positions of its clients. ICC also requires that Clearing 
Participants contribute to its Guaranty Fund.
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    \4\ Capitalized terms not otherwise defined herein have the 
meanings assigned to them in ICC's Clearing Rules or the Treasury 
Policy, as applicable.
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    ICC's Treasury Department is responsible for daily cash and 
collateral management of margin and Guaranty Fund assets, including 
Client-Related Initial Margin assets.\5\ The Treasury Policy contains 
policies and procedures that aid the ICC Treasury Department in 
carrying out these responsibilities.\6\
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    \5\ Notice, 88 FR at 58628.
    \6\ Id.
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    Aside from non-substantive, typographical changes (for example, the 
addition of quotation marks around the word ``haircuts''), ICC proposes 
to make two categories of changes to the Treasury Policy. First, ICC 
proposes clarifications and changes to the way it values the collateral 
that Clearing Participants provide to ICC to cover their margin and 
Guaranty Fund requirements. Second, ICC proposes adding a new section 
to its Treasury Policy addressing circumstances under which it would 
use a foreign exchange facility to convert one currency to another.
1. ICC's Collateral Valuation
    In valuing collateral, ICC's currently effective Treasury Policy 
aims to accurately and effectively price assets posted as collateral 
and haircut those assets for their native market risks \7\ and related 
cross-currency risks.\8\ The proposed rule change would not change 
these overall aims, but ICC notes that it would clarify and simplify 
some already-existing procedures which achieve these aims.\9\ It would 
also change the haircut process for Great British Pounds posted as 
Client-Related Initial Margin to cover a Euro-denominated product 
requirement.
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    \7\ ICC defines native market risk as the risk of a decrease in 
value of the asset posted as collateral. Id.
    \8\ ICC defines cross-currency risk as the risk of the change in 
value of one currency as compared to the value of another currency. 
Id.
    \9\ Notice, 88 FR at 58628.
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Current Valuation Process
    ICC's valuation process depends on the type of collateral. 
Currently, ICC accepts US Treasuries, US Dollars (``USD''), Euros, and 
for client-related margin only, Great British Pounds (``GBP''). 
Moreover, ICC currently clears products denominated in USD and in 
Euros.
    With respect to US Treasuries covering a USD-denominated product 
requirement, the currently effective Treasury Policy provides that ICC 
calculates the cover value as follows: accrued interest plus mid-price 
multiplied by principal less applicable haircut established by the ICC 
Risk Department.\10\ For US Treasuries or USD covering a Euro-
denominated product requirement, ICC haircuts the USD value at the 
currency haircut for Euros (after first converting the US Treasuries to 
USD).
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    \10\ ICC's Risk Department calculates haircuts on an on-going 
basis. ICE Clear Credit LLC Treasury Operations Policies and 
Procedures. ICC describes the qualitative manner in which it derives 
its collateral haircuts in its Collateral Risk Management Framework. 
Securities Exchange Act Release No. 96557 (Dec. 21, 2022), 87 FR 
79922 (Dec. 28, 2022) (File No. SR-ICC-2022-013) (``Order'').
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    With respect to Euro covering a Euro-denominated product 
requirement, there is no haircut. With respect to Euro covering a USD-
denominated product requirement, ICC first converts the Euro to the USD 
value and then haircuts the USD value at the Euro currency haircut 
established by the ICC Risk Department.
    With respect to GBP covering a USD-denominated product requirement, 
ICC first converts the GBP to the USD value and then haircuts the USD 
value at the GBP currency haircut established by the ICC Risk 
Department. With respect to GBP covering a Euro-denominated product 
requirement, ICC first converts the GBP to the USD value and then 
haircuts the USD value at the GBP currency haircut established by the 
ICC Risk Department. ICC then converts the Euro-denominated product 
requirement to the USD value, and ICC then grosses up the resulting USD 
requirement by the Euro currency haircut.
Amended Valuation Process
    The proposed rule change would delete much of the currency-specific 
language and replace it with general principles that would apply to any 
currency ICC accepts. In doing so, the proposed rule change would not 
alter the substance of the current process, except with respect to the 
valuation of GBP in certain circumstances, as discussed below.
    The proposed rule change would delete the language described above 
related to collateral posted in the currency of the obligation, and 
replace it with general language stating that posted cash collateral 
used to cover a specific currency obligation in the currency of the 
posted collateral is not subject to a haircut. Language related to 
collateral posted in a currency other than the currency of the 
obligation would also be deleted. In its place, the proposed rule 
change would add language stating that posted cash collateral used to 
cover a specific currency obligation is first converted to its value 
expressed in the currency of the obligation, and further haircut to 
capture the potential foreign exchange risk between the posted cash 
collateral and the currency of the obligation.
    With respect to U.S. Treasuries, the proposed rule change would 
maintain the current language regarding cover value. As under the 
current Treasury Policy, ICC would determine the cover value as accrued 
interest plus mid-price multiplied by principal, less applicable 
haircut. Finally, the proposed rule change would specify that the cover 
value of U.S. Treasuries used to cover a specific non-USD currency 
obligation is computed by foreign exchange haircutting the 
corresponding USD-equivalent cover value, where the applicable foreign 
exchange haircut captures the potential foreign exchange risk between 
the USD cash and the currency of the obligation.
    For U.S. Treasuries, USD, and Euros, this proposed change is 
consistent with currently effective policies. However, the proposed 
rule change would alter ICC's process for GBP. With respect to GBP used 
to cover a Euro-denominated product requirement, the proposed rule 
change would delete a provision requiring ICC to convert the GBP cash 
value to its USD value, haircut the USD value, convert the Euro-
denominated product requirement to its USD value, and gross up the 
resulting USD requirement by the Euro currency haircut. Deleting the 
currently effective haircut process related to GBP used to cover a 
Euro-denominated product requirement and replacing it with the proposed 
changes makes the process more efficient by eliminating what amounts to 
a double haircut.\11\
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    \11\ Notice, 88 FR at 58628; see, infra, note 20 and related 
text.
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2. ICC's Use of a Foreign Exchange Facility
    ICC also proposes adding a new section to its Treasury Policy 
titled ``Non-Committed FX Facility.'' This section addresses 
circumstances under which ICC would use a foreign exchange facility to 
convert one currency to another. The proposed

[[Page 68213]]

section begins by noting that ICC has access to foreign exchange 
facilities with various commercial counterparties. The facilities are 
uncommitted, which means that they do not require ICC's counterparties 
to provide requested currencies, but ICC still may use them to convert 
one currency to another for same day settlement.
    The proposed section also describes circumstances under which ICC 
would need to convert Client-Related Initial Margin, posted by Clearing 
Participants in GBP, into another currency. ICC may need to convert 
Client-Related Initial Margin posted in GBP in the context of a default 
of the client that provided the GBP as margin. None of the contracts 
that ICC clears settles in GBP. Therefore, to the extent that margin is 
posted in GBP, it would need to be converted to the currency of an 
obligation before it is used to satisfy that obligation.
    ICC proposes to state in the Policy that the circumstances where it 
would need to convert GBP to another currency are very narrow. The 
added section provides two reasons to support ICC's position. First, as 
mentioned above, ICC does not currently clear any contracts that are 
settled in GBP; thus, GBP is not required for daily settlement. Second, 
use of Client-Related Initial Margin in the context of a Clearing 
Participant default is very limited.\12\ The proposed section closes by 
noting that if ICC needs to convert GBP collateral to either USD or 
Euro in the context of a Clearing Participant default, ICC would use 
one of its non-committed foreign exchange arrangements to do so.
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    \12\ For example, ICC would use a client's Client-Related 
Initial Margin only where that particular client has defaulted.
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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.\13\ For the reasons given below, the Commission finds 
that the proposed rule change is consistent with Section 17A(b)(3)(F) 
of the Act \14\ and Rule 17Ad-22(e)(5).\15\
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    \13\ 15 U.S.C. 78s(b)(2)(C).
    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ 17 CFR 240Ad-22(e)(5).
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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 . . . .'' \16\ 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) because it helps 
ensure ICC can monitor its collateral and enhances ICC's ability to 
deal with a potential default.
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    \16\ 15 U.S.C. 78q-1(b)(3)(F).
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    ICC's proposed changes to its collateral valuation process do not 
change any fundamental aspects of the process, but instead serve to 
simplify and make more efficient the description of the process; thus, 
ICC's proposed changes help to ensure that the collateral valuation 
process is clearer and more transparent to members. As noted above, 
ICC's currently effective Treasury Policy aims to accurately and 
effectively price assets posted as collateral and haircut those assets 
for their native market risks and related cross-currency risks.\17\ 
ICC's proposed changes align with these aims related to collateral 
valuation. A number of ICC's proposed changes--for example, ICC's non-
material edits to policies governing the valuation process for U.S. 
Treasuries posted as collateral--merely clarify and simplify pre-
existing procedures related to collateral valuation. ICC's proposal to 
add text requiring that posted cash used to cover a specific currency 
obligation is first converted to its value expressed in the currency of 
the obligation and then haircut to capture the potential foreign 
exchange risk supports its stated aim to accurately price assets and 
haircut them for their cross-currency risks. The changes help to make 
the process clearer and more transparent, which would in turn 
facilitate the accurate valuation of ICC's financial resources and 
ensure that ICC is able to determine whether it needs to bolster 
resources available to it in order to clear and settle trades.
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    \17\ Notice, 88 FR at 58628.
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    ICC's proposed addition of the Non-Committed FX Facility section to 
its Treasury Policy enhances ICC's ability to deal with a potential 
default. ICC proposes to add a Non-Committed FX Facility section to its 
Treasury Policy that notes that ICC has access to non-committed foreign 
exchange facilities with various commercial counterparties that may be 
used to convert currency, including GBP, to another currency for same 
day settlement. Adding the Non-Committed FX Facility section of the 
Treasury Policy ensures that members have knowledge of ICC's access to 
non-committed foreign exchange facilities and notice of the potential 
for specific scenarios, such as the possibility that ICC would be 
unable to exchange currency using ICC's non-committed foreign exchange 
facilities to satisfy certain obligations. Such notice should make it 
easier for ICC and its Clearing Participants to manage these scenarios 
should they ever arise during a potential default. Therefore, the 
addition of the Committed FX Facility section promotes the prompt and 
accurate clearance and settlement of securities transactions and 
assures the safeguarding of securities and funds which are in the 
custody or control of the clearing agency or for which it is 
responsible.
    The Commission believes, therefore, that the proposed rule change 
is consistent with the requirements of Section 17A(b)(3)(F) of the 
Act.\18\
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    \18\ 15 U.S.C. 78q-1(b)(3)(F).
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B. Consistency With Rule 17Ad-22(e)(5)

    Rule 17Ad-22(e)(5) requires ICC to ``establish, implement, 
maintain, and enforce written policies and procedures reasonably 
designed to . . . limit the assets it accepts as collateral to those 
with low credit, liquidity, and market risks, and set and enforce 
appropriately conservative haircuts and concentration limits . . . .'' 
\19\ 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 Rule 17Ad-22(e)(5) because the change to its haircut 
process for GBP used to cover a Euro-denominated product requirement is 
appropriately conservative.
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    \19\ 17 CFR 240.17Ad-22(e)(2).
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    ICC proposes to alter its currently effective haircut process for 
GBP used to cover a Euro-denominated product requirement. The currently 
effective haircut process requires that ICC convert the GBP cash value 
to its USD value and haircut the USD value at the GBP currency haircut. 
It also requires that the Euro-denominated product requirement be 
converted to its USD value. The USD value of the Euro-denominated 
product requirement is then grossed up by the EUR currency haircut.\20\ 
ICC proposes to eliminate this

[[Page 68214]]

process, which is in effect is a double haircut requirement, and 
replace it with an approach in which the posted GBP is converted 
directly to the currency of the obligation and then haircut once.
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    \20\ The USD value of the Euro-denominated product requirement 
is grossed up by the EUR currency haircut because ICC's treasury 
system automatically would haircut the Euro value in the process of 
converting it to the USD value. Securities Exchange Act Release No. 
97489 (May 11, 2023), 88 FR 31571, 31573 (May 17, 2023) (File No. 
SR-ICC-2023-003).
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    ICC's proposed process would still align with its collateral 
valuation process, which requires that assets posted as collateral are 
haircut for their native market risks and cross-currency risk. The 
proposed process would still apply a haircut that addresses cross-
currency risk, but would eliminate an extraneous haircut that, 
according to ICC, is a byproduct of its previous clearing system 
business logic.\21\ As such, the Commission believes that the proposed 
change is consistent with Rule 17Ad-22(e)(5) because it remains 
appropriately conservative.
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    \21\ Notice, 88 FR at 58628 n.5.
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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 \22\ and Rule 17Ad-
22(e)(5) thereunder.\23\
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    \22\ 15 U.S.C. 78q-1(b)(3)(F).
    \23\ 17 CFR 240.17Ad-22(e)(5).
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    It is therefore ordered pursuant to Section 19(b)(2) of the Act 
that the proposed rule change (SR-ICC-2023-013) be, and hereby is, 
approved.\24\
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    \24\ 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.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2023-21796 Filed 10-2-23; 8:45 am]
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