
[Federal Register Volume 77, Number 58 (Monday, March 26, 2012)]
[Notices]
[Pages 17536-17537]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-7206]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66631; File No. SR-ICC-2012-03]


Self-Regulatory Organizations; ICE Clear Credit LLC; Notice of 
Filing of Proposed Rule Change to Its Risk Model To Reduce the Current 
Level of Risk Mutualization Among Its Clearing Participants and To 
Modify the Initial Margin Risk Model so That It Is Easier for Market 
Participants To Measure Their Risk

March 20, 2012.
    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 March 8, 2012, 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 (i.e., modifications to the 
ICC risk model) is to (1) reduce the current level of risk 
mutualization among ICC's clearing participants (Modification 
1) and (2) modify the initial margin risk model approach in a 
manner that will make it easier for market participants to measure 
their risk (Modification 2).
    As discussed in more detail in Item II below, Modification 
1 reduces the level of default resources held in the 
mutualized ICC guaranty fund and significantly increases the level of 
resources held in initial margin. Modification 2 modifies the 
initial margin risk model by removing the conditional Recovery Rate 
stress-scenarios and adding a new Recovery Rate sensitivity component 
that is computed by considering changes in Recovery Rate assumptions 
that impact the Net Asset Value of the portfolio.

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), 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

    The counterparty risk brought to ICC by any of its clearing 
participants is ``collateralized'' in the first instance by the 
clearing participant counterparty through its initial margin. In the 
event that any defaulting clearing participant's initial margin and 
guaranty fund contributions are insufficient to cover its obligations, 
any such deficit is mutualized across all non-defaulting clearing 
participants through their respective guaranty fund contributions.\4\ 
The respective initial margin contributions of non-defaulting clearing 
participants are not mutualized and would not be used to satisfy the 
deficit of another clearing participant's default.
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    \4\ ICC has also contributed a total of $50 million to the 
guaranty fund. $25 million of ICC's contribution is exposed prior to 
the mutualization of the non-defaulting clearing participants' 
contributions and the second $25 million of ICC's contribution is 
mutualized along with the non-defaulting clearing participants' 
contributions to the guaranty fund on a pro rata basis.
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    Since its launch, ICC has maintained a very high percentage of its 
default resources in the mutualized guaranty fund. On average, the size 
of the guaranty fund has been roughly 50% of the initial margin held by 
ICC. Whereas, historically, traditional futures clearinghouse have 
maintained guaranty funds in an amount equal to roughly 5-7% of the 
initial margin held. In other words, at ICC, the clearing participant 
resources available to be mutualized in the guaranty fund versus the 
resources available as initial margin have been approximately ten times 
greater on a

[[Page 17537]]

percentage basis than at traditional futures clearinghouses.
    Modification 1 reduces the level of default resources held 
in the mutualized ICC guaranty fund and increases the level of 
resources held in initial margin (collateral).
    The ICC guaranty fund is relatively much larger, as compared to 
traditional futures clearinghouses, in part because the guaranty fund 
model is currently designed to cover the uncollateralized losses that 
would result from the three single names that would cause the greatest 
losses when entering a state of default. Modification 1 
incorporates into the initial margin risk model the single name that 
causes the greatest loss when entering a state of default (i.e., the 
single name that results in the greatest amount of loss when stress-
tested). This change effectively collateralizes the loss that would 
occur from the single name that causes the greatest loss entering a 
state of default. Consequently, the amount of uncollateralized loss 
that would result from the three single names causing the greatest 
losses when entering a state of default is reduced, thereby reducing 
the amount of required guaranty fund contributions.
    This change to the guaranty fund and initial margin risk model 
will, as noted above, result in a reduction of the guaranty fund 
requirements and an increase in the initial margin requirements. 
However, it is important to note that the decrease in the guaranty fund 
and the increase in initial margin requirements are not symmetrical. 
Instead, based upon current portfolios, for every $1 decrease to the 
guaranty fund there will be a corresponding increase to the initial 
margin requirements of approximately $5.
    Modification 2 modifies the initial margin risk model by 
removing the conditional Recovery Rate stress-scenarios and adding a 
new Recovery Rate sensitivity component that is computed by considering 
changes in the Recovery Rate assumptions and their impact on the Net 
Asset Value of the Credit Default Swap portfolio. This modification 
will make it easier for market participants to measure their risk.
    ICC believes that the proposed rule change is consistent with the 
requirements of Section 17A of the Act and the rules and regulations 
thereunder applicable to it. ICC believes that by reducing the level of 
default resources held in the guaranty fund and increasing the level of 
default resources held as initial margin and by modifying the initial 
margin risk model as described above, it is able to safeguard 
securities and funds in its custody or control or for which it is 
responsible.

(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 email to rule-comments@sec.gov. Please include 
File Number SR-ICC-2012-03 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-2012-03. This file 
number should be included on the subject line if email 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_030812.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-2012-03 
and should be submitted on or before April 16, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-7206 Filed 3-23-12; 8:45 am]
BILLING CODE 8011-01-P


