
[Federal Register Volume 78, Number 161 (Tuesday, August 20, 2013)]
[Notices]
[Pages 51248-51250]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-20218]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70201; File No. SR-ICEEU-2013-11]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change Related to Enhanced Margin and 
Guaranty Fund Methodology

August 14, 2013.
    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 August 14, 2013, ICE Clear Europe Limited (``ICE Clear Europe'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed changes as described in Items I, II, and III below, which 
Items have been prepared primarily by ICE Clear Europe. The Commission 
is publishing this notice to solicit comments on the proposed change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    ICE Clear Europe proposes to adopt changes to the enhanced margin 
and guaranty fund methodology (the ``Decomp Model'') \3\ of ICE Clear 
Europe Limited (``ICE Clear Europe'') for cleared credit default swaps 
(``CDS') that address specific wrong way risk from cleared index CDS 
positions and the liquidation period used in determining the initial 
margin requirement for customer CDS positions.
---------------------------------------------------------------------------

    \3\ The Commission has previously approved the Decomp Model. See 
Order Approving Proposed Rule Change, as Modified by Amendment No. 1 
Thereto, Relating to Enhanced Margin Methodology, Exchange Act 
Release No. 34-68955 (Feb. 20, 2013), 78 Fed. Reg. 13130 (Feb. 26, 
2013) (SR-ICEEU-2012-11).
---------------------------------------------------------------------------

    ICE Clear Europe has developed its Decomp Model, as previously 
approved by the Commission, to permit appropriate portfolio margining 
between related index and single-name CDS positions by recognizing that 
index CDS instruments are for risk management purposes essentially a 
composition of specific single-name CDS.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for proposing changes to 
the Decomp Model. The text of these statements may be examined at the 
places specified in Item IV below. ICE Clear Europe has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant aspects of these statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In anticipation of the launch of customer clearing in CDS, and in 
furtherance of the ongoing European regulatory reform program designed 
to improve the safety and soundness of the European derivatives 
markets, ICE Clear Europe proposes to adopt certain enhancements to the 
Decomp Model to address so-called specific wrong-way risk (``Specific 
Wrong-Way Risk''), which is additional risk arising from the fact that 
certain index CDS contracts include as reference entities Clearing 
Members or affiliates of Clearing Members (``self-referencing CDS''). 
Although ICE Clear Europe does not permit a Clearing Member to enter 
into or maintain a single-name CDS referencing itself or an affiliate, 
a self-referencing CDS position may arise through an index CDS where 
the Clearing Member or an affiliate is a component of the index.
    Under the enhancements to the Decomp Model, ICE Clear Europe will 
require an additional contribution to the CDS Guaranty Fund from those 
Clearing Members that present Specific Wrong-

[[Page 51249]]

Way Risk, up to a defined threshold. The additional Guaranty Fund 
contribution amount is based on the highest uncollateralized loss-
given-default exposure among any of such self-referencing CDS positions 
of Clearing Members. In addition, each such Clearing Member will be 
required to provide additional initial margin to collateralize any 
Specific Wrong-Way Risk presented by its positions in excess of such 
threshold.
    The proposed amendments would also enhance the CDS Guaranty Fund 
calculation methodology to cover the uncollateralized losses that would 
result from up to five single names--two Clearing Members and three 
other single names--that would cause the greatest losses when entering 
a state of default. Consequently, the amount of uncollateralized loss 
may increase in cases when the Clearing Members chosen to size the 
Guaranty Fund are reference entities in index CDS contracts.
    ICE Clear Europe also proposes to change the liquidation period for 
calculation of initial margin for customer CDS positions. Currently, 
the Decomp Model provides portfolio risk coverage against at least 5-
day market realizations. ICE Clear Europe intends to facilitate porting 
of client positions for a period of 2 days following the default of a 
Clearing Member. In order to account for situations when it may not be 
possible to port after the initial porting period, resulting in 
liquidation, the risk horizon for liquidation of customer CDS 
portfolios would be extended to 7 days. The increased liquidation 
period used in determining the initial margin requirement for customer 
CDS positions will only apply to the spread response, basis and 
interest rate risk components.
    The ICE Clear Europe CDS Risk Policy, the CDS Risk Model 
Description methodology document, CDS Back-Testing Framework and CDS 
Default Management Framework have been updated to account for the above 
mentioned enhancements.
    ICE Clear Europe believes that the changes will facilitate the 
prompt and accurate settlement and risk management of security-based 
swaps and contribute to the safeguarding of securities and funds 
associated with security-based swap transactions. ICE Clear Europe does 
not believe the proposed amendments would have any impact, or impose 
any burden, on competition.
    ICE Clear Europe believes that the amendments are consistent with 
the requirements of Section 17A \4\ of the Act and regulations 
thereunder applicable to it, including the standards under Rule 17Ad-
22.\5\ In particular, the amendments will enhance the clearinghouse's 
margin methodology by more accurately addressing Specific Wrong Way 
Risk presented by index CDS positions of Clearing Members. They will 
also enhance the Guaranty Fund calculation methodology, and adjust the 
liquidation period for customer positions used in calculating initial 
margin for CDS. In ICE Clear Europe's view, the amendments will 
therefore promote the prompt and accurate clearance and settlement of 
securities transactions, the safeguarding of securities and funds in 
the custody or control of ICE Clear Europe and the protection of 
investors and the public interest, within the meaning of Section 
17A(b)(3)(F) of the Act.\6\ Furthermore, the revisions will enhance ICE 
Clear Europe's financial resources, consistent with the requirements of 
Rule 17Ad-22(b),\7\ by requiring additional initial margin and CDS 
Guaranty Fund contributions to address Specific Wrong Way Risk. They 
will also promote the efficient use of margin for the clearinghouse and 
its clearing members and their customers, by enabling the clearinghouse 
to provide appropriate portfolio margining treatment between single-
name and index CDS positions. The other amendments will similarly 
enhance ICE Clear Europe's financial resources, but adjusting the CDS 
Guaranty Fund contribution methodology and increasing the liquidation 
horizon for customer positions.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78q-1.
    \5\ 17 CFR 240.17Ad-22.
    \6\ 15 U.S.C. 78q-1(b)(3)(F).
    \7\ 17 CFR 240.17Ad-22(b).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any material impact, or impose a material burden, on competition, 
and further believes that any such impact is necessary and appropriate 
in furtherance of the Act. The proposed amendments are intended to 
enhance the margin and Guaranty Fund methodology for CDS to address 
certain risks, including Specific Wrong Way Risk presented by Clearing 
Members, as discussed above, and to adjust the liquidation horizon to a 
level that ICE Clear Europe believes appropriate for default management 
purposes. Although the amendments may result in an increase in margin 
and/or Guaranty Fund levels applicable to Clearing Members and their 
customers as a result of these risks, ICE Clear Europe believes that 
these changes will properly align margin and Guaranty Fund levels to 
the risks presented by Clearing Members and their customers. As a 
result, ICE Clear Europe is of the view that these changes are 
necessary and appropriate in furtherance of the Act and the 
Commission's regulations thereunder, including the financial resources 
and risk management requirements of Rule 17Ad-22.\8\ Furthermore, ICE 
Clear Europe does not believe that the proposed changes, and any such 
resulting increase in margin or Guaranty Fund requirements, would 
significantly affect the ability of Clearing Members or other market 
participants to continue to clear CDS, consistent with the risk 
management requirements of the clearing house, or otherwise limit 
market participants' choices for selecting clearing services. For the 
foregoing reasons, the proposed changes do not, in ICE Clear Europe's 
view, impose any unnecessary or inappropriate burden on competition.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.17Ad-22.
---------------------------------------------------------------------------

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, CDS Clearing Members or Others

    ICE Clear Europe will notify the Commission of any written comments 
received by ICE Clear Europe. As noted above, ICE Clear Europe has 
consulted extensively with CDS Clearing Members and others in 
developing changes to the Decomp Model.

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.

[[Page 51250]]

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-ICEEU-2013-11 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-ICEEU-2013-11. 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 Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of ICE Clear Europe 
and on ICE Clear Europe's Web site at https://www.theice.com/publicdocs/regulatory_filings/ICEU_SEC_081313.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-ICEEU-2013-11 
and should be submitted on or before September 10, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-20218 Filed 8-19-13; 8:45 am]
BILLING CODE 8011-01-P


