
[Federal Register Volume 76, Number 205 (Monday, October 24, 2011)]
[Notices]
[Pages 65763-65765]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27380]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65588; File No. SR-ICC-2011-01]


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

October 18, 2011.

I. Introduction

    On August 30, 2011, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change SR-ICC-2011-01 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder.\2\ The 
proposed rule change was published for comment in the Federal Register 
on September 9, 2011.\3\ The Commission received no comment letters 
regarding the proposal. For the reasons discussed below, the Commission 
is granting approval of 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. 34-65259 (September 2, 
2011), 76 FR 55984 (September 9, 2011). In its filing with the 
Commission, ICC included statements concerning the purpose of and 
basis for the proposed rule change. The text of these statements are 
incorporated into the discussion of the proposed rule change in 
Section II below.
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II. Description

    This rule change will amend Chapter 26 of ICC's rules to add 
Sections 26D and 26E to provide for the clearance of Emerging Markets 
Standard Sovereign CDS Contracts (``SES Contracts''). ICC will clear 
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 with the Commission.
    SES Contracts have similar terms to the North American Corporate 
CDS Contracts (``Corporate Single Name CDS Contracts'') currently 
cleared by ICC and governed by Section 26B of the ICC rules. 
Accordingly, proposed rules in Section 26D largely mirror the ICC rules 
for Corporate Single Name CDS Contracts in Section 26B, with certain 
modifications that reflect differences in terms and market conventions 
between SES Contracts and Corporate Single Name CDS Contracts. In the 
event that

[[Page 65764]]

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 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.\4\ 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'' (as compared to the corresponding definition in Section 
26B), due to the fact that certain terms and elections for Corporate 
Single Name CDS Contracts 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 Contracts) and (ii) the applicability of certain 
International Swaps and Derivatives Association (``ISDA'') supplements 
that may apply to Corporate Single Name CDS Contracts 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. According to ICC, 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 with respect to certain conforming changes.
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    \4\ Similar to the index credit default swap (``CDS'') contracts 
and Corporate Single Name CDS Contracts that ICC currently clears, 
ICC will accept for clearing sovereign CDS contracts 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 the 
corresponding provisions applicable to Corporate Single Name CDS 
Contracts in Section 26B of ICC rules, other than with respect to 
certain conforming changes. 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 rules for Corporate Single Name 
CDS Contracts 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, to account for certain elections and supplements used for 
Corporate Single Name CDS Contracts 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 Contracts currently cleared by ICC are 
generally 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, each referred to as a 
``Matched Restructuring Pair,'' 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 restructuring credit 
event is followed by a determination that such event did not in fact 
occur.\5\ 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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    \5\ 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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    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.\6\
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    \6\ 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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[[Page 65765]]

III. Discussion

    Section 19(b)(2)(B) 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.\7\ For example, Section 17A(b)(3)(F) of the Act \8\ 
requires, among other things, that the rules of a clearing agency be 
designed to remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions and to assure the safeguarding of securities 
and funds in the custody or control of the clearing agency or for which 
it is responsible.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    If approved, the proposed rule change would for the first time 
permit a Commission-registered clearing agency to clear sovereign CDS 
contracts, and ICC has informed the Commission that it intends to 
introduce clearing of 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) 
products promptly after obtaining Commission approval. By bringing 
additional products into clearing, the Commission believes the proposed 
rule change is consistent with the requirements of the Act in that it 
would contribute to the national system for the prompt and accurate 
clearance and settlement of securities transactions.
    Given the particular characteristics of the products proposed to be 
cleared, the Commission also carefully considered ICC's ability to 
clear SES Contracts in a safe and sound manner. After considering the 
representations made by ICC regarding its belief that the clearance of 
SES Contracts will contribute to the safeguarding of securities and 
funds associated with security-based swap transactions based on its 
analysis,\9\ the Commission believes that the proposed rule change is 
consistent with Section 17A(b)(3)(F) of the Act, including ICC's 
obligation to ensure that its rules be designed to assure the 
safeguarding of securities and funds in the custody or control of the 
clearing agency or for which it is responsible.
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    \9\ Supra note 6.
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IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \10\ and the 
rules and regulations thereunder.
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    \10\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-ICC-2011-01) be, 
and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 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.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-27380 Filed 10-21-11; 8:45 am]
BILLING CODE 8011-01-P


