
[Federal Register Volume 76, Number 175 (Friday, September 9, 2011)]
[Notices]
[Pages 55984-55986]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-23073]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65259; File No. SR-ICC-2011-01]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change To Add Rules Related to the Clearing of 
Emerging Markets Sovereigns

September 2, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ notice is hereby given that 
on August 30, 2011, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared primarily by ICC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The purpose of the proposed rule change is to adopt new rules that 
will provide the basis for ICC to clear additional credit default swap 
(``CDS'') contracts. Specifically, ICC is proposing to amend Chapter 26 
of its rules to add Sections 26D and 26E to provide for the clearance 
of Emerging Markets Standard Sovereign CDS (``Standard Emerging 
Sovereign Single Names'' or ``SES Contracts'').
    As discussed in more detail in Item II(A) below, Section 26D 
(Standard Emerging Sovereign Single Names) provides for the definitions 
and certain specific contract terms for cleared SES Contracts. Section 
26E (CDS Restructuring Rules) provides the rules applicable to SES 
Contracts in the event of a restructuring credit event.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. ICC has prepared summaries, set forth in sections (A), 
(B),

[[Page 55985]]

and (C) below, of the most significant aspects of these statements.\3\
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    \3\ The Commission has modified the text of the summaries 
prepared by ICC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    ICC has identified SES Contracts as a product that has become 
increasingly important for market participants to manage risk and 
express views. ICC believes that clearance of SES Contracts will 
facilitate the prompt and accurate settlement of security-based swaps 
and contribute to the safeguarding of securities and funds associated 
with security-based swap transactions.\4\ ICC is requesting approval 
for SES Contracts on four sovereign reference entities, the Federative 
Republic of Brazil, the United Mexican States, the Bolivian Republic of 
Venezuela and the Argentine Republic. If ICC determines to list 
additional SES Contracts, it will seek approval from the Commission for 
such contracts (or for a class of product including such contracts) by 
a subsequent filing.
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    \4\ ICC has performed a variety of empirical analyses related to 
clearing of SES Contracts on sovereign reference entities, including 
back tests and stress tests using actual clearing participant 
portfolios (with respect to the stress tests) combined with 
hypothetical positions in sovereign CDS contracts based on data 
retrieved from the Depository Trust Clearing Corporation's Trade 
Information Warehouse and through interaction with ICC's Trade 
Advisory Committee.
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    SES Contracts have similar terms to the North American Corporate 
CDS (``Corporate Single Name CDS'') contracts currently cleared by ICC 
and governed by Section 26B of the ICC rules. Accordingly, the proposed 
rules found in Section 26D largely mirror the ICC rules for Corporate 
Single Name CDS in Section 26B, with certain modifications that reflect 
differences in terms and market conventions between SES Contracts and 
Corporate Single Name CDS. In the event that a clearing participant is 
domiciled in a country that is the reference entity for an SES 
Contract, ICC will not permit the clearing participant to clear such 
SES Contract.
    Rule 26D-102 (Definitions) sets forth the definitions used for the 
SES Contracts. An ``Eligible SES Reference Entity'' is defined as 
``each particular Reference Entity included from time to time in the 
List of Eligible Reference Entities,'' which is a list maintained, 
updated and published from time to time by ICC containing certain 
specified information with respect to each reference entity.\5\ The 
Eligible SES Reference Entities will at present be limited to the four 
Latin American sovereigns listed above. Certain substantive changes 
have also been made to the definition of ``List of Eligible SES 
Reference Entities,'' due to the fact that certain terms and elections 
for Corporate Single Name CDS are not applicable to SES Contracts. 
These include (i) the need for an election as to whether 
``Restructuring'' is an eligible ``Credit Event'' (it is by market 
convention applicable to all SES Contracts, whereas it is generally not 
applicable to Corporate Single Name CDS) and (ii) the applicability of 
certain International Swaps and Derivatives Association's (``ISDA's'') 
supplements that may apply to Corporate Single Name CDS but do not 
apply to SES Contracts, including the 2005 Monoline Supplement, the 
ISDA Additional Provisions for a Secured Deliverable Obligation 
Characteristic and the ISDA Additional Provisions for Reference 
Entities with Delivery Restrictions. As set forth in the List of 
Eligible SES Reference Entities, SES Contracts will only be denominated 
in U.S. Dollars. The remaining definitions are substantially the same 
as the definitions found in ICC Section 26B, other than certain 
conforming changes.
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    \5\ Similar to the credit index CDS and Corporate Single Name 
CDS that ICC currently clears, ICC will accept for clearing 
sovereign CDS denominated in U.S. Dollars only.
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    Rules 26D-203 (Restriction on Activity), 26D-206 (Notices Required 
of Participants with respect to SES Contracts), 26D-303 (SES Contract 
Adjustments), 26D-309 (Acceptance of SES Contracts by ICE Trust), 26D-
315 (Terms of the Cleared SES Contract), 26D-316 (Relevant Physical 
Settlement Matrix Updates), 26D-502 (Specified Actions), and 26D-616 
(Contract Modification) reflect or incorporate the basic contract 
specifications for SES Contracts and are substantially the same as 
under ICC Section 26B for Corporate Single Name CDS. For the avoidance 
of doubt, ICC will not accept a trade for clearance and settlement if 
at the time of submission or acceptance of the trade or at the time of 
novation the CDS Participant submitting the trade is domiciled in the 
country of the Eligible SES Reference Entity for such SES Contract.
    In addition to various non-substantive conforming changes, the 
proposed rules differ from the existing Corporate Single Name CDS rules 
in that the contract terms in Rule 26D-315 incorporate the relevant 
published ISDA physical settlement matrix terms for Standard Latin 
American Sovereign transactions, rather than Standard North American 
Corporate transactions, and, as noted in the preceding paragraph, 
certain elections and supplements used for Corporate Single Name CDS 
that are not applicable to SES Contracts.
    New Section 26E (CDS Restructuring Rules) provides rules applicable 
to cleared Contracts in the event of a restructuring credit event. 
Corporate Single Name CDS currently cleared by ICC are not subject to 
these restructuring rules. Unlike other credit events, following a 
restructuring credit event, parties to a cleared SES Contract must 
determine whether or not to trigger their credit protection. To 
facilitate this election while permitting ICC to maintain a matched 
book of cleared Contracts, Section 26E provides that protection buyers 
and protection sellers under a Restructuring CDS Contract (defined as a 
CDS Contract where a restructuring credit event has occurred) will be 
matched into pairs, called Matched Restructuring Pairs, by ICC for 
purposes of sending and receiving such triggering notices. Rule 26E-102 
sets forth the definitions used throughout Section 26E in connection 
with a restructuring credit event.
    The procedures for creation of Matched Restructuring Pairs are set 
forth in Rule 26E-103 (Allocation of Matched Restructuring Pairs). 
Following the announcement that a restructuring credit event has 
occurred with respect to an SES Contract, ICC will match each 
protection seller in that contract with one or more protection buyers 
in that contract, such that the notional amount of the contract of each 
protection seller is fully allocated to one or more protection buyers. 
In order to be matched, positions in an SES Contract must be of the 
same type (i.e., having the same reference entity, tenor, reference 
obligation, fixed rate, and relevant physical settlement matrix).
    The mechanics associated with the delivery and receipt of notices 
by clearing participants under Matched Restructuring Pairs are set 
forth in Rule 26E-104 (Matched Restructuring Pairs; Designations and 
Notices). This rule provides that once ICC has created the Matched 
Restructuring Pairs, ICC will be deemed to have designated the matched 
CDS buyer and matched CDS seller as its designee to receive and deliver 
credit event notices in relation to the Restructuring CDS Contract. The 
rule also contains a mechanism for notifying ICC of disputes with 
respect to such notices.
    Finally, Rule 26E-105 (Separation of Matched Restructuring Pairs) 
addresses situations where an announcement of a

[[Page 55986]]

restructuring credit event is followed by a determination that such 
event did not in fact occur.\6\ The rule provides that if ICC has not 
matched buyers with sellers to form a Matched Restructuring Pair, then 
ICC will not do so. If ICC has matched sellers with buyers to form a 
Matched Restructuring Pair, but settlement (either auction settlement 
or fallback physical settlement) has not occurred, then ICC will 
reverse the matching. If fallback physical settlement is applicable, 
ICC will not reverse any matching to the extent that the matched CDS 
buyer or matched CDS seller has given notice to ICC that the parties 
have settled the relevant matched CDS contract within one Business Day 
following delivery of the matching reversal notice. If a CDS contract 
is reversed, ICC will recalculate the margin accordingly.
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    \6\ Determination of a credit event and a subsequent 
determination that a credit event did not occur are made by the ISDA 
relevant credit derivatives determinations committee (``DC''), or, 
in the event a request has been submitted to the relevant DC and 
ISDA has publicly announced that the relevant DC has resolved not to 
determine the answer, by the appropriate ICE Clear Credit Regional 
CDS Committee.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    ICC does not believe the proposed rule change would have any 
impact, or impose any burden, on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments relating to the proposed rule change have not been 
solicited or received. ICC will notify the Commission of any written 
comments received by ICC.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-ICC-2011-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICC-2011-01. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Section, 100 F Street, 
NE., Washington, DC 20549, on official business days between the hours 
of 10 a.m. and 3 p.m. Copies of such filings will also be available for 
inspection and copying at the principal office of ICC and on ICC's Web 
site at https://www.theice.com/publicdocs/regulatory_filings/ICEClearCredit_082611.pdf. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-ICC-2011-01 and should be submitted on or before 
September 30, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-23073 Filed 9-8-11; 8:45 am]
BILLING CODE 8011-01-P


