
[Federal Register Volume 77, Number 90 (Wednesday, May 9, 2012)]
[Notices]
[Pages 27255-27256]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-11131]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66916; File No. SR-ICC-2012-03]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change To Reduce the Current Level of Risk 
Mutualization Among Clearing Participants and To Modify the Initial 
Margin Risk Model So That It Is Easier for Clearing Participants To 
Measure Their Recovery Rate Risk Exposure

May 3, 2012.

I. Introduction

    On March 8, 2012, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change SR-ICC-2012-03 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 March 26, 2012.\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. 34-66631 (March 20, 
2012), 77 FR 17536 (March 26, 2012).
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II. Description

    This rule change permits ICC to make two modifications to its risk 
model for clearing credit default swaps (``CDS'') contracts. For the 
first modification (``Modification 1''), ICC is reducing the 
current level of risk mutualization among its clearing participants by 
modifying its initial margin model to collateralize the loss that would 
occur from the single name CDS that causes the greatest loss entering a 
state of default. For the second modification (``Modification 
2''), ICC is modifying its initial margin model to make 
clearing participants' risk requirements more transparent by removing 
the conditional recovery rate stress-scenarios and adding a new 
standalone recovery rate sensitivity component that is computed by 
considering changes in recovery rate assumptions and their impact on 
the net asset value of the clearing portfolio.
    ICC represents that Modification 1 will reduce the level 
of default resources held in ICC's mutualized guaranty fund and 
increase the level of default resources held in initial margin. ICC is 
implementing this by incorporating into its initial margin

[[Page 27256]]

model the single name CDS that causes the greatest loss when entering a 
state of default (i.e., the single name CDS that results in the 
greatest amount of loss when stress-tested). This change collateralizes 
the loss that would occur from the single name CDS that causes the 
greatest loss entering a state of default. Consequently, the amount of 
uncollateralized loss that would result from the three single name CDS 
contracts causing the greatest cumulative losses when entering a state 
of default is reduced, thereby reducing the amount of required guaranty 
fund contributions from clearing participants. ICC represents that the 
decrease in the guaranty fund and the increase in initial margin 
requirements are not symmetrical. Instead, based upon current 
portfolios, ICC approximates that for every $1 decrease to the guaranty 
fund there will be a corresponding increase to the initial margin 
requirements of approximately $5.
    ICC represents that Modification 2 will make it easier for 
clearing participants to evaluate the risk of their CDS clearing 
portfolio as measured by the impact of changing recovery rate 
assumptions. ICC is implementing this by removing the conditional 
recovery rate stress-scenarios and adding a new standalone recovery 
rate sensitivity component that is computed by considering changes in 
recovery rate assumptions that impact the net asset value of the CDS 
clearing portfolio. ICC argues that by making it easier for market 
participants to measure their risk, Modification 2 is 
consistent with the requirements of Section 17A of the Act and the 
rules and regulations thereunder applicable to it.

III. Discussion

    Section 19(b)(2)(C) of the Act \4\ 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. Section 17A(b)(3)(F) of the Act \5\ 
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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    \4\ 15 U.S.C. 78s(b)(2)(C).
    \5\ 15 U.S.C. 78q-1(b)(3)(F).
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    Modification 1 will require each clearing participant to 
collateralize its greatest single name CDS exposure that it creates for 
other clearing participants. As such, Modification 1 will 
require clearing participants to bear a greater portion of the loss 
resulting from their default and also increases the amount of risk 
requirements ICC collects, thereby assuring the safeguarding of 
securities and funds in the custody or control of ICC or for which it 
is responsible. Modification 2 will require ICC to separately 
estimate requirements using various recovery rate assumptions and 
improve the ability of clearing participants to identify the impact of 
considering various changes to recovery rate assumptions on the net 
asset value of their CDS clearing portfolios, thereby removing an 
impediment to the prompt and accurate clearance and settlement of 
securities transactions.

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 \6\ and the 
rules thereunder.
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    \6\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-ICC-2012-03) be, and 
hereby is, approved.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 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.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Kevin O'Neill,
Deputy Secretary.
[FR Doc. 2012-11131 Filed 5-8-12; 8:45 am]
BILLING CODE 8011-01-P


