
[Federal Register Volume 78, Number 36 (Friday, February 22, 2013)]
[Notices]
[Pages 12409-12411]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04097]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68938; File No. SR-ICC-2012-23]


Self-Regulatory Organizations; ICE Clear Credit LLC; Order 
Approving Proposed Rule Change To Add Rules Related to the Clearing of 
iTraxx Europe Index 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-2012-23) 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. 68481 (Dec. 19, 2012), 
77 FR 76109 (Dec. 26, 2012).
    \4\ Securities Exchange Act Release No. 68882 (Feb. 8, 2013), 78 
FR 10646 (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. ICC is proposing, as described in further detail below, to 
amend Chapters 8, 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 iTraxx Europe 
Index CDS (``iTraxx Contracts''). The iTraxx Contracts reference the 
iTraxx Europe index, the current series of which consists of 125 
European corporate reference entities. iTraxx Contracts, consistent 
with market convention and widely used standard terms documentation, 
can be triggered by credit events for failure to pay, bankruptcy and 
restructuring. iTraxx Contracts will be denominated in Euro.
    ICC proposes to amend Chapter 8 of its rules to provide for an 
additional Guaranty Fund Contribution by those Clearing Participants 
that present Specific Wrong Way Risk (i.e., the risk that arises from 
the fact that iTraxx Contracts include, in part, the names of certain 
Clearing Participants or Clearing Participant affiliates). In a default 
scenario, if the defaulting Clearing Participant has funded a Specific 
Wrong Way Risk Contribution, the Specific Wrong Way Risk Contributions 
of all contributing Clearing Participants would be used immediately 
following the defaulting Clearing Participant's funds to cure deficits 
related to the default.
    ICC proposes to amend Chapter 20 of its rules, concerning CDS 
generally, to remove definitions that are included in Chapter 26E of 
the rules, as well as to include the Specific Wrong Way Risk Guaranty 
Fund Contribution, as appropriate, as a portion of Clearing Participant 
funds.

[[Page 12410]]

    ICC proposes to amend Section 26E of its rules to include certain 
additional provisions relevant to the treatment of restructuring credit 
events under iTraxx Contracts and standard single-name CDS Contracts 
referencing European corporate reference entities (``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 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 also proposes to add Section 26F to provide for the clearance 
of the iTraxx Contracts. Rule 26F-102 (Definitions) sets forth the 
definitions used for the iTraxx Contract Rules. An ``Eligible iTraxx 
Europe Untranched Index'' is defined as ``each particular series and 
version of an iTraxx Europe index or sub-index, as published by the 
iTraxx Untranched Publisher, included from time to time in the List of 
Eligible iTraxx Untranched Indexes,'' 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 index. 
``iTraxx Europe Untranched Terms Supplement'' refers to the market 
standard form of documentation used for credit default swaps on the 
iTraxx Europe index, which is incorporated by reference into the 
contract specifications in Chapter 26F. ICEE has stated that the 
remaining definitions are substantially the same as the definitions 
found in ICC Section 26A and Section 26C, other than certain conforming 
changes.
    Rules 26F-309 (Acceptance of iTraxx Europe Untranched Contracts by 
ICE Clear Credit), 26F-315 (Terms of the Cleared iTraxx Europe 
Untranched Contract), and 26F-316 (Updating Index Version of Fungible 
Contracts After a Credit Event or a Succession Event; Updating Relevant 
Untranched Standard Terms Supplement) reflect or incorporate the basic 
contract specifications for iTraxx Contracts. In addition to various 
non-substantive conforming changes, proposed Rule 26F-317 (Terms of 
iTraxx Europe Untranched Contracts) differs from the corresponding Rule 
26A-317 for CDX.NA Contracts to reflect the fact that restructuring is 
a credit event for the iTraxx Contract.\5\
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    \5\ The provisions dealing with the ``spin-out'' of a single 
name CDS following a restructuring credit event for a component of 
the iTraxx Europe index are part of the iTraxx Europe Untranched 
Standard Terms Supplement (Nov. 2009 edition), which is incorporated 
into the contract specifications for cleared iTraxx Europe contracts 
through proposed ICC Rule 26F-315(c). Specifically, Section 7.3(b) 
of the Supplement addresses the removal of the restructured 
reference entity from the index and continuation of that component 
as a separate contract. (Proposed ICC Rule 26F-317(h) clarifies the 
treatment of the reference obligation for that separate cleared 
contract.) This is part of the basic standard terms of the iTraxx 
Europe contract and operates the same way in both the cleared and 
uncleared contexts (much like other aspects of the market standard 
terms supplements and/or ISDA Credit Derivatives Definitions on 
which other cleared and uncleared CDS trade).
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    In connection with clearing iTraxx 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 iTraxx Contracts: Markit iTraxx Europe 
Main Series 18 with a 5-year maturity, maturing on December 20, 2017; 
Markit iTraxx Europe Main Series 18 with a 10-year maturity, maturing 
on December 20, 2022; Markit iTraxx Europe Main Series 17 with a 5-year 
maturity, maturing on June 20, 2017; Markit iTraxx Europe Main Series 
17 with a 10-year maturity, maturing on June 20, 2022; Markit iTraxx 
Europe Main Series 16 with a 5-year maturity, maturing on December 20, 
2016; Markit iTraxx Europe Main Series 16 with a 10-year maturity, 
maturing on December 20, 2021; Markit iTraxx Europe Main Series 15 with 
a 5-year maturity, maturing on June 20, 2016; Markit iTraxx Europe Main 
Series 15 with a 10-year maturity, maturing on June 20, 2021; Markit 
iTraxx Europe Main Series 14 with a 5-year maturity, maturing on 
December 20, 2015; Markit iTraxx Europe Main Series 14 with a 10-year 
maturity, maturing on December 20, 2020; Markit iTraxx Europe Main 
Series 13 with a 5-year maturity, maturing on June, 20, 2015; Markit 
iTraxx Europe Main Series 13 with a 10-year maturity, maturing on June, 
20, 2020; Markit iTraxx Europe Main Series 12 with a 5-year maturity, 
maturing on December 20, 2014; Markit iTraxx Europe Main Series 12 with 
a 10-year maturity, maturing on December 20, 2019; Markit iTraxx Europe 
Main Series 11 with a 5-year maturity, maturing on June 20, 2014; 
Markit iTraxx Europe Main Series 11 with a 10-year maturity, maturing 
on June 20, 2019; Markit iTraxx Europe Main Series 10 with a 5-year 
maturity, maturing on December 20, 2013; Markit iTraxx Europe Main 
Series 10 with a 10-year maturity, maturing on December 20, 2018; 
Markit iTraxx Europe Main Series 9 with a 5-year maturity, maturing on 
June 20, 2013; Markit iTraxx Europe Main Series 9 with a 10-year 
maturity, maturing on June 20, 2018; Markit iTraxx Europe Main Series 8 
with a 5-year maturity, maturing on December 20, 2012; Markit iTraxx 
Europe Main Series 8 with a 10-year maturity, maturing on December 20, 
2017; Markit iTraxx Europe Main Series 7 with a 10-year maturity, 
maturing June 20, 2017; Markit iTraxx Crossover Series 18 with a 5-year 
maturity, maturing on December 20, 2017; Markit iTraxx Crossover Series 
17 with a 5-year maturity, maturing on June 20, 2017; Markit iTraxx 
Crossover Series 16 with a 5-year maturity, maturing on December 20, 
2016; Markit iTraxx Crossover Series 15 with a 5-year maturity, 
maturing on June 20, 2016; Markit iTraxx Crossover Series 14 with a 5-
year maturity, maturing on December 20, 2015; Markit iTraxx Crossover 
Series 13 with a 5-year maturity, maturing on June, 20, 2015; Markit 
iTraxx Crossover Series 12 with a 5-year maturity, maturing on December 
20, 2014; Markit iTraxx Crossover Series 11 with a 5-year maturity, 
maturing on June 20, 2014; Markit iTraxx Crossover Series 10 with a 5-
year maturity, maturing on December 20, 2013; Markit iTraxx Crossover 
Series 9 with a 5-year maturity, maturing on June 20, 2013; Markit 
iTraxx HiVol Series 18 with a 5-year maturity, maturing on December 20, 
2017; Markit iTraxx HiVol Series 17 with a 5-year maturity, maturing on 
June 20, 2017; Markit iTraxx HiVol Series 16 with a 5-year maturity, 
maturing on December 20, 2016; Markit iTraxx HiVol Series 15 with a 5-
year maturity, maturing on June 20, 2016; Markit iTraxx HiVol Series 14 
with a 5-year maturity, maturing on December 20, 2015; Markit iTraxx 
HiVol Series 13 with a 5-year maturity, maturing on June, 20, 2015; 
Markit iTraxx HiVol Series 12 with a 5-year maturity, maturing on 
December 20, 2014; Markit iTraxx HiVol Series 11 with a 5-year 
maturity, maturing on June 20, 2014; Markit iTraxx HiVol Series 10 with 
a 5-year maturity, maturing on December 20, 2013; Markit iTraxx HiVol 
Series 9 with a 5-year maturity, maturing on June 20, 2013; and Markit 
iTraxx HiVol

[[Page 12411]]

Series 8 with a 5-year maturity, maturing on December 20, 2012.
    ICC also updated its Policies and Procedures to provide for the 
clearance of iTraxx 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 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: Wrong Way Risk, Foreign Exchange Risk, Liquidity Risk, Time 
Zone Risk, and Operational Risk. Additionally, the Portfolio Approach 
was updated to include appropriate portfolio benefits between North 
American CDS Indices and iTraxx Contracts. ICE Clear Credit will 
continue to review risk parameters with Clearing Participants through 
existing governance procedures and will notify Clearing Participants of 
any changes.\6\
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    \6\ 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 
iTraxx 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 iTraxx 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 
iTraxx 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.\7\ 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.\8\
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    \7\ 15 U.S.C. 78s(b)(2)(C).
    \8\ 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 the iTraxx 
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, the Commission notes that the Commodity 
Futures Trading Commission has determined that iTraxx Contracts are to 
be subject to mandatory clearing under Section 2(h) of the Commodity 
Exchange Act.\9\ ICC's clearance of iTraxx Contracts therefore will 
promote the prompt and accurate clearance and settlement of securities 
transactions and, to the extent applicable, derivative agreements, 
contracts, and transactions.
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    \9\ 7 U.S.C. 2(h); see also Clearing Requirement Determination 
Under Section 2(h) of the CEA, Final Rule, 77 FR 74283 (Dec. 13, 
2012) at 74291, 74336-74337.
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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-2012-23) be, 
and hereby is, approved.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 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.\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. 2013-04097 Filed 2-21-13; 8:45 am]
BILLING CODE 8011-01-P


