
[Federal Register Volume 78, Number 36 (Friday, February 22, 2013)]
[Notices]
[Pages 12407-12409]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04098]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68939; File No. SR-ICC-2012-24]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change To Add Rules Related to the Clearing of 
European Corporate Single-Name CDS

February 15, 2013.

I. Introduction

    On December 6, 2012, ICE Clear Credit LLC (``ICC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (SR-ICC-2012-24) 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 December 26, 2012.\3\ On February 8, 2013, the Commission extended 
the time within which to take action of the proposed rule change to 
March 26, 2013.\4\ 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. 68482 (Dec. 19, 2012), 
77 FR 76156 (Dec. 26, 2012).
    \4\ Securities Exchange Act Release No. 68881 (Feb. 8, 2013), 78 
FR 10652 (Feb. 14, 2013).
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II. Description 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 
contracts. As described in further detail below, ICC is proposing to 
amend Chapters 20 and 26 and Schedule 401 and Schedule 502 of its 
rules, as well as make corresponding changes to the applicable ICC 
Policies and Procedures to provide for the clearance of standard 
single-name CDS Contracts referencing European corporate reference 
entities (``European SN Contracts''). ICC has stated that European SN 
Contracts have similar terms to the North American Corporate Single 
Name CDS Contracts (``North American SN Contracts'') currently cleared 
by ICC and governed by Section 26B of the Rules and the Latin American 
sovereign CDS contracts currently cleared by ICC and governed by 
Section 26D of the Rules. Accordingly, the proposed rules found in 
Section 26G largely mirror the ICC rules for North American SN 
Contracts in Section 26B, with certain modifications that reflect 
differences in terms and market conventions between European SN 
Contracts and North American SN Contracts. European SN Contracts will 
be denominated in Euro.
    ICC proposes to amend Chapter 20 of its rules, concerning CDS 
generally, to remove definitions that are included in Chapter 26E of 
the rules. ICC proposes to amend Section 26E of its rules to include 
certain additional provisions relevant to the treatment of 
restructuring credit events under iTraxx Europe Index CDS (``iTraxx 
Contracts'') and European SN Contracts. In addition, ICC proposes to 
make conforming changes in Section 26E of the Rules (the CDS 
Restructuring Rules), principally to address the particular 
restructuring terms that apply to iTraxx Contracts and European SN 
Contracts. Specifically, ICC proposes to modify the notice delivery 
procedures in Rule 26E-104 to include ``notices to

[[Page 12408]]

exercise movement option'' under the Modified Restructuring Maturity 
Limitation and Conditionally Transferable Obligation terms under the 
ISDA Credit Derivatives Definitions (``Mod Mod R terms''). In addition, 
the definition of ``Triggered Restructuring CDS Contract'' has been 
modified to reflect that under Mod Mod R terms a CDS contract may be 
triggered in part following a restructuring credit event.
    ICC proposes to add new Section 26G to provide for the clearance of 
European SN Contracts. New Section 26G provides for the definitions and 
certain specific contracts terms for cleared European SN Contracts. 
Rule 26G-102 (Definitions) sets forth the definitions used for the 
European SN Contracts. An ``Eligible SNEC 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 by the ICC Board of Managers or its designee, 
containing certain specified information with respect to each reference 
entity. The Eligible SNEC Reference Entities will initially consist of 
121 European corporate reference entities specified in Schedule 502 to 
the ICC Rules. Certain substantive changes have also been made to the 
definition of ``List of Eligible SNEC Reference Entities'', due to the 
fact that certain terms and elections for North American SN Contracts 
are not applicable to European SN Contracts. These include (i) the need 
for an election as to whether ``Restructuring'' is an eligible ``Credit 
Event'' (it is by contract term and market convention applicable to all 
European SN Contracts, whereas it is generally not applicable to North 
American SN Contracts) and (ii) the applicability of certain ISDA 
supplements that may apply to North American SN Contracts but do not 
apply to European SN 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. The remaining definitions are 
substantially the same as the definitions found in ICC Section 26B, 
other than certain conforming changes.
    Rules 26G-203 (Restriction on Activity), 26G-206 (Notices Required 
of Participants with respect to SNEC Contracts), 26G-303 (SNEC Contract 
Adjustments), 26G-309 (Acceptance of SNEC Contracts by ICE Clear 
Credit), 26G-315 (Terms of the Cleared SNEC Contract), 26G-316 
(Relevant Physical Settlement Matrix Updates), 26G-502 (Specified 
Actions), and 26G-616 (Contract Modification) reflect or incorporate 
the basic contract specifications for European SN Contracts and are 
substantially the same as under ICC Section 26B for North American SN 
Contracts, except as follows. In addition to various non-substantive 
conforming changes, the proposed rules differ from the existing North 
American SN Contracts in that the contract terms in Rule 26G-315 
incorporate the relevant published ISDA physical settlement matrix 
terms for Standard European Corporate transactions, rather than 
Standard North American Corporate transactions, and, as noted in the 
preceding paragraph, certain elections and supplements used for North 
American SN Contracts are not applicable to European SN Contracts. In 
addition, the contracts reflect the fact that under the ISDA physical 
settlement matrix terms, the restructuring credit event and the related 
additional terms Mod Mod R terms apply to European SN Contracts.
    ICC will update Schedule 401 of its Rules (Eligible Collateral & 
Thresholds), as applicable, with respect to Initial Margin and Guaranty 
Fund liquidity requirements for Non-Client and Client-Related positions 
for both US Dollar and Euro denominated products.
    ICC will also update Schedule 502 of its Rules (Cleared Products 
List) to include the following European SN Contracts: Centrica Plc; 
E.ON AG; ENEL S.P.A.; EDISON S.P.A.; EDP--Energias de Portugal S.A.; 
ELECTRICITE DE FRANCE; EnBW Energie Baden-Wuerttemberg AG; Fortum Oyj; 
Adecco S.A.; Aktiebolaget Volvo; ALSTOM; BRITISH TELECOMMUNICATIONS 
public limited company; COMPAGNIE DE SAINT-GOBAIN; Deutsche Telekom AG; 
FRANCE TELECOM; GAS NATURAL SDG, S.A.; GDF SUEZ; HELLENIC 
TELECOMMUNICATIONS ORGANISATION SOCIETE ANONYME; IBERDROLA, S.A.; 
Koninklijke KPN N.V.; NATIONAL GRID PLC; Portugal Telecom International 
Finance B.V.; RWE Aktiengesellschaft; TELECOM ITALIA SPA; TELEFONICA, 
S.A.; Telekom Austria Aktiengesellschaft; TELENOR ASA; TeliaSonera 
Aktiebolag; UNITED UTILITIES PLC; Vattenfall Aktiebolag; VEOLIA 
ENVIRONNEMENT; VIVENDI; VODAFONE GROUP PUBLIC LIMITED COMPANY; Deutsche 
Post AG; European Aeronautic Defence and Space Company EADS N.V.; 
FINMECCANICA S.P.A.; Holcim Ltd; ROLLS-ROYCE plc; Siemens 
Aktiengesellschaft; PostNL N.V.; REPSOL, S.A.; Bayerische Motoren Werke 
Aktiengesellschaft; BRITISH AMERICAN TOBACCO p.l.c.; Daimler AG; 
DANONE; DIAGEO PLC; Koninklijke Philips Electronics N.V.; LVMH MOET 
HENNESSY LOUIS VUITTON; Nestle S.A.; Svenska Cellulosa Aktiebolaget 
SCA; Unilever N.V.; VOLKSWAGEN AKTIENGESELLSCHAFT; ACCOR; Bertelsmann 
AG; CARREFOUR; CASINO GUICHARD-PERRACHON; COMPASS GROUP PLC; EXPERIAN 
FINANCE PLC; GROUPE AUCHAN; J SAINSBURY plc; Koninklijke Ahold N.V.; 
MARKS AND SPENCER p.l.c.; METRO AG; NEXT PLC; PEARSON plc; PPR; 
PUBLICIS GROUPE SA; REED ELSEVIER PLC; SAFEWAY LIMITED; SODEXO; TESCO 
PLC; Wolters Kluwer N.V.; WPP 2005 LIMITED; AKZO Nobel N.V.; Anglo 
American plc; ArcelorMittal; BASF SE; Glencore International AG; Henkel 
AG & Co. KGaA; Koninklijke DSM N.V.; LANXESS Aktiengesellschaft; Linde 
Aktiengesellschaft; Solvay; XSTRATA PLC; STMicroelectronics N.V.; Bayer 
Aktiengesellschaft; SANOFI; Aegon N.V.; Allianz SE; ASSICURAZIONI 
GENERALI--SOCIETA PER AZIONI; AVIVA PLC; AXA; BANCA MONTE DEI PASCHI DI 
SIENA S.P.A.; BANCO BILBAO VIZCAYA ARGENTARIA, SOCIEDAD ANONIMA; Banco 
Espirito Santo, S.A.; BANCO SANTANDER, S.A.; Bank of Scotland plc; 
INTESA SANPAOLO SPA; JTI (UK) FINANCE PLC; Swiss Reinsurance Company 
Ltd; Zurich Insurance Company Ltd; Compagnie Financiere Michelin; L'AIR 
LIQUIDE SOCIETE ANONYME POUR L'ETUDE ET L'EXPLOITATION DES PROCEDES 
GEORGES CLAUDE; BAE SYSTEMS PLC; BOUYGUES; BP P.L.C.; IMPERIAL TOBACCO 
GROUP PLC; KINGFISHER PLC; Suedzucker Aktiengesellschaft Mannheim/
Ochsenfurt; Swedish Match AB; TECHNIP; IMPERIAL CHEMICAL INDUSTRIES 
LIMITED; ALTADIS SA; BRITISH SKY BROADCASTING GROUP PLC; Aktiebolaget 
Electrolux; THALES; Metso Oyj; Muenchener Rueckversicherungs-
Gesellschaft Aktiengesellschaft in Muenchen; Syngenta AG; TATE & LYLE 
PUBLIC LIMITED COMPANY; and TOTAL SA.
    ICC also updated its Policies and Procedures to provide for the 
clearance of European SN Contracts, specifically the ICC Treasury 
Operations Policies & Procedures, ICC Risk Management Framework and ICC 
End-of-Day (``EOD'') Price Discovery Policies and Procedures. 
Consistent with the changes to Schedule 401 of the ICC Rules, the ICC 
Treasury Operations Policies & Procedures have been updated to include 
Initial Margin and Guaranty Fund liquidity requirements for Non-Client 
and Client-Related positions for

[[Page 12409]]

both US Dollar and Euro denominated products. In order to accommodate 
the return of funds during London banking hours, the ICC Treasury 
Operations Policies & Procedures have been updated to require requests 
for Euro withdrawals to be submitted by 9:00 a.m. Eastern.
    The ICC Risk Management Framework has been updated to account for 
Euro denominated portfolios. Specifically, updates have been made to 
the Guaranty Fund, Initial Margin and Mark-to-Market Methodologies to 
address: Foreign Exchange Risk, Liquidity Risk, Time Zone Risk, and 
Operational Risk. ICE Clear Credit will continue to review risk 
parameters with Clearing Participants through existing governance 
procedures and will notify Clearing Participants of any changes.\5\
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    \5\ Telephone conversation February 15, 2013 among Michelle 
Weiler, Assistant General Counsel, ICE Clear Credit; Marta Chaffee, 
Assistant Director, SEC; Gena Lai, Senior Special Counsel, SEC; 
Jennifer Ogasawara, Financial Economist, SEC; and Justin Byrne, 
Attorney-Advisor, SEC.
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    The ICC EOD Price Discovery Policies and Procedures has been 
updated to provide that ICC will use ICE Clear Europe's EOD prices for 
European SN Contracts and rely on the ICE Clear Europe Firm Trade 
process to ensure the accuracy of price submissions. ICC will extend 
the risk time-horizon for European SN Contracts to account for the 
half-day difference, on average, between the EOD price discovery 
process timings. The extended risk horizon accounts for the fact that 
European markets close earlier and new financial information may be 
reflected only in the North American instrument prices and not 
reflected in the European SN Contracts, in general.

III. Discussion

    Section 19(b)(2)(C) 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.\6\ Section 17A(b)(3)(F) of the Act requires, among other 
things, that the rules of a clearing agency be designed to promote the 
prompt and accurate clearance and settlement of securities transactions 
and, to the extent applicable, derivative agreements, contracts, and 
transactions, as well as to assure the safeguarding of securities and 
funds in the custody or control of the clearing agency or for which the 
clearing agency is responsible.\7\
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    \6\ 15 U.S.C. 78s(b)(2)(C).
    \7\ 15 U.S.C. 78q-1(b)(3)(F).
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    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a registered clearing agency. The 
Commission carefully considered ICC's ability to clear European SN 
Contracts in a manner that assures the safeguarding of securities and 
funds which are in the custody and control of ICC or for which ICC is 
responsible. In addition, ICC's clearance of European SN Contracts will 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements, 
contracts, and 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 \8\ and the 
rules and regulations thereunder.
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    \8\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-ICC-2012-24) be, and 
hereby is, approved.\10\
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ In approving this proposed rule change the Commission has 
considered the proposed rule's impact of efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-04098 Filed 2-21-13; 8:45 am]
BILLING CODE 8011-01-P


